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your still off base trying to use your average annual returns your using for these hypothetical portfolios . perhaps this explanation i found makes it easier to understand.
"An average annual return is irrelevant. It's the sequence of returns that's important.
For example, over the 17-year period (1987-2003), the S&P 500's average return was 13.47%. It doesn't make any difference if we look at the returns from 1987 to 2003 or from 2003 to 1987. The order of the returns doesnt matter, no matter how we average them out they are the same.
But when taking withdrawals, the sequence of returns makes all the difference. The same initial capital, the same withdrawal amount, the same returns - but a different sequence produces dramatically different results.
For a $100,000 portfolio taking $10,000 a year adjusted for 4% inflation over those 17 years, the difference is a remaining balance of $76,629 to a deficit of $187,606."
folks read that again, THE SAME EXACT AVERAGE ANNUAL RETURNS but the gains and losses happening in a different sequence. it ranged from a 100% success rate to total failure. its sooooo important you understand this concept.
i didnt bother to post all the results from the various sequence's happening in different orders but for anyone who wants to sort through the charts ill post the link.
what it means is that your portfolio is about everything you own. its return is based on everything you own including cash..
first problem today is when interest rates were higher if you took a hit of 15% on your portfolio and markets didnt bounce right back the 5-7% interest on the income section of a 50/50 mix made you whole again in 2 years time . but with no interest on cash and 2-3% on bonds how long before you recover? instead your spending down principal in a prolonged downturn compounding a negative return.
if your balanced fund is 1 million and your pulling 40k a year and we took another 45% drop this year you have 650k left from which you will pull 40k again leaving you less then 610k if you inflation adjusted.
you are really no different then someone about your age retiring now with 610k taking only 4% of that number. but you are still taking 4% of 1 million based on what was.
if markets stay down another year you are pulling 42,500 now after inflation adjustments from the 610k leaving you around 568k..
in 3 years time you went through 1/2 your money already that you started with.
that hit early on made all the difference in your success rate of basing it on 1 million even though your average long term return on the fund may still come out to 5%. its all about the sequence not the return.
its great your funds will bounce back to that 5% average return already but in the mean time you spent a load of principal trying to sustain yourself . there is less money to grow now when rates and markets bounce back.
had you had the 5% average annual return spread out evenly over that time frame instead of being welcomed with a 45% drop that first year you would pretty much have your entire million left from which you are pulling that 4%... huge difference in results.
thats why without knowing the sequence we will get whacked in its near impossible to plan using average returns you think you will get or got. hense thats why for some it makes sense to shed some of that sequence risk over to a 3rd party. tou are not only beating on your own where the markets will go, where interest rates will go but most important in what order with the gains and losses come. thats 3 variables to deal with.
Last edited by mathjak107; 04-07-2011 at 03:12 AM..
Yes, and the only reason a 40/60 portfolio did better in the last decade than a 60/40 portfolio was the flight to safety due to the credit crisis and three recessions. Bond returns were heavily skewed.
the interesting thing is corporate bonds took a beating in the flight to safety in 2008 , treasuries soared . the long treasury bond and TLT were up over 30%. typical corporate bond funds were down 6-8% or so
your still off base trying to use your average annual returns your using for these hypothetical portfolios . perhaps this explanation i found makes it easier to understand.
"An average annual return is irrelevant. It's the sequence of returns that's important.
For example, over the 17-year period (1987-2003), the S&P 500's average return was 13.47%. It doesn't make any difference if we look at the returns from 1987 to 2003 or from 2003 to 1987. The order of the returns doesnt matter, no matter how we average them out they are the same.
But when taking withdrawals, the sequence of returns makes all the difference. The same initial capital, the same withdrawal amount, the same returns - but a different sequence produces dramatically different results.
For a $100,000 portfolio taking $10,000 a year adjusted for 4% inflation over those 17 years, the difference is a remaining balance of $76,629 to a deficit of $187,606."
folks read that again, THE SAME EXACT AVERAGE ANNUAL RETURNS but the gains and losses happening in a different sequence. it ranged from a 100% success rate to total failure. its sooooo important you understand this concept.
i didnt bother to post all the results from the various sequence's happening in different orders but for anyone who wants to sort through the charts ill post the link.
what it means is that your portfolio is about everything you own. its return is based on everything you own including cash..
first problem today is when interest rates were higher if you took a hit of 15% on your portfolio and markets didnt bounce right back the 5-7% interest on the income section of a 50/50 mix made you whole again in 2 years time . but with no interest on cash and 2-3% on bonds how long before you recover? instead your spending down principal in a prolonged downturn compounding a negative return.
if your balanced fund is 1 million and your pulling 40k a year and we took another 45% drop this year you have 650k left from which you will pull 40k again leaving you less then 610k if you inflation adjusted.
you are really no different then someone about your age retiring now with 610k taking only 4% of that number. but you are still taking 4% of 1 million based on what was.
if markets stay down another year you are pulling 42,500 now after inflation adjustments from the 610k leaving you around 568k..
in 3 years time you went through 1/2 your money already that you started with.
that hit early on made all the difference in your success rate of basing it on 1 million even though your average long term return on the fund may still come out to 5%. its all about the sequence not the return.
its great your funds will bounce back to that 5% average return already but in the mean time you spent a load of principal trying to sustain yourself . there is less money to grow now when rates and markets bounce back.
had you had the 5% average annual return spread out evenly over that time frame instead of being welcomed with a 45% drop that first year you would pretty much have your entire million left from which you are pulling that 4%... huge difference in results.
thats why without knowing the sequence we will get whacked in its near impossible to plan using average returns you think you will get or got. hense thats why for some it makes sense to shed some of that sequence risk over to a 3rd party. tou are not only beating on your own where the markets will go, where interest rates will go but most important in what order with the gains and losses come. thats 3 variables to deal with.
Fallacies in your post:
1. the 45% drop in your portfolio is for the stock portion only; the bond portion actually gained; in 2008, VTSMX dropped 37% while VBMFX gained 5%; if you owned long term treasuries as your core bond holding (VUSTX), you would have gained 23% in that; so if you retired in 2008 with a 60:40 allocation, your loss would have been only 13% (if using VUSTX for bonds) or 21% (if using VBMFX for bonds), not the 45% you claimed in your example; your example is actually a strawman argument once again; it doesn't reflect the actual holdings of a typical retiree; for a $1 million portfolio, you would have ended 2008 with $766K (accounting for the $40K you subtracted for living expenses)
2. in 2009, VTSMX gained 28.7%, while VBMFX gained 5.9%; your portfolio is now back up to $873K (after deducting $42K in living expenses)
3. in 2010, VTSMX gained 17% , while VBMFX gained 6.9%; your portfolio is back up to $943K (after deducting $44K in living expenses)
4. you didn't have to sell any stocks in 2008 if you owned bonds; so your stock losses were on paper only; today, your stocks are back to even, and then some
5. no one put a gun to your head to withdraw 4% during the recession; you could have withdrawn 3%; the 4% SWR is not the 10 Commandments
The numbers would look even better had the retiree started 2008 with a 50:50 or 40:60 portfolio. I used 60:40 in my analysis above to show you that even an aggressive allocation like that would have done okay as long as the retiree didn't sell stocks at the bottom - locking in his losses, and preventing him from benefitting from the rebound. Also, if the retiree reined in his spending by withdrawing less than 4%, his portfolio would remain largely intact today. The key here is to have a large enough portfolio that contains enough bonds and cash to be able to ride out the volatility in stocks, and to control your spending.
For a $100,000 portfolio taking $10,000 a year adjusted for 4% inflation over those 17 years, the difference is a remaining balance of $76,629 to a deficit of $187,606."
Huh? $10K withdrawal from a $100k portfolio is a 10% withdrawal rate.No wonder you are running out of money. Not even the Trinity study supports that. Seems to me from all your responses you are posting numbers that don't mesh with reality or don't represent the findings of Trinity study....all in an attempt to make the picture look worse than it actually is. Not credible.
Its only illustrative of the difference the sequence makes ... it has nothing to do with the actual withdrawl rate being practical . although it was over a 17 year period so they could up the rate and it did last, given the right sequence for the time frame. you can make the withdrawl rate whatever you like but the relationship stays the same from high to low. and shows exactly what its supposed to illustrate.
the point is they a merely showing that the sequence has more to do with your actual survival rate then the average return..
Last edited by mathjak107; 04-07-2011 at 09:00 AM..
I would say $100K to $120K per year. I want to have some fun. I also want to see my money grow.
Not there yet.
In todays dollars or are you figuring that $100 to 120K will be plenty when you do retire? In the mid 1960's my dad was making $4,200 a year and that was a good income. Also that was all that was needed to support a family. The house payment was $105 a month. Here we are 45 years later and $4,200 is a good bi weekly pay. Someone starting out now may need to up their goals for the future.
the point is they a merely showing that the sequence has more to do with your actual survival rate then the average return..
Meaningless point. You can't control the sequence of return. But you can control your withdrawal rate. And you can control your asset allocation. So, fretting about getting an adverse sequence of return is a pointless exercise since it is not actionable.
Thats the first point we agree on... yep the sequence of things happening is the big wild card we cant control.
thats the big deal breaker as to whether a plan lives or dies. the fact a portfolio returned a certain annual return is a moot point . as the 17 year study i posted shows you can have a great annual average return yet your real time results sucked . the spread with the same annual return was so dependant on the way the ups and downs unfolded as to blow my mind because the differences were so great. .....
that gets back to my origonal statement that it could be very beneficial to look into alternate means of stabilizing and insuring at least some of your income stream .
the trinity study now has extended data to 2009 .that tells us only what happened to those that retired up to 1980, since the new data ends at 2009 and looks at 30 year retirements . what i always found fascinating is that no average return for a certain allocation is ever figured. its strictly based on its ratio of stocks to bonds and the way events unfolded over that time frame in the order that they did. then they test various withdrawal amounts and tell you what percentile of success you would have made it over the 30 years without running out of money.
the book is to continue but i think when the data is IN for those who retired in the 2000's the picture will be alot different.
Last edited by mathjak107; 04-07-2011 at 10:48 AM..
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