Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
very interesting article. it seems that the process of drawing money out of our nest egg changes the results of even the biggest bull market returns . drawing out money is no different in flat or down markets to a trader having a string of loosing trades. the end result is the same.
while the 17 year period of 1987 to 2003 had the s&p averaging over 13% a year the returns a retiree saw werent even close to that because of the sequence in which the gains and losses came.
three years of negative returns for retires drawing out money right at the beginning negated one of the greatest bull markets ever.
they took a 100k portfolio and an almost 14% average return for 17 years and ran a few different sequence simulations on it.
using the rule of thumb of having an average long term return of 7% from a 50/50 mix which would allow 4% to be drawn and 3% to grow the portfolio by inflation they increased the withdrawl rate to match an almost 14% return and 4% inflation . they left 4% to grow the nest egg by the inflation rate and in this case were able to take a 10% withdrawl rate to keep the same ratio.
the results were mind blowing.
the balance ranged from a high of 76,629 left over to a low of minus 187,606 depending on the sequence of gains and losses.
.
thats amazing, because the return was a whopping average of almost 14% a year over that time frame and the only thing they changed was the order of the actual gains and losses.
it shows you that besides market rate risk and interest rate risk the biggest risk we take of all is sequence risk. it also shows you there is no such thing as a long term average return thats meaningful when it comes to the de-accumulation stage of our lives.
looking at past performance of funds and seeing the 6 % or 10% average return for a 10 year period is meaningless for predicting how you may do going forward. you cant say if i had this fund the last decade i would have been just fine. nope ,the order of events happening may still have wiped you out even though the average return says you should have been able to pull 4% a year and had more now then you started with.
2- 3 years from retirement, and this housing market still is not recovering much, but then the job market and people's wages have not recovered much either. Anyway, wanting to sale my house before/at retirement so my fixed expenses are nil. Then I'll have the spending flexibility I want in retirement. Our small s/d of 17 houses has two foreclosures, (one bank-owned, the other just going through the advertising process), and three houses, (two of which have been 4sale for 2 years), on the market right now. County finally getting around to reappraisal of the entire digest. They have already announced a downgrade of -30% for undeveloped land, Figure houses and developed lots are in for a 20-25% downgrade.
Weighs on my mind. This moving toward and being in retirement thing is not a retiring occupation. There, I feel better.
2- 3 years from retirement, and this housing market still is not recovering much, but then the job market and people's wages have not recovered much either. Anyway, wanting to sale my house before/at retirement so my fixed expenses are nil. Then I'll have the spending flexibility I want in retirement. Our small s/d of 17 houses has two foreclosures, (one bank-owned, the other just going through the advertising process), and three houses, (two of which have been 4sale for 2 years), on the market right now. County finally getting around to reappraisal of the entire digest. They have already announced a downgrade of -30% for undeveloped land, Figure houses and developed lots are in for a 20-25% downgrade.
Weighs on my mind. This moving toward and being in retirement thing is not a retiring occupation. There, I feel better.
It certainly is a greater challenge now compared to 4 years or more ago.
very interesting article. it seems that the process of drawing money out of our nest egg changes the results of even the biggest bull market returns . drawing out money is no different in flat or down markets to a trader having a string of loosing trades. the end result is the same.
while the 17 year period of 1987 to 2003 had the s&p averaging over 13% a year the returns a retiree saw werent even close to that because of the sequence in which the gains and losses came.
three years of negative returns for retires drawing out money right at the beginning negated one of the greatest bull markets ever.
they took a 100k portfolio and an almost 14% average return for 17 years and ran a few different sequence simulations on it.
using the rule of thumb of having an average long term return of 7% from a 50/50 mix which would allow 4% to be drawn and 3% to grow the portfolio by inflation they increased the withdrawl rate to match an almost 14% return and 4% inflation . they left 4% to grow the nest egg by the inflation rate and in this case were able to take a 10% withdrawl rate to keep the same ratio.
the results were mind blowing.
the balance ranged from a high of 76,629 left over to a low of minus 187,606 depending on the sequence of gains and losses.
.
thats amazing, because the return was a whopping average of almost 14% a year over that time frame and the only thing they changed was the order of the actual gains and losses.
it shows you that besides market rate risk and interest rate risk the biggest risk we take of all is sequence risk. it also shows you there is no such thing as a long term average return thats meaningful when it comes to the de-accumulation stage of our lives.
looking at past performance of funds and seeing the 6 % or 10% average return for a 10 year period is meaningless for predicting how you may do going forward. you cant say if i had this fund the last decade i would have been just fine. nope ,the order of events happening may still have wiped you out even though the average return says you should have been able to pull 4% a year and had more now then you started with.
good question. im not sure there is an answer other than depends. one thing is for sure though,you couldnt work a withdrawl based on that 13.4% annual return. you would have to base a lower withdrawl rate on less average gains per year since your portfolio has different allocation now with more cash and bonds taken as a whole...
.
if it was a growth and income fund annual return you were basing it on thats 50/50 then you would have to figure withdrawls based on a different range of say 7% to 9% over that time frame with 4% staying with the nest egg and 4% withdrawl.
dont forget if the down years happened in an order beneficial to withdrawing down then having no cash bucket or bonds would win by a landslide at that 13.4% return.
if the order happened in the worst possible sequence than the buckets would win out .
i think percentage wise of success the buckets would be the safest bet overall . they would temper down the right sequence and help make the down sequence less damaging giving you something in the middle range more ofton than not. but they would do it at a smaller withdrawl rate.
.
Last edited by mathjak107; 04-10-2011 at 03:28 AM..
good question. im not sure there is an answer other than depends. one thing is for sure though,you couldnt work a withdrawl based on that 13.4% annual return. you would have to base a lower withdrawl rate on less average gains per year since your portfolio has different allocation now with more cash and bonds taken as a whole...
.
if it was a growth and income fund annual return you were basing it on thats 50/50 then you would have to figure withdrawls based on a different range of say 7% to 9% over that time frame with 4% staying with the nest egg and 4% withdrawl.
dont forget if the down years happened in an order beneficial to withdrawing down then having no cash bucket or bonds would win by a landslide at that 13.4% return.
if the order happened in the worst possible sequence than the buckets would win out .
i think percentage wise of success the buckets would be the safest bet overall . they would temper down the right sequence and help make the down sequence less damaging giving you something in the middle range more ofton than not. but they would do it at a smaller withdrawl rate.
.
If you draw down your cash holdings your return rate goes up as you have less drag on it. I assume you are also using the floating rate high income fund? What do you think of the new conservative income bond fund? I find the why of starting it interesting.
well your asset allocation shifts of your total portfolio so you really have to look and see how it ends up. you will end up very aggressively invested after a few years of spending with maybe not enough cash ..
lets say 1 million bucks is used. in this case you were 100% in the s&p P 500 getting 13.45.. a 10% withdrawl rate will give you 100k a year with 4% staying to grow the nest egg.
if you divide that up into cash and bonds now you have 50/50 . that means
1/2 the mix is getting about 14% and the bonds/cash about 6 %..
thats about 10% . that leaves 4% for saving and 6% to withdraw.
by the time you spend 100k you will have 500k in equities and 400k in bonds and cash but now only 900k
your allocation is now 55/45 equities to bonds and cash. all figuring now is based on 900k and of course the big question is do you want 55/45 with lower cash reserves. most likely not so you would want to bring your stocks down to 50% again and bonds and cash 50% . nothing worse then growing older with less cash and a growing stock allocation and hitting a down turn..
its all about keeping your balance your comfortable with. most of us started our retirement portfolios off with a certain risk vs reward in mind and an allocation to match. spending down and not rebalancing would be self defeating to having an allocation in mind and a system for withdrawls in the first place.
but no question, get rid of the cash and in an up year your return will look better but that would have been true even not spending it down, just add more to equities and bring it up to that same 55/45 increasing your stock allocations.
Last edited by mathjak107; 04-10-2011 at 07:53 AM..
If you draw down your cash holdings your return rate goes up as you have less drag on it. I assume you are also using the floating rate high income fund? What do you think of the new conservative income bond fund? I find the why of starting it interesting.
i just started using the new fund and split my money market in 1/2 putting it in conservative bond fund..
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
