Principle Preservation Is WRONG When You Retire

[corn18]

Interesting point. Is that historically accurate? It makes sense.

I've seen numerous articles about the demand for stocks being sky high now because it's really the only alternative. And that demand is part of what is driving higher prices.

That and an unprecedented supply of cheap money. It will crash one day (it always does), but in the meantime, I agree with Singuy that there aren't a lot of good options for savers.

[Like2Plan]

I've actually seen some favorable modeling which calls for the highest bond allocation at retirement with increasing amounts of equities as you get older.

The successful Monte Carlo simulations that I've looked at call for at least 30% equities.

But, even Warren Buffet does not recommend 100% equities. https://www.investopedia.com/terms/1/90-10-strategy.asp

Then, there is the human factor that has been mentioned above. The plan would not have a good chance for success if you lose your nerve and sell off your equities. I think it is probably easier to maintain the course when most of your human capital is in front of you, than behind you--it's harder to go out and get a job to shore up your income when you are 70 vs 30.

[Singuy]

Interesting point. Is that historically accurate? It makes sense.

I've seen numerous articles about the demand for stocks being sky high now because it's really the only alternative. And that demand is part of what is driving higher prices.

Historically there hasn't been a time if zero interest rates, especially for this long. Interest rate is so low Covid shut down and I rocketing unemployment rate doesn't phase the market. This is the longest bull running market in history even with black swan events that comes every hundred years.

[Like2Plan]

I love this thread titled "I can't believe I am thinking this" : https://www.bogleheads.org/forum/viewtopic.php?t=25126 It is a great read. It starts Oct 9, 2008......

[Singuy]

I've actually seen some favorable modeling which calls for the highest bond allocation at retirement with increasing amounts of equities as you get older.

The successful Monte Carlo simulations that I've looked at call for at least 30% equities.

But, even Warren Buffet does not recommend 100% equities. https://www.investopedia.com/terms/1/90-10-strategy.asp

Then, there is the human factor that has been mentioned above. The plan would not have a good chance for success if you lose your nerve and sell off your equities. I think it is probably easier to maintain the course when most of your human capital is in front of you, than behind you--it's harder to go out and get a job to shore up your income when you are 70 vs 30.

Seems like the argument against this is more self sabotage than mathmatically proven.

[corn18]

Seems like the argument against this is more self sabotage than mathmatically proven.

Maybe you can run with pure math, but I can tell you I cannot. If you think you have it all figured out and the past predicts the future, then 100% S&P 500 will work fine for you. Just don't push it off as THE answer. Ask anyone who retired in 1964 or 1984 and lived with 0% REAL returns for 20 years.

[Singuy]

Maybe you can run with pure math, but I can tell you I cannot. If you think you have it all figured out and the past predicts the future, then 100% S&P 500 will work fine for you. Just don't push it off as THE answer. Ask anyone who retired in 1964 or 1984 and lived with 0% REAL returns for 20 years.

You have to take all thing into consideration because it seems like you are using historical circumstances to judge future returns, not me.

Back in the 60s people had a hard time buying equities because the world wasn't digitalized. In the 70s and 80s interest rates were beyond 15%. The flow of information was at snail pace and require Joe to rely on a broker to sale them in on a stock which in itself was a gigantic risk when scam artists were plenty.

Comparing that era to today is like comparing Earth to Pluto. Factor everything in and you will come to just one logical conclusion.

[corn18]

You have to take all thing into consideration because it seems like you are using historical circumstances to judge future returns, not me.

Back in the 60s people had a hard time buying equities because the world wasn't digitalized. In the 70s and 80s interest rates were beyond 15%. The flow of information was at snail pace and require Joe to rely on a broker to sale them in on a stock which in itself was a gigantic risk when scam artists were plenty.

Comparing that era to today is like comparing Earth to Pluto. Factor everything in and you will come to just one logical conclusion.

You seem to have it all figure out, so I'll just say good luck.

[Like2Plan]

Seems like the argument against this is more self sabotage than mathmatically proven.

You say that like it is a bad thing....but, anyway here's another example in the "food for thought" department:

https://www.marketwatch.com/story/decades-later-investors-still-havent-recovered-from-historys-greatest-bubble-2019-06-18

https://asia.nikkei.com/Spotlight/Datawatch/30-years-since-Japan-s-stock-market-peaked-climb-back-continues

[corn18]

Here is my retirement planner that uses Monte Carlo. The charts are run @ 95% success (success defined as not running out of money). For 100% S&P 500, I need $1.189M. For a 40/60 portfolio, I need $913k. Why the difference? I know why and have offered an article that explains it.

[Singuy]

You say that like it is a bad thing....but, anyway here's another example in the "food for thought" department:

https://www.marketwatch.com/story/decades-later-investors-still-havent-recovered-from-historys-greatest-bubble-2019-06-18

https://asia.nikkei.com/Spotlight/Da...back-continues

You know how I feel about foreign markets. It's trash and always will be.

[corn18]

And if you love backtesting, this chart shows you that 100% equities is not the best risk adjusted return.

[LivingAlmostLarge]

But what about the point that let's say you FIRE with $1m = $40k portfolio at 35 years old. TRUE story for many FIRE retirees. They retire with very small portfolios because they live on very little. Assume 100% stocks. Now fast forward 5 years and it's been $1M because they have been living interest and dividends from their portfolio. But then the recession hits and they take a 25% hit (which is low for 100% stocks). They are are $750k but they aren't working and now do they scale back to $30k? What if they can't because retirement at 40 has gotten more expensive? What if they can't get a job at 40 or 45 or 50 because of covid and jobs are going by the wayside. So they have to live on $40k (which might be a lot or a little depending on where they live). Property taxes could be crushing them, let alone medical insurance. Oh yeah nevermind they have subsidized obamacare.

But the recession and stocks last 2 years and they tap at a rate of 6% instead of 4% while the market keeps crushing their portfolio. It goes down to $700k. Now what? How do you circumvent the portfolio hit for a 100% return?

Worse if you were say $500k in stock and $500k in real estate but your tenants on your paid for 4 plex stopped paying during this covid. You don't have a mortgage but you have property taxes and maintenance of the property and you are unable to evict? And instead you were using the $500k property to generate your $20k/year and instead you have to tap your cash?

I know what you will say singuy...idiots for retiring so close to the edge. Idiots for retiring without building a LARGE safety net. But how many people retire with barely enough capital to retire? I'd guess like 90%. 90% probably retire with barely $100k and live on SS and eek out a living like that. So yes i will be a huge hit if you lose even 25% of your portfolio.

[Singuy]

But what about the point that let's say you FIRE with $1m = $40k portfolio at 35 years old. TRUE story for many FIRE retirees. They retire with very small portfolios because they live on very little. Assume 100% stocks. Now fast forward 5 years and it's been $1M because they have been living interest and dividends from their portfolio. But then the recession hits and they take a 25% hit (which is low for 100% stocks). They are are $750k but they aren't working and now do they scale back to $30k? What if they can't because retirement at 40 has gotten more expensive? What if they can't get a job at 40 or 45 or 50 because of covid and jobs are going by the wayside. So they have to live on $40k (which might be a lot or a little depending on where they live). Property taxes could be crushing them, let alone medical insurance. Oh yeah nevermind they have subsidized obamacare.

But the recession and stocks last 2 years and they tap at a rate of 6% instead of 4% while the market keeps crushing their portfolio. It goes down to $700k. Now what? How do you circumvent the portfolio hit for a 100% return?

Worse if you were say $500k in stock and $500k in real estate but your tenants on your paid for 4 plex stopped paying during this covid. You don't have a mortgage but you have property taxes and maintenance of the property and you are unable to evict? And instead you were using the $500k property to generate your $20k/year and instead you have to tap your cash?

I know what you will say singuy...idiots for retiring so close to the edge. Idiots for retiring without building a LARGE safety net. But how many people retire with barely enough capital to retire? I'd guess like 90%. 90% probably retire with barely $100k and live on SS and eek out a living like that. So yes i will be a huge hit if you lose even 25% of your portfolio.

No what I will say is you need 2 million to have a interest of 40k/year because the best CDs today are 2%.

I rather take my chances in the equity market because me and everyone else couldnt tank the stock even if we want to because there are no where else to find returns.

In a zero interest rate environment, equity is the only go to because not only will the market not crash because companies will borrow at no cost to fund growth, but also it's a major risk to go bonds as bond value decreases when interest rate goes up..which has a 100% of going up when rates are zero percent or close to zero.

So if you want to go cash, you need lots of it to have your living expenses covered..and the more cash you have, the less risk you have. If 2 million tanks to 1.25 million for awhile, you shrug it off vs 1 million tanks to 600k.

[LivingAlmostLarge]

No what I will say is you need 2 million to have a interest of 40k/year because the best CDs today are 2%.

I rather take my chances in the equity market because me and everyone else couldnt tank the stock even if we want to because there are no where else to find returns.

In a zero interest rate environment, equity is the only go to because not only will the market not crash because companies will borrow at no cost to fund growth, but also it's a major risk to go bonds as bond value decreases when interest rate goes up..which has a 100% of going up when rates are zero percent or close to zero.

So if you want to go cash, you need lots of it to have your living expenses covered..and the more cash you have, the less risk you have. If 2 million tanks to 1.25 million for awhile, you shrug it off vs 1 million tanks to 600k.

No I'm not saying cash but say 50/50 portfolio. I am not sure how you reconcile people not having saved enough with having a super risky portfolio to supercharge returns to make up for not having enough for a buffer. Say saving $1.25M instead of $1M because it's a 25% buffer. So if the market goes down 25% then you can still draw the same amount in retirement. Also if you needed to leave it alone. I can see a huge problem for people who retire with very little fat in their budget and with a very small porfolio.