# Bond tent



## MrBlackhill (Jun 10, 2020)

I haven't seen any of our retirees or near-retirement forum members talk about the bond tent strategy.

Any opinion?









The Portfolio Size Effect And Optimal Equity Glidepaths


How the portfolio size effect impacts the optimal asset allocation glidepath of a lifecycle or target date fund, and how a bond tent reduces volatility risk.




www.kitces.com


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## Thal81 (Sep 5, 2017)

It's something I've been considering for my early retirement, which could come as early as 6 months from now. But given how the BoC rate is probably going up soon, and the potential impact on bonds, I find it really hard to increase my bond allocation.

Ideally I'd want to move from my current 25% bond allocation to 40% to mitigate the sequence of returns risk for the next 5 years or so. But on the other hand, I could lose a lot of money if interest rates go up significantly in 2022-23. Bond funds are already pricing in some rate hikes, but I wish those hikes would come sooner so I could just rebalance at advantageous prices without fear of losing too much capital near term.

My current thinking is to wait until the moment when I pull the plug, then rebalance to 40% fixed income by buying 15% short term bond funds, so I'd have a mix of aggregate and short term bonds.


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## AltaRed (Jun 8, 2009)

There has actually been quite a lot of discussion about this, at least over at FWF, and to some extent here. Just have not heard of it necessarily described as a V equity path. Without the benefit of empirical analysis and internet discussion of this approach, this is approximately the approach I undertook starting about 20 years ago. I built up a fairly good cash/GIC allocation leading up to retirement (2006), partly because I knew things like new cars and relocation (houses), and a divorce were going to occur immediately post-retirement, but mostly to 'protect' the portfolio until I had established a system and had some experience of what decumulation would look like.

After about 8 years or so into retirement, my equity allocation has been growing and at 72 years of age, it is now the highest it has been since my 40s. I don't see any need to deviate from that trajectory though I think I am now fairly static going forward. I am shedding equity at opportune times to stay in that neighbourhood.


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## agent99 (Sep 11, 2013)

The article seems a bit over-complicated - I gave up on it part way through.

However, it does make sense for those approaching retirement who will have little or no pension beyond CPP/OAS, to be somewhat conservative with their investments.

Looking back to when we retired, I see I had a target of 50% fixed income for overall portfolio. (it was 52% when I started my spreadsheet in 2003). Target in our registered accounts back then was 60% (actual now still 50-52%) Back then, fixed income provided reasonable returns! Unregistered accounts were mostly in stable dividend payers. Their value might have been at risk in a bear market, but the dividends were not.

In retirement, we have maintained about the same total fixed income in dollar terms (our safety net) The percentage FI has dropped as the overall portfolio has grown. Not everyone will see this - others may need to draw down their savings. If so, they should still maintain a reasonable FI buffer and perhaps invest in stable dividend payers rather than risky growth or cyclical stocks.

So perhaps we have done some of what article suggests.


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## londoncalling (Sep 17, 2011)

It has been awhile since I have read anything on this concept. Thanks for sharing! The article is sound and raises many good points on the impacts of a bear market around retirement date and sequence of returns risk. I think the reason that this area has not been given much focus lately is because the markets have carried along and those retiring currently are enjoying great returns. By comparison, my guess would be if one went and read retirement threads from 2008-9 there would be plenty of discussion on capital preservation and what to do about market impact on retirement planning. Another reason the tent does not get much attention would be that those that are much further along in their retirement years have already got past this challenge either successfully or unsuccessfully. If one has enough to live comfortably with the portfolio composition as is 10 years into retirement, why would one crank up the risk for more return? 

Being in my mid forties, portfolio conservation is an area I should probably focus more of my attention over the next few years. I have made peace with the fact that there will be bull and bear markets and I can't change that fact or when they occur. Being in accumulation phase this entire time I see the corrections as opportunity. The equity bear markets have also not been long lived. This may not be the case with a bear market that hits all investments for a long period, at the most inopportune stage of life. 

I may be somewhat protected from the big bear near retirement challenge by participating in well managed, well funded and well capitalized DB plans. This is where the majority of my retirement income will come from. I also have 2 DC plans from previous employers. The larger DC plan has wiggle room to move from growth to balanced to Income at any time. I then also have DIY Registered accounts and a TFSA. As such, my planning around the what the market does near retirement issue would be to start or delay wind down of those DC plans in a different order or a different time based on the amount needed. Another option we may have is to when we start CPP payments or to push back the retirement date.

To use an analogy on our options one could consider all our portfolio composition options as levers on a large console. We can move the levers as we please. At what point do we start to move the levers? by how much? for how long? Previous consensus was you start with equity lever near full throttle and the bond lever barely open and slowly slide them in opposite directions. The bond tent provides a new way to think about what to do with those levers. It makes sense to reduce risk of loss of capital based on when it is needed. We typically advise others not to put money they will be accessing in the short term in to higher risk investments.

A primary difference in taking a misstep in moving those levers is time. An investing mistake in our 30s usually provides more opportunity to correct than one in our 70s. Although the impact is the same, we are usually willing to let the market be the reason our retirement plan was derailed than because we made a shift at the wrong time. Perhaps this is another reason indexing is a better option for most people.

Life can throw some challenges to thwart the current plan (job loss, health, tragedy etc.) which are equally concerning with retirement planning. With so many moving parts we'll never get it perfect but those of us who get the right mix of planning, luck and timing will be fine.


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## dotnet_nerd (Jul 1, 2009)

The article focuses on bear market risk only. It ignores 2 other significant risks. Rising interest rates. Inflation.

Interest rates: As mentioned by others, this can be devastating. Rule of thumb, bond values vary inversely with interest rates 10:1. IOW if interest rates rose 2%, the bond allocation would be clobbered 20%. This scares me more than a bear market.
Bear markets are like bad colds. They suck, but they pass. But a retiree in their 60s or 70s could conceivably see interest rates rise over 2% and stay there _for the rest of their life_. Meaning you would NEVER recover from that haircut.

Inflation: The tent strategy might be great at protecting the cash value of your portfolio. But you can't eat money. At some point you need to buy stuff, like food. Inflation will destroy its spending power.

Nah, I'll pass on a 75% bond tent thanks. I have a 5 yr GIC ladder cash wedge to weather any bear markets.


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## AltaRed (Jun 8, 2009)

FWIW, I don't agree with the percentage allocations in the article either, but that shouldn't take away from the general concept. Take the scale on the Y axis away and the concept has relevance.


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## james4beach (Nov 15, 2012)

I try to avoid any strategy that relies on accurately predicting the direction of interest rates and inflation. I don't think we can predict those with any certainty.

So in my portfolio design, I adopt an approach where I have neutral outlooks on all of these factors and consider that all directions are possible.

I also like to stick with what I know and understand. I don't understand all the mechanics of what Kitces is describing.


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## AltaRed (Jun 8, 2009)

Everything into the future is an unknown roll of the dice. Nothing substitutes for diversification, i.e. covering the bases.


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## Covariance (Oct 20, 2020)

MrBlackhill said:


> I haven't seen any of our retirees or near-retirement forum members talk about the bond tent strategy.
> 
> Any opinion?
> 
> ...


It doesn‘t make much sense to me as it over generalizes what should be an important set of plans for someone. The individual should have an Investment Policy Statement. In the IPS a section should clearly lay out the expected after retirement liquidity and cash flow to maintain the lifestyle (and an expected horizon). Anyone close to retirement age should have this section fairly accurately estimated.

The asset allocation they have in the same IPS should then specify how to fund it while relying on realistic returns. Equity, fixed income, etc allocations all flow out of what the portfolio needs to generate and realistic capital market expectations.

If they update this every year, including grounded return expectations it should get them to retirement and beyond based on the reality of their needs and capabilities.

It seems kind of dangerous to me to short curcuit all this important planning and rely on a strategy that may or may not be appropriate for the individuals circumstances.


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## prisoner24601 (May 27, 2018)

MrBlackhill said:


> I haven't seen any of our retirees or near-retirement forum members talk about the bond tent strategy.
> 
> Any opinion?
> 
> ...


Thanks for sharing this article MrBlackhill. I found myself asking the same questions as Joe in the linked article comments comments and Mr. Kitces gives a thoughtful response that the optimal shape of the tent is an open research issue. I find the following research more interesting and use it in my own retirement plan https://www.advisorperspectives.com...ce-of-asset-allocation-in-retirement-planning.








My take away:
1. Any portfolio with an equity component is risky. Look at the copied chart and this does not even account for 25% of the worst outcomes in the Monte-Carlo simulation! The range of possible outcomes are huge so hope for the best and plan for the worst
2. Get the equity allocation approximately right - 60-75% is close enough if you can tolerate lots of volatility.
3. The tails of the distribution matter in life, not so much in academic papers. So be humble when considering your ability to forecast the future
4. Use an age linked withdrawal strategy like VPW or RMD which translates market risk into swings in the annual draw on your portfolio. You won't run out of money this way but also there is no guarantee that you won't have some lean years when the market takes a dump.
5. Make sure you can cover the big swings by cutting back on spending proportional to market performance. And try to spend more when the market is up.
6. If you can comfortably tolerate the reduction in spending during bad years (say a 50% drop in stocks) then you are ready to retire with a good plan. If not save more.

For me, it took a few extra years of work to get to the point where portfolio passive income and CPP was "enough". And I hope we still have plenty of upside as the future unfolds!


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## Covariance (Oct 20, 2020)

prisoner24601 said:


> Thanks for sharing this article MrBlackhill. I found myself asking the same questions as Joe in the linked article comments comments and Mr. Kitces gives a thoughtful response that the optimal shape of the tent is an open research issue. I find the following research more interesting and use it in my own retirement plan https://www.advisorperspectives.com...ce-of-asset-allocation-in-retirement-planning.
> View attachment 22284
> 
> My take away:
> ...


Congrats on putting together a great plan.


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## james4beach (Nov 15, 2012)

prisoner24601 said:


> For me, it took a few extra years of work to get to the point where portfolio passive income and CPP was "enough"


Don't forget to sell shares, too!

It's perfectly fine to harvest both dividends and capital appreciation out of stock portfolios. Sometimes people under-spend in retirement out of an (irrational) fear of selling shares.


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## agent99 (Sep 11, 2013)

james4beach said:


> Don't forget to sell shares, too!
> 
> It's perfectly fine to harvest both dividends and capital appreciation out of stock portfolios.* Sometimes people under-spend in retirement out of an (irrational) fear of selling shares.
> *




James - where do you get that sort of information??? Just make it up?? 

Prisinor's plan is same as I had 18 years ago. He has accumulated a portfolio that along with CPP (& presumably OAS) will generate enough cash flow to cover living expenses. Living costs will increase with inflation. Growth in portfolio and dividends will likely cover that. 

Sell some of your holdings on a regular basis and you could have ever diminishing returns and eventually run out of money. Some, perhaps many, may *have* to do that, but it is not something to recommend to those still in accumulation stage.


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## james4beach (Nov 15, 2012)

agent99 said:


> James - where do you get that sort of information??? Just make it up??


Nope, this is a well known thing among financial planners. People have an irrational fear of "selling shares" resulting in them trying to live off, for example, only dividends and interest.

There is a very widespread misconception about this matter, encouraged by many books, telling people to "not touch principal".









Why Earning Investment Income Is Overrated


Living off interest and not touching principal has never really been a very good approach, even if the allure of the perceived safety of the approach persists, says columnist Dan Moisand.




www.fa-mag.com


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## AltaRed (Jun 8, 2009)

That fear is marketed by % of AUM advisors in order to continue to: a) maintain/enhance their gravy train, and b) convince folk they need financial advisors. Most people would do well by simply working with 4% SWR and/or VPW withdrawal percentages and spend/gifting as appropriate, albeit there are those who have reasons/motivations for larger than life legacies. It is obviously up to them to do as they wish but fear of selling does result in most seniors I've known in my entire life to have lived below what they could have otherwise done. 

I would suggest there is a happy workable median in between the two book ends and that is where I have been playing for the 15+ years of my life so far.


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## agent99 (Sep 11, 2013)

james4beach said:


> Nope, this is a well known thing among financial planners. People have an irrational fear of "selling shares" resulting in them trying to live off, for example, only dividends and interest.
> 
> There is a very widespread misconception about this matter, encouraged by many books, telling people


I agree with the part about there likely being a misconception among financial planners! Financial planners may not like clients wanting to live off portfolio income because perhaps they can't generate that income after collecting their hefty fees. They then publish misleading magazine articles 

Rainy Day musings:

*A - Live off income or not?*
You invest your $1million and generate 4% in cash flow (dividends and interest). Not hard to do. $40k pa. You are a retired couple with estimated living expenses of $60k pa in retirement. You collect $35k pa in CPP & OAS (max is about $42k). So now you have $75k pa. $15k more than you need.

So what should you do with that extra $15k pa. But wait, it's not just $15k if you use the James plan. You must sell some of your portfolio - Say another $15k. So now you have $30k looking for a home.
Using James' plan just spend it? No? How about don't sell anything but re-invest the extra $15k income. Maybe in TFSA emergency fund to cover issues life can throw at you? On top of that your portfolio hopefully grows. At least enough to cover inflation so that your future living expenses are covered. Finally, you leave your capital to family or charities.

There _are_ some reasons to NOT live off dividends and interest:

*Case B* You have a huge portfolio invested in low yield fixed income - maybe $3-$5million. You just spend it just as though it was money stored under the mattress and don't have to worry about ever running out. You leave what's left to family or charities.

*Case C * The total opposite - You just have not saved enough and/or you are invested very conservatively or through a high fee financial manager. Portfolio income doesn't cover your living expenses. You have to sell off your holdings regardless of what markets are doing just to cover expenses. You may end up with nothing before you expire. Or at best have to cut back on your living expenses and die poor. No legacy for family or charities.

I wish I was at *B*, but definitely not at *C*. I suspect many retirees may be at *C* if they have not planned well. Not many here would likely be at *B*, but hopefully many will strive for* A*.


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## AltaRed (Jun 8, 2009)

agent99 said:


> *Case C * The total opposite - You just have not saved enough and/or you are invested very conservatively or through a high fee financial manager. Portfolio income doesn't cover your living expenses. You have to sell off your holdings regardless of what markets are doing just to cover expenses. You may end up with nothing before you expire. No legacy for family or charities.


One never ends up with nothing if withdrawals are properly manged with any one of the 3-5 tools (algorithms) that exist. 4% SWR and/or VPW gets folks to their expiry date without running out of money. I suspect this is the case for perhaps 90% or retirees. Only the 10%ers likely fall into A and of those only the 1%ers likely fall into B. The Irvings and Westons come to mind.


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## james4beach (Nov 15, 2012)

AltaRed said:


> One never ends up with nothing if withdrawals are properly manged with any one of the 3-5 tools (algorithms) that exist. 4% SWR and/or VPW gets folks to their expiry date without running out of money. I suspect this is the case for perhaps 90% or retirees.


Yes, to be clear, I'm talking about being aware of the withdrawal rate and then operating *within* the reasonable withdrawal rates. As you say, something like 4% or variable strategies.

Withdrawals = dividends, interest, or selling shares. It doesn't matter which combination you do. Even if it's entirely dividends, the same rule applies: it has to be a sustainable withdrawal rate.

I did not mean that one can sell shares willy nilly to your heart's content. But you also can't take out dividends to your heart's content. For example if you put together a dividend portfolio with 7% yield (which one can do) there is NO reason to think that's sustainable.

What concerns me is when people get caught up on the "never sell any shares" idea, this can lead to some unfortunate results. For example

1. they might hold a diversified portfolio but then think they can only withdraw the 2% that it spins off... in fact they can safely take much more!

2. they might start buying things like covered call ETFs or high dividend stocks, with yields like 6% to 10%, and mistakenly think that's sustainable because they aren't selling shares... nope.


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## AltaRed (Jun 8, 2009)

Regardless of how a portfolio is structured. e.g. growth heavy or income heavy, the withdrawal algorithms work in total. FAs deal with this all the time with client portfolios cherry picking where and how much the withdrawal amounts come from. A number of my spouse's relatives are with RBC DS. All they do is rely on the advisor to tell them how much can be taken out of the portfolio in any given year, and a schedule is made to do the withdrawals. It's been ongoing for over 10 years. A DIY investor needs to do the same thing.

However, Agent99 is correct in saying advisory fees have to be taken into consideration. Most of the withdrawal algorithms assume low portfolio fees, probably in the range of 20 bp (one would have to dig into the specifics of each methodology to know what the assumptions are). I seem to recall when I used FIRECalc back in the early 2000s for my simulations, the assumption was 20bp but I believe I used in the range of 0.5% to be 'conservative'. If someone is in 2.5% MER ((advisory fee + product MERs). territory, that kills a lot of net cash flow out of the 4%SWR.


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## agent99 (Sep 11, 2013)

james4beach said:


> Withdrawals = dividends, interest, or selling shares. It doesn't matter which combination you do. Even if it's entirely dividends, the same rule applies: it has to be a sustainable withdrawal rate.


What matters, is
firstly, how much you will or have saved for retirement,
secondly, how much you need (or want) for living expenses,
thirdly, how much will inflation affect your living expenses.
fourthly, how much of a buffer do you want to maintain for unexpected events

If you have not saved enough to allow you to draw enough income to cover living expenses (and grow your portfolio in step with inflation), you may _have_ to sell shares. Hopefully not in down markets.

Another reason you may have to sell shares, is that you are overly cautious with your investments. GICs and the like won't likely generate the income you need, unless you have a very large nest egg. If plan is to sell growth stocks or funds, they may not grow in your retirement time frame!

We have been through a lot of this before. I believe that those saving for retirement should first try and maximize their savings. Then invest a good part in solid dividend payers with healthy yields (e.g. banks, utilities). Also, create a fixed income safety net, perhaps in TFSAs. And don't gamble with your savings (tech, crypto, etc). Arrange lifestyle to achieve realistic living expenses in line with expected income from portfolio and pensions. If possible, try to avoid having to sell shares or funds for income. Don't run out of money!


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## prisoner24601 (May 27, 2018)

agent99 said:


> Prisinor's plan is same as I had 18 years ago. He has accumulated a portfolio that along with CPP (& presumably OAS) will generate enough cash flow to cover living expenses. Living costs will increase with inflation. Growth in portfolio and dividends will likely cover that.


Thanks, it's always reassuring to hear from someone that's been there done that. And, if I'm not mistaken, 18 years would have included at least a couple of bear markets in the early days of retirement (the Red zone). I hope to report back in 2040 that my retirement is tracking to plan!


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## james4beach (Nov 15, 2012)

agent99 said:


> If possible, try to avoid having to sell shares or funds for income. Don't run out of money!


You seem to be implying that not selling shares, and only living off dividends, has a lower risk of running out of money. If that's what you meant, it just isn't true. You can avoid selling a single share, and only live off dividends. But if those dividends are too high (resulting in too high a withdrawal rate) you will STILL run out of money. It's just as dangerous as selling too many shares.

So whether or not you sell shares is just irrelevant to the danger of running out of money. The only thing that matters is how MUCH you withdraw, whether those withdrawals are dividends, or selling shares. The *mechanism* of withdrawing the money doesn't matter.

You can run out of money in retirement even if you only use dividends and never sell a single share.

The correct version of your advice should be: avoid withdrawing too much money, whether it's dividends or selling shares. And maybe that's what you meant.


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## agent99 (Sep 11, 2013)

james4beach said:


> You seem to be implying that not selling shares, and only living off dividends, has a lower risk of running out of money. If that's what you meant, it just isn't true. You can avoid selling a single share, and only live off dividends. *But if those dividends are too high (resulting in too high a withdrawal rate) you will STILL run out of money.* It's just as dangerous as selling too many shares.


James, that is totally illogical and wrong. 
You seem to think that because we earn dividends, we have to *spend* the money?
The opposite is true. Excess income is re-invested and allows the portfolio to grow - at least enough to keep pace with inflation.


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## AltaRed (Jun 8, 2009)

prisoner24601 said:


> Thanks, it's always reassuring to hear from someone that's been there done that. And, if I'm not mistaken, 18 years would have included at least a couple of bear markets in the early days of retirement (the Red zone). I hope to report back in 2040 that my retirement is tracking to plan!


Agent99 is being conservative and cautious in terms of portfolio decumulation. That is a personal decision made possible by a number of factors, not a general public financial planning perspective that is more applicable to the masses. Algorithms like 4% SWR and VPW are the standard vehicles for decumulation potential which almost certainly includes both withdrawal of investment income AND a portion of invested capital. I use the word 'potential' purposefully because the algorithms are meant to be 'ceilings'. Clearly no one needs/should be depleting more than they need too, e.g. if 3.5% SWR is enough to meet cash flow needs, then withdraw only 3.5%.

I do similar with VPW methodology in which I withdraw less than what the algorithm says I can. It is not whether the withdrawal amount is investment income only, or a combination of investment income and invested capital. Staying within the algorithm ensures one does not run out of money before they expire. I am 15 years into such a plan and it is working perfectly well. Two caveats as previously mentioned: 1) the algorithms are based on low fee accounts, so the withdrawal amounts are essentially gross before fees, i.e. subtract MER values to get to net percentage withdrawals, and 2) SWR is based on a balanced 60/40 portfolio so that more conservative portfolios would need to use lower SWR percentages. VPW methodology is much better than SWR because it adjusts for differences in asset allocation percentages.

Living only off investment income or a portion thereof is a far too conservative approach to withdrawal for most people, unless one wants to leave a very large legacy, almost certainly larger than one started retirement with by a factor* of 2 to 4 in a 25-30 year retirement. This is a highly unconventional place for most retirees to be. Hence why depletion of invested capital is in all the standard withdrawal mechanisms. Growing invested capital is certainly not in my retirement plans, i.e. I'd rather give/gift while living than having a large lump sum left upon death.

* Rule of 72. If one's capital (price) appreciation annually is 3%, invested capital doubles every 24 years. If 5%, invested capital doubles every 14.5 years. If 8%, invested capital doubles every 9 years.


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## prisoner24601 (May 27, 2018)

AltaRed said:


> Agent99 is being conservative and cautious in terms of portfolio decumulation. That is a personal decision made possible by a number of factors, not a general public financial planning perspective that is more applicable to the masses.


Yes, I see your point. My thinking is that being able to live off interest/div plus CPP/OAS gives you a very good indication of whether you are able to cope with the drop the algorithm would impose during a bad market stretch. Not to say that's a rule every year but if you have to be comfortable understanding it's not a pension that guarantees a fixed dollar amount.


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## prisoner24601 (May 27, 2018)

AltaRed said:


> Algorithms like 4% SWR and VPW are the standard vehicles for decumulation potential which almost certainly includes both withdrawal of investment income AND a portion of invested capital.


It's interesting to me why algorithms like VPW or Constant % are not better understood and marketed by financial advisors. The so-called 4% rue (constant dollar withdrawal) is a relatively inefficient approach as shown by research (see below leftmost bar on the chart) yet is the 'gold standard'. But it should be clear that with the 4% rule (constant dollar withdrawal) you might go broke or spend too little. I think it has to do with the value proposition of a financial advisor - essentially "my services can provide you with a guaranteed pension like retirement income stream from a risky portfolio". This can't be true and why the 4% rule comes with fine print that says except for sequence of returns risk or 95% of the time you won't go broke given certain market assumptions.



https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi72L-28-LzAhUlmuAKHRRyDg8QFnoECAYQAQ&url=https%3A%2F%2Finvestmentsandwealth.org%2Fgetattachment%2F90eb6376-d090-4904-9f82-786553ff5ed9%2FRMJ023-OptimalWithdrawalStrategy.pdf&usg=AOvVaw3Ymy_3wk0wLKTceGnq9oDb


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## agent99 (Sep 11, 2013)

Prisoner, I always assumed that the 4% SWR was more of a planning tool than one to use in practice.

Our withdrawal rate varies according to our needs. Initially I used 4% of portfolio value as a rough guide as to what we could safely withdraw. Our dividends and interest at that time (2004 figure) totalled about 5% and were enough to cover our expenses & taxes without need to sell anything. 

That 5% cash flow has now dropped to 4%, but portfolio has grown to over twice the size. With only 10-15 yr horizon, we could spend a lot more. But on what? We don't have a LOT of money, but have always done whatever we want. 

I think the reason for our success over 18 years, was *NOT *being overly conservative. My target was, and still is, to invest in a way that will produce enough income to cover our desired withdrawal rate. If we incur a one time big expense, then we _may _sell something  

I realize not everyone may be able or want to do this. It does require living within your means, or taking risk of an ever depleting portfolio. Those who have pension incomes (we don't) are in a different category.


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## AltaRed (Jun 8, 2009)

prisoner24601 said:


> It's interesting to me why algorithms like VPW or Constant % are not better understood and marketed by financial advisors. The so-called 4% rue (constant dollar withdrawal) is a relatively inefficient approach as shown by research (see below leftmost bar on the chart) yet is the 'gold standard'. But it should be clear that with the 4% rule (constant dollar withdrawal) you might go broke or spend too little. I think it has to do with the value proposition of a financial advisor - essentially "my services can provide you with a guaranteed pension like retirement income stream from a risky portfolio". This can't be true and why the 4% rule comes with fine print that says except for sequence of returns risk or 95% of the time you won't go broke given certain market assumptions.


I don't subscribe to the 4% SWR rule (or 3.5% SWR now commonly quoted due to low fixed income rates) for the reasons you mention. The methodology has been examined and reported on perhaps a few thousand times over the past 10 years.

The more common application of that rule is to apply it on the portfolio balance at the beginning of each year...for the year. That way, one never goes broke but ends up with a variable amount each year depending on the portfolio balance at the beginning of that year. It also accommodates performance return inefficiencies in the account such as a high fixed income balance, poor selection of products, etc. The rule actually works quite well in that characterization. 

Ultimately, no one has to actually withdraw, or spend, that 4% anyway. It simply is the guidepost on which not to exceed that amount. It is a reasonable 'plan' as a starting point to be set in place between a senior who relies on financial advisors.

VPW is a much better methodology and is my own guidepost for maximum withdrawal from the portfolio. I've never approached* the percentage amounts suggested for my age and asset allocation but I could if I wanted too. I have no intention of living past 100 so I can never go broke even if I did withdraw and spend all those percentages.

* At least from a personal spend perspective. I do a fair amount of gifting/giving so occasionally top out near the percentages. There is no need to die wealthy so giving it away while alive brings a lot more joy than some lump sum severely taxed upon death.


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