raddr- what ever happend to our unlucky y2k retiree?

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ataloss
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raddr- what ever happend to our unlucky y2k retiree?

Post by ataloss » Tue Feb 17, 2004 11:05 am

the one with the 75% s&p portfolio

his total assets had dropped after his stock allocation got pole-axed and his returns were all catty whompus

Is he walkin' in tall cotton?





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Last edited by ataloss on Wed Feb 18, 2004 5:09 pm, edited 1 time in total.
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Post by raddr » Wed Feb 18, 2004 7:03 am

Here ya go:

Code: Select all

Year   Return(%)   CPI(%)   Withdrawal   Balance 
2000    -9.0        3.4        40        870
2001    -9.9        1.6        40        744
2002   -18.7        2.4        40        565
2003    19.8        1.8        40        637                                                                        


As you can see, last year's stellar market performance improved things somewhat but the retiree is still in deep trouble. The $1000 bank roll is now $637 in inflation-adjusted terms so the initial 4% withdrawal rate is about 6.3%. Better than the 7.0% rate at the end of last year but still very high. Historically, such a scenario would've resulted in ruin nearly half the time in the subsequent 30-40 years. I think, however, that the situation is considerably worse now since stocks are still at sky-high valuations. In the past a portfolio this beaten down would have benefitted from low valuations and juicy dividend yields of 5-6% or greater in the aftermath of the big bear that decimated their portfolio. Now the Y2K retiree is looking at <2% yields which will be a big drag on returns going forward. My simulations show that this portfolio will have a roughly 75-80% chance of going broke in the next 30-40 years unless withdrawals are decreased. :shock:

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Post by ben » Fri Feb 20, 2004 9:23 pm

And I can see he is too scared to even adjust withdrawals for inflation!
Guess with inflation this low that is a realistic possibility; changing orange juice for Tang Etc. - no big adjustments.
Manwhile Ii do have a couple of comment:

1. how does this retiree survive the first year? Seems your calculation deducts the 40K end year only? I guess a more realistic with drawal (besides getting into monthly calc) would be beginning of year if one had to chose? I.e. 2000: $1mill-40K and then - 9%? That would leave our sad retiree slightly better off ending at 874K end 2000.

2. Your returns do not seem to match www.scottburns.com coach potato 75/25% portfolio? He uses Vanguard SP500 index fund and Vanguard total bond market index fund to get following returns:

ret 50/50 ret 75/25
1.17 -3.95 2000
-1.8 -6.91 2001
-6.95 -14.55 2002
16.2 22.4 2003

By combining the 2 above points our sad retiree pulling the 40K into mm account beginning of year and using the 2 Vanguard funds would end 2003 with $768K and not your 637K? A gigantic difference! What am I missing? :oops:
The 50/50% portfolio would end 2003 on almost 900K - not shabby!
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Post by raddr » Sat Feb 21, 2004 4:30 am

Hi Ben,

It looks to me like the Burns' numbers do not include inflation and maybe not expense ratios. I'm also using commercial paper as the fixed income component which alters the FI return a bit. My numbers are stated in real terms (inflation-adjusted). This alone would account for about a 9.5% difference since the end of 1999.

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Post by ben » Sun Feb 22, 2004 6:50 am

ehh.... If I read correcly you have reduced the % return with the inflation each year which then is the main explanation of the return difference? (real return).

You could simply adjust the 40k withdrawal with the inflation. The end no. is in December 2003 USD so guess that is fine?

Scott Burns nos use the actual return of the Vanguard funds so expense ratios are included. Inflation is then naturally not.

So in conclusion; I am not wrong to say that had the sad retiree just used the Vanguard funds in the 75/25% format and not adjusted for inflation (as he saw the nest egg drop, and as inflation low) he would sit on $768K in Dec 2003 USD. - Sad - but not as sad as 637K.....

And had he used the 50/50% couch potato portfolio of the 2 funds he would sit on 900k in Dec 2003 USD (again; if not adjusted for inflation) on new years eve 2003!
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Post by raddr » Sun Feb 22, 2004 7:07 am

So in conclusion; I am not wrong to say that had the sad retiree just used the Vanguard funds in the 75/25% format and not adjusted for inflation (as he saw the nest egg drop, and as inflation low) he would sit on $768K in Dec 2003 USD. - Sad - but not as sad as 637K.....


That sounds about right to me. Ignoring inflation since the start of 2000 would add about 10% to the balance which would get you from $637 to about $700. Using the total bond fund instead of comm. paper would also have increased returns since yields were falling during most of that four year period. Did Burn's increase withdrawals with inflation? I don't know. If he did not adjust then his numbers look better than they really are.

As for the 50:50 allocation, naturally it will look better than a 75:25 portfolio during a bear market but it will underperform in positive-return years or about 70-75% of the time. A 50:50 allocation is fine for short retirements but is not adequate for most early retirees.

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Post by ben » Sun Feb 22, 2004 7:11 pm

Just to clarify; Scott Burns was not discussing w/r or adjustments for inflation. He was simply informing the return of his 50/50% and 75/25% portfolios of Vanguard SP500/Vanguard bond funds.

If I decided (which I won't!) to go the simple way of only those 2 assets I would certainly pick them as diversified as possible; I.e. Vanguard total stock market fund and total bond fund. It creates more stability being vital to a retiree - I.e. just changing the SP500 for the total market fund would mean an annualized return difference of a couple of % for last 5 years:

http://www.dallasnews.com/sharedcontent ... cadd0.html

I guess my point is that also Intercst and others (Bogle) agrees that total market is better for diversification but it did not exist at the initial studies.

As for the bond fund it is of course a choice of accepting the costs which naturally is vital for a bond return. I believe the low Vanguard costs is worth it, considering the diversification one gets.

As for the 50/50% vs 75/25% I fully agree that one would be giving up some return - above link shows about 1% lost - with the SP500/total bond 50/50% doing 10.5% over 15 years and the 75/25% doing 11.4%.

15 years is naturally not a long retirement to look at - and the various retirement calculators would have to be used - but bull or bear the 50/50% portfolio would make one sleep better at night, at a lower w/r of course. :?
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Post by raddr » Mon Feb 23, 2004 3:56 am

I.e. just changing the SP500 for the total market fund would mean an annualized return difference of a couple of % for last 5 years:

http://www.dallasnews.com/sharedcontent ... cadd0.html

I guess my point is that also Intercst and others (Bogle) agrees that total market is better for diversification but it did not exist at the initial studies.


That's true for the last five years because small caps greatly outperformed large caps. However, for the last 10 years the S&P500 index outperformed the TSM index. Over longer periods the returns have been virtually the same. The bottom line is that the two are essentially the same for all practical purposes. Their correlation coefficient is around 0.99. It wouldn't have mattered which of the two were used in the historical studies. Oh, and remember, neither index even existed during the bulk of the time period of the Trinity & REHP studies, much less index funds to invest in. So I'd take these "studies" with grain of salt. :wink:

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