Raddr's Early Retirement and Financial Strategy Board

[raddr]

I've finally gotten around to calculating the 2004 year end balance of the portfolio of a hypothetical investor who retired at the end of 1999 with a 75:25 mix of S&P500 stocks and 6 mo. commercial paper. This was the type of portfolio that was being touted as "100% safe" on some investment boards based on historical backtesting at the time. The following numbers assume a 0.2%/yr. expense ratio, 4%/yr. withdrawal, and are stated in constant (real) dollar amounts:

[ben]

VBINX guy ended 2004 with $883k in todays USD. There is a good reason for using Sp500 and 6mth commercial papers for the longterm historical SWR studies - but when doing it in our modern age it does not make any sense I think. VBINX (tot equ/bond) guy would have to pull around $45k 1st Jan 2005.

I also think you are doing a mistake by BOTH adjusting nest egg size AND withdrawals for inflation. Either or. Am I missing something?

Cheers!
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90% of my money I intend to spend on wild women, booze, and good times and the other 10% I will spend foolishly.

[raddr]

Hi Ben,

[ben]

Yes my $883k is in todays $ as mentioned. Also agree that we are not comparing apples to apples with this fund - but 60% equity is plenty for me and most FIREd I think. The 40% could be split out more: commodities/PM/foreign bonds/reits come to mind.

Anyway; just proves what we all say here: diversify into asset classes you think are not too overvalued.
_________________
90% of my money I intend to spend on wild women, booze, and good times and the other 10% I will spend foolishly.

[raddr]

[ataloss]

628 k? I would be working especially with current valuations
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Ataloss


Have Fun

[raddr]

[lazyday]

Very interesting and scary analysis.

I imagine if one did something like the Trinity study in 1965, the 100% safe withdrawal rate would be higher than 4%. (I guess we can calculate the swr to 1965, I haven't). Then, a 1965 or 1973 retiree using that maximum swr would have run out of money.

I think the same might be true for 1999/2000, only more so. Year end 1999 might turn out to have been worse than any point in history to retire on an S&P500/shortbond portfolio.

I agree that the hypothetical retiree is in trouble, and may easily run out of money in the years or decades ahead. He/she might make things even worse IMO by trying too hard to fix past mistakes, and gobbling up lots of small cap value today. (After all, if S&P500 was a hot, very overpriced asset in 1/2000, maybe today SV is a hot, somewhat overpriced asset, compard to other assets.)

[raddr]

[tmeri]

raddr, what are the details for the returns, or can you post the source for those numbers?

[raddr]

Hi Tmeri,

[tmeri]

How does 5.5% nominal become -9.1% real after you subtract 3.4% inflation and 0.2% expenses? I get: 5.5% - 3.4% - 0.2% = 1.9%. Obviously, I'm missing something.

[raddr]

[wanderer]

ben -

I also think you are doing a mistake by BOTH adjusting nest egg size AND withdrawals for inflation.

I suppose he could inflate up the $40 w/drawal and take out of current dollar nest egg but wouldn't the result be the same?

Agree with raddr, VBINX bond holdings too high for 50 year horizon.

[wanderer]

hmm. I come out with 7k-12k more for ending balances. Assumed draw at beginning so 'bad' sequence affects balance a bit less... Still, not a good sitch.