Not just dynamic spending, but dynamic withdrawals. It makes sense to withdraw way more than 4% when the market is at all time highs and save the cash to get you by when the market inevitably goes down for a couple years.
Exactly, what a joke. 4% was specifically designed as the highest withdrawal rate where the sequence of returns risk isn't dangerous. We know that. Now show us the same chart with a higher withdrawal percentage and watch the sequence of returns risk destroy your life.
I'm going to have to agree with several others who commented about what this video is really about. Besides that, your overall contention has one HUGE flaw (a trap that sooooo many other professionals fall into as well), and that is that you contend bonds in the end don't serve a retirement plans like stocks. Your assessment is essentially true, IF you run out the plan to 20 or 30 years...and that right there is the problem! If you follow the 3-part philosophy that many experts push these days of 'Go/slo go/no go' for an overall retirement, then we see by your own graphs that for the first 10 to 20 years (the years you actually will be spending the most amount of money in your portfolio), bonds actually provide the 'safest' alternative. You reference one of your bar graphs (and you actually mention a reference point at 20-years) at the 30-year mark, but who's going to be actually all that active and spending when they're +90?! (if you're alive at all)
What's your opinion on using a cash wedge - keeping a certain amount of cash for expenses on hand? Anywhere from 3-12 months worth. This is effectively the fixed income of your overall net worth. For me, this is approach I'm taking meaning I could weather 1 year long downturn or more. This cash is earning about 4% as well, so it's at least keeping pace with inflation.
Wouldn't the plan just to be ladder T-Bills for short-term expenses, then on higher return years in stocks, maybe withdrawal 5% instead of 4% to use 1% to re-fill up bonds and cash, then on down years you'd withdraw 1-3%, You'd want a couple years of bonds or cash to cover essential expenses. If you had enough cash or bonds to cover 5 years of expenses you'd basically mitigate almost all risk of having to pull out in a down market. It's just a matter of having a lot of money in retirement relative to your actual expenses.
You seem to be trying to debunk the sequence of return risk by using the 4% rule. However the 4% rule research was created on the basis of a "safe" withdrawal rate taking into account variations in sequence of returns. The risk surely very much exists if you were to withdraw at say the average real rate of return of the S&P 500?
Yeah... this. The 4% rule was designed to work in even the worst environments. It's not surprising that it's mostly immune to sequence risk, we already knew that. And in the paper that gave us the 4% rule (by William Bengen in 1994), the author himself recommends not going lower than a 50% bond allocation. So testing it at 100% bonds and seeing it fail more often seems kinda unneeded.
Part of the reason bonds don’t help is because people are buying the wrong bonds. You buy bonds for diversification, and corporate bonds don’t provide much diversification to a portfolio of mostly equities. Adding some long dated treasuries, not because they have good total return (they don’t) but because they have low correlation with equities, and rebalancing can enhance the SWR.
In your models, I heard nothing about rebalancing in the bond/stock portfolio. Analysis I've seen states a mixed portfolio with rebalancing will provide a reduced risk of running out of money over 100% stocks. Only slightly diminished return but lower volatility.
Simply have 2-3 year cash reserve to pull from when markets down , replenish during good times! Video is correct that must have growth stocks to sustainable retirement amount and history has proved that!
One reason given for a stock/bond portfolio is the ability to rebalance and buy stocks after a downturn. Did your 70/30 example in the video rebalance every year?
I was thinking the same thing, my guess is his model auto rebalanced monthly and took a proportional draw down on stock and bonds. I'd like to see a version of this where the percentage of bonds varies from 5-30 percent based on market draw down.
I believe that 2000 retirees are faring a lot better today if they used 60/40 instead of 100% equities. As someone looking at early retirement. I'm going to wary as heck if I'm looking to retire after an insane bull market, particularly how the last few years of the 90s went. I'll also just jump back into the workforce if we implode like in 2000. What are your thoughts on Bond Tents? Kitces and Early Retirement Now (ERN) are pretty big on them. Both agree that long retirements absolutely NEED very high stock allocations.
Ed, I have serious doubts after doing some fact checking. At 27:25 of your video you state the 2008 market came back in 2-3 years? The S&P 500 index did not recover to the same level from the beginning of the decline in Oct 2007 until Mar 2013 (look at any S&P 500 history chart). That's 5.5 years or about double of your 2-3 years claim! How did your client's 100% stock investments recover so quickly as you claim?
I was talking about our personal experience. Most of our fund managers recovered quickly. One peaked Sept. 2007 was back by Oct. 2010. One peaked Sept. 2008 and was back by Oct. 2010.
@@EdRempel Not if you were using S&P 500 as your equity fund... coupling that with their yearly withdrawls which that first year would have been approaching 7-8% after the market decline.
4% rule means you withdraw 4% of the INITIAL portfolio adjusted for inflation each year, AKA you have the same spending power. for 100% in the S&P 500 with 4% withdrawal it failed 4% of the years in the last century 1969 1968 1966 1929. Reducing the withdrawal rate to 3.5% it solves the issue. although i am a fun of international stocks as the last 100 years they had lower returns but you could have higher safe withdrawal rates (when you want something like 99% to 95% success probability, if you are ok with high withdrawal rates like 5% or 6% then US stocks HAD higher chanses but the chanse to fail was higher than 10%)
So this guy says no bonds. No stable portion of your money. What if you only have $200,000 saved and you need a new car in retirement ? You take $35,000 out after the sp 500 dropped 40% ? But you need a new roof too. I don't think the average person should be 100% in stocks. It's too risky. Sequence of events applies to most people. If you have millions, pensions, go for 100% stocks.
I'm not sure why you kept analyzing 70% Bonds and 30% stock allocations. To make your data more applicable to the real world you should have modeled 60% stock and 40% bonds.
100% equity portfolio fails at higher rate than 60/40 over the last 100 years using the 4% rule... run the historical numbers include the failures from 2000 since they failed in less than 10 years. It won't fail if you are not withdrawing, but the topic was sequence of returns.
I’m astonished that anyone living in the United States who is planning to retire on less than $2M - which is nearly everybody - thinks that a 4% withdrawal rate is enough to live on, at all. Never mind 30 years.
You can't be serious. Of course sequence of returns risk is not scary if you pull 4%. 4% was specifically determined as the highest withdrawal rate for which the sequence of returns risk is not scary. Try the same chart with 5% or higher and you will see. This video is a joke.
TERRIBLE advice! Sequence of return risk is real. You are talking a lot for a very simplistic view. First, this video is bout the 4% rule, not sequence of risk I retired in June, and my expenses are a set value of required and discretionary spending. 4% rule simply says how much you can pull out of your portfolio. What happens when the market crashes, and that 4% doesn't cover your expenses? Here's a REAL example. You retire at rhe end of 1999 with $1,000,000, and your expenses are $40,000. With actual s&p returns, pulling $40,000 a year you end 2008 with $348,893. That is sequrnce of returns. I didn't adjust expenses for inflation, so you portfolio would be even lower. That also doesn't account for any unforseen event, such as a medical emergency, or a major house repair. The goal of retirement is to NOT have to lower expenses in a market downturn. That's why you plan your portfolio to cover those times.
Seems to me there are two types of "high risk tolerance" people. Those who do nothing when investments are down - and are happy with that. And... b) Folks who do nothing when investments are down - but worry like hell all the time about it! lol. It's nicer to be in the first camp - but fortunately both types are leaving their investments alone.
Devil is in the details.. what metric are you using for "Bonds".. short term gov bonds? I can get 10 year MYGA from insurance companies that pay 6% guaranteed .. of course a planner will never suggest you have some rental property, because they can't get their 1-2% fee out of it ! GBAB.. a taxable muni fund paying 9%, PFFA a preferred fund paying north of 9%, WFC-L will pay 6 % forever.. The SP500 has never been so concentrated in the top 15 companies as now.. increasing the risk.. not diversified.
So I guess Dave Ramsey is right when he says to stay 100% of a portfolio during retirement should be in stocks At least, according to this person And I have to say you do make a pretty good argument, so I’m not knocking you. I’m just putting it into perspective.
This video needs millions of views, that's all I'm gonna say.
Why
Excellent video! Best idea “dynamic spending”.
In other words adjust your discretionary spending based on market returns.
Not just dynamic spending, but dynamic withdrawals. It makes sense to withdraw way more than 4% when the market is at all time highs and save the cash to get you by when the market inevitably goes down for a couple years.
Using the 4% rule to prove that the sequence of returns risk isn't dangerous is like using tank armor to prove that assault rifles aren't dangerous
Exactly, what a joke. 4% was specifically designed as the highest withdrawal rate where the sequence of returns risk isn't dangerous. We know that. Now show us the same chart with a higher withdrawal percentage and watch the sequence of returns risk destroy your life.
A Reverse Mortgage Line of credit withdrawal at the end of bad years vs portfolio withdrawals could help mitigate SOR risk.
Agree with the video. I've come to the same conclusions. Risk is relative, and I always thought inflation was the biggest risk.
Thank you for talking common sense, not fear mongering.
I'm going to have to agree with several others who commented about what this video is really about. Besides that, your overall contention has one HUGE flaw (a trap that sooooo many other professionals fall into as well), and that is that you contend bonds in the end don't serve a retirement plans like stocks. Your assessment is essentially true, IF you run out the plan to 20 or 30 years...and that right there is the problem! If you follow the 3-part philosophy that many experts push these days of 'Go/slo go/no go' for an overall retirement, then we see by your own graphs that for the first 10 to 20 years (the years you actually will be spending the most amount of money in your portfolio), bonds actually provide the 'safest' alternative. You reference one of your bar graphs (and you actually mention a reference point at 20-years) at the 30-year mark, but who's going to be actually all that active and spending when they're +90?! (if you're alive at all)
Thanks Ed, I am happy you explained this.
Glad it was helpful!
What's your opinion on using a cash wedge - keeping a certain amount of cash for expenses on hand? Anywhere from 3-12 months worth. This is effectively the fixed income of your overall net worth. For me, this is approach I'm taking meaning I could weather 1 year long downturn or more. This cash is earning about 4% as well, so it's at least keeping pace with inflation.
Wouldn't the plan just to be ladder T-Bills for short-term expenses, then on higher return years in stocks, maybe withdrawal 5% instead of 4% to use 1% to re-fill up bonds and cash, then on down years you'd withdraw 1-3%, You'd want a couple years of bonds or cash to cover essential expenses.
If you had enough cash or bonds to cover 5 years of expenses you'd basically mitigate almost all risk of having to pull out in a down market. It's just a matter of having a lot of money in retirement relative to your actual expenses.
You seem to be trying to debunk the sequence of return risk by using the 4% rule. However the 4% rule research was created on the basis of a "safe" withdrawal rate taking into account variations in sequence of returns. The risk surely very much exists if you were to withdraw at say the average real rate of return of the S&P 500?
Yeah... this. The 4% rule was designed to work in even the worst environments. It's not surprising that it's mostly immune to sequence risk, we already knew that. And in the paper that gave us the 4% rule (by William Bengen in 1994), the author himself recommends not going lower than a 50% bond allocation. So testing it at 100% bonds and seeing it fail more often seems kinda unneeded.
Part of the reason bonds don’t help is because people are buying the wrong bonds. You buy bonds for diversification, and corporate bonds don’t provide much diversification to a portfolio of mostly equities. Adding some long dated treasuries, not because they have good total return (they don’t) but because they have low correlation with equities, and rebalancing can enhance the SWR.
In your models, I heard nothing about rebalancing in the bond/stock portfolio. Analysis I've seen states a mixed portfolio with rebalancing will provide a reduced risk of running out of money over 100% stocks. Only slightly diminished return but lower volatility.
that was good advice until 2022 when bonds dropped 20% and stocks 25%.
@@lawLess-fs1qx so you'd want to rebalance slightly toward stocks.
All this time I've been doing nothing and it's worked out well.
Excellent video ! Easy to understand and great graphics and charts.... New Subscriber here !
Simply have 2-3 year cash reserve to pull from when markets down , replenish during good times! Video is correct that must have growth stocks to sustainable retirement amount and history has proved that!
One reason given for a stock/bond portfolio is the ability to rebalance and buy stocks after a downturn. Did your 70/30 example in the video rebalance every year?
I was thinking the same thing, my guess is his model auto rebalanced monthly and took a proportional draw down on stock and bonds.
I'd like to see a version of this where the percentage of bonds varies from 5-30 percent based on market draw down.
I believe that 2000 retirees are faring a lot better today if they used 60/40 instead of 100% equities.
As someone looking at early retirement. I'm going to wary as heck if I'm looking to retire after an insane bull market, particularly how the last few years of the 90s went. I'll also just jump back into the workforce if we implode like in 2000.
What are your thoughts on Bond Tents? Kitces and Early Retirement Now (ERN) are pretty big on them. Both agree that long retirements absolutely NEED very high stock allocations.
Ed, I have serious doubts after doing some fact checking. At 27:25 of your video you state the 2008 market came back in 2-3 years? The S&P 500 index did not recover to the same level from the beginning of the decline in Oct 2007 until Mar 2013 (look at any S&P 500 history chart). That's 5.5 years or about double of your 2-3 years claim! How did your client's 100% stock investments recover so quickly as you claim?
I was talking about our personal experience. Most of our fund managers recovered quickly. One peaked Sept. 2007 was back by Oct. 2010. One peaked Sept. 2008 and was back by Oct. 2010.
@@EdRempel Not if you were using S&P 500 as your equity fund... coupling that with their yearly withdrawls which that first year would have been approaching 7-8% after the market decline.
4% rule means you withdraw 4% of the INITIAL portfolio adjusted for inflation each year, AKA you have the same spending power. for 100% in the S&P 500 with 4% withdrawal it failed 4% of the years in the last century 1969 1968 1966 1929. Reducing the withdrawal rate to 3.5% it solves the issue. although i am a fun of international stocks as the last 100 years they had lower returns but you could have higher safe withdrawal rates (when you want something like 99% to 95% success probability, if you are ok with high withdrawal rates like 5% or 6% then US stocks HAD higher chanses but the chanse to fail was higher than 10%)
$40k pretax is not nearly sufficient for the average person's annual expenses after taxes.
So this guy says no bonds. No stable portion of your money. What if you only have $200,000 saved and you need a new car in retirement ? You take $35,000 out after the sp 500 dropped 40% ? But you need a new roof too. I don't think the average person should be 100% in stocks. It's too risky. Sequence of events applies to most people. If you have millions, pensions, go for 100% stocks.
I'm not sure why you kept analyzing 70% Bonds and 30% stock allocations. To make your data more applicable to the real world you should have modeled 60% stock and 40% bonds.
100% equity portfolio fails at higher rate than 60/40 over the last 100 years using the 4% rule... run the historical numbers include the failures from 2000 since they failed in less than 10 years. It won't fail if you are not withdrawing, but the topic was sequence of returns.
I’m astonished that anyone living in the United States who is planning to retire on less than $2M - which is nearly everybody - thinks that a 4% withdrawal rate is enough to live on, at all. Never mind 30 years.
Haven’t met a lot of people who want to adjust their lifestyle for the following year on December 31. Respectfully.
So based on your gut feeling, we should not apply proven risk management principles to our portfolios. Got it.
You can't be serious. Of course sequence of returns risk is not scary if you pull 4%. 4% was specifically determined as the highest withdrawal rate for which the sequence of returns risk is not scary. Try the same chart with 5% or higher and you will see. This video is a joke.
TERRIBLE advice! Sequence of return risk is real. You are talking a lot for a very simplistic view. First, this video is bout the 4% rule, not sequence of risk I retired in June, and my expenses are a set value of required and discretionary spending. 4% rule simply says how much you can pull out of your portfolio. What happens when the market crashes, and that 4% doesn't cover your expenses? Here's a REAL example. You retire at rhe end of 1999 with $1,000,000, and your expenses are $40,000. With actual s&p returns, pulling $40,000 a year you end 2008 with $348,893. That is sequrnce of returns. I didn't adjust expenses for inflation, so you portfolio would be even lower. That also doesn't account for any unforseen event, such as a medical emergency, or a major house repair. The goal of retirement is to NOT have to lower expenses in a market downturn. That's why you plan your portfolio to cover those times.
If you only withdrew 3.3% the portfolio would have survived. I just ran some back testing.
My plan is to withdraw 3% and have 5 years cash.
Can we assume the next hundred years will mirror the last hundred years?
Seems to me there are two types of "high risk tolerance" people. Those who do nothing when investments are down - and are happy with that. And...
b) Folks who do nothing when investments are down - but worry like hell all the time about it! lol. It's nicer to be in the first camp - but fortunately both types are leaving their investments alone.
Good point. As long as they don't act on it, they are "high risk tolerance" people. :)
Devil is in the details.. what metric are you using for "Bonds".. short term gov bonds? I can get 10 year MYGA from insurance companies that pay 6% guaranteed .. of course a planner will never suggest you have some rental property, because they can't get their 1-2% fee out of it ! GBAB.. a taxable muni fund paying 9%, PFFA a preferred fund paying north of 9%, WFC-L will pay 6 % forever.. The SP500 has never been so concentrated in the top 15 companies as now.. increasing the risk.. not diversified.
So I guess Dave Ramsey is right when he says to stay 100% of a portfolio during retirement should be in stocks
At least, according to this person
And I have to say you do make a pretty good argument, so I’m not knocking you. I’m just putting it into perspective.