“Realize that the 4% Safe Withdrawal Rate is based on a mix of SP500 stocks and US bonds. There’s also an inflation increase annually, but of course that’s the US-based inflation rate.”
yes I realize that. That is why I ask.
Actually I have a portfolio of individually picked stocks and many are in the S&P500 or in the NYSE or NASDAQ. I have maybe barely 10% in bonds.
In the https://cfiresim.com/ simulator, they have a %bond/stocks each are as you describe I assume. To conform to the study, does the stock portion have to be a S&P500 index? or can they be any selected stocks in the S&P500? are there other criteria to the a 4% rule retirement portfolio than the ones you cite?
yes in the past 1 or 2 years I have added some dividends and less volatile stocks and I may add more. Currently I think my dividend stocks are less than 10% of the portfolio which is heavily pitched on growth but I also have some steady growers such as MA, SBUX, DIS (not so much these past few years tough), COST, HD…
The dividend stocks only a couple really have high yield but I am more fond of potential dividend growers that currently have an ok yield 2 to 3%.
I heard somewhere that whatever you take dividend yield or capital gains, it should not matter. Both are value you extract from you portfolio. Certainly some stocks regardless of dividend payers or not are more or less volatile. Dividend stocks tend in general to be less volatile.
“We still have our Dividend core positions and interest-bearing annuities… I manage that portion of our portfolio to produce 150% of our needed expense cash. It is now at 220%.”
What is the % from your Dividend alone if you take out the interests from your annuities?
thJ: To conform to the study, does the stock portion have to be a S&P500 index? or can they be any selected stocks in the S&P500?"
Owning only a few stocks gives you highly risky portfolio survival.
One company suddenly taking a dive…and poof… whether from lawsuit… or ‘accident’…or sector meltdown. or the CEO and board are all on a plane which crashes…
Just look at Apple stock over the last 40 years… or the FAANG group…where some are down 35%…
Perhaps you could Google “William Bengen 4% rule”. Or Trinity study.
A different set of assets will have different characteristics,and may or may not work at a 4%
Rate of withdrawal. If the individual stocks you have chosen have higher volatility,or less diversification,it follows that the same rules may not apply.
The idea behind any broadly diversified portfolio is optimizing for survival,not maximum value.
Real estate is an expense to be minimized. I’m only willing to buy if I can get a home at a low enough price to produce something like an S&P 500 return.
“Rent vs. buy” didn’t favor buying for me until 2012 when I bought my current home for 70%-off it’s 2008 value. It’s more than tripled in price since, actually beating the S&P500 by a bit.
yes I hear that. The 4% rules is still based on the statistics of the market of the last 100? years. Nothing in principle would say that this statistics would be maintained in the next 100years.
Wharton Finance Professor Jeremy Siegel has looked at stock market returns over the past 200 years (See “Stocks for the Long Run”). If it’s “different”, I suspect that it will at least “rhyme” with the past.
I am interested to know more about how different portfolio compositions give different results. There will be different results of course but I want to know how could certain portfolios ‘not make it’ even if the starting number was good to go.
I’ve been following several different retirement portfolio for the past 28 years. I’ve also tracked them for a year 2000 retirement start, which was the worst timw to retire in the last 30-40 years.
what do you think about portfolio re-balance? Do you do any of that? When you harvest to feed your cushion, do you do it evenly across the portfolio or do you decide to sell more of this or that? How much % of the draw is in dividends?
I only rebalance to the extent that I can do so without increasing my Federal income tax liability. It’s not worth doing if you have to pay additional taxes on portfolio rebalancing.
I spend my dividend income first, and then withdraw any remaining funds needed for my annual living expenses from the asset (stocks or fixed income), that gets me closer to my target asset allocation.
Since the stock market goes up about 2/3rds of the time, you’re usually selling stock and just letting the 5 years’ worth of living expenses in fixed income sit.
When you’re managing your portfolio for Obamacare tax credits, it may make sense to spend down some of the fixed income assets, since you can usually do that with less of an income tax liability than a stock sale.
Would you typically draw more if your portfolio has gone up for a while? How do you handle or plan large ticket items? say you need to buy a car in the next 2 or 3 years? don’t you draw from the market over the next 2 or 3 years enough to cover that particular expense? and if the market is bad then you don’t buy it and wait a couple of years to do so?
When I bought my home in 2012, I paid cash for it out of my 5 years of expenses in fixed income, and then replenished the cash fund over the next 2 or 3 years. It didn’t make sense to me to take out a 3% mortgage when the cash was only earning 2%, but others use different arithmetic.
I was going to buy a new car last year, but I refuse to pay more than MSRP for it. So I put a new set of tires on my current vehicle.
To conform to the study, does the stock portion have to be a S&P500 index? or can they be any selected stocks in the S&P500? are there other criteria to the a 4% rule retirement portfolio than the ones you cite?
Something like 4% of the stocks in the S&P500 index account for 100% of the returns. For small cap stocks it’s even worse, about 1% of the stocks in the index account for all the positive investment return over the long run. The only problem is that no one can reliably pick the winners ahead of time
maybe a naive question how do you think it would change if instead of an index you choose a few stocks in each of the class?
I can answer that with real life experience.
After I dumped my Exxon stock in 1985, I split the proceeds between Tech and Drug stocks. Even though I had big winners in both (DELL and Pfizer) and have dome phenomenally well, I’d actually have twice as much money today if I’d just bought Tech and Health Care sector funds. Few people sell their winners near the top, and often take some money off the table once it’s gone up 5 or 10-fold, missing the next leg in the runup on a big winner.
“Real estate is an expense to be minimized. I’m only willing to buy if I can get a home at a low enough price to produce something like an S&P 500 return.”
intercst — mschmit was not asking about real estate!
“Realize that the 4% Safe Withdrawal Rate is based on a mix of SP500 stocks and US bonds. There’s also an inflation increase annually, but of course that’s the US-based inflation rate.”
yes I realize that. That is why I ask.
Actually I have a portfolio of individually picked stocks and many are in the S&P500 or in the NYSE or NASDAQ.
A portfolio of individual stocks will probably be more volatile (maybe much more) than the SP500 index. So, despite your basket of individual stocks being in the SP500 index, that doesn’t mean you can call it the same as the index for SWR. Your stocks may do BETTER than the index, but looking at worst case survivability, you are forging new ground.
A large part of portfolio survivability is making it through the down years because whatever is withdrawn then is no longer in the portfolio for the good years. Imagine a portfolio whose average return is a couple points above the SP500, but it has much higher volatility. We’ve seen a couple 50% drawdowns in the index (maybe one was just 45%), but imagine a portfolio with a 75% loss. Two years of that (a 75% loss followed by a 0% year) with a 4% (of the original amount) withdrawn and you’ve taken out 32%! That’s a big hole when this hypothetical portfolio comes roaring back to average 12%. Plus, the SP500 won’t go bankrupt, but a couple stocks in a 25-stock portfolio can. That’s 8% lost, and probably when everything else is down too.
I’m not saying what you’re doing is bad in any way. I’m saying that it’s outside the bounds of what was studied.
Yes, there is never a bad time to retire if you have the resources. Running short and trying to go back to work after a few years and when your friends have likely retired can be tough.
My thoughts precisely–I’d rather work an extra year at the end of my career than try to make up a shortfall at age 80 when the shortfall is obvious. Other benefits of working another year at age 59 included health insurance being a large benefit (prior to Medicare eligibility), plus life/dental/vision.
The downside is that under good or even average conditions, I’ll end up with way more than enough, maybe even more than I started with.