Portfolio Longevity

[Deleted]

I've seen many threads and posts in various forums for many years now.  My first investment (and loss) was in the late '60s in a "go-go" fund named "Investment Indicators" with many investing hills and valleys and some learning since then.  This post below from the old M* forum is the one that I most treasure, so I want to share it again.  Note that the thoughts below are in terms of a "retirement distribution" portfolio, not an "accumulation" one.  And Otar's website referenced below is still a valid one.



posted by Gatorbyter Re: Ideas For an "All Bond Funds" Portfolio
06-30-2017, 8:24 AM | Post #3851247


For a great understanding of Sequence of Return Risk, I HIGHLY suggest reading "Unveiling the Retirement Myth - Advanced Retirement Planning based on Market History" by Jim C. Otar. It's 525 pages of highly detailed presentation and currently available online (PDF) for $6 from his website  http://www.retirementoptimizer.com  


Note. I have no association with Mr. Otar and provide this link only as a courtesy. I bought the PDF book a while ago and certainly got a lot out of it. The following was gently lifted from another review:



Otar is an engineer turned financial advisor. His book is filled with a great amount of data analysis and detail based on his research using historical market returns. If you are near or in retirement, you owe it to yourself to check it out.



Otar points out that retirement distribution portfolios have critical differences from accumulation portfolios; e.g., they have a finite lifespan of 30 years or less and they are a "wasting asset" instead of a "growth asset" as money is being withdrawn. These differences result in many of the tools and concepts used in financial planning for accumulation portfolios being essentially useless for retirement distribution portfolios.



For example, here are some of his conclusions:



1) Asset allocation and diversification, particularly within asset classes (e.g. stocks) make little difference for portfolio longevity.



2) Portfolio rebalancing, no matter how it is implemented, has little effect on portfolio longevity.



3) Conventional Efficient Frontier analysis does NOT incorporate cash flow and is useless for distribution portfolios.



4) Conventional Monte Carlo analyzers do NOT incorporate negative fat tails of market returns and produce results for distribution portfolios that are far too optimistic.



5) You should NOT select the optimal asset mix (the one that produces the longest portfolio life); instead you should select the tolerable asset mix (the one that produces the maximum loss over a given timeframe that you can tolerate without panicking).



6) Portfolio longevity and appropriateness are overwhelmingly determined by (1) Luck and (2) Withdrawal Rate.



7) If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck.



8) Luck is comprised primarily of two elements: (a) sequence of returns, and (b) inflation. These two factors overwhelmingly determine the likelihood of survivability of a distribution portfolio.



> Luck: If you are unlucky enough to experience significant losses in your portfolio, particularly in the first few years of retirement, nothing you can do will restore your portfolio to its previous level during your lifetime. Unless you permanently reduce the level of your distributions your portfolio is very likely to run out too soon.



> Inflation: Significant inflation during your retirement will destroy the purchasing power of your income withdrawals. Stocks and nominal bonds provide poor protection from inflation; therefore you should incorporate meaningful allocations to real assets and TIPS.




--- Frank

[alvinthechipmunk]

Portfolio longevity. Definitely something to focus upon with inflation now running hotter. Everything costs more. And our geographical move a couple of years ago to a more desirable location itself added a lot to our cost of living. Withdrawal rate? How about NONE, so far? ...Nope, I take that back. Money has been withdrawn, but not regularly and routinely. Those were "one-off" expenses. People depend on us. I'm not the only one who can say that. So I don't want to be calculating a withdrawal rate I won't stick to, either by withdrawing less than the specified rate or more than the specified rate. Perhaps monthly dividends might start to get taken, rather than re-invested, in 2022. I've concentrated the portfolio for simplicity, but the only way I can live with the added risk due to concentrating assets is to be disciplined and continue to gradually reduce stocks, while still being mindful of the need to catch SOME of the gains in stocks, looking toward the future.  That strategy is simple enough to suit me. Not precise, like a recipe, but it IS a plan. And when are the Dodgers going to move back to Brooklyn?


media2.giphy.com/media/l3fQf1OEAq0iri9RC/giphy.gif?cid=ecf05e47f17x7y04190zaaescj833mw0cniaeg8lu2m2dxdd&rid=giphy.gif&ct=g

[steelpony10]

@fpajerski ,

           I pretty much found all those conclusions to be true while managing my parents and in laws portfolios from 1982-2017. Fumbling through the ups and downs and fine tuning along the way from experience as circumstances changed led us when we retired into a 3 part system, safety, income and backup. Planning and luck the last 10-12 years let us spend liberally and still allowed our portfolio to grow in value.

           My personal opinion based on the experiences of those 2 retirements and ours so far is the longer your retirement lasts the more important those points become. When most reach that oh oh moment it’s to late to correct without taking on more risk or radically making lifestyle changes at an advanced age, something you’re probably totally unprepared to do.

[Chahta]

So how does an income only portfolio vanish in 30 years?

[alvinthechipmunk]

Over-spending? Not having a big enough pie to start with? Depending on numbers and circumstances that no longer apply, are not REAL? Self-sabotage. Or maybe the spouse is the saboteur? To retire without taking stock to see if you reasonably have enough resources would be a major misstep: like trying to steal third base from second base in the bottom of the ninth with only one out. A base hit would more than likely score the runner from 2nd, anyhow. If caught stealing at third, there are NO baserunners remaining, behind you. OOPS. 
youtu.be/Aq4Bp_gJG1Y

 

[Fearchar]

It really depends on the portfolio...

A few years ago (before he passed away) my Dad remarked how his portfolio
had gained more in 1 year than what he had ever earned while working.

I haven't really changed his portfolio much and even after paying for my Mom's care,
the port has appreciated even more so thanks in no small part to SPGI, which
was acquired in the 60's and DE (Dad bought a John Deere for the hobby farm).

[steelpony10]

Nov 16, 2021 18:11:01 GMT Chahta said:

So how does an income only portfolio vanish in 30 years?

      It can’t unless spending gets out of hand, home care, assisted living and of course LTC. A big reserve slows that down.

      The same flaws exist for spending down with more decision making as you age, forced spend down in down markets, dependence on near term headlines and fear of spending because of the vise grip the unknowns have on a retiree. Add to that market timing in pursuit of the holy grail of portfolios maybe ultimately leaving a horrendous mess of numerous unrelated pieces to a successor. Need a longer list? 

       For my mom a 50/50 CEF’s and a muni portfolio at the end was smolted in it’s 35th year for LTC. This was a $250k portfolio to start, 2 SS and a small pension from a pre WWII job that ended with a 30k/year income and 120k/year in expenses. This is after spending 2 months a year in Europe plus trips to Hawaii to visit my sister for maybe 5 years along with 2-3 cruises, CEF money and principle. The flaw was no reserve when the “S” hit the fan. Game over.

[Fearchar]

Chahta ,steelpony10 ,

What steelpony10 posted plus what some people type isn't exactly what they mean or what actually happened.

By "Income Only", they may mean that the portfolio is invested only in super safe income producing assets.

BUT what they did was spend principle in addition to whatever income was produced.

[steelpony10]

Fearchar ,

          By principle I meant all that came in plus most of the income from a muni, 4% at that time coming off stagflation, and income investments, utilities, with no regards to future possible needs. After my father passed in 1999, one SS was lost. I started adding CEF’s to replace that income getting the cash from cap gains in the growth part. I also set up a funeral trust to protect assets while my father was in LTC a short time. As late as 2014 or so 230k of the principle, the small pension and 1 SS remained. About 2.5 years of LTC ate that up. Medicaid covered the last 8 months for my mom.

           We modeled our portfolio based on that adding a large excess to needs cash flow with CEF’s during the bank crisis to build a large reserve before full  retirement. After 12 years that excess flows projected to last to age 90 with a compound calculator set at a 3.5% personal inflation rate.* Although I have no problem spending down principle if either of us lived to age 90 I don’t think it will happen. Only LTC or maybe assisted living will cast some doubt. 

            My personal opinion from all this is depending on markets, being too conservative, constant shuffling negating long term compounding and creating dead money etc. can backfire. I saw what we did work long term twice. If someone lives an average life span it probably all works. It’s a lot easier to spend knowing you’re not spending all your income each month for years.
            
             * Lots of inflation slop there as SS pays a good part of our personal inflation rate. At the end of each year I recheck this with one less year to age 90. This allows us to reduce our CEF investment and put the proceeds into cash or growth equities if we wish because the projected number needed decreases each year. If you’re an optimist you can let it ride adding more wiggle room.

[FD1000]

Otar points are simple, correct, based on numbers without emotions:

1) Longevity isn't based on: allocation, diversification, rebalancing, cash, monte carlo predictions. You can add to it (higher) distributions.

2) What is important:

*Sequence of Return Risk(link) "Significant market losses in the early years of retirement can shorten the longevity of a portfolio, even if better-than-average market returns occur in later years

* Withdrawal Rate

* Luck which you can't control

Based on the above and reading/posting for over 10 years, all the discussions about item 1 are useless, but you will find plenty on it and this thread is no different.

You will find many who claim, I have done this and that and it works.  This means I made the right decisions.  Actually, it's not.

Examples:
1) If you have pension + SS that cover all your expenses or your portfolio is big enough, it doesn't matter what you did.  You are guaranteed to succeed.
2) A portfolio with higher distribution/income/yield isn't a guarantee for a better longevity.

I don't know when the higher income myth started, but it needs to be debunked every time. Just last week, I had a serious discussion with one of my Bridge buddies about higher income stocks.

Friend: I owned about 40 blue chips stocks. I divided my portfolio to 50/50 stocks/higher income stocks
Me: first easy question, did all your higher income stocks beat your other? if not, why are you doing it?

Friend: To cover my bases and the income is nice. Sounds familiar.
Me: Let me "guess", do you own ATT(they all have it)? Do you realize it has a very bad performance in the last 10 years 

Friend: sure, I own it.  I also own IBM for the yield
Me: do you realize that SPY made 16+% annually while ATT made 4+% annually. What do think is a better company IBM or MSFT and how long you know that?

Friend: well, both IBM+ATT had great income and supported my expense. I know for many years that ATT is average at best and MSFT would be much better than IBM
Me: Do you realize MSFT made almost 30% annually in the last 10 years while IBM lost money.  Do you realize you can set up in 2 minutes a monthly order to sell a specific number of MSFT(or other company) shares to support your expenses? If you have a mutual fund such as VFIAX (SP500), you can sell a specific dollar amount. Do you realize that you can select what stock/fund you want to sell at what time and if this stock doesn't pay dividends andn taxable you don't pay taxes (he also has AMZN) while you paid much higher taxes on higher paying stocks?

Friend: well, I get what you are saying, but I read so many times about income.
Me: sure, I read it many times too, but it doesn't make sense. Maybe it made sense prior to the tech era when great solid companies paid higher income, maybe you read about someone who did great selecting higher income stocks but the best performing stocks since the 80" were high-tech stocks.  
Just take a moment and think what things you want to accomplish and can't be done by selecting the best companies without paying too much attention to their income, after all, I showed you how you can achieve everything without them, not to mention, you gave up a lot of performance.

Friend: right now, I can't come up with anything? BTW, I'm worries that if I die, my kids wouldn't know how to handle these stocks
Me: Do you think your stocks beat the SP500 over many years?

Friend: I don't think so, every couple of years I check and they are not, I was consumed to keep up with higher income. 
Me: great, if you have more questions, please ask.  I have another idea for you, looks like you can't let go of higher income.  Why not convert all your stocks to 50/50 SP500 + SCHD with about 3% dividend but good performance. Your kids would appreciate it too.

Friend:  you opened my eyes, I need to think more about that.

The above is so typical to many retirees. Wait, I'm not done.  The above is also related to all the other higher income ideas, such as RE, MLP, CEF.

[bf22]

Nov 17, 2021 5:21:31 GMT FD1000 said:

You will find many who claim, I have done this and that and it works.  This means I made the right decisions.

That is the one correct statement.

If you are making enough, you are making enough (you should know)...

There is always one smarter, more successful, richer, (not necessarily better looking) than me. 

[Mustang]

I haven't read Otar's book and I consider myself a novice at investing and withdrawing. I'm still learning and still researching. I have read Bengen's 1994 study, the 1998 Trinity study, and many others. I am currently researching the problems with the various withdrawal methods. It is easier to mitigate the risks if the problems are known.

I believe Otar is correct in that the withdrawal phase is very different than the accumulation phase. I read one quote that I thought was interesting. In an article discussing the drawbacks of Monte Carlo analysis James Sandidge, a principle of the Sandidge Group, is reported to have said, "Accumulating wealth is a linear process and predictable, but in the nonlinear world of retirement income, returns and standard deviation are not predictors of success and therefore are unreliable inputs for Monte Carlo analysis. Retirement income is governed by chaos theory which makes it unpredictable." www.marketwatch.com/story/should-you-use-a-monte-carlo-simulation-to-determine-if-your-retirement-savings-will-last-11611607222

For me its simple, dollar cost averaging allows the investor to build wealth by buying when the market is down but selling when the market is down causes the portfolio to run out sooner.. That is why a lot of advisors prefer dynamic withdrawal methods. Unfortunately, they do not provide a stable source of income. They usually provide less than planned income about half the time. One writer criticizing the Guyton-Klinger Guardrail method pointed out that it had an entire decade of providing half the promised income. Whether it be a pension, social security, or fixed withdrawals from investments retirees should have a stable income to cover needs.

Otar's first few points are correct if you do not take any money out. But of what use is retirement investments if they are not used in retirement? Luck and withdrawal rates? Luck is risk and there are ways of mitigating risk. Once withdrawals start then things like asset allocation become important for portfolio's longevity. No one can see the future but we can see what has worked in the past. Bengen, the Trinity study, and Pfau 2018 update of the Trinity study give us a pretty good idea of what has worked and what might work in the future.

There is an old saying, "Plan for the worst and hope for the best." For those wanting a stable income analysis of historic data showed that a 4% initial withdrawal from a 50/50 stock/bonds portfolio lasted at least 30 years. A 75/25 portfolio did the same with higher ending balances. In his update Pfau showed that portfolios of 100% stock and no stock did not fare so well. Of the 92 possible 30-year payout periods from 1926-2017 only 44% of the portfolios with no stock lasted to the end. During the withdrawal phase asset allocation does matter and research has shown that for longevity the portfolio needs between 50-75% stock.

The 4% Rule was developed for the worst case scenario (retirement starting in 1966). In an overwhelming number of those 92 possible payout periods a substantial amount was left over. The problem is that the future is unknown and when we retire we do not know if we are looking at a future similar to 1966 or one similar to 1990 where an initial withdrawal rate of 7.5% was successful.

For some 4% might not cover needs. Those studies also showed that a 5% initial withdrawal was successful if inflation was under control. Inflation is the killer. The 1998 Trinity study found that 17 of the 18 30-year payout period failures associated with a 5% initial withdrawal occurred during the high inflation years. Reducing the length of the payout period also increases the initial withdrawal rate. 30 years takes the retiree from 65 to 95. Most people do not live that long. In the US the average life expectancy of men is 77 and women is 81. In those studies a 6% initial withdrawal lasted 15 years 100% of the time (including 1966). It lasted 20 years 80% of the time.

There are other ways of making a portfolio last of for those who need more increasing the initial withdrawal rate. Taking a little less than full inflation increases each year will increase the initial withdrawal rate by 10% or more.  How you withdraw money makes a difference.  Withdrawing from the best performing funds makes the portfolio last longer.  So does a cash buffer allowing the retiree to skip withdrawals during market losses.  Withdrawals and spending are not the same thing.  Excess withdrawals should be saved to cash and used to prevent selling during crashes.

I disagree with some of those points. My only recommendation is to do more research. Don't go by a single individual's advice.