Friday, May 07, 2021 8:48:35 AM
AIM as a retirement data indicator:
A popular option is to use a 4% SWR (safe withdrawal rate) approach for retirement income. You take 4% of the start date portfolio value as income for the first year, and then uplift that amount by inflation as the amount of income drawn in subsequent years, so a nice inflation pacing income over time.
The 4% rule of thumb was determined by inspecting historic 30 year periods to identify the maximum amount that could be drawn and that left precisely $0 remaining. Being the worst case, likely a peak to trough start/end date range, other cases were better than that, in some cases (trough to peak) substantially better. More left for heirs (or longevity).
To better avoid the worst case, bearing in mind this is all back-looking so no guarantees that the same might hold in forward time, we might set up a AIM applied to S&P500 inflation adjusted prices, all on paper/virtual, and just run that until it indicates its first buy trade, at which point that is the date we can retire and start drawing from the portfolio. Guaranteed historically to have uplifted the 4% SWR to a higher figure, better placed to leave more for heirs or have more available for longevity.
Using portfoliovisualizer that has data going back to the early 1970's I looked at a assumption of a newly retired 50 year old who started their retirement in January 1973 when holding a aggressive all-stock portfolio and applying a 4% SWR. By September 1974 their portfolio value in inflation adjusted terms had declined nearly 50%, but did battle on and recovered in later years before finally perhaps seeing both themselves aged mid 90's and their portfolio value having died (2015).
Another who had been running a virtual/paper AIM might have deferred their retirement, until June 1974, after AIM indicated a buy trade in May 1974. With the same 4% SWR applied from that AIM indicated retirement date their retirement was far more comfortable portfolio value volatility wise and at the same 2015 end date the value was 6.5 times more than the inflation adjusted start date portfolio value. Very nice for their heirs, or perhaps they might have used discretion to draw additional spending from the portfolio along the way.
I've used a aggressive assumption here, all stock only holdings. The 4% SWR rule of thumb was based on a 60/40 stock/bond allocation. Using 60/40 instead and the Jan 1973 retirees 2015 portfolio value was at 23% of the inflation adjusted start date value, compared to the AIM timed June 1974 retirement start dates 3.8 times more.
I guess one way that a aggressive investor that wanted to maximise wealth and leave a large inheritance might live could be to all in stock during accumulation years, averaging in over time and letting it compound, until levels where they felt they had enough such that a 4% SWR amount could sustain them, and then go defensive, and await a time when a virtual/paper AIM indicated to 'buy' and use that to rotate back into all stock and start their retirement/SWR drawdown. Based on history they might have saved less/spent more during their accumulation years, or hit their retirement date sooner rather than later, and then in retirement been more financially comfortable and/or left more for heirs.
Being the AIM board I've of course spun this from a AIM perspective. Another option might be to simply look for 20% pullbacks from prior highs (again using inflation adjusted S&P500 price) and use that as the retirement date. Such events occur reasonably regularly enough, and in many cases might even be evident at the time when you considered you had accumulated/inherited/won enough to retire
A main factor is what assets might you hold once having reached a target wealth level but where stock prices were above a 20% pullback level? Fundamentally a defensive asset allocation that loses less (or little) as/when stocks do pull down to a -20% lower level. Being based on real (after inflation) figures even cash might drop in the event of interest rates being substantially lower than inflation - such as the state printing money to buy their own bonds and keep prices high/interest rates low whilst inflation at times spikes. Perhaps a third each in stocks/gold/TIPS asset allocation? Or maybe a long/short combo. Or maybe
10% in each of stocks and gold, 80% T-Bills (click the inflation adjusted tickbox in the chart to see how that held up better in real terms than just T-Bills (cash) alone).
Clive
A popular option is to use a 4% SWR (safe withdrawal rate) approach for retirement income. You take 4% of the start date portfolio value as income for the first year, and then uplift that amount by inflation as the amount of income drawn in subsequent years, so a nice inflation pacing income over time.
The 4% rule of thumb was determined by inspecting historic 30 year periods to identify the maximum amount that could be drawn and that left precisely $0 remaining. Being the worst case, likely a peak to trough start/end date range, other cases were better than that, in some cases (trough to peak) substantially better. More left for heirs (or longevity).
To better avoid the worst case, bearing in mind this is all back-looking so no guarantees that the same might hold in forward time, we might set up a AIM applied to S&P500 inflation adjusted prices, all on paper/virtual, and just run that until it indicates its first buy trade, at which point that is the date we can retire and start drawing from the portfolio. Guaranteed historically to have uplifted the 4% SWR to a higher figure, better placed to leave more for heirs or have more available for longevity.
Using portfoliovisualizer that has data going back to the early 1970's I looked at a assumption of a newly retired 50 year old who started their retirement in January 1973 when holding a aggressive all-stock portfolio and applying a 4% SWR. By September 1974 their portfolio value in inflation adjusted terms had declined nearly 50%, but did battle on and recovered in later years before finally perhaps seeing both themselves aged mid 90's and their portfolio value having died (2015).
Another who had been running a virtual/paper AIM might have deferred their retirement, until June 1974, after AIM indicated a buy trade in May 1974. With the same 4% SWR applied from that AIM indicated retirement date their retirement was far more comfortable portfolio value volatility wise and at the same 2015 end date the value was 6.5 times more than the inflation adjusted start date portfolio value. Very nice for their heirs, or perhaps they might have used discretion to draw additional spending from the portfolio along the way.
I've used a aggressive assumption here, all stock only holdings. The 4% SWR rule of thumb was based on a 60/40 stock/bond allocation. Using 60/40 instead and the Jan 1973 retirees 2015 portfolio value was at 23% of the inflation adjusted start date value, compared to the AIM timed June 1974 retirement start dates 3.8 times more.
I guess one way that a aggressive investor that wanted to maximise wealth and leave a large inheritance might live could be to all in stock during accumulation years, averaging in over time and letting it compound, until levels where they felt they had enough such that a 4% SWR amount could sustain them, and then go defensive, and await a time when a virtual/paper AIM indicated to 'buy' and use that to rotate back into all stock and start their retirement/SWR drawdown. Based on history they might have saved less/spent more during their accumulation years, or hit their retirement date sooner rather than later, and then in retirement been more financially comfortable and/or left more for heirs.
Being the AIM board I've of course spun this from a AIM perspective. Another option might be to simply look for 20% pullbacks from prior highs (again using inflation adjusted S&P500 price) and use that as the retirement date. Such events occur reasonably regularly enough, and in many cases might even be evident at the time when you considered you had accumulated/inherited/won enough to retire
A main factor is what assets might you hold once having reached a target wealth level but where stock prices were above a 20% pullback level? Fundamentally a defensive asset allocation that loses less (or little) as/when stocks do pull down to a -20% lower level. Being based on real (after inflation) figures even cash might drop in the event of interest rates being substantially lower than inflation - such as the state printing money to buy their own bonds and keep prices high/interest rates low whilst inflation at times spikes. Perhaps a third each in stocks/gold/TIPS asset allocation? Or maybe a long/short combo. Or maybe
10% in each of stocks and gold, 80% T-Bills (click the inflation adjusted tickbox in the chart to see how that held up better in real terms than just T-Bills (cash) alone).
Clive
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