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Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Tuesday June 1, 2021. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Financial Independence & Early Retirement

The so called FIRE — Financial Independence, Retire Early is ‘a financial movement defined by frugality and extreme savings and investment. By saving up to 70% of annual income, FIRE proponents aim to retire early and live off small withdrawals from accumulated funds.’, defined by

Regardless of whether you retire early or late, it’s extremely important to properly structure your investments and withdrawals. The recent CNBC report titled as ‘This couple retired at 38 in 1991 with $500,000 in savings. Here’s how their investments have lasted over the years‘ generated quite some comments on

In this article, we take a look at some portfolios and discuss what would have happened if the couple followed those portfolios instead. 

The 4% retirement withdrawal rule

The background in the CNBC report is that the couple Billy and Akaisha Kaderli retired in 1991 at the age of 38 after saving $500,000. In their 30 years of retirement, they managed through a series of booms and busts: tech boom in 1990s, tech bust in early 2000, financial housing boom before 2007, 2008-2009 the great recession and the ever lasting bull market since then to 2020’s short lived pandemic.  Their nest egg is currently at $1 million which more or less its original purchase power: about $412K 1991’s purchase power if assumed 3% annual inflation or $550K if assumed 2% annual inflation. A more realistic CPI inflation would probably put their original $500k to be equivalent to today’s $1.15 million. 

The couple relies on so called 4% annual withdrawal rule for their retirement spending out of their investments. We have touched this withdrawal rule several times in our newsletters such as 

We have written a program strategy for this rule

Floor and Ceiling Retirement Strategy with 4 Percent Fixed Percentage is one of variable withdrawal strategies in order to maximize withdrawals while at the same time incorporating some provision to reduce withdrawals.

The withdrawal amount is calculated as a percentage of the portfolio total value. The withdrawal amount is allowed to rise or fall with the performance of the portfolio. However, the withdrawal will neither fall below a floor nor rise above a ceiling.

As an example, the initial floor can be set at 3.6% and rise with inflation. And the initial ceiling can be set at 5% and rise with inflation. The withdrawal amount can be set initially at a fixed percentage like 4%. On a $1,000,000 portfolio, the withdrawal will not fall below an inflation-adjusted amount of $36,000. Nor will the withdrawal rise above an inflation-adjusted amount of $50,000.

The basic rule is that you withdraw 4% with floor 3.6% and ceiling 5%, inflation adjusted annually at the beginning of a year. Remember, as one of commenters said on , this rule wasn’t even available in early 1990s. So it’s remarkable that the couple was able to follow it over time. 

Investment portfolios

Now let’s look at what would have happened if the couple followed one of the following portfolios: 

Withdrawal comparison: 
Ticker/Portfolio Name First withdrawal (12/31/1991) Latest withdrawal (12/31/2020) Cumulative withdrawal amount (12/31/2020) Current portfolio value (5/7/2021) Portfolio value on 3/9/2009
P Floor and Ceiling 4 Percent On VFINX SMA 200d Portfolio 24,072 59,128 1,248,644 8,026,128 1,902,382
P Floor and Ceiling 4 Percent On VFINX 26,039 59,128 1,258,068 5,289,139 871,549

The two portfolios follow the assumption:

  • Initial amount $500,000 on 12/31/1990
  • At the end of every year (12/31), it withdraws a whole year spending based on the 4% withdrawal rule. 
  • P Floor and Ceiling 4 Percent On VFINX SMA 200d Portfolio withdraws off the investment portfolio P_73397 (P SMA 200d VFINX VFINX ABNDX As Cash Monthly). This portfolio is a representative of tactical asset allocation portfolios. It invests in Vanguard 500 index fund (S&P 500 fund) VFINX when VFINX’s total return is above its 200 day simple moving average. Otherwise, it would invests in ABNDX, American Funds Bond Fund of America A, a bond fund that has long enough history. This fund has a similar return compared with Vanguard bond index fund VBMFX. We use this portfolios instead of our portfolios like those on Brokerage Investors page solely because this portfolio has long enough history dated back to 1991. 
  • The other portfolio P Floor and Ceiling 4 Percent On VFINX basically withdraws off VFINX, the S&P 500 index fund. So it’s essentially a buy and hold stock index fund. 
  • Assume tax is paid by the spending withdrawal amount in that year. This might not be possible for P Floor and Ceiling 4 Percent On VFINX SMA 200d Portfolio as the tax liability might not be covered by that year’s spending. 

See the detailed chart >>

Observations and comments:

  • It’s the most striking to see that the portfolios have grown so much in the last 30 years: the tactical portfolio’s value, after annual withdrawals, stood at $8 million. Even the buy and hold S&P 500 index fund portfolio had value $5.3 million. This compares with the couple’s reported $1 million nested egg. 
  • The couple was actually very lucky to retire in 1991: right after their retirement, they subsequently enjoyed a decade long bull ride. This had materially made a very big difference in their nest egg, compared with one who would have retired at a bull market peak, right before the next bear market (see July 8, 2013: When To Retire And Bear Market Impact On Retirement Income And Spending, for example)
  • Of course, we don’t really know whether the couple actually sticked to the 4% completely or their rule is the same as our academic one. 
  • Nor we don’t know the couple’s actual investment portfolio. Though we do know they invest mainly in index funds based on the video. 
  • The latest withdrawal is a bit more than double of the initial withdrawal (2.3x to 2.5x). The two portfolios have about the same total (cumulative) withdrawal amounts, indicating both portfolios have had enough to withdraw, in fact, often the withdrawal hits the original ceiling. 
  • The last point reveals the 4% rule’s ultra conservative stance: even though the portfolios have grown to $5 or $8 millions, their withdrawals (or spendings) are limited to the original withdrawal ceiling. For example, the last withdrawal on the VFINX portfolio actually had over $189k left on the table. 
  • One can see how severe a big correction or recession has on a buy and hold full stock portfolio: at its lowest point on 3/9/2009, the S&P VFINX portfolio’s value stood at $870k, probably less than the inflation adjusted original $500k amount. No wonder in the CNBC report, the couple mentioned that that was the only time they were thinking about going back to the workforce. The tactical portfolio sit at a very comfortable $1.9 million level on that day. A huge psychological and physical difference. 
  • On the other hand, it also shows how important to stick to your strategy. S&P 500 or VFINX eventually rose 7.8x from its low on 3/9/2009. This might also surprises many people. 

By now, many readers might have spotted some very noticeable flaws for the withdrawal strategy: even now the portfolios sit on $5 to $8 million, the annual spending is capped to the original 5% ceiling (adjusted with inflation). So the annual withdrawal or spending $59k, while being OK compared with the original $24-$26K 30 years ago, is way too conservative on a $5 million portfolio (1%+). We’ll discuss another more sensible withdrawal strategy in a future newsletter.

To summarize, it’s more advantageous, both psychologically and practically, to adopt a good tactical investment strategy than a buy and hold strategy for a retirement portfolio. This is actually more important now as markets have reached one record high after another in some very overvalued levels based on many historically proven valuation metrics. 

Market Overview

We again take a look at the blended Q1 earnings growth for S&P 500 companies, recorded weekly by Factset: on May 7, 2021 last Friday, 

  • 88%% of the companies reported by last Friday, the blended earnings growth was 49.4%, compared with 45.8% the week before, 33.8% two weeks before, 30.2% three weeks before and, 23.8% on March 31, 2021. 

Again, we are seeing the earnings reports have consistently beaten expectation weekly. 

However, a big rotation has been ongoing for a while. For example, the high flying ARK Innovation ETF ARKK has dropped 35% from its high on 2/12/2021. Year to date, it has lost about -16.5%. In fact, many high flying tech stocks have corrected more than 30% so far this year. On the other hand, value stocks like Vanguard Value ETF VTV has risen 19% this year. So far, we view this as a very healthy rotation. The worry is whether this might continue and turn into a broad base market correction. 

We are again cautiously optimistic and reiterate the following practice: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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