I’d like to see an analysis of the Yale withdrawal strategy based on the Yale asset allocation strategy. I think the two are optimized to be used in tandem.
First heard about the Yale Endorsement method from another video and I was intrigued. TH-cam picked up on that and recommended this video, and I'm glad it did!
Thank You. That is a great video. Apparently, Yale has done some studies on the upper end of the withdrawal strategy. They are using 6.5% as the upper end, which means that once you get above 6.5% of the portfolio value, then this may do long term damage to the withdrawal strategy in the future? This seems reasonable. So, with that said, why not this hybrid approach? Start in retirement with the 4% rule adjusted for inflation. Then going forward if the withdrawal rate goes below 4% of the portfolio value, then adjust the withdrawal rate back up to 4% and start all over again on adjusting for inflation (this way you are not leaving money on the table during Bull markets). Then on the upper end, any time the withdrawals become more than 6.5% of the portfolio value (during Bear markets), then do not go above 6.5%, which means you would not get a full inflation adjustment but at the same time it would help keep the portfolio intact going forward and not running out of money. Then in the next year compare the 6.5% withdrawal from the previous year (adjusted for inflation) to the 6.5% upper end limit for the current year to see what amount to take as a withdrawal. The hope would be then that a Bull market would then come along and drive the percentage back down well below 6.5% so that you can get back to getting inflation adjustments in the future. This is basically keeping the 4% rule range bound (4% to 6.5%) at all times.
The more I look into withdrawal strategies the more I realize its as random as anything to do with investing. But better to be more conservative and have some margin of safety than none.
Yes, there can definitely be a lot of variance with them (especially when they calculate withdrawals based in part on the current value of your nest egg). But I agree when it comes to planning out your retirement its better to have some margin of safety than none at all :) Thanks for the comment!
Thanks for all of your work on this one Daniel. I've been looking forward to your analysis. This one is such a give and take for me. There are definitely pros to the Yale Endowment (especially without the benefit of foresight), but are they really worth the drawbacks. This one has me stumped. I've been doing all of my retirement calcs based on the inflation adjusted 4% rule and I have no heirs to pass on accumulated wealth to when I die. So something that accounts for market performance seems to make more sense to me. I'm scratching my head over here.
Sure thing, Andrew! Yes there certainly is some give and take with the approach relative to a simple 4% rule and it varies dependent on the performance of your investments due to the fact that the Yale approach incorporates market valuations into its withdrawal calculations (which generally leads to higher income-generation all else being equal [and without the benefit of foresight, obviously :)]). If it helps it's worth noting that as I stated in the video even though the 4% rule is (by far) the most well-known/popular variant of the inflation-adjusted withdrawal approach it isn't the only one out there (I hinted at one of these with the periodic step up of withdrawals comment near the end of the income section... but there are a few other options as well). There are strategies that seek to modify (and hopefully improve upon) the traditional 4% rule's tendency to "leave money on the table" and many of them do take market performance into account (at least to some degree). So if maintaining buying power/stability of income (reasonable strengths of the 4% rule) and having a little more upside for your income stream is something that's important to you but you don't have any need/desire to leave a ton of money for heirs or other causes it's possible that one of those modified approaches will be more intriguing for you as a sort of "middle ground" between the traditional 4% rule and something like the Yale approach.
@@NextLevelLife As always, I appreciate your in-depth responses. The middle-ground approach would be nice, but sometimes you just can't have it all. In that case the Yale strategy probably wouldn't be the worst way to go, for my scenario. My investment performance is similar to that if a 60/40 split, so I tend to look at those numbers. When you take foresight out of the equation and if you maintain the same strategy through the entirety of your retirement, the Yale strategy isn't bad at all. It wins out on income and stability. Predictability isn't great, but if you've managed to cut survival expenses enough to not NEED so much income when the markets are down it doesn't hurt so bad. Buying power is a bit of a mixed bag since a 60/40 portfolio on the Yale strategy, should be able to produce enough excess income on average over what you'd get from the inflation adjusted strategy (without foresight) that it kind of offsets the lower buying power. At least to some extent. I look forward to seeing what other strategies you have in store for this mini-series.
Suppose a retiree has $1.5 million, after living off $70,000 annual salary. She retired at 70, receives $35,000 a year from Social Security, and spends $500,000 of her retirement savings on an annuity that pays $35,000 a year (7%). She leaves the remaining $1 million in a total stock market index fund. Would this strategy work?
You can put in your numbers to CFireSim (youtube doesn't allow me to link it directly so you'll have to google it your self) and hit Run Sim to simulate how your portfolio would've done historically, your ending portfolio etc. You can change the Spending Plan for the drop down menu if you want to add guard rails etc. to your spending plan. It does take a bit of time to get used to the calculator but I think it's time well spent. There's more detailed explanation in the About section, though that can get a bit technical.
Personally with the scenario you put forth I would simply hold the 1.5m in a 60/40 stock/bond split (or similar depending on your risk tolerance) and use the inflation adjusted 4% rule for your withdrawals. You'd be able to withdraw $60k per year + inflation in retirement along with the $35k per year from social security. This provides you with a simple and stable way of withdrawing $95k year after year. Yes you could invest the 500k into the annuity if so choose. This would provide you with $35k from social security, another $35k from the annuity and $40k from your retirement portfolio. Your total ends up at $110k each year. It's really up to you. I just personally prefer the higher long term growth potential of not using the annuity.
Making sure you're out of debt. Owning a home/appartment. Keeping your fixed expenses low. Is the best way to insure. You will not run out of money. Regardless of what strategy you decide to use. I am personally investing into rentals. Dividend stocks in Roth IRA and brokerage accounts. Plus a small business. That I can sell or automate to a certain extent. Allowing myself to have a stream of income. No matter what's going on in the market/economy. Invest in things that people need. Food, water, a place to live, energy. Lastly. We all have health expenses and we will all eventually die. So keep those things in mind. When looking for long term investments.
Thank you for correctly attributing the 4% rule to the true founder, Becket. NOT the Trinity Study, who stole the idea.
Always excited to see a new series from you
Hope you enjoy it :)
I’d like to see an analysis of the Yale withdrawal strategy based on the Yale asset allocation strategy. I think the two are optimized to be used in tandem.
yeah exactly lol
First heard about the Yale Endorsement method from another video and I was intrigued. TH-cam picked up on that and recommended this video, and I'm glad it did!
4:10 look at the Moderate column. I think you meant equity and bond, not bond and bond.
Thank You. That is a great video. Apparently, Yale has done some studies on the upper end of the withdrawal strategy. They are using 6.5% as the upper end, which means that once you get above 6.5% of the portfolio value, then this may do long term damage to the withdrawal strategy in the future? This seems reasonable. So, with that said, why not this hybrid approach? Start in retirement with the 4% rule adjusted for inflation. Then going forward if the withdrawal rate goes below 4% of the portfolio value, then adjust the withdrawal rate back up to 4% and start all over again on adjusting for inflation (this way you are not leaving money on the table during Bull markets). Then on the upper end, any time the withdrawals become more than 6.5% of the portfolio value (during Bear markets), then do not go above 6.5%, which means you would not get a full inflation adjustment but at the same time it would help keep the portfolio intact going forward and not running out of money. Then in the next year compare the 6.5% withdrawal from the previous year (adjusted for inflation) to the 6.5% upper end limit for the current year to see what amount to take as a withdrawal. The hope would be then that a Bull market would then come along and drive the percentage back down well below 6.5% so that you can get back to getting inflation adjustments in the future. This is basically keeping the 4% rule range bound (4% to 6.5%) at all times.
The more I look into withdrawal strategies the more I realize its as random as anything to do with investing. But better to be more conservative and have some margin of safety than none.
Yes, there can definitely be a lot of variance with them (especially when they calculate withdrawals based in part on the current value of your nest egg). But I agree when it comes to planning out your retirement its better to have some margin of safety than none at all :)
Thanks for the comment!
I like beans and rice. But I understand. Thanks for the show.
Yale approach also has about 30% in private markets.
Thanks for all of your work on this one Daniel. I've been looking forward to your analysis. This one is such a give and take for me. There are definitely pros to the Yale Endowment (especially without the benefit of foresight), but are they really worth the drawbacks. This one has me stumped. I've been doing all of my retirement calcs based on the inflation adjusted 4% rule and I have no heirs to pass on accumulated wealth to when I die. So something that accounts for market performance seems to make more sense to me. I'm scratching my head over here.
Sure thing, Andrew! Yes there certainly is some give and take with the approach relative to a simple 4% rule and it varies dependent on the performance of your investments due to the fact that the Yale approach incorporates market valuations into its withdrawal calculations (which generally leads to higher income-generation all else being equal [and without the benefit of foresight, obviously :)]).
If it helps it's worth noting that as I stated in the video even though the 4% rule is (by far) the most well-known/popular variant of the inflation-adjusted withdrawal approach it isn't the only one out there (I hinted at one of these with the periodic step up of withdrawals comment near the end of the income section... but there are a few other options as well). There are strategies that seek to modify (and hopefully improve upon) the traditional 4% rule's tendency to "leave money on the table" and many of them do take market performance into account (at least to some degree).
So if maintaining buying power/stability of income (reasonable strengths of the 4% rule) and having a little more upside for your income stream is something that's important to you but you don't have any need/desire to leave a ton of money for heirs or other causes it's possible that one of those modified approaches will be more intriguing for you as a sort of "middle ground" between the traditional 4% rule and something like the Yale approach.
@@NextLevelLife As always, I appreciate your in-depth responses. The middle-ground approach would be nice, but sometimes you just can't have it all. In that case the Yale strategy probably wouldn't be the worst way to go, for my scenario. My investment performance is similar to that if a 60/40 split, so I tend to look at those numbers.
When you take foresight out of the equation and if you maintain the same strategy through the entirety of your retirement, the Yale strategy isn't bad at all.
It wins out on income and stability.
Predictability isn't great, but if you've managed to cut survival expenses enough to not NEED so much income when the markets are down it doesn't hurt so bad.
Buying power is a bit of a mixed bag since a 60/40 portfolio on the Yale strategy, should be able to produce enough excess income on average over what you'd get from the inflation adjusted strategy (without foresight) that it kind of offsets the lower buying power. At least to some extent.
I look forward to seeing what other strategies you have in store for this mini-series.
Damn 2 mins in and great value given
Suppose a retiree has $1.5 million, after living off $70,000 annual salary. She retired at 70, receives $35,000 a year from Social Security, and spends $500,000 of her retirement savings on an annuity that pays $35,000 a year (7%). She leaves the remaining $1 million in a total stock market index fund. Would this strategy work?
I hope social security is there when I get older
You can put in your numbers to CFireSim (youtube doesn't allow me to link it directly so you'll have to google it your self) and hit Run Sim to simulate how your portfolio would've done historically, your ending portfolio etc. You can change the Spending Plan for the drop down menu if you want to add guard rails etc. to your spending plan. It does take a bit of time to get used to the calculator but I think it's time well spent. There's more detailed explanation in the About section, though that can get a bit technical.
You should hold a good portion of bonds in order to stabilize your nest egg during a downturn
Personally with the scenario you put forth I would simply hold the 1.5m in a 60/40 stock/bond split (or similar depending on your risk tolerance) and use the inflation adjusted 4% rule for your withdrawals. You'd be able to withdraw $60k per year + inflation in retirement along with the $35k per year from social security. This provides you with a simple and stable way of withdrawing $95k year after year.
Yes you could invest the 500k into the annuity if so choose. This would provide you with $35k from social security, another $35k from the annuity and $40k from your retirement portfolio. Your total ends up at $110k each year. It's really up to you. I just personally prefer the higher long term growth potential of not using the annuity.
👍🏾
Where the speaker puts emphasis on his words is odd and makes it harder to follow your thoughts. Anyone else feel this?
I like his cadence. I find it very inviting.
No
Making sure you're out of debt.
Owning a home/appartment.
Keeping your fixed expenses low.
Is the best way to insure. You will not run out of money. Regardless of what strategy you decide to use.
I am personally investing into rentals. Dividend stocks in Roth IRA and brokerage accounts.
Plus a small business. That I can sell or automate to a certain extent. Allowing myself to have a stream of income. No matter what's going on in the market/economy.
Invest in things that people need.
Food, water, a place to live, energy.
Lastly. We all have health expenses and we will all eventually die. So keep those things in mind. When looking for long term investments.