ockham wrote:I confess to ignoring all the "safe withdrawal rate" discussions.
The 4% rule was never really fully accepted by everyone and "officially" defined, but the people that seem to push it seem to believe that without great market fluctuations (aka 1930s or 2007-20xx), the return on investment should cover both the 4% withdrawals and the inflation increase. For example, a constant 7% return combined with 3% inflation was going to preserve the inflation-adjusted capital until death. Worst case, to account for fluctuations and recessions, the 4% was generally supported by testing the withdrawal rate against historical market data to determine that the distribution was safe in "the real world". For example, a 55-year-old would enter numbers in an electronic calculator (Google "Firecalc") and his proposed distribution would be tested against historical market data from the 20th century. Until the current market crisis, a figure of 4% from a balanced portfolio was generally seen and back-tested as safe for a typical retiree (55-65) seeking to preserve the distribution until his/her 90s (possibly depleting all the capital by then though). I don't know what would happen when we consider back-test data that include 2008 and 2009, or whether anyone knows how long the markets will take before getting back to normal after the crisis.
ockham wrote:Is the idea here that under a range of reasonable assumptions, a 4% withdrawal rate is safe only with an equity allocation of ~60%, this equity allocation being needed to defend this withdrawal rate against the predations of inflation?
If you subscribe to the 4% rule of thumb, then you'll realize that a 100% bond portfolio at the current rates cannot yield enough to cover both a safe 4% withdrawal and to allow for some of the interest to be reinvested to inflation-protect the capital. A $100 bond yielding 3.5% would be worth $99.50 after 4% withdrawal and $96-97 after the effect of inflation. In a matter of a few years, you'd lose quite a bit of inflation-adjusted capital. Under that same rule of thumb, the only way to achieve an annual return which is high enough to provide a "safe" 4% inflation adjusted withdrawal for several decades is to have a yield of 6-8% per year (inflation + 3-5%) so that you preserve enough of your annual growth to preserve inflation. With the bond returns we've seen in the past decade, you'd need to supplement your portfolio with a large percentage of equities (assuming you don't hit a crisis like the current one too often). It's possible that the few websites that back-test safe withdrawal rates against historical data have found that 60% equities was optimal in the few decades leading up to 2007.
milo wrote:which is better strip RRB or coupon RRB? (I think for coupon bonds, i get a payment 2x a year, stripped i don;t)
To go back to the recent question about strip vs no-strip: assuming both of them can be found, you'd use a strip if you perceive the yield to be high and :
1. You are young and want the entire invested amount and its yield to be inflation-protected until 20XX when you retire, annuitize or need the inflation-protected funds;
2. You may be older, but want to a certain amount fully kept and inflation protected for a certain number of years;
3. You don't want to bother with taking the small coupon payment, and reinvesting it in a new RBB every year.
You'd want to pick the no-strip bond if:
4. You are retiring and want or can use the cashflow;
5. You don't mind or want to periodically reinvest the proceeds in new RRBs or in a different investment.
6. The yield is so low that it doesn't matter: the invested amount will be inflation adjusted, and the cash it throws will be used elsewhere
A full bond is broken into a large strip that follows the original maturity (2021, 2026, 2031 & 2036 in the case of RRBs) and smaller strips that are the coupon payments. It would be easier to find strips with that are the original principal with an original maturity of 2021, 2026, 2031 or 2036, than it would be finding strips that represent the original coupons.
When I called TDW the yield where different (i forgot exactly)
where the stripped RRB has a higher yield.
The strip will be more expensive (have lower yield) if the real return of the bond was high (it was the case when real returns where 2.4-2.8% recently). You know that your principal will continuously be reinvested at today's high yield.
In theory, the strip would be less expensive (have higher yield) if the real return of the bond was very low because you can then reinvest the coupon in something else every year. In practice, it may not be the case because of the convenience, and the cheap cost of reinvesting a very small annual amount.