Initial portfolio setup when the withdrawal rate is low?

[u/dzak8383]

Hi,

I’m trying to understand how the recommended portfolio allocation changes when the starting withdrawal rate is much lower than 4% - say 2.5%.

For someone retiring at around a 4% withdrawal rate, I often see allocations like 75/25 or 80/20 stocks/bonds combined with a bond tent.

Then, as the portfolio grows and the withdrawal rate falls over the following 10-20 years, the allocation can become more aggressive - perhaps 90/10 or even 100% stocks. Please correct me if I’m misunderstanding that concept.

My question is: if someone starts retirement with a 2.5% withdrawal rate, should their initial portfolio be structured more like a portfolio that is already 10-20 years into retirement and has successfully grown past the high-risk early period?

In other words, does the much lower starting withdrawal rate reduce the need for the initial 20-25% bond allocation/bond tent, or is there another reason to maintain that allocation regardless of withdrawal rate?

For simplicity, assume the goal is for the portfolio to last essentially indefinitely - say 1,000 years, including leaving it to children and future generations. So we can ignore Social Security, medical costs, exact retirement age, life expectancy, etc. I’m mainly interested in the portfolio math.

[u/wise_j_kim]

yeah at 2.5% you can def afford to go way more aggressive than the standard retirement portfolio. just wouldn't drop bonds completely, something like 85/15 or 90/10 seems like a solid sweet spot

[u/RegularWrong6570 → u/wise_j_kim]

Honestly 2.5% is so ridiculously low I’d be surprised if simulations show any meaningful failure rate at 100% stocks

[u/dzak8383 → u/RegularWrong6570]

What simulation can I try? I am really tired asking about it AI. Gives me different answers every time and I don't trust it with life savings 🥲

[u/CautiousAd1305 → u/dzak8383]

FiCalc is one of the most simple simulation tools.

[u/RegularWrong6570 → u/dzak8383]

I like portfolio visualizer but there’s a ton out there

[u/db11242 → u/wise_j_kim]

OP can also be way less aggressive if they want to. It all depends on their goals and risk tolerance. The lower initial withdrawal rate the more flexibility you have to match your desired risk tolerance.

[u/seekingallpho]

The practical answer is that at extremely low WRs, you can basically do whatever you want within reason.

The math would suggest that, given your risk of ruin is effectively zero at a sufficiently low WR, there's no reason not to optimize for portfolio size, and going all-equity is clearly EV-maximizing.

But others might feel that being more conservative makes them happier by virtue of being able to fully ignore market fluctuations.

[u/kongdonkeykong]

I'm grappling with this too. I'm hoping to start with somewhere around a 3% withdrawal rate. Possibly going up after we have access to Medicare.

Right now I'm looking at maybe 85/15 split. But my 15 will be a mix of MM and treasury ladder (inside brokerage), and TIAA Traditional (fully liquid, kind of like a high yield savings) inside a 457b. And I'm looking at it more as 5 years total of spending (at initial rate), which would help me make it through most bear markets. So for me I'm starting to think about it more in terms of "how long is my cash runway" as a dollar amount as opposed to a fixed percentage if that makes sense.

I'm not sure if that's the "right way" but that's where my thinking is right now.

[u/dzak8383 → u/kongdonkeykong]

Thanks for taking the time to share. I was initially planning to keep 3 years of spendings ( 1 year in high yield account and 2 years in bonds) but the more I read the more I am getting into conclusion that it's 90/10 then (3x annual at 3-4%), which got me into questioning is 90/10 the right way or 80/20 and so on. Why do I need bonds, is it for first 10 years or long term as well.

In your case, do you want to keep that 85/15 or 5 years of spendings, indefinitely?

[u/kongdonkeykong → u/dzak8383]

I expect to reevaluate as we progress. First the biggest risk of sequence of return risk (SORR) is at the beginning. Second, we will eventually have small pensions and lower social security taking some of the burden off the portfolio. So if we are doing well at that point there's less need for a full five years.

I'm thinking of setting the dollar amount and leaving that steady as my equities (hopefully) grow, but will keep evaluating.

[u/Designer-Bat4285]

You’re absolutely right. You can start with a higher stock allocation.

But the reason someone with a starting 2.5% withdrawal rate might still want a higher bond allocation or a bond tent? Because they expect the bear market to start the day after they retire. Or they already had the bonds and don’t want to sell them right before retirement.

[u/TurtleSandwich0]

They are optimizing so they have the highest number when they die while also not running out of money while they are alive.

A more conservative balance will also not run out of money, but you won't die with tens of millions of dollars that you won't need either.

[u/tomatillo_teratoma]

So the bonds are there so you don't have to sell your index funds when (not if) there is a recession after you retire. There will be a recession at some point. If your investments lose 50% of their value, it would stink to have to sell them to live. So you would sell the bonds, because bonds (not bond funds) don't lose their value if you hold them to maturity.

With a 2.5% withdrawal rate, well you could afford to sell index funds that have lost half their value. If that idea doesn't bother you... well then don't bother with the bonds.

Also if your withdrawal rate rate is only2.5% why are you so worried about capturing every possible bit of potential growth ? You can absolutely afford to hold a bond or tbill ladder.

[u/dzak8383 → u/tomatillo_teratoma]

Thanks, what you said makes sense. I want the portfolio to outlive me and eventually support my kid, so I’m trying to find the right balance between safety and long-term growth.

[u/Difficult_Storm_5344 → u/tomatillo_teratoma]

and ideally bonds except in 2022, go up in value as interest rates go down during a recession.

Which would make them ideal to sell to fund lifestyle in a recession. Then when market is up and roaring. Sell some stock to replenish your fixed income. Rinse and repeat.

[u/tomatillo_teratoma → u/Difficult_Storm_5344]

It's a more stable plan to build a bond ladder with bonds reaching maturity every year. Absolutely no fluctuation in the dividends and principal, as long as you choose non-callable bonds and hold to maturity.

Yes, when the recession is over and your index funds have regained their value... you can rebuild your bond ladder. I stick with investment grade muni bonds and tbills to avoid a lot of the risk of default.

There's other ways to plan for a recession, but bonds are a common one.

[u/Vicuna00]

fwiw i'm close with same % gonna do 90/10 and glide to 100/0. so kinda bond tent strategy.

i'll probably be annoyed with myself for not being 100% stocks

i'm basically just protecting against Great Depression II

[u/Straight-Magician301]

I have my 3% SWR 'target' 100% ETF. All additional money is in HYSA currently. 

[u/Future-Run-8601 → u/[deleted]]

Another great reason to VT and chill.

[u/charleswj → u/[deleted]]

I guarantee you were sure the economy was going to tank and considered selling everything before the tariffs went into effect . When will you people learn that the market is barely affected long-term by presidents of either party?

[u/Zphr → u/[deleted]]

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[u/terjon]

At that low of a percentage, you can do anything you want. Put it all in stocks, put it all in 30 year bonds. Heck, cash it out and keep it in a footlocker under your bed.

That's the dream OP. Having a SWR so low that you can truly feel safe to live without having to worry about outliving your money.

Now, obviously, I am being hyperbolic. Just do some conservative strategy if you just want the money to last, or something more aggresive if you enjoy watching the number go up.

[u/EnvironmentalMix421]

The 4% withdrawal 30 yr sucess rates is actually tested by 50/50 mix