On December 7th, 2014, KTTH radio (770 on the AM dial) in Seattle broadcast a show called Absolute Return Radio with Brian Decker and Jim Black. We all make mistakes, and there appears to be one with respect to the time horizon. At about the 13 minute mark (copy and paste this link in a browser to listen for yourself: http://ktth.com/listen/9980682), Mr. Decker emphatically claims that he can show that someone who retired on January 1st, 2000 would have a portfolio “that is gone by 2008” (by the end of 2008) if he had withdrawn 4% of his portfolio annually. Finding this highly unlikely using reasonable data for a retiree, I decided to fact check Brian’s declaration, and I found no such thing. Using a pragmatic portfolio of 65% equities (stocks) and 35% cash/bonds AND withdrawing 4% annually of the original portfolio value, adjusted higher for inflation, I found the investor’s portfolio was nowhere near gone! Our investor’s portfolio did decline by 27%, but he was definitely not broke or out of money. In fact, I had the investor withdrawing MORE than 4% in all years except year one. Here’s the breakdown of the withdrawal amounts and percentages of the beginning of the year portfolio balances (assumes a $1,000,000 portfolio beginning balance in January of 2000):
2000 – $40,000 – 4.00%2001 – $40,800 – 4.20%2002 – $41,616 – 4.50%2003 – $42,448 – 5.20%2004 – $43,297 – 4.60%2005 – $44,163 – 4.50%2006 – $45,046 – 4.60%2007 – $45,947 – 4.80%2008 – $46,886 – 4.70%
Even when I increase our investor’s hypothetical portfolio to 95% equities and 5% cash/bonds, entirely inappropriate for a retiree, his portfolio is still nowhere near gone. Yes, his portfolio has declined in value by 49.5%, but he has still NOT completely depleted his financial resources by withdrawing 4% annually. Lastly, I created a 95/5 portfolio where the equity (stock) portion was all in the S&P 500 – again, highly inappropriate for any retiree – and I still could not cause the portfolio to evaporate by the end of 2008. Respectfully, I can only assume Mr. Decker misspoke about the time horizon. Yes, Brian can show a portfolio that is gone by 2008 if it is comprised of Lehman Brothers, General Motors, or other bankrupt companies, but let’s hope that’s not his data set. I feel my two 95% equity exposure examples are highly unrealistic as any retiree will, hopefully, have a prudent amount of cash/bonds for safety and soundness and to reduce portfolio volatility. Perhaps Mr. Decker can substantiate, with empirical data, his claims that he can show how a retiree who retires in January of 2000 has a portfolio that is GONE by 2008 as a result of withdrawing 4% of his portfolio annually, but I cannot, under any real world scenario. Even if I add a disproportionately high allocation of foreign and emerging market equities, I cannot fully deplete our investor’s portfolio. The takeaway – be wary of claims some advisers make with respect to portfolio performances. Challenge any and everything you hear from financial services professionals, including me. Use a simple Google search to fact check information you hear or read.
My Data: In the 65/35 portfolio referenced above, here is the portfolio allocation: 35% cash and bonds evenly split between the 1 month T-Bill and the 5yr US Treasury Note; 30% U.S. Large Cap; 22% U.S. Large Cap value; 9% U.S. Small Cap; and 4% U.S. Small Cap value. In the above referenced 95/5 portfolio, here is the portfolio allocation: 5% cash and bonds evenly split between the 1 month T-Bill and the 5yr US Treasury Note; 44% U.S. Large Cap; 32% U.S. Large Cap value; 13% U.S. Small Cap; and 6% U.S. Small Cap value. The 95/5 portfolio with the equity portion all S&P 500 is self evident.
Stuart McGehee, Pacific Northwest Asset Management, LLC, Seattle, WA