Rising Equity Glide Path vs Annual Rebalancing of a retirement portfolio?

Bostonerimus1

SVaz said:

Mine will become a U shape I imagine,  once I’ve used up my liquid funds over the next 7 years,  everything will be in equities / mixed assets once again and I’ll only draw off the 1.8% ish  that will be from dividend income at State pension age. 

We intend to have more in the pot at 80 than at 70 to use for any elderly care needs and for that we’ll need a high equities percentage,  probably 80/20 or 70/30. 

Many people are not going to adopt this approach as they will be in "lifestyle funds" and it goes against conventional wisdom.

SVaz

Yes, it only works for us because I have a DB pension,  with that and two state pensions we won’t really have to touch my Sipps,  my wife will have emptied hers into an ISA by 67.  

Hoenir

GazzaBloom said:

Hoenir said:

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

In a decades time there'll be a reflective look back at the post GFC Quantative Easing era with a far better understanding.  I can recall back as far as 2015 and the discussed death of the 60/40 portfolio. As  it was, there was a boom in both Infrastructure and Real Estate Investment Trusts. With investors piling in to secure high yields. 

Origins of 60/40 go back many decades. The status quo is returning.  There are many variable components to a 60/40 portfolio. Not simply an annual (or quarterly) mechanical rebalancing. There's also a constant income stream that's being reinvested. 

This is back tested using over 100 years of historical data in the modelling so covers the periods before GFC.

The data is manufactured though. The dataset was first created by Dimson, Marsh and Staunton in 1990, and has been updated annually since. Who knows what it might have been had investors been able to trade as they do now over the entire period. 

Bostonerimus1

SVaz said:

Yes, it only works for us because I have a DB pension,  with that and two state pensions we won’t really have to touch my Sipps,  my wife will have emptied hers into an ISA by 67.  

The research is saying that for people doing drawdown ie without annuities or DB pensions, this rising equity allocation approach allows for slightly higher withdrawals and/or better chances of success. The benefits are not dramatic and could easily be wiped out when taken from the pages of a journal and made to face reality, and maybe the people that benefit most from all this are the authors as they get paid for the articles and get to burnish their reputations. Still as I also have a DB pension and I can't be bothered to rebalance anymore I figured why not go for a rising equity allocation in retirement.

GazzaBloom

Hoenir said:

GazzaBloom said:

Hoenir said:

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

In a decades time there'll be a reflective look back at the post GFC Quantative Easing era with a far better understanding.  I can recall back as far as 2015 and the discussed death of the 60/40 portfolio. As  it was, there was a boom in both Infrastructure and Real Estate Investment Trusts. With investors piling in to secure high yields. 

Origins of 60/40 go back many decades. The status quo is returning.  There are many variable components to a 60/40 portfolio. Not simply an annual (or quarterly) mechanical rebalancing. There's also a constant income stream that's being reinvested. 

This is back tested using over 100 years of historical data in the modelling so covers the periods before GFC.

The data is manufactured though. The dataset was first created by Dimson, Marsh and Staunton in 1990, and has been updated annually since. Who knows what it might have been had investors been able to trade as they do now over the entire period. 

The accuracy of the data is not particularly relevant.

OldScientist

Hoenir said:

GazzaBloom said:

Hoenir said:

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

In a decades time there'll be a reflective look back at the post GFC Quantative Easing era with a far better understanding.  I can recall back as far as 2015 and the discussed death of the 60/40 portfolio. As  it was, there was a boom in both Infrastructure and Real Estate Investment Trusts. With investors piling in to secure high yields. 

Origins of 60/40 go back many decades. The status quo is returning.  There are many variable components to a 60/40 portfolio. Not simply an annual (or quarterly) mechanical rebalancing. There's also a constant income stream that's being reinvested. 

This is back tested using over 100 years of historical data in the modelling so covers the periods before GFC.

The data is manufactured though. The dataset was first created by Dimson, Marsh and Staunton in 1990, and has been updated annually since. Who knows what it might have been had investors been able to trade as they do now over the entire period. 

The various data sets (DMS, macrohistory, GFD, etc.) use historical prices and dividends to obtain the returns. Differences between the datasets will arise based on selection, accuracy (or otherwise) of the sources used, methodology etc. You're right, that had the liquidity been different then the prices might have been different. To take some random examples (which I happen have the data for), some US equities were rarely traded on the NYSE - e.g., no shares in the Philadelphia Rapid Transit company were traded in Feb 1928 (and only 10 were traded in the January of that year) while 30 shares in the Bank of NY were traded (of course, they may have been traded elsewhere). On the other hand, others were traded more frequently, e.g., 48800 Coca Cola shares and 54000 Gillette shares were traded that month. Given that modelling the effect of liquidity (and taxes and trading costs) on prices would be impossible, then taking the historical prices, and consequently returns, is as close as we can get.

There are other uncertainties in the data (e.g., inflation) which add to those caused by liquidity. Modelling would suggest that the error bars on SWR are around plus/minus 25 basis points, so any strategy that results in changes less than that may not be worthwhile pursuing.

Bostonerimus1

OldScientist said:

Hoenir said:

GazzaBloom said:

Hoenir said:

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

In a decades time there'll be a reflective look back at the post GFC Quantative Easing era with a far better understanding.  I can recall back as far as 2015 and the discussed death of the 60/40 portfolio. As  it was, there was a boom in both Infrastructure and Real Estate Investment Trusts. With investors piling in to secure high yields. 

Origins of 60/40 go back many decades. The status quo is returning.  There are many variable components to a 60/40 portfolio. Not simply an annual (or quarterly) mechanical rebalancing. There's also a constant income stream that's being reinvested. 

This is back tested using over 100 years of historical data in the modelling so covers the periods before GFC.

The data is manufactured though. The dataset was first created by Dimson, Marsh and Staunton in 1990, and has been updated annually since. Who knows what it might have been had investors been able to trade as they do now over the entire period. 

The various data sets (DMS, macrohistory, GFD, etc.) use historical prices and dividends to obtain the returns. Differences between the datasets will arise based on selection, accuracy (or otherwise) of the sources used, methodology etc. You're right, that had the liquidity been different then the prices might have been different. To take some random examples (which I happen have the data for), some US equities were rarely traded on the NYSE - e.g., no shares in the Philadelphia Rapid Transit company were traded in Feb 1928 (and only 10 were traded in the January of that year) while 30 shares in the Bank of NY were traded (of course, they may have been traded elsewhere). On the other hand, others were traded more frequently, e.g., 48800 Coca Cola shares and 54000 Gillette shares were traded that month. Given that modelling the effect of liquidity (and taxes and trading costs) on prices would be impossible, then taking the historical prices, and consequently returns, is as close as we can get.

There are other uncertainties in the data (e.g., inflation) which add to those caused by liquidity. Modelling would suggest that the error bars on SWR are around plus/minus 25 basis points, so any strategy that results in changes less than that may not be worthwhile pursuing.

Pfau and Kitches are comparing various allocation strategies using the same set of historical data so I wouldn't worry too much about it. I also wouldn't read too much into the results as the improvements in success and SWR aren't that dramatic for various different equity allocation trajectories; cancelling Sky etc. is probably going to improve your finances more.