TABLE 2

Expected Portfolio Return Based On Asset Allocation

Based on the past 50 years .

INVESTING

ASSET ALLOCATION RETURN ( Lump Sum ) RISK ( Standard Deviation ) 100 % Equity / 0 % Fixed Income 10.5 % 17 % 80 % Equity / 20 % Fixed Income 10 % 14 % 60 % Equity / 40 % Fixed Income 9 % 11 % 40 % Equity / 60 % Fixed Income 8 % 8 % 20 % Equity / 80 % Fixed Income 7 % 6 % 0 % Equity / 100 % Fixed Income 6 % 5 %

of the time . The average RMD annual withdrawal during retirement “ drops ” to just over $ 176,000 , the total amount withdrawn over 25 years is $ 4.4 million on average , and the average ending balance after 25 years of withdrawals is $ 2.5 million . Impressive results to be sure .

The classic 60 / 40 portfolio produces an annualized return of about 9 % and an average RMD withdrawal of just more than $ 150,000 . The average ending balance of the portfolio doubles from $ 1 million to $ 2 million after 25 years of withdrawals . Interestingly , a 60 / 40 portfolio produces a lump sum return that is 14.5 % lower than the all-equity portfolio but it has 36 % less volatility ( when you take the standard deviation of 10.68 % instead of the 16.68 % figure we have in the all-equity portfolio ). That ’ s a seemingly acceptable risk / return trade-off .

We also have portfolios of 40 % equities and 60 % fixed income , and portfolios with 20 % equities and 80 % fixed income . In these , the 50-year return declines by roughly 1 percentage point ( 100 basis points ) and negative annual returns happen only about 10 % of the time .

The 100 % fixed-income portfolio consists of 70 % bonds and 30 % cash . In our analysis , the 50-year return on this was 6.01 % and the standard deviation was a paltry 5.5 %. When the standard deviation of returns is lower than the average annualized return , you can assume you ’ re dealing with a fixed-income portfolio ( though not high yield !) In this low-volatility portfolio , our hypothetical retiree had an average annual RMD withdrawal of just over $ 93,000 , a total

25-year withdrawal of $ 2.3 million ( on average ), and an average ending portfolio balance of just under $ 1 million .

In all these cases , the retirement portfolio never ran out of money , since the RMD is a withdrawal mechanism based on percentages . That means you can ’ t kill the portfolio if there are only withdrawals based on the required minimum distribution . Other factors , of course — such as horrible investments — can indeed deplete a retirement portfolio .

We see something interesting in the second table . I ’ ve done some gentle rounding , but at each asset allocation level below 100 % equity the return drops by 100 basis points ( or by one percentage point ). In the world of broadly diversified portfolios , the range of returns stretches from roughly 10.5 % for a portfolio made up entirely of equities to 6 % for one made up entirely of bonds . But volatility is a different matter . The range is larger , from 17 % down to 5 %. In other words , asset allocation has more potential impact on volatility than on return . We often show standard deviation to our clients , but it ’ s seldom understood . This simple summary table suggests that 5 % is a low standard deviation and 17 % is a relatively high one for a portfolio .

With these simple “ bookend ” figures , a client can make sense out of standard deviation figures and better evaluate if the standard deviation of their own portfolio is high or low .

CRAIG L . ISRAELSEN , PH . D . teaches in the Financial Planning Program at Utah Valley University . He is the designer of the 7Twelve ® Portfolio . Craig can be reached at craig @ 7TwelvePortfolio . com .

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MARCH 2023 | FINANCIAL ADVISOR MAGAZINE | 43