Expanded Allocator Insights C

This time, I examined mortgages.

Conditions

I considered three investment types as well as 2% TIPS to manage cash flows. One of these was a 20 or 30 year mortgage at 6% interest.

I simulated a 20 year mortgage by assuming an interest rate of 8.718% and multiplying all payments through Year 20 by 1.0 and after Year 20 by 0.0.

I simulated a 30 year mortgage by assuming an interest rate of 7.264% and multiplying all payments through Year 20 by 1.0 and after Year 20 by 0.0.

Investment 1: 3% initial yield with 8% per year growth.
Investment 2: 4% initial yield with 5% per year growth.
Investment 3: 6% mortgage over 20 years (8.718% multiplied by 0 after Year 20).
TIPS: 2% real interest.
Inflation: 3%.
and
Alternative Investment 3: 6% mortgage over 30 years (7.264% multiplied by 0 after Year 30).

Results

ALL CONDITIONS:

Investment 1: 3% initial yield with 8% per year growth.
Investment 2: 4% initial yield with 5% per year growth.
Investment 3: 6% mortgage over 20 or 30 years.
TIPS: 2% real interest.
Inflation: 3%.

CONDITION A:

Investment 3: 6% mortgage over 20 years (8.718% multiplied by 0 after Year 20).

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 40%.
TIPS allocation: 20%.
Withdrawal Rate: 5.3%.

CONDITION B:

Investment 3: 6% mortgage over 30 years (7.264% multiplied by 0 after Year 30).

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 40%.
TIPS allocation: 20%.
Withdrawal Rate: 5.3%.

CONDITION C:

Investment 3: 6% mortgage over 30 years (7.264% multiplied by 0 after Year 30).

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 50%.
TIPS allocation: 10%.
Withdrawal Rate: 5.3%.

CONDITION D:

Investment 3: 6% mortgage over 20 years (8.718% multiplied by 0 after Year 20).

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 40%.
TIPS allocation: 20%.
Withdrawal Rate: 5.345%.

ALL CONDITIONS:
Withdrawal Rate: 5.3%.

BEST CONDITION, CONDITION D:
Withdrawal Rate: 5.345%.

Conclusions

All conditions produced a continuing withdrawal rate of 5.3% (plus inflation) after optimization.

The choice of a 20 year mortgage or 30 year mortgage made little difference.

Once again, the BEST combination consisted of the extremes: one investment with a high initial income and the other with the fastest growth rate at a lower initial yield.

Have fun.

John Walter Russell
April 17, 2007