Reality Matters
Posted: Mon Jun 21, 2004 4:55 am
There are a good number of community members at the various FIRE/Passion Saving/Retire Early boards who, when faced with the reality of what the historical data says re SWRs, have in essence responded: "I don't like this particular reality and I don't intend to permit it to influence my thinking on SWRs." It is when this happens that you see arguments made to the effect that there is no right or wrong in the determination of SWRs, that just because the SWR is a mathematical construct does not mean that SWR researchers need be bound by the laws of mathematics in putting forward their "findings" as to what the historical data says.
I reject that line of thinking. The reason why I founded this board was so that community members interested in pursuing the realities of what the historical data says would have a safe place to go to for purposes of holding such discussions. That's why I don't permit word game posts at this board. The purpose of word game posts is to confuse people about the realities. The purpose of the discussions held at this board is to bring about a stronger understanding of the realities. Word games do not serve our purpose; they undermine it.
There is a thread going on today at the Early Retirement Forum
http://early-retirement.org/cgi-bin/yab ... 1087764331
that illustrates well the tangles that communities get themselves into when they make decisions to ignore the reality principle.
The question raised in the thread-starter is--Is it proper to adjust one's withdrawal rate after the beginning of a retirement in which SWR anlaysis was used to determine the initial take-out number?
The answer for those following the conventional methodology studies is generally "no." There are some "puzzling"Â exceptions to the general rule; the exceptions were examined in depth at the earlier "SWR of 6.21 percent"Â thread, also at the Early Retirement Forum. The general rule, however, is that one should continue withdrawing the same 4 percent from the retirement starting-date portfolio amount. The conventional studies are rooted in the assumption that the SWR is an unchanging number. If the DOW were to rise to 30,000, the SWR would still be 4. If the Dow were to drop to 2,000, the SWR would still be 4. Recognition is generally not given to the effect of changes in valuation levels.
The conventional methodology approach is an unrealistic way to think about the question being posed in SWR analysis--What is safe? The reality is that the SWR changes each time valuation levels change. When valuation levels go up, the SWR goes down. When valuation levels go down, the SWR goes up.
Those following the data-dased SWR approach do not face a "puzzle" as to whether to change their personal withdrawal rate (PWR) when stock prices go up or down. They of course may do so; it is a matter of personal choice and if their life circumstances have changed (if, for example, they now require a higher or lower level of safety than they required at their retirement starting-date), changes are of course appropriate and it is of course appropriate to take the SWR that applies at the new valuation level into account in deciding on what changes to make. But changes in valuation levels do not change a withdrawal amount that was 90 percent safe at the beginning of a retirement into a withdrawal amount that now provides something greater or lesser than 90 percent safety. A withdrawal rate that was truly 90 percent safe at the beginning of a retirement will remain 90 percent safe regardless of upward or downward changes in valuation levels during the retirement.
Say that you began taking a 5 percent withdrawal from a high-stock-percentage stock portfolio at a time when the historical data showed that you enjoyed 90 percent safety with that withdrawal level. Then prices go down. You now have a smaller portfolio. Do you need to change your take-out amount to continue to enjoy 90 percent safety? You do not. The drop in prices raises the SWR so that afterwards you enjoy 90 percent safety at a higher withdrawal rate, perhaps 6 percent. Since your portfolio is now smaller, you are taking more than 5 percent out each year to support your planned annual spending target, again perhaps 6 percent. Your withdrawal is still 5 percent of the retirement starting-date portfolio amount. But it is 6 percent of the reduced portfolio amount. And the SWR for high-stock-percentage portfolios has increased to 6 percent. It all works out nicely.
What if stock valuations go up in the years immediately following your retirement? May you begin taking out more each year? Not if you want to maintain the same level of safety that you started with. The number that provides you with a 90 percent level of safety for a retirement beginning at a specified valuation level does not change just because stock valuations change. The SWR associated with the higher valuation level is a lower number, of course. If you continue withdrawing the same percentage of your retirement starting-date portfolio amount, that amount will be a smaller percentage of the new portfolio amount. Again, it all works out nicely.
Things work out nicely with the Data-Based SWR Tool because the Data-Based SWR Tool is rooted in the realities of what the historical data says. The historical data says that the SWR changes with changes in valuation levels, and the tool incorporates those changes into its determinations of the SWR. The conventional methodology does not do this. That's why consideration of the conventional methodlogy findings lead to mind-numbing "puzzles"Â as to whether it is reasonable to change one's withdrawal rate when valuation levels change.
There are no satisfying answers to these puzzles because the entire methodology is built on a fantasy-land assumption that changes in valuation levels have zero effect on SWRs. Buy into that one, and you are buying into belief in an alternate universe in which stocks perform in ways in which they have never performed in the one we actually live in. Ongoing puzzlement is a natual consequence of trying to make sound money decisions in this world while following methodologies designed for application only in others perhaps existing in galaxies far far away.
This community's understanding of SWRs will prevail.
Not because we are in the majority; we obviously are not. Not because we are better liked; we obviously are not. Not because we will employ dirty posting practices to obtain an edge; we obviously will not. This community's understanding will prevail because the SWR concept is a data-based construct, and this community's approach to determining SWRs is rooted in what the data says. When it comes to SWRs, data trumps opinion polls, data trumps personal loyalties, and data trumps dirty posting tactics. When it comes to SWRs, data trumps everything.
The SWR is what the historical data says it is. That's our board motto.
Reality matters. That's the guiding principle we aim to keep in mind when offering money advice to fellow community members.
I reject that line of thinking. The reason why I founded this board was so that community members interested in pursuing the realities of what the historical data says would have a safe place to go to for purposes of holding such discussions. That's why I don't permit word game posts at this board. The purpose of word game posts is to confuse people about the realities. The purpose of the discussions held at this board is to bring about a stronger understanding of the realities. Word games do not serve our purpose; they undermine it.
There is a thread going on today at the Early Retirement Forum
http://early-retirement.org/cgi-bin/yab ... 1087764331
that illustrates well the tangles that communities get themselves into when they make decisions to ignore the reality principle.
The question raised in the thread-starter is--Is it proper to adjust one's withdrawal rate after the beginning of a retirement in which SWR anlaysis was used to determine the initial take-out number?
The answer for those following the conventional methodology studies is generally "no." There are some "puzzling"Â exceptions to the general rule; the exceptions were examined in depth at the earlier "SWR of 6.21 percent"Â thread, also at the Early Retirement Forum. The general rule, however, is that one should continue withdrawing the same 4 percent from the retirement starting-date portfolio amount. The conventional studies are rooted in the assumption that the SWR is an unchanging number. If the DOW were to rise to 30,000, the SWR would still be 4. If the Dow were to drop to 2,000, the SWR would still be 4. Recognition is generally not given to the effect of changes in valuation levels.
The conventional methodology approach is an unrealistic way to think about the question being posed in SWR analysis--What is safe? The reality is that the SWR changes each time valuation levels change. When valuation levels go up, the SWR goes down. When valuation levels go down, the SWR goes up.
Those following the data-dased SWR approach do not face a "puzzle" as to whether to change their personal withdrawal rate (PWR) when stock prices go up or down. They of course may do so; it is a matter of personal choice and if their life circumstances have changed (if, for example, they now require a higher or lower level of safety than they required at their retirement starting-date), changes are of course appropriate and it is of course appropriate to take the SWR that applies at the new valuation level into account in deciding on what changes to make. But changes in valuation levels do not change a withdrawal amount that was 90 percent safe at the beginning of a retirement into a withdrawal amount that now provides something greater or lesser than 90 percent safety. A withdrawal rate that was truly 90 percent safe at the beginning of a retirement will remain 90 percent safe regardless of upward or downward changes in valuation levels during the retirement.
Say that you began taking a 5 percent withdrawal from a high-stock-percentage stock portfolio at a time when the historical data showed that you enjoyed 90 percent safety with that withdrawal level. Then prices go down. You now have a smaller portfolio. Do you need to change your take-out amount to continue to enjoy 90 percent safety? You do not. The drop in prices raises the SWR so that afterwards you enjoy 90 percent safety at a higher withdrawal rate, perhaps 6 percent. Since your portfolio is now smaller, you are taking more than 5 percent out each year to support your planned annual spending target, again perhaps 6 percent. Your withdrawal is still 5 percent of the retirement starting-date portfolio amount. But it is 6 percent of the reduced portfolio amount. And the SWR for high-stock-percentage portfolios has increased to 6 percent. It all works out nicely.
What if stock valuations go up in the years immediately following your retirement? May you begin taking out more each year? Not if you want to maintain the same level of safety that you started with. The number that provides you with a 90 percent level of safety for a retirement beginning at a specified valuation level does not change just because stock valuations change. The SWR associated with the higher valuation level is a lower number, of course. If you continue withdrawing the same percentage of your retirement starting-date portfolio amount, that amount will be a smaller percentage of the new portfolio amount. Again, it all works out nicely.
Things work out nicely with the Data-Based SWR Tool because the Data-Based SWR Tool is rooted in the realities of what the historical data says. The historical data says that the SWR changes with changes in valuation levels, and the tool incorporates those changes into its determinations of the SWR. The conventional methodology does not do this. That's why consideration of the conventional methodlogy findings lead to mind-numbing "puzzles"Â as to whether it is reasonable to change one's withdrawal rate when valuation levels change.
There are no satisfying answers to these puzzles because the entire methodology is built on a fantasy-land assumption that changes in valuation levels have zero effect on SWRs. Buy into that one, and you are buying into belief in an alternate universe in which stocks perform in ways in which they have never performed in the one we actually live in. Ongoing puzzlement is a natual consequence of trying to make sound money decisions in this world while following methodologies designed for application only in others perhaps existing in galaxies far far away.
This community's understanding of SWRs will prevail.
Not because we are in the majority; we obviously are not. Not because we are better liked; we obviously are not. Not because we will employ dirty posting practices to obtain an edge; we obviously will not. This community's understanding will prevail because the SWR concept is a data-based construct, and this community's approach to determining SWRs is rooted in what the data says. When it comes to SWRs, data trumps opinion polls, data trumps personal loyalties, and data trumps dirty posting tactics. When it comes to SWRs, data trumps everything.
The SWR is what the historical data says it is. That's our board motto.
Reality matters. That's the guiding principle we aim to keep in mind when offering money advice to fellow community members.