Sanity check on investment ideas

Research on Safe Withdrawal Rates

Moderator: hocus2004

hocus2004
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Post by hocus2004 »

If your analysis says a 2.5% SWR is about right for 80% stocks what does it say for 50% stocks?

Here's a link to a thread that JWR1945 put up titled "Calculated Rates of the Past Decade:"

http://nofeeboards.com/boards/viewtopic.php?t=2657

JWR1945's research shows an SWR of 3 percent for a 50 percent S&P allocation. This post is a little dated, but I don't believe that the valuation levels have changed greatly. So that appears to be a reasonable ballpark number.

It's important that you understand the distinction between a safe withdrawal rate (SWR) and a personal withdrawal rate (PWR). The SWR is a mathematical construct. There is a right and wrong when it comes to reporting SWRs. The PWR is the take-out number that a particular retiree elects for himself or herself. This is a subjective judgment call. There are no right or wrong answers when it comes to PWRs, only better informed and less-well informed judgment calls.

The SWR is a highly conservative number. When we say that the SWR for an 80 percent S&P allocation today is about 2.5 percent, we are NOT saying that aspiring early retirees who have large stock allocations should be planning on a 2.5 percent take-out. There is no law of the universe that says that you have to take the SWR as your PWR.

It alarms me to hear a retiree heavily invested in stocks say that he is going to take a 4 percent PWR. For an 80 percent S&P portfolio, a 4 percent take-out has only a 50 percent chance of working out, according to the historical data. That's not just a little bit unsafe. That's real real unsafe. I do not recommend that anyone put their life savings at risk in a plan that is basically a coin flip.

But I see no problem with someone going with a PWR of greater than 2.5 percent, even for a 80 percent S&P portfolio. Perhaps 80 percent safe is safe enough for you, or something like that. If you take the allocation down to 50 percent, you can obviously go with a higher take-out and still retain the same level of safety.

Nothing that we are saying makes it impossible for people to attain their Retire Early dreams. You hear that one all the time, and it is pure and complete nonsense. There are few posters in the history of our movement with as many posts in their records expressing enthusiasm for the Retire Early concept as me. But I see this movement as a movement of Practical Dreamers. Yes, we want to free ourselves of the corporate shackles. But we want to do so in ways that have a good chance of working out. We want to be realistic in our planning.

People who sell dreams not rooted in reality are not our friends. Not in my book. Unrealistic Retire Early schemes hurt people. When people get hurt trying this stuff, it discredits all of us and it discredits the Retire Early idea itself. We are dreamers, yes, but we are Practical Dreamers. That makes all the difference.
hocus2004
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Post by hocus2004 »

Maybe a better question is, is the tool you use available online somewhere?

I like the response that JWR1945 gave to this question. He teases out some interesting implications in the post he linked to.

If you want a simpler way to look at it, though, another way of saying it is that the Data-Based SWR Tool is SWR analysis itself. Our community has talked about SWR analysis from its first days, from the founding of the Motley Fool board in May 1999. What threw everything off track is that the founder of that board had done a study which got the number wrong. Lots of people bought into the REHP study, and so lots of people have gotten very mixed-up ideas as to what the historical data says re SWRs.

On May 13, 2002, I put forward a post aimed at setting things straight. The approach to SWR analysis suggested in that post is something new, that's a fact. Intercst didn't get the number wrong because he is dumb. The methodology he used is a methodlogy that was used in a number of earlier studies put together by some very smart people (including the Trinity study, a study which William Bernstein characterized as "breakthrough research") The conventional SWR methodology was state of the art in 1996, when intercst posted his SWR study to RetireEarlyHomePage.com.

Things change. That study isn't state of the art anymore. I did some research of my own in the mid-90s and I determined that the conventional methodology is analytically invalid for purposes of determining SWRs. We have checked the data, and the data backs me up on this claim. So it is time to consign the conventional SWR methodology to the dustbin of history. It had its day. It generated some important insights. Its day is over. The conventional SWR methodology is the SWR methodology of the past. The data-based SWR methodology is the SWR methodology of the future.

JWR1945's methodology is one data-based methodlogy. It is not the only possible one. I consider the methodology used by William Bernstein in his book "The Four Pillars of Investing" to be an analytically valid SWR methodology. I also consider the methodology that raddr used in some fine research he put to the FIRE board in earlier days to be an analytically valid methodology.

I refer to these valid studies as "data-based" because they reflect the reality that the data shows that changes in valuations have always affected SWRs. The REHP study ignores the effect of changes in valuation, and therefore it is analytically invalid; it does not report accurately what the data says re what withdrawal rate is safe.

The Data-Based SWR Tool is SWR analysis, updated for what we learned about what the historical data says from my May 13, 2002, post and from the tens of thousands of posts that followed in its wake. We are still developing the tool. It is certainly not a finished product. I expect that we (the entire community, learning together) will continue to develop it for many years to come.
hocus2004
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Post by hocus2004 »

Never been to the Motly Fool board, only the Dorey36 board so pardon me if I'm woefully uninformed.

It's not your fault, Peterv. You are like many others. You come to Retire Early boards because you are interested in learning what it takes to put together a successful plan for early retirement. Instead of being permitted to enjoy discussions that would help in that regard, you have been asked to endure a never-ending deluge of trash talk.

Not acceptable.

I say that you have a right to get from the various boards what you came to them to get from them. I say that the Motley Fool board should permit honest and informed posting on SWRs, and that the raddr board should permit honest and informed posting on SWRs, and that the Early Retirement Forum should permit honest and informed posting on SWRs, and yes, I am even so bold as to say that the board associated with the RetireEarlyHomePage.com site should permit honest and informed posting on SWRs. Every blessed one of them. If you are a site owner and you can't bear the thought of permitting honest and informed posting on SWRs, find some name for your board that does not include words like "retire early" or "financial freedom" or anything else along those lines.

I want the nonsense to stop. I'm not kidding. I don't mean next Monday afternoon. I want it to stop at 5:39 AM today, the time at which I am typing these words onto the computer screen. Please do what you can to spread the word, Peterv.
unclemick
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Post by unclemick »

Back to chickenheartedness as an investment theme - being in retirement - ?? is it timing or valuation?? - watching the 'general' level of dividends - which have a 'rough' correlation with valuation. There may be times when this relationship has broken down in history.

But being a Boglehead - I usually start with initial div rate plus swags for growth plus up or down speculation whither P/E versus history.

With my 'benchmark' Vanguard Balanced Index in the 2-2.5% range - I've put my thumb on the scale a little - via individual dividend stocks and REIT Index(in1998-900) to improve yield.
peterv
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Post by peterv »

Hocus wrote:This is so. I am very much advocating that people aim to "time the market." The reason why there is such resistance to the idea is that there is a lot of confusion about research that people have heard about that shows that "timing is impossible." There is indeed research that shows that short-term timing is very difficult to pull off successfully. There is no research that I know of that shows that long-term timing is impossible.

Any time that you start feeling queasy about long-term timing, take out your copy of William Bernstein's book "The Four Pillars of Investing" and reread Chapter Two. He discusses in great depth why long-term stock returns (but not short-term stocks returns) are highly predictiable. It is because short-term returns are so unpredictable that short-term timing generally does not work. It is because long-term returns are so predictable that long-term timing generally does.
This is why I decided to take the plunge and change my initial allocation from 70% stocks. 50% may not be ideal but it's moving in the right direction and is something I can sleep with. As I get more experience I may modify it further.
The SWR is a highly conservative number. When we say that the SWR for an 80 percent S&P allocation today is about 2.5 percent, we are NOT saying that aspiring early retirees who have large stock allocations should be planning on a 2.5 percent take-out. There is no law of the universe that says that you have to take the SWR as your PWR.
Understand completely. Being new to the game, my PWR at least for the first couple of years will be on the low side. I may be fooling myself that 2ish percent is even safer - somewhere, I think on this board, I read that external forces like natural disaster, unstable government (is there any other kind?), etc. impose about a 20% "fee" to your survivablity. Oh well, at least I'll control what I can and keep my powder dry. (Do MREs and ammunition count as investments? ;) ) In any case 2ish percent is going to feel like a big raise. After many years of depriving myself while saving like crazy I can finally live a little. Going to take some getting used to for sure.
JWR1945's research shows an SWR of 3 percent for a 50 percent S&P allocation. This post is a little dated, but I don't believe that the valuation levels have changed greatly. So that appears to be a reasonable ballpark number.
I don't know what I'd do with that much to spend every month but it would be fun finding out.
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