SWR definition for FAQ

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What do you think of this attempt at a swr/faq

Poll ended at Tue Aug 17, 2004 2:50 pm

ok
7
88%
could be better (specify changes)
1
13%
it is simply despicable (for jwr1945)
0
No votes
 
Total votes: 8

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ataloss
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SWR definition for FAQ

Post by ataloss »


Have fun.

Ataloss
raddr
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Post by raddr »

Looks good to me. I think that far too much hand-wringing has gone into finding a precise definition for a non-precise entity, the SWR. I might also add that the SWR Police need to lighten up a bit when some poor soul commits a transgression against the definitions that have been proposed on this board. 8)
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Post by bpp »

Hi ataloss,
People seem to have different preferences on how to estimate a SWR (or calculate it with absolute precision in one case.) Some like to define their favorite method as the only correct SWR.


I would suggest dropping the bolded parts. Avoids fanning the flames.

Cheers,
Bpp
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gummy
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Post by gummy »

Although I've seen umpteen SWR discussions and a jillion opinions and several methods of calculation, I don't recall EVER seeing any indication of who is going to use this SWR ... generated by whatever method :?

(A) Is it the retiree, generating some number which will tell her how much to withdraw this month ... or maybe this year?

(B) Is it the 20 year old who is trying to estimate how much money he'll need when he retires in 40 years?

If you were asked for a SWR by (A) or (B), would you give different answers?
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gummy
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Post by gummy »

At the risk of becoming wearisome, here's yet another Sam and Sally story :D

The year is 1929 and all the gurus are predicting that the market will continue its meteoric rise.
In October, an Ohio economist says that prices will remain high for years to come, a Yale economist says that increased earnings justify current prices and the chairman of the City Bank of New York says that stock prices are sound.
http://home.golden.net/~pjponzo/1929-crash.htm

By 1932, the DOW had fallen from a high of over 350 ... to under 50 !!
The gurus were now saying:
Reduce expectations! Be cautious when calculating SWRs. Try 1% or 2% withdrawal rates! The days of double digit returns are over!

So, starting in 1933, gool ol' Sam reduced his withdrawal rate to 2% (his withdrawals changing with inflation).
Sally, realizing that she couldn't trust the cerebral machinations of the gurus, started to withdraw at 13% (her withdrawals changing with inflation).

Each started with $100K
... and BOTH portfolios survived for forty years :!:

Aaah, but Sam's portfolio was worth $9,000,000 when he dropped dead in 1972.

There's a moral here ... if I could only find it :wink:
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BenSolar
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Post by BenSolar »

gummy wrote: Although I've seen umpteen SWR discussions and a jillion opinions and several methods of calculation, I don't recall EVER seeing any indication of who is going to use this SWR ... generated by whatever method :?

(A) Is it the retiree, generating some number which will tell her how much to withdraw this month ... or maybe this year?

(B) Is it the 20 year old who is trying to estimate how much money he'll need when he retires in 40 years?

If you were asked for a SWR by (A) or (B), would you give different answers?


My opinions are that both A and B need a number to shoot for, and that SWR research can serve as a guide for both. Would I give you different numbers for A and B. It depends, :wink: but quite possibly, yes.

For A, we can look at the specifics of the retiree's portfolio, her age and life expectancy, how that mix has performed in the past, what current market conditions are, the retirees appetite for risk, the retirees withdrawal strategy and fall back strategy, the price of tea in China, etc, etc ... and come up with our best estimate of what is safe for her.

For B I think we can generically say: shoot for a broadly diversified portfolio, watch out that assets with bubble type valuations don't dominate it, and aim for roughly 4% withdrawal rate.

There's your jillionth + 1 opinion on the subject. :D

Regards,
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by raddr »

gummy wrote: At the risk of becoming wearisome, here's yet another Sam and Sally story :D

The year is 1929 and all the gurus are predicting that the market will continue its meteoric rise.
In October, an Ohio economist says that prices will remain high for years to come, a Yale economist says that increased earnings justify current prices and the chairman of the City Bank of New York says that stock prices are sound.
http://home.golden.net/~pjponzo/1929-crash.htm

By 1932, the DOW had fallen from a high of over 350 ... to under 50 !!
The gurus were now saying:
Reduce expectations! Be cautious when calculating SWRs. Try 1% or 2% withdrawal rates! The days of double digit returns are over!

So, starting in 1933, gool ol' Sam reduced his withdrawal rate to 2% (his withdrawals changing with inflation).
Sally, realizing that she couldn't trust the cerebral machinations of the gurus, started to withdraw at 13% (her withdrawals changing with inflation).

Each started with $100K
... and BOTH portfolios survived for forty years :!:

Aaah, but Sam's portfolio was worth $9,000,000 when he dropped dead in 1972.

There's a moral here ... if I could only find it :wink:


Hi gummy,

LOL - nice story! :lol: I think it would apply to 2003 except for one thing. Starting out in 1933 the PE10 was 8.7 and the dividend yield was 7% vs. 25 and 1.7% currently. :wink: For me the moral of the story is to pay attention to valuations and not to gurus. 8) BTW, do you think there's any chance that Sam's heirs might include us in their wills? :lol:
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gummy
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Post by gummy »

Ben:
For A, we can look at the specifics of the retiree's portfolio, her age and life expectancy ...

That sounds eminently reasonable, which makes me wonder how one can generate any rational "formula" for SWR that applies to the masses, as is often done %^$#*!?
For B I think we can generically say: shoot for a broadly diversified portfolio ... and aim for roughly 4% withdrawal rate

Aim for 4%" That's what I tell my kids! Forget the math! :D


raddr:
... do you think there's any chance that Sam's heirs might include us in their wills?

Me first!!
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ataloss
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Post by ataloss »

I modified this a little to make it even less confrontational. I think SWR vs. what investors might really do is a separate matter.
Q: SWR

A: Safe withdrawal rate. The answer to bylo's question "How much of my
savings can I withdraw in each year of my retirement without incurring an
undue risk of depleting my assets?"
http://www.bylo.org/saferetr.html

Gummy:
1. A number, expressed as a percentage (like 4%), called the SWR
... that's the Rate word.
2. This Rate determines (in some prescribed manner) how much to withdraw
from some portfolio value
... that's the Withdrawal word.
3. The result of withdrawing at this Rate will be that your portfolio will
last until you drop dead (or for 30 or 40 years or whatever)
... that's the Safe word http://home.golden.net/~pjponzo/Safe-Withdrawals.htm


and:

When people talk about Safe Withdrawal Rates (see Bylo's list) they usually
assume certain Rules like

* rebalancing your portfolio at fixed intervals (annually, for example)
* maintaining some fixed allocation of assets (like 80% stocks + 20%
bonds, for example)
* withdrawing a certain percentage of your portfolio each year (like 5%,
for example)
* increasing withdrawal amounts with inflation (at 3%, perhaps)
http://home.golden.net/~pjponzo/sensibl ... rawals.htm

People seem to have different preferences on how to estimate a SWR. Some like to define their favorite method as the only correct SWR.

Of course one can consider withdrawals as a constant percentage of the portfolio:
http://www.efficientfrontier.com/ef/998/hell.htm
Have fun.

Ataloss
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ataloss
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Post by ataloss »

Q. So what good is a SWR? Would you recommend that a retiree adopt a withdrawal rate at the start of retirement and take inflation adjusted withdrawals with no regard for subsequent events?

A. SWR gives a pre-retiree an idea of the size of the nest egg required. The idea of SWR is useful when comparing one allocation approach versus another. It gives the retiree an idea of what would be a reasonable range for withdrawals. It is hard to imagine that a retiree would actually blindly put the SWR into practice without considering other factors like market returns, life expectancy, risk tolerance and other income sources.

Sensible Withdrawal Rates, the "other SWR" might be more practical:
Or consider "the other swr,"￾ sensible withdrawal rates:
http://home.golden.net/~pjponzo/sensibl ... rawals.htm
Have fun.

Ataloss
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Post by [KenM] »

It's the "safe" word that I always consider is very misleading and I personally consider it absurd to say that there is ever likely to be a fixed, precise "safe" rate that applies throughout a retirement period of 30 years or so. Unfortunately "S" in SWR is always translated as "safe" rather than "sensible".
I seem to recall someone, somewhere, saying that the best way to decide if investment/financial stuff is valid is to try and convince your spouse it is (if someone didn't say it then they should have done). If I tried to convince my wife there's a fixed "safe" WR she would fall off her chair laughing. After she'd picked herself up off the floor she'd then hit me over the head with the nearest available implement. Just my opinion - but then I've been hit over the head quite a few times in the last 27 years :lol:
KenM
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ataloss
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Post by ataloss »


Have fun.

Ataloss
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