From Chapter 7

Research on Safe Withdrawal Rates

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JWR1945
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Post by JWR1945 »

A couple of points for peteyperson:

Regarding the CPI for Urban workers (CPI-U) in the United States, I followed the issue very closely a few years ago when it was cut by 0.5%. It was almost universal accepted that the CPI overstated inflation. The Federal Reserve Board of Governors reported to congress that it was overstated by 1.0%.

There was quite a bit of suspicion voiced at the time because so much is tied to that single number CPI-U. Congress decided to split the difference: something bigger than 0% and less than 1%.

The Federal Reserve Board of Governors maintains that it got the numbers right in the first place. If so, an additional downward adjustment of 0.5% would be in order. Don't expect that to happen, however, unless the Government gets desperate.

In terms of personal inflation rates, the Government makes all of the elements available to us and it tells us how to come up with our own numbers (by changing the relative weights of each item in the calculation).

In terms of hankjoy's high dividend approach, I have not studied it enough to reach firm conclusions. I know that there is something to be gained by applying extreme price discipline. In addition, yields are always referenced back to the initial purchase price because one is purchasing a stream of (real) income, not necessarily a growing stream of income.

As far as hocus's discussion of Income Streams, he has posted it at the Early Retirement Forum recently. But I got the full dramatic effect when I read his (final draft of his) new book, Passion Savings. To me, the comparison would be similar to a 5-minute description of Dave Ramsey's recommendations versus listening to his entire show for several weeks.

Have fun.

John R.
peteyperson
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Post by peteyperson »

Will regard to inflation, inflation numbers here just got slashed by 1% when the Brit govt decided to change the name and work it out differently. They then killed the old version and renamed the new version to what it used to be called.

Europe has various differnet methods to calculate inflation and now has a harmonized one that is supposed to be worked out the same for everyone. One has to ask, surely there is a right answer to this? Of course if you weight the different expenditures differently then there isn't a single right answer, but then one would have to make the observation that any inflation number is then useless because the weightings do not match your own.

For me, I keep an eye on the official data but here in the UK we are not experiencing 2.5% inflation no matter what anyone tries to tell you. Jeremy Grantham uses a 2.2% inflation number in his calculations. My chatting with Americans indicates pretty clearly that Americans are not experiencing that sort of low inflation either. The difference is dramatic enough that it is not the weightings that are wrong but the data itself and/or the way it is calculated. I use 4% in my calculations because whilst inflation averaged 5% by the official numbers over the past 3 decades, if your spending if focused on staples sourced thru Wal-Mart (Asda supermarket is owned by Wal-Mart and follows that same low cost ideal) rather than more expensive luxury items, then personal inflation tends to get held down more. I also think we have a little bit of a better handle on it than in the past, but not by much. I am quite prepared to use a 5% number if necessary but I think 4% is noticeably above the official numbers to be comfortable for now.

Petey
JWR1945 wrote:A couple of points for peteyperson:

Regarding the CPI for Urban workers (CPI-U) in the United States, I followed the issue very closely a few years ago when it was cut by 0.5%. It was almost universal accepted that the CPI overstated inflation. The Federal Reserve Board of Governors reported to congress that it was overstated by 1.0%.

There was quite a bit of suspicion voiced at the time because so much is tied to that single number CPI-U. Congress decided to split the difference: something bigger than 0% and less than 1%.

The Federal Reserve Board of Governors maintains that it got the numbers right in the first place. If so, an additional downward adjustment of 0.5% would be in order. Don't expect that to happen, however, unless the Government gets desperate.

In terms of personal inflation rates, the Government makes all of the elements available to us and it tells us how to come up with our own numbers (by changing the relative weights of each item in the calculation).

In terms of hankjoy's high dividend approach, I have not studied it enough to reach firm conclusions. I know that there is something to be gained by applying extreme price discipline. In addition, yields are always referenced back to the initial purchase price because one is purchasing a stream of (real) income, not necessarily a growing stream of income.

As far as hocus's discussion of Income Streams, he has posted it at the Early Retirement Forum recently. But I got the full dramatic effect when I read his (final draft of his) new book, Passion Savings. To me, the comparison would be similar to a 5-minute description of Dave Ramsey's recommendations versus listening to his entire show for several weeks.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

IMHO, Gene Epstein, who writes for Barron's but who is on a sabbatical to write a book, has described the best way to track inflation: use the median of the various components instead of something like the core rate that excludes food and gasoline.

For now, at least, the political effect of reducing the reported rate of inflation would be overwhelmingly negative. Something might get slipped in sometime in the future during a fiscal crisis, but not now. You can tell by the hostility underneath discussions about inflation.

BTW, what many people would like to use is the inflation index for the elderly. It exists. But Government payouts and union contracts are all tied to the urban worker CPI-U. [There is also an index for the cost of employees. It is usually higher than the cost of living adjustments reported by the CPI-U index.] Of course, if the Government were to shift social security payments to the CPI for the elderly, the Government would have to pay more.

Have fun.

John R.
th
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Post by th »

JWR1945 wrote:In terms of hankjoy's high dividend approach, I have not studied it enough to reach firm conclusions.
I have. The strategy as I read it is to buy high (6+%) dividend value stocks. Such a contender would probably be a stressed company or one paying unusually high dividends that may not be sustainable. Buy and hold them and collect the dividends and ignore the stock price swings.

Two problems that will manifest themselves with longer term adherence to this strategy: the companies will go out of business and take your capital with them, or they'll at some point decide to cut the dividend to staunch the bloodflow from the bottom line.

I tried this strategy sparingly in 2000-2003, in the face of apparent continued downtrend in stock prices. Bought REITS and some distressed high dividend players. Figured I'd at least get myself an income stream better than MM or short bonds. And I did. I always managed to get out before the companies exploded and took a walk when they cut their dividends. Some tobacco, car, energy and drug co's. Only a couple paid over 6%, like Ford and Philip Morris, and for good reasons. Ford cut their dividend (adios muchachos) and Philip Morris looked like they might bankrupt on that bond posting deal.

Its possible to make money on these, but I wouldnt do it on a buy and hold, and it requires one to pay very close attention to the hourly influences on the issues.
He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you. - Nietzsche
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