A New Tool: Overview from Wed, Apr 28, 2004 at 4:26 pm CDT
http://nofeeboards.com/boards/viewtopic.php?t=2426
I am now using the phrase conditional Calculated Rates for what I had previously called the conditional Safe Withdrawal Rates. I refer to the lower 90% confidence limit relative to a conditional Calculated Rate as the conditional Safe Withdrawal Rate.
I used the New Tool to tell us the extent that previously reported Historical Database Rates (i.e., the maximum withdrawal rate for a portfolio that would have lasted for a specified number of years) were the result of a lucky sequence of returns. What I calculated was not the safe rate but the most likely rate. To guarantee safety, it is necessary to drop down to the lower confidence limit.
In 1966 with an 80% stock portfolio, the conditional Calculated Rate was 3.24%. To guarantee safety we would have needed to subtract 1.07%. The conditional Safe Withdrawal rate was 2.17%. [The actual outcome for 1966 was much better (3.9%) but below the upper confidence limit (4.31%).]I wrote:4) For 1966, the conditional Safe Withdrawal Rate with 80% stocks was 3.24%. The value of HDBR80 turned out to be 3.9%.
The standard deviation at 14 years and 80% stocks is 0.67%. The 90% confidence limits are plus and minus 1.07% (i.e., plus and minus 1.6 times the standard deviation).
In 1966 the dividend yield of the S&P500 was 2.94%. The (conditional) Safe Withdrawal Rate was 2.17%. For the privilege of selling stocks while insisting on a very high level of safety over 30 years, we had to reduce our withdrawals to 0.77% below the initial dividend yield.
My rule of thumb no longer holds up. The 30-year Safe Withdrawal Rate is not approximated by the dividend yield plus 1%. If you insist upon the privilege of selling stocks regardless of price, the 30-year Safe Withdrawal Rate is just a little bit higher than the dividend yield minus 1%.
Have fun.
John R.