Dividend yield minus 1%
Posted: Thu Jun 03, 2004 12:59 pm
I was reading my original post about the New Tool:
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 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.
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.