SWR: adjust for high valuation, or at least note risk?
SWR: adjust for high valuation, or at least note risk?
Proposition:
The conventional historical SWR studies like the Trinity study and the REHP study achieve their results by studying financial market returns over periods with start dates ranging from 1871 to the 1970s. During that time the maximum Price/Rolling Ten Year Average Earnings of the S&P large cap index was 33, and the PE-10 only rarely reached the mid 20s.
There is a strong foundation of logic and statistics that valuation directly affects long term stock market returns, and thus directly affects the long term withdrawal rate achievable from a stock heavy portfolio.
In light of these facts, when preparing to retire and take withdrawals, it is essential to consider the valuation of the stock market. If you plan on a stock heavy portfolio like 75% S&P 500 / 25% FI, and if valuations are near the top, or over the top , of the range covered in the historical record, then you must adust your withdrawal rate down, or at minimum take note of increased risk of failure and have a fall-back plan.
BenSolar
The conventional historical SWR studies like the Trinity study and the REHP study achieve their results by studying financial market returns over periods with start dates ranging from 1871 to the 1970s. During that time the maximum Price/Rolling Ten Year Average Earnings of the S&P large cap index was 33, and the PE-10 only rarely reached the mid 20s.
There is a strong foundation of logic and statistics that valuation directly affects long term stock market returns, and thus directly affects the long term withdrawal rate achievable from a stock heavy portfolio.
In light of these facts, when preparing to retire and take withdrawals, it is essential to consider the valuation of the stock market. If you plan on a stock heavy portfolio like 75% S&P 500 / 25% FI, and if valuations are near the top, or over the top , of the range covered in the historical record, then you must adust your withdrawal rate down, or at minimum take note of increased risk of failure and have a fall-back plan.
BenSolar
"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
I clicked "other" simply because the statement about flexibility and/or a fall back plan will apply to ANYBODY, nomatter WHAT the valuations are at the start of retirement with drawals.
Like Ken it blows my mind that anybody could even consider to just blindly pull whatever set % no (be it 1,2,3,4,5,6,7,8,9 to infinity) adjusted for inflation out and never check the portfolio again!
Further, like Ken, I ensure that I leave flexibility financially (3 budgets: normal, good,luxury) in my with drawals and will almost automatically adjust downwards in bad times to lowest budget. That car can last a bit longer, Tang can replace fresh orange juice, address can change to Thailand Etc. Funny enough I think I will have a harder time adjusting upwards in good markets/growing nest egg times than downwards in bad . Guess my moms LBYM(live below your means) attitude taught me well!
Like Ken it blows my mind that anybody could even consider to just blindly pull whatever set % no (be it 1,2,3,4,5,6,7,8,9 to infinity) adjusted for inflation out and never check the portfolio again!
Further, like Ken, I ensure that I leave flexibility financially (3 budgets: normal, good,luxury) in my with drawals and will almost automatically adjust downwards in bad times to lowest budget. That car can last a bit longer, Tang can replace fresh orange juice, address can change to Thailand Etc. Funny enough I think I will have a harder time adjusting upwards in good markets/growing nest egg times than downwards in bad . Guess my moms LBYM(live below your means) attitude taught me well!
Last edited by ben on Wed Jun 04, 2003 10:39 am, edited 1 time in total.
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
Hi Ben, I understood hocus to be in favor of adjustment for valuation in the historical range and that such adjustment could increase as well as decrease swr. I think I am more in favor of the approach you are suggesting (and as mentioned by a person on that other board ie adjustment for extreme valuation only.)
Have fun.
Ataloss
Ataloss
There is a strong foundation of logic and statistics that valuation directly affects long term stock market returns, and thus directly affects the long term withdrawal rate achievable from a stock heavy portfolio.
The posting of BenSolar's well-crafted statement brings one aspect of this debate to an end, I believe. So I think this is a good time for me to take my leave of the board for a time. My wife says that, if I do not soon finish work on another project, she will be filing divorce papers. She's kidding. But she has said it more than once, so it is not meant entirely as a joke, if you know what I mean.
I have some further thoughts on how to enhance safe withdrawal rate (SWR) analyses. I will aim to prepare some posts dealing with those ideas (and in preparation for the NFB Event Nights with SWR Experts) for presentation to the board in late October.
The posting of BenSolar's well-crafted statement brings one aspect of this debate to an end, I believe. So I think this is a good time for me to take my leave of the board for a time. My wife says that, if I do not soon finish work on another project, she will be filing divorce papers. She's kidding. But she has said it more than once, so it is not meant entirely as a joke, if you know what I mean.
I have some further thoughts on how to enhance safe withdrawal rate (SWR) analyses. I will aim to prepare some posts dealing with those ideas (and in preparation for the NFB Event Nights with SWR Experts) for presentation to the board in late October.
Ataloss; you are way ahead of me as you actually understand hocus...
I must be too dumb for that . I can't seem to get into my thick head how come the traditional SWR study methods does not give correct (historical!) nos since I know it ALSO included extreme valuations....
Any talk about FUTURE SWR is complete nonsense to illiterate me but for dumb me the 4% rule of thumb based on the traditional SWR studies+Ben's SWR study, COMBINED with common sense/flexibility is the way to go (for me!).
I must be too dumb for that . I can't seem to get into my thick head how come the traditional SWR study methods does not give correct (historical!) nos since I know it ALSO included extreme valuations....
Any talk about FUTURE SWR is complete nonsense to illiterate me but for dumb me the 4% rule of thumb based on the traditional SWR studies+Ben's SWR study, COMBINED with common sense/flexibility is the way to go (for me!).
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
ataloss wrote: Hi Ben, I understood hocus to be in favor of adjustment for valuation in the historical range and that such adjustment could increase as well as decrease swr. I think I am more in favor of the approach you are suggesting (and as mentioned by a person on that other board.)
Greetings, ataloss
Personally, if I were retiring when PE-10 were in the mid single digits, and in my judgement the US wasn't breaking apart or a wave of mass extinction wasn't sweeping through the world, then I think I would overweight S&P 500 and ratchet my WR up a notch to maybe 5%. Dividend yield would provide that much and more at those levels. I'd also (as always) have a backup plan if things continued south and dividends got cut significantly ... maybe always plan on a WR of dividend yield - 2 or something.
B.
PS. gummy - neat chart!
"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
-
- *** Veteran
- Posts: 174
- Joined: Sat Jan 04, 2003 4:00 am
- Location: Henderson, Nevada, USA
Thanks for the chart, gummy and to ataloss for reminding me of Bernstein's acid test and hocus for emphasizing the significance of current valuation.
Here is a milestone in my planning. For more than ten years now, I have been using 4% real annual return as my usual assumption in personal financial planning. I've been retired just less than ten years. The original plan served to ease my anxiety about living without paychecks. That 4% assumption did not get me into any trouble during the 90's and I regularly adjusted my spending up a little with the market. I've started reading The Four Pillars too, in addition to the people I mentioned at the top of this post. The result is this: As of yesterday, I changed my assumption on real annual return to 2.5%. That produces a standard of living for me better than I ever had while working and about what I had in 1997. As always, a major defect in my approach is that historical data is present only in the summary form of assumptions on two variables: investment return and inflation. With annual increases for inflation and the capital growing faster than inflation, my withdrawal rate goes up only to cover increased income taxes resulting from mandatory IRA withdrawals. (How are you people going to compute SWR's without considering the income tax implications of those IRA withdrawals? Will you just let the income tax man squeeze your standard of living after age 70, or will you maybe burn up the IRA early and forfeit its shelter?) So, here is my new plan, subject of course to revision as market action unfolds:
Age Range and Average Annual Withdrawal Rate:
63 to 69 1.94%
70 to 79 2.04%
80 to 89 2.27%
90 to 94 2.43%
If that isn't conservative enough, I'll just have to reduce my standard of living. I can do that.
Here is a milestone in my planning. For more than ten years now, I have been using 4% real annual return as my usual assumption in personal financial planning. I've been retired just less than ten years. The original plan served to ease my anxiety about living without paychecks. That 4% assumption did not get me into any trouble during the 90's and I regularly adjusted my spending up a little with the market. I've started reading The Four Pillars too, in addition to the people I mentioned at the top of this post. The result is this: As of yesterday, I changed my assumption on real annual return to 2.5%. That produces a standard of living for me better than I ever had while working and about what I had in 1997. As always, a major defect in my approach is that historical data is present only in the summary form of assumptions on two variables: investment return and inflation. With annual increases for inflation and the capital growing faster than inflation, my withdrawal rate goes up only to cover increased income taxes resulting from mandatory IRA withdrawals. (How are you people going to compute SWR's without considering the income tax implications of those IRA withdrawals? Will you just let the income tax man squeeze your standard of living after age 70, or will you maybe burn up the IRA early and forfeit its shelter?) So, here is my new plan, subject of course to revision as market action unfolds:
Age Range and Average Annual Withdrawal Rate:
63 to 69 1.94%
70 to 79 2.04%
80 to 89 2.27%
90 to 94 2.43%
If that isn't conservative enough, I'll just have to reduce my standard of living. I can do that.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]
Chips
Chips
Greetings Chips:
Chips, that's a plan anyone would be jealous of. The annual return you mentioned in the quote above seems to be about the average of several of the more respected (by this board's high standards) in the financial world.
Roughly, what transitional asset allocation percentages are you/will you be following? What I mean if I made no sense there is how do you plan to be diversified WRT equities & FI through those age brackets you mentioned?
Bookm
As of yesterday, I changed my assumption on real annual return to 2.5%.
So, here is my new plan, subject of course to revision as market action unfolds:
Age Range and Average Annual Withdrawal Rate:
63 to 69 1.94%
70 to 79 2.04%
80 to 89 2.27%
90 to 94 2.43%
Chips, that's a plan anyone would be jealous of. The annual return you mentioned in the quote above seems to be about the average of several of the more respected (by this board's high standards) in the financial world.
Roughly, what transitional asset allocation percentages are you/will you be following? What I mean if I made no sense there is how do you plan to be diversified WRT equities & FI through those age brackets you mentioned?
Bookm
Wall Street investment products suck because it's all about them and their revenue today. It's not about us and our income tomorrow. - Scott Burns
-
- *** Veteran
- Posts: 174
- Joined: Sat Jan 04, 2003 4:00 am
- Location: Henderson, Nevada, USA
Thanks, bookm. My modest corporate pension and Social Security, starting in 2005, support my standard of living more significantly as I reduce my expectations from the market. Four Pillars reminds me how fortunate for my retirement accounts it was to retire in 1993 rather than, say, 1966. The available data do not support the three-figure accuracy of my posted withdrawal rates, but I put them up without rounding for curiosity's sake. My retirement investment assets (at Schwab and Vanguard) are 88% equities and 12% fixed income today. I don't trouble myself much about rebalancing, just taking all dividends as cash in the taxable accounts and reinvesting all dividends in equities in the tax-deferred accounts. More than 40% of the retirement stash is in my IRAs which have been accumulating almost untouched since 1993. I see my unmortgaged house and the discounted present value of my pension and Social Security as fixed income assets, but I did not include them in the 88/12 numbers.
I have an old friend whose withdrawals rates can be zero because his government-guaranteed pensions, with full cost of living adjustment, more than cover his family's living expenses. Now, that position is enviable. He also has significant royalty income and FI investments and a rapidly appreciating house. He pays almost no attention to investment matters since he does not need to and is not interested. I just explained the difference between average income tax rates and marginal income tax rates again, finally in terms that seem to make sense to him. Further, he didn't realize until I brought up the subject that, after federal and state income taxes and inflation, some of his fixed income investments have a negative yield. The guy got rich while looking elsewhere, that is, at his career and hobbies. I don't think his pattern is repeatable. Most people need to plan.
I have an old friend whose withdrawals rates can be zero because his government-guaranteed pensions, with full cost of living adjustment, more than cover his family's living expenses. Now, that position is enviable. He also has significant royalty income and FI investments and a rapidly appreciating house. He pays almost no attention to investment matters since he does not need to and is not interested. I just explained the difference between average income tax rates and marginal income tax rates again, finally in terms that seem to make sense to him. Further, he didn't realize until I brought up the subject that, after federal and state income taxes and inflation, some of his fixed income investments have a negative yield. The guy got rich while looking elsewhere, that is, at his career and hobbies. I don't think his pattern is repeatable. Most people need to plan.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]
Chips
Chips
Chips
I've been meaning to say before that I like your presentation of your retirement income strategy. A very elegant analysis to suit your own personal way of looking at things.
With respect to....
....a lot of people I know have "over-planned". With detailed analysis several times a year over the years they have continually adjusted and fiddled with their asset allocations so that their final overall worth has not been as good as if they had somewhat neglected their investments. Procrastination and tucking an investment away in the back of a drawer and forgetting about it for 20 years or so has often produced better results.
I've been meaning to say before that I like your presentation of your retirement income strategy. A very elegant analysis to suit your own personal way of looking at things.
With respect to....
The guy got rich while looking elsewhere, that is, at his career and hobbies. I don't think his pattern is repeatable. Most people need to plan.
....a lot of people I know have "over-planned". With detailed analysis several times a year over the years they have continually adjusted and fiddled with their asset allocations so that their final overall worth has not been as good as if they had somewhat neglected their investments. Procrastination and tucking an investment away in the back of a drawer and forgetting about it for 20 years or so has often produced better results.
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
Never try to teach a pig to sing. It wastes your time and annoys the pig.
-
- *** Veteran
- Posts: 174
- Joined: Sat Jan 04, 2003 4:00 am
- Location: Henderson, Nevada, USA
Thank you for saying so, Ken. I intend to keep my posts understandable and possibly useful. Your response helps me calibrate my style.
Since I'm 63 and almost ten years into retirement, I can serve either of two purposes around here. I can help you younger guys keep up your FIRE motivation, or at least provide you with a bad example. <Scratches his head, wondering if there was any way to foresee that having "too much" money in an IRA could eventually produce a tax problem.>
Did I mention how much I enjoy my free time?
Since I'm 63 and almost ten years into retirement, I can serve either of two purposes around here. I can help you younger guys keep up your FIRE motivation, or at least provide you with a bad example. <Scratches his head, wondering if there was any way to foresee that having "too much" money in an IRA could eventually produce a tax problem.>
Did I mention how much I enjoy my free time?
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]
Chips
Chips
Clearly, I am not as educated as probably everyone here on the SWR debate, but I am trying to learn as much as I can. I voted "agree"- not due to an extensive understanding of current valuations vs. potential future returns, but because I am one of those people who believes in a contingency plan for a contingency plan.
IIRC, one of KenM's previous posts vaguely discussed his portfolio: 33%stocks/ 33% pension/ 33% Real estate?? The point is that he is accounting for risk by truly diversifying. IMO. You only have to come out 33% successful over a long period to be able to survive retirement. If you get 2/3, you end up sitting pretty.
But what do I know about this stuff??
Trex
IIRC, one of KenM's previous posts vaguely discussed his portfolio: 33%stocks/ 33% pension/ 33% Real estate?? The point is that he is accounting for risk by truly diversifying. IMO. You only have to come out 33% successful over a long period to be able to survive retirement. If you get 2/3, you end up sitting pretty.
But what do I know about this stuff??
Trex
Trex
You're proabaly aware of this but it's worthwhile reading the article on gummy at The Globe and Mail http://www.globeinvestor.com/servlet/Wi ... lug=STMYMO
Much more by good luck than good judgement I've finished up in perhaps a similar position but by a somewhat different route. Gummy bought an annuity while I've got a couple of frozen pensions which unfreeze at inflation adjusted levels in the next couple of years. At the time the pensions were frozen I could have cashed them in but due to having more interesting things to think about at the time or procrastination or whatever I missed the deadlines for opting for cash. Which turn out to have been good "decisions" (one of them was back in 1974 ) Obviously as with any asset there are risks with pensions/annuities and as with any asset there are probably right/wrong times to buy an annuity or cash in a pension.
I would also make the point that my retirement income will be made up of about 33% pensions income/33%real estate income/33% stocks income - that's not my portfolio value - and the "safety" of the income is in the pension/real estate/stocks order and at the comfortable/very comfortable/very,very comfortable level. I've not actually calculated the equivalent total portfolio value from these assets because I'm well aware by now of my investment "temperament" and if, for example, the return on the real estate looked lower than stocks I'd probably find it difficult to resist trading - based on my experience over 30 years that would probably turn out to be most unwise .
You're proabaly aware of this but it's worthwhile reading the article on gummy at The Globe and Mail http://www.globeinvestor.com/servlet/Wi ... lug=STMYMO
His wife, in an astute move, persuaded him to take half that money and buy a life annuity. Interest rates were much higher at the time -- the annuity is based on 9.1 per cent -- and haven't seen those heights since.
The other half of his pension money became his tuition as he went about an in-depth and, at times, costly independent study into the way of the stock market.
"My portfolio could go to zero and we could live comfortably. That's why I can afford to put all my money into one basket."
Despite some early successes, his investment portfolio is a quarter of what it was at the height of the boom in early 2000, he said.
Much more by good luck than good judgement I've finished up in perhaps a similar position but by a somewhat different route. Gummy bought an annuity while I've got a couple of frozen pensions which unfreeze at inflation adjusted levels in the next couple of years. At the time the pensions were frozen I could have cashed them in but due to having more interesting things to think about at the time or procrastination or whatever I missed the deadlines for opting for cash. Which turn out to have been good "decisions" (one of them was back in 1974 ) Obviously as with any asset there are risks with pensions/annuities and as with any asset there are probably right/wrong times to buy an annuity or cash in a pension.
I would also make the point that my retirement income will be made up of about 33% pensions income/33%real estate income/33% stocks income - that's not my portfolio value - and the "safety" of the income is in the pension/real estate/stocks order and at the comfortable/very comfortable/very,very comfortable level. I've not actually calculated the equivalent total portfolio value from these assets because I'm well aware by now of my investment "temperament" and if, for example, the return on the real estate looked lower than stocks I'd probably find it difficult to resist trading - based on my experience over 30 years that would probably turn out to be most unwise .
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
Never try to teach a pig to sing. It wastes your time and annoys the pig.