4% of what?

[haha]

But the early failures are probably due to stock market weakness. If my portfolio at 5% will take care of me for forever with no pricinpal loss. Then I have the balance to fall back on for growth when the stock market rebounds.

If you divide into 2 equal parts, and take 5% from the fixed income part, let your equity part alone unless it does very well, and make do with the 5% fixed, you should do fine come hell or high water. Since you are not inflation adjusting along the way, that is more conservative than a 2.5% inflation adjusting SWR on your whole portfolio.

If after 10 years or so you start to feel pinched, and your stocks still aren't doing much, maybe you should reconsider.

Still, it doesn't seem to be a bad plan to me. It would take a lot of money or a small $ draw to make it work.

Mikey

 

[peteyperson]

Shhh...dont know if anyone noticed but we just had a nice 2 page (and running) discussion on SWR's where we talked about reasonable rates, variables, valuations, etc and there were no death threats, no lies, no deceptions, no DCM's, etc.

Who'd have thought?

That is only because what is being said is mostly wrong.

Many have said a flat 4% w/r is doable on inflation-adjusted values. This makes the awfully large assumption that future expected returns from today's overvalued market are sufficient to still deliver 4% real.

Fundamental returns are real earnings growth and initial dividend yield. For the S&P 500 they are 1.8% real and 1.8% dividend. 3.6% real. Bogle's speculative return - the adjustment in returns for valuations that move up or down from present levels - would knock of at least 2% from returns over the next decade or 1% over 2 decades. P/Es are moving in the 20-22 range and just under 20 globally. Everything is overvalued. So real returns on the S&P 500 are fair less than 3.6% real over a 20-year period. This is also backed up by Jeremy Grantham's numbers when compressing valuations over just 7 years as he does in his numbers at GMO.com.

When mixing with bonds which offer some of the lowest coupon rates in decades, the returns fall even further.

So big disagreements, no, but not much sense being talked either.

Petey

 

[peteyperson]

What I mean is that your overall portfolio rate of return must be 7.5% or so in order to allow you to take 4% for your SWR, give half a percent to the money managers (and let's not forget the spreads and commissions charged and never seen when your funds buy and sell securities), and still have your portfolio grow by 3% in order to keep the real value intact against inflation.

That allows your next year's portfolio, assuming you started with a million on Jan 1 of this year, and earned the average 7.5% in 2005, to begin 2006 at 1,030,000, the same real value as you had on Jan 1 2005 (assume 3% inflation, the long run average).  (You earned 75k, you spent 40k and gave the managers 5k, leaving you with 30k of increase). 

Actually, from 1900-2002 US real returns were 6.3%, not 7.5%. This data comes from Elroy Dimson of the London Business School and was published in his recent book. 7.5% real returns in the US are highly unlikely from hereon and never actually occurred in the first place. It is a little like the belief that the US has the highest returning stocks market over the past century. This also isn't true either.

Petey

 

[peteyperson]

If you were certain about maximum life span, you could almost eliminate risk of portfolio failure in some cases (assuming the TIPS inflation adjustment was accurate) if you are willing to accept a terminal value of zero. I forget who posted this observation...

This depends on what you spending rate is and when you FIRE. You can spend 2.5% of principal if using TIPS over 40 years and retiring at 60 with a lifespan of up to 100. This is enough for most people. Also if one has 20% in TIPS, there is still the other 80% of the portfolio which may survive past 100 if you do.

Petey

 

[haha]

That is only because what is being said is mostly wrong.

I just felt a strange tremor deep in the earth. Anyone else notice?

Mikey

 

[Cut-Throat]

Many have said a flat 4% w/r is doable on inflation-adjusted values. This makes the awfully large assumption that future expected returns from today's overvalued market are sufficient to still deliver 4% real.

Pete,

You were making the awfully large assumption that you would never eat into principle, which is not the case.

You don't need 4% real to have a 4% withdrawal rate if you make the rather small assumption that you will die someday

 

[preben]

Petey; you also use only the SP500 to predict the future real equity returns.
And the trend for dividend payouts seem to be up (albeit one could argue that it has to be taken from the growth no instead).
4% was the worst case historical SWR for a US only fairly non-diversified portfolio - some periods starting at higher valuations than today I believe.
I find it silly to think that anyone can make the kind of 3.6% predictions you try to make.
But if you believe so; then just take only 3.6%. Cheers!

 

[unclemick]

Heh, heh, heh, heh, heh

I'll mention one of my last posts over at NFB during it's death rattle:

It's my world that's round - all others are flat earth stuff.

Of course some wise acre may point out that millions lived and died in the past with a belief that the earth was flat - didn't hurt them a bit.

More than one way to skin a cat - just make sure you watch 'your plan' and adjust as required.

The more I read these forums - the more new wrinkles I see.

Psst - Wellesley, the Norwegian widow, heh, heh, heh!

 

[cute fuzzy bunny]

That is only because what is being said is mostly wrong.

Many have said a flat 4% w/r is doable on inflation-adjusted values. This makes the awfully large assumption that future expected returns from today's overvalued market are sufficient to still deliver 4% real.

Fundamental returns are real earnings growth and initial dividend yield. For the S&P 500 they are 1.8% real and 1.8% dividend. 3.6% real. Bogle's speculative return - the adjustment in returns for valuations that move up or down from present levels - would knock of at least 2% from returns over the next decade or 1% over 2 decades. P/Es are moving in the 20-22 range and just under 20 globally. Everything is overvalued. So real returns on the S&P 500 are fair less than 3.6% real over a 20-year period. This is also backed up by Jeremy Grantham's numbers when compressing valuations over just 7 years as he does in his numbers at GMO.com.

When mixing with bonds which offer some of the lowest coupon rates in decades, the returns fall even further.

So big disagreements, no, but not much sense being talked either.

Petey

As I've said often, you can have your own opinions, but you cant have your own facts.

What you're basing your opinion on is a set of stats sliced and diced by others, who used those piece parts of information to form an opinion.

I welcome your opinion because its another way of looking at our future prospects. But its not necessarily a fact, nor does someone elses simpler, more complex or simply differing opinion based on someone elses simpler, more complex or simply differering view of the facts "wrong" or "not sensible".

In fact, I saw "yet another analysis" of "credible portions of 20th century stock market data" (ie: the part that supports the thesis being proposed) that said that the vast majority of long term, real returns in the US stock market were almost solely from dividends.

Which made me feel good since I derive most of my income from them, so I was fairly tempted to raise that "opinion" to fact status, which of course would have made anyone investing in the low-dividend S&P500 "wrong".

Just to show how ridiculously good my memory is on broad statements of "fact", I remember on either NFB or Raddrs board (whoops, there goes my good memory) about a year ago you made a broad statement that US treasury bonds were not 100% safe because the treasury has in fact defaulted on them more than once. The indication being that you couldnt really fully "trust" US bonds. Someone challenged you on that assertion and you never responded. I looked into it and except for some securities issued by the confederate government and some by the 'regular' US government around the time of the civil war, no, the US government hasnt defaulted on any treasury bonds.

So while your statement of opinion was more or less 'factual', it didnt really create any likelihood of a current day default problem.

So can we agree to differ on opinions and state the supporting opinions and facts to discuss, rather than proclaiming others "wrong" or "speaking nonsense", and take care to determine what is opinion, what is fact and what is an opinion based on a distilled set of facts, which may or may not be the whole set of facts?

 

[laurence]

Wait a second, did someone pick up the torch unceremoniously dropped by *****?

 

[unclemick]

Nope

Mr P is a Brit - deep value oriented, and possibly under the impression I may lose my myopic provincial American view, loosen up on the Norwegian widow and learn some intrinsic value methods - applied wherever the value can be found.

If you are expat - bonds have the added vis a vis currency gyrations to think about.

That other guy - Bogle - uses the same thinking - looks at the alternatives and advises - suck it up and stay the course, cut expenses and take what the market gives you.

And then, and then - psst value premium !Wellesley!

 

[peteyperson]

Pete,

You were making the awfully large assumption that you would never eat into principle, which is not the case.

You don't need 4% real to have a 4% withdrawal rate if you make the rather small assumption that you will die someday

True enough, but given that the markets can fall 50% on not move up for a decade or more (longest US bear market is 18 years), a plan to spend down principal and basing your estimates of capital needed on this assumption could make your broke in short order. A 4% w/r becomes 8% and this is cleaned out in little over a decade. A plan to spend principal on top of this possibility is a true recipe for disaster.

Petey

 

[peteyperson]

Petey; you also use only the SP500 to predict the future real equity returns.
And the trend for dividend payouts seem to be up (albeit one could argue that it has to be taken from the growth no instead).
4% was the worst case historical SWR for a US only fairly non-diversified portfolio - some periods starting at higher valuations than today I believe.
I find it silly to think that anyone can make the kind of 3.6% predictions you try to make.
But if you believe so; then just take only 3.6%. Cheers!  

I don't try to make predictions, I simply look at the facts as they stand today. Totally different. This is much better than taking past data and extrapolating it into the future using an ignorance of current valuations to prove your point!

I don't discount other markets. The EAFE Index is also overvalued today and dividend payments are lower than history too. The UK market is over P/E 20 and dividends are approx. 3%, not the 4.9% historically provided. In all developed markets the picture is the same, just worst in America. So take your pick of index my friend.

A mix of other assets may help but past indications show that one does not achieve the long-run returns from the stock market when living off assets year-to-year. You have to live in all years. Holding other assets help reduce the losses to capital when markets are underwater, but it doesn't remove them entirely. When all major asset classes offer far lower returns today, one has to reassess what is possible looking ahead not looking behind. To do otherwise is shortsighted and will only lead to trouble.

Petey

 

[peteyperson]

As I've said often, you can have your own opinions, but you cant have your own facts.

What you're basing your opinion on is a set of stats sliced and diced by others, who used those piece parts of information to form an opinion.

I welcome your opinion because its another way of looking at our future prospects.  But its not necessarily a fact, nor does someone elses simpler, more complex or simply differing opinion based on someone elses simpler, more complex or simply differering view of the facts "wrong" or "not sensible".

In fact, I saw "yet another analysis" of "credible portions of 20th century stock market data" (ie: the part that supports the thesis being proposed) that said that the vast majority of long term, real returns in the US stock market were almost solely from dividends.

Which made me feel good since I derive most of my income from them, so I was fairly tempted to raise that "opinion" to fact status, which of course would have made anyone investing in the low-dividend S&P500 "wrong".

Just to show how ridiculously good my memory is on broad statements of "fact", I remember on either NFB or Raddrs board (whoops, there goes my good memory) about a year ago you made a broad statement that US treasury bonds were not 100% safe because the treasury has in fact defaulted on them more than once.  The indication being that you couldnt really fully "trust" US bonds.  Someone challenged you on that assertion and you never responded.  I looked into it and except for some securities issued by the confederate government and some by the 'regular' US government around the time of the civil war, no, the US government hasnt defaulted on any treasury bonds.

So while your statement of opinion was more or less 'factual', it didnt really create any likelihood of a current day default problem.

So can we agree to differ on opinions and state the supporting opinions and facts to discuss, rather than proclaiming others "wrong" or "speaking nonsense", and take care to determine what is opinion, what is fact and what is an opinion based on a distilled set of facts, which may or may not be the whole set of facts?

TH,

It is incredible to me that you can call a look at the S&P 500 and total market US returns from 1900 on as slicing and dicing. Total market is just that. TOTAL market. No fancy dancing required!

I have simply noted that returns are comparised of dividends, real earnings growth and adjustments to multiple of earnings. If prices are high enough that dividends are far lower than in the past, then returns will be lower to reflect the smaller cash dividend being received. I assume real earnings growth on par with history even though boomers may spend less as they try to accumulate more. I then look at P/E valuations and dividend levels and conclude as many other investors have done that the markets are overpriced. Shiller's data indicates clearly over the past century that owning overpriced stocks delivers poor returns because markets mean revert. Jerremy Grantham's own research has also found this to be true. Again, no slicing and dicing or selective analysis.

So yes, it is a fact of what has happened, it is a fact of what past fundamental returns have been comprised and how things look today based on these fundamentals.

Petey

 

[Yipee-Ki-O]

An article entitled The 3% Solution in the March 23, 2006 issue of Standard & Poor's The Outlook has an interesting perspective on dividends and whether stocks are overvalued. According to the article, an old rule of thumb holds that stocks are overvalued whenever the yield on the S&P falls below 3%. The current payout ratio of the "500" is only about 32%while historically dividends have represented 54% of the index's earnings. They point out that if the payout ratio were at its historical average, then the yield on the index would be 3.1% rather than 1.8%. They also note that the dividend yield on the "500" rose 15.3% in 2004 and estimate it will rise 12.2% in 2005. Their opinion is that companies have room to boost dividend payments significantly going forward as companies in the S&P 500 are "still sitting on a mountain of cash." So the current lower levels of dividend payments may be a little deceptive in terms of future returns.

 

[cute fuzzy bunny]

TH,

It is incredible to me that you can call a look at the S&P 500 and total market US returns from 1900 on as slicing and dicing. Total market is just that. TOTAL market. No fancy dancing required!

I have simply noted that returns are comparised of dividends, real earnings growth and adjustments to multiple of earnings. If prices are high enough that dividends are far lower than in the past, then returns will be lower to reflect the smaller cash dividend being received. I assume real earnings growth on par with history even though boomers may spend less as they try to accumulate more. I then look at P/E valuations and dividend levels and conclude as many other investors have done that the markets are overpriced. Shiller's data indicates clearly over the past century that owning overpriced stocks delivers poor returns because markets mean revert. Jerremy Grantham's own research has also found this to be true. Again, no slicing and dicing or selective analysis.

So yes, it is a fact of what has happened, it is a fact of what past fundamental returns have been comprised and how things look today based on these fundamentals.

Petey

Still having the same problem vis a vis facts and opinions.

I've yet to see anyone establish as a fact what "valuations" mean, and what is and isnt a fair valuation.

Shiller has an opinion. He also has some data of a segment of a single asset class during a period of time. Most of that period of time is irrelevant to todays economic situations.

Jeremy Grantham (whoever that is) also has his views and data and opinions, no doubt.

It was a lot of smart peoples opinion that the S&P500 was overvalued in 1995. And 1996. And 1997...1998...1999...2000...and then undervalued in 2002...and now overvalued again in 2004.

You get out of the US stock market in 1995 or 1996, no ER soup for you!

So your opinions on valuations might be right. Your idea to get out of a segment of the US stock market or that this particular segment may be overvalued, or that it might have weaker returns in the future than in the past may be right too.

I dont particularly like the looks of the S&P500 or the TSM to bring back great returns anytime really soon. Which is why I dont own any of either.

But none of that makes my opinions factual. Or anyone elses. Or makes the running discussion "wrong" or "nonsense". Unless you're the kind of guy who feels his opinions are so good they're as good as facts, and that anyone elses opinion is simply incorrect.

And yes, I get the feeling I've had this same discussion a lot lately.

 

[Mr._johngalt]

Let's face it guys. "fair" and "valuation" are pretty vague and non-specific. Thus, they may mean about whatever you choose to believe, but maybe only to you.
Trying to pin them down only results in having them squish out from under the microscope and to prolong
the argument/debate ad nauseum.

JG

 

[unclemick]

The debate is endless.

Sort of like talking about sports before the game - pick your favorite and why. Football season awaits.

Fair and valuation applied to the future has a level of uncertainty - but a variety of methods have been used.

I'm sure JG would have some sense of 'good value' when looking at real estate.

Has the worm turned - long term trend wise on dividend payout ratio's? I've seen speculation as to reasons why. Will the current P/E for various indexes stay the same, trend up, or down? Will the value premium persist, shrink or expand?

Heh, heh, heh - Norwegian widow and perhaps, perhaps a tad Wellesley in the fall for my partial Roth conversion.

P.S. Grantham is not usually counted among the optimists.

 

[preben]

And let's face it - reducing the w/r to 2-3% to fit some valuation opinions preparing us for a worse than history scenario will just make it impossible for even more people to retire. No TIPs ladder will change that.

A better way is to diversifiy much more and be prepared to reduce spending (sensible w/r) if nest egg takes a hit.

Cheers!

Ps. petey; what's up with your tone? Having some bad days? Me too actually.

 

[Jarhead*]

O.K., TH, and Petey: Let's get real for a moment.

Early retirement was generally defined at age 62 at any period up to the early 80"s.

The twenty year run-up in both stock and bond mkts. has led to a proliferation of early retirement boards, and unlimited arguments and theories about your money lasting as long as you do. (Retiring in your 30"s and 40's).
There are special circumstances, I suppose, that make the discussions worthwhile for a small percentage of people. (Being single, large inheritence, trust-fund recepient, stock options millionaire, etc. etc.).
Most people do not fall into that category, but never-the-less, continue to try and squeeze that round peg into a square whole.
If, by definition, retirement (my definition), is nobody in the household working and "earning" a living, no matter how you slice it is very risky business to assume you can "safely" retire in your 30"s or 40's. (No matter which side of the SWR matter you believe is valid.)
If you are in your 30"s, have a family, and the biggest complaint you have about your job is that you are "bored", and life is too short, and therefore you want to do more "fun" things, then by all means quit your good paying job, because you can always find a sub-par paying job in your late 40's, and work until they won't have you anymore.
INMHO, the goal of early retirement is a worthy one in that it requires living within your means, and helps make you "Madison Ave" resistent, but don't fall into the trap of thinking you will be better off by leaving a good paying job, and spending the rest of your life wondering
if your money's going to run out.

 

[RockMiner]

INMHO, the goal of early retirement is a worthy one in that it requires living within your means, and helps make you "Madison Ave" resistent, but don't fall into the trap of thinking you will be better off by leaving a good paying job, and spending the rest of your life wondering
if your money's going to run out.

I agree. Running FIRE Calc simulations is interesting and useful, but as the saying goes, life is what happens to you while you're busy planning your future.

Unexpected events are inevitable (just ask J.G.). Anyone under the age of 55 is vulnerable to unknown changes to SS and Medicare benefits for starters...consumption taxes, means testing, and perma-Bear markets, etc.

It's pretty clear there will be some young optimists who (having ER'd at the earliest opportunity) run into financial trouble. I advocate starting with a "margin of safety" ala Ben Graham. Those who don't should proceed with eyes wide open.

 

[peteyperson]

I agree. Running FIRE Calc simulations is interesting and useful, but as the saying goes, life is what happens to you while you're busy planning your future.

Unexpected events are inevitable (just ask J.G.).  Anyone under the age of 55 is vulnerable to unknown changes to SS and Medicare benefits for starters...consumption taxes, means testing, and perma-Bear markets, etc.

It's pretty clear there will be some young optimists who (having ER'd at the earliest opportunity) run into financial trouble.  I advocate starting with a "margin of safety" ala Ben Graham.  Those who don't should proceed with eyes wide open.  

Hi Rok,

2000 is illustrative of your point. Many people retired either unaware of historical valuations & dividend yields, or plain ignoring them. Many had to return to work as the S&P 500 peaked at 44 and fell back down to earth.

Being optimistic is one thing, being ignorant quite another. These people who featured in many articles in 2001/2 moaned that the markets "weren't safe" but still after the fact failed to recognise their folly.

Petey

 

[youbet]

Excellent comments ex-Jarhead!

As a frequent reader of, but rare contributor to, this forum, I've learned to skim strings quickly for useful, worthwhile information. Key to this is understanding who looks at things analytically and who is influenced by their own personal circumstances. Your comments always seem to be directed towards facts we all have in common such as historical and forecasted market returns, interest rates, inflation rates, etc. That's really appreciated. All the banter from others regarding their still employed spouses, free lifetime medical coverage, expected multi-million dollar inheritances, etc., are interesting but not very useful as I try to determine when and how I'll step out of the harness and let someone else pull my employer's plow.

So, thanks. It's good reading.

 

[peteyperson]

As I've said often, you can have your own opinions, but you cant have your own facts.

What you're basing your opinion on is a set of stats sliced and diced by others, who used those piece parts of information to form an opinion.

I welcome your opinion because its another way of looking at our future prospects.  But its not necessarily a fact, nor does someone elses simpler, more complex or simply differing opinion based on someone elses simpler, more complex or simply differering view of the facts "wrong" or "not sensible".

In fact, I saw "yet another analysis" of "credible portions of 20th century stock market data" (ie: the part that supports the thesis being proposed) that said that the vast majority of long term, real returns in the US stock market were almost solely from dividends.

Which made me feel good since I derive most of my income from them, so I was fairly tempted to raise that "opinion" to fact status, which of course would have made anyone investing in the low-dividend S&P500 "wrong".

Just to show how ridiculously good my memory is on broad statements of "fact", I remember on either NFB or Raddrs board (whoops, there goes my good memory) about a year ago you made a broad statement that US treasury bonds were not 100% safe because the treasury has in fact defaulted on them more than once.  The indication being that you couldnt really fully "trust" US bonds.  Someone challenged you on that assertion and you never responded.  I looked into it and except for some securities issued by the confederate government and some by the 'regular' US government around the time of the civil war, no, the US government hasnt defaulted on any treasury bonds.

So while your statement of opinion was more or less 'factual', it didnt really create any likelihood of a current day default problem.

So can we agree to differ on opinions and state the supporting opinions and facts to discuss, rather than proclaiming others "wrong" or "speaking nonsense", and take care to determine what is opinion, what is fact and what is an opinion based on a distilled set of facts, which may or may not be the whole set of facts?

TH,

The US did default on their bonds during the war. They later resumed payments. I did not avoid a response in a thread nor would I have cause to - the information was accurate - I simply did not see the reply to which you are referring. I'm not sure how you can say the US did not default when you had multiple exceptions in which bonds did or didn't default. Either the US has never defaulted or it has. Clearly it is the latter and your research proven it so.

Clearly you do not understand about valutions. If you did, you would certainly be familiar who Jeremy Grantham is.

Shiller looked at data in the present century, an entirely relevant period to consider. Jeremy Siegel on the other hand considers data from the 1800s which is completely irrelvant as the US was an emerging market in the 1800s with no regulation. Shiller's data is far more useful and applicable to today's markets and their level of maturity. There is no "portions" of data from part of the last century being selected. You keep repeating this nonsense to distract from the valid point being made. Nice try!

The thread has been written as if 4% withdrawals from today and even 5% from today is reasonable assumption using the typical asset allocation of 60% S&P 500 and 40% bonds. This is very unlikely to be the case for the reasons I have already outlined. Only if real earnings growth suddenly leaps up or P/E multiple shoot thru the roof will it make it so. Both could happen but are fairly unlikely, and certainly unpredictable. I think you need to learn some market history and understand what are facts & what are not. You're way off the mark.

Petey

 

[peteyperson]

And let's face it - reducing the w/r to 2-3% to fit some valuation opinions preparing us for a worse than history scenario will just make it impossible for even more people to retire. No TIPs ladder will change that.  

A better way is to diversifiy much more and be prepared to reduce spending (sensible w/r) if nest egg takes a hit.

Cheers!

Ps. petey; what's up with your tone? Having some bad days? Me too actually.

Hmmm.. what is the alternative, Ben? Ignore valuations, cross our collective fingers and hope? Year 2000 retirees did just this, ignored P/E over 40 and look how that turned out! Ignorance is not bliss when it comes to market values.

Should retirees kid themselves about what is possible on the traditional 60/40 S&P 500/US bond index mix? Just retire anyway? Surely it is better to understand the situation ahead of time, consider saving more and work longer? Better that than suffering crushing portfolio losses from a revision to the mean and be forced back to the workforce at reduced pay having left your job before you could really afford it.

No problems here, just tired of seeing rear-view mirror people posting that 4% is safe when it ain't. It seems people are happy to use past returns as an indicator for the future, but not past valuations that went with past returns as an indicator of anything. This is a rather selective & blinkered view, and unrealistic.

Petey