4% Rule

The topic of SWR usually transgresses into very complicated forumulas, and soon leaves the real world.

I would guess that anyone that had computed an SWR with the assitance of NASA and MIT Graduates would make some changes once they saw their portfolio plunge 40% by a bear market.

The whole idea of a fixed withdrawal amount over 35 years is ridiculous. It's good for basic planning purposes, but does anyone actually believe that someone would start out in the year 2000 or 2003 with a SWR of 3.8% and stick to this number for 35 years?
 
Cut throat,

Thank you your point is well taken. Too precise planning can get you into an endless loop. That said, to get where you want to be you need a plan. having an understanding of historical returns, asset allocation , etc gets you going. I have taken a number of road trips, you have a destination and a route to get you there. You still encounter detours, side trips, breakdowns, etc. even with the best of plans. Not unlike investing.

earlyout
 
The topic of SWR usually transgresses into very complicated forumulas, and soon leaves the real world.

I would guess that anyone that had computed an SWR with the assitance of NASA and MIT Graduates would make some changes once they saw their portfolio plunge 40% by a bear market.

The whole idea of a fixed withdrawal amount over 35 years is ridiculous. It's good for basic planning purposes, but does anyone actually believe that someone would start out in the year 2000 or 2003 with a SWR of 3.8% and stick to this number for 35 years?
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As with much of life, we measure with a micrometer, mark with a lumber crayon, and cut with an axe! :D

Dory36
 
The topic of SWR usually transgresses into very complicated forumulas, and soon leaves the real world.
Click to expand...

I swear at no time during this discussion did my body leave this world -- nor did I leave the atmosphere of earth. But if others did, I would like to hear about it. :)

I would guess that anyone that had computed an SWR with the assitance of NASA and MIT Graduates would make some changes once they saw their portfolio plunge 40% by a bear market.
Click to expand...

Although to my knowledge, no NASA or MIT Graduates were involved in my own financial planning, I confess to making changes to my plans regularly. Discussions like the one in this thread often lead me to other ways of thinking about things and actually prompt those changes. I hope my plan keeps getting better as I learn, but I would be hard pressed to prove it to anyone. :)

The whole idea of a fixed withdrawal amount over 35 years is ridiculous. It's good for basic planning purposes, but does anyone actually believe that someone would start out in the year 2000 or 2003 with a SWR of 3.8% and stick to this number for 35 years?
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I don't think anyone believes or suggests fixed withdrawal over 35 years is likely to happen. But as you point out, it may be an excellent starting point for your plan.

I've had to plan and coordinate a number of long-term, large project budgets over the years. (Thanks to RE, I only have to do this for myself now). The linear budget with time has almost always been the starting point. If you can't buy all the capital and pay for all the labor you need in the allotted time, then the budget just won't work. Distribution of those expences in a linear fashion is a first cut budget, and if that looks like it could reasonably be accomplished, then there is almost certainly a way to complete a more serious and realistic allocation of resources that fluctuates month-to-month.
 
I'm not sure why some of you have focused on correlation and decided that it is bad. Correlation is, in fact, one of the strengths of a historical calculator -- not a weakness. The financial data (investment returns, inflation etc.) for a given year is highly correlated, not only to itself, but to the financial data and events of previous years. This correlation is important, but so complex as to be nearly impossible to understand and predict. The complexity of this correlation is one of the key reasons why Monte Carlo simulations so badly underestimate safe withdrawal rates. By using historical data in correct chronological order, we are guaranteed to include the complex data correlations without understanding the underlying causes for it or having to describe those correlations mathematically.
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Sounds a bit over the top to me.
 
As I noted previously, FIRECalc's output tends to be weighted towards the years in the middle of the period of analysis. This weighting effect does not make any difference if a person is looking for the absolute worse case historical scenario, but it makes some difference if they are looking for an investment strategy that would have been successful in anything less than 100% of past periods.

My educated guess is that the stock market of the future has less risk of "crashing" the way that happened during the 1930's (because of greatly improved monetary policy) but that the long-term total return will be less (for fundamental economic reasons).

These changes can be addressed in using FIRECalc by (1) exaggerating the "expense ratio" on investments (which has the effect of reducing the total return) but (2) feeling comfortable with a "probability of success" of less than 100%.

All of this is great for planning an approximate allowable spending rate, but in the real world most people have periodic large expenditures such as automobiles and vacations. Logically, they tend to make these large expenditures when the stock market is "up" and they are feeling wealthy. But illogically, many of them pay for these expenditures by liquidating assets other than stocks. If everybody did a better job of keeping their asset allocation in balance, it would reduce the volatility of the stock market and associated business cycle.
 

Anybuddy care to predict end-of-Oktober? :)
End-of November?

http://home.golden.net/~pjponzo/Oktoberfest.htm
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Considering the long-term trend in the real return of the stock market, it is about "on track" now after having slightly over-retracted from the "bubble" that extended from about 1997 to 2000. Long term, I expect the real return on large cap stocks to be maybe 5.5% to 6% and on small cap stocks to be maybe 6.5% to 7%.

While I believe that stock prices have this upward bias, neither I nor anyone can predict what prices will do in the short term. On Oct 17, I said that I think there is less risk of the market crqashing the way that it did inb the 1930s. That was a protracted crash associated with a collapse of the real economy, and I consider a repeat of that to be less likely because of numerous government programs (such as Federal Deposit Insurance) and policies (such as Federal Reserve adding liquidity) that were not in place in the 30's.

There certainly still is a significant chance of a short-term "crash" of the typed that occurred in October 1987. In fact, the chances of it being triggered by a terrorist event are probably greater. But the people who were hurt by that were day traders and people with stock on margin. For long-term investors of the type that retirees should be, it was just another short-term fluctuation. The bottom line is that I'm modestly increasing my allocation to stocks in my portfolio now that the economy appears to be recovering and stocks are fairly valued relative to bonds.
 
And another thing :)..............not holding any stock at
all makes the allocation/reallocation thing so much simpler.

Talked to my broker last week (normally not much need for this
as I have little activity in my accounts). Anyway, if
we talk long enough he always tries to get me looking
at stock funds. Reminds me of what my former father
in law had to say about venereal disease....."I never
had it and I don't want it again!"
 
Cut-Throat,

While a degree of skepticism about the future is fine, I think that you and Templeton are worried about economic occurrences that tend to be mutually exclusive.

In particular, your link indicates that Templeton is worried that the dollar will decline and cause the U.S. bond market to crash and the U.S. economy to crash along with it, due to the alleged inability of the U.S. to compete with lower cost producers in world markets. But the ability of the dollar to decline relative to other currencies is what allows the U.S. to remain competitive in world markets for real goods.

The unemployment rate in the U.S. is substantially less than in other industrialized countries (except Japan, where it is about equal) and is showing signs of falling as industrial production picks up. If the dollar continues to decline, that will encourage exports and create additional demand for jobs in export industries -- particularly agriculture where good 'ol "Sir John" is saying that investors should be betting on foreign agricultural exporters.

I agree that foreigners will tend to sell their holdings of U.S. Treasury securities, causing long term bond prices to fall, (interest rates to rise) as they are presently doing. The increased deficit financing aswsociated with simultaneous federal spending increases and tax cuts will also cause bond prices to fall. (For those reasons, I sold all of my long-term bonds other than TIPs several months ago.)

While increasing interest rates are a negative for economic growth, it is no reason to panic because interest rates are modest by historical standards and have room to rise without it shutting down the economy. (In fact, some participants in this forum have been complaining about interest rates being too low.)

Another set of concerns that are largely mutually exclusive are (1) that there won't be enough workers to support future retirees and (2) there won't be enough jobs for people. Historical experience and economic logic indicate that these things tend to pretty well work themselves out as long as government acts to protect market forces (such as floating currency exchange rates) rather than stifle them. The moderate politicians in both parties seem to recognize that -- if only the American political process is capable of keeping them in office.
 
Ted,

I was not implying that my worries about the economy were similar to Templetons at all. Just additional things to worry about.  

My main concern about the stock market is that the Dow has rallied 2000 points off its lows and is now trading at P/E levels that are higher than when Greenspan declared 'irrational exburance'. This is the reason I'm only 50% in stocks. They are just plain overvalued by any historical measure that I've seen used.

I'll always be at least 50% in stocks, as no one can predict the future and you have to have stocks for inflation protection and growth.

I see more downside risk at present than upside. Earnings are being driven by cost cutting and artificial tax cuts. And without mega jobs being created any growth cannot be sustained.
 
Cut-Throat,

I agree that anyone who isn't always at least somewhat concerned about the economy (and the environment, terrorism, and various other global issues) is a simple-minded ditz. But market based economic systems have always contained a number of self-correcting mechanisms, and these have been enhanced over the years (at least in the U.S.) by government policies that tend to reduce the magnitude and frequency of periods of reduced economic activity (recession/depression). I haven't come across too many people who seem to understand this system thoroughly, and John Templeton isn't one of them despite his past successes with his mutual funds.

As this relates to personal investment strategy, I regard a 50% allocation to stocks as reasonable for an early retiree. Right now, however, I would avoid having any of the other 50% in long-term bonds, because of the prospects for a continued rise in long term interest rates.

I think that stocks are fairly valued relative to bonds in that the S&P 500 p/e ratio based on projected next year's earnings is about 19. That represents an earnings yield of 5.2%, which is still above the yield on 10 year Treasuries. If the yield on Treasuries continues to rise, it will tend to throttle the rise in stock prices, but I still think that stocks are relatively more attractive now.

An important reason why the rise in interest rates won't stop the economic recovery is that it will be accompanied by rising inflation, which will have the advantage of keeping real interest rates modest (although at the expense of people holding fixed income securities).
 
I would avoid having any of the other 50% in long-term bonds, because of the prospects for a continued rise in long term interest rates.
Click to expand...

I totally agree with this and that is why I am 50% in Cash. With interest rates at historic lows, it looks like there is only one way they can go.

The cash is for an unkown buying opportunity down the road.
 
Cut-Throat, I also have a higher cash allocation for the reasons you mention. I'm in the process of transferring a large chunk of cash to ING where I can get 2% vs. the 0.76% I'm getting at Vanguard. I'm still holding short-term bond funds, however. I don't see too much downside there as maturing bonds will be replaced with higher yielding issues at a pretty fast clip when/if rates rise. Are you seeing better deals than 2% for your short term cash investments?
 
Bob Smith,

I am actually getting a paltry .2 % for last month. Just checked my Schwab Statement. I just liquidated some of my stock holdings and the money is just sitting doing nothing right now.

I was actually thinking of doing something like you're doing with ING. Let us know how it goes. Do they take IRA accounts as well?
 
If you anticipate parking the money for at least 12 months, I-bonds work out better than the rates you mentioned. Even with a 3 month penalty for early withdrawal, the current rates would give you the equivalent of 3.5% in 1 year increasing to 4.66% at the end of 5 years. If inflation goes up, so do these figures. You are limited to $30,000/person/year.
 
Posted by: Ted on 17.10.03 at 07:15:53
All of this is great for planning an approximate allowable spending rate, but in the real world most people have periodic large expenditures such as automobiles and vacations.  Logically, they tend to make these large expenditures when the stock market is "up" and they are feeling wealthy.
Click to expand...

This may not be so logical. You would likely be better off by making these large purchases during the economic downturns when fewer others are making these purchases. Lots of businesses will be offering official purchase incentives or at least be willing to haggle. Not all of the big purchases can be timed like this but perhaps a decent fraction of them could.

Hyperborea
 
Hey Cut Throat

Have you looked at a short(under 3 yrs.) ladder of Treasury STRIPs?
 
Hey Cut Throat

Have you looked at a short(under 3 yrs.) ladder of Treasury STRIPs?

BTY- This is really unclemick - still can't post to 4% on my webtv.
 
[b][/b]Re: 4% Rule

SG,

got any recommendations for $300 Gs?
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Well . . . I really try to avoid giving advice or making recommendations. But sure . . . I can throw out some ideas to consider. Of course, it depends a lot on your particular situation and outlook.

I've been parking money for almost 3 years. I chose to build a bond ladder with 3 to 5 year horizon. As the earliest stuff matures, I decide whether to keep parking it and for how long . . . or whether to get back in the market . . . or whether to do a little of both.

Right now, you can find corporate bonds (Moodys A or better rating) with ~ 2 year maturity paying ~4.1%, with ~3 year maturity paying 4.7%, and with ~4 year maturity paying ~5.0%.

You can findagency bondswith ~ 2 year maturity paying ~2.6%, with ~3 year maturity paying 3.1%, and with ~4 year maturity paying ~3.8%.

You can find Treasurieswith ~ 2 year maturity paying ~2.0%, with ~3 year maturity paying 2.6%, and with ~4 year maturity paying ~3.1%.

If you shop selectively, you can beat these numbers.

So, for example, If I believed that the economy is likely not to inspire my confidence in the stock market for 2 or 3 more years, I would put together a ladder of corporate and agency bonds with my parked money that would mature in that time frame. But I would put the first $30K into I-bonds before I started shopping corporate and Agency bonds.

If I believed that we've seen the worst and things are going up from here, then I would take the funds from bonds as they matured and put them in some stock index funds.

And if I'm not sure, I might take half and build a bond ladder while taking the other half and putting it into stock. :)
 
I was actually thinking of doing something like you're doing with ING. Let us know how it goes. Do they take IRA accounts as well?
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Cut-Throat, first I opened an ING account and linked it to my checking account - which I could do entirely on-line. It was an easy, smooth process. Then I deposited the cash ($150,000 from my Vanguard account) into my checking account. As soon as the Vanguard check clears (five days at my bank), I'll do an on-line transfer from the checking account to ING. So it was all quite easy to do and no hassles so far. I figure it was costing me about $150 per month to leave the funds at Vanguard. Yes, they do handle IRAs. Here's what they say about that: "ING DIRECT Securities, Inc. offers the Orange Investment Account as either a Traditional or Roth IRA. If you have an IRA, 401(k) or other retirement accounts elsewhere that are compatible, you can even transfer those funds into an Orange Investment Account IRA."

I considered going the CD/Bond route too. I'm not planning to park it for very long, however. I just want to buy a few months to think things over. I'm about 11 months from ER (I hope).

Also, it had been so long since I had any substantial assets in a bank that I almost overlooked FDIC coverage limits. It turned out that it wasn't an issue for me with $150,000 in a joint account, but I wouldn't want to exceed $200,000 on that one account (or $100,000 on a single account).
 
Just wondering, am I the only one with a portfolio worth more today than in 2000?
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I was doing some thinking on this one, and this may not be a good thing. You may be invested too conservatively. I was down about 1.7% during this time frame, but since 1979 when I started investing I am averaging 12.89% - I just checked my numbers.

No, I was not getting the high flying returns in the DOT Com era, and yes I may have lost a few bucks during 2002, but you have got to look at the whole picture. And I'll take 12.89% to the finish line any day ;)
 
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