Article on safe withdrawal rates

[Midpack]

Quote:

Originally Posted by marko It's an entirely different world/economy/measurements/planet isn't it? Quote: Originally Posted by Tyro That's been my contention for some time. ...worst returns ever so far...

Whether it turns out to be worse than the Great Depression or the mid-60's is anyone's guess, a case can be made for any POV. I suspect most folks in the 1930's thought it was "an entirely different world/economy/measurement/planet" too.

Again, if history is of little or no value, what would you and marko propose as an alternative for planning purposes?

[NW-Bound]

Quote:

Originally Posted by truenorth418 1966-1982 was also a 16 year secular bear market characterized by huge swings in the major indices. Yes, there was higher than average inflation, especially in the later years of that period, but the stock market over that period did not see much if any increase. So inflation is an enemy, but it's even worse when combined with no increase in stocks.

That time frame was before my time as an investor, but I wonder if an international investor would do better.

So, I looked up the Nikkei. It opened at 1418 in Jan 1966, and closed at 8017 in Dec 1982. That's a return of 5.65X in 17 years, or a 10.7% annual nominal rise. That's not too shabby. It appears that while the US was mired in the Cold War and Vietnam War, the Japanese economy was ramping up very well.

Diversify, diversify, that's all I know to do...

PS. The Nikkei performance above did not include dividends. That would make it a LOT better!

[marko]

Quote:

Originally Posted by Midpack What would you suggest for comparison?

My question was theoretical rather than applicative.

I don't know what to compare today to, but to me, the economies and economic drivers today are entirely different than even 40 years ago.

I'm not sure that having nothing better for comparison justifies relying on questionable (in the sense of the sentence above) data.

Granted, if it's "all we have" it makes for an interesting excersize but I"m not sure what conclusions can be safely drawn.

As noted I'm no mathemetician/statistician and I wasn't challenging any position...just asking a question... so if in this case "history is prologue" (somewhat) I'll defer to the experts.

[rodi]

One of the things shaping my retirement planning is what happened to my grandparents.

My grandfather retired with full pension at age 55. (Gram was a homemaker). It was a nice pension - more than enough for them to live comfortably. They moved from the Detroit suburbs and rented a nice apartment about 6 blocks from the beach here in San Diego. Life was good.

The pension was not cola'd. But they had SS as well from when he turned 62.

Then the 70's happened with all it's inflation. Since Gramps was already on SS, it made more financial sense for Grammy to head out to work.

So, in her 60's, she got a job as a "shop girl" at a gift shop in La Jolla. I'm not sure she had worked outside the home prior to that, ever.

I look at their plans - and how inflation destroyed the plans... and get nervous. It's enough to keep me in the "one more year" phase longer than I currently plan.

[Nords]

Quote:

Originally Posted by marko It's an entirely different world/economy/measurements/planet isn't it?

Quote:

Originally Posted by Tyro That's been my contention for some time.

"This time it's really different."

..."and this time we really mean it!"

[pb4uski]

Quote:

Originally Posted by rodi One of the things shaping my retirement planning is what happened to my grandparents. My grandfather retired with full pension at age 55. (Gram was a homemaker). It was a nice pension - more than enough for them to live comfortably. They moved from the Detroit suburbs and rented a nice apartment about 6 blocks from the beach here in San Diego. Life was good. The pension was not cola'd. But they had SS as well from when he turned 62. Then the 70's happened with all it's inflation. Since Gramps was already on SS, it made more financial sense for Grammy to head out to work. So, in her 60's, she got a job as a "shop girl" at a gift shop in La Jolla. I'm not sure she had worked outside the home prior to that, ever. I look at their plans - and how inflation destroyed the plans... and get nervous. It's enough to keep me in the "one more year" phase longer than I currently plan.

This is one of the reasons why I plan to wait until I am 70 to draw SS. From 62 onward SS is my plan B if for some reason I'm depleting my retirement nestegg too fast.

[haha]

Quote:

Originally Posted by truenorth418 1966-1982 was also a 16 year secular bear market characterized by huge swings in the major indices. Yes, there was higher than average inflation, especially in the later years of that period, but the stock market over that period did not see much if any increase. So inflation is an enemy, but it's even worse when combined with no increase in stocks.

Despite the myth that inflation is good for stocks, the best situation for stocks is what we have had most of the time over recent decades, falling or low inflation. Inflation will always attack PEs, then eventually as the higher price levels work through sales and profits earnings will rise enough that even valued at a lower PE, equity prices may go up. See Ed Easterling's work.

Ha

[mathjak107]

actually if inflation gets to high its bad for stocks. anything like the 1970's is bad.

its only after inflation started coming down that stocks took off ..

[Tyro]

Quote:

Originally Posted by Midpack Whether it turns out to be worse than the Great Depression or the mid-60's is anyone's guess, a case can be made for any POV. I suspect most folks in the 1930's thought it was "an entirely different world/economy/measurement/planet" too. Again, if history is of little or no value, what would you and marko propose as an alternative for planning purposes?

That's not exactly what I said (or meant), and I cannot speak for Marko. Since (as I believe) the rules have changed beginning in the '80s, (change occurs over time) and we're talking about an empirical science, I don't know if there's enough data yet to assess the 'new' economy, and that's at least part of my point. That and the fact that I have no idea what to use.

Currently, I'm using a 5% average annual return on investments, and 4% average annual inflation rate (cautious optimism) and hoping things will be at least that good over the next 40 yrs.

Picking a place to start, and remaining vigilant, flexible, and hoping for the best is about all we can do. YMMV.

Tyro

[Huston55]

Quote:
Originally Posted by rescueme
I was responding to mathjak107,
Sure, market history can certainly be used as an artifact to see how withdrawal rates would be affected in the "new retirement funding" of IRA/401(k);s of the current time, but if you're not in the market to accumulate or depend on it for retirement income, it makes little sense to consider it. Those who retired in the mid-60's (the point of time under discussion) were not necessarily concerned with safe withdrawl rates nor widely invested in the market.

Quote:

Originally Posted by RobLJ This doesn't make much sense--so do we only begin analysis at the 80's or 90's to test? I agree that the future may not look like the past, but beginning with a particular portfolio level and testing it from the 30's or 50's makes a lot more sense than starting in the 80's. I may have misunderstood your point however. And if your point is the future will not resemble the past, you are correct but the more pasts included in the model the more likely one will gain some useful information. Again, I suspect I'm misinterpreting your point.

If a dollar falls on Wall Street and your portfolio is not there to hear it, does it make a sound in anyone else's portfolio?

[HFWR]

Things are "different", for sure, but there are still 6 or 7 billion consumers coming on line, so maybe a few companies will make some money...

Since I'm not likely to be funding a 30-40 year retirement like some here, I'm pretty comfortable with a 4% SWR. Still deciding about when to take SS...

[JoeWras]

It's hard to remember just how bad it was, but it was bad. CD rates in the early 80's could push 20%. Yes, 20%.

I got my first job and car in 1985. Mom and Dad wanted to help me finance part of it with a loan/gift. Problem was Mom and Dad had a 5 yr CD that was paying something like 18%, due in just a few months, and this is where the money would come from.

The banker played some tricks and gave them a short term loan (at about 13%) to the end of the CD term, and the loan was backed by the CD. This was to save the penalty, which was huge when the CD was paying 18%. So, they at least made 5% during that 90 days or so.

[NW-Bound]

Quote:

Originally Posted by haha Despite the myth that inflation is good for stocks, the best situation for stocks is what we have had most of the time over recent decades, falling or low inflation...

Quote:

Originally Posted by mathjak107 actually if inflation gets to high its bad for stocks. anything like the 1970's is bad...

I have not seen anybody here saying that inflation is good for stocks. But other than piling into gold, equities are still a lot better than some fixed-incomes at 10-yr and 30-yr terms. Nobody wins, and we are just trying to minimize loss.

In the 79-82 time frame, I remember people even talked about buying collectibles like arts and rare stamps. Good grief!

Quote:

Originally Posted by Tyro Picking a place to start, and remaining vigilant, flexible, and hoping for the best is about all we can do. YMMV.

Amen.

[nun]

Quote:

Originally Posted by rodi One of the things shaping my retirement planning is what happened to my grandparents. My grandfather retired with full pension at age 55. (Gram was a homemaker). It was a nice pension - more than enough for them to live comfortably. They moved from the Detroit suburbs and rented a nice apartment about 6 blocks from the beach here in San Diego. Life was good. The pension was not cola'd. But they had SS as well from when he turned 62. Then the 70's happened with all it's inflation. Since Gramps was already on SS, it made more financial sense for Grammy to head out to work. So, in her 60's, she got a job as a "shop girl" at a gift shop in La Jolla. I'm not sure she had worked outside the home prior to that, ever. I look at their plans - and how inflation destroyed the plans... and get nervous. It's enough to keep me in the "one more year" phase longer than I currently plan.

I wanted to have a number of guaranteed retirement income sources that could track inflation as I don't want to rely on the stock and bond markets. So I have US SS and I paid the UK's equivalent of FICA voluntarily so that I will get a UK SS checks as well. I also have a rental property, although I'm a bit of a soft touch and haven't raised the rent for 6 years. Still those 3 sources should produce a cola'd $50k a year so that income from investments is gravy and can be reinvested.

Another factor that reduces risk is just reducing your retirement income needs. So while you are working I'd pay off the mortgage, buy a new car, do any repairs, just get as many major expenses out of the way while you have earned income. Without a mortgage or car payment $50k/year is a very comfortable income for a single person.

[Leon44]

I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other.

But he went on to say that his best option for at least a portion of your nest egg was annuities. He said let the insurance company take the market risk. Then instead of worrying about the long term safety of a 4% withdrawal you can receive more then 4% safely without shouldering the risk.

I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio.

Anybody else use annuities to ease their SWR needs?

[nun]

Quote:

Originally Posted by Leon44 I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio. Anybody else use annuities to ease their SWR needs?

SPIAs are not unpopular here as a mechanism to general a portion of your retirement income. Quite a few people have them and some have even used annuity type produces in the accumulation phase for the past 20 or 30 years.....ie those in the Federal Government or with access to products like TIAA-Traditional.

[braumeister]

Quote:

Originally Posted by NW-Bound Mark Twain made a very bad investment and had to file bankruptcy.

The poor guy made a number of bad investments; he never seemed to learn his lesson there.
How to Start Investing with Inspiration from Mark Twain

[Midpack]

Quote:

Originally Posted by Leon44 I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other.

You can indeed take 4% off your new balance at the end of each year after the effects of market performance with absolute certainty you'll never run out of money. In fact you can take out 6% and also be certain you'll never run out of money following that methodology. Of course the funds available at the end of each year may rise comfortably (lucky), or they may rise and fall erratically (likely) or you could be eating cat food living under a bridge (unlucky), but you will NOT run out of money altogether. You might consider a new radio talk show...

[braumeister]

Quote:

Originally Posted by Leon44 I heard an interesting discussion on SWR on a radio financial talk show today. One of the host's was suggesting that we can no longer consider 4% a safe long term withdrawal rate. He did suggest that you may be able to still take 4% a year off your "new" balance at the end of the year after the effects of the market performance adjusted your portfolio one way or the other. But he went on to say that his best option for at least a portion of your nest egg was annuities. He said let the insurance company take the market risk. Then instead of worrying about the long term safety of a 4% withdrawal you can receive more then 4% safely without shouldering the risk. I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio. Anybody else use annuities to ease their SWR needs?

That is exactly the point made recently by Wade Pfau, a well respected analyst.
Retirement Researcher Blog: An Efficient Frontier for Retirement Income

[Alan]

Quote:

Originally Posted by Leon44 I know that annuities are not popular here and I don't own any. But when I think of them in the context of a safe a SWR it makes me reconsider them for at least a portion of my portfolio. Anybody else use annuities to ease their SWR needs?

I would definitely consider annuities if I didn't have 4 pensions, SS for myself and DW, plus UK SS for myself.

It is nice to have those checks coming in every month covering all of our basic needs, while only counting on the retirement savings for the provision of lagniappe.