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Bear Market Isn’t a Disaster for Retirees
01-26-2009, 08:40 PM
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#1
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Thinks s/he gets paid by the post
Join Date: May 2007
Posts: 1,525
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Bear Market Isn’t a Disaster for Retirees
"Bear Market Isn’t a Disaster for Retirees" is the title of Scott Burns' column today. Bear Market Isn’t a Disaster for Retirees - Registered Investment Advisor
In a nutshell, he says research shows that SWR's can safely go up a percentage point or so when the market is down: "If prospective returns are higher in low valuation markets, perhaps retirees can safely increase their withdrawal rates. Research by financial planner Michael Kitces has shown that the usual 4 percent rule of thumb for initial withdrawal rates from retirement nest eggs can be increased in periods of low valuation. A typical 60/40 (equity/fixed income) portfolio, for instance, will only support a safe withdrawal rate of 4.4 percent in a high valuation market. But it will safely sustain a 5.7 percent withdrawal rate in a low valuation market..."
The link to Mr. Kitces' report is broken, but I understand the gist of it: Retire at the peak of the market and he calculates the SWR rate will be less than if you retire at a time that the market is at a low.
Said another way, a reversion to the mean rate of stock market returns can cut both ways, tending toward hurting the returns of the retire-at the-peak folks and helping those who start withdrawing at a time of market lows.
I take Mr. Burns with a grain of salt, so it's not likely that I'll jump on this particular bandwagon. But I do have a question.
Supposing one did buy into this idea, how would one know today's market's relative value? Burns gives no specific support for his statement that today's market is in the "third decile" of valuation.
Would traditional measures like the S&P 500's P/E or dividend rate be a sufficient indicator of the market's valuation? Or would it be some sort of technical indicator? The amount of government financial bailouts being doled out in a particular year?
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01-26-2009, 09:12 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Aug 2007
Posts: 1,224
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Kitces used the P/E10. I don't know what it is currently but I suspect it is still pretty high. I have seen some quoting "low P/E's" but that is based on todays price divided by last years earnings...
DD
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01-27-2009, 03:47 AM
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#4
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Thinks s/he gets paid by the post
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,635
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Sort of what I have felt for some time. Seems to me if one starts taking a 4% SWR (which is adjusted up for CPI numbers each year) after about 10 years of ER you would be someplace between 5-6% anyway (of the basis of the initial withdrawal). Of course the older one gets the years to the "top number" (life expectancy) becomes lower. At some point it becomes "expected" years to go divided into the "nest egg" which will govern the a "higher" SWR (assuming the need to leave a "pile" behind is not a consideration). Helps to have a finite "nest egg" too.
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Vietnam Veteran, CW4 USA, Retired 1979
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01-27-2009, 06:17 AM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2007
Location: New Orleans
Posts: 47,500
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I wonder if we aren't moving into "uncharted territory", so to speak, with the recent economic crisis. Whether we choose 4% or 5.7%, we may want to polish up our LBYM and belt-tightening skills just in case such withdrawal rates don't turn out to be feasible for us in the long run.
Or am I unduly worried and stressed out over this economy? I'm determined to retire anyway.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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01-27-2009, 06:29 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 9,072
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Quote:
Originally Posted by Want2retire
I wonder if we aren't moving into "uncharted territory", so to speak, with the recent economic crisis. Whether we choose 4% or 5.7%, we may want to polish up our LBYM and belt-tightening skills just in case such withdrawal rates don't turn out to be feasible for us in the long run.
Or am I unduly worried and stressed out over this economy? I'm determined to retire anyway.
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No. I'm just thankful I can live fine on 3% of my battered portfolio.
__________________
Retired 3/31/2007@52
Investing style: Full time wuss.
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01-27-2009, 06:31 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
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Quote:
Originally Posted by Htown Harry
The link to Mr. Kitces' report is broken, but I understand the gist of it: Retire at the peak of the market and he calculates the SWR rate will be less than if you retire at a time that the market is at a low.
Said another way, a reversion to the mean rate of stock market returns can cut both ways, tending toward hurting the returns of the retire-at the-peak folks and helping those who start withdrawing at a time of market lows.
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I think this is intuitively obvious -- but translating that into a reliable mechanical strategy that doesn't reek of data mining is a bit more problematic.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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01-27-2009, 06:35 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2007
Location: New Orleans
Posts: 47,500
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Quote:
Originally Posted by Dawg54
No. I'm just thankful I can live fine on 3% of my battered portfolio.
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Me, too. I'd really be worried if I felt I needed 5.7% just to make ends meet.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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01-27-2009, 07:04 AM
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#9
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Gone but not forgotten
Join Date: Jan 2007
Location: Sarasota,fl.
Posts: 11,447
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I'm just wondering how many of our retired members are still using the 4% plus inflation from their orginal portfolio when they retired ? I don't have the guts for that so I just do 4% of my portfolio on Jan.1 each year .
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01-27-2009, 07:09 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Location: North Oregon Coast
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Quote:
Originally Posted by Moemg
I'm just wondering how many of our retired members are still using the 4% plus inflation from their orginal portfolio when they retired ? I don't have the guts for that so I just do 4% of my portfolio on Jan.1 each year .
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I don't think I'll have the guts to use 4% now.
While this economy is still nowhere near that of the 1930s and hopefully it never will be, I have a newfound appreciation for the money mentality of so many of the people who lived through those times.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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01-27-2009, 07:26 AM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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__________________
"It's tough to make predictions, especially when it involves the future." ~Attributed to many
"In theory, there is no difference between theory and practice. But, in practice, there is." ~(perhaps by) Yogi Berra
"Those who have knowledge, don't predict. Those who predict, don't have knowledge."~ Lau tzu
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01-27-2009, 08:23 AM
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#12
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Recycles dryer sheets
Join Date: Nov 2008
Posts: 131
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What reversion to the mean is he talking about? The S&P has actually been above long term trend for a decade or more.
S&P Regression to Trend | The Big Picture
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01-27-2009, 08:27 AM
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#13
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Quote:
Originally Posted by Architect
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How do they go back to 1871 when the S&P 500 has only existed since 1957? Even the Dow only goes back to the 1890s, IIRC.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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01-27-2009, 08:31 AM
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#14
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Recycles dryer sheets
Join Date: Nov 2008
Posts: 131
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Looks like he's using the Shiller data -
dshort.com - Financial Life Cycle Planning
I haven't checked what Shiller bases his on. I think it's used in FIRECalc though, for instance.
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01-27-2009, 08:37 AM
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#15
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Thinks s/he gets paid by the post
Join Date: Aug 2006
Posts: 2,433
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IMO, the optimal retirement would occur if you had sufficient assets to live off the dividend income from the S&P 500, since over the long-term dividend growth has outpaced inflation. This will likely be the case in the future. Unfortunately, most of us do not have enough assets to do this, so we shoot for the 4% (25 times) SWR.
Imagine you had enough assets to live off the S&P 500 dividend, which currently equates to about a 3% yield. You would likely have a perpetuity SWR of 3%. If the S&P 500 were to drop another 50% without further dividend cuts, this number would be 6%.
I think most of us are comfortable living off the income thrown off by our portfolios, and adjusting our withdrawal rates to that income. The problem is not the portfolio value so much as the income thrown off. In 2008, the Vanguard S&P 500 index fund paid the same annual dividend as in 2007, even though the index price was down 38.5%.
Obviously, for someone who's income came predominantly from bank stocks, this wouldn't apply, since there have been massive dividend cuts in banks. However, someone who is living off a well-diversified portfolio of dividend payers (e.g. the S&P 500) can have a significantly higher SWR in a bear-market than Firecalc might suggest, with plenty of safety, and should never have to sell assets when the price is down, which is the cause of a Firecalc failure.
So, to those of you who are feeling discouraged that you won't be able to FIRE anytime soon, I would say that today you would likely be 100% safe in perpetuity with a portfolio of 33 times your SWR, where as at the market high in 2007 you would have needed a portfolio 60 times your SWR. So, if your required withdrawal amount is 60K, a portfolio of $2MM will do it today, whereas back at the market high of 2007, you would have needed $3.6MM. To the extent that your portfolio has outperformed the S&P 500 in 2008, you have actually gained on FIREing.
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01-27-2009, 08:37 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
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Quote:
Originally Posted by Architect
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Wouldn't surprise me, since it's not unusual to trace back to 1871 (or 1926). But it still seems misleading to call it the S&P.
Anyway, I think you can't really look too much at current valuation relative to the long-term trend line without other considerations such as current interest rates. A stock market valuation which may be cheap given today's interest rates (3% long Treasuries) would be overvalued with the interest rates of 1981 (12% long Treasuries).
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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01-27-2009, 08:52 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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RE: FIRE'd's comments, I have noticed that my earnings are more stable than valuations. A lot more stable. I am looking at planning based on my earnings stream rather than a rigid percentage. I am reminded of the old joke about the Boston matrons who resorted to prostitution rather than spending their capital.
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I have outlived most of the people I don't like and I am working on the rest.
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01-27-2009, 09:41 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Ed_The_Gypsy
RE: FIRE'd's comments, I have noticed that my earnings are more stable than valuations. A lot more stable. I am looking at planning based on my earnings stream rather than a rigid percentage. I am reminded of the old joke about the Boston matrons who resorted to prostitution rather than spending their capital.
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How do we know that earnings will remain relatively stable? It seems like we are navigating uncharted waters these days. Sorry if the question is stupid but I really don't know the answer. So, I have even considered living on less than my earnings and plowing the rest back into principal (at least for a couple of years until I get my feet wet once I become a new ER).
I'm not from New England, but my now deceased parents really drummed into me the idea of not touching one's principal.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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01-27-2009, 09:47 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Want2retire
I'm not from New England, but my now deceased parents really drummed into me the idea of not touching one's principal.
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Mine did too. In fact, they drummed into me the idea of not touching one's anything.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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01-27-2009, 10:03 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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We can't help spending less than our 4% + Inflation allowance each year, due to the current market conditions, but my spreadsheet keeps track of the how much less. That amount goes in to the fun money column, to be spent in better times.
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Al
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