Desparately Trying To Understand SWR?

hat

Nice non-answer.

There are two factors that affect SWRs. The first is the factor that Bernstein refers to as "Future Risk." This factor is addressed in the REHP study. The second is the factor that Bernstein refers to as "Expected Return." This factor is ignored in the REHP study.

Bernstein and intercst were looking at the same data. So they should have come to findings at least roughly similar. They did not. The Bernstein number is two full percentage points off from the one reported by intercst. Either Bernstein got the number wrong or interest got the number wrong.

JWR1945 has been studying the data on a full-time basis for two years now. His findings back up Bernstein.
 
Let's all stop feeding the troll, guys.

The question was asked & answered. Move on or take it to PMs.

Dory, maybe it's time for that "Ignore" list that M* has so ably implemented.
 
*****:

"JWR1945's research shows that the SWR for an 80 percent stock portfolio in January 2000 was 1.6 percent. "

That's a ridiculous claim.  No one knows what the SWR for the future is.  Maybe it is totally groundless statements like this that have caused you to have no credibility on this issue.  The "research" over at NFB's SWR research board is the product of endless datamining, exclusion of time periods that don't fit the hypothesis,  faulty statistics, etc.   IMO it's worthless.  I've already debunked some of it here:

http://nofeeboards.com/boards/viewtopic.php?t=2399&highlight=switching+beware
 
Dont waste your time Raddr. ***** and his alter ego's already think they can predict the future.

Further, I'd propose that ***** really has no interest in SWR's or in anything else constructive. If he did, what human would persist to write these droves of drivel in the face of virtually consistent disgust from readers?

I propose that what we need isnt an ignore function, but that we simply ignore the troll. He seems to go away nicely if nobody responds to his foolishness. Feel free to respond to newbies who actually try to engage him in a discussion with a brief note of warning.

But my advice is that going forward, we do not feed that which lives below the bridge.
 
Hi TH,

Yeah, you're right. I only responded because I don't want any impressionable newbies out there to actually think he knows what he's talking about as far as being able to predict the future SWR and also to point out the junk science that has been spewed out over at the SWR "Research" Board at NFB.
 
Frustrating, I know. But the responses are what it lives off of. I doubt any newbie worth his or her salt is going to pay any attention to this stuff, not to mention most people dont have the attention span to read it and try to figure out if there's anything actually worthwhile in it.

Glad to see you on this boat though Raddr...hope you stick around.
 
I have stayed away from the SWR discussions partly because they are kind of boring and partly because I don't understand all that is being said. However, my husband and I are discussing when I should retire. The current plan is for me to work part time next year and see how that goes. He is nervous about me totally calling it quits because in his opinion, the stock market is way over valued and we are still in a bubble that one way or another will burst. Our other worry is the potential that health insurance costs will continue to seriously outpace inflation. Nevertheless, if I retired today, we would have enough for us to easily live on at a 3% withdrawl rate with plenty of padding for emergencies. FireCalc gives us a 100% chance of success.

About 1/3 of our investments are not liquid but in real estate partnerships. The rest is in cash, (lots of cash right now) in the stock market and bonds. So if my husband is right and there is a 30% drop in the market, and the market doesn't get back to current levels for 10 years, how can you calculate a safe withdrawl rate? If my husband is wrong, then having sold a lot of his stock and holding cash was a mistake and at some point something has to be done with the cash or we lose ground to inflation. He absolutely is uninterested in mutual funds given his view that there is a bubble but is investigating hedge funds.

Any thoughts on all this?

Martha
 
Your take out is what the Norwegian widow says it is - dividends/interest, da SEC yield of what you own, the real estate is the cash you end up with after you sell - hopefully you can guess correctly.

IMHO - or not so humble - SWR is bull crap. Your portfolio is what's important.

Now - a good data set with a withdrawal rate as one of the tests, can give you feel/insight as to how you 'might' want to adjust your portfolio - but never, never take it out of context.

Dividends/interest are real $ - all else is calculation.
 
unclemick, you are starting to sound a little like me.
That's pretty scary :)

John Galt
 
I have stayed away from the SWR discussions partly because they are kind of boring and partly because I don't understand all that is being said.  However, my husband and I are discussing when I should retire.  The current plan is for me to work part time next year and see how that goes.  He is nervous about me  totally calling it quits because in his opinion, the stock market is way over valued and we are still in a bubble that one way or another will burst. Our other worry is the potential that health insurance costs will continue to seriously outpace inflation. Nevertheless, if I retired today, we would have enough for us to easily live on at a 3% withdrawl rate with plenty of padding for emergencies.  FireCalc gives us a 100% chance of success.

About 1/3 of our investments are not liquid but in real estate partnerships.  The rest is in cash, (lots of cash right now)  in the stock market and bonds.  So if my husband is right and there is a 30% drop in the market, and the market doesn't get back to current levels for 10 years, how can you calculate a safe withdrawl rate?  If my husband is wrong, then having  sold a lot of his stock and holding cash  was a mistake and at some point something has to be done with the cash or we lose ground to inflation.  He absolutely is uninterested in mutual funds given his view that there is a bubble but is investigating hedge funds.  

Any thoughts on all this?  

Martha
Click to expand...

The 4% inflation-adjusted withdrawal rate that you read about on this board is based on a study of stock market returns from 1871-2002, over 130 years of data.

During that time there have been countless instances where the stock market has dropped over 30%. The market even suffered a more than 85% drop from 1929-1932 during the Great Depression. Someone taking a 4% withdrawal from a portfolio of stocks and fixed income securities survived it all.

intercst
 
Re: Desparately Trying To Understand SWR? justifie

So if my husband is right and there is a 30% drop in the market, and the market doesn't get back to current levels for 10 years, how can you calculate a safe withdrawal rate?

Your husband is absolutely justified in his concern re current valuation levels. Changes in valuation levels have in the past always had a critical effect on the determination of long-term returns (and, thus, SWRs).

You might be able to put your husband's mind a bit at ease re your plan if you could tell him that you have taken valuations into account. You might want to consider also posting your question at the SWR Research Group board (at NoFeeBoards.com). The SWR methodology discussed at that board includes an adjustment for changes in valuation levels.

The SWR for an 80 percent S&P portfolio at today's valuation levels is about 2.5 percent. That number will go up when valuations go down. In all likelihood we will be seeing SWRs for stocks of 4 percent or even higher in the not-too-distant future. Since you have a good bit in cash today, you are in a position to take advantage of those higher SWRs when they become available. My guess is that through careful construction of a plan you can come up with something that satisfies both you and your husband.
 
Martha,

As intrcst points out, the 4% estimate of safe initial withdrawal rate comes from considering all historical data back to 1871 and finding the worst case. The initial withdrawal rate that survives that case (for a 30+ year retirement) is approximately 4%. By definition, this analysis considers valuation of the markets and their relationship to returns in both the stock an bond markets as well as to inflation.

Not everyone who posts on this board understands how historical simulators work. Be careful and ask questions if you are getting inconsistent information that you don't understand.

One thing that makes your own case fall outside of the situation considered by FIRECALC is that you are apparently heavily invested in real estate. Real estate performance in not considered in the historical simulation. :)
 
I have treated the real estate somewhat like bonds. The real estate partnerships currently yield cash returns from a high of 12% to a low of 0%. There is lots of pass through depreciation so the cash they pay out ends up tax free (until of course the property is sold). Half of our estimated retirement income could come from the real estate investments.

I am Norwegian, but not yet a widow, so we'll have to see about the dividend paying stocks. I know my spouse has some, but they never have been a big part of the portfolio.

So what are hedge funds and how do they reduce risk? Or do they?
 
So what are hedge funds and how do they reduce risk?   Or do they?
Click to expand...
Hedge funds are basically small unregulated mutual funds that charge EXORBITANT fees.   They have a certain mystique because only "accredited investors" can invest.   (The SEC figures that if your net worth is north of $1M, you know what you're doing.   Ha!)

They tend to deal in slightly exotic securities, like options, convertibles, arbitrage, etc.    But, AFAIK, there is no data that supports the idea that they out-perform mutual funds or actually perform a useful "hedge" function.
 
By definition, this analysis considers valuation of the markets...

My recollection is that the REHP study was published in 1996. How many times has intercst updated his SWR number since then to reflect the effect of changes in valuation levels? The answer is "zero."

Ny guess is that Martha's husband will be something less than convinved of the study's analytic validity for purposes of reporting what withdrawal rate is "100 percent safe" when Martha fills him in on that little piece of helpful background information.
 
Use of a hedge fund(in commodities) done very vary carefully 'might' have a spot in a well constructed multiple asset class portfolio - provided you have a intimate grasp of correlations among asset classes. Raddr's Early Retirement site has threads on this.

I'm intrigued but have no plans to try anything yet. I'm not sure what I don't know. Not for the average investor - you'd better be an advanced slicer and dicer.
 
By definition, this analysis considers valuation of the markets...

My recollection is that the REHP study was published in 1996. How many times has intercst updated his SWR number since then to reflect the effect of changes in valuation levels? The answer is "zero."

Ny guess is that Martha's husband will be something less than convinved of the study's analytic validity for purposes of reporting what withdrawal rate is "100 percent safe" when Martha fills him in on that little piece of helpful background information.
Click to expand...

*****'s recollections are as faulty as his understanding of arithmetic.

The REHP study has been updated through 2003. The results haven't changed.

The worst case 30-year period for a January start date is 1966 to 1996. For a 60% S&P500/40% fixed income portfolio, a 4.12% withdrawal rate would have survived 30 years with $1 left in the account.

intercst
 
unclemick opines a "hedge fund" might be okay for
a "slicer and dicer". Maybe. But, if you invest
you might find your "hedge" clipped or trimmed :)

Anyway, I agree that the garden variety ER should just
stay away.

John Galt
 
The results haven't changed.

Valuation levels have changed. And the take-out number that you claim is "100 percent safe" has not.

The worst case 30-year period for a January start date is 1966 to 1996. For a 60% S&P500/40% fixed income portfolio, a 4.12% withdrawal rate would have survived 30 years with $1 left in the account.

"Would have" are key words here. The valuation levels that applied in 1966 do not apply today. So an informed analyst of the historical data would not declare the number that "would have" worked at the 1996 valuation levels to be "100 percent safe" for a retirement beginning today. Make an adjustment for changes in valuation levels, and the SWR you get for a high-stock portfolio today is 2.5 percent.
 
For those newer arriver's - heh, heh, heh --- De Gaul and the Norwegian widow --- one more time:

age 61 (ER'd 1993 at 49)

Income : 60% defined pension, 1998
40% (15% of
portfolio)Norwegian widow
utilities, REITs, baby bells, oils, drugs, - 40 DRIP stocks.

The stretch: SS available at 62.

The 800 pound gorilla behind the curtain: IRA - 75% Lifestrategy and 10% REIT Index - aka De Gaul as in balanced index with a kicker. If we make to 70 1/2 - RMD instead of SWR.

'God looks after Drunkards, Fools, and The Untied States of America.'
Charlies De Gaul

Balanced index will rebalance itself - hold your asset mix - AND

'Press on regardless,' or 'don't just stand there, do nothing.' - Bogle.

And for those investor's who can't wait for winter:

"90% of the game is half mental"
Yogi Berra
 
The results haven't changed.

Valuation levels have changed. And the take-out number that you claim is "100 percent safe" has not.

The worst case 30-year period for a January start date is 1966 to 1996. For a 60% S&P500/40% fixed income portfolio, a 4.12% withdrawal rate would have survived 30 years with $1 left in the account.

"Would have" are key words here. The valuation levels that applied in 1966 do not apply today. So an informed analyst of the historical data would not declare the number that "would have" worked at the 1996 valuation levels to be "100 percent safe" for a retirement beginning today. Make an adjustment for changes in valuation levels, and the SWR you get for a high-stock portfolio today is 2.5 percent.
Click to expand...

There are literally thousands of factors that effect stock market returns. PE ratio (what ***** calls 'valuation') is only one.

The strength of historical analysis is that all those thousands of factors are reflected in the historical data --- the 25% unemployment during the 1930's is in there, the 10% annual inflation during the 1970's is in there, all the wars since the US Civil War are in there.

Anyone that tells you that they can predict the future by looking at one factor doesn't have much credibility.

That goes double when you hear it from someone who doesn't understand arithmetic.

intercst
 
*****'s recollections are as faulty as his understanding of arithmetic.

The REHP study has been updated through 2003. The results haven't changed.

The worst case 30-year period for a January start date is 1966 to 1996. For a 60% S&P500/40% fixed income portfolio, a 4.12% withdrawal rate would have survived 30 years with $1 left in the account.

intercst
Click to expand...


PLEASE stop feeding the troll.
 
The strength of historical analysis is that all those thousands of factors are reflected in the historical data

Bernstein discusses this in Chapter Two of his book "The Four Pillars of Investing." He says that the returns sequence data that you look at in your study can be used to examine all of the factors OTHER than changes in valuation levels. But he treats the "Expected Return" factor as a SEPARATE factor.

This is why the number he reports as the SWR is so far off from the one you report as the SWR, intercst. This is why he says that your methodology is "highly misleading" at times of high valuation.

It is clear that when you developed the study you believed that valuation was just one more factor like all the rest. But you are wrong about this.

Anyone that tells you that they can predict the future by looking at one factor doesn't have much credibility.

The Data-Based SWR tool takes into account every factor taken into account in the REHP study PLUS ONE.
 
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