heretical ideas

[Lazy Jack]

I just received my copy of American Funds “Investor” glossy, color, propaganda newsletter for Spring/Summer 2006. It had an interesting article relevant to the discussions here. They compared the performance of their American Mutual Fund (AMF) to S&P500 for a period from 1970 to 2000 and 2005. They found that the fund tracked the S&P pretty well through 2000 with S&P slightly ahead in 2000 but AMF greatly surpassed S&P through 2005. But the BIG difference came if someone was withdrawing retirement funds from AMF and a S&P Index fund. They chose a rate of 5% per year adjusting for inflation at 5% per year. At the end of 1999, AMF had clobbered the S&P An initial 100K investment was worth 1300K for the AMF but only 555K for the S&P. Through 2005 it was even worse: 100K grew to 1700K for AMF but only 347K for S&P. They attribute the difference to less volatility in the AMF fund versus the S&P. Their calculation included sales charges and fund expenses.

I compared my retirement 80% equities portfolio performance to the S&P 500 over the period of 12/31/99 to 12/31/05 without and with hypothetical withdrawals. In a buy and hold scenario, my portfolio beat the S&P by 14%. With a hypothetical 5% withdrawal rate, my portfolio beat the S&P by 30%. In fact using the “safe” withdrawal rate of 4% for the S&P, my portfolio still beat the S&P at a 6% withdrawal rate.

So here are my heretical thoughts:

1). All SWR calculators rely on indexes to predict how a portfolio might perform. In fact I believe it is pretty easy to beat the indexes, and thus any SWR based on a prediction using indexes is likely to be way too conservative.

2). Fund, or index, performance is not the only criteria that is important to calculating a SWR. Volatility matters too.

3). The standard 4% SWR is too conservative. 5% is also too conservative. I will not go out on a limb and state what my opinion of a SWR ought to be but it is a lot more than 4%. I think this is confirmed by the observations that most calculators will show you that while 4% is “safe”,  in the vast majority of scenarios you end up with way more money than you started with, even with allowance for  inflation.

Now I’ll sit back and let everyone flame me.

 

[wildcat]

1). All SWR calculators rely on indexes to predict how a portfolio might perform. In fact I believe it is pretty easy to beat the indexes, and thus any SWR based on a prediction using indexes is likely to be way too conservative.

2). Fund, or index, performance is not the only criteria that is important to calculating a SWR. Volatility matters too.

3). The standard 4% SWR is too conservative. 5% is also too conservative. I will not go out on a limb and state what my opinion of a SWR ought to be but it is a lot more than 4%. I think this is confirmed by the observations that most calculators will show you that while 4% is “safe”, in the vast majority of scenarios you end up with way more money than you started with, even with allowance for inflation.

1 - massive amounts of research would disagree with you
2 - has some validity
3 - a lot more? hmmm I will let the others disupte that one

 

[MasterBlaster]

the 4% SWR means you NEVER have to eat dog-food.

Yes many (even most) time periods allow much greater withdrawal rates. How do you know which time period it is into which you are retiring ? Increasing your rate over 4% just increases your dog-food chance.

What is your tolerance for the dog-food/ possum livin outcome ?

 

[free4now]

Yesterday I was with a friend buying cat food. I was amazed how cheap it is... even in whole foods you can get a tuna-can sized portion of "real" meat cat food for 49 cents.

But I must admit I'd rather work for walmart than live on cat food.


The original poster seems confused about what "safe withdrawal rate" means. People on these forums use the term to mean the rate that has a very low chance of causing a bust over the specified term.

Everyone agrees that you can withdraw more if you are willing to risk running out of money or needing other income.

 

[Nords]

Now I’ll sit back and let everyone flame me.

The beauty of ER is that we don't have to argue.

I can retire on my 4% SWR and consider letting dividends drive the portfolio.

You can retire on your >5% SWR and hope that the equity risk premium does you proud over the next 30 years.

I'm not punished for your SWR, and you don't benefit from mine. At least one of us will never have to go back to work. The one who dies with the biggest portfolio... is dead. Everyone gets what they deserve!

I think the biggest threat to a successful ER is an undercapitalized portfolio and a budget that has no room for cutting back. Meanwhile I'm going to watch the research and keep some in reserve for life's little surprises.

 

[justin]

Yesterday I was with a friend buying cat food. I was amazed how cheap it is... even in whole foods you can get a tuna-can sized portion of "real" meat cat food for 49 cents.

The whole eating cat food is kind of a joke. The canned cat food I usually buy is ~$0.75/lb. Plenty of products are that cheap or cheaper. Walmart brand chef boyardee (with meat in it). Vegetables (including beans). Rice. Bread. Bananas. Potatoes. Onions. And the list goes on. Why anyone would choose cat food baffles me.

 

[TromboneAl]

You gotta buy the 80 lb bag of Little Friskies to make it worth it. Put it in the slow cooker.

Seriously though, good point, Justin.

Anybody here try eating cat or dog food? I've tasted a "milk-bone" -- no idea why the dogs like it so much.

 

[ESRBob]

Justin,
I think the catfood thing is the "wet" catfood which is high in protein and meat 'products'. If you're a vegetarian then you never have to go there Its easy to get reasonably priced non-meat without having to go the friskies route (slow cooker indeed, Al!)

To Lazy Jack (welcome btw, are you a sailor?), volatility is definitely an issue -- equal withdrawals against a lower volatility portfolio will lead to a higher (or at least never lower) ending portfolio value -- I am pretty sure its just math, so we can't even argue about it! (I will figure out how to check the math on this unless anyone knows of someone who's done it already?)

As to what to do about it -- that is one of the key reasons some people choose to take 4-4.5% of portfolio value each year as your SWR amount. In the 9 times out of 10 that your portfolio does better than worst case (we hope the odds stay roughly in line with history) you'll be increasing your withdrawals nicely in real terms in step with your rising fortunes. You'll still die with a pile, but you can give a lot away in your later years to deserving grand kids or nurses.

But it prevents you having to worry about Master Blaster's point -- which period are you retiring into? You'll never have to answer that since it doesn't matter -- you just take the percent each year and do your best to keep up with inflation with some belt-tightening or a bit of ushering at the ballpark or mediating disputes or gigging at weddings like Al.

Finally, though -- using blended portfolios with multiple asset classes doesn't really get you to an SWR bigger than 5% in my experience. For my book we put together such portfolios and tested them historically, albeit with a higher bar or definition of 'success' (keeping real value intact over time vs keeping portfolio balance north of bankrupt) but the 4-5% range still held.

This higher definition of success was necessary since the ER needs to have the portfolio hold up over several decades, and the other SWR studies tend to run for 20-30 years max, so you could end up 'surviving' to the end of 30 years with a badly depleted, though positive value portfolio, and be broke a few years later. That may be where your 5%+ inflation-adjusted SWR leads you. (see page 195 of Work Less Live More for a pretty ugly graph of what happens to portfolio success rates in a blended portfolio at >5% withdrawal rates. You can get the book from the library, or order it at the link below and feed a few watts to the forum's servers)

 

[REWahoo]

(see page 195 of Work Less Live More for a pretty ugly graph of what happens to portfolio success rates in a blended portfolio at >5% withdrawal rates. You can get the book from the library, or order it at the link below and feed a few watts to the forum's servers)

Bob, off topic, but since you brought the subject up , I just received two (2) copies of your book, ordered from Amazon via the link below, of course. I'm giving each of my two 30something daughters and their spouses a copy with the hope it will help them "get it". They've seen dad enjoying his new-found freedom for the past several months and I'm thinking my timing might be about right. Guess time will tell.

 

[ats5g]

Anyone care to wager on how long it took American Funds to data mine the data for this article. Let's see, AMF was incepted in 1950, so why not 1950-1985 or 1960-1995, etc. Oh, and AMF is a large value fund, so why are they comparing it to the S&P 500 and not something like the S&P LV, or large value stocks?

Oh well, back to the 'ol bread n' butter of paying brokers kickbacks.

- Alec

 

[CyclingInvestor]

Anybody here try eating cat or dog food? I've tasted a "milk-bone" -- no idea why the dogs like it so much.

I was at a dog rescue event / potluck. After trying the desserts I told
my friend to avoid the brownies, they tasted like cardboard. She started
laughing and pointed to the sign indicating that the brownies were from
the 'doggy snack' area of the table.

 

[ESRBob]

I'm giving each of my two 30something daughters and their spouses a copy with the hope it will help them "get it".

ReWahoo-
Wow- You're demonstrating the ultimate in confidence in FIRE -- if we would actually want our son-in-law to go this route, you know we believe its a safe and useful direction! I think that qualifies as the acid test for any idea about finance and life strategy out there.

thanks for supporting the book and the forum -- hope your daughters find it a useful way to start a conversation with spouses about what Dad is really doing and why we might actually want to follow his lead in this case 8)

 

[REWahoo]

Wow- You're demonstrating the ultimate in confidence in FIRE -- if we would actually want our son-in-law to go this route, you know we believe its a safe and useful direction! I think that qualifies as the acid test for any idea about finance and life strategy out there.

Hmmmmm. Thanks, but I'm afraid you are giving me way too much credit for my SIL confidence level. Actually, my confidence is in my two daughters and their ability to lead those guys by the nose persuade their spouses to pursue FIRE. The trick is, as always, helping them see there is an alternative to running the rat race until you choke on the cheese.

 

[Nords]

Actually, my confidence is in my two daughters and their ability to lead those guys by the nose persuade their spouses to pursue FIRE.

Learned it from their mother in your house, too, eh?

 

[Telly]

Anyone care to wager on how long it took American Funds to data mine the data for this article. Let's see, AMF was incepted in 1950, so why not 1950-1985 or 1960-1995, etc. Oh, and AMF is a large value fund, so why are they comparing it to the S&P 500 and not something like the S&P LV, or large value stocks?

Someone who has AMF can answer the question about what the comparison would be from the fund's inception. 
Each American Fund's Annual Report has a chart that compares investing $10k in the beginning of the fund, $10k in the S&P500 at the same time (for domestic equity American Funds), the CPI, and what the A/F's fund would be if you took all dividends as income.  For the A/F's, the respective load is deducted at the beginning, and the chart includes all expenses through the years.
The S&P500 in the chart is the index itself, no expenses. So to do an honest comparison using a real purchaseable S&P500 Index Fund, you would have to include the drag of expenses on the S&P500 fund. Low per year, but there nonetheless.  There's that compounding effect again.

I don't have AMF.

There are A/F's that go back to the 30's, and maybe the 1920's.
I'd research that, but I'm Early Retired 

Another factor mentioned in the online version of the A/F story that Lazy Jack related, is the effect of dividends.  They said AMF has a higher dividend than the S&P500. That, obviously, helps too.

 

[brewer12345]

Anybody here try eating cat or dog food?  I've tasted a "milk-bone" -- no idea why the dogs like it so much.

I've never sampled the kibble, but if my dogs are representative, they like the stuff so much because they will eat ANYTHING with gusto.

 

[azanon]

If nothing else, it confirms to me that the index/managed fund issue is of minor importance.   Far more important to simply have one's asset allocation chosen correctly.   Also, far more important to simply save enough or save more.   

Oh well, back to the 'ol bread n' butter of paying brokers kickbacks.

Insane isnt it?  Why wont they spend all their time and money researching specific stocks for our portfolios and watching closely as to when to buy and sell them for free.   I'm outraged that I actually have to pay for this service! 

....

Sarcasm aside, i think the strong performance of managed funds for 2000-2006 show the value of having a real human instead of a monkey at the helm when things start going wild.   Just being on autopilot with no ability to maneuvuer can have very detrimental effects to one's portfolio;  that is, unless you take on market timing yourself and swap funds around amonst the index funds.   I know for certain i'm no market timer, so I like the comfort and convinence of a professional at the helm that i personally selected (not selected randomly as the proponets of index funds use in their examples) amonst many choices.

I have a lot of index anyway;  dont have much choice since I have TSP.  But again, it doesnt really matter that much one way or the other IMO.  Far more what matters is what my contribution percentage is set to and my stock/bond ratio.

My worst international fund is my "I fund" by a long shot. My actively managed foreign fund, Janus Overseas, no less than destroys it; management fee and all.

 

[setab]

Azanon,

The I fund has gone up and up; yours is doing better? Might have to check that.

setab

 

[Momtwo]

I saw Paul Newman on the Jay Leno show last night. Jay dared him to eat Newmans canned organic dog food right on the show. I think it was chicken and brown rice. Newman took the dare and did it. He actually said it was good. I wanted to barf!

 

[brewer12345]

I saw Paul Newman on the Jay Leno show last night.  Jay dared him to eat Newmans canned organic dog food right on the show. I think it was chicken and brown rice. Newman took the dare and did it. He actually said it was good. I wanted to barf!   

Actually, the high end dog food is actually made out of good quality stuff. I'd have no qualms about eating the Newman's food if I had to. Purina, OTOH, well, you really don't wanna know whats in that stuff.

 

[cute fuzzy bunny]

I've tasted dog kibble AND the biscuits. I figured if I like it, the dogs would like it. Then again, they eat cat poop.

All four of us did a 'taste test' with five "high end" dog foods, mostly made from human grade ingredients.

The verdict? Tasted like rice cereal, with a little meat undertone, slightly greasy, coarse crunchy texture. Surprisingly quite bland.

Never tried the canned food though

Any other questions?

 

[justin]

I've had the dry cat food. It had a weird bitter aftertaste and was rather bland.

I'm still pretty sure one could get a decent variety of protein as part of a balanced diet for less than the cost of cat food. USDA recommendations for the "protein" component of a male's diet call for 6 ounce-equivalents of meat, eggs, beans or other protein items. Wet cat food is $0.75/lb. I can get a mix of different meats, eggs, and beans with an average cost of less than $0.75/lb pretty easy. It won't be the best variety and quality of food, but it would sure beat cat food. Worse case - you purchase 2.7 pounds of protein products for a little more than $0.75/lb and have an extra $5-10 in expenses per month. Increase your nest egg by $3000, and that will cover $10/month extra at a 4% SWR.

I think I'll work an extra few weeks to save another $3000 if it was cat food vs. real food.

 

[haha]

This is a rather dispiriting thread.

Ha

 

[ESRBob]

Ha,
It gets worse. I'm thinking Newman's Organic would not be the place you'd turn if you were looking for cheap eats in old age. Probably prices in somewhere north of good old Chef Boy-Ar-Dee

I'm with Justin -- if finances are that tight, spend a few more years on the treadmill and earn enough extra to make sure you're not going to have to go there. That or learn to garden!

 

[2B]

To a certain extent, I believe we're all falling into the "overplanning trap." I remember a financial planning article that talked about SWR and expenses in retirement. They actually proposed that you would need more in retirement income than you currently make/spend. After all, haven't you always wanted endless summers in the south of France (in a fabulous villa, of course).

Watching my in-laws and my own father confirms that your spending will fall after you reach your 70's and by your 80's you're just puttering around.

This tells me two things. First, don't live in dire deprivation now trying to save for ER. Take some time to enjoy life. Go and do but keep on a plan. Second, you don't need as much as you think. You may be sucking your ER stash down at 5 or 6% at 55 but at 80 your desire will be for 3% or less (inflation adjusted).

I'm now in a good paying, low stress job. My goal is to do more (yes, spend money on fun) and reduce my savings rate (it is currently over 25% of gross so I have some room). What I've noticed in my portfolio is that the organic growth is overwhelming the contribution of savings. That got me starting to ask why am I saving as much. The $10K I put away 15 years ago is laughing at the $10K I put away today.