Implications of SWR

[GDH]

This business of safe withdrawl rates has me wondering... there doesn't seem to have been any consideration given to marginal probabilities-- that is, your SWR doesn't change with respect to what actually occurs in the market, unless it is worse than the worst case that has occured in the past.

So assume for a moment a portfolio that has a 100% SWR of 4% on the day you retire. The implication of this is that you can continue to draw 4% per annum indefinitely, regardless of market action (given the better-than-worst-case assumption).

Take your retirement date to be January 1st of 2000. You take your portfolio on this date, run the numbers and determine your safe withdrawl rate is X. Three years later, after one hell of a ride you find yourself re-estimating your SWR on January 1st of 2003. About 40% of your portfolio is gone and you get a smaller SWR rate of Y.

No here's the problem that I have with all of this. The BTWC assumption is still true-- nothing catastrophic has happened, so if the whole SWR concept has any validity you must still be able to draw out at your original rate of X since it was calculated to survive _any_ BTWC scenario.

Why does a retiree who retired in 2000 and loses 40% of his portfolio get a better withdrawl than someone who starts in 2003 with the same amount?

Shouldn't you be able to look at the past 10 years or so using inflation adjusted dollars, pick the date where your portfolio's SWR would have been highest and say "Since the worst case hasn't happened, if it was safe then, it must still be safe now?"

Am I missing something?

 

[cute fuzzy bunny]

This was royally beaten to death in the thread "swr of 6.21%?" or some such title. The thread also included massive disagreements, much thrashing about the head and shoulders, and no actual conclusion...but a lot of opinions.

I think the upshot of my opinion was that taking an SWR calculation while stock market valuations are very high might give you a higher SWR than is really sustainable, while taking one at fairly weak valuations would give you too low a number. Reason being the initial port size is unlikely to maintain its very large/very small basis.

Now, the next argument being that if it gives you one number one year and a different one the next year, that SWR's are complete hogwash. I think this is also true. I mean, if a number is right one year, and its supposed to be right the next year on the basis of history, but the new number is also supposed to be right and will continue to be right according to history...well...thats an insoluble paradox! The only possibility is that SWR is neither steady, nor truly safe.

We spend way too much time on "swr"s...they're just a rough idea, a passing momentary rule of thumb. Such a calculation, done in conjunction with the other usual napkin/spreadsheet calculations can tell you if you're in the ballpark to successfully retire, but they can tell you absolutely nothing about long term viability. If you run firecalc and it says you have a 30% chance of success, stay at work. If it says you're 100% and can withdraw 50% more than you need, then you should be hastily scrawling a letter of resignation on the back of a beer bottle label while driving to work to deliver it.

If you were smart enough to get yourself to ER, you're smart enough to figure out how much to take out every year/quarter/month without screwing yourself up.

Heck, I was ER'ed for 3 years before I even heard of the term SWR. Good thing I finally learned about it before I accidentally had a successful 40 year ER without even understanding the fundamental core pivot point without which one cannot succeed...

 

[Cut-Throat]

Why does a retiree who retired in 2000 and loses 40% of his portfolio get a better withdrawl than someone who starts in 2003 with the same amount?  

Am I missing something?

Here is what you're missing - If you lost 40% of your portfoilo, you were not invested in the overall stock market. If the overall stock market declined 40% in value, the market would be a better value after having lost 40% in value. And hence would have a better chance of recovery.

If you lost 40% - you were not invested in the FIRECalc Index.

And like all predictors of the future, It goes by past events. The guy that started in 2003 did not have as large a starting portfoilo, so it stands to reason that if he retired in 1929 his situation would have been more meager than the guy than the guy that started in 2000.

 

[cute fuzzy bunny]

I dont think thats true Cut-Throat...the total stock market index (vanguard) reached a high of ~35 in 2000 and fell to a low of ~19 in the 3rd quarter of 2002. Well over a 40% drop.

Did its price in Q3/02 mean a good value? According to many measurements at the time, including morningstar fair value, they did not. Prices were still slightly above the mean over the past 75 years.

I should also point out that this isnt the first time a relatively new poster has "discovered" the paradox that valuations do matter with regards to SWR's and made a point of it...

 

[Cut-Throat]

I should also point out that this isnt the first time a relatively new poster has "discovered" the paradox that valuations do matter with regards to SWR's and made a point of it...

Yes like all things to predict the future, it's a little foggy. Even Crystal Balls.

I know you don't have much faith in Inflation Numbers. I have even less in Valuation Numbers. I don't think we know how to fairly value a stock. Too much emotion involved. Like Real Estate. Lake Front or next to a Freeway - Just does not compute.

 

[cute fuzzy bunny]

Yes like all things to predict the future, it's a little foggy. Even Crystal Balls.

I know you don't have much faith in Inflation Numbers. I have even less in Valuation Numbers. I don't think we know how to fairly value a stock. Too much emotion involved. Like Real Estate. Lake Front or next to a Freeway - Just does not compute.

I completely agree, there is no good way to truly value stocks.

Help me out with one thing though...I know you're a firm believer in the future of investment returns being at least somewhat predictable based on past returns. Buy the balanced index of US stocks/bonds, forget about it and go fishing and it'll all turn out in the long run.

Along with that belief, dont you sort of have to believe in a trend of some sort? Yeah, some people call it 'the mean', and in looking at our market over the long haul there is a definite trend line thats fairly straight and strong. I imagine if you apply the gordon equation to it, that would provide the basis.

But we're well above that trend line, and have been for the last 10 years or so. Doesnt that almost automatically imply that we're going to have either one very bad event or a 10+ year period of nothing happening to bring us back to that line? In fact, dont we need to spend 10 years BELOW that line to accommodate for a true RTM??

How do you rationalize that bifurcation? That the future will be no worse than the past, that historic returns are predictors of future returns, yet that the historic numbers against todays almost dictate a fairly bad and probably long lasting downturn in the US stock market?

If someone doesnt understand what I'm saying, pull up your favorite stock charting page, put in the DJ or S&P500, or any other broad long running index that goes back to the early 1900's. Choose "value of a 10,000 investment" or whatever option allows you to chart the worth of a unit of money invested at the start of the period.

Chart it for the full term to present.

You have a nice smooth line you can almost lay a ruler on, in fact the great depression era is almost unnoticed, and the crash of 87 isnt even visible. That smooth trend continues until the late 80'sthen theres a little upturn, then in the mid 90's it shoots to the moon.

Granted technology and productivity increases, global economy...all sorts of things have been brought out to explain the uptilt.

Which sort of means "its all different now", which most people dont buy into, or that "it could be different going forward", and again, most people dont buy into that either.

So is it going to be different, and therefore current over-mean valuations are ok, or is it the same and valuations are too high, which is a predictor of weaker returns or a drop in the market? I dont think you can have it both ways...

 

[Cut-Throat]

But we're well above that trend line, and have been for the last 10 years or so.  Doesnt that almost automatically imply that we're going to have either one very bad event or a 10+ year period of nothing happening to bring us back to that line?  In fact, dont we need to spend 10 years BELOW that line to accommodate for a true RTM??

How do you rationalize that bifurcation?  That the future will be no worse than the past, that historic returns are predictors of future returns, yet that the historic numbers against todays almost dictate a fairly bad and probably long lasting downturn in the US stock market?

Oh Yeah, I agree!  - And If I were letting my emotions run my investment portfolio right now, I would not be in stocks.

The problem is that we don't know what the future holds. Lets say that we have a correction of 80% next week. Those of us that are not in the Market know exactly what to do. Invest in the Market.

But, Let's say the Market and the Economy continues on an upward sluggish rate of 3% above inflation and stays 'overvalued' for 25 years. Then folks like ***** don't really know what to do. It's not obvious.

If I did say - Hey the Market is way overvalued. I'm gonna take my money out. I would have no idea what to do with it.

The best thing for me is when I run FIRECalc and see that my portfoilo survives a Depression Style meltdown with NO CHANGE in Spending Habits. It's good enough for me. Our Valuations are not as high now as they were before 1929.

I have no idea what is going to happen and I invest accordingly. Those that say they know may have to eat Crow someday. The bottom line TH, is that I see very little choice other than constructing  a diversified portfoilo and staying the course. I would be more nervous sitting on the sidelines 'waiting for the big correction'.

I should be more afraid of being hit by lighting. And when I see lighting, I'm off the Trout Stream in a Flash

 

[unclemick]

Without using the N word - Vanguard Balanced Index( a 60/40 fund) closed today a tad north of 2.5% SEC yield. My overall portfolio is constructed to live off SEC yield on the order of 3%. And Yep - we are above the 1871 trendline. Flatline, big dip, or another bubble - I'm ready, I hope.

If you are an advanced 'slice and dicer' with say ten or more asset classes then SWR might have more significance. Although rebalance discipline would be the central issue (for me). SWR within a given data set can provide some insight.

But since I've never owned any of the exact portfolio's run in the data set's - SWR is an indicator.

Heh, heh, heh - dividends and interest are real money - and I'm seconded by the IRS.

 

[unclemick]

Ooop's - I almost forgot:

"It's deja vu all over again!"

Page 30 - The Yogi Book.

 

[cute fuzzy bunny]

As opposed to Vuja-De...the feeling that this has happened to you before and you never want it to happen again?

I dont know if I'd want to throw the word "emotional" around.

I think its more emotional to ignore the data and "stay the course than to note that something is overpriced and move out of it a little bit into other things that arent as overpriced.

Dont get me wrong, I'm not voting for switching strategies or "systems" or anything else like that. I am voting for making a move when things are particularly expensive or cheap. Such a move in 2000 helped me ER.

A lot of people note that if there was a huge drop in stock prices, that they'd be buyers. Even Warren Buffet!

Why the hell wouldnt you be a seller when things are overpriced?

 

[Cut-Throat]

Why the hell wouldnt you be a seller when things are overpriced?

The answer is 1.) Maybe they aren't
2.) They may never get cheaper
3.) tell me what you see a screamin deal on today as far as investments.

In 1958 Stock dividends became less than bonds. Many folks left the market vowing only to return when Stock Dividends went higher. They don't have to wait any longer they're dead

 

[ESRBob]

A lot of people note that if there was a huge drop in stock prices, that they'd be buyers.  Even Warren Buffet!

Why the hell wouldnt you be a seller when things are overpriced?

TH,
I happen to agree with you, though things need to get pretty extreme for me to 'know' things are over or under-priced enough to want to do more than tweak the allocation. I did it three times in 2001 and 2002, bailing out of over-valued stocks before they went lower, dialing down from 60% equities to about 20%; the first two were brilliant, the third time I found the bottom : yep, right there on October 9. So I admit it: I'm too much of an idiot to really know what I am doing, and I like a system that protects me from myself.

But, <nudge, nudge>, if you keep talking about buying low and selling high, you're going to start sounding like the H-person!

ESRBob

 

[hocus]

if you keep talking about buying low and selling high, you're going to start sounding like the H-person!

The funny thing is that my views are a combination of the views expressed above in this thread by TH and Cut-Throat, two of my harshest critics. TH is saying that it makes sense to adjust one's stock allocation as valuations change. I agree with TH on that. Cut-Throat is concerned that he is not smart enough to know when to make the allocation adjustments. I also believe that I am not smart enough to know when to make the adjustments. That's why I use the historical stock-return data to guide me. My "system," if it must be called that, is to combine the strategies favored by Cut-Throat (Buy-and-Hold) and TH (Buy Low, Sell High) to form a a new strategy which I believe contains the strong points of both of the earlier ones.

 

[eukrate]

GDH you're right. The essential difficulty is with SWR estimation itself: it collapses decades of data into a single value with,hopefully, some predictive value. The problem is that the historical data has to include not only the variations that you are experiencing with you begin withdrawals, but also the exact SEQUENCE of data- i.e. they need to occur in the same order as the data in the SWR estimate. Since this is unlikely to occur, the SWR is at best a rough guideline and is, as you imply, not an indication of assured survival. The best you can do is continuously re-compute it and adjust.