"Is the Safe Withdrawal Rate TOO Safe?"

[Nords]

Jonathan Guyton in the Oct FPA Journal: http://www.fpanet.org/journal/articl...nderforprint=1 (This was shamelessly plagiarized from Ted's posts at FundAlarm.)

Don't try this SWR at home, folks.

Most of the article analyzes a portfolio that's 85% equities, and that's what gives the highest withdrawal rate. How many retirees are willing to accept volatility from 85% equities?

All other portfolios have a much lower withdrawal, and a more typical 50/40/10 portfolio is only mentioned as an endnote. The SWR is much closer to 4% than to the 5.7% teaser rate.

Guyton doesn't have real data. He's using Russell indices that didn't start until 1979, six years after portfolio withdrawals started. He uses a proxy of mutual funds to create the "equivalent".

Even without full data, he's data mining with only one period that he considers the "perfect storm", and yet it doesn't even cover his 40 year period. We have to agree that this is the WORST retirement period ever without seeing how this system did during the Depression years or WWII. He assumes that if the portfolio survives 1973-4 and 2000-2003 then it'll survive until 2013. The analysis would be much more reassuring if it covered actual 40-year periods... many retirement calculators go back at least to 1926 which would give him 38 of those periods. In fact, he pays considerable homage to the Bengen paper (the source of the 4% SWR) without pointing out that IT starts with 1926.

I'm confused by the discussion of "withdrawal freezes" vs "preserving 1973 purchasing power". Presumably the withdrawal rate is frozen after bad years-- but when does it catch up to restore 1973's purchasing power? (Note that preserving purchasing power for 40 years pushes the SWR back down to 4.8%, not the teaser rate of 5.7%.

At one point he advocates an option to withdraw more money during the early "active" years of retirement and then throttling back in "less active" years. But nowhere does the study address the disproportionately high costs of geriatric medical care, nor the much higher inflation rate of that care. Better have a great LTC policy!

If a withdrawal rate is too high during the early years of the portfolio, how do you know? Do you project the spending for another 40 years or use some other simulation method? How does the author handle large capital expenses during every 5th or 10th year-- a new roof, replacement vehicles, a kid's wedding, a fantasy vacation?

The author is assuming that the retiree has accurately accounted for all post-retirement spending. Yet most retirees just want to know when they have "enough"-- IOW, how soon can I quit? Most are pushing for a bare minimum retirement portfolio without building in the additional buffers to handle volatility, periods of high inflation, or capital expenses.

One of my pet peeves with these retirement "studies" is that the author is working for a paycheck. He's not living off his portfolio and he doesn't tell us whether his parents or his in-laws are using his system. At least Bud Hebeler (Analyze Now!) is retired and mentions numerous examples of other retirees.

Nowhere does the author mention tax brackets, IRA RMDs, Social Security, or rebalancing/transaction costs. Presumably SS isn't part of the portfolio?

I'm sure that I'm missing even bigger factors.

[Brat]

The studies I have seen indicate that volitity is the killer of retirement savings for retirees, having 85% in equities doesn't support that historically. IMHO, the lowest withdrawal rate consistent with a modest lifestyle is the safest.

4% or less is tough for many of us, but if we can sustain that the occassional higher withdrawal for a-typical expenditures is possible.

Note Nords comment about a LTC policy as a part of retiree income preservation plan.

[hocus]

I'm not commenting here on the study referenced above, but on the question you pose with your thread title, Nords.

The SWR is too safe for some and not safe enough for others. SWR analysis calls for one optimistic assumption (that stocks will perform in the future no worse than they have performed in the past) and one pessimistic assumption (that a worst-case returns sequence will happen to pop up in your retirement). I think that it is perfectly reasonable for optimists to use a personal withdrawal rate (PWR) a bit higher than the SWR and for pessimists to use a PWR a bit lower than the SWR.

I think the article has some great points. That how you withdraw your money from your portfoilo is very important and somewhat ignored here.

I think most folks probably will end up withdrawing less after a down year in the markets because of human nature. This will in fact have a another positive affect on the portfolio overall. The article hints at this by not upping the inflation level after a down year. I have talked to Dory about including some Flexible withdrawal calculations into FireCalc that could take this into consideration.

In other words - A range of withdrawals. More after an up year, less after a down year. This is how we actually spend our money anyway. Trips, Cars and other major purchases usually follow an up year in the market. And most of us pull in our horns after a down year.

[Brat]

Ah, you assume that the person who takes a lower withdrawal rate is a pessimist. Not so, the "pessimist" expects what is left behind will continue to grow and more will be available for an unexpected need. Pessimists spend now and don't save for the future.

This is all about how the retiree manages risk.

[Brat]

In this thread we have talked about SWR and Long Term Care insurance and Nord linked us to an interesting article. Some of the board readers might enjoy taking a peek at the Financial Planners Journal. The September issue includes discussions about LTC (warning: one writer, a PhD, discusses it only in terms of nursing home stays).

http://www.fpanet.org/journal/articles/2004_Issues/

Enjoy.

[Hyperborea]

I read the paper and it provided some interesting analysis of the effects of varying your withdrawal rules. What I'm not sure about is the first footnote.

The author is applying for U.S. patent protection to cover the process of determining an investment portfolio's "safe" initial withdrawal rate by using the decision rules presented in this paper.

I guess the patent will stop other financial planners from advising clients to use such withdrawal methods without paying the author a fee. However, I'm pretty sure that we had discussions on such inflation increased limiting schemes over on the TMF REHP board maybe 2-3 years ago (or more). That may constitute prior art that would invalidate the patent.

[Nords]

That may constitute prior art that would invalidate the patent.

Sounds like you'd better get hot on your own patent application, Hyper. I'd rather have it be your property that TMF's!

If you don't need the income then Dory could always upgrade the board to a 386-based server...

[Hyperborea]

Sounds like you'd better get hot on your own patent application, Hyper. *I'd rather have it be your property that TMF's!

Ahh, well it wasn't just me it was a lot of others too. Besides that has two big problems. The first is that it requires me to use the infamously awful (not in the sense of inspiring awe) search functions of the TMF boards. The second is that a patent is just a piece of paper and what makes it worthwhile is the enforcement. I wouldn't have the resources to know about and then litigate every little financial planner in every little town who used this.

If you don't need the income then Dory could always upgrade the board to a 386-based server...

You mean this isn't a Z80 based system running CP/M?

[cute fuzzy bunny]

I hate to worry you guys, but the computing power this board runs on is a little more simplistic.

Every few moments, Dory has to move some beads along a wire with a small stick.

[sgeeeee]

I hate to worry you guys, but the computing power this board runs on is a little more simplistic.

Every few moments, Dory has to move some beads along a wire with a small stick.

Yeah . . . but the beads are made of compressed dryer sheets, the wire is stretched between two kayaks and the stick is wielded by a Norwegian widow.

[cute fuzzy bunny]

the stick is wielded by a Norwegian widow.

Hey...this is a PG site mister...

Man, TMF, REHP, SWR, LTC, CP/M, and RMDS is makin' my head spin. I ERed PDQ when I reached CM.
Now the IRS is SOL and my ROI is A-OK. Well, got to take my Vitamin C ASAP, and watch TV until
lunch. Probably a BLT.

John Galt

[Cal]

Man, TMF, REHP, SWR, LTC, CP/M, and RMDS is makin' my head spin. *I ERed PDQ when I reached CM.
Now the IRS is SOL and my ROI is A-OK. *Well, got to *take my *Vitamin C ASAP, and watch TV until
lunch. *Probably a BLT.

John Galt

Ugh! Reminds me of all those corporate catch phrases!

Oh well, gotta go now and finish those TPS reports.