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Old 02-09-2011, 12:21 PM   #61
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I would say 3.5%
Now the challenge is to drag that number out to five or six significant figures while having "an open and honest SWR discussion"...
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Old 02-09-2011, 12:23 PM   #62
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...while having "an open and honest SWR discussion"...
Hocurse pocus...
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Old 02-09-2011, 12:59 PM   #63
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Read A History of Interest Rates, which goes back to Roman times, and you'll find that historically "3% real" returns have been the norm---this corresponds well with the overall growth rate of nature, e.g. trees, so it makes sense.

The one exception is when/if trade breaks down, like during the dark ages, but I presume if that happened, you'd have other things to worry about.

Interest rates go up whenever uncertainty goes up. The more chaos, the higher the rate, until the point where you can't borrow at all. The Romans enjoyed about the same financial rates (3-6%) on their housing loans as we do.

From a historical perspective, the 20th century (and the 21st by extension) has been something of an aberration---it is the first time when finances has been significantly severed from "the physical world" (gold, finance, service) resulting in more bouts of inflation.
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Old 02-09-2011, 03:44 PM   #64
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Read A History of Interest Rates, which goes back to Roman times, and you'll find that historically "3% real" returns have been the norm---this corresponds well with the overall growth rate of nature, e.g. trees, so it makes sense.
Interesting idea. Maybe I should buy bamboo futures?

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Old 02-09-2011, 08:33 PM   #65
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I was thinking about a poll on pine trees versus oak trees.
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Old 02-16-2011, 10:09 AM   #66
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Using Shiller's data, I explored what withdrawal rate would preserve capital over the whole period for which he computed PE10. I think the period in question was something like 1880 to 2009. I found that a withdrawal rate of something like 83%/PE10 would leave the initial sum intact in real terms after 129 years. I believe PE10 is currently about 24, and I usually round the factor of 83% down to 80%, so I would say that you could take 3.3% (less fund management cost) from a 100% equity portfolio, at the moment.

(Note that the withdrawal rate is not fixed, you continually recalculate it along the way. This doesn't make income very volatile, it's not affected by changes in the price of shares, it only varies with the ten year average of profits, which is a relatively stable quantity.)
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Old 02-16-2011, 10:12 AM   #67
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It's worth adding that at the height of the 2000 bubble, the withdrawal rate would have been below 2%. Considering there were times in the late nineties when you could have got up to 4% from TIPS, this would have told you something about the wisdom of being invested in equities then.

Edit: just checked the figures, the all-time low for withdrawal rate calculated in this way was December 1999, 1.8%. A relatively recent high was July 1982, when the withdrawal rate would have been 12%! (Note the withdrawal rate is varying inversely with prices, which is why change in prices (or portfolio value) doesn't actually affect the dollar income you take.)
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Old 02-16-2011, 10:50 AM   #68
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For those skeptical about a 12% withdrawal rate, I've looked at a retirement starting on that date with $1 million capital. Up to November 2010, the average monthly income would have been $8,400, the minimum $6,800 and the maximum $10,500. The final balance would be a fraction under $3 million. All figures in real terms, so the real value of capital has tripled over a period in which annualised average income withdrawal was 10% of the initial balance. 1982 was a good time to put $1 million into equities.
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Old 02-16-2011, 11:54 AM   #69
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Using Shiller's data, I explored what withdrawal rate would preserve capital over the whole period for which he computed PE10. I think the period in question was something like 1880 to 2009. I found that a withdrawal rate of something like 83%/PE10 would leave the initial sum intact in real terms after 129 years. I believe PE10 is currently about 24, and I usually round the factor of 83% down to 80%, so I would say that you could take 3.3% (less fund management cost) from a 100% equity portfolio, at the moment.

(Note that the withdrawal rate is not fixed, you continually recalculate it along the way. This doesn't make income very volatile, it's not affected by changes in the price of shares, it only varies with the ten year average of profits, which is a relatively stable quantity.)
This seems quite an intersting approach to me, but I do not understand the part that I bolded. Easy for me to accept that PE10 (or perhaps other valid approaches to valuation) would give a much better estimate of a safe withdrawal rate going forward than an eternal 4%. What I don't understand from your description are the exact operations that one would follow to mimic what you tested.

Could you comment? Or better yet just give a recipe?

Another question. I assume that in theory this applies only to a 100% .SPX fortfolio?

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Old 02-16-2011, 12:03 PM   #70
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For those skeptical about a 12% withdrawal rate, I've looked at a retirement starting on that date with $1 million capital. Up to November 2010, the average monthly income would have been $8,400, the minimum $6,800 and the maximum $10,500. The final balance would be a fraction under $3 million. All figures in real terms, so the real value of capital has tripled over a period in which annualised average income withdrawal was 10% of the initial balance. 1982 was a good time to put $1 million into equities.
I take each year you calculate PE10/83 and apply that figure to the remaining portfolio? Thus the withdrawals changes but not as rapidly as with a percentage against the price of the portfolio. If you are a spend it down before it goes person (seems like a fair number around here) how and when would you adjust the rate?
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Old 02-17-2011, 03:52 AM   #71
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The presumed portfolio is the S&P 500. I'd guess that other well-diversified equity portfolios would have a high correlation with the S&P 500, so it would be a good guide for them as well.

The implementation is fairly simple - get the latest value of PE10, divide 80% by PE10 to get an annualised withdrawal rate. So if PE10 is 24 the rate is 80%/24 = 3.33%, if it's 16 the rate is 80%/16 = 5%. Obviously if calculating monthly or quarterly income then that figure gets further divided by 12 or 4.

In case there's anyone this isn't obvious to: when PE10 is 24, that means a dollars worth of S&P500 is 24 times the average level of S&P 500 annual earnings (profits) over the last ten years, or putting it another way, each dollars worth of S&P 500 has an underlying yield of 1/24 = 4.17%. In theory this should be a safe withdrawal rate, in practise historically it seems you need to knock (17% rounded to) 20% off this to be safe. (I'm not sure why - possibly a reverse-DCA issue.) So when PE10 is 24, withdrawal rate is 80%/24 = 80% * (1/24) = 80% * average_annualised_profits = 80% * 4.17% = 3.33%.

PE10 stands for P/E10, so if E10 (the fairly stable ten year average of profits) is unchanged between one review date and the next, and if prices have increased by 10% then PE10 has increased by 10%, and when you calculate your income you get unchanged income:-

new_income = new_balance * 80% / new_PE10
= (old_balance * 110%) * 80% / (old_PE10 * 110%)
= old_balance * 80% / old_PE10
= old_income.

So a change in prices, up or down, however big or small, makes no difference to the dollar amount of income. Only a change in underlying profits changes income.

One wrinkle I can think of is that in the speadsheet on his web site, Shillers data is necessarily a little behind the current date, and I think that sometimes the most recent figure gets revised as data comes in. Therefore it might be worth using the figure from (for example) 3 months earlier. If you do, then also use the portfolio value at that time. So if PE10 was 24 three months ago, then the withdrawal rate for three months ago is 3.33%, and your annualised income is 3.33% times what your portfolio balance was 3 months ago.
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Old 02-17-2011, 04:32 AM   #72
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I take each year you calculate PE10/83 and apply that figure to the remaining portfolio?
You use the value the portfolio had at the date of your PE10 figure.
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If you are a spend it down before it goes person (seems like a fair number around here) how and when would you adjust the rate?
I think you're asking how to adapt this method if you don't want to preserve capital?

I believe you can't simply increase the withdrawal rate without starting to encounter sequence-of-returns issues that carry unacceptable risks. For people with a very long horizon, this is the maximum SWR. What you can do, as your horizon shortens, is at each calculation ask yourself what withdrawal rate you would have if you were to switch your portfolio to safe non-volatile assets and run it down. (The safe assets could be an inflation-linked SPIA and/or TIPS. There are no sequence-of-returns issues with non-volatile assets.) As you age, the income you could generate from the latter strategy increases, given that your capital is being spread across fewer and fewer years. When a equal income becomes possible, you can consider making a once-only permanent switch of some or all of your portfolio. (If you switch only part then you run the two strategies separately, and can make the same decision with regard to the remainder of the equity portfolio at each future review.)

You might feel that having a slightly more stable income is not enough reason for switching to safe assets as soon as it becomes possible. In that case you could set yourself a target of saying you will only switch when you can increase your income by doing so. For example, you might decide to take a somewhat fluctuating income from 100% equities until switching to 100% safe assets would increase your income by 25%, or any other arbitrary percentage that appeals to you.

Note that in addition to your age, when you can switch will also be dependent on unpredictable fluctuations in equity markets, with rises tending to decrease the ages at which switching is possible, and falls increasing them. (There may be multiple ages when switching is possible because market fluctuations may mean you can switch one year but not the following one, then be able to switch again in a subsequent one.) So this switching algorithm can be seen as a opportunistic timing decision that gets some or all of your portfolio permanently out of equities at a relatively good time.
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Old 02-17-2011, 06:03 AM   #73
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As an example of the switching decision in practise, someone who is happy to run out of money in precisely 30 years time (doesn't want an SPIA) might calculate a withdrawal rate from safe assets for real returns of 0%, 1% or 2% respectively as being (in Excel) PMT(0% or 1% or 2%,30,-1) = 3.3%, 3.9% or 4.5% respectively. All of these are equal or better than the 3.3% withdrawal rate from equities, so it is possible to switch now.

If the same person were ten years younger they would substitute 40 for 30 in the PMT function and get estimated incomes of 2.5%, 3.0% or 3.7%, so from these three possible returns from safe assets, only a 2% real return is going to give them a higher income than equities.
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Old 02-17-2011, 08:53 AM   #74
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Using Shiller's data, I explored what withdrawal rate would preserve capital over the whole period for which he computed PE10. I think the period in question was something like 1880 to 2009. I found that a withdrawal rate of something like 83%/PE10 would leave the initial sum intact in real terms after 129 years. I believe PE10 is currently about 24, and I usually round the factor of 83% down to 80%, so I would say that you could take 3.3% (less fund management cost) from a 100% equity portfolio, at the moment.

(Note that the withdrawal rate is not fixed, you continually recalculate it along the way. This doesn't make income very volatile, it's not affected by changes in the price of shares, it only varies with the ten year average of profits, which is a relatively stable quantity.)
Thanks for posting.

I've seen other ideas about varying withdrawal rates by P/E ratios, but this one is simple to implement and has a nice mix of responsive/stable.
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Fixed Percentage
Old 02-17-2011, 09:47 AM   #75
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Fixed Percentage

I think I read on Bob's financial site that taking a fixed % is not an optimal withdrawal system in terms of buying power. But if i can live with volatile returns then how do I calculate when taking say 5% at the end of each year results in a loss of buying power from a portfolio? I assume I couldn't actually run out of money this way but might lose buying power to inflation. I like this approach 1) because it is simple 2) I can live with volatility and 3) should last 'forever'. Just want to understand the possible loss of buying power.
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Old 02-17-2011, 10:02 AM   #76
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The definitive SWR rate of 3.784% can be found at :50 here:

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Old 02-17-2011, 12:00 PM   #77
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The definitive SWR rate of 3.784%
So all you need is Wellesley?
VANGUARD WELLESLEY INCOME FD AD
Net Asset Value: 53.41
Trade Time: Feb 16
Change: 0.10 (0.19%)
Prev Close: 53.41
YTD Return*: 9.03%
Net Assets*: 18.52B
Yield*: 3.87%
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Old 02-17-2011, 12:07 PM   #78
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So all you need is Wellesley?
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Old 02-17-2011, 03:52 PM   #79
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IMO there are 3 basic approaches to supporting oneself from a portfolio. 1)contractual cash money payments-eg. indexed TIPS, or indexed annuities. 2) Speculation. I put all SWR methods in this group, even though this is likely to be a minority viewpoint. My reason is that since securities usually must be periodically sold, one is essentially speculating on price, or a greater fool who comes along and buys what you want to sell, when you want or need to sell it. It can be an very sound speculation, like when you buy your index at PE10 below 10, or a very dicey speculation, like when you bought your index in 1999. 3) Living from the distributed earnings of sound companies. A pure dividend approach falls in this group.

All these methods have their strengths and weaknesses, and their various iterations and variations. And of course one can divide a portfolio and run the parts differently, some part according to one or another of these various basic plans.

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Old 02-18-2011, 06:59 PM   #80
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CJKING, thinking about this PE10 approach leaves me a bit confused. How is it much different than simply picking a % (e.g.5%) and taking that much out of the current portfolio each year? I haven't run the numbers but intuitively the PE10 won't change dramatically each year (it is a running ten year average). So, if you were at 3.3% (PE10 = 24) this year and the your portfolio collapsed 50%, PE10 would presumably fall a bit, but no more than about 5% right? So next year you would take maybe 3.5% from a portfolio half as big reducing your spendable income almost by half, correct? What am I missing here?
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