NEWSFLASH: Bernstein slams early retirement!!!

[Gone4Good]

I too, happen to agree with Bernstein.  I believe the standard argument for FIRECALC results that I can expect no worse than the worst outcome over the past 120 years (including the depression, two world wars, etc.) makes a 4% withdrawal rate seem more conservative then it really is.  Another way to phrase a 4% withdrawal rate is that it survived the worst 30-year periods during the single most productive time in human history, which witnessed breathtaking technological advances including the automobile, airplane, semiconductor, penicillin, etc.  The 4% withdrawal rate is also calculated against the financial markets of the country that was the single biggest beneficiary of those advances, growing over the relevant test period from an industrial power to the world's lone super power.  

Anyone ever run a "safe" withdrawal rate based on Japan's financial markets?  

 

[Nords]

Anyone ever run a "safe" withdrawal rate based on Japan's financial markets?  

Now there's a great idea!  Dory, does Schiller (or any other credible source) have any international or global data that could be applied to FIRECalc?

Or does anyone else know of an American stock period that closely resembles 1990-2005 Japan?

 

[lazyday]

I may not entirely agree with Bernstein's comments on the Diehards board, but I don't hold that against him.

For one, he's produced some great work which has done a lot of good, and doesn't have to please me with all his opinions, to maintain my great respect for him. I don't agree with everything in his books, either, though I have wholeheartedly reccomended them to many people.

Also, I don't think we should hold comments on a message board to the same scrutiny as published works. If he were writing for his website or a book, maybe he would have researched or thought about the issues more, and/or written something slightly different.
Maybe we can expect influential people to be somewhat careful with their posts, but if they have to thoroughly research everything they say, it would be too much trouble to participate at all.

My opinion is that RE is risky. It is a whole lot less risky with a w/r of 2% than it is at 4%, but even 2% is a risk. I also believe that for some people, it can make perfect sense to take the risk, even with a w/r of 4%.

There are probably very few people on the Diehards board who can/did retire at 45 with a 2% w/r. Maybe Bernstein's comments would have been a little different on this board, where some people are knowingly taking a relatively small risk, and others knowingly taking a large risk.

 

[lazyday]

I think the wage inflation risk vs. inflation risk may be a serious problem over time.

For example, someone who retired in 1970 might not have expected to really want to spend $2500+ on one or two computers in the 1990's.
My LBYM helped me here, as I used computers in public libraries, when computers were still expensive. (I was still working then.)

But what if a 2000 RE finds in 2030 that people spend a huge portion of their $ on preventive health care, in ways that we can't imagine now. I'd really want to keep up with what others can spend (and not just inflation) in that case.

 

[Gone4Good]

Now there's a great idea!  Dory, does Schiller (or any other credible source) have any international or global data that could be applied to FIRECalc?

Or does anyone else know of an American stock period that closely resembles 1990-2005 Japan?

Not just stocks, which are still down about 60% from their peak 15 years ago, but bonds are only yielding around 1%. Presumably the bond portfolio has appreciated in value (assuming you weren't 100% in stocks like some on this board recommend ) but after 15 years your average yield on a domestic debt portfolio is probably pretty close to 1%. I assume deflation has helped to some degree, so maybe you don't need 4%-4.5% of your original portfolio any longer, but your portfolio is much smaller than it was in 1990 and maybe yielding less than 1%.

I also read in a recent WSJ article that very few individual investors in Japan own stocks. This is understandable after a 15 year rout that has seen a fair share of false recoveries. But this gets to a point made by someone earlier in this thread. Who among us would continue rebalancing to a high equity weighting after 15 years of getting kicked in the teeth by domestic stocks?

 

[cute fuzzy bunny]

Bleuughhh...a lot of fun stuff in here.

As far as PE's looking 'reasonable now compared to a few years ago', i'm at a loss to understand how comparing todays PE's to the ridiculous numbers of internet/tech euphoria makes for a good comparison. Todays PE's are still high relative to historic values, dividends (where a fair bit of historical stock returns came from) are at historical lows, and very few CEO's think they can maintain earnings growth over the next 5 years like they have over the last couple of years. What can you draw from this? PE's are too high and in the absence of psychologically beneficial buyers, broad based stock indexes like the s&p500 and TSM wont do well in the short term, maybe intermediate term (1-5, 1-10 years).

Reversion to mean is hooey? Hmmm, everything i've seen says that every financial market in the history of the world did funny things in that 1-5, 1-10 year periods, but over the longer haul...20 years seems to be the magic number...all financial markets reverted to roughly the level of economic growth (or non growth) of that company (for individual stocks) or that country (for broad based indexes like tsm/s&p500. Every outlier period of higher valuations/pricing was moderated by a large drop or a long sideways period, in every market, in every country, throughout history.

Every economy had a young/speculative period, a maturing period, and either an ending or slid into a post maturation period of low returns.

So to say that counting your future chickens based on current market conditions while using data primarily from our young/speculative economic period is workable? Well...that might not be such a swell idea.

Putting together a strategy that produces relatively low taxable income through dividends and interest, while maintaining pace with inflation...that might work. Putting your seven figure portfolio into the s&p500 or TSM...I'd be sleeping badly over the next decade...

 

[Gone4Good]

So to say that counting your future chickens based on current market conditions while using data primarily from our young/speculative economic period is workable?  Well...that might not be such a swell idea.

Brilliantly said! I used many more words to say the same thing in an earlier post

 

[cute fuzzy bunny]

Give me time, I can be more verbose if necessary...

 

[Nords]

Who among us would continue rebalancing to a high equity weighting after 15 years of getting kicked in the teeth by domestic stocks?

Well, there's your problem right there-- "domestic".  Tweedy, Browne's last report cited buying stock in a South Korean electric utility with a P/E of ... 3.  I think Graham would smile on that valuation.

We're in a high-equity weighting, but it's 25% Berkshire Hathaway, another 33% international, about 20% in a small-cap value, another 8% in a DOW dividend ETF, and the rest in individual stocks or cash.  The bigger holdings have all performed better than the S&P500 and the TSM.  Our "big move" will be rebalancing the international into one or more of the other three.  (Berkshire Hathaway was below $2700 on Thu but I don't think it's going to stay there.)

Even between 1966-82 the S&P500 returned some dividends.  IIRC the averages cited for those periods don't include the dividend payouts.

 

[Gone4Good]

Well, there's your problem right there-- "domestic".  

I deliberately specified "domestic" because I understand some of this risk can be diversified away.  But FIRECalc is based 100% on "domestic" market returns.  I'd be willing to bet that over the past 100 years the US equity market has pretty dramatically outperformed a globally diversified equity portfolio.  I think its hazardous to calculate a "safe" withdrawal rate on data from the century's hottest "growth country" and extrapolate that data as being equally valid for a more broadly diversified portfolio (or even for the US market as it likely enters a more "mature" growth phase as articulated by ()). 

 

[maddythebeagle]

Seems like you could do the what if...forever. There is no such thing as reward without risk. I would say there is a lot more risk for wage slaves with little savings and a lot of debt. Job and wage security isnt going to go far. I have seen too many people that believed that myth. If there is another depression, take 2 prozac and call me in the morning. Everyone will be going back to basics then anyway and wont be worrying about getting the newest camera cell phone.

 

[Gone4Good]

I would say there is a lot more risk for wage slaves with little savings and a lot of debt. Job and wage security isnt going to go far.

I would whole heartedly agree with that.  A lot of folks out there courting disaster.

Not me though.  Right now I sleep like a baby with 3 layers of income protection - a fat portfolio, current employment, and up-to-date job skills.  8)

 

[maddythebeagle]

Not me though.  Right now I sleep like a baby with 3-layers of income diversification - a fat portfolio, current employment, and up-to-date job skills. 

That's great then and I dont know your whole situation. You may be the most skilled brain surgeon in the world and save tons of lives and/or love your job with a passion. Not that I should generalize too much but all I can go by is the folks that I know. I know some folks in their late 50s that can retire with full pension bennies and health care insurance paid but appear to either stay (I will call it lingering since they dont work very hard the last few years) for either fear of the unknown (thinking that they wont have enough money) or just dont know what they will do all day. I think they are little greedy also since they are just looking for a couple more years of formula multiplier. I guess that I find this behavior strange since they complain that their jobs arent as satisfying as they used to be.

 

[wabmester]

Or does anyone else know of an American stock period that closely resembles 1990-2005 Japan?

Not yet, but if you shift the S&P 500 left by 10 years, then the period starting in 2000 has a resemblance. Ask me again in 10 years.

 

[wabmester]

Job and wage security isnt going to go far. I have seen too many people that believed that myth.

Mr. McGuire: "I want to say one word to you. Just one word."
Ben Braddock: "Yes, sir."
Mr. McGuire: "Are you listening?"
Ben Braddock: "Yes, I am."
Mr. McGuire: "Demographics."

In the future, fewer workers available to fill available jobs will not only improve job security, but you'll see wages skyrocket due to increased competition for those workers. Unstoppable demographics.

 

[Nords]

In the future, fewer workers available to fill available jobs will not only improve job security, but you'll see wages skyrocket due to increased competition for those workers.    Unstoppable demographics.

I thought the spendthrift geezer Boomers were going to work until they dropped at their desks, clogging the jobs pipeline and forever blocking the slackers, Gen Y wannabe workers, echo boomers, and immigrants (legal & otherwise).

I'm pretty sure that Social Security is counting on this scenario!

 

[haha]

Well, I don't have anything against actively-managed mutual funds either, but I don't post about them on the Vanguard Diehards board!

This factor as much as anything makes boards such as this less valuable than they otherwise might be. Irving Janis studied this phenomenon and coined the term groupthink, with respect to the Bay of Pigs Invasion, as well as other situations where bad decisions were made at least in part as a result of group dynamics.  http://en.wikipedia.org/wiki/Groupthink

Note the conditions conducive to groupthink, and check them against the conditions that pertain to internet special interest discussion boards such as this one. Pretty good fit, IMO.

I notice that the overall tone of confidence in this recent thread (regarding SWR, etc.) is lower than in earlier threads. People have actually mentioned 2% SWRs, and not been shouted down. I would expect that future negative events in the economy or markets could cause further shifts in the tone here, and that these shifts will happen more or less "en masse".

There is irony in this particular thread. On this board we have a doughty group of independent-minded free thinkers, capable of evaluating evidence and striking out happily on their own, shunning and frequently denigrating professional advice. Then one person, Bernstein, says "Hey, I don't think too much of this 4% SWR and very young ER." Look at how many posts this thread has drawn. Did Dimson’s book or paper get much comment? (No) So it looks to me like people are looking to Bernstein as their guru, to lessen anxiety in an area that is naturally anxiety provoking. It is as if the Majarishi came out and said, "Well, I didn’t think this yogi meditation crap through very well, maybe it doesn’t do much after all."

Bernstein writes about something that he prefers to avoid himself(ER). What he really did is transit from a pretty good job, neurologist, to a really good job, money manager/guru. And one who has defined himself as keeper of the high bar.

Now as his revised opinion sinks in around here, it evidently causes some amount of anxiety. And it should. What other parts of the dogma will be renounced?

People ask questions about market history that are clearly answered in links on this board, as well as papers referenced in this very thread. To me it sounds a little like asking your buddy what color something is. Wouldn't it usually be better to look at the object for as long as necessary to form one's own opinion?

Ha

 

[Gone4Good]

That's great then and I dont know your whole situation. . .

I'll admit that my situation is somewhat unique.  Although I probably have enough put away to retire by many people's standards, I'm only 34 so (hopefully) I have plenty of time to worry about running out of money - which is a bigger concern right now than dieing early.  I also happen to like my job  which may put me in singular company on this board.  I do not now, nor will I ever, have a pension or company provided health benefits - so my portfolio needs to be that much larger by comparison.  I also value highly my financial security and financial independence, which would be weakened by retirement at such a young age.

However, as Cut Throat posted in a different thread that life is about balance.  And I'll also admit that my life is not as balanced as I'd prefer.  Although I like my job, it is demanding and stressful and I don't plan on doing it forever.  I'm hopefully laying the groundwork for semi-retirement in a handful of years.  But even then I plan on working in some manner (which may or may not involve paid employment).  I like the idea of being "productive" (which I'll define here as "producing something" beyond clean dishes).  For me this is also part of a balanced life.  Although I fully believe the old saying that "nobody on their deathbed wished they had spent more time at the office" (except perhaps Joe Dominguez  ) I also believe few people's final regret will be that they should have surfed the internet more.  

 

[maddythebeagle]

In the future, fewer workers available to fill available jobs will not only improve job security, but you'll see wages skyrocket due to increased competition for those workers. Unstoppable demographics.

2 words: immigration and outsourcing.

 

[cute fuzzy bunny]

I notice that the overall tone of confidence in this recent thread (regarding SWR, etc.) is lower than in earlier threads. People have actually mentioned 2% SWRs, and not been shouted down. I would expect that future negative events in the economy or markets could cause further shifts in the tone here, and that these shifts will happen more or less "en masse".

Mikey - I think if you read between the bazoodles of lines, the message is a little different. I dont think i've ever heard any of the regular rank and file here say that a particular withdrawal rate is good or bad, but that 4% "worked" historically, and that something in that range is probably going to work going forward.

Where there has been divergence is when someone says "I know 4% wont work, but 2% will". The right overlay to that is "You Dont Know, and You Dont Know".

Then there was the random insanity of Hosucs 'death threats' and all that other ridiculousness.

I have great concern about any plans I see that involve inflation adjusted returns over 3-4%. I have great concern about anyone who says they have a magic tool or crystal ball that tells them what will and wont work. I have great concern about people who wont take over 2% and will let their quality of life suffer as a result. I have great concern about people looking at 20-30 year 'runs' using historic data where none of those runs include complete series after 1984 or 1974 for 20 and 30 year runs, respectively...in other words, nothing in really modern economic times. I have great concern about people doing debt arbitrage and index investing with the greatest bull market in US history fresh in our wallets and only a ho-hum short term bear as their primary investing experience.

But I dont think I've seen detrimental "group think" here, unless its to hit people who proclaim surety over things they have absolutely no surety about or people who are too far on one side (Buy TIPS and eat your portfolio!") or too far to the other ("Buy Commodities and small cap value and take 7% a year!").

I've sort of dived down the middle. Take ~3% dividends from good dividend paying equities, get the hell out of bonds because they arent worth owning right now, and leave the principal alone as it should appreciate at a rate comparable to or better than inflation. Spend what I get plus the wifes income, reinvest what we dont spend. If we run into a deficit, spend less (although that doesnt look like its gonna happen...).

As far as fewer workers chasing more jobs, I think its going to be the other way around. Most people are up to their eyeballs in debt and will continue to spend more than they can pay off in their lifetimes, delaying retirement, and more jobs will go to cheaper places to manufacture stuff and answer phones.

 

[laurence]

This factor as much as anything makes boards such as this less valuable than they otherwise might be. Irving Janis studied this phenomenon and coined the term groupthink, with respect to the Bay of Pigs Invasion, as well as other situations were bad decisions were made at least in part as a result of group dynamics. http://en.wikipedia.org/wiki/Groupthink

Note the conditions conducive to groupthink, and check them against the conditions that pertain to internet special interest discussion boards such as this one. Pretty good fit, IMO.

I notice that the overall tone of confidence in this recent thread (regarding SWR, etc.) is lower than in earlier threads. People have actually mentioned 2% SWRs, and not been shouted down. I would expect that future negative events in the economy or markets could cause further shifts in the tone here, and that these shifts will happen more or less "en masse".

There is irony in this particular thread. On this board we have a doughty group of independent-minded free thinkers, capable of evaluating evidence and striking out happily on their own, shunning and frequently denigrating professional advice. Then one person, Bernstein, says "Hey, I don't think too much of this 4% SWR and very young ER." Look at how many posts this thread has drawn. Did Dimson’s book or paper get much comment? (No) So it looks to me like people are looking to Bernstein as their guru, to lessen anxiety in an area that is naturally anxiety provoking. It is as if the Majarishi came out and said, "Well, I didn’t think this yogi meditation crap through very well, maybe it doesn’t do much after all."

Bernstein writes about something that he prefers to avoid himself(ER). What he really did is transit from a pretty good job, neurologist, to a really good job, money manager/guru. And one who has defined himself as keeper of the high bar.

Now as his revised opinion sinks in around here, it evidently causes some amount of anxiety. And it should. What other parts of the dogma will be renounced?

People here ask questions about market history that are clearly answered in links on this board, as well as papers referenced in this very thread. To me it sounds a little like asking your buddy what color something is. Wouldn't it usually be better to look at the object for as long as necessary to form one's own opinion?

Ha

Excellent post, Ha. I have worried about being a victim of groupthink myself (note thread asking for some one to play devil's advocate wrt inflation). This is the only board I visit, and I admit most of the literature I've read has been recomended here. At the same time, as a young dreamer with years/decades to go, I can't really see much to change from what I'm doing now.

 

[wabmester]

Wouldn't it usually be better to look at the object for as long as necessary to form one's own opinion?

When the object is future stock market performance, you can stare at it until your eyes bleed if you want to, but I'm not sure it'll do any good.    It comes down to this: what probabilities do you assign to various outcomes, can you reasonably justify those probabilities, and what can you do to mitigate known risks?    If you're like me, you don't like surprises.

Most investors simply extrapolate the past to the future, and we know that doesn't work (see the Dalbar study for how poorly that belief system performs).

Some investors fear regression to the mean.   But there are very few physical constraints on the financial markets, so it's virtually impossible to determine if mean P/E (for example) is really meaningful, and it is impossible to tell when reversion might happen.

So, what's left?   For me, the only knowable attributes of the future are demographic trends and supply/demand characteristics.    I won't bet against the US economy, but I'm definitely hedging my bets.    Asia ex-Japan has better demographic trends than the US, Europe, and Japan.    Oil has increasing demand and limited supply.  Ditto for waterfront real estate (ex hurricane zones and flood plains).   Ditto for health care.    And, who knows, you might even want to speculate on the reserves of fresh water.

Retirement at any age is fraught with risks.   ER simply magnifies those risks.   Keep your job if you want to minimize retirement risk.

 

[lazyday]

I like the idea of being "productive" (which I'll define here as "producing something" beyond clean dishes). For me this is also part of a balanced life.

This is a concept there seems to be a bit of groupthink on, in the RE boards. There is a lot of support for posts which state some opposite of the above.
Though I'm not working and have no specific plans to ever work again, I fully support anyone who wants to work and be "productive" either for themselves or for others.
I've posted before that I don't really expect to never work again, and that if I work again, one of the reasons might include doing something to contribute to society. I am aware of the fact that I am not directly contributing much currently.

For me, I haven't found any balance issues in not working.

I'll admit that my situation is somewhat unique.

Maybe not the age part... there's been posts from at least two RE in 30's, and perhaps several more who haven't given their age.

 

[retire@40]

...However, if the market dropped 75%, you're damn right I would become as paranoid as *****.   In fact, what you'll probably find is that an entire generation will avoid the stock market like the plague if that were to happen.

I'm not too sure about that.  On Black Monday when the market dropped 25% in one day, it was one of the best buying opportunities in history.  And it didn't take a generation to recover from that drop.

I'll stick with the 4% SWR for now because it's the only rate that has a backbone.  I know we could get hit with a nuclear weapon, or that the Japanese SWR might be lower than the US SWR, or that Venezuela's inflation rate is high than the USA's, or that penicillin was invented during the past century, but the fact is nobody knows the future.

Of course if you say 2% will always be safer than 4%, chances are that statement will always be right.  By why stop there.  If I say 0.01% is the safest rate to use, I'll always be ahead of all you 2% forecasters.  How low do we want to go?

 

[haha]

I have run many scenarios with an 80% market meltdown and could survive and thrive just fine. This keeps me sleeping at night and fishing all day! 8)

An 80% Market meltdown BTW is not an 80% portfolio loss. If you are 50% stocks/ 50% Fixed it is a 40% portfolio loss. I'm very comfortable with these numbers.

Also, consider if we did have an 80% Market Meltdown from our current P/E levels - Don't you think our Rates of return would probably be much larger after the 80% drop?

80% market Drop is tolerable with me. - Never will put money in the mattress however!

I think that you are in the clear. If an 80% equity market drop wouldn't faze you, I think you have the needed margin of safety!

Ha