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"reasonable worst case" SWR: 2.55%
Old 09-28-2004, 08:52 AM   #1
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"reasonable worst case" SWR: 2.55%

From another thread I observed the dialogue between two of the long-time members:

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I think if your retirement plan passes the FIRECalc test for retiring in 1928 and your portfolio survives for 54 years until 1982, it would cover some fairly grim periods of U.S. Stock market history. Also this scenario leaves out the biggest bull market in history with current stock valuations much less than they were in 1928!

Is this the worst case scenario? - No! , but I think if we have a repeat of the great depression, we will have greater problems than our portfolios.

I think it's a reasonable bet that your portfolio will fare better over the next 52 years than it did from 1928-1982.


Quote:
I'll buy that. During that period, transistors, computers, and the internet were invented. And as we now know, all turned out to be tremendous anti-productivity tools. So unless we invent something in the next 50 years that allows us to waste more time, it's reasonable to expect the 8% or so from stocks that we got during that period as baseline. And then subtract 2% for slower economic growth due to the retiring boomers, and I think that's a reasonable worst case.

I used FireCalc with default 75% stock, 54-year outlook, 2.2% expense (2% to account for "slower economic growth due to the retiring boomers", and 0.2% for real expenses). FireCalc gave 2.55% SWR as 100% safe.

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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 09:04 AM   #2
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Re: "reasonable worst case" SWR: 2.55%

It appears to me to just be coincidence, but that number is pretty darn close to the number that JWR1945's research shows as the SWR that applies for the valuation levels that were in effect in late June (for an 80 percent S&P portfolio).

http://www.nofeeboards.com/boards/viewtopic.php?t=2657

The 2.5 percent number that applied in late June is the most recent number he has provided us.
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 09:38 AM   #3
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Re: "reasonable worst case" SWR: 2.55%

From JWR1945's research
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For those who are invested 80% in stocks, the Safe Withdrawal Rate bottomed out near 1.59%. It was below 2.00% from 1999-2001. It was below 3.00% from 1996 until today. The odds in favor of success are at least 50-50 in all cases with a withdrawal rate of 3.17% and lower. Except for 1998-2002, the odds in favor of success have been at least 50-50 at a withdrawal rate of 4.00%. Those who started withdrawing 5.00% in 1999-2000 are almost certain to run out of money within 30 years .
From the original poster:
Quote:
I used FireCalc with default 75% stock, 54-year outlook, 2.2% expense (2% to account for "slower economic growth due to the retiring boomers", and 0.2% for real expenses). FireCalc gave 2.55% SWR as 100% safe.
Comparing apples and oranges. The number of years that the portfolio must last should at least be the same (among other things).

arrete
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 10:48 AM   #4
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Re: "reasonable worst case" SWR: 2.55%

Comparing apples and oranges.

We are always comparing apples and oranges when we discuss different SWR methodologies, Arrete. Intercst employed a methodology that produced a number of 4 percent at all valuations. Bernstein employed a methodology that produced a number of 2 percent at the top of the bubble. JWR1945 employed a methodology that produced a number of 1.6 percent in January 2000 and a number of 2.5 percent in June 2004. Raddr employed a methodology that produced a number a little higher than the Bernstein number and a lot lower than the intercst number. If there were someone in our community with views even farther out on the pro-stock side of the spectrum than intercst's, that poster could cook up a methodology that would produce a number of 8 percent or 10 percent or 12 percent.

Intercst was the first to put forward a number. He repeated that number lots of times in the early years of the boards. Some seem to have heard the intercst number so many times that they have come to feel more comfortable with that number than with the many possible alternatives. But the intercst number is not an inevitable number. It's the intercst number, that's all. It's the product of intercst's extreme pro-stock views. Those with more moderate pro-stock views produce more moderate numbers.

I am a proponet of the data-based SWR methodology. But I don't want people to take my views on faith anymore than I want them to take intercst's views on faith. If you want to use SWR analysis to help in the development of your investment strategies, you need to examine the methodologies of all of the available studies to determine which SWR number best reflects your own views on stock investing. It is the assumptions employed in a study's methodology that determine the results the study generates.
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 10:55 AM   #5
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Re: "reasonable worst case" SWR: 2.55%

Please dont feed the geese.
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 11:00 AM   #6
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Re: "reasonable worst case" SWR: 2.55%

In our case - SWR's are fun to play with on retirement calculators - as a ball park guide.

But being slightly retro (De Gaul and the Norwegian widow) - we basically use the SEC yield of the portfolio - dividends/interest.

85% - balanced index including 10% REIT Index. About 50-60% stock counting REIT's as stock.

15% dividend stocks via DRIP's.

Overall about 3%, nowadays. Notice the loose relationship between yield and historical SWR's. Not precise - but workable in our specific case. How dividends hold versus inflation - well - that's a story yet to be told.

If I had to push to make the portfolio work harder to get 4% or more - I would abandon principle(Bogle, Bernstein) and go to the value camp - more dividend stocks, and Wellington, Wellesley, etc. - I understand Dodge and Cox has closed some funds due to the current rush. There are others and Wall Street is feeding the ducks once again with more dividend related products.

If Mr Market gives me some good dividend buys via a nice 50-60% market drop - ok - but I will let the computers at Vanguard do the heavy lifting for the balanced index. And when I get really old in ten years - say 70 - might go to 50/50 stocks/bonds.

My most stellar move the last five years was to do absolutley nothing - except for adding very small amounts to my dividend stocks.
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 11:06 AM   #7
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Re: "reasonable worst case" SWR: 2.55%

Wall Street is feeding the ducks once again with more dividend related products.

Can you imagine how mixed up things might get if some geese flew over and tried to take some of the food that had been intended for the ducks?
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 11:42 AM   #8
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Re: "reasonable worst case" SWR: 2.55%

Quote:
2.2% expense (2% to account for "slower economic growth due to the retiring boomers", and 0.2% for real expenses).
I just noticed that. A rather clever way to insert your own ideas about the future. How would you included the possibility of an asteroid?

You don't think that the slow growth of the Depression is "sort of" similar to the possible drag by the Boomers? It's all guessing anyway, which is why worrying about tenths of a percent for a SWR is silly - IMHO, anyway.

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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 12:30 PM   #9
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Re: "reasonable worst case" SWR: 2.55%

Quote:

I just noticed that. *A rather clever way to insert your own ideas about the future. *How would you included the possibility of an asteroid?

You don't think that the slow growth of the Depression is "sort of" similar to the possible drag by the Boomers? *It's all guessing anyway, which is why worrying about tenths of a percent for a SWR is silly - IMHO, anyway.

arrete


I hope you also noticed the quotation marks. If you read my initial post, you would see that I was basing this scenario upon the words of wisdom from the more senior members of the community (with higher dryer sheet stars).

Peace...
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 12:48 PM   #10
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Re: "reasonable worst case" SWR: 2.55%

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I was basing this scenario upon the words of wisdom from the more senior members of the community (with higher dryer sheet stars)
I'm not sure a higher number of dryer sheets always denotes wisdom.

arrete - teasing
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 01:11 PM   #11
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Re: "reasonable worst case" SWR: 2.55%

Considering about 10 minutes ago I went to take a sip of coffee and missed my lower lip, I can absolutely confirm that analysis.

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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 02:07 PM   #12
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Re: "reasonable worst case" SWR: 2.55%

Quote:
"Well, I certainly don't agree that your planning should depend on worse economic conditions than from 1928-1982. - I view this as a worst case scenario. (Yes, there are worse cases that would elminate the need for planning at all!).

The other poster stuck the 2% figure in there. I am not sure what the average returns of the stock market for the period of 1928-1982, but I'd still bet that the next 54 years will easily beat it."
I'm not completely sold on that thesis.

There are certainly plenty of things that will be different.

In that specified time period, we had a fairly continuously expanding population. People didnt live as long. Inflation wasnt much of a problem until the tail end of it. A lot fewer people were investors in stocks. We hadnt suffered any attacks on our home soil. Terrorism wasnt much of a threat. We used a lot less energy and had a far larger set of sources. We made less, lived on less, and typically didnt carry anywhere near the credit load that we do today. Federal deficits didnt really exist until the tail end. Higher percentages of people voted. No tv, dvd, cable, satellite, internet, computers etc at all except for some cable and tv towards the tail end. Most of that time period involved fairly old fashioned family situations - one working parent, lower divorce rate, etc. We trusted our politicians a lot more. We didnt meddle in other countries business as much.

I'd hesitate before making a good long term guess and definitely dont feel very strongly that its going to be better.

I'm reminded of the letter in Bernsteins "four pillars" describing the writers analysis of his country's historic highs and lows, following up that things were going pretty good and the future looked pretty bright. Written by a Londoner in 1900. Things were actually fairly awful for them for the next 60 or so years...
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 02:12 PM   #13
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Re: "reasonable worst case" SWR: 2.55%

Ted (a long time poster of the past) was one of the advocates of using a high expense ratio in order to simulate his low expectations for future stock market returns. But taking this approach doesn't really do what you might want it to do.

The average return of the markets has nothing to do with the SWR results of the historical simulator. The simulator already finds the worst performing period of time in history and computes the SWR for that period. If you use an expense ratio of 2.2% instead of 0.2%, you have subtracted the 2% off of the worst returns in history -- not just muted the roaring 90s. The simulator is already finding the worst case. If you subtract 2% on top of that, you aren't just simulating below average returns expectations, you are simulating returns that are worse than any time in history. You have also altered the relationship between stock returns and bond returns and the relationship between stock returns and inflation.

I would also advise caution about looking at retirement periods much greater than 30 years. The last 30 year period started in 1974 -- already ancient investment history. Run a 50 year simulation and you start the last complete run in 1954. High tech was a black and white round screen TV at that time (I may be wrong about this, but I think that's true). Instead of running a longer simulated retirement period, try running a series of runs with retirement lengths of 26, 28, 30, 32 and 34 years. Then plot the data and look at the extrapolation of the curve. You'll probably find that historical SWRs are saturating for long retirements at a value of about 3.75% or so.

Good luck.
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 02:23 PM   #14
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Re: "reasonable worst case" SWR: 2.55%

How about a less analytical perspective...

If you're new at this or just pondering it, Firecalc should give you some rough perspectives on whats possible, albeit backwards looking. If Firecalc says your realistic prospects are 50% or lower, you probably need to rethink working longer, adjusting your spending, or just doing something else different. For hand grenade calculations, its pretty good.

If you're already ER'ed or have a pretty good handle on it, then you probably already know that the future is unknowable and all the finest planning in the world could easily be made useless by any one of a dozen or two perfectly plausible events.

So how about just calling it even if it looks like you should be able to make close to or more than you need to spend, you dont waste your dough, and you arent denying youself what makes you happy?

After all, there really ISNT any such thing as a "Safe" withdrawal rate. Pick almost any reasonable number over 3% and I'll find a reasonable period of time when it worked and when it didnt. If you can live on <3% you either have a pretty freakin' big bag of cash or you're living too lean.

If you think you'll make over 8%+ going forward, or your withdrawal rate is a lot higher than 5 or 6%, you're probably going to fail. Other than that, its all completely within your control.

I think the truth lies somewhere between 3 and 6%. You cant guess it. I cant guess it. Nothing we can lay out on paper will even get us close.

So why worry too much about it or throw half your life away honking like a goose about it? Like I said, I spent 3 years in ER before I ever heard the term "SWR" and I did perfectly ok with one metric: "Am I bringing in close to or more than I'm spending? Yep. Ok then, the next serious consideration is whether I have the materials to make pina coladas or do I have to go to the store...?"

And come on...whats the worst case? "Enjoy your shopping at WalMart...thanks for coming".
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 02:27 PM   #15
 
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Re: "reasonable worst case" SWR: 2.55%

I agree with SG. - I think 3.75% is a very reasonable number for planning
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 02:33 PM   #16
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Re: "reasonable worst case" SWR: 2.55%

Quote:
I think the truth lies somewhere between 3 and 6%. You cant guess it. I cant guess it. Nothing we can lay out on paper will even get us close.
I agree. FIREcalc is a wonderful way to get a feel for where you are in the savings process. After retirement, using it in conjunction with either Dory's 3 buckets of income or gummy's fancy trips/canasta scenarios is a good check to see if you are getting out of whack.

I've always thought that anyone that looked only at SWR without doing their own analysis for their own peculiar situation was fooling themselves. Successful FIREees are usually careful to have some padding in ye olde budget, or else they are willing to make drastic cuts if necessary - or both.

My prime directive is to never have to go back to work - so I was very careful to have sufficient funds in order to prevent that catastophe.

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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 02:46 PM   #17
 
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Re: "reasonable worst case" SWR: 2.55%

Yup, I have always maintained that you should have 50% of luxury items in your budget, with an SWR of 3.75%

- That way if things did go south you could cut back on spending if need be without the truly worst case scenario that TH mentioned or "Do you want fries with that?"
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 03:05 PM   #18
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Re: "reasonable worst case" SWR: 2.55%

I have always maintained that you should have 50% of luxury items in your budget, with an SWR of 3.75%

That would be pretty darn safe. But not everyone is in a situation where 50 percent of their spending is directed to the purchase of luxuries. Those who do not have that much slack in their budgets can benefit from knowing what the historical data says re the SWRs that apply for various asset allocations. Knowing that permits you to adjust your asset allocations so that you can obtain for yourself a 4 percent take-out that is safe according to the historical data without needing to provide for a lot of slack in your budget.
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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 04:50 PM   #19
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Re: "reasonable worst case" SWR: 2.55%

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Yup, I have always maintained that you should have 50% of luxury items in your budget, with an SWR of 3.75%
Sounds good to me. Anyone with something less (more or less) hasn't done their homework.

The worst of all possible world is to do something really very risky (like quitting work with not enough assets), only to find that you are extremely risk-adverse. Nightmares would ensue.

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Re: "reasonable worst case" SWR: 2.55%
Old 09-28-2004, 07:24 PM   #20
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Re: "reasonable worst case" SWR: 2.55%

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I just noticed that. *A rather clever way to insert your own ideas about the future.
The 2% hit on GDP growth wasn't my idea. * That came from our government's own estimate. * It seems reasonable to me, and we'll be able to verify by watching the performance of other economies (like Japan and Germany) who should be taking the hit before we do.

Quote:
How would you included the possibility of an asteroid?
There's certainly a non-zero probability of being wiped out by an asteroid, but it's not much higher than zero over a 54 year period. * *For comparison, the probability of a depression-like event (a 50% hit sustained over 3 years) is about 12% during any given 50-year period.

Of course, starting your retirement just before a depression would be bad, but the market had remarkable RTM to the upside, so it wasn't that big of a deal over the 54 year period in question.

Quote:
You don't think that the slow growth of the Depression is "sort of" similar to the possible drag by the Boomers? *It's all guessing anyway, which is why worrying about tenths of a percent for a SWR is silly - IMHO, anyway.
No, the boomer thing is pretty much guaranteed to be a drag on the economy over the next 50 years (starting in about 10 years). * The only way out of that is to start making babies like crazy. * The period from 1928-1982 wasn't that bad (over 8% annualized returns). * We don't have many 50-year periods to compare it to, but it'll probably be considered pretty normal in the very long run. * So, I think it's reasonable (for worst-case planning) to assume we'll have a "normal" 54 year period along with a guaranteed boomer drag. *I'm sure worst-case can be *much* worse than that. *Take the Roman Empire, for example, but 6% annualized is a "reasonable" worst-case.

Edited to add that the original quotes were taken somewhat out of context. * The other drag on the economy being discussed was the likelihood that we'll be getting a diminishing return from technology in the form of productivity enhancements.

It's really hard to imagine bigger productivity improvements than we've had historically. * How are we going to top electricity, telephony, the automobile, the computer, and disco? *
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