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Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle
Old 04-05-2011, 10:08 AM   #1
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Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle

Interesting twist on SWR. Introducing "Safe Savings Rates" into the equation.
From the paper you get the following snippet,
"The focus of retirement planning should be on the savings rate rather than the withdrawal rate."
Pretty good read.
Download link for pdf file:
Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle - Munich RePEc Personal Archive
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Old 04-05-2011, 11:27 AM   #2
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It's true the savings rate determines the nestegg that determines the withdrawal rate.

I couldn't help notice, He references Rob Bennett and the "Passion Savings" website.
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Old 04-05-2011, 11:30 AM   #3
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He references Rob Bennett and the "Passion Savings" website.
Instantaneous destruction of credibility.
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Old 04-05-2011, 11:39 AM   #4
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Instantaneous destruction of credibility.
Oh come on, admit it, you miss him!

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Old 04-05-2011, 11:40 AM   #5
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Old 04-05-2011, 11:55 AM   #6
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It's true the savings rate determines the nestegg that determines the withdrawal rate.

I couldn't help notice, He references Rob Bennett and the "Passion Savings" website.


Part true and part not....


No matter how much you have saved... the 4% range (or less) is the only 'safe' withdrawal rate... now, how much you saved determines how much you can spend when you retire...
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Old 04-05-2011, 11:56 AM   #7
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I noticed a thread over at the Bogleheads forum discussing this very subject, and the paper's author is chiming in.
Bogleheads :: View topic - Safe Savings Rates
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Old 04-05-2011, 11:58 AM   #8
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Instantaneous destruction of credibility.
Think that horse is dead. Don't you think?
Check out his other references.
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Old 04-05-2011, 12:06 PM   #9
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Think that horse is dead. Don't you think?
No, not until someone drives a wooden stake into his heart....
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Old 04-05-2011, 03:55 PM   #10
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From the abstract
Quote:
the lowest sustainable withdrawal rates (which give us our idea of the safe
withdrawal rate) tend to follow prolonged bull markets, while the highest sustainable withdrawal
rates tend to follow prolonged bear markets.
We've discussed this idea here. If you retire when P/E ratios are high, you should plan on a lower withdrawal rate. If you retire when P/E ratios are low, you can plan for a higher withdrawal rate.

So, people who were planning to retire around 2000 would notice their nest eggs are growing fast in the 1990s. They should not slow their savings rate because the fast growth was the result of higher P/E's which implied lower withdrawal rates at retirement. That makes sense to me.

OTOH, people who were planning to retire around 1980 would notice their nest eggs are growing slowly in the 1970s. They should not increase their savings rate because the slow growth was the result of low P/E's which implied higher withdrawal rates at retirement. Although that seems plausible, and did work with 20/20 hindsight, I wonder how many of us would have the belief to actually do that.

Here's a different way of looking at it.
The typical American planning to retire at 62 (not people on this board) can save money at age 28 and assume that particular bucket of money will grow exactly 35 years until it is withdrawn at 62.
The money saved at 29 goes into a different bucket and grows 35 years until it's withdrawn at 63.
...
The money saved at 61 will grow 35 years until it's withdrawn at 96.

In this view, the nest egg at 62 and the SWR is irrelevant. As long as you believe that over any 35 year period you'll get a pretty "average" return, you simply ignore all the ups and downs along the way and plan to spend anything that happens to be in the designated bucket each year in retirement.
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Old 04-05-2011, 04:23 PM   #11
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We've discussed this idea here. If you retire when P/E ratios are high, you should plan on a lower withdrawal rate. If you retire when P/E ratios are low, you can plan for a higher withdrawal rate.
So what then is the PE normalizer that works in most cases ?

What is the magic SWR formula using nestegg size and PE ?
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Old 04-05-2011, 09:15 PM   #12
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What is the magic SWR formula using nestegg size and PE ?
Well there must be a unique magic formula or the concept is invalid, no?
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Old 04-05-2011, 09:20 PM   #13
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It's true the savings rate determines the nestegg that determines the withdrawal rate.

I couldn't help notice, He references Rob Bennett and the "Passion Savings" website.
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Old 04-05-2011, 10:25 PM   #14
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Here's a different way of looking at it.
The typical American planning to retire at 62 (not people on this board) can save money at age 28 and assume that particular bucket of money will grow exactly 35 years until it is withdrawn at 62.
The money saved at 29 goes into a different bucket and grows 35 years until it's withdrawn at 63.
...
The money saved at 61 will grow 35 years until it's withdrawn at 96.

In this view, the nest egg at 62 and the SWR is irrelevant. As long as you believe that over any 35 year period you'll get a pretty "average" return, you simply ignore all the ups and downs along the way and plan to spend anything that happens to be in the designated bucket each year in retirement.
With apologies for taking this slightly out of context, the two difficulties I have with this sort of planning are:

1. the implict assumption that people will be able to save continuously for 35 years and that what they have saved will remain invested right through that savings period. In the real world, illness, unemployment, children, divorce and a lot of other things will happen. IMHO, it's pretty [-]stupid reckless [-] ambitous to plan for retirement on the basis of 35 years of continuous and untouched savings;

2. the reliance on average returns. It is actually unusual for investments (or at least the equity component) to ever provide actual returns that match the average. Get negative or even below average positive returns in the early drawdown stages and the plan falls apart pretty quickly.
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Old 04-06-2011, 09:20 AM   #15
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So what then is the PE normalizer that works in most cases ?

What is the magic SWR formula using nestegg size and PE ?
See the table on page 8 here: http://www.kitces.com/assets/pdfs/Ki...t_May_2008.pdf

I remember this type of P/E vs. SWR discussion in an earlier thread on this forum, but I couldn't remember enough about it to find that thread in a quick search this morning. I recall that the thread was sparked by an article like the one above, but I don't think it was exactly the same.
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Old 04-06-2011, 09:47 AM   #16
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With apologies for taking this slightly out of context, the two difficulties I have with this sort of planning are:

1. the implict assumption that people will be able to save continuously for 35 years and that what they have saved will remain invested right through that savings period. In the real world, illness, unemployment, children, divorce and a lot of other things will happen. IMHO, it's pretty [-]stupid reckless [-] ambitous to plan for retirement on the basis of 35 years of continuous and untouched savings;

2. the reliance on average returns. It is actually unusual for investments (or at least the equity component) to ever provide actual returns that match the average. Get negative or even below average positive returns in the early drawdown stages and the plan falls apart pretty quickly.
1) Anybody with good intentions of saving for retirement at age 28 or 33 or whatever has to make some "stupid or reckless" assumptions about the future. No matter what planning method you use, you need to adjust as real life doesn't play out as expected. Someone using this bucket approach would shift money between buckets (which probably only exist on a spreadsheet) in response to unemployment etc. The key is that you don't shift money due to short term investment performance because you believe that long term will even out.

2) Yes, actual returns vary. But again, any planning requires that you make some assumption about future returns. What should we use? I think the author is suggesting that we tend to assume the worst case in the accumulation phase, followed by the worst case in the decumulation phase. That's probably overly conservative as we don't see history of "worst" following "worst".

The bucket approach (which is my take on the idea, not the author's) allows you to think about the long term. Shiller's stock data says the lowest 35 year compound real return was 5.6% (starting in March 1974) and rates below 6.0% are very rare. Maybe that's a good place to start planning.

Using our standard approach, which takes the nestegg at retirement as the key driver for withdrawal amounts, it's certainly true that poor returns "in the early drawdown stages" are very bad. This approach eliminates that line of thinking. The nestegg at retirement does not determine a withdrawal rate, the amount withdrawn each year is simply the amount in that year's bucket.
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Old 04-08-2011, 11:13 PM   #17
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