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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 09:56 AM   #121
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Re: SWR of 6.21% for 26 years

BigMoney:
Quote:
But I don't know how to play Canasta; can other card games be substituted without disturbing statistical analysis, correlation or valuation?
For Canadians, it has to be Canasta:
Canadian Alternate Norm After Stockmarket Tanks, A?

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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 10:13 AM   #122
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Re: SWR of 6.21% for 26 years

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My personal favourite "Safe" withdrawal calculation is (sorta) like this:
http://home.golden.net/~pjponzo/sens...ithdrawals.htm
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 10:30 AM   #123
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Re: SWR of 6.21% for 26 years

Quote:
[i]

Here's a post from the SWR Research Group board where JWR1945 puts forward an allocation strategy that the historical data indicates would support a 4 percent withdrawal at today's valuation levels.

http://nofeeboards.com/boards/viewtopic.php?t=2158

.
Is JWR1945 somehow business-related to Zvie Body and Mike Clowes? They are also advocating a 100% TIPS strategy for ER, but I am having trouble buying it...
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 11:53 AM   #124
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Re: SWR of 6.21% for 26 years

Is JWR1945 somehow business-related to Zvie Body and Mike Clowes?

No.

I bear full responsibility for JWR's move to the dark side. I think he had about two or three messages to the Motley Fool board in his entire posting career when I put up the now famous (infamous?) May 13, 2002, post asking whether SWR analysis should include an adjustment for changes in valuation levels. One of the funny historical facts to know and tell about all this is that I was fed up with all the heat being directed at me after three days, and I bowed out of the debate on May 16, 2002. Then JWR pulled me back in. He really is the one to blame for all that followed!

After I bowed out, JWR1945 did a statistical analysis checking whether there was any validity to my claims. He found that there was was, and put up two posts--"***** is Really Onto Something!" and "***** Started It All (and I'm Having a Ball)" that each received about 50 or 60 recs from other members of the board community. That strong expression of a desire to further explore the realities of SWRs prompted me to put up the "Coin Toss" and "My Plan" posts, which became two of the most popular posts in the history of the board. The board had gotten stuck in a rut of off-topic posting, and there were scores of posters that came forward then thanking me for getting things back on the right track.

Lots of complications followed. There have been tens of thousands of posts put forward at the four boards that have participated in the Great SWR Debate. I think it is fair to say that the road has been a rocky one. The other side of this, however, is that those who are interested in learning about how to put together an effective plan for early retirement have learned an awful lot from the best of those tens of thousands of posts. I learned enough that I now have an outline for a second book which will bascially be my in-depth exploration of the most important concepts explored during the course of the Great SWR Debate.

I'm too close to this today to say whether this all has been a good thing or a bad thing. It's sucked up an awful lot of my time, so much that it's painful for me even to think about that aspect of it. But asking me not to participate where there's learning about the subject of early retirement going on is like asking a guard-dog not to bark when someone breaks in through the window at night; learning about this stuff is what I live for.

My view is that this debate has revealed to us both the best of the new discussion-board communications medium and the worst of the new discussion-board communications medium. The bad stuff has been real bad. The good stuff has been too wonderful for words.

To get back to your actual question (I didn't forget!), JWR1945 has revealed himself to be an absolute giant of the Retire Early movement. He has devoted himself on a full-time basis to preparing research for us on these important questions for close to two full years now without charging us one shiny dime! It amazes me and astounds me every time I think about it.

That sort of thing happens on internet discussion boards all the time. I tell people from time to time about the trouble I have experienced during this thing, and the usual reaction I get is something to the effect of "Why do you waste your time on such nonsense?" My answer is that it is not nonsense. There are things that you can learn on an internet discussion board that you cannot learn anywhere else. I know because back in the mid-90s I searched everything available in book stores and libraries. During the Golden Age of the Motley Fool board, I regularly gained access to insights that were not available anywhere else on Planet Earth. So I see real value in well-run discussion board communities.

When they are working right, these boards to me are a wonder. People come to these boards and talk about their dreams, and share details of their budgets, and put their hopes for a more free and fulfilling future in our hands. We have an obligation to talk straight with them. They can ban me from six boards if they like, and I will never let the people who read my stuff down in that regard. I feel a moral obligation to shoot stright with the people who come to these boards expecting to hear my story of how to retire early the best that I am able to tell it.

Anyway, the point I am trying to get across is that JWR1945 has been the brightest of the bright spots of the past two years for our little movement. He is the model that all other posters should aim to emulate, in my view. He is positively selfless, so far as I can tell. He works hard and he works smart and he works free. Where else do you get a deal like that nowadays?

There is hardly anyone who ever talks to him when he posts over at the SWR Research Group board because the leaders of the community there have imposed a boycott of that board. I think it would be great if a few posters from here would head over there and provide him a little company from time to time.

You will learn from tapping into his research and he will learn from the feedback you provide. That's what community is all about. It's each of us learning from the others, and thereby all achieving our life goals sooner. JWR1945 has an awful lot to offer those who tap into his statistical expertise, so I hope that you will give it a little bit of thought.
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 12:10 PM   #125
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Re: SWR of 6.21% for 26 years

Quote:
At this point, I don't even understand what you think I said. And I certainly don't understand what you are expecting from me? I do value your inputs on this board and respect you, however, so lets see if we can find some common ground.
Thats why I asked you several times to simply restate your points. And I agree with the sentiment.
Quote:
This whole discussion started because I pointed out that amt's conclusion (that the RE of today could retire with a 6.2% initial withdrawal rate and be as safe as the RE2000 who started with a FIRECALC approved 100% safe 4.1% withdrawal) was correct, logical and mathematically sound. I went on to point out that if you don't believe Mr. RE2004 will be safe with a 6.2% initial withdrawal rate, then you should question the safety of the 4.1% rate.

Do we agree on that? Because that's the key point here.
Yep, we agree completely. Shocked? I'm not. And I think that I added something that may be useful: if you are calculating SWR for a given starting point, it may be useful to eyeball investment valuations and short term impacts to your portfolio and if the valuations are largely considered "high" by some measures, or there are significant short term impacts (ie, imminent interest risk), you might consider toning down the SWR for the short haul or delaying retirement a few more years until things settle down. I think over long hauls the calculators truth is good, but starting out on a high note may induce some indigestion.
Quote:
The reason that the statements above are true is not related to some post-FIRECALC analysis that is inconsistent with the underlying principles within FIRECALC. It is not because we used a 100% safe rate as opposed to a 90% or 80% safe rate. It is because FIRECALC calculates the safe rate based on the worst case. So as long as you can know that a prior year will provide a retirement series that is worse than the retirement year you are currently in, you can start your calculations from that point.

Do we agree on that?
Yep. One hundred percent.

Quote:
I don't believe that I can develop a simulator that will predict future returns -- long, mid- or short.

Do we agree on that?
Yep, one hundred percent. But at one point you said that you felt the market was somewhat predictable in the short term, and unpredictable in the long term. We disagree on that.

Quote:
And finally, just because I cannot predict the future does not mean that the future is not causally connected to the present and to the past.

Do we agree on that?
We agree on that 100%. Where we diverged is that I stated that if a causal connection demonstrating correlation <>0 existed, that it should be identifiable, and measurable. In the absence of that identifiability and measurability, it has no benefit to us in this time to determine future market movements on that basis. You disagreed with that, saying it was beneficial. Hence my confusion. Tying that to your previously stated belief that shorter term market movements are predictable, I determined that you felt there were measurable correlations that would allow such prediction in a beneficial manner. Hence my frustration. Are there correlations. What are they. Are they measurable and actionable. What measurements and actions would I take if they are.

So as far as I can tell, we're in complete violent agreement on these topics.
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 12:14 PM   #126
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Re: SWR of 6.21% for 26 years

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I'll stand by that statement completely. I am quite certain of the truth of that statement and believe that most people who develop and use such techniques are well aware of the truth of that statement. The fact that you interpret what I've said to be meaningless or false is just something that I will live with.

The reason that the correlation I am speaking about in this particular statement is difficult to capture mathematically is because one of the data sets (ie. future returns) is not yet known and the cause and effect relationship of the correlation is too complex to describe with simple formula -- or even to capture in advance. Once two data sets are known (as in the case of historical data) the correlation can always be captured.
I'm still a little confused about this. What pieces of information are we seeing historically that are <>0 correlated on a consistent basis? My knowledge is admittedly not anywhere near an expert level but I see market movements in all directions in the presence of and absence of any two pieces of financial data moving together, or apart.

I see gummy pointed to a monte carlo simulator that uses correlative factors to assemble year runs. I will look at that to get an idea of what someone has considered useful and implemented in the system.
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 03:41 PM   #127
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Re: SWR of 6.21% for 26 years

Quote:
About using correlation in Monte Carlo simulation, there's a spreadsheet described here which does that:
http://home.golden.net/~pjponzo/Monte-Carlo.htm

About correlation between various assets, there's a table (somewhere near the bottom) here:
http://home.golden.net/~pjponzo/Covariance.htm

And a question which has always interested me:

For those on this board who suggest using SWR when you're retired (and withdrawing from your portfolio),
do you imagine doing this each year on (say) January 1 and using the result to determine what you'll withdraw
... for the remainder of that year ?


I'm retired (and withdrawing) but I've never considered doing any SWR calculation to determine my withdrawals.

As has been noted by arrete, after a bad year me & the missus don't go nowhere or spend much ... but play canasta instead
My method (although short lived) is about the same, i'm living off of my dividends and if necessary, I'll draw some capital. So far so good.

I'm thinking that with regards to correlations, we're all talking about 97,000 different things. I see the material you pointed to and your correlations have to do with standard deviations from the mean, and correlations between returns of various asset classes...a useful thing to reduce volatility and improve returns. Yes? Not exactly what were were discussing though.

Our original discussion had more to do with determining why a monte carlo analysis would produce more "bad" periods that were "worse" than a historic analysis would, and my original contention was that this was because the monte carlo sims I've seen (and this includes the one you pointed to) use random walk methods to sample years to put together. Since a random walk approach can assemble a set of 20 or 30 or 35 years that are "worse" with more "bad" years in them than a historical data set contains, that produced "more" "worse" results.

SG's contention was that this was not correct, that these monte carlo simulations draw correlations in the data to put together (my words here) more realistic data sets than a simple "random collection". This was coupled with a comment (from recollection, I'm sick of reading this thread) that one years returns, interest rates, inflation and other behaviors are influenced by preceding years and influence following years, and this methodology is applied to return analysis in monte carlo situations.

In the monte carlo that was linked to, I dont see a professed heuristic or bayesian capability (or anything) that applies correlations in how it assembles the data sets for returns, inflation, interest rates and so forth.

Perhaps we're splitting the wrong hairs (again).

What "correlations" exist that are influenced by prior years returns and/or market behavior, and then influence following years returns and/or market behavior, and how does this fit into a market predictive monte carlo?
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 04:18 PM   #128
 
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Re: SWR of 6.21% for 26 years

I am 60 years old, fully retired since 1998. I have not
made any capital withdrawals as yet and none are
planned. However, with each passing year, the
angst associated with this declines. Ten years ago
capital drawdown would have been unthinkable.
Now, I could stand it.

John Galt
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 04:24 PM   #129
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Re: SWR of 6.21% for 26 years

Quote:
Bob_Smith:
My personal favourite "Safe" withdrawal calculation is (sorta) like this:
http://home.golden.net/~pjponzo/sens...ithdrawals.htm
Gummy, that's my favorite too. I snagged that page several months ago and have read it several times. I plan to implement that approach over the next 40 years, if I live that long. It makes a lot of sense to me and will form a major part of my strategy. Thanks for making it available!
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 04:30 PM   #130
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Re: SWR of 6.21% for 26 years

Dammit amt! See what you started?
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 07:40 PM   #131
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Re: SWR of 6.21% for 26 years

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I'm still a little confused about this. *What pieces of information are we seeing historically that are <>0 correlated on a consistent basis? *My knowledge is admittedly not anywhere near an expert level but I see market movements in all directions in the presence of and absence of any two pieces of financial data moving together, or apart.

I see gummy pointed to a monte carlo simulator that uses correlative factors to assemble year runs. *I will look at that to get an idea of what someone has considered useful and implemented in the system.
Let me offer an example of a correlation that I thought of today that is very real, yet is almost useless as a predictor for specific events.

I hike in the dessert quite a bit and often run into rattlesnakes. I probably scare up a few dozen each year. If the weather is below about 65 - 70 degrees, rattlesnake sightings are very rare. Similarly, if the temperature is above 105 - 110 degrees, rattlesnake sitings are rare. There is a clear correlation between daytime high temperatures and rattlesnake sightings. In this particular example, the reason for this correlation is understood, but it doesn't have to be.

On any given day, however, I can look at the temperature and still not have any idea of whether or not I will see a rattlesnake on my outings that day. I've seen them when the temperatures are cold. I've seen them when the temperatures are hot. And I've been out on many days when the temperature is perfect for rattlesnakes and not seen a one.

There is a correlation between temperature and rattlesnake activity. If I collected the data sets on all my outings that included daytime temperatures and rattlesnake sightings, a correlation analysis would find a significant correlation. But temperature is not the only factor. In fact, the factors that contribute to the sighting event are so complex and numerous, that temperature alone will not allow me to make reliable predictions.

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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 07:41 PM   #132
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Re: SWR of 6.21% for 26 years

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. . .
So as far as I can tell, we're in complete violent agreement on these topics.
I am truely happy about the agreement part, and I pledge to try to make that agreement less violent.
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 08:00 PM   #133
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Re: SWR of 6.21% for 26 years

Quote:

Let me offer an example of a correlation that I thought of today that is very real, yet is almost useless as a predictor for specific events.

I hike in the dessert quite a bit and often run into rattlesnakes. I probably scare up a few dozen each year. If the weather is below about 65 - 70 degrees, rattlesnake sightings are very rare. Similarly, if the temperature is above 105 - 110 degrees, rattlesnake sitings are rare. There is a clear correlation between daytime high temperatures and rattlesnake sightings. In this particular example, the reason for this correlation is understood, but it doesn't have to be.

On any given day, however, I can look at the temperature and still not have any idea of whether or not I will see a rattlesnake on my outings that day. I've seen them when the temperatures are cold. I've seen them when the temperatures are hot. And I've been out on many days when the temperature is perfect for rattlesnakes and not seen a one.

There is a correlation between temperature and rattlesnake activity. If I collected the data sets on all my outings that included daytime temperatures and rattlesnake sightings, a correlation analysis would find a significant correlation. But temperature is not the only factor. In fact, the factors that contribute to the sighting event are so complex and numerous, that temperature alone will not allow me to make reliable predictions.
We're missing. I completely understand what correlation means. What I'm asking is WHAT items do you believe are correlated in historic investing data. In specific, you said specific correlations are used to assemble monte carlo situations (as opposed to the simple random walks that I thought they all were).

Just to revisit and perhaps explain my fascination with this, my former life as I may have mentioned once or twice was as the marketing droid responsible for driving higher microprocessor usage tools and products. I drove the investment of about $300M into companies that built products based on bayesian and neural nets, AI, smart handwriting recognition, active group collaboration tools, simulation tools (like those monte carlo simulators), etc. I sat on the board of a handful of these investments. I ran $40M worth of programs to encourage universities to come up with better ideas. My efforts were responsible for as much as $3B in incremental revenues to the company.

In otherwords, I dont need a lesson in what these are...

Some of the companies we worked with were developing tools to analyze stock market data looking for ANY correlations, past present or future. Particular interest in the future.

At the time I retired, NOBODY had ANYTHING that could hook what happened in any one year to the ones before or after with any strong correlation in the way that (i think) you described.

What you described was that there are correlations between SOMETHING (and THATS what I want to know) and SOMETHING ELSE (and that too!), that work better historically to connect returns and movements from one year, and those that went before and after. And that these are used by some monte carlo simulators to put together strings of years in an investment returns run, and that they therefore arent random, and that this somehow explained why monte carlo simulators return worse results than simple historic analysis.

Since nothing like that existed at the time I quit 3 years ago, and you say stuff like this exists (even if in theory only), I wanna know what the heck it is!

So what I want to know is:

#1 - What two or more things create correlations in any kind of market data, current past or future, that connect that years returns or behaviors to years past...ex: when interest rates are high, bond prices fall sort of correlations.

#2 - How are these applied to monte carlo simulations to create the run periods and/or produce their data walks.

#3 - Where are these monte carlo simulators. The one gummy pointed to appears to create its data runs through random walk.
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 08:35 PM   #134
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Re: SWR of 6.21% for 26 years

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We're missing.
Yes, I can see that now. Either I misspoke or you misread. The only financial monte carlo program I know of that includes any attempt to include one of the correlation factors I was discussing is the one raddr has produced and discussed on his web site. Here are a couple of links:

raddr's monte carlo simulation --
http://nofeeboards.com/raddr/enhance...simulation.htm

discussion of the simulator --
http://nofeeboards.com/raddr/Rebalance.htm *

He accomplishes the RTM (historical) correlation effect differently than I would have approached it and he discusses some of the limitations. But it's more than any other monte carlo effort I'm aware of and the more I thought about it, the more I liked it.

Quote:
#1 - What two or more things create correlations in any kind of market data, current past or future, that connect that years returns or behaviors to years past...ex: when interest rates are high, bond prices fall sort of correlations.

#2 - How are these applied to monte carlo simulations to create the run periods and/or produce their data walks.

#3 - Where are these monte carlo simulators. *The one gummy pointed to appears to create its data runs through random walk.
All monte carlo simulators create their "input" data using random number generators. But usually not directly. The random number is used as the input of an equation that produces a distribution of results that (hopefully) approximates the observed distribution. There are a couple of standard ways to include correlations between input variables that could be used in financial monte carlo simulators. One way to do this is to vary the mean and sigma of the distribution function of one variable based on the value of another variable. So, for example, you could use your first random number to predict a stock return. Then based on that return value select a mean and sigma that would be used with your next random number to predict bond returns. You can similarly relate inflation to bond returns.

I am not aware of any monte carlo simulators that do that today, and that is one of the reasons they provide pessimistic results. There is nothing in the programs that keep stock, bond and inflation rates from varying without regard for each other. Yet, in reality, they are correlated in important ways.
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Re: SWR of 6.21% for 26 years
Old 03-31-2004, 09:51 PM   #135
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Re: SWR of 6.21% for 26 years

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Dammit amt! See what you started?
Oh my! I'm awe struck by the depth of these discussions. Very glad to be learning from you folks.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 01:27 AM   #136
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Re: SWR of 6.21% for 26 years

I am truely happy about the agreement part, and I pledge to try to make that agreement less violent.

The proposal I put forward below is not directly connected to the discussion that caused SalaryGuru to make the above comment. But it is so in tune with the spirit of this comment that I thought I would use SalaryGuru's words as a kick-off.

My sense is that we are in agreement on the two core questions.

1) We agree that the conventional methodology SWR studies offer information of great value to aspiring early retirees. I have long recommended that anyone with a serious interest in early retirement read these studies and use them to formulate their investment stratagies, as I have. I don't know of anyone who takes issue with this recommendation.

2) We are generally in agreement that the number generated by the conventional methodology studies does not provide true safety in the event that a worst-case scenario pops up in one's retirement. There have been a good number of posters who have said that those using the 4 percent number or the 6 percent number need to include a good bit of slack in their plans to cover themselves in the event of a worst-case scenario. By definition, the SWR number is the number that works in the worst case, so not much slack should be necessary if the number were being calculated properly.

I believe that we are in general agreement on the facts and on the nature of the advice that we should be giving to aspiring early retirees. There are lots of things we still do not know, to be sure. There are lots of questions we still need to examine in more depth. But I don't see that there is any good reason why there should need to be a greater-than-average contentiousness in these discussions from this point forward.

It seems to me that all the friction that has been experienced in the past has come as the result of differences over terminology. The SWR is defined as the number that works in the worst-case scenario, and, because the conventional methodology does not adjust for valuation, there are serious grounds for doubt as to whether the conventional methodology number will work in worst-case scenarios for retirements beginning at times of extremely high valuation levels.

That said, the conventional methodology number might work for retirements that do not experience a worst-case scenario. In any event, some retirees may reasonably view the true SWR number as overly conservative and may elect to employ the conventional methodology number in their plans. There is obviously nothing wrong with them doing so, and they obviously need access to the conventional methodology studies (and to discussions about them) to do this.

I propose a change in terminology. I propose that we begin referring to the conventional methodology number as the "historical surviving withdrawal rate (HSWR)." That is what it is. It is a number that worked in the past. There are concerns that it may not work in the future, but it is up to the retiree using the tool to determine for himself how serious he thinks those concerns are.

I believe that the project that I and JWR1945 are engaged in is a project to determine the true SWR. But neither of us has ever said a word critical of the HSWR concept (other than to say that it is not the true SWR, which is not intended as a criticism but merely as a correction of an analytical mistake first made by whoever it was who first came up with the conventional methodology years before any of these boards were in existence).

Does anyone see any appeal in making this change in terminology as a means of insuring that discussions of SWRs and HSWRs remain fruitful and do not get tangled up in unproductive disputes over semantics?
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 05:35 AM   #137
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Re: SWR of 6.21% for 26 years

Quote:
I propose a change in terminology. I propose that we begin referring to the conventional methodology number as the "historical surviving withdrawal rate (HSWR)."
A change in terminology is probably a good idea. We could nitpick further and call it the "historical survivnig withdrawal rate based on Jan-Dec returns with once per year withdrawals based on overlapping sample periods"; I leave the acronym as an exercise for the reader, but perhaps someone can suggest an even more appropriate name. Perhaps "Statistical Historical Reality Check WR" to guide its usefulness.

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I believe that the project that I and JWR1945 are engaged in is a project to determine the true SWR.
Should we hear a chorus of angels singing yet? Seriously, the term "true" may indicate too much confidence in any predictive number. It sounds as if it's becomming a religious belief, and pushing religious beliefs on others is much more difficult than offering new SWR tools and insights.

Or put more simply calling it the true SWR will cause a lot more ER BBS arguing.

Other than that I'm all for other people doing lots of hard work that increases my confidence in retiring early.

Thanks!
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 06:48 AM   #138
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Re: SWR of 6.21% for 26 years

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Seriously, the term "true" may indicate too much confidence in any predictive number.
Well, there two approaches to getting close to a true SWR:

1) Improve our ability to predict stock market returns (and I'm dismayed that this thread still hasn't come to the logical conclusion that I've been hinting at: stock prices are set by humans, so all you need to do is model human behavior *)

2) Reduce the unknowns. * For example, with a 100% TIPS portfolio, the SWR is approximately the real yield of the TIPS you purchased + 2%.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 06:50 AM   #139
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Re: SWR of 6.21% for 26 years

BigMoney:

I'd suggest
Statistical Historical Investigation of Termination :
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 07:30 AM   #140
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Re: SWR of 6.21% for 26 years

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I'd suggest
Statistical Historical Investigation of Termination :
For the sake of any boy who ever got a thrill out of looking up dirty words in the dictionary or reading them in literature (myself included), I agree on that term and can't wait to see the writeup in the Wall Street Journal and Forbes.

Furthermore it's more descriptively correct and has an acronym that reminds us of its certainty for future evaluations. Brilliant.

Wabmester:
Quote:
(and I'm dismayed that this thread still hasn't come to the logical conclusion that I've been hinting at: stock prices are set by humans, so all you need to do is model human behavior )
That's perfect for this group; throw out Bogle and Bernstein, bring in Myers, Briggs, Keirsey and Montgomery! INTPs and INTJs rejoice, leave the offtopic forum and join the SWR--I mean the Statistical Historical Investigation of Termination--forum.
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