Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
SWR of 6.21% for 26 years
Old 03-25-2004, 08:20 AM   #1
Recycles dryer sheets
 
Join Date: Jul 2003
Posts: 70
SWR of 6.21% for 26 years

If you retire now (at S&P around 1100), your SWR should be about 6.21%, given the assumption that the 30 yr period 2000-2029 would not be worse than the worst 30 year period from the past.

Reason: If you had $1000000 at the beginning of 2000, FIRECalc will tell you that your SWR for 30yrs is 4.19%, using the defaults. If you stick to 4.19% withdrawal, at the end of 2003, your nest egg will be about $674000. Yet, you should be OK to continue withdrawing $41900, plus inflation adjustment til 20209. Hence, if you had $1mil at the end of 2003, then you should be able to withdraw $41900*1000000/674000=$62166, or about 6.22% annually, inflation adjusted. Of course, if you believe that 2000-2029 period will be worse than the worst we've ever experienced then, your personal SWR will be less than that.
__________________

__________________
amt is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: SWR of 6.21% for 26 years
Old 03-25-2004, 08:44 AM   #2
 
Posts: n/a
Re: SWR of 6.21% for 26 years

Anyone who believes they know what will happen
in the financial markets between now and 2029
has a bigger problem than their SWR.

John Galt
__________________
  Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-25-2004, 08:57 AM   #3
Recycles dryer sheets
 
Join Date: Jul 2003
Posts: 70
Re: SWR of 6.21% for 26 years

Sorry for multiple posts. I was having technical difficulties.
__________________
amt is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-25-2004, 03:27 PM   #4
 
Posts: n/a
Re: SWR of 6.21% for 26 years

Hey amt, no problem about the multiple posts.
It gave me an excuse (yeah, like I need one)
to pontificate on many issues and therefore override
what you had posted. I never seem to run out of opinions. You could ask the wife

John Galt
__________________
  Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-25-2004, 04:01 PM   #5
Early-Retirement.org Founder
Developer of FIRECalc
dory36's Avatar
 
Join Date: Jun 2002
Posts: 1,826
Re: SWR of 6.21% for 26 years

There is no mathematical reason to argue with what you said. Your portfolio doesn't "know" you didn't retire in 2000.

I will delete the extra posts that have no answers -- although John Galt replied with different answers to 3 of these identical posts...

__________________
Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
dory36 is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-25-2004, 04:29 PM   #6
 
Posts: n/a
Re: SWR of 6.21% for 26 years

Which just proves that I have the answer for everything.
Like George W., I may be wrong but never in doubt

John Galt
__________________
  Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-25-2004, 05:03 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: SWR of 6.21% for 26 years

I was beginning to suspect you were actually a turing machine.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
For those who are wondering WTF is a... ?!?
Old 03-25-2004, 05:46 PM   #8
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
For those who are wondering WTF is a... ?!?

Turing machine: A mathematical model of a device that changes its internal state and reads from, writes on, and moves a potentially infinite tape, all in accordance with its present state, thereby constituting a model for computer-like behavior.

Turing test: A test devised by the English mathematician Alan M. Turing to determine whether or not a computer can be said to think like a human brain. In an attempt to cut through the philosophical debate about how to define "thinking," Turing devised a subjective test to answer the question, "Can machines think?" and reasoned that if a computer acts, reacts and interacts like a sentient being, then call it sentient. The test is simple: a human interrogator is isolated and given the task of distinguishing between a human and a computer based on their replies to questions that the interrogator poses. After a series of tests are performed, the interrogator attempts to determine which subject is human and which is an artificial intelligence. The computer's success at thinking can be quantified by its probability of being misidentified as the human subject.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-25-2004, 07:13 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: SWR of 6.21% for 26 years

Could be both
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: SWR of 6.21% for 26 yearsThere is no mathemati
Old 03-26-2004, 01:35 AM   #10
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 570
Re: SWR of 6.21% for 26 yearsThere is no mathemati

There is no mathematical reason to argue with what you said.

I agree with this in part and I disagree in part.

There are two things going on in the analysis put forward in the opening post. One thing is that amt is showing how a lowering of valuation levels causes the SWR to go up. The reason why he is coming up with a 6.2 number rather than a 4.1 number is that valuations have gone down since the beginning of 2000. I believe that the logic of this claim is solid; the SWR really has gone up since the year 2000.

The problem I have with the analysis is that no adjustment was made for changes in valuation levels in the analysis that produced the 4.1 number for 2000. A similar adjustment should have been made for that number. If the year 2000 number had been adjusted for valuation, you would had a far lower number for 2000. Then, when you made an upward adjustment for the lowering in valuation levels that has taken place since, you would be adding points or fractions of points to a lower base number.
__________________
hocus is offline   Reply With Quote
Re: SWR of 6.21% for 26 yearsThere is no mathemati
Old 03-26-2004, 05:08 AM   #11
Recycles dryer sheets
 
Join Date: Jul 2003
Posts: 70
Re: SWR of 6.21% for 26 yearsThere is no mathemati

Quote:
The problem I have with the analysis is that no adjustment was made for changes in valuation levels in the analysis that produced the 4.1 number for 2000. A similar adjustment should have been made for that number. If the year 2000 number had been adjusted for valuation, you would had a far lower number for 2000. Then, when you made an upward adjustment for the lowering in valuation levels that has taken place since, you would be adding points or fractions of points to a lower base number.
*****

You are right if we have to adjust the SWR based on our individual assessment of current valuations, which will be true for many of us. On the other hand, as many have pointed out in the previous posts, the method we are using to get the SWR should already have taken into acount the problems with valuations; i.e., the valuations in 1929 or 1965 just before the prolonged bear markets should already account for overvaluation in 2000, unless if one thinks that 2000 was worse than 1929 or 1965, in which case appropriate downward adjustment to their personal SWR can be made.

regards,
__________________
amt is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 06:10 AM   #12
Dryer sheet aficionado
 
Join Date: Mar 2004
Posts: 39
Re: SWR of 6.21% for 26 years

Quote:
There is no mathematical reason to argue with what you said. Your portfolio doesn't "know" you didn't retire in 2000.
There is, actually, a fallacy here . It just doesn't work. I, too, was thinking the same thing a few months ago ("If the stock market has gone down recently, I'll obviously need less money to retire than someone did a few years ago"). But it doesn't work mathematically.

Think of a coin toss. If you toss a coin 10 times, and it is heads each time, what is the chance that the next toss will be heads? A lot of people say it is more likely to be heads (given that there were already so many heads), while a lot of people will say it is more likely to be tails (there have been so many heads, tails are due their turn). But mathematically, there is still a 50% chance of it being heads.

The same applies here. The flaw in the logic is that firecalc doesn't know the future. In 2000, it comes up with a SWR of 4.19% (let's assume that's given a 95% chance of success), given all the 100+ 30-year scenarios it looks at. But the stock market being down significantly 4 years later is only in perhaps 10 of those 100+ scenarios. So if you know that the stock market is going to be down significantly, you now have only 10 scenarios to pick from, 5 of which are the ones from the 5% chance of failure. So you now have a 50% chance of failure.

And guess what? If you go into firecalc today, and put in 6.21% for 26 years, you get about a 50% chance of failure.

The other flaw is that the comparison is with two things that aren't the same (a 30-year SWR to a 26-year SWR: shorter periods always have higher SWRs).

Of course, if you have $X today, you'll definitely be better off than someone who retired 4 years ago with the same amount of money (assuming that their portfolios did not provide a return exceeding inflation).
__________________
IDunno is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 01:51 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Re: SWR of 6.21% for 26 years

Quote:
The flaw in the logic is that firecalc doesn't know the future. *In 2000, it comes up with a SWR of 4.19% (let's assume that's given a 95% chance of success), given all the 100+ 30-year scenarios it looks at. *But the stock market being down significantly 4 years later is only in perhaps 10 of those 100+ scenarios. *So if you know that the stock market is going to be down significantly, you now have only 10 scenarios to pick from, 5 of which are the ones from the 5% chance of failure. *So you now have a 50% chance of failure.
Welcome, IDunno. I'd say you do know. Stick around and share more of your probability understanding with us?

I read the original post, and the responses, and although I couldn't put my finget on why they made me uneasy, you have just done so. It just seemed that something was being overlooked. Something that could reach up and take a bite out of my butt.

Mikey
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 07:45 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: SWR of 6.21% for 26 years

Quote:
. . . The flaw in the logic is that firecalc doesn't know the future. *. . .
No. Your analogy to a coin toss does not apply. The reason for the coin toss result is that the results of each toss is completely and totally independent of the previous toss. There is no correlation between them.

The same is not true for the financial results of the historical simulator. Financial returns and inflation are correlated to each other and to the results of previous years. The correlation is not simple and it is not easily captured mathematically, but it is real. This is precisely the reason why Monte Carlo simulations tend to predict less optimistic withdrawal rates than historical simulators. Monte Carlo simulations fail to capture the correlations between the returns and inflation data.

The fundamental assumption behind using a safe withdrawal rate from a historical simulator is that the future will not be any worse than the worst case we have ever faced in the past. If you believe that, then the conclusion amt draws is valid. If you don't believe that, then you really can't use the historical simulator results to calculatre SWR at all.
__________________
sgeeeee is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 08:20 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: SWR of 6.21% for 26 years

Quote:
Financial returns and inflation are correlated to each other and to the results of previous years. The correlation is not simple and it is not easily captured mathematically, but it is real. This is precisely the reason why Monte Carlo simulations tend to predict less optimistic withdrawal rates than historical simulators. Monte Carlo simulations fail to capture the correlations between the returns and inflation data.
Uh oh, here we go again

I dont believe there is ANY demonstrable correlation for either inflation or investment returns from any one year to the next. If you have any data that shows how to predict even a modicum of the direction that one year will feed into another, I am ALL ears.

I thought about this extensively, and his argument is 100% correct as far as I can see. There is not only no guarantee that a portfolio size today will bounce back, it might go lower still.

Historical models a la firecalc, and composite models such as monte carlo simulations are good for giving you ballpark results and most likely, very good ideas of whether an investment process might be better than another one...based on historical data.

That having been said, a 100% or 98% result assures nothing, and a 25 or 50% result assures the same nothing.

I think calculators like these are beneficial to find the 90% mix of the right investments for longer terms, but to say that because this year was bad, and the year before that was bad, next year will be good because it was 90% of the time historically is akin to playing at market timing or guessing the future.

If financial markets were calculable or followed even the smallest of patterns, someone would have a system to work it.

Otherwise for a period of days, weeks, months and years, its a flip of the coin. No more likely to be heads than tails for each and every flip. There are no formulaic models; its a social model laid over a mathematical one. The former assures unpredictability over short to medium terms. The latter assures some long term predictability.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 09:12 PM   #16
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: SWR of 6.21% for 26 years

I may be all wet on this, but I think there is some
correlation of the market with interest rates and
the business cycle, neither of which changes very
fast. After all, investors follow the money and when
rates rise, bonds compete more favorably with
stocks and the reduced demand for stocks reduces
their valuation. Rising interest rates tend to
depress the market and falling rates boost the
market. Why in the hell to you think the 90's were
so good? That is when we got a handle on inflation
and lowered interest rates to 40 year lows.

That is just my opinion. Take it for what it cost you.

Cheers,

Charlie (aka Chuck-Lyn)
__________________
charlie is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 09:52 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: SWR of 6.21% for 26 years

Charlie - you're close. Rising and falling rates have an impact. Although the 90's saw an increasing rate structure as the fed tried to cool off the stock market speculation. The boom in bonds in the last few years was probably more in line with people running like hell from collapsing stocks.

The trouble is, nobody can accurately predict when interest rates will rise and fall. Many pundits have predicted rising rates any day now for two years. I'm guessing a quarter to a half point by this time next year, and perhaps a total of 2 points by two years from now. That would put me late on the curve as far as 'experts' go.

The interest rate effect generally has a less than one year effect (and its almost immediate) on both stocks and bonds...beating them down. 1987, 1994, 1999 are good recent examples. Stocks usually do a nice pop up within the year due to the accompanying inflation or overheated economical conditions that brought on the interest rate hike. Bonds tend to follow a year or two later as dividend rates rise and bond prices rebound.

The hard part is: when does the economy catch fire...when does inflation surge...when do rates go up and down.

Now we're getting to the meat of it...all of those factors have historically proven relatively unpredictable. The smartest people have taken shots at it and often been early, late or clearly wrong. The whole logic behind index investing says you cant get it right even half the time, and thats weaker than coin flipping rates. Of course, you can debate the index investing argument, but if you throw that baby out, the whole argument of historic data bathwater goes with it.

What we're seeing right now is fantastic capital investment and ROI based on recent loans at historically low rates. Beating the pants off of very low analyst estimates. Exceeding weak expectations. A nice surge, but for it to continue onwards for 5-10 years we need to see earnings in excess of 2x the historic numbers excluding the companies that cooked the books to make them look good.

Bonds on the other hand have already taken a beating because of expected rising rates, and the low interest environment creates a scenario for declining bond fund dividends for at leat a year on top of an additional downward pop when rates are brought up.

REIT's are at a serious high on prices, and a low on dividends.

Some foreign stocks are underpriced compared to their US counterparts, particularly Japan which I bought into heavily some months ago when it appeared that they might finally have figured out what they were doing wrong. I wasnt happy with the 70/30 europe/pacific split most combo funds or indexes are going with based on those historic performances.

Emerging markets have some legs, but they're run up and risky/volatile.

Value stocks arent ugly...at least not as ugly as their growth counterparts.

Thats why I'm sticking with predominately value stocks and the low end (5-7 years) of the intermediate bond range. No big guts, no big glory, but no big damage either.

But we're at the basis of the discussion here. So many folks want to associate market movements with factors, formulae and past patterns. But in the short term its mass psychology.

A theater catches fire or terrorists try to take over a plane...how will people react? Depends on the people, the time of day, some random circumstance, how they feel about something that happened recently or a long time ago, what leadership is in place and what they decide to do and how effective they are, etc.

But I think you end up at the same conclusion.

Spread the peanut butter around to a variety of asset classes. Get low cost vehicles to do this. Do some asset balancing every year or two; no more, no less. Dont trade on news or feelings. Dont believe anything any 'expert' tells you, and sure as hell dont pay anyone for that 'expert' opinion. Be as knowledgeable about your investing as anything you ever knew in your work life. When crazy things happen, do nothing...act on the basis of years and decades, not days/weeks/months.

If it doesnt work, roll up your sleeves and go back to work to fill in the gaps.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re:  It's not that easy.
Old 03-26-2004, 10:30 PM   #18
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re:  It's not that easy.

Clearly we could all review how worthwhile a retirement calculator is when it's trying to predict the future longer than 20 years or success rates higher than 80%.

http://www.efficientfrontier.com/ef/998/hell.htm
http://www.efficientfrontier.com/ef/101/hell101.htm
http://www.efficientfrontier.com/ef/901/hell3.htm
http://www.efficientfrontier.com/ef/103/hell4.htm
http://www.efficientfrontier.com/ef/403/hell5.htm

For those who've had enough Bernstein, Part III contains my favorite indictment of all retirement calculators-- "Consider the implications of the above 97% success rate at a withdrawal of $2,500 per month ($30,000 per year). For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely? Only if you are an historical illiterate (which, I’m afraid, subsumes many finance academics)."
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-26-2004, 11:50 PM   #19
Full time employment: Posting here.
 
Join Date: Sep 2003
Posts: 902
Re: SWR of 6.21% for 26 years

Whenever I'm experiencing angst about SWRs and my future financial security without work, I reflect upon this:

MY PAST
--Total financial dependence upon the whims of employers who had not the slightest interest in my well-being
--Exposure to disability that could have wiped out my earning power in an instant
--Children and a wife who were dependent upon my ability to maintain a job
--No financial cushion. At times we didn't have enough to handle even a major automobile breakdown.
--Throughout all of this we had to figure out a way to save something for retirement, buy a house, and pay for college for our kids.

MY PRESENT
* *
--The kids are almost raised and doing very well
--Own my house free and clear
--Only three years away from a pension
--Only 10 years from SS
--Enough money saved so that my biggest worry is whether my assets will last for 30 years, or 40

The insecurity I face going forward is almost nothing compared to the risk that I (and probably most of us) have already faced in the past.
__________________
Bob_Smith is offline   Reply With Quote
Re: SWR of 6.21% for 26 years
Old 03-27-2004, 03:53 AM   #20
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 570
Re: SWR of 6.21% for 26 years

Welcome, IDunno. I'd say you do know. Stick around and share more of your probability understanding with us?

I second Mikey's warm endorsement of IDunno's contribution. I have been studying the SWR issue for over nine years now, and I view the point he makes in his post as one offering great insight.

The problem with the conventional methodology is that it looks at the entire data set for its data, but then uses the results from only a single data point to generate its conclusion. The valuation levels that produced numbers close to 4 were the valuation levels that applied in 1929 and 1966. There are only 2 data points showing that a 4.1 withdrawal worked at the highest pre-bubble valuation levels, not 130.

Two data points is just not enough to support reasonable claims that a 4 percent withdrawal at those valuation levels is safe. What JWR1945 and I do with our data-based SWR model is make adjustments for changes in valuation, which permits us to make use of the entire data set in generating our SWR findings. My recollection is that the number JWR1945 tentatively came up with for retirements starting at valuation levels equal to the highest pre-bubble valuations was 3.3, not 4.1. We still have work to do in confirming those tentative findings, but it does not appear to me that the 4.1 number is going to stand even for the pre-bubble period.

In the bubble of the late 1990s, valuations went far higher than where they were in 1929 or 1966. So the SWR we get for retirements beginning at bubble-level valuations is much lower yet.

The root question is--Do changes in valuation affect the determination of what withdrawal rate is safe or do they not? The data we have assembled reveals a strong correlation between the PE10 (the valuation assessment tool endorsed by Robert Shiller) that applies at the retirement start date and the highest surviving withdrawal rate that ultimately applies for the 30-year historical return sequence that follows (we refer to the latter number as the historical data base rate, or HDBR.)
__________________

__________________
hocus is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
2% SWR firewhen Hi, I am... 17 12-27-2006 07:49 PM
Will you stay 5 more years for $1,000,000? honobob Other topics 18 12-17-2006 10:31 AM
Strategy for a (substantially) higher withdrawal hankjoy FIRE and Money 87 05-24-2004 09:18 PM
SWR, terminal values, TIPS, I-bnds & comm paper sgeeeee FIRE and Money 144 02-25-2004 04:35 PM
$50 a day? No way! patnbj FIRE and Money 112 01-30-2004 09:21 PM

 

 
All times are GMT -6. The time now is 12:37 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.