The future is what matters

[btbw2380]

I have always had my concerns about SWR based on historical scenarios that may or may not have much relevancy to current and likely conditions going forward. I found this latest Pfau post addressing those concerns and presenting many points to consider.

Pensions, Retirement Planning, and Economics Blog: Safe Withdrawal Rates and Retirement Date Market Conditions

 

[haha]

I have always had my concerns about SWR based on historical scenarios that may or may not have much relevancy to current and likely conditions going forward. I found this latest Pfau post addressing those concerns and presenting many points to consider.

Pensions, Retirement Planning, and Economics Blog: Safe Withdrawal Rates and Retirement Date Market Conditions

This is so obviously true, and clearly known forever by anyone who comes to the retirement question with an understanding of finance and business, rather than financial advising.

What counts is the underlying, look-through productivity of the assets, and free cash flows and profitable asset conversions represented by these.

But the "retirement community" will never learn this until some guru has blessed it to them.

Not my problem, but a recurring source of puzzlement.

Ha

 

[Independent]

Good article. Note that he acknowledges our prescience:

For at least a decade, this issue has been debated ad nauseam at personal finance discussion boards, but it was Michael Kitces’ May 2008 issue of The Kitces Report that brought the issue to wider attention.

I'll add that the US workforce grew faster in the 20th century than it will in the 21st, and that has some impact on expected stock returns.

Also, for a new retiree looking at bond returns, does it make sense to simply consider a bond ladder? Even if you're in a fund, the ladder is the best predictor or what you'll earn.

 

[mortal]

Lordy, I am at heart a pessimist, but that chart shows predicted SWR at around 2%! That's *half* of what trinity supports.

From everything I've read 3% is the lower bounds for longer time periods and poorer returns.

 

[haha]

This thead got the play I expected. "Don't bring me bad news, I'm a good news guy."

 

[Major Tom]

This post by Wade Pfau was discussed in another thread very recently*, but now I can't find it in order to provide the link. I remember looking at the graph and thinking pretty much the same thing as mortal, i.e. "Holy cow - his model predicts that for very recent retirees, the MWR is a little under 2%!"

I thought I was doing OK with my 2.5% WR...........


*As in yesterday, I think.

 

[foxfirev5]

1%, 2%, 4%....7%. Who knows. It's enough to drive you batty. When I get home form the airport I think I'll tear up the goals posted on the fridge, erase the timer to retirement on the computer and simply keep working. I'd probably drive my wife nuts if I retired anyway.

 

[Hamlet]

I don't think it makes sense to compare dividend yields to the past without also taking into account stock buybacks. Buybacks have become a popular alternative way to return money to shareholders.

 

[rescueme]

"The future is what matters"

Sure; without it, you're probably dead ...

 

[tapper]

It seems that limiting ones investment exposure to a "60/40 asset allocation of large-capitalization stocks and 10-year government bonds" is less than ideal. I suspect that a more diversified set of holdings would perform better.

 

[Lsbcal]

Comments on Pfau's figure 4:

1) His confidence intervals really open up as he gets to current years
2) The 10 year earnings yield (used in PE10) has had a much higher standard deviation then historically. That is because we had some earnings collapse periods in recent years.

Here is a chart showing the PE10 and note the wild swings in real earnings (solid blue) and much higher standard deviation of 10 year earnings (yellow line).

 

[Katsmeow]

Interesting article. BTW, note the author's comment in the comments:

And finally, Doug Nordman made a good effort at explaining these competing viewpoints here:

Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence

Also the comments drew comparisons between this article and the Scott Burns recent column that is discussed on another thread leading to the author's new column where he discussed future withdrawal rates and the Burns column:

Pensions, Retirement Planning, and Economics Blog: Lower Future Returns and Safe Withdrawal Rates

 

[harley]

While trying not to upset Ha's cranky expectations of our responses here, I would like to point out that in the comments to the blog post Wade admits that there are anomalies in the chart regarding the MWR starting 2009. What he's posted here is data, and a possible interpretation of it. But there's more to be considered. Personally, I'm already retired and have no intention fo going back to work. If my WR is too high, I'll have to cut spending. If it's way too high, I'll have to work somewhere despite my best intentions. The future is all that matters, but we can't actually predict it. So I'm going to keep muddling through as best I can.

 

[2B]

I don't think it makes sense to compare dividend yields to the past without also taking into account stock buybacks. Buybacks have become a popular alternative way to return money to shareholders.

The only problem is that there is not a good correlation between buy backs and long term stock performance. The purchased shares seem to have a tendency to end up being awarded to management for their ability the increase the earnings per share (due primarily to the buy back). Earning fall and new goals are set only to be met with another buy back.

I know I have a problem with my cynicism but with everything going on in the world, I just can't seem to keep up.

 

[EvrClrx311]

In regards to the doomsday predictions I tend to just hold to the idea that I've done better than average... in fact better than 95% at savings towards retirement. So if the ___ really hits the fan (dollar becomes worthless, or market drops indefinitely) and I'm forced into a lifestyle I didn't want or wasn't presented in any of the models... at least I'll take comfort knowing I'm still better prepared than the other 95%. I'll enjoy spam... while everyone else eats ramen

More of a psychological crutch... but stands for something at least. Right?

 

[Major Tom]

In regards to the doomsday predictions I tend to just hold to the idea that I've done better than average... in fact better than 95% at savings towards retirement. So if the ___ really hits the fan (dollar becomes worthless, or market drops indefinitely) and I'm forced into a lifestyle I didn't want or wasn't presented in any of the models... at least I'll take comfort knowing I'm still better prepared than the other 95%. I'll enjoy spam... while everyone else eats ramen

More of a psychological crutch... but stands for something at least. Right?

I tend to think the same way you do, EvrClrx311 (I'm not sure if your name means what I think it does, but I met Art Alexakis briefly once, if that means anything to you.)

I'm on a 2.5% WR with the hope that I'll be able to increase that a little as I get older, and then when SS kicks in, things will be looking better still. If Wade's model turns out to be accurate, and 2% is the MWR for very recent retireees, then by the time I can claim SS, I'll still be living the same basic lifestyle instead of living it up a little. Not a complete disaster, just not the outcome I'm hoping for. If it's my worst case, I won't be terribly happy, but I can live with it.

 

[btbw2380]

To me, just more data to consider - as if we didn't have enough. The predictive value of the past though seems much more likely to be useful if we run scenarios based on similiar circumstances that exist today. This has probably been discussed as well (I'm new here, and by the way, the most useful forum I've run across) but general inflation rates used are convenient, but not very useful. Our own personal inflation rates will vary a great deal from "that basket" used to calculate numbers in the aggregate depending on the items we use, or don't use, most. Nothing more useful than using our own personal numbers.

 

[EvrClrx311]

I tend to think the same way you do, EvrClrx311 (I'm not sure if your name means what I think it does, but I met Art Alexakis briefly once, if that means anything to you.)

Very cool!

(and yes it does)

 

[Hamlet]

I agree that stock buybacks are often ill-timed.

However, if the market as a whole is spending money on buybacks that they used to spend on dividends, it is going to increase capital gains and reduce dividend yields.

It's going to distort an attempt to measure historical valuations that are based on dividend yield.

Would the market suddenly be worth a massive amount more if every company in it redirected their stock buyback money to dividends?

The only problem is that there is not a good correlation between buy backs and long term stock performance. The purchased shares seem to have a tendency to end up being awarded to management for their ability the increase the earnings per share (due primarily to the buy back). Earning fall and new goals are set only to be met with another buy back.

I know I have a problem with my cynicism but with everything going on in the world, I just can't seem to keep up.

 

[Gone4Good]

I'll add that the US workforce grew faster in the 20th century than it will in the 21st, and that has some impact on expected stock returns.

Indeed. I think most economists agree that U.S. growth will be slower in the century ahead, then the one behind. The force of the baby-boomers is mostly spent, we can't add women to the workforce a second time, nor can we educate the masses again or build interstate highway systems, electrify the nation, etc.

Slower than historic domestic economic growth and investment valuations in the upper decile suggest we're likely looking at one of the bottom lines on a typical FIRECalc spaghetti graph, or perhaps even worse.

It's certainly not the economic and financial backdrop where we should worry about how we're going to spend the vast fortunes we'll accumulate drawing 4% real from our portfolios.

 

[Gone4Good]

Here's an old post I made about a potential adjustment to make FIRECalc's data relevant to today's market valuations. At the time, 10-yr yields were 3.3% versus today's 1.98%, so this is still a little optimistic from today's perspective:

Here's a thought on making an adjustment to FireCalc runs to reflect current valuations. The basic idea is to revalue your portfolio as if valuations were typical for the model's data set. That means a PE-10 for stocks of 16.4x compared to 23.4x today and a 10-year Interest rate of 4.7% compared to 3.3% today. To do that, simply reduce your equity balance by 30% and your fixed income balance by 11% and use the smaller portfolio for FireCalc runs.

So in the case of a $1MM portfolio split 60/40, the 'revalued' portfolio is reduced to $776K and a $40K annual withdrawal becomes a 5.2% draw assuming a portfolio valued right in the middle of FireCalc's data set.

 

[sengsational]

Indeed. I think most economists agree that U.S. growth will be slower in the century ahead, then the one behind. The force of the baby-boomers is mostly spent, we can't add women to the workforce a second time, nor can we educate the masses again or build interstate highway systems, electrify the nation, etc.
.

Yeah, we can't do those things again, but I'm hoping/thinking that the next generation will do more than play video games, hehe. I have no idea what he next big thing will be, but I'm hopeful, and can't imagine there won't be one or more. Personally, I'd like to see super capacitors take off. So many cool things we could do with light weight, high energy density power sources. More than just the awesome RC planes I'd be building!

 

[harley]

Indeed. I think most economists agree that U.S. growth will be slower in the century ahead, then the one behind. The force of the baby-boomers is mostly spent, we can't add women to the workforce a second time, nor can we educate the masses again or build interstate highway systems, electrify the nation, etc.

Ah, but you forget about the rapidly growing international middle class, including women, all needing to be employed, educated, etc. And somebody is going to need to go around and install the teleport pads and fusion charging stations. Not to mention the (currently) third world plumbing, roads, and power grids that need to be implemented. The U.S. may slow down, as empires do. But I don't care where my returns come from. I worship the god of diversification.

 

[Running_Man]

From the executive study summary of safe withdrawl rates advocating 4% is only good for very conservative investors:

• We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk-averse clients with moderate guaranteed income sources
• The ability to accept greater shortfall probabilities means that risk-tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio

From this study.

The 4 percent withdrawal rate rule cannot be considered as safe for U.S. retirees in recent years when stock market valuations have been at historical highs and the dividend yield has been at historical lows. Despite the peak for PE10 in 2000, I find that sustainable withdrawal rates may continue to decline after 2000 as the continued falling dividend yields and bond yields offset falling earnings-valuation levels. The model predicts sustainable withdrawal rates falling below three percent since 1999, and even below two percent since 2003.

That with a straight face he can publish these two reports and claim they are studying 2 different topics is

But in relation to the Burns piece, what my co-authors and I are describing is that in some cases it can be okay to run of out money after all.

But this latest study if true would mean the failure rate is far higher than he concluded in his previous study invalidating it. The 57% error rate would be far worse. But yet that is the one developed for Financial Planners and this is just his blog. Amazing........

 

[Nords]

I don't think it makes sense to compare dividend yields to the past without also taking into account stock buybacks. Buybacks have become a popular alternative way to return money to [-]shareholders[/-] executives.

There, fixed it for you.

The only problem is that there is not a good correlation between buy backs and long term stock performance. The purchased shares seem to have a tendency to end up being awarded to management for their ability the increase the earnings per share (due primarily to the buy back). Earning fall and new goals are set only to be met with another buy back.
I know I have a problem with my cynicism but with everything going on in the world, I just can't seem to keep up.

I agree that stock buybacks are often ill-timed.
However, if the market as a whole is spending money on buybacks that they used to spend on dividends, it is going to increase capital gains and reduce dividend yields.
It's going to distort an attempt to measure historical valuations that are based on dividend yield.
Would the market suddenly be worth a massive amount more if every company in it redirected their stock buyback money to dividends?

Reducing a stock's total number of shares (the float) would be a good way to return $$ to shareholders, except that companies generally suck at their buyback timing.*

It's interesting to compare the number of buyback announcements with the actual shares outstanding of a stock. If companies actually followed through with their buyback authorizations, let alone stopped handing out options, they would have gone private years ago.

* I'm willing to grant an exception to Berkshire Hathaway. By declaring that they'll buy stock at 1.1x book value, they effectively put a floor on the value of their stock that makes it quite straightforward to earn money selling put options.