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The future is what matters
Old 04-11-2012, 07:13 AM   #1
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The future is what matters

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
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Old 04-11-2012, 10:22 AM   #2
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Quote:
Originally Posted by btbw2380 View Post
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
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Old 04-11-2012, 10:45 AM   #3
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Good article. Note that he acknowledges our prescience:
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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.
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Old 04-12-2012, 11:53 PM   #4
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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.
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Old 04-13-2012, 12:20 AM   #5
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This thead got the play I expected. "Don't bring me bad news, I'm a good news guy."
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Old 04-13-2012, 01:06 AM   #6
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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.
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Old 04-13-2012, 04:38 AM   #7
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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.
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Old 04-13-2012, 06:30 AM   #8
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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.
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Old 04-13-2012, 07:30 AM   #9
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"The future is what matters"

Sure; without it, you're probably dead ...
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Old 04-13-2012, 08:26 AM   #10
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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.
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Old 04-13-2012, 10:42 AM   #11
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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).


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Old 04-13-2012, 10:52 AM   #12
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Interesting article. BTW, note the author's comment in the comments:

Quote:
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
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Old 04-13-2012, 10:58 AM   #13
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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.
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Old 04-13-2012, 11:58 AM   #14
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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.
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Old 04-13-2012, 12:10 PM   #15
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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?
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Old 04-13-2012, 12:25 PM   #16
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Originally Posted by EvrClrx311 View Post
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.
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Old 04-13-2012, 01:07 PM   #17
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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.
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Old 04-13-2012, 01:12 PM   #18
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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)
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Old 04-13-2012, 04:00 PM   #19
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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?


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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.
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Old 04-13-2012, 04:36 PM   #20
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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.
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