The “Safe Withdrawal Rate” May Be Changing

[Meadbh]

From Part 3: After detailing the very wide variety of infrequent but cataclysmic social events that rock human societies, Bernstein writes:But, in a nuthell: Yes, I think it's possible a black swan bigger and badder than any we've seen in the US in the last 100 years might pay us a visit. But, that's not what I'm most concerned about. Instead, I'm concerned that the good fairy has been sitting on our shoulder for the last 60 years, and that the wonderful average returns we've experienced during that time are now the base set of the data in FIRECalc and other models (Monte Carlo or not). If the good fairy has left us (and there are many reasons to believe she has), then we'll be getting about 2-4%% real total return on our portfolios for a long time, and it won't take a terrific black swan to wipe out retirees who need 6-8% real total return just to stay even.

I worry about the same thing. Will history look back at the 20th century as the golden age of equities?

 

[rayvt]

You are saying that the companies don't pay a percentage of their current stock value as the dividend but so many cents per share and that we create the percentage. A worthy distinction, still, if my rents stay constant or grow a bit but property values drop a bunch or go up a lot my yield expressed as a percentage would show that and maybe indicate a good time to sell. I do appreciate your distinction - rents or dividends are what we spend, percentages are just mathematical conceits.

"mathematical conceits" I like that way of putting it.

Your comment brings me back to a question that has been haunting me ever since I started buying preferred stocks.

Suppose I buy a stock with a coupon rate of 8% ($2.00 per year) at a discount of 9.8% (vs. par) (22.62). My yield at the purchase is therefore 8.84%. Subsequently the price rises to par (25.00).

I'm still getting the same $2.00 a year. But is my yield 8.84% or 8%?
I think that what CI is saying is, "Who cares? I'm still getting $2 amd that's all that matters."

 

[ERD50]

I'm still getting the same $2.00 a year. But is my yield 8.84% or 8%?
I think that what CI is saying is, "Who cares? I'm still getting $2 amd that's all that matters."

I'd say it does matter in terms of - 'could I sell it and get a better return somewhere else?'.

Take an extreme case where you buy a stock for $20 and it pays a $1 dividend, 5%. The stock goes up to $200/sh, same $1 div., but only 0.5% You could sell and probably move the money to something where you could 'lock in' a safe dividend over 0.5%.

-ERD50

 

[kyounge1956]

In addition tot he link posted by onward, these other Bernstein "Retirement Calculator from Hell" articles are well worth a read.

Retirement Calculator from Hell Part II

Retirement Calculator from Hell Part III

Retirement Calculator from Hell Part IV

Retirement Calculator from Hell Part V

From Part 3: After detailing the very wide variety of infrequent but cataclysmic social events that rock human societies, Bernstein writes:But, in a nuthell: Yes, I think it's possible a black swan bigger and badder than any we've seen in the US in the last 100 years might pay us a visit. But, that's not what I'm most concerned about. Instead, I'm concerned that the good fairy has been sitting on our shoulder for the last 60 years, and that the wonderful average returns we've experienced during that time are now the base set of the data in FIRECalc and other models (Monte Carlo or not). If the good fairy has left us (and there are many reasons to believe she has), then we'll be getting about 2-4%% real total return on our portfolios for a long time, and it won't take a terrific black swan to wipe out retirees who need 6-8% real total return just to stay even.

I'll check those links. I know I've read some of the RCFH articles, but don't remember there being that many, so perhaps I've missed some. I think we're saying kind of the same thing about the swans. Could be that future swans will be bigger and blacker because (due to the influence of the good fairy), what we thought were black swans the last several decades were actually only big, dark-colored ducks. If the good fairy leaves, the regular and extra-large swans may put in an appearance at some point. More likely than not, what with mean reversion and all.

 

[BigNick]

IMO - One should be fairly confident about being able to provide for their basic lifestyle (for their expected lifespan) if they are considering ER. If not, perhaps the plan should be adjusted.

...

Assuming one can fund their lifestyle (with a conservative estimate/projection)... I believe other factors can present far more risk. People have some level of control over their spending and can exercise it. Plus it is easy to understand.

Amen. I will increase the value of my portfolio by 10% this year, and 6 of those 10 points will come from savings - which is just the reverse side of the "adjusting spending coin". I could try to change my 4% return to 4.5%, with a lot of effort and no certainty, or I can just buy fewer clothes (or rather, suggest to DW that she's got enough already ).

Something I'm finding paradoxical since I joined this fine forum is that there seem to be lots of people who are very (excessively?) cautious on the downside of many things ("assume that every one of your relatives will gamble away all of the inheritance or leave it to the cat's home", "make sure your plans cover what happens when the S&P500 to lose half its value", "dividends will never be the same again", etc), yet are planning to retire early with a relatively fixed income in a way that more or less presumes that society will continue to function pretty much as it does today, with supermarkets, restaurants, overseas vacations, etc.

But if something truly catastrophic happened to society or there were some fundamental change to the economy, everything would change, and we would have to change our plans too. The good news is that, as intelligent humans, we will be able to do that. So much journalism is based on the idea of "OMG, if nothing is done, trend X will kill us all", which is fine except that something will always get done - it may take longer than we'd like, but humanity never just sits there while the floodwaters rise (provided only that we can see them rising).

 

[Texas Proud]

But if something truly catastrophic happened to society or there were some fundamental change to the economy, everything would change, and we would have to change our plans too. The good news is that, as intelligent humans, we will be able to do that. So much journalism is based on the idea of "OMG, if nothing is done, trend X will kill us all", which is fine except that something will always get done - it may take longer than we'd like, but humanity never just sits there while the floodwaters rise (provided only that we can see them rising).

Except for global thermonuclear war.... or some kind of N1H1 virus that kills half the population... I don't see anything that would change the face of things where there are no supermarkets and society breaks down to chaos...


You can see it over and over again... people adjust like you say... now, we may not be able to afford the food or we will struggle, but that black swan that you are talking about just will never be in my plans...

All the other changes that seem to be talked about are usually going to change things over time... and we can adjust...

I am not planning on the sun blowing up.... if it does.. well, I will be in a heap of trouble... until then I am happy as a clam at high tide...

 

[haha]

So much journalism is based on the idea of "OMG, if nothing is done, trend X will kill us all", which is fine except that something will always get done - it may take longer than we'd like, but humanity never just sits there while the floodwaters rise (provided only that we can see them rising).

I think I know what you are saying, but if this were literally true the Hittites would still be running the world. But since them there have been many consolidating regimes, all of which except the US are defunct. We had the Pax Romana, the Holy Roman Empire of the Middle Ages, Large Colonial powers such as France, Spain, Netherlands, the Pax Britannica, and now many are conceding that the Pax Americana might well be in its final times. And this doesn't even mention all the major regional empires Nazi Germany, USSR, China of many periods, the Ottoman Empire, etc.etc.

And with respect to ecological disasters, we really don't know enough, or understand enough of the factors and all their interactions to make dismissive statements from knowledge.

I think that humans characteristically wait until the last minute to act- that is why the bible, nursery rhymes and other repositories of culture are filled with parables about planning ahead. Where we are flying blind is that we cannot know if the greater speed and power of today's human disturbances in the environment might not create crises which are different in essence, not just scale, from earlier human experience.

Everybody knows this and that, but much of what they know always turns out to be false. Therefore I believe that conservatism is a good stance.

Economic and historical and natural disasters happen with disturbing frequency, and will continue to happen. Infrequent events can be very meaningful for an entire society. And increasingly, what affects one area will affect others too.

From my POV, an intellectually and morally valid stance is to admit that we are flying blind, that almost anything might happen, but to persist in living life optimistically and seeking pleasure and goodness as we are living life.

Ha

 

[Texas Proud]

Just an interesting comment about 'rising water'... and if we want to discuss we should move to another thread...

I was watching something on the history channel about the various ice ages... and they showed that Florida was three times wider than it is now during the last major ice age... and that NYC would have been under 1 mile of ice... now, it will probably continue... but at such a slow pace that it does not affect me...

And that is my point.. all of the empires HaHa mentioned did decline.. most did it in a slow way... but guess what... all are still occupied with us pesky humans... all with probably more people than back when...