William Sharpe questions 4% WR...

[LARS]

... but doesn't give any real ideas on what will optimize. Anyway a link:

Time to replace the 4% withdrawal rule Robert Powell - MarketWatch

 

[audreyh1]

Yeah - criticism with lots of fancy language but no recommendations!

The main criticism is that in many cases there is a build up of surpluses - money that the retiree is not using.

You can take advantages of surpluses by "reseting" your SWR each year. Otherwise known as using a fixed % SWR calculated each year.

This can lead to the problem that eventually you run into some bad years. But if you have been accumulating some of your surpluses (not using them all up but saving them) this can help you weather the years that your draw is decreased due to the portfolio going down.

Audrey

 

[LARS]

Yeah, and to think he's got a Nobel in economics. Clearly his conclusion (though I haven't read the paper so what do I know) won't get him another Nobel. Still, I can remember reading his INVESTMENTS book in business school.

 

[Nords]

Yeah, and to think he's got a Nobel in economics.

IIRC his prize was awarded years later for his original work of extending MPT to the Sharpe ratio, and the quality of the analysis has improved quite a bit since then.

He's been quoted as saying that it's a good thing the Nobel Committee can't revoke their awards.

If Sharpe had a good idea how to handle SWR, then FinancialEngines would do a better job of retirement spending projections. Best it can do now is assume that you put all of your portfolio into a perfect annuity.

The other issue is that the "excess" funds from the 4% SWR may go to heroic end-of-life treatment or long-term care. So perhaps it's not such a bad idea to have a little left over for the endgame, especially if you're not sentient enough to take the field.

I think a [-]better[/-] more precise answer lies in variable spending along Bob Clyatt's 4%/95% rule. Bud Hebeler has a pretty conservative annual-estimation negative-feedback system on his Analyze Now! website, too. The problem is that anything too much more precise *cough* [-]ESPlanner[/-] *cough* can quickly get too time-consuming & complicated for even the most dedicated ER SWR disciple.

 

[audreyh1]

The other issue is that the "excess" funds from the 4% SWR may go to heroic end-of-life treatment or long-term care. So perhaps it's not such a bad idea to have a little left over for the endgame, especially if you're not sentient enough to take the field.

That is a very good point!

I thought perhaps Bob Clyatt's method also increased draw with portfolio growth (thus keeping surpluses from getting too big), but I wasn't sure.

Audrey

 

[Gone4Good]

Of all the things I worry about, dieing with too much money ranks somewhere right above being too healthy and having too much fun.

 

[donheff]

Jeesh, I actually read the article. What a waste. In summary it says, "there must be a better way, maybe we will find it some day."

 

[RonBoyd]

Jeesh, I actually read the article. What a waste. In summary it says, "there must be a better way, maybe we will find it some day."

I love it. A statement that can be used for every possible situation... financial or not, happy outcome or not. A line of reasoning that simply cannot be argued against.

 

[ziggy29]

Translation: "It's not perfect, but we can't identify anything better." That was helpful.

 

[unclemick]

Jeesh, I actually read the article. What a waste. In summary it says, "there must be a better way, maybe we will find it some day."

1948 RR 9 Kelso, Washington, The Norwegian widow - Ms Wright aka Andersen. Of course other tellings place it at other locations/times/names in the ole PacNW.

Handgrenades and horseshoes - the non math version can be fun. SEC yield in hard times and a little extra in good times - use that 4% stake as your aiming point.

heh heh heh - maximize my stinking utility! Right. My cholorestol is back down below 200 - The Jazz Fest opens in New Orleans and I'm up here eating nuts and twigs in my 17th year of ER and eschewing BBQ. There is a message in there somewhere. ? Dory36's old quote - measure with a micrometer and cut with a hatchet. .

 

[harley]

Jeesh, I actually read the article. What a waste. In summary it says, "there must be a better way, maybe we will find it some day."

When I read this

A retiree using a 4% rule faces spending shortfalls when risky investments underperform, may accumulate wasted surpluses when they outperform and, in any case, could likely purchase exactly the same spending distributions more cheaply."

I was pretty sure I'd be seeing a pitch for annuities somewhere in the article. At least he didn't go there.

 

[ziggy29]

I was pretty sure I'd be seeing a pitch for annuities somewhere in the article. At least he didn't go there.

Glad I wasn't alone in expecting that. Looking for the fastball and they threw a changeup.

 

[donheff]

When I read this



I was pretty sure I'd be seeing a pitch for annuities somewhere in the article. At least he didn't go there.

Glad I wasn't alone in expecting that. Looking for the fastball and they threw a changeup.

Yup, I was expecting he same thing. But, I was disappointed that he dangled that "more cheaply" bon mot out there and then never delivered anything.

 

[walkinwood]

From the article "Supporting a constant spending plan using a volatile investment policy is fundamentally flawed"

I totally agree, but the flaw is in the first part of the sentence - the part about a constant spending plan.

I don't think you can have a retirement plan run purely by formula. Adjustments need to be made based on life expectancy and portfolio performance.

 

[RonBoyd]

I don't think you can have a retirement plan run purely by formula. Adjustments need to be made based on life expectancy and portfolio performance.

+1

 

[Independent]

From the article "Supporting a constant spending plan using a volatile investment policy is fundamentally flawed"

I totally agree, but the flaw is in the first part of the sentence - the part about a constant spending plan.

I don't think you can have a retirement plan run purely by formula. Adjustments need to be made based on life expectancy and portfolio performance.

Nice post.

In addition to the lack of an alternative, and assumption of level spending, I was disappointed that he didn't recognize the uncertainty about the date of death. It amazes me that these investment types will go to great lengths to deal with the uncertainties of invesments, but the ignore the uncertainties related to spending and dying.

 

[FinanceDude]

I don't think you can have a retirement plan run purely by formula. Adjustments need to be made based on life expectancy and portfolio performance.

Yes, and no.........I don't plan on dramatically reducing my budget based on poor market performance, and am taking steps to make sure I am position that I don't need to...........

 

[Gotadimple]

The theory of the 4% rule often gets buried in the reality of cash management. One never sees an article from an economist that connects an overall annual withdrawal rule of thumb with a detailed asset analysis that matches spending needs to the bond portion of a portfolio.

There are all kinds of analyses that show that a 60-40 stock/bond portfolio appears to weather all kinds of market volatility, but very few analyses that lay out a rule of thumb about how much cash needs to be held to cover expenses.

So the flaw in talking about the 4% rule is where the 4% withdrawal actually comes from. Many here have multiple years of cash in their portfolios that performs several functions: (1) becomes the source of the 4% for the year, (2) acts as a buffer to market volatility, (3) generates income to feed the withdrawal in future years, and (4) contributes to sound sleep at night.

-- Rita

 

[haha]

I think this article has a number of very interesting points, including a funding method for a time certain that lacks only a practical liquid market to make it pretty good. Prof. Sharpe is no lightweight, and that alone differentiates him from many who are writing in this area.

He references funding a 4.46% withdrawal by buying an annual series of TIPS strips, such that one matures each year for 30 years. It requires a 2% real yield on the TIPS, which is not available now but has been for much of the time since TIPS have been issued, and even most of the time during which TIPS have been debated on this board. It also requires a more liquid market for TIPS strips, which IMO would come rapidly if this idea were widely publicized. Many individuals might not be able to understand it, but advisors should be able to.

It would not be suitable for true early retirement, because of the many years requiring funding.

Another useful conclusion is that the 4% constant allocation rule dominates what he calls glide path strategies- those that reduce equity allocations as the retiree or aspiring retiree ages. I am not familiar with target retirement funds, but I imagine that they have some of this attribute. The reason for this is the basic RTM nature of markets- losses tend to be followed in time by gains. If one systematically reduces the higher beta proportion of his portfolio, he is also systematically reducing his stake in the eventual market recovery.

Ha

 

[MichaelB]

1948 RR 9 Kelso, Washington, The Norwegian widow - Ms Wright aka Andersen. Of course other tellings place it at other locations/times/names in the ole PacNW.

Handgrenades and horseshoes - the non math version can be fun. SEC yield in hard times and a little extra in good times - use that 4% stake as your aiming point.

heh heh heh - maximize my stinking utility! Right. My cholorestol is back down below 200 - The Jazz Fest opens in New Orleans and I'm up here eating nuts and twigs in my 17th year of ER and eschewing BBQ. There is a message in there somewhere. ? Dory36's old quote - measure with a micrometer and cut with a hatchet. .

unclemick, I gotta admit I sometimes don’t understand your posts but feel I am missing something important.

 

[REWahoo]

... the eventual market recovery.

I knew you were an optimist at heart!

 

[audreyh1]

unclemick, I gotta admit I sometimes don’t understand your posts but feel I am missing something important.

My interpretation:

His psssst Wellesley yields close enough to 4% - sometimes with a little extra cap gain distribution. That takes care of him (plus all those Norwegian widows)!

No worry about the details. He is busy enjoying life, and has managed this way for several decades now.

Audrey

 

[RonBoyd]

unclemick, I gotta admit I sometimes don’t understand your posts but feel I am missing something important.

Me too. On the plus side it did make me look at that Norwegian Widow definition again:

http://www.early-retirement.org/for...-living-off-investments-41292.html#post761445

 

[brewer12345]

unclemick, I gotta admit I sometimes don’t understand your posts but feel I am missing something important.

My interpretation is that we are making this too hard and life is to be lived in ER, not fretted over. None of us will live forever and most of us can alter our paths if things get hairy and the 4% constant doesn't look sustainable.

Personally, I get the feeling that Prof. Sharpe is getting set to start collecting fees for promoting annuities, but I am a suspicious bastard.

 

[MichaelB]

My interpretation is that we are making this too hard and life is to be lived in ER, not fretted over. None of us will live forever and most of us can alter our paths if things get hairy and the 4% constant doesn't look sustainable.

This is something I certainly agree with and practice as hard as I can.