see http://www.retireearlyhomepage.com/twoperc.html for the January 2005 article.
new retire early home page article
- Thread starter wzd
- Start date
I put forward some strongly worded stuff re this article in a thread titled "Intercst Article on 2% SWR," which appears at the SWR Research Group board at the NoFeeBoards.com site. My personal view is that it would be healthy if we discussed the points raised there. However, my sense of things is that there are a good number of community members here who would prefer that we not do that. I don't think it is a good idea to force the issue. If people have questions, I will respond. If not, I will accept it as sufficient that those interested in hearing my views on this article can do so by checking out what I wrote at the other board.
Just so that this post does not come across as being absurdly mysterious, I will provide a greatly summarized version of my take. The words that appear in the article are generally OK if considered outside of the context in which they were published. What disturbs me is that the title of the article suggests that the article is going to be intercst's response to the question that was put on the table during The Great SWR Debate--Do changes in valuation levels affect SWRs? There are a number of serious people who say that they do, and I believe that intercst owes us a reasoned response to the arguments that those people have put forward. This article promises in its title to address those points, but fails to do so in its text.
Just so that this post does not come across as being absurdly mysterious, I will provide a greatly summarized version of my take. The words that appear in the article are generally OK if considered outside of the context in which they were published. What disturbs me is that the title of the article suggests that the article is going to be intercst's response to the question that was put on the table during The Great SWR Debate--Do changes in valuation levels affect SWRs? There are a number of serious people who say that they do, and I believe that intercst owes us a reasoned response to the arguments that those people have put forward. This article promises in its title to address those points, but fails to do so in its text.
Tadpole
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It has struck me that annuity providers have gravitated to a rate of a little over 4%. I realize that the current interest rate affect this number. But it has also struck me that they are at the 4% level where they have a high chance of keeping the original investment. Why would they want to ever offer any more than 4% if this is the case? Concerning the 2%, does anyone here have enough investments to adhere to this?
Concerning the 2%, does anyone here have enough investments to adhere to this?
The SWR for an 80 percent S&P portfolio is now about 2.5 percent (valuations have gone down since Bernstein did his calculation showing an SWR for stocks of 2 percent). By lowering your stock allocation, you can obtain a higher SWR for your own particular plan. Or you can go with 80 percent stocks and hope that you get a good returns sequence. At today's valuation levels, a high-stock plan calling for a 4 percent take-out has about a 50 percent chance of surviving 30 years, according to the historical data.
The SWR for an 80 percent S&P portfolio is now about 2.5 percent (valuations have gone down since Bernstein did his calculation showing an SWR for stocks of 2 percent). By lowering your stock allocation, you can obtain a higher SWR for your own particular plan. Or you can go with 80 percent stocks and hope that you get a good returns sequence. At today's valuation levels, a high-stock plan calling for a 4 percent take-out has about a 50 percent chance of surviving 30 years, according to the historical data.
Tadpole
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Thanks. Is this approximately what you mean by valuation?
The value of a share using a weighted average of the P/E ratio, DCF, price/net tangible assets and other measures.
The value of a share using a weighted average of the P/E ratio, DCF, price/net tangible assets and other measures.
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Speaking only for myself (with hats off to the Norwegian widow).
Vanguard Balanced Index: SEC yield 2.44%
" Wellesley: SEC yield 3.62%
" Wellington: SEC yield 2.53%
The numbers speak for themself.
BTY - I enjoyed the article.
Vanguard Balanced Index: SEC yield 2.44%
" Wellesley: SEC yield 3.62%
" Wellington: SEC yield 2.53%
The numbers speak for themself.
BTY - I enjoyed the article.
Is this approximately what you mean by valuation?
I believe that it is critical to take valuation into consideration in determining SWRs. I don't believe that there is any one way that is the only possible correct way. Bernstein incorporated valuations into his analysis in one way, raddr did it another, and JWR1945 did it in yet a third way.
My personal favorite approach to SWR analysis is the JWR1945 methodology. He uses PE10 for the valuation component of his analyses. P/E10 is the current price of the S&P500 index divided by the average of the most recent decade of earnings.
I believe that it is critical to take valuation into consideration in determining SWRs. I don't believe that there is any one way that is the only possible correct way. Bernstein incorporated valuations into his analysis in one way, raddr did it another, and JWR1945 did it in yet a third way.
My personal favorite approach to SWR analysis is the JWR1945 methodology. He uses PE10 for the valuation component of his analyses. P/E10 is the current price of the S&P500 index divided by the average of the most recent decade of earnings.
hi Tadpole,
That's a good question and hits indirectly at one of the key problems the sub-4% SWR advocates face. They first make the argument that historical SWR is not valid since past results are no guarantee of future performance. That much is hard to argue with.
Then they use valuation metrics like PE or PE10 etc. which are historical measures. PE measures past performance to current price while PE10 measures 10 years past perfomance to current price. And using the same past performance that they don't trust from historical simulators, they argue that SWR must be lower than the historical safe rate.
Trying to use valuation metrics to predict future performance is a form of market prediction that is very difficult to justify and impossible to prove until after the fact. The way sub-4% SWR types attempt to justified it is to use historical data indicating there has been some correlation between PE or PE10 and SWR in the past. This is the same historical data that they consider invalid for determining SWR.
While I would never claim to know that the 4% historically safe SWR will be safe forever and ever, I think it is a very good number to help retirees and future retirees set investment targets. Clearly, the more safety margin a retiree places in their plan, the more likely they are to feel comfortable in retirement. Most of the people who discuss their retirement plans on this board seem to discount future social security and pension benefits, over estimate their retirement spending, and build up a nest egg that reflects a smaller than 4% withdrawal rate. That makes most posters feel pretty safe.
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I also lean toward JWR's valuation method - close to my take on Ben Graham(1949) and Watler L. Morgan(1929).
But Fama and French ala Berstein's value premium(book value) and Buffett's intrinsic value ranges(Fisher?) are also useful. Buffet's are the trickiest to grasp - and potentially the most rewarding.
But Fama and French ala Berstein's value premium(book value) and Buffett's intrinsic value ranges(Fisher?) are also useful. Buffet's are the trickiest to grasp - and potentially the most rewarding.
I think you've just identified one of the biggest problems with Hoco-mania and the 2% withdrawal rate.
As far as the *****/JWR1945 "stock-switching" valuation studies go, raddr has done a good job debunking the "junk-science" behind this work.
http://nofeeboards.com/boards/viewtopic.php?t=2399&highlight=switching+beware
intercst
C
Cut-Throat
Guest
Thanks for the link and just read it. It shows that there probably more perils in fearing the market (i.e. Valuations) than not fearing it.
As far as the *****/JWR1945 "stock-switching" valuation studies go, raddr has done a good job debunking the "junk-science" behind this work.
I don't think raddr has done a good job challenging JWR1945's findings on switching strategies. I think he has done a poor job. He has said that he does not read the work that JWR1945 posts at the SWR Research Group board. That means that he is uninformed on many of the details of how the research was conducted. And he did not post his "debunking" at the board at which the research appeared. That's lame.
When I challenged your REHP study, intercst, I challenged it at the board at which you posted so that you had an opportunity to respond to the arguments I put forward. Anyone with a desire to "debunk" JWR1945's work should post their arguments at the SWR Research Group board. If there is something to the challenge, they are doing a good thing and we will all learn from the interchange. If there is nothing to their claims, then we will learn that. Either way, that is the proper manner in which to proceed.
Raddr's approach was to leave the NoFeeBoards.com site (where the site owner ES had featured his research on the home page), start his own board, and then ban JWR1945 from the raddr board for life before JWR1945 ever put up a single post there. That's shameful. The very fact that raddr proceeded in that manner should reveal to all reasonable community members just how confident raddr is in his ability to "debunk" the research that JWR1945 has shared with our community.
I think you've just identified one of the biggest problems with Hoco-mania and the 2% withdrawal rate.
There is no such thing as "hoco-mania," intercst. It's a nonsense term that you made up as part of your effort to turn every discussion of the realities of SWRs into a circus event. Please cut out the nonsense.
Here's a serious question for you. William Berstein says in his book "The Four Pillars of Investing" that the conventional SWR methodology (the methodology used in your REHP study) is "highly misleading" at times of high valuation. He said in an e-mail to Ataloss that anyone thinking of using the conventional methodology SWR to plan a retirement today would be well-advised to "fuggetaboutit." Do you think that Bernstein is off base with these statements? If you do, please tell us why you do.
I don't think raddr has done a good job challenging JWR1945's findings on switching strategies. I think he has done a poor job. He has said that he does not read the work that JWR1945 posts at the SWR Research Group board. That means that he is uninformed on many of the details of how the research was conducted. And he did not post his "debunking" at the board at which the research appeared. That's lame.
When I challenged your REHP study, intercst, I challenged it at the board at which you posted so that you had an opportunity to respond to the arguments I put forward. Anyone with a desire to "debunk" JWR1945's work should post their arguments at the SWR Research Group board. If there is something to the challenge, they are doing a good thing and we will all learn from the interchange. If there is nothing to their claims, then we will learn that. Either way, that is the proper manner in which to proceed.
Raddr's approach was to leave the NoFeeBoards.com site (where the site owner ES had featured his research on the home page), start his own board, and then ban JWR1945 from the raddr board for life before JWR1945 ever put up a single post there. That's shameful. The very fact that raddr proceeded in that manner should reveal to all reasonable community members just how confident raddr is in his ability to "debunk" the research that JWR1945 has shared with our community.
I think you've just identified one of the biggest problems with Hoco-mania and the 2% withdrawal rate.
There is no such thing as "hoco-mania," intercst. It's a nonsense term that you made up as part of your effort to turn every discussion of the realities of SWRs into a circus event. Please cut out the nonsense.
Here's a serious question for you. William Berstein says in his book "The Four Pillars of Investing" that the conventional SWR methodology (the methodology used in your REHP study) is "highly misleading" at times of high valuation. He said in an e-mail to Ataloss that anyone thinking of using the conventional methodology SWR to plan a retirement today would be well-advised to "fuggetaboutit." Do you think that Bernstein is off base with these statements? If you do, please tell us why you do.
This is the same historical data that they consider invalid for determining SWR.
I believe that the record of how stocks have done in the past is a reasonable guide to how they may do in the future. The historical record is obviously not a perfect guide to the future. But what else do we have to go by? I think it makes sense to look at the historical data in putting together a Retire Early investment strategy.
Anything worth doing is worth doing properly. There is obviously nothing wrong with looking at the historical return sequences. They are part of the historical record. But it is equally obvious (at least to experts like William Bernstein, Rob Arnott, Robert Shiller, Peter Bernstein, and Andrew Smithers) that changes in valuation affect long-term returns. It is not possible to determine SWRs by looking only at historical returns sequences. To determine SWRs requires an examination of the effects of changes in valuation levels in addition to an examination of the historical returns sequences. Both factors must be taken into account in coming up with an informed answer to the question at issue--What withdrawal rate is safe?
I believe that the record of how stocks have done in the past is a reasonable guide to how they may do in the future. The historical record is obviously not a perfect guide to the future. But what else do we have to go by? I think it makes sense to look at the historical data in putting together a Retire Early investment strategy.
Anything worth doing is worth doing properly. There is obviously nothing wrong with looking at the historical return sequences. They are part of the historical record. But it is equally obvious (at least to experts like William Bernstein, Rob Arnott, Robert Shiller, Peter Bernstein, and Andrew Smithers) that changes in valuation affect long-term returns. It is not possible to determine SWRs by looking only at historical returns sequences. To determine SWRs requires an examination of the effects of changes in valuation levels in addition to an examination of the historical returns sequences. Both factors must be taken into account in coming up with an informed answer to the question at issue--What withdrawal rate is safe?
C
Cut-Throat
Guest
Howdy DoodyHead !
Are you any relation to Salary Guru?
Are you any relation to Salary Guru?
Sounds like an endorsement of the historically derived 4% SWR to me.
It's not an endorsement of the REHP study. But it is an endorsement of something that intercst holds dear to his heart--SWR analysis. Something that I believe that many people overlook is that intercst and I have a lot in common. We both have an intense dislike of time-wasting staff meetings. We both did SWR research in the mid-90s. We both like to post at internet discussion boards. We both believe that SWR analysis has great value. We both started our "retirements" using a 4 percent take-out number.
We are at odds on the question of whether changes in valuation affects SWRs. So what? Why does this difference have to create so much controversy? Since when is there a rule that everyone must walk in step on a question before a discussion board community? I say that the SWR today for an 80 percent S&P portfolio is 2.5 percent. Intercst says it is 4 percent. This difference between us need not be viewed as a bad thing. It gives us all something to talk about does it not? So why all the friction? It is the friction that we should be aiming to suppress, not the SWR discussions. That's my take.
It's not an endorsement of the REHP study. But it is an endorsement of something that intercst holds dear to his heart--SWR analysis. Something that I believe that many people overlook is that intercst and I have a lot in common. We both have an intense dislike of time-wasting staff meetings. We both did SWR research in the mid-90s. We both like to post at internet discussion boards. We both believe that SWR analysis has great value. We both started our "retirements" using a 4 percent take-out number.
We are at odds on the question of whether changes in valuation affects SWRs. So what? Why does this difference have to create so much controversy? Since when is there a rule that everyone must walk in step on a question before a discussion board community? I say that the SWR today for an 80 percent S&P portfolio is 2.5 percent. Intercst says it is 4 percent. This difference between us need not be viewed as a bad thing. It gives us all something to talk about does it not? So why all the friction? It is the friction that we should be aiming to suppress, not the SWR discussions. That's my take.
1) re: Hoco-mania Anyone who has followed your record on the various "retire early" boards over the past two years will confirm that "Hoco-mania" is an authentic phenomenon. As a matter of fact, when people ask me if there is any downside to retiring early, I refer them to your robust collection of ravings on "the 2% SWR" as an example of the demons that can possess those who attempt early retirement with a half-a$$ plan and a limited understanding of arithmetic.
2) re: Bernstein This question has been answered for ***** so many times on the various retire early boards, that it only confirms "Hoco-mania".
***** continues to be unable to differentiate between future stock market returns (which we don't know) and historical stock market returns (which we can calculate to three or more significant figures of precision.)
Bernstein (or anyone else) doesn't know what future stock market returns will be. The "higher valuations" might lead to lower long term returns that provide a 30-year SWR of less than 4%, they might not.
The historically high stock market valuations in 1929 required the additional factors of the Great Depression and a 25% unemployment rate to knock the SWR down to 4%. I see no evidence that those accompanying factors are present today nor were they present at the market peak in 2000.
Over on the Motley Fool board, prometheuss recently offered this rebuttal to *****'s continuing misinterpretation of Bernstein.
http://boards.fool.com/Message.asp?mid=21783972
<<arrete: Beyond that, you can fairly see the envy dripping out of his [*****] post. All talk and no substance. All he can do (apparently) is slime other people.>>
Good point. The question YKW [i.e., *****] asked was answered several times, but no answer can satisfy him because his envy clouds his judgment.
http://boards.fool.com/Message.asp?mid=18201341
The book "Four Pillars of Investing," by William Bernstein, discusses the efficient frontier in great detail. On page 234, Bernstein makes the following statement in regard to safe withdrawal rates for stocks:
"A particularly bad returns sequence can reduce your safe withdrawal rate amount by as much as 2 percent below the long-term return of stocks. Recall from Chapter 2 that it's likely that future real stock returns will be in the 3.5 percent range, which means that current retirees may not be entirely safe withdrawing more than 2 percent of the real starting values of their portfolios per year."
YKW ignores everything Bernstein says and grasps at the 2% number to counter his nemesis. No one has ever disputed that a future with 3.5% real stock market returns would reduce the SWR. After all, such a future would be much worse than the historical record. Bernstein says that such a future might occur for someone who retires at the height of the 90's bull market. And it might--or it might not.
</snip>
I concur with prometheuss's remarks.
intercst
Depends on the pattern of returns over the 30-year pay out period. It could happen when combined with a 3.5% real return (which is much less than the historical average.)
On the other hand, we could be hit with an asteroid, nuclear war, or worldwide deadly plague before then.
That's why Bernstein doesn't recommend that anyone actually limit their withdrawals to 2%.
http://www.efficientfrontier.com/ef/901/hell3.htm
intercst
My sincere apologies to everyone. I left the board for a few months last time he got started, and am sorry if this causes others to do the same. Mea Culpa.As a matter of fact, when people ask me if there is any downside to retiring early, I refer them to your robust collection of ravings on "the 2% SWR" as an example of the demons that can possess those who attempt early retirement with a half-a$$ plan and a limited understanding of arithmetic.
It is a fact that you have said such things on numerous occasions. You should stop. You demean yourself by putting forward such arguments. You also demean the board community that is exposed to them when you put them forward.
re: Bernstein This question has been answered for ***** so many times on the various retire early boards, that it only confirms "Hoco-mania"
When I have been asked to provide cites to my quotations of Bernstein, I have done so. You have claimed that I have "misquoted" Bernstein. You have never given a single example of any wording that I misquoted. You have never given any reasoned explanation of why Bernstein says that the SWR at the top of the bubble was 2 percent if, as you say, anyone who thinks that it can ever go below 4 percent is "mentally ill."
***** continues to be unable to differentiate between future stock market returns (which we don't know) and historical stock market returns (which we can calculate to three or more significant figures of precision.)
I asked for an explanation of why Bernstein says that your numbers are "highly misleading," intercst. Please try to forget about ***** for the time-being. Please tell us why Bernstein says that your numbers are "highly misleading" and please tell us why Bernstein says that anyone using your numbers to plan a retirement today would be well-advised to "forgeddaboutit."
It is a fact that you have said such things on numerous occasions. You should stop. You demean yourself by putting forward such arguments. You also demean the board community that is exposed to them when you put them forward.
re: Bernstein This question has been answered for ***** so many times on the various retire early boards, that it only confirms "Hoco-mania"
When I have been asked to provide cites to my quotations of Bernstein, I have done so. You have claimed that I have "misquoted" Bernstein. You have never given a single example of any wording that I misquoted. You have never given any reasoned explanation of why Bernstein says that the SWR at the top of the bubble was 2 percent if, as you say, anyone who thinks that it can ever go below 4 percent is "mentally ill."
***** continues to be unable to differentiate between future stock market returns (which we don't know) and historical stock market returns (which we can calculate to three or more significant figures of precision.)
I asked for an explanation of why Bernstein says that your numbers are "highly misleading," intercst. Please try to forget about ***** for the time-being. Please tell us why Bernstein says that your numbers are "highly misleading" and please tell us why Bernstein says that anyone using your numbers to plan a retirement today would be well-advised to "forgeddaboutit."
Depends on the pattern of returns over the 30-year pay out period. It [the "it" being referred to here is the failure of a plan with a withdrawal rate of greater than 2 percent] could happen when combined with a 3.5% real return (which is much less than the historical average.) "
This sentence sums up the entire debate in a nutshell. Intercst is acknowledging here that a high-stock portfolio with a withdrawal rate greater than 2 percent may fail if valuation levels do indeed continue to affect long-term returns (as they always have in the past and as Bernstein says they must as a matter of "mathematical certainty"). It is not correct to say that such plans must fail. It depends on what sort of returns sequence pops up, and we don't know today what sort of returns sequences are going to pop up in the future.
What we know is that it was not "100 percent" safe to to take a 4 percent withdrawal from a high-stock portfolio for a retirement beginning at the top of the bubble. Intercst was telling community members in January 2000 that a 4 percent take-out was "100 percent safe." There are a number of posts in the archives in which community members said that, since 4 percent was 100 percent safe, they thought it was safe enough to go with 5 percent. JWR1945's research shows that, in January 2000, the SWR for stocks was 1.6 percent and the Unsafe Withdrawal Rate (the take-out number that has only a 5 percent chance of working) was 4.8.
The REHP study has put a number of retirements at great risk of going bust. It was an honest mistake back in January 2000. It is not an honest mistake today. Today, we know about Bernstein's findings, we know about raddr's findings, and we know about JWR1945's findings. To not allow community members to hear accurate reports on what the historical data says today is wrong.
That's why Bernstein doesn't recommend that anyone actually limit their withdrawals to 2%.
I have no objection to anyone taking a 4 percent withdrawal in their plan so long as they are informed as to what the historical data says re SWRs. On this question, Bernstein and I are in complete agreement.
This sentence sums up the entire debate in a nutshell. Intercst is acknowledging here that a high-stock portfolio with a withdrawal rate greater than 2 percent may fail if valuation levels do indeed continue to affect long-term returns (as they always have in the past and as Bernstein says they must as a matter of "mathematical certainty"). It is not correct to say that such plans must fail. It depends on what sort of returns sequence pops up, and we don't know today what sort of returns sequences are going to pop up in the future.
What we know is that it was not "100 percent" safe to to take a 4 percent withdrawal from a high-stock portfolio for a retirement beginning at the top of the bubble. Intercst was telling community members in January 2000 that a 4 percent take-out was "100 percent safe." There are a number of posts in the archives in which community members said that, since 4 percent was 100 percent safe, they thought it was safe enough to go with 5 percent. JWR1945's research shows that, in January 2000, the SWR for stocks was 1.6 percent and the Unsafe Withdrawal Rate (the take-out number that has only a 5 percent chance of working) was 4.8.
The REHP study has put a number of retirements at great risk of going bust. It was an honest mistake back in January 2000. It is not an honest mistake today. Today, we know about Bernstein's findings, we know about raddr's findings, and we know about JWR1945's findings. To not allow community members to hear accurate reports on what the historical data says today is wrong.
That's why Bernstein doesn't recommend that anyone actually limit their withdrawals to 2%.
I have no objection to anyone taking a 4 percent withdrawal in their plan so long as they are informed as to what the historical data says re SWRs. On this question, Bernstein and I are in complete agreement.
My sincere apologies to everyone.
You have nothing to apologize for, wzd. If the community had no concerns re this matter, it would not put up questions and comments about it. If the community still has unasnwered questions, it will continue to pursue them by putting posts to the board. That's as it should be.
You have nothing to apologize for, wzd. If the community had no concerns re this matter, it would not put up questions and comments about it. If the community still has unasnwered questions, it will continue to pursue them by putting posts to the board. That's as it should be.
Just my 2 cents worth...
All this debate over over SWRs is a waste of perfectly good brain power IMHO. OK, there is no guaranteed SWR. Never has been , never will be. There is no way to tell who is right and who is wrong, only history will tell us that. These are all opinions {by intelligent people} who have worked hard to come up with a method to predict the future based on the past.
I, for one, like using the 4% withdrawal rate as a guideline; however, I will adjust my investments, spending, etc. based on my performance as measured by my change in net worth from year to year. I am not going to cheat myself now because of some potential future catastrophic event that may change (reduce) my withdrawal rate. I will deal with that IF it happens.
Anybody that retires on a shoestring budget, at whatever age, based on a 4%, or 3% or 2% for that matter, withdrawal rate has to know that there is a chance that they may actually have to go back to work at some point in the future if things go wrong, God forbid.
All this debate over over SWRs is a waste of perfectly good brain power IMHO. OK, there is no guaranteed SWR. Never has been , never will be. There is no way to tell who is right and who is wrong, only history will tell us that. These are all opinions {by intelligent people} who have worked hard to come up with a method to predict the future based on the past.
I, for one, like using the 4% withdrawal rate as a guideline; however, I will adjust my investments, spending, etc. based on my performance as measured by my change in net worth from year to year. I am not going to cheat myself now because of some potential future catastrophic event that may change (reduce) my withdrawal rate. I will deal with that IF it happens.
Anybody that retires on a shoestring budget, at whatever age, based on a 4%, or 3% or 2% for that matter, withdrawal rate has to know that there is a chance that they may actually have to go back to work at some point in the future if things go wrong, God forbid.
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