donheff
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Michael Kitces has posted a look at SWRs that is a bit more optimistic than a lot of what we have been hearing lately. It is really nothing new. He just points out that the SWR literature is based on historical worst case scenarios, not historical averages. Thus, even if we face a low "new normal" for the coming decades there is no reason to assume we are on track for a new worst case scenario. Looking at the historical data he points out that, assuming our bond market will remain as is (essentially negative with respect to inflation - comparable to historic worst cases), then:
if you expect the coming safe withdrawal rates from here to be worse than anything seen in history, you need to assume not just below-average returns; you need to assume that the stock market cannot generate more than 1% real returns between now and 2027 given a 15-year real bond return of 0% at todays rates, and that if inflation increases from here that equities will fail to increase dividends dollar payouts, grow earnings, or provide any effective hedge to inflation whatsoever.
Given this reality, it's notable that merely getting 'new normal' returns of low single digits would actually represent not a risk to historical safe withdrawal rates; it would actually be an upside surprise that would result in materially higher lifetime spending! It would only be appropriate to assume a safe withdrawal rate lower than the historical 4% - 4.5% rate if you believe that equities will fail to deliver even a 1% real return over the next 15 years, implying (given current dividend and inflation levels) that the S&P 500 price level will be lower in 2027 than it was in 2007 (which would also be lower than it was in 2000, resulting in no appreciation for 27 years!).
As I said, no new data but a more optimistic perspective than some of the 2-3% SWR proponents put forward.
if you expect the coming safe withdrawal rates from here to be worse than anything seen in history, you need to assume not just below-average returns; you need to assume that the stock market cannot generate more than 1% real returns between now and 2027 given a 15-year real bond return of 0% at todays rates, and that if inflation increases from here that equities will fail to increase dividends dollar payouts, grow earnings, or provide any effective hedge to inflation whatsoever.
Given this reality, it's notable that merely getting 'new normal' returns of low single digits would actually represent not a risk to historical safe withdrawal rates; it would actually be an upside surprise that would result in materially higher lifetime spending! It would only be appropriate to assume a safe withdrawal rate lower than the historical 4% - 4.5% rate if you believe that equities will fail to deliver even a 1% real return over the next 15 years, implying (given current dividend and inflation levels) that the S&P 500 price level will be lower in 2027 than it was in 2007 (which would also be lower than it was in 2000, resulting in no appreciation for 27 years!).
As I said, no new data but a more optimistic perspective than some of the 2-3% SWR proponents put forward.