SWR of 6.21% for 26 years

[amt]

If you retire now (at S&P around 1100), your SWR should be about 6.21%, given the assumption that the 30 yr period 2000-2029 would not be worse than the worst 30 year period from the past.

Reason: If you had $1000000 at the beginning of 2000, FIRECalc will tell you that your SWR for 30yrs is 4.19%, using the defaults. If you stick to 4.19% withdrawal, at the end of 2003, your nest egg will be about $674000. Yet, you should be OK to continue withdrawing $41900, plus inflation adjustment til 20209. Hence, if you had $1mil at the end of 2003, then you should be able to withdraw $41900*1000000/674000=$62166, or about 6.22% annually, inflation adjusted. Of course, if you believe that 2000-2029 period will be worse than the worst we've ever experienced then, your personal SWR will be less than that.

 

[John Galt]

Anyone who believes they know what will happen
in the financial markets between now and 2029
has a bigger problem than their SWR.

John Galt

 

[amt]

Sorry for multiple posts. I was having technical difficulties.

 

[John Galt]

Hey amt, no problem about the multiple posts.
It gave me an excuse (yeah, like I need one)
to pontificate on many issues and therefore override
what you had posted. I never seem to run out of opinions. You could ask the wife

John Galt

 

[dory36]

There is no mathematical reason to argue with what you said. Your portfolio doesn't "know" you didn't retire in 2000.

I will delete the extra posts that have no answers -- although John Galt replied with different answers to 3 of these identical posts...

 

[John Galt]

Which just proves that I have the answer for everything.
Like George W., I may be wrong but never in doubt

John Galt

 

[cute fuzzy bunny]

I was beginning to suspect you were actually a turing machine.

 

[Nords]

For those who are wondering WTF is a... ?!?

Turing machine: A mathematical model of a device that changes its internal state and reads from, writes on, and moves a potentially infinite tape, all in accordance with its present state, thereby constituting a model for computer-like behavior.

Turing test: A test devised by the English mathematician Alan M. Turing to determine whether or not a computer can be said to think like a human brain. In an attempt to cut through the philosophical debate about how to define "thinking," Turing devised a subjective test to answer the question, "Can machines think?" and reasoned that if a computer acts, reacts and interacts like a sentient being, then call it sentient. The test is simple: a human interrogator is isolated and given the task of distinguishing between a human and a computer based on their replies to questions that the interrogator poses. After a series of tests are performed, the interrogator attempts to determine which subject is human and which is an artificial intelligence. The computer's success at thinking can be quantified by its probability of being misidentified as the human subject.

 

[cute fuzzy bunny]

Could be both

 

[hocus]

Re: SWR of 6.21% for 26 yearsThere is no mathemati

There is no mathematical reason to argue with what you said.

I agree with this in part and I disagree in part.

There are two things going on in the analysis put forward in the opening post. One thing is that amt is showing how a lowering of valuation levels causes the SWR to go up. The reason why he is coming up with a 6.2 number rather than a 4.1 number is that valuations have gone down since the beginning of 2000. I believe that the logic of this claim is solid; the SWR really has gone up since the year 2000.

The problem I have with the analysis is that no adjustment was made for changes in valuation levels in the analysis that produced the 4.1 number for 2000. A similar adjustment should have been made for that number. If the year 2000 number had been adjusted for valuation, you would had a far lower number for 2000. Then, when you made an upward adjustment for the lowering in valuation levels that has taken place since, you would be adding points or fractions of points to a lower base number.

 

[amt]

Re: SWR of 6.21% for 26 yearsThere is no mathemati

The problem I have with the analysis is that no adjustment was made for changes in valuation levels in the analysis that produced the 4.1 number for 2000. A similar adjustment should have been made for that number. If the year 2000 number had been adjusted for valuation, you would had a far lower number for 2000. Then, when you made an upward adjustment for the lowering in valuation levels that has taken place since, you would be adding points or fractions of points to a lower base number.

*****

You are right if we have to adjust the SWR based on our individual assessment of current valuations, which will be true for many of us. On the other hand, as many have pointed out in the previous posts, the method we are using to get the SWR should already have taken into acount the problems with valuations; i.e., the valuations in 1929 or 1965 just before the prolonged bear markets should already account for overvaluation in 2000, unless if one thinks that 2000 was worse than 1929 or 1965, in which case appropriate downward adjustment to their personal SWR can be made.

regards,

 

[IDunno]

There is no mathematical reason to argue with what you said. Your portfolio doesn't "know" you didn't retire in 2000.

There is, actually, a fallacy here . It just doesn't work. I, too, was thinking the same thing a few months ago ("If the stock market has gone down recently, I'll obviously need less money to retire than someone did a few years ago"). But it doesn't work mathematically.

Think of a coin toss. If you toss a coin 10 times, and it is heads each time, what is the chance that the next toss will be heads? A lot of people say it is more likely to be heads (given that there were already so many heads), while a lot of people will say it is more likely to be tails (there have been so many heads, tails are due their turn). But mathematically, there is still a 50% chance of it being heads.

The same applies here. The flaw in the logic is that firecalc doesn't know the future. In 2000, it comes up with a SWR of 4.19% (let's assume that's given a 95% chance of success), given all the 100+ 30-year scenarios it looks at. But the stock market being down significantly 4 years later is only in perhaps 10 of those 100+ scenarios. So if you know that the stock market is going to be down significantly, you now have only 10 scenarios to pick from, 5 of which are the ones from the 5% chance of failure. So you now have a 50% chance of failure.

And guess what? If you go into firecalc today, and put in 6.21% for 26 years, you get about a 50% chance of failure.

The other flaw is that the comparison is with two things that aren't the same (a 30-year SWR to a 26-year SWR: shorter periods always have higher SWRs).

Of course, if you have $X today, you'll definitely be better off than someone who retired 4 years ago with the same amount of money (assuming that their portfolios did not provide a return exceeding inflation).

 

[haha]

The flaw in the logic is that firecalc doesn't know the future.  In 2000, it comes up with a SWR of 4.19% (let's assume that's given a 95% chance of success), given all the 100+ 30-year scenarios it looks at.  But the stock market being down significantly 4 years later is only in perhaps 10 of those 100+ scenarios.  So if you know that the stock market is going to be down significantly, you now have only 10 scenarios to pick from, 5 of which are the ones from the 5% chance of failure.  So you now have a 50% chance of failure.

Welcome, IDunno. I'd say you do know. Stick around and share more of your probability understanding with us?

I read the original post, and the responses, and although I couldn't put my finget on why they made me uneasy, you have just done so. It just seemed that something was being overlooked. Something that could reach up and take a bite out of my butt.

Mikey

 

[sgeeeee]

. . . The flaw in the logic is that firecalc doesn't know the future.  . . .

No. Your analogy to a coin toss does not apply. The reason for the coin toss result is that the results of each toss is completely and totally independent of the previous toss. There is no correlation between them.

The same is not true for the financial results of the historical simulator. Financial returns and inflation are correlated to each other and to the results of previous years. The correlation is not simple and it is not easily captured mathematically, but it is real. This is precisely the reason why Monte Carlo simulations tend to predict less optimistic withdrawal rates than historical simulators. Monte Carlo simulations fail to capture the correlations between the returns and inflation data.

The fundamental assumption behind using a safe withdrawal rate from a historical simulator is that the future will not be any worse than the worst case we have ever faced in the past. If you believe that, then the conclusion amt draws is valid. If you don't believe that, then you really can't use the historical simulator results to calculatre SWR at all.

 

[cute fuzzy bunny]

Financial returns and inflation are correlated to each other and to the results of previous years. The correlation is not simple and it is not easily captured mathematically, but it is real. This is precisely the reason why Monte Carlo simulations tend to predict less optimistic withdrawal rates than historical simulators. Monte Carlo simulations fail to capture the correlations between the returns and inflation data.

Uh oh, here we go again

I dont believe there is ANY demonstrable correlation for either inflation or investment returns from any one year to the next. If you have any data that shows how to predict even a modicum of the direction that one year will feed into another, I am ALL ears.

I thought about this extensively, and his argument is 100% correct as far as I can see. There is not only no guarantee that a portfolio size today will bounce back, it might go lower still.

Historical models a la firecalc, and composite models such as monte carlo simulations are good for giving you ballpark results and most likely, very good ideas of whether an investment process might be better than another one...based on historical data.

That having been said, a 100% or 98% result assures nothing, and a 25 or 50% result assures the same nothing.

I think calculators like these are beneficial to find the 90% mix of the right investments for longer terms, but to say that because this year was bad, and the year before that was bad, next year will be good because it was 90% of the time historically is akin to playing at market timing or guessing the future.

If financial markets were calculable or followed even the smallest of patterns, someone would have a system to work it.

Otherwise for a period of days, weeks, months and years, its a flip of the coin. No more likely to be heads than tails for each and every flip. There are no formulaic models; its a social model laid over a mathematical one. The former assures unpredictability over short to medium terms. The latter assures some long term predictability.

 

[charlie]

I may be all wet on this, but I think there is some
correlation of the market with interest rates and
the business cycle, neither of which changes very
fast. After all, investors follow the money and when
rates rise, bonds compete more favorably with
stocks and the reduced demand for stocks reduces
their valuation. Rising interest rates tend to
depress the market and falling rates boost the
market. Why in the hell to you think the 90's were
so good? That is when we got a handle on inflation
and lowered interest rates to 40 year lows.

That is just my opinion. Take it for what it cost you.

Cheers,

Charlie (aka Chuck-Lyn)

 

[cute fuzzy bunny]

Charlie - you're close. Rising and falling rates have an impact. Although the 90's saw an increasing rate structure as the fed tried to cool off the stock market speculation. The boom in bonds in the last few years was probably more in line with people running like hell from collapsing stocks.

The trouble is, nobody can accurately predict when interest rates will rise and fall. Many pundits have predicted rising rates any day now for two years. I'm guessing a quarter to a half point by this time next year, and perhaps a total of 2 points by two years from now. That would put me late on the curve as far as 'experts' go.

The interest rate effect generally has a less than one year effect (and its almost immediate) on both stocks and bonds...beating them down. 1987, 1994, 1999 are good recent examples. Stocks usually do a nice pop up within the year due to the accompanying inflation or overheated economical conditions that brought on the interest rate hike. Bonds tend to follow a year or two later as dividend rates rise and bond prices rebound.

The hard part is: when does the economy catch fire...when does inflation surge...when do rates go up and down.

Now we're getting to the meat of it...all of those factors have historically proven relatively unpredictable. The smartest people have taken shots at it and often been early, late or clearly wrong. The whole logic behind index investing says you cant get it right even half the time, and thats weaker than coin flipping rates. Of course, you can debate the index investing argument, but if you throw that baby out, the whole argument of historic data bathwater goes with it.

What we're seeing right now is fantastic capital investment and ROI based on recent loans at historically low rates. Beating the pants off of very low analyst estimates. Exceeding weak expectations. A nice surge, but for it to continue onwards for 5-10 years we need to see earnings in excess of 2x the historic numbers excluding the companies that cooked the books to make them look good.

Bonds on the other hand have already taken a beating because of expected rising rates, and the low interest environment creates a scenario for declining bond fund dividends for at leat a year on top of an additional downward pop when rates are brought up.

REIT's are at a serious high on prices, and a low on dividends.

Some foreign stocks are underpriced compared to their US counterparts, particularly Japan which I bought into heavily some months ago when it appeared that they might finally have figured out what they were doing wrong. I wasnt happy with the 70/30 europe/pacific split most combo funds or indexes are going with based on those historic performances.

Emerging markets have some legs, but they're run up and risky/volatile.

Value stocks arent ugly...at least not as ugly as their growth counterparts.

Thats why I'm sticking with predominately value stocks and the low end (5-7 years) of the intermediate bond range. No big guts, no big glory, but no big damage either.

But we're at the basis of the discussion here. So many folks want to associate market movements with factors, formulae and past patterns. But in the short term its mass psychology.

A theater catches fire or terrorists try to take over a plane...how will people react? Depends on the people, the time of day, some random circumstance, how they feel about something that happened recently or a long time ago, what leadership is in place and what they decide to do and how effective they are, etc.

But I think you end up at the same conclusion.

Spread the peanut butter around to a variety of asset classes. Get low cost vehicles to do this. Do some asset balancing every year or two; no more, no less. Dont trade on news or feelings. Dont believe anything any 'expert' tells you, and sure as hell dont pay anyone for that 'expert' opinion. Be as knowledgeable about your investing as anything you ever knew in your work life. When crazy things happen, do nothing...act on the basis of years and decades, not days/weeks/months.

If it doesnt work, roll up your sleeves and go back to work to fill in the gaps.

 

[Nords]

Re:  It's not that easy.

Clearly we could all review how worthwhile a retirement calculator is when it's trying to predict the future longer than 20 years or success rates higher than 80%.

http://www.efficientfrontier.com/ef/998/hell.htm
http://www.efficientfrontier.com/ef/101/hell101.htm
http://www.efficientfrontier.com/ef/901/hell3.htm
http://www.efficientfrontier.com/ef/103/hell4.htm
http://www.efficientfrontier.com/ef/403/hell5.htm

For those who've had enough Bernstein, Part III contains my favorite indictment of all retirement calculators-- "Consider the implications of the above 97% success rate at a withdrawal of $2,500 per month ($30,000 per year). For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely? Only if you are an historical illiterate (which, I’m afraid, subsumes many finance academics)."

 

[Bob_Smith]

Whenever I'm experiencing angst about SWRs and my future financial security without work, I reflect upon this:

MY PAST​

--Total financial dependence upon the whims of employers who had not the slightest interest in my well-being
--Exposure to disability that could have wiped out my earning power in an instant
--Children and a wife who were dependent upon my ability to maintain a job
--No financial cushion. At times we didn't have enough to handle even a major automobile breakdown.
--Throughout all of this we had to figure out a way to save something for retirement, buy a house, and pay for college for our kids.

MY PRESENT​

   
--The kids are almost raised and doing very well
--Own my house free and clear
--Only three years away from a pension
--Only 10 years from SS
--Enough money saved so that my biggest worry is whether my assets will last for 30 years, or 40

The insecurity I face going forward is almost nothing compared to the risk that I (and probably most of us) have already faced in the past.

 

[hocus]

Welcome, IDunno. I'd say you do know. Stick around and share more of your probability understanding with us?

I second Mikey's warm endorsement of IDunno's contribution. I have been studying the SWR issue for over nine years now, and I view the point he makes in his post as one offering great insight.

The problem with the conventional methodology is that it looks at the entire data set for its data, but then uses the results from only a single data point to generate its conclusion. The valuation levels that produced numbers close to 4 were the valuation levels that applied in 1929 and 1966. There are only 2 data points showing that a 4.1 withdrawal worked at the highest pre-bubble valuation levels, not 130.

Two data points is just not enough to support reasonable claims that a 4 percent withdrawal at those valuation levels is safe. What JWR1945 and I do with our data-based SWR model is make adjustments for changes in valuation, which permits us to make use of the entire data set in generating our SWR findings. My recollection is that the number JWR1945 tentatively came up with for retirements starting at valuation levels equal to the highest pre-bubble valuations was 3.3, not 4.1. We still have work to do in confirming those tentative findings, but it does not appear to me that the 4.1 number is going to stand even for the pre-bubble period.

In the bubble of the late 1990s, valuations went far higher than where they were in 1929 or 1966. So the SWR we get for retirements beginning at bubble-level valuations is much lower yet.

The root question is--Do changes in valuation affect the determination of what withdrawal rate is safe or do they not? The data we have assembled reveals a strong correlation between the PE10 (the valuation assessment tool endorsed by Robert Shiller) that applies at the retirement start date and the highest surviving withdrawal rate that ultimately applies for the 30-year historical return sequence that follows (we refer to the latter number as the historical data base rate, or HDBR.)

 

[dory36]

Let me try to offer a different example to show why this is mathematically accurate (with a clarification). I'm ignoring whether you think the future will be worse than the past -- that's a different dogfight. However, if you'll follow the logic below, it doesn't matter what you believe about future vs past  to accept the conclusion of this example.

The clarification: keep in mind that you're now looking at 27 years and not 30 year survival.

Imagine Bill and Bob.

Bill retires on 12/31/00, taking his 4.1%. Bob works 3 more years.

On 12/31/03, Bob retires, and by coincidence he has exactly as much to start his retirement as Bill has left in his portfolio.

The withdrawal that Bill is taking has now risen, due to portfolio losses, to 6.21% of his remaining portfolio.

Now regardless of who retired when, if Bob starts withdrawing the identical amount of money from a portfolio that, as of 12/31/03, has the identical value, then they will both have the identical amount on 12/31 of every following year -- even though Bob's starting withdrawal happened to be 6.21% of his 12/31/03 portfolio.

How could it be otherwise?

Dory36

(Anyone who protests that Bill and Bob will have different tax situations will be fined a dryer sheet!)

 

[IDunno]

Now regardless of who retired when, if Bob starts withdrawing the identical amount of money from a portfolio that, as of 12/31/03, has the identical value, then they will both have the identical amount on 12/31 of every following year -- even though Bob's starting withdrawal happened to be 6.21% of his 12/31/03 portfolio.

How could it be otherwise?

You are 100% correct (OK, in my opinion ).

However, the question then becomes "Is this a safe withdrawl rate?" If so, the 6.21% SWR is fine for Bob retiring in 2003, but Bill was stuck with a 4.19% SWR in 2000. We know Bill couldn't have safely taken out 6.21%. What is the difference between Bill's situation and Bob's? The only difference is what we know the history of the stock market for the past few years.

So I believe that the 6.21% SWR theory is flawed, *unless* we can assume that the decline in the stock market for the past few years indicates that better years are to come (which can easily be debated either way).

Going back to the flaw in the original logic that came up with the 6.21% SWR, let's exaggerate a bit. Let's say that Bill retired 28 years ago with $1,000,000 and his 4.21% SWR rate, and has $20,000 left today. According to the theory that came up with a 6.21% SWR rate at the beginning of this thread, Bob can retire today with $20,000 and have a SWR of 200+% (since Bill is taking out $42,100 per year, that's what Bob takes) for 2 years. I believe this correlates exactly with the original scenario, just with a difference in the number of years (28 versus 3) and the fact that it is based on a hypothetical stock market rather than the real 2000-2003 results.

I don't have an opinion (yet!) on whether or not past results can help predict future results (the basis for why 6.21% may be OK today). But I do believe that the original basis for the 6.21% SWR is flawed (although I didn't think it was flawed about 6 months ago, when I too had the brilliant idea that the 6.21% SWR would be OK -- and almost posted here about it).

 

[charlie]

TH,

I was siding with salaryguru's position that there
is some correlation year-to-year on stock market
returns. I know it is difficult to measure this
correlation and impossible to predict short or
even intermediate term returns but according to
Bernstein/Bogle et. al., the long term trend is
very predictable via the Gordon Equation. My
point is that there are "long" cycle forces like
the business cycle and inflation that continue
over a period of years and, IMHO, influence
market returns. The dog may walk in ramdom
directions but as long as he is constrained by
the leash of GDP growth, his average direction
will be north. Thus, I believe that the logic
behind FIREcalc is valid and the coin-toss analogy
is not valid.

But what do I know?

Cheers,

Charlie (aka Chuck-Lyn)

 

[Peter]

Maybe I'm missing something here, but it seems to me that there's no mystery about different SWR estimates at different times.

Looking at the historical record, there were times when a given SWR resulted in a large remaining portfolio after some given number of years. At other times, the same starting portfolio, with the same SWR, would be totally exhausted after the same number of years.

Obviously if you start in a 'good' year, you can draw more than if you start in a 'bad' year. The problem is that you only know about 'good' and 'bad' in retrospect.

And while it's tempting to say that the decline in values over the last few years suggests that now may be 'good', there is no guarantee that this will turn out to be the case.

Peter

 

[cute fuzzy bunny]

Charlie -

You know a lot, and as you know the gordon equation and I are agreeable.

That having been said, while the gordon equation is strong at 30+ year measurements, in less than that its no predictor. We've had 3 periods of 20 year "hard times", and those were all before we had the potential for attacks on our own soil. Its been a long time since that happened. While history and common sense tells us that there is a good chance that all may go well, a gordon equation fitting scenario of 27 years straight down or sideways, followed by 3 years of 30-40% upticks still "straightens out the dog".

The question is: will the average portfolio survive long enough to make it past those 27 years and will the average retired investor leave their stocks in play for that same period of time waiting for the eventual uptick. I think the answer to either question is a strong "unlikely". Coupled I think its a clear "no".

The other thing is that Bernstein accorded a second formula/scenario to go along with the Gordon equation. The trend of a civilization/market over its term of existence.

As a civilization has become more developed and settled, its risks (and market returns) become progressively lower. I remember some kind of bell curve in the "four pillars" that showed returns swelling up (along with risks) as a market emerged, then a long slow slide as risk became reduced further.

I would imagine the greeks and romans, living on top of the world, as they grew more obese, less interested in the goings on of their government, and more interested in the amusements of the moment...they never expected it was all about to end. Sound familiar? Same for the Bernstein example I used in my "book report" post where the pre-WWI londoner feels the world is his oyster.

Something in the next 30 years is going to bang up the markets. Whether its a depression-type scenario or a 65-84 scenario, those scared a generation away from the stock market, WWIII breaking out in the middle east, or a dirty bomb detonated over NYC or Washington. Or maybe just the effects of trickling out a few billion dollars at a time trying to fight an unstructured enemy with structured approaches strong in hindsight, followed by billions more investigating why we failed and whose fault it was.

But as usual I wander far afield. The original point was that a good year in the market doesnt dictate a bad one is forthcoming, nor vice versa. Its reasonable to say that a good one will come eventually, but its unreasonable to say that any past pattern becomes a predictor of the future. Hindsight says that over long hauls it should all work out, but the length of the long haul is past the lifespan of many of us. And while the two guys with the same size portfolio making the 6.21% withdrawal will be in exactly the same boat, there isnt anything saying that either of them will get to the finish line with a positive bank balance.