Another 1966-1982?

[FinallyRetired]

I plan to retire in 2 years. A couple of years ago, during the boom, I laid out an Excel safe withdrawal spreadsheet with an assumed (conservative then) 8.5% return and 4% withdrawal, which worked fine. After the market drop, I lowered my expectation to a 6.5% return in a 60/40 bond/stock mix, which was a bit tighter but still worked. Most balanced funds have historical returns at least this high over the period they report, which is usually from the early 90s (bull market). Given the latest market gyrations, which are starting to look like 1966, I tried to find historical returns from 66-82 but could not. I then went to the Dow's annual returns for that period, which were awful, with five years of double digit negative returns and a total return of less than 1% (by my calculation) over that period. Turns out most balanced funds are well correlated with the Dow, so if this holds, and we have another 66-82, many retirees will be in real trouble. After this exercise, I am seriously considering going to 100% TIPS during retirement. Thoughs? Anyone know where to find historical fund returns from 66-82?

[intercst]

SoonToRetire asks,

Anyone know where to find historical fund returns from 66-82?

Don't know about funds, but you can get the past 130 years of S&P500 data at this link:

http://www.econ.yale.edu/~shiller/data.htm

intercst

[FinallyRetired]

Thanks for the link. I also went to
http://www.early-retirement.org/fire/
which has an excellent on-line calculator to do "what if" comparisons of how a retiree would have done if he retired in different years, with different mixes of TIPS and equities.

I used the same approach for my own excel spreadsheet, adjusting for specifics in my case (ie, other pension income, social security, etc), and my results were consistent with the FIRE calculator. The bottom line is this:

If we have another 1966-1982 type of bear market, I would need at least 70% TIPS to have more in my IRA in 30 years than I start with. Less than 70% and my funds draw down. At 40% TIPS I use up all my funds at the end of 30 years, and less than 40% and I outlive my funds. Of course, we might not have such a bear market, in which case I would not make nearly as much as if I were invested more heavily in the market. Also, if I were invested in bonds rather than TIPS, I would be in a bad situation if we had high inflation.

I hope everyone does this type of calculation for themselves. There is too much advice out there about a 60-40 ideal equity/bond split, and making calculations based on returns from the early 90s to today, which are an anomaly. You can really get screwed if the market goes south for a sustained period.

[intercst]

SoonToRetire writes,

I hope everyone does this type of calculation for themselves. There is too much advice out there about a 60-40 ideal equity/bond split, and making calculations based on returns from the early 90s to today, which are an anomaly. You can really get screwed if the market goes south for a sustained period.

----------------------------------------------------

What's optimal depends on the length of your pay out period. It ranged from 45% stock for a 10 year pay out period to more than 80% stock if you expect to live more than 50 years.

If you're considering TIPS and expect to live more than 30 years, make sure you understand that you may not get the same 3% coupon in 30 years when the bonds mature. It might be a lot less.

intercst

I have worked with retired investors for 20 of my 35 years in the business. The best combination of investments I have found is:
1/3 franklin income fund
1/3 mutual shares
1/3 templeton growth
Based on rebalancing the portfolio, the returns from 1966 thru 1982 was 714%.
This combination worked quite well during 73-73 and 1999-2002.

[MRGALT2U]

Thought perhaps I should clarify my anti-common stock
advice. Hyperbole tends to creep into all of my
correspondence due to a treatable (hopefully) case
of galloping egomania. Anyway, although I hold no common stock myself (other than a very small company that
I own), over half of my "base" is in real estate, not
all income producing. Although I am not sure how I would feel without this illiquidity to deal with, I suspect my aversion to common stock would not diminish.

[northwestbob]

Unfortunately, no one can predict the future. Worse yet, stock markets can remain irrational for longer than many of us can stay solvent. (I think this is a John M. Keynes quote.)

For an interesting and plausible treatise on why the S&P 500 may not go anywhere for the next ten years see this weeks newsletter on:

http://www.frontlinethoughts.com/

The short story is that the long term price to earnings ratio of the S&P 500 is 14.6. We are still way above that after a significant drop in prices. Read the article for a more thorough explaination.

You can receive a weekly e-mailed new letter from the author, John Mauldin, by signing up on this site. It is free. I read the newsletter each week.

John Mauldin is involved in some sort of hedge fund operation. Hedge funds are not allowed to sell to anyone with a net worth less than $1 million plus some other restrictions. Hence he has no ax to grind with the public. He was called to testify in Congress this week about more regulation for hedge funds.

The newsletter topics are most economic in nature with few specific recommendations as to what to do about whatever he is writing about. Still it is an interesting read. I point it out for your consideration.

[MRGALT2U]

Hey northwestBob! Love the John Keynes quote.
Never heard it. I agree of course.

I wonder about laws like the hedge fund rule that they
can only sell to people with a net worth over $1 million.
Why? To protect us from ourselves? And, why a million?
Why not $500,000, or 2 million?? Hardly anything annoys me more than all of the rules and regulations
foisted upon us by government. Truly, our liberty is never in more danger than when congress is in session
(end of rant).

[Michael]

Since the P/E has been below 10 a number of times in the past, it is reasonable to think that it may once again be at those levels in the future. What surprised me was that there was no long term advantage to switching to cash during past periods when the P/E ratio rose above 20 (or some other number). If you have Exel, check out the spreadsheet at:

http://rehphome.tripod.com/re60.html

Mike