Jonathan Guyton in the Oct FPA Journal: http://www.fpanet.org/journal/articles/2004_Issues/jfp1004-art6.cfm?renderforprint=1 (This was shamelessly plagiarized from Ted's posts at FundAlarm.)
Don't try this SWR at home, folks.
Most of the article analyzes a portfolio that's 85% equities, and that's what gives the highest withdrawal rate. How many retirees are willing to accept volatility from 85% equities?
All other portfolios have a much lower withdrawal, and a more typical 50/40/10 portfolio is only mentioned as an endnote. The SWR is much closer to 4% than to the 5.7% teaser rate.
Guyton doesn't have real data. He's using Russell indices that didn't start until 1979, six years after portfolio withdrawals started. He uses a proxy of mutual funds to create the "equivalent".
Even without full data, he's data mining with only one period that he considers the "perfect storm", and yet it doesn't even cover his 40 year period. We have to agree that this is the WORST retirement period ever without seeing how this system did during the Depression years or WWII. He assumes that if the portfolio survives 1973-4 and 2000-2003 then it'll survive until 2013. The analysis would be much more reassuring if it covered actual 40-year periods... many retirement calculators go back at least to 1926 which would give him 38 of those periods. In fact, he pays considerable homage to the Bengen paper (the source of the 4% SWR) without pointing out that IT starts with 1926.
I'm confused by the discussion of "withdrawal freezes" vs "preserving 1973 purchasing power". Presumably the withdrawal rate is frozen after bad years-- but when does it catch up to restore 1973's purchasing power? (Note that preserving purchasing power for 40 years pushes the SWR back down to 4.8%, not the teaser rate of 5.7%.
At one point he advocates an option to withdraw more money during the early "active" years of retirement and then throttling back in "less active" years. But nowhere does the study address the disproportionately high costs of geriatric medical care, nor the much higher inflation rate of that care. Better have a great LTC policy!
If a withdrawal rate is too high during the early years of the portfolio, how do you know? Do you project the spending for another 40 years or use some other simulation method? How does the author handle large capital expenses during every 5th or 10th year-- a new roof, replacement vehicles, a kid's wedding, a fantasy vacation?
The author is assuming that the retiree has accurately accounted for all post-retirement spending. Yet most retirees just want to know when they have "enough"-- IOW, how soon can I quit? Most are pushing for a bare minimum retirement portfolio without building in the additional buffers to handle volatility, periods of high inflation, or capital expenses.
One of my pet peeves with these retirement "studies" is that the author is working for a paycheck. He's not living off his portfolio and he doesn't tell us whether his parents or his in-laws are using his system. At least Bud Hebeler (Analyze Now!) is retired and mentions numerous examples of other retirees.
Nowhere does the author mention tax brackets, IRA RMDs, Social Security, or rebalancing/transaction costs. Presumably SS isn't part of the portfolio?
I'm sure that I'm missing even bigger factors.
Don't try this SWR at home, folks.
Most of the article analyzes a portfolio that's 85% equities, and that's what gives the highest withdrawal rate. How many retirees are willing to accept volatility from 85% equities?
All other portfolios have a much lower withdrawal, and a more typical 50/40/10 portfolio is only mentioned as an endnote. The SWR is much closer to 4% than to the 5.7% teaser rate.
Guyton doesn't have real data. He's using Russell indices that didn't start until 1979, six years after portfolio withdrawals started. He uses a proxy of mutual funds to create the "equivalent".
Even without full data, he's data mining with only one period that he considers the "perfect storm", and yet it doesn't even cover his 40 year period. We have to agree that this is the WORST retirement period ever without seeing how this system did during the Depression years or WWII. He assumes that if the portfolio survives 1973-4 and 2000-2003 then it'll survive until 2013. The analysis would be much more reassuring if it covered actual 40-year periods... many retirement calculators go back at least to 1926 which would give him 38 of those periods. In fact, he pays considerable homage to the Bengen paper (the source of the 4% SWR) without pointing out that IT starts with 1926.
I'm confused by the discussion of "withdrawal freezes" vs "preserving 1973 purchasing power". Presumably the withdrawal rate is frozen after bad years-- but when does it catch up to restore 1973's purchasing power? (Note that preserving purchasing power for 40 years pushes the SWR back down to 4.8%, not the teaser rate of 5.7%.
At one point he advocates an option to withdraw more money during the early "active" years of retirement and then throttling back in "less active" years. But nowhere does the study address the disproportionately high costs of geriatric medical care, nor the much higher inflation rate of that care. Better have a great LTC policy!
If a withdrawal rate is too high during the early years of the portfolio, how do you know? Do you project the spending for another 40 years or use some other simulation method? How does the author handle large capital expenses during every 5th or 10th year-- a new roof, replacement vehicles, a kid's wedding, a fantasy vacation?
The author is assuming that the retiree has accurately accounted for all post-retirement spending. Yet most retirees just want to know when they have "enough"-- IOW, how soon can I quit? Most are pushing for a bare minimum retirement portfolio without building in the additional buffers to handle volatility, periods of high inflation, or capital expenses.
One of my pet peeves with these retirement "studies" is that the author is working for a paycheck. He's not living off his portfolio and he doesn't tell us whether his parents or his in-laws are using his system. At least Bud Hebeler (Analyze Now!) is retired and mentions numerous examples of other retirees.
Nowhere does the author mention tax brackets, IRA RMDs, Social Security, or rebalancing/transaction costs. Presumably SS isn't part of the portfolio?
I'm sure that I'm missing even bigger factors.
