NEWSFLASH: Bernstein slams early retirement!!!

[OldAgePensioner]

Anyone on here ever question his claims?

 

[intercst]

For the record, i agree with him.   Intercst/those on that other sister website know that i do, because i disagree with the assumption made by firecalc that the great depression can be assumed to be the worst case scenario.   To assume it could never get worse than that is simply naive, if i may just be blunt.

I think as with so, so many things in life, the best answer for me, and i charge possibly for most people, is a happy medium.   For me that's probably going to be mid-late 50s.    I think for most people, mid 40s is taking it too far, and 37 (looks at intercst), is just insane.   Intercst, you will either continue your speaking engagements and/or you will go back to work some day.   Its probably best someone tells you that now while you're still young enough to reconsider your approach.  Now if you're worth 2mil+ now and living like the unibomber, then yes consider myself "corrected".

I'm 49 now and have been retired for 11 years. My retirement portfolio has grown five-fold over that time while my annual living expenses have increased a bit more than 50%. My annual withdrawal rate is about 1.5% of assets today.

Not that I would have taken it, but I'm glad you weren't around in 1994 to offer advice. <grin>

(PS. That 'speaking engagements' thing is a joke, though you'd be surprised how many organizations try to book me, and how many financial advisor types ask me to refer them the 'overflow')

intercst

 

[haha]

Even though I plan on staying invested in equities, I am only planning on 2% real return to trout fish until I die. Even 0% real could keep me drinking decent wine. A negative return could eliminate travel. And a double digit negative return would require me to enact the 'trout bum in a trailer parked down by the river lifestyle'

What does this article say to you?

Assuming that your question is real, and not rhetorical, the most important part of the paper is in 4 plots near the end. He gives 4 plots, using mean real returns of 4% and 5%, and SDs of (15%, 20%), and (20%, 30%) respectively. He then shows dispersion of returns over periods ranging upwards from 10 years. What this might mean to you, with your 2%, 0%, and negative return matrix would depend on how you look at things, and of course what actually happens. To me, the average guy in drawdown (not you I suspect, since your wife has a good professional job) would get pretty nervous long before 10 years were up, let alone 20 or more.

We should also remember that these graphs are not indexed to valuations at the start of the return period. I don't want to start that debate again, but I just thought it should be mentioned.

As far as what it means to me, it is mainly preaching to the choir. I will use it to help me see more clearly the fuzzballs that get passed off as fact, unwittingly and on purpose by writers on retirement money management.

My own situation is that I am no longer exactly an "early retiree", though I was. But I am definitely retired, so large mistakes would not be very clever on my part. I have no pension, and when I draw SS it will be basically pitiful, because when I retired the limit on SS taxed income was still fairly low and I have more than a few blank years too. I am not risk averse, so much as risk discriminating. Well researched factual articles like this add to my data base of relevant information.

Lastly, I know myself well enough to know that I would be much happier moving to the trailer now, increasing my odds of having at least a gently rising standard of living, than I would  be if I were to keep the spending pedal to the metal and risk an abrupt comeuppance. The first cut is the kindest.

But hey, I spend money. Just last weekend I bought a (new to me) Turkish cymbal for $135. I just took it out of the budget for household cleaning products which don’t get a lot of use anyway.

Ha

 

[Cut-Throat]

Mikey,

I read your post and gleaned that a guy might get pretty nervous.

In your best prognostiction. What do you think the real return of a 50/50 stock/bond portfoilo will be over the next 30 years?

Yes, a real question.

 

[Mr._johngalt]

Assuming that your question is real, and not rhetorical, the most important part of the paper is in 4 plots near the end. He gives 4 plots, using mean real returns of 4% and 5%, and SDs of (15%, 20%), and (20%, 30%) respectively. He then shows dispersion of returns over periods ranging upwards from 10 years. What this might mean to you, with your 2%, 0%, and negative return matrix would depend on how you look at things, and of course what actually happens. To me, the average guy in drawdown (not you I suspect, since your wife has a good professional job) would get pretty nervous long before 10 years were up, let alone 20 or more.

We should also remember that these graphs are not indexed to valuations at the start of the return period. I don't want to start that debate again, but I just thought it should be mentioned.

As far as what it means to me, it is mainly preaching to the choir. I will use it to help me see more clearly the fuzzballs that get passed off as fact, unwittingly and on purpose by writers on retirement money management.

My own situation is that I am no longer exactly an "early retiree", though I was. But I am definitely retired, so large mistakes would not be very clever on my part. I have no pension, and when I draw SS it will be basically pitiful, because when I retired the limit on SS taxed income was still fairly low and I have more than a few blank years too. I am not risk averse, so much as risk discriminating. Well researched factual articles like this add to my data base of relevant information.

Lastly, I know myself well enough to know that I would be much happier moving to the trailer now, increasing my odds of having at least a gently rising standard of living, than I would  be if I were to keep the spending pedal to the metal and risk an abrupt comeuppance. The first cut is the kindest.

But hey, I spend money. Just last weekend I bought a (new to me) Turkish cymbal for $135. I just took it out of the budget for household cleaning products which don’t get a lot of use anyway.

Ha

Interested in your view of SS.  I too am "no longer an early retiree
but definitely retired".  NO pension, no paid health insurance.............
SS (I will draw near max) is the linchpin that anchors our retirement.
Without it, we could do it I suppose (have been for 8 years now)
but it wouldn't be pretty.  SS will save my ass from years of careless
spending and ignoring the future.  (It was quite a party though)  
352 days and counting.....................

JG

 

[haha]

Mikey,

I read your post and gleaned that a guy might get pretty nervous.

In your best prognostiction. What do you think the real return of a 50/50 stock/bond portfoilo will be over the next 30 years?

Yes, a real question.

Hi Cutthroat, OK now that we have established that the questions are real, I unfortunately have to take a pass on your Q above. I don't have a clue. I just don't like the amount of variability that seems built in, given my postion of living off portfolio generated income. I will only increase my spending if I get very lucky, or find a low risk money generating business activity-ie. un-retire. My health is good, so I could do a number of things.

Your situation however is quite different. Your wife is young and working, you probably have good SS coming along sometime, and if I remember correctly you have a very healthy portfolio. Mine is healthy, and has become healthier; but I still don't call it "very healthy". 

Ha

 

[Eagle43]

Okay, so tell me whats so productive about getting up at 6am, putting on clothes you only bought for work, getting in your car and driving it somewhere where you'll leave it all day, and spending that day sitting in a windowless room arguing over whether a program should be named 'x' or 'y', or having two hour conversations about taking away employees cell phones and pagers to save on expenses. All this to get a paycheck to pay for the clothes, the car, the house that sat empty all day, and for gifts and vacations with the family you never get to see...?

I guess some jobs may be more "productive" than others. On the other hand, some ER's may be more "productive" than others. I learn a lot. I spend every hour of every day with my newborn son. I dont get stressed out over work politics and projects that dont matter now, let alone a few months or years from now.

I like my ER productivity a LOT better than my old work productivity.

Nicely stated. Projects that don't matter now? Hmmmm. or a few months or years later Hmmmm. Been there, done that. I suspect most of us, retirees or still working, have also been or are currently there. That's the problem, IMHO. Working doesn't bother me. Irrelevance does.

 

[haha]

I was just wondering what you or the article seems to think that real returns will be in the next 30 years. 1-2% real?

He really doesn't make an assumption for a period that short. He points out that over the past century, US median real returns have been ca 6.3%, with an SD around 20% He then trims that to 5% going forward. He then shows the range (dispersion) of likely possibilities given that 5% median real return over fixed holding periods of 10, 20, 30 years. The meat of paper is in this dispersion, and in his caveats. Even during the past century, only a portfolio undisturbed for 100 years would get that exact 6.3%. All shorter periods are dispersed around this median, with the greatest dispersion in the shortest holding periods. It really doesn't lend itself well to summarization. But, taking the case of 5% real median return, then the range at 30 years is as follows: ( I am just eyeballing this from a graph) the range is from annualized -5% to +17% at 30 years. The quartiles are bounded by approximately 0 and +13%. To directly address your question of a 50:50 portfolio of fixed and diversified equities, if one uses an average of the current yield on 20 and 30 year TIPs to give the fixed return, the range of a 30 year holding period of a 50:50 mix should be from -1.6% to +9.4%.

I recommend a close reading; there is lot there. He is not telling anyone what to do, this is no Bernstein type guru. He describes the past and points out things not likely to be repeated, and lets the reader decide what it might mean for him. Actually I should say they, since there are 3 authors.

Ha

 

[eridanus]

For the record, i agree with him. Intercst/those on that other sister website know that i do, because i disagree with the assumption made by firecalc that the great depression can be assumed to be the worst case scenario. To assume it could never get worse than that is simply naive, if i may just be blunt.

If it gets worse then the great depression, working won't be a solutution to low or negative returns -- more then 25% won't have a job.

 

[Jarhead*]

I'm 49 now and have been retired for 11 years. My retirement portfolio has grown five-fold over that time while my annual living expenses have increased a bit more than 50%. My annual withdrawal rate is about 1.5% of assets today.

Not that I would have taken it, but I'm glad you weren't around in 1994 to offer advice. <grin>

(PS. That 'speaking engagements' thing is a joke, though you'd be surprised how many organizations try to book me, and how many financial advisor types ask me to refer them the 'overflow')

intercst

Intercst:  I think you are making a big mistake by not following the
advice of the 30 year old government employee that suggested in no uncertain terms that you get back to work post-haste.

Incidentally, I think I've figured out how your retirement has been so successful.   Cheap Green Fees in Texas.

Regards, Jarhead

 

[wabmester]

I'm 49 now and have been retired for 11 years. My retirement portfolio has grown five-fold over that time while my annual living expenses have increased a bit more than 50%. My annual withdrawal rate is about 1.5% of assets today.

Hmm, 16% annualized yield over 11 years, and that doesn't even take into account your withdrawal, so I assume your investments returned almost 20%/year. That beats the hell out of everybody, including Buffett, S&P 500, small/value, etc. How'd you do it?

 

[wabmester]

If it gets worse then the great depression, working won't be a solutution to low or negative returns -- more then 25% won't have a job.

The Great Depression was pretty bad as economic events go. One estimate I saw was that it was approximately a once-in-400-year magnitude event.

While there's a fair chance you might see such an event in your lifetime, it is not required to have a new worst-case SWR sequence. For example, a long sideways market (like the 70's) is almost as bad as a 3-year crash like the Great Depression, as far as retirement goes. If we have a secular bear market, ER's might be screwed. If we have less upward regression to the mean after a bear, retireees might be screwed. We don't need a depression to screw us.

 

[intercst]

Hmm, 16% annualized yield over 11 years, and that doesn't even take into account your withdrawal, so I assume your investments returned almost 20%/year.   That beats the hell out of everybody, including Buffett, S&P 500, small/value, etc.    How'd you do it?

I bought DELL and PFE in the early 1990's.

Up until I retired in 1994, my portfolio had only beaten the S&P500 by about 1.5% per annum. It didn't really take off until after I retired.

intercst

 

[Mr._johngalt]

The Great Depression was pretty bad as economic events go.   One estimate I saw was that it was approximately a once-in-400-year magnitude event.

While there's a fair chance you might see such an event in your lifetime, it is not required to have a new worst-case SWR sequence.   For example, a long sideways market (like the 70's) is almost as bad as a 3-year crash like the Great Depression, as far as retirement goes.   If we have a secular bear market, ER's might be screwed.   If we have less upward regression to the mean after a bear, retireees might be screwed.   We don't need a depression to screw us.

Screwed by a bear? Arggggggggggggh! And what is a "secular bear".
One that eschews religious dogma? Sounds like a "Brinkerism".

JG

 

[Mr._johngalt]

Nicely stated.  Projects that don't matter now?  Hmmmm.  or a few months or years later  Hmmmm.  Been there, done that.  I suspect most of us, retirees or still working, have also been or are currently  there.  That's the problem, IMHO.  Working doesn't bother me.  Irrelevance does. 

Death doesn't bother me. Work does.

JG

 

[intercst]

Intercst:  I think you are making a big mistake by not following the
advice of the 30 year old government employee that suggested in no uncertain terms that you get back to work post-haste.

Incidentally, I think I've figured out how your retirement has been so successful.   Cheap Green Fees in Texas.

Regards, Jarhead

Cheap green fees certainly help. I've been on an extended vacation in Connecticut since July. Green fees are about double Texas prices up here.

intercst

 

[TargaDave]

I can accept volatility, assuming they smooth out over a 15-20 period.
Everyone seems to say that real returns going forward will be lower. I was just wondering what you or the article seems to think that real returns will be in the next 30 years. 1-2% real?

More than what to expect for future returns I would question people's real tolerance for volatility. We talk a big stick about being able to weather storms yet what have we lived through? 87? the early 90's road bump? the tech bubble burst? They have been minor blips. Most here had no sizable assets during 70's when real returns were negative for quite some time. All these successful ER's I read about have had an unprecedented bull market to work with. How does that go? "past results are not an indicator of future returns".

One thing I think Berstein hit square on the head was our real risk tolerance. His analogy was the plane crash drill versus the real thing. Everyone talks a big line until they are in one and then the machismo confidence goes out the window. I'm not talking some 1-3 yr market blip I'm talking 15 years of negative real returns on the S&P

He made one other good point that is relevent to people on these boards. He asked "how often do you check your portfolio?" If you check it often (who here could go 6 months without checking let alone 6 days) then your "real" (long term) risk tolerance is much less than you think. I would add that running Firecalc often is another sign of low risk tolerance.

BTW 1-2% real on AVG sounds great compared to a large portion of the 70's. My conclusion: ER's got nothin to do with productivity it's all about "real" risk tolerance.

 

[rmark]

This is what I worked to explain some of this to my wife.  Trying to put 1,000 pages of reading on one page ain't easy. The columns may not line up very well.

Planning -

More activities early, more healthcare later, with near level spending until late life.

small total reit corp total bills      Past u.s. investor averages (up to 200 yrs)
         stock              bond
           12                                 arithmetic return (overstates stock, bond differ)
           -1                                  fluctuating return (true geometric -2)
           -1                                  survivor bias (failed companies from old records)
           10                    6            nominal return (tax deferred or paid from work)
           -3                    -3           inflation (varied considerably)
           -2                    -1           investing costs (commissions, trading)
    6      5      4      3     2     1    5% saving net real return (more stock,  up +1)
           -2                    -2           international (and typical u.s. 25 yr +/- deviation)
    4      3      2      1     0    -1    3% saving net real return (more stock, up +1)
                                                2% developed world growth (and u.s.)
           -2                    -1           1% withdrawal net real return (more bond, -1)
           -1                    -1           0% withdrawal net real return after taxes

0% net real return after taxes in late life likely from ever more conservative portfolios.

Current fund pricing – yahoo finance, funds, holdings – past averages are mostly trivia
                      tax deferred net real saving               taxed net real withdrawal
Stock     (1/pe - cost) x weight = %                                - 2% - tax
Bond     (yield - inflation - cost) x weight = %                 - 1% - tax
Actively managed funds may have investing costs twice the published expense ratios.

Dividing after tax fixed pensions and mixed portfolio annually over remaining IRS life expectancy, spending part and investing the rest, gives a historically conservative withdrawal that matches required minimum distributions from defined benefit plans.

Portfolio amounts over replacement used as reserve for large purchases & emergencies
Surviving spouse switches to single life expectancy withdrawal after the lesser SS ends.
Broad diversification tends to dampen spending swings from changing portfolio values.
Increasing percentage withdrawal uses capital maintaining spending level until late life.
SS may be a fully income taxed fixed pension with non-cola taxes and med B deducted.
Slowly declining spending in late life may remove need to adjust SS as a fixed pension.

 

[rmark]

Later I'll post GrandPa's carp bait recipe - its in the recipe box at home.

We had a boss who retired to go trout fishing in New Mexico. I gave him a copy of the carp bait recipe as a back up plan in case the trout retirment didn't work out.

 

[Mr._johngalt]

I would add that running Firecalc often is another sign of low risk tolerance. 

I ran it exactly once, just for grins

JG

 

[laurence]

More than what to expect for future returns I would question people's real tolerance for volatility. We talk a big stick about being able to weather storms yet what have we lived through? 87? the early 90's road bump? the tech bubble burst? They have been minor blips. Most here had no sizable assets during 70's when real returns were negative for quite some time. All these successful ER's I read about have had an unprecedented bull market to work with. How does that go? "past results are not an indicator of future returns".

One thing I think Berstein hit square on the head was our real risk tolerance. His analogy was the plane crash drill versus the real thing. Everyone talks a big line until they are in one and then the machismo confidence goes out the window. I'm not talking some 1-3 yr market blip I'm talking 15 years of negative real returns on the S&P

He made one other good point that is relevent to people on these boards. He asked "how often do you check your portfolio?" If you check it often (who here could go 6 months without checking let alone 6 days) then your "real" (long term) risk tolerance is much less than you think. I would add that running Firecalc often is another sign of low risk tolerance.

BTW 1-2% real on AVG sounds great compared to a large portion of the 70's. My conclusion: ER's got nothin to do with productivity it's all about "real" risk tolerance.

A lot of us have not been tested, especially we young dreamers. Right now, I check my balances about once a week, but when the market is getting pummeled, I just don't look. But my total portfolio is less than our annual gross household income, so who knows If I'd be able to do that when there are close to/above seven figures instead of barely six?

 

[SteveR]

A lot of us have not been tested, especially we young dreamers.  Right now, I check my balances about once a week, but when the market is getting pummeled, I just don't look.  But my total portfolio is less than our annual gross household income, so who knows If I'd be able to do that when there are close to/above seven figures instead of barely six?

No matter the value of the portfolio, when you are saving to live on income from it, looking is pretty hard NOT to do.

I lost everything (what little there was) to a divorce in 1991. I started from a negative net worth and tons of CC debt from ex-wife. I also started investing only after the debts were paid off so I feel like I started from scratch in about 1993 with a few shares here and a few there. Flash ahead to 2001 and my net worth was in the six figures. The market bubble cost me 30% of my investments and 401(k). I have made the 30% back and am gaining bit by bit each year. I am not an active investor like I used to be; more hold or adjust right now. My index fund investments have increased and I am still working on mortgages (my only debt). I check my after tax stuff a couple times a week but don't excited with the ups and downs for now. I am looking out 30+ years so I don't see the bumps that big a deal in the short run.

With 18 months, give or take, left before full ER, I am starting to move stuff around to generate income before SS. I plan on doing a 72(t) because of higher income needs right now (mortgages, college expenses, and travel plans) but expect to scale back in 5 years. Also, I don't want to get hit with a major tax bill by waiting to start taking my IRAs. I know, it is a really tough problem to have. 8) But tax containment is part of my overall plan. We have sliced and diced our expenses, income and taxes with real data and various projections on costs, taxes, inflation and market returns over the next 10 years and while we are not 100% we believe we can keep our standard of living and not work ever again unless it is on our terms.

It's good being FI.

 

[Cut-Throat]

More than what to expect for future returns I would question people's real tolerance for volatility.  We talk a big stick about being able to weather storms yet what have we lived through? 87? the early 90's road bump? the tech bubble burst? They have been minor blips.  Most here had no sizable assets during 70's when  real returns were negative for quite some time.  All these successful ER's I read about have had an unprecedented bull market to work with. How does that go? "past results are not an indicator of future returns".

One thing I think Berstein hit square on the head was our real risk tolerance.  His analogy was the plane crash drill versus the real thing. Everyone talks a big line until they are in one and then the machismo confidence goes out the window.  I'm not talking some 1-3 yr  market blip I'm talking 15 years of negative real returns on the S&P

He made one other good point that is relevent to people on these boards.  He asked "how often do you check your portfolio?" If you check it often (who here could go 6 months without checking let alone 6 days) then your "real" (long term) risk tolerance is much less than you think. I would add that running Firecalc often is another sign of low risk tolerance. 

BTW 1-2% real on AVG sounds great compared to a large portion of the 70's.  My conclusion: ER's got nothin to do with productivity it's all about "real"  risk tolerance.

Dave

A lot of what you write is true and I have to agree with you. In fact a couple items you bring up are two of the four pillars of investing. 1.) History of the Markets and 2.) The emotional side of investing.

Knowing that markets will 'tank' and can tank for long periods of time is essential in staying the course. And then understanding that investors emotions will often do the wrong thing at the wrong time is also crucial in staying the course.

I do have to disagree with you on one large point however. I don't think being aware of your investments and running FireCalc is an indication that you'll change your your Investments when they go south. Hopefully they will change your spending. I think those of us who are aware of our investments and aware of History and our emotions would be most likely to stand there and Do Nothing. Time will tell however. I plan on doing nothing, also recognizing that as the market drops, so does the risk of being invested in it and the more likely that it will rise.

When looking at the period of 1966-82 - When the S&P 500 did nothing. It actually did quite a bit. It managed to stay even with Inflation (which was quite hefty during this period). One could say that for the last 5 years the S&P 500 has 'Lost' Money. So we are already in one of those sideways periods. Also Inflation was stated higher in the 70's than we state it today. So the S&P over the last 5 years is probably much worse than stated.

 

[yakers]

The Great Depression was pretty bad as economic events go. One estimate I saw was that it was approximately a once-in-400-year magnitude event.

While there's a fair chance you might see such an event in your lifetime, it is not required to have a new worst-case SWR sequence. For example, a long sideways market (like the 70's) is almost as bad as a 3-year crash like the Great Depression, as far as retirement goes. If we have a secular bear market, ER's might be screwed. If we have less upward regression to the mean after a bear, retireees might be screwed. We don't need a depression to screw us.

Someone asked on another thread "Where are the Bears?"
Looks like they are doing just fine right here. Great quote, "we don't need a depression to screw us." Just cheers me right up. Or is it just being realistic?

 

[wabmester]

Someone asked on another thread "Where are the Bears?"
Looks like they are doing just fine right here. Great quote, "we don't need a depression to screw us." Just cheers me right up. Or is it just being realistic?

Well, I'm not a short-term bear who thinks they can time the onset of a bear market. Here is my stock-market belief system in a nutshell:

1) The stock market is basically a proxy for the economy. You're investing in GDP growth (whether you take that growth as earnings or dividends doesn't really matter).

2) The wonderful historical returns from the US stock market are a function of our growth spurts as a young aggressive country.

3) As a country, we're not as young, mobile, or hostile as we once were. Our future GDP growth and stock market returns will reflect this.

4) However, there will still be sectors that will grow faster than the overall economy. This is one area in which I strongly disagree with Bernstein -- I think you can still beat the market if you pick sectors, countries, and individual stocks that have good long-term growth characteristics. Of course, you're still making bets, but you don't have to implicitly make a bet on just US economic growth.