Predicting SWR based on current market

[DblDoc]

Wade Pfau who posts over on Bogleheads has another article out about SWR. This one is a model predicting SWR's for a retiree based on market conditions at the time they retire rather than the historical 4%. Note this is not for the faint of heart (ie the model predicts 1.5% SWR fo 2008 retirees )

Paper here: Can We Predict the Sustainable Withdrawal Rate for New Retirees?

Thread at Bogleheads here: Bogleheads :: View topic - Wade in the Economist. As the paper just came out there is little discussion yet.

And yes I know this is no where near as exciting as what the markets did today but you gotta know this stuff. Test next friday...

DD

 

[DoraM]

With the current market, maybe a negative SWR is adviseable

But realistically, 2% SWR with 100% TIPS seems quite reasonable for a 35 year retirement. Won't be leaving any money for the kiddies, but shouldn't be out on the street either...

 

[DblDoc]

With the current market, maybe a negative SWR is adviseable

But realistically, 2% SWR with 100% TIPS seems quite reasonable for a 35 year retirement. Won't be leaving any money for the kiddies, but shouldn't be out on the street either...

If you look at the 95% confidence intervals it does go to 0! I'm guessing an artifact of the regression model and data used. He mentions alternatives in the conclusions:

Retirees must maintain flexibility, and the fixed real withdrawal strategy tested here is only a starting point to define baseline parameters about what may be sustainable. Other asset classes such as Treasury-Inflation Protected Securities (TIPS), small-capitalization stocks, international assets, real estate, commodities, annuities, and other alternative investments could all provide a way to diversify away from the risks of overvalued assets.

DD

 

[packrat44]

Makes a strong case for the 8% increase each year by holding off drawing SS until 70 IF SS remains unchanged. Yeah, fat chance.

 

[obgyn65]

I am sticking to 3.5% SWR unless the economic environment changes drastically.

 

[kumquat]

I'm good for 40 years at 0% return as long as inflation = return. Will I survive? Who knows, who cares, I won't know who I am in 40 years.

 

[chinaco]

Thanks for the link.


It is good to see that researcher keep plugging away at the problem looking to develop more insight.


I liked the last paragraph of his conclusion. Well put.... the average person can do something to deal with it.... actually take advantage of it if they are a little lucky (while mitigating the downside). IOW - Overvalued could mean excess profit to be had (locked in). But a lockin means either hedging (a cost) or giving up some potential upside.

Retirees must maintain flexibility, and the fixed real withdrawal strategy tested here is only a starting point to define baseline parameters about what may be sustainable. Other asset classes such as Treasury-Inflation Protected Securities (TIPS), small-capitalization stocks, international assets, real estate, commodities, annuities, and other alternative investments could all provide a way to diversify away from the risks of overvalued assets. If risky assets imply a lower withdrawal rate than can be obtained by constructing a TIPS ladder, then including TIPS in one’s retirement portfolio could help create a floor the MWR cannot fall below. Spending flexibility and reduced spending needs later in retirement could also help provide a cushion for a bad sequence of asset returns.

Here is a question: If one is getting ready to FIRE, and the market is historically overvalued.... would one be wise to lockin some of that upside. For example. Let's say the initial plan was to have a strategic allocation of 50/50 by FIRE. The person is adjusting as they approach FIRE to the target allocation. Market is doing well, and stocks are historically overvalued. Would this person be better off changing their strategic allocation target to a 40/60 mix? Lockin a little more of the overvalued asset gains?

Or what if they only intended to hold a 40/60 allocation through the next bear market and go back to their 50/50 allocation during the beginning of the next bull?

 

[Gone4Good]

Here is a question: If one is getting ready to FIRE, and the market is historically overvalued.... would one be wise to lockin some of that upside. For example. Let's say the initial plan was to have a strategic allocation of 50/50 by FIRE. The person is adjusting as they approach FIRE to the target allocation. Market is doing well, and stocks are historically overvalued. Would this person be better off changing their strategic allocation target to a 40/60 mix? Lockin a little more of the overvalued asset gains?

My answer is 'Yes'; asset allocation should (or at least can) change based on market conditions. The simple truth is that the larger the portfolio relative to planned withdrawals, the less risk you need to take. Bill Gates could withdraw $1MM per year for the rest of his life from a portfolio of 100% cash. Most of us aren't so fortunate. However, if our retirement plan assumes a 4% withdrawal rate, and market conditions drive our portfolio higher so the WR falls to 3%, there is no reason we can't take that 33% real portfolio gain and move it some place safe. We don't have to blindly leave it exposed to an equity market whose valuation has deteriorated, in all likelihood.

I used that logic to reduce my equity allocation to the lowest it has ever been during this most recent rally. I'm pretty happy to be sitting here with a low withdrawal rate, a less risky portfolio, and plenty of 'dry powder' should this swoon turn into something greater. But I don't see this as 'market timing' as much as it is 'risk management.' I didn't need as much risk because my WR had declined.

 

[rescueme]

Would this person be better off changing their strategic allocation target to a 40/60 mix? Lockin a little more of the overvalued asset gains?

Or what if they only intended to hold a 40/60 allocation through the next bear market and go back to their 50/50 allocation during the beginning of the next bull?

You are not retired, I assume?

I am, and I could provide an answer (based upon "my life"); the problem is that you probably would argue the point if you are still in the accumulation phase of your life.

Sometimes, you can't tell the temp of the water, untill you are swiming in it ...

 

[chinaco]

You are not retired, I assume?

I am, and I could provide an answer (based upon "my life"); the problem is that you probably would argue the point if you are still in the accumulation phase of your life.

Sometimes, you can't tell the temp of the water, untill you are swiming in it ...

Yup.. just did FIRE.

I made major allocation change over 5 years ago in prep for FIRE.

It was a just a discussion item.

 

[unclemick]

Thanks for the link.


It is good to see that researcher keep plugging away at the problem looking to develop more insight.


I liked the last paragraph of his conclusion. Well put.... the average person can do something to deal with it.... actually take advantage of it if they are a little lucky (while mitigating the downside). IOW - Overvalued could mean excess profit to be had (locked in). But a lockin means either hedging (a cost) or giving up some potential upside.


Here is a question: If one is getting ready to FIRE, and the market is historically overvalued.... would one be wise to lockin some of that upside. For example. Let's say the initial plan was to have a strategic allocation of 50/50 by FIRE. The person is adjusting as they approach FIRE to the target allocation. Market is doing well, and stocks are historically overvalued. Would this person be better off changing their strategic allocation target to a 40/60 mix? Lockin a little more of the overvalued asset gains?

Or what if they only intended to hold a 40/60 allocation through the next bear market and go back to their 50/50 allocation during the beginning of the next bull?

To inject a little humor into this thread: Psssst Wellesley! .

As for me 2-6% SWR 1993 to present with 4% 60/40 as my benchmark center point to tap dance around depending on my nerves.

Since 2006 - Target Retirement 2015.

Agile, mobile and hostile.

heh heh heh - now that I've been practicing ER for 18 yrs maybe I should settle down and get serious about real retirement. Or not.