Retiring In Secular Cycles

[Nords]

Quote:

Originally Posted by wab What are the safe havens during times like we have today?

I bonds?

Maybe they're just a "safer" haven. Like bungee jumping with a parachute.

[haha]

That is *****' idea in a nutshell, and of course absolutely contra to the Religion of Retirement Calculators. None of it really makes any sense when you try to push it beyond it's obvious useful purpose- to help people (including many FPs) realize that one can't just take total smoothed annual rturn, subtract inflation and what is left over is draw. Volatility kills that plan.

That is really all there is here.

Ha

[justin]

Quote:

Originally Posted by HaHa Justin’s argument above about PEs going from 18 to 36, therefore everything still copasetic on the SWR front is a speculator’s argument. “Hell boy, you think 18 is high, just watch!” And why not? Why not go to 100; surely someone created the intellectual framework for that during the last big boom.

If PE's went to 36 today, I would probably make a tactical asset allocation decision to reduce my new contributions and/or existing holdings in equities. At PE = 18, I feel ok as a long term investor (75+ years maybe). I'm certainly not going to get rich with 5.x% bond yields!

The tricky thing about using PE as an indicator is that the E could get cut in half (which may happen if we hit a recession). Does the PE ratio get cut in half? Go down 60%? Or does the P drop 50%, thereby maintaining the same PE of 18? My guess is that when the E starts dropping rapidly, the PE will drop too, thereby amplifying the drop in P. Good for me as someone in the accumulation phase, not so much for those FIRE'd in the withdrawal phase.

[justin]

Quote:

Originally Posted by yakers The element Justin added was that he would use a lower SWR because his portfolio has increaded significantly. I found that a interesting idea.

By my thinking, I would not HAVE to use a lower SWR necessarily, but my actual WR might be lower if I have a sudden unexpected last minute boost to my portfolio value.

I would qualitatively consider it more risky to retire after a 3-4 year very strong bull market where I experienced 20%+ returns each year AND I was basing my SWR on my newly inflated portfolio value.

[Animorph]

Which is all Crestmont is saying as well. It's riskier to retire just after a bull market (high P/E's) than just after a bear market (low P/E's).

Dan

[terminator]

Quote:

Originally Posted by justin My guess is that when the E starts dropping rapidly, the PE will drop too, thereby amplifying the drop in P.

My own qualitative observations while doing research tells me it depends on the strength of the company (size, debt, market share/position). Large blue-chips seem to tend to keep the same P/E as earnings go higher (and quite often the P doesn't change much so the P/E goes higher) because investors "know" that the earnings will come back up eventually and the company is paying dividends in the meantime. Smaller companies are more likely to have their P/E's shrink since their earnings are more volatile overall and they are less likely to be in as strong a position during a downturn as the large blue-chips. But then again, after a downturn shakes out then there would be more "value" stocks in the smaller ranks. Just my observations.

[youbet]

Quote:

Originally Posted by Animorph Which is all Crestmont is saying as well. It's riskier to retire just after a bull market (high P/E's) than just after a bear market (low P/E's). Dan

Not exactly....... Say in 2003 I had $1,000,000 and planned to retire in 2007 with an estimated $1,300,000. But, to my pleasant surpirse, a nifty bull market takes my portfolio value to $1,500,000 or $200,000 more than I estimated. I go ahead and retire in 2007. I don't feel any more at risk than if I had retired with the $1,300,000 that would have resulted from a less positive market.

[Animorph]

Youbet,

But you are taking more risk, if you believe Crestmont. FIRECalc may say that you have a 95% chance of survival on average, but Crestmont notes that all of those 5% failures have come when starting retirement at high P/E's. If you consider only those retirement start years with similar high P/E's, your success rate looked more like 80%. Even if you use bonds, your stock portion is still subject to those lower returns. This is one simple way of trying to predict future returns, unless you think the P/E is going to be 40 when you die.

I was happy it wasn't worse, and we are on the line between the quartiles, but I don't expect to see much P/E gain during retirement.

Dan

[youbet]

Dan.....

Perhaps I need to explain further. The hypothetical situation I gave is similar to what actually happened to me. In 2003, I felt we were FI and I was considering retiring. Being somewhat financially conservative ( chickensh!t) by nature, I dragged my feet and waited until June, 2006, when my company helped me make the decision. The market did better, by far, between 2003 and mid-2006 than I estimated it would. My portfolio was significantly larger than I planned it would be. I asked myself "since I have considerably more money than I planned on having at this point, should I retire anyway?" And I answered myself "YES!"

I don't withdraw any more in absolute terms than I would have if my portfolio had grown more slowly. All my plans were in dollars, not percentages. So, despite the higher PE at retirement, I feel I'm taking no additional risk as I have more money and my WR is lower as a percentage.

[New Thinking]

If you were to view equities at this "point in time", shouldn't you also view the bond component as a point in time as Crestmont suggests? You are not going to get price appreciation over the next X years..Look at Business Week's cover article this week, "It's a Low,Low,Low, Low-Rate World".

And although human behavior could cause one to lower a SWR, human behavior will cause more folks to buy and sell at the wrong times and do more damage..Not the profile of many of you, but the average individual..Look at the Dalbar site for their annual mutual fund returns of the average investor over the last 20 years.

Dalbar shows that the following returns over the twenty-year period of 1986-2005:

· S & P 500 return of 11.9%
· Average Equity Fund Investor earned 3.9%
· Long-Term Shearson Government Bond Index 9.7%
· Average Fixed Income Investor earned 1.8%7


This is the real danger for the masses of future retirees. Its not all investment expenses but fear and greed driving behavior.

[Tadpole]

I am enjoying this.

Should the SWR be set at a level commensurate with the value of the portfolio at the end of the last bear market adjusted to the value the portfolio would have had if it had been invested entirely in bonds during the bull cycle?

[Gone4Good]

Quote:

Originally Posted by bpp This came up on raddr's board last May: http://www.raddr-pages.com/forums/viewtopic.php?t=2546 Maybe I'll do an update through 2006 at some point, but the basic results won't change: 3% and diversification starting in 1990 would have left one intact (so far).

You'll notice that he also has a 50/50 stock/bond mix. In the first pass, without international diversification, and a 60/40 split the 3% withdrawal scenario "survived" but in year 15 you were pulling 10% withdrawals - even after some pretty good equity returns over the last few years.

I put together my own numbers using the Nikkei this afternoon (before seeing this link) and my calculations tie back to the results posted therein. Some interesting notes from my calculations:

1) Higher bond allocations were always better.
2) Retiring 3 years earlier in 1987 (allowing for a 100% increase in equity prices between 1987 & 1990) helped, but not as much as you might think. And higher bond allocations were still always better.
3) A retiree in Jan 1990, using a 50/50 mix, 4% initial withdrawal rate, and a flexible withdrawal would have to reduce his real standard of living by 45% in order to keep a 4% withdrawal rate by 2006.
4) In the same scenario as #3, an 80/20 portfolio would require a 73% reduction in standard of living
5) A 3% withdrawal rate, 50/50 mix, requires a 23% reduction in standard of living to have a 4% withdrawal rate in '06.
6) A 3% withdrawal rate, 80/20 mix, requires a 58% reduction in living standards.

"Safe Withdrawal Rates" defined as no reduction in real spending and a 4% withdrawal rate in 2006 is as following for the following equity/debt mix:

50/50 2.4%
60/40 2.1%
80/20 1.4%
100/0 0.94%

It does make you take a second look at the risk/reward trade off between the security of holding more bonds versus the foregone income potential of higher equity ownership.

It also makes you think twice about FIRECalc as a "worst case" simulator.

[DRiP Guy]

Quote:

Originally Posted by 3 Yrs to Go It also makes you think twice about FIRECalc as a "worst case" simulator.

Makes me think twice about investing in the Nikkei !


(j/k -- obviously today's best wisdom seems to be to have a fair amount of international exposure)

[wabmester]

Quote:

Originally Posted by DRiP Guy Makes me think twice about investing in the Nikkei !

Japan is coming off a 15-year-long "recession." They've seen deflation, which we haven't seen in 60+ years. And their GDP is growing faster than ours. I think Japanese who ER now will probably do OK. Maybe it's time to think about going 100% NIKKEI.

[Gone4Good]

Quote:

Originally Posted by wab Japan is coming off a 15-year-long "recession." They've seen deflation, which we haven't seen in 60+ years. And their GDP is growing faster than ours. I think Japanese who ER now will probably do OK. Maybe it's time to think about going 100% NIKKEI.

Still a 38 P/E.

[wabmester]

Quote:

Originally Posted by 3 Yrs to Go Still a 38 P/E.

As Ed would ask, where are they in the earnings cycle? Our market P/E was 30-something in 2002, wasn't it?

[JohnEyles]

Quote:

Originally Posted by HaHa ... one can't just take total smoothed annual return, subtract inflation and what is left over is draw. Volatility kills that plan.

You have a gift for succinct summary. People should spend more time
playing with Excel - such exercise makes these things clear on a gut level.
And you're right - there are FP's who don't understand this.

[bpp]

Quote:

Originally Posted by 3 Yrs to Go You'll notice that he also has a 50/50 stock/bond mix.

I didn't want to get too clever playing with percentages, so I did my final splits (stocks/bonds, domestic/foreign) at 50/50, except for the 60/40 case that Kramer had specifically requested.

Quote:

It does make you take a second look at the risk/reward trade off between the security of holding more bonds versus the foregone income potential of higher equity ownership.

Yes.

Quote:

It also makes you think twice about FIRECalc as a "worst case" simulator.

Yes, at least for an all-domestic portfolio.

Incidentally, for reference, here is the time series for 4% withdrawals on a 4x25 portfolio (25% Japan stocks, 25% foreign stocks, 25% Japan bonds, 25% foreign bonds) with a 0.5% expense ratio:


Year Withdrawal End-year Balance
1989 -------- 1,000,000
1990 40,000 860,812
1991 41,240 859,997
1992 42,601 787,586
1993 43,283 774,506
1994 43,845 715,778
1995 44,152 742,561
1996 44,108 780,836
1997 44,152 801,446
1998 44,947 742,713
1999 45,216 806,883
2000 45,081 744,447
2001 44,765 693,238
2002 44,452 560,187
2003 44,052 562,509
2004 43,920 542,340
2005 43,920 606,176
2006 43,788 608,037



Not clear to me that the portfolio will hit zero before 30 years are up, so 4% may actually "work" in the full-speed-ahead, d@mn-the-white-knuckles sense of the word. What would FIREcalc give for a similar 4x25 stock/bond, US/foreign blend?

Quote:

Still a 38 P/E.

This is true if you look at individual companies, though if you look at "consolidated" P/Es (lump parent-child entities together), it is more like 27:
http://www.tse.or.jp/english/data/pe...-pbr200701.pdf

By the way, in Feb. 2006 it was 34 for consolidated, 47 for non-consolidated P/Es:
http://www.tse.or.jp/english/data/pe...-pbr200602.pdf

Don't ask me where we are in the earnings cycle, though. (Sorry, wab.)

[EDITED to add updated data through 2006]

[EDITED again to report fixed numbers]

[wabmester]

Quote:

Originally Posted by bpp Don't ask me where we are in the earnings cycle, though. (Sorry, wab.)

Thanks for that data, bpp. Hard to figure out anything about the earnings cycle with 1 year's data, but the good news is that earnings are growing, GDP is growing at a good pace, and P/E is going down.

I also looked at the TOPIX index from 1968-2006. From 1968-1983, there was smooth 8%/year growth, and then the market went bonkers in the mid-80's, and crashed from 1990-today.

Here's an over-simplistic factoid: if we extrapolate 8% growth from 1968, the TOPIX should be at 3725 today. It closed recently at 1775, so if the market doubles, it'll be back on the old trend line. Maybe that means it's at 1/2 fair value?

I would love to see a more sophisticated analysis of Japan. It seems like the only market that hasn't really gone bonkers in the last few years.

[Gone4Good]

Quote:

Originally Posted by bpp Incidentally, for reference, here is the time series for 4% withdrawals on a 4x25 portfolio (25% Japan stocks, 25% foreign stocks, 25% Japan bonds, 25% foreign bonds) with a 0.5% expense ratio:

My thought in pointing out the 50/50 mix is that most folks (here anyway) seem to be leaning toward more equity heavy portfolios. 60%-80% equity seems the norm here - and that norm may be trending toward conventional wisdom. I also think that conventional wisdom argues for something like 20% international exposure, instead of 50%

I added an "international" component to my calculation this afternoon and came up with results that are similar to/same as yours. For the international component I used Vanguard's International Value Fund because I didn't want to include the excess US returns over the 1990-2000 period.

Here's what I get at 12/31/06 if I bump up the equity contribution with the equity split 50/50 between the Nikkei and VTRIX.

2006 2006
% Equity Port Balance Withdrawal % Withdrawal
50/50 $796,765 $43,388 5.5%
60/40 $660,026 $43,388 6.6%
70/30 $526,544 $43,388 8.2%
80/20 $397,512 $43,388 10.9%

Here's what I get if I limit my international exposure to 20% of the portfolio:

2006 2006
% Equity Port Balance Withdrawal % Withdrawal
50/50 $675,564 $43,388 6.4%
60/40 $444,601 $43,388 9.8%
70/30 $242,298 $43,388 17.9%
80/20 $67,773 $43,388 64.0%

Seems like more international equity and more bonds might be a good way to go.