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SWR, CAPE & Inflation - Bengen's new paper
Old 09-28-2020, 08:30 AM   #1
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SWR, CAPE & Inflation - Bengen's new paper

William Bengen is out with a new article that analyzes the relationship between SAFEMAX (what we usually call SWR here), Schiller's CAPE ratio and inflation at the start of a 30 year retirement. He assumes a portfolio comprised of 50% equity (S&P500 + Small cap) and 50% mid-term government bonds.


https://www.fa-mag.com/news/choosing...tml?section=40


Interesting read.


I firmly believe that a variable SWR method is more attuned to reality than these fixed SWR studies, but new ways of looking at this complex issue are always welcome.
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Old 09-28-2020, 08:58 AM   #2
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I see the logic to this tweak on Kitces's work. As mentioned in the article, though, the CAPE has been pegged, so the result for most retirement dates would be the lowest percentage. And it's not surprising that in a low inflation (low interest rate) environment, 50% bonds isn't going to get you to a higher SWR.
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Old 09-28-2020, 11:25 AM   #3
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Thanks for posting this.
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Old 09-28-2020, 01:00 PM   #4
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Old 09-28-2020, 01:20 PM   #5
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I don't use any of these models but they are reassuring.
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Old 09-28-2020, 04:20 PM   #6
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The article brings up an important point, that the CAPE we have today is outside the range that the 4.5% rule was based on. We can extrapolate to a low SAFEMAX based on recent CAPE values, but no one really can say if that will hold up or not. Another point not often appreciated is that there are really only 3 independent 30 year periods between 1926 and now. For example, someone retiring in 1986 has 29 out of 30 years in common with someone retiring in 1987, and These are not independent 30 year periods. This says we do not really have a good basis for determining the range of possible SAFEMAXs. I believe these points both call for flexibility in spending during retirement.
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Old 09-28-2020, 05:01 PM   #7
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... no one really can say if that will hold up or not. ...
Exactly. That is true of all these models and calculators, no matter how much detail and how many charts and graphs are used.

One thing Bengen said, though, IMO is worth paying attention to:
"I can’t emphasize enough the importance of inflation to a portfolio’s sustainability. The time line of inflation that a retiree experiences when they stop working is as important to their portfolio’s endurance as the sequence of investment returns, which has received much greater attention. This truth has been masked by a history of generally low inflation in the United States over the last 100 years (leaving out the 1970s and the period from 1948 to 1952)."
Withdrawal rates are inevitably variable because life's costs are variable, and they will to some degree (for good or bad) will reflect people's fortunes in the market.
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Old 09-28-2020, 05:54 PM   #8
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Exactly. That is true of all these models and calculators, no matter how much detail and how many charts and graphs are used.

One thing Bengen said, though, IMO is worth paying attention to:
"I can’t emphasize enough the importance of inflation to a portfolio’s sustainability. The time line of inflation that a retiree experiences when they stop working is as important to their portfolio’s endurance as the sequence of investment returns, which has received much greater attention. This truth has been masked by a history of generally low inflation in the United States over the last 100 years (leaving out the 1970s and the period from 1948 to 1952)."
Withdrawal rates are inevitably variable because life's costs are variable, and they will to some degree (for good or bad) will reflect people's fortunes in the market.
Agree generically, but isn't one's personal inflation rate even more important?
For example if one's personal inflation rate is much lower than the official rate and the CD type yields are much higher, the net effect can work out better.
This differential might be easier to achieve than the net effect in a lower yield environment.
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Old 09-28-2020, 07:10 PM   #9
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I've been programmed to believe 4% for so long that I only acknowledged 4.5% as a buffer rather than a new SWR. Now I can go to 5%, but I'll stick with 3.5-4% for now.
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Old 09-29-2020, 05:55 AM   #10
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Originally Posted by Navigator View Post
The article brings up an important point, that the CAPE we have today is outside the range that the 4.5% rule was based on. We can extrapolate to a low SAFEMAX based on recent CAPE values, but no one really can say if that will hold up or not. Another point not often appreciated is that there are really only 3 independent 30 year periods between 1926 and now. For example, someone retiring in 1986 has 29 out of 30 years in common with someone retiring in 1987, and These are not independent 30 year periods. This says we do not really have a good basis for determining the range of possible SAFEMAXs. I believe these points both call for flexibility in spending during retirement.
+1 I agree.
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Old 09-29-2020, 09:24 AM   #11
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Agree generically, but isn't one's personal inflation rate even more important? ...
Yes, of course. Bengen dodges this, consciously or unconsciously, by simply referring to "inflation."

I think it's kind of a distinction without a difference though. First, your and my personal inflation rate is sure to be reasonably correlated with the CPI, so the CPI is probably a useful surrogate. Second, how would we ever know, apples and apples, how our personal rate compares to the CPI anyway? The CPI includes a lot of adjustments (example: https://www.bls.gov/cpi/quality-adjustment/) that we have no way to make. And third, the most important IMO, we have no way to forecast any flavor of future inflation. So it makes no difference whether we can't forecast the CPI or we can't forecast our personal rate.
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Old 09-29-2020, 09:44 AM   #12
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Yes, of course. Bengen dodges this, consciously or unconsciously, by simply referring to "inflation."

I think it's kind of a distinction without a difference though. First, your and my personal inflation rate is sure to be reasonably correlated with the CPI, so the CPI is probably a useful surrogate. Second, how would we ever know, apples and apples, how our personal rate compares to the CPI anyway? The CPI includes a lot of adjustments (example: https://www.bls.gov/cpi/quality-adjustment/) that we have no way to make. And third, the most important IMO, we have no way to forecast any flavor of future inflation. So it makes no difference whether we can't forecast the CPI or we can't forecast our personal rate.

We do a bit. A significant chunk of our annual spend is our mortgage. It’s remarkable the impact on success rate if you break this out and make inflation zero. Much of our personal inflation risk is on discretionary items, so can be managed more tightly if needed.

Of course so far in yr 1 inflation on healthcare costs have negated any benefit here.

Thanks for sharing the article. I thought it was an interesting analysis. I’d love to have seen the same for more extended retirement periods.
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Old 09-29-2020, 01:45 PM   #13
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It's a nice update by Mr. Bengen but while everyone else has been talking about inflation and the equity allocation no one's said anything about the half of his model portfolio that's made up of Intermediate-Term Treasuries.

Current SEC yield on Vanguard Intermediate Treasury Index fund is .28%. Kind of puts high CAPE valuations (which unlike current interest rates aren't unprecedented) in perspective.

https://investor.vanguard.com/mutual.../profile/VSIGX
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Old 09-29-2020, 01:49 PM   #14
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Yes, of course. Bengen dodges this, consciously or unconsciously, by simply referring to "inflation."

I think it's kind of a distinction without a difference though. First, your and my personal inflation rate is sure to be reasonably correlated with the CPI, so the CPI is probably a useful surrogate. Second, how would we ever know, apples and apples, how our personal rate compares to the CPI anyway? The CPI includes a lot of adjustments (example: https://www.bls.gov/cpi/quality-adjustment/) that we have no way to make. And third, the most important IMO, we have no way to forecast any flavor of future inflation. So it makes no difference whether we can't forecast the CPI or we can't forecast our personal rate.
Fair enough.
Let me restate it with a different twist.
IIRC, Kitces and Big ERN both note the correlation of the investment portfolio balances in REAL terms at a point in time over the first let's say 10 to 15 years to the ultimate survival of the portfolio over 30 or X years.
Thus my reference is that the REAL investment portfolio value over the first X number of years could use one's personal inflation rate vs. using the CPI stated rates.

Perhaps splitting hairs.
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Old 09-30-2020, 03:51 AM   #15
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Agree generically, but isn't one's personal inflation rate even more important?
For example if one's personal inflation rate is much lower than the official rate and the CD type yields are much higher, the net effect can work out better.
This differential might be easier to achieve than the net effect in a lower yield environment.
We can certainly control our own inflation rate to a certain, possibly large, extent.
If cost of autos go up buy a cheaper car or hold on to it longer.
If food goes up buy cheaper cuts of meat e.g.
If you own your own home, rising cost of renting and homes don't affect you. Might even help.
If you're on Medicare w medigap then you're sheltered to a certain extent from major rising medical costs.
Any part of your budget that can be described as discretionary can be cut. It probably will be cut anyway as you age. Even if non discretionary items increase because of inflation you can cut the discretionary to match it.
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Old 09-30-2020, 06:19 AM   #16
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Ah yes, if there was only 1 right answer that fit everybody's situation, took care of one's own personal inflation rate, including unexpected personal inflation events, wouldn't that be great? In all seriousness SWR was never supposed to be a plan for how to withdraw money during retirement and, in my opinion, is best used as an "are you ready to retire" guideline (emphasis on "guideline", not "rule"). Having "enough" so that you can be flexible in your spending during inevitable downturns is key here. Still, any method anybody comes up has risks. No escaping it and those risks can only, at best, be crudely estimated.
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