Updated Situation for 2000 Retirees

[Midpack]

Good news, bad news. I just thought this might be of interest to most current retirees, not just those who pulled the plug in 2000.

Retirement Researcher Blog: Updated Situation for 2000 Retirees

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Now that 12 years have passed since the retirement date for 2000 retirees, we can obtain a progress report about how they fare relative to other historical retirees. Ranked in terms of real remaining wealth 12 years after retirement, the 2000 retiree comes in 15th place with 67.6% of their retirement date wealth remaining after 12 years. This is for a 4% withdrawal rate, 50/50 asset allocation. On the surface, the situation does not look dire for 2000 retirees. The 14 retirees with less remaining real wealth after 12 years all subsequently experienced success over 30 years with the 4% rule. Did the 2000 retiree already past the test to be well on the way to success with the 4% rule as well? Perhaps, but I do not think that great confidence is called for yet. While a lot of those retirees also appear in the above table as well for 12 year retirements, it is also worthwhile to note the current market conditions 12 years after retirement. For the 14 retirees ranked in worst-shape than the 2000 retiree after 12 years, harsh market conditions had already tended to bring market valuations to rather low levels.

[MichaelB]

Thanks for that link. I like reading him. For the Year 2000 retiree, like me, he says

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On the surface, the situation does not look dire for 2000 retirees. The 14 retirees with less remaining real wealth after 12 years all subsequently experienced success over 30 years with the 4% rule. The current withdrawal rate (which is the real withdrawal amount of 4 divided by the remaining real wealth of 67.6) for the 2000 retiree is 5.92%,

So, not dire. That's reassuring. After withdrawing 4% my portfolio should be around 1/3 below its inflation adjusted value of when I retired. Actually, our WR has been a bit above 4% per year and the portfolio is worth about 90% of its original adjusted value, so I guess we're doing ok. That difference is probably due to investing in assets other than S&P, such as EM and ISC. Would be higher if I were a better investor.

[Lsbcal]

Some of us may have had expected higher withdrawal rates early in retirement. Then when the SS kicks in the withdrawal rates can go down leading to a possible catch up period.

We're at 90% of our inflation adjusted starting total in 2003. But our expenses are now down (DS graduated college) and SS has kicked in. With decent luck our inflation adjusted total should rise or at least remain stable from here on. Our current withdrawal rate is set at 4.0% but we could reduce that if necessary now, whereas in the past we could not easily reduce withdrawals.

I think Pfau's data is interesting but is a bit simplistic when applied to real life individual cases.

[walkinwood]

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Originally Posted by Lsbcal I think Pfau's data is interesting but is a bit simplistic when applied to real life individual cases.

I agree!

I like the more nuanced variable withdrawal methodologies like Guyton's Decision Rules. I would like to see how annual withdrawals using those rules would fare under the harsher future predictions that Pfau has used for some of his modeling.

We currently use the 4% of portfolio valuation, but the withdrawals under that method are very volatile. We use it mainly because we may have 40+ years of ER. At some point, we'll have SS to add to the mix.

[Nords]

Quote:

Originally Posted by Lsbcal I think Pfau's data is interesting but is a bit simplistic when applied to real life individual cases.

I agree that it's simplistic, but if even the Y2K retiree can survive this situation then a lot of retirees have a lot to be optimistic about.

It reminds me of the comparative research being carried out by a true simplist, Raddr's happless Y2K ER.
Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update

[Bikerdude]

I retired in 2000 and I'm below 3% SWR. I had an overall conservative retirement plan along with pension and SS kicking in at predetermined points that allows me to be confident in the future.

[Running_Man]

Wade Pfau's own study on what a safe withdrawal portfolio should be was 60/40 with the 40 in 6 month commercial paper. (see attached article) His study on this same topic in 2010 was also at 60/40. Having Y2K start with 10 year US government bonds at nearly a 7 percent yield 12 years after the fact seems, well cherry-picked. As Raddr's web site is tracking, most articles at the time were a 75/25 allocation would last forever with cash in short term paper. I find his tracking far more compelling than this paper. His real-time study is at 50% of the original portfolio and with over a 10% withdrawal rate at this point.

I have a feeling if interest rates had risen along this period, Wade would be issuing a study that revealed upon retirement one who set up a ladder approach to bonds to minimize interest rate risk, or else perhaps commercial paper if short term rates had really risen, would be doing ok. But the best strategy at 2000 in retrospect by 2010 is to buy all of the bonds at 10 year at one time, so that is what we are seeing in this "study". The difference is immense in that 50% of the 6.6% 10 year bond yield along with the S&P500 dividend, even at it's meager yield in Y2K 1.16%, would have provided most of the cash needed for a 4% withdrawal in the early years as the S&P500 took it's dive mostly avoiding the sale of stocks for portfolio withdrawal in those early crappy years.

Also ignoring fees totally seems equally wrong as well, I do not see how if Raddr can track this that Wade Pfau with all the resources at his disposal cannot do the same.

Safe Savings Rates: A New Approach to Retirement Planning over

[MichaelB]

Pfau updated his analysis based on feedback from this thread, the result is clearly much more pessimistic.

[Lsbcal]

Quote:

Originally Posted by MichaelB Pfau updated his analysis based on feedback from this thread, the result is clearly much more pessimistic.

I'm wondering where he changed things. Any specifics?

[Lsbcal]

Pfau's year 2000 retiree seems to have missed some opportunities. For instance, in the year 2000 the retiree could have bought Ibonds at 3.4% (30 year maturity) up to $60k per year for a couple (we did). That couple could have made more purchases of them in the next year or two (we did not, ugh!). Then that retiree would be looking at a different picture for the bond side of his portfolio going forward now.

On the other hand, his 2000 retiree did not invest in tech stocks.

I'm just thinking that Pfau's analysis assumes a very generic approach to investing.

I don't agree with Pfau's comments that the equity markets are somewhat overvalued. Probably the bond markets are. So the 50/50 investor might be wise to think outside the box (at least with the 50% in bonds).

[Midpack]

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Originally Posted by Lsbcal I don't agree with Pfau's comments that the equity markets are somewhat overvalued.

PE10 seems a pretty well accepted, quantifiable indicator to me. And today's PE10 is considerably higher than all the 14 other periods in his article, wasn't even close. Not arguing, but what do you use?

[audreyh1]

Arrrgh! - I just lost my posting with more details, but whatever. Retired in Aug 1999, so I consider myself more or less a Y2K retiree.

We set aside a retirement portfolio "nest egg" in 2000, but our goal was to let it build for at least 10 years without withdrawals. In the mean time we planned to live off of additional savings and by selling other riskier assets. We did make the 10 years no withdrawals, and in fact took very little out in the past two years.

So in our case, in terms of seeing "how we did" it makes more sense to look at our total net worth 2000 thru present.

Anyway, comparing our net worth at the beginning of 2000 to end of March 2012, we are up 34.35%. But after inflation that puts us at -1.85% in real terms. Still not that bad considering 12+ years of expenses and taxes and any splurges we decided to make.

Interestingly, if I compare it to my actual retirement day in 8/1999, our net worth is up 56.5%. After inflation, that is still up 18.9% in real terms. Those last 5 months of 1999 made a big difference!

[Mulligan]

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Originally Posted by Lsbcal Pfau's year 2000 retiree seems to have missed some opportunities. For instance, in the year 2000 the retiree could have bought Ibonds at 3.4% (30 year maturity) up to $60k per year for a couple (we did). That couple could have made more purchases of them in the next year or two (we did not, ugh!). Then that retiree would be looking at a different picture for the bond side of his portfolio going forward now. On the other hand, his 2000 retiree did not invest in tech stocks. I'm just thinking that Pfau's analysis assumes a very generic approach to investing. I don't agree with Pfau's comments that the equity markets are somewhat overvalued. Probably the bond markets are. So the 50/50 investor might be wise to think outside the box (at least with the 50% in bonds).

You have to rub those early 2000 I Bond purchases in my face. I was so dumb not to do that, plus missing out on the instant cash back by purchasing them with credit cards when that was offered too.

[audreyh1]

Quote:

Originally Posted by Midpack Quote: Originally Posted by Lsbcal I don't agree with Pfau's comments that the equity markets are somewhat overvalued. PE10 seems a pretty well accepted, quantifiable indicator to me. And today's PE10 is considerably higher than all the 14 other periods in his article, wasn't even close. Not arguing, but what do you use?

I find myself leaning a bit more towards Lsbcal's point of view.

Pfau states that:

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Compared to a PE10 of 21.21 at the start of 2012, 2000 retirees may not be able to expect higher forward looking stock market returns. As well, dividend yields are lower than experienced in the past. Bond yields are also at the lowest levels in U.S. history, and this is the best predictor of future bond returns.

Yet compared to 2000, it's all so much healthier. Dividend yield on S&P 500 of 2.06% is double that compared to 2000 when it was around 1.1%. And PE10 of 21.21 is still way lower than the 40+ seen in 2000, and back down to levels of the mid 1990s.

I expect regular P/Es to keep dropping gradually for several more years at least, but if company earnings keep improving it may not translate into an extended period of significantly lower stock prices, just not major advances in stock prices. At the same time there are projected negative returns in "safe" bonds and negative real returns in cash at the moment, so it's bad across ALL asset classes (except for maybe some more esoteric ones). One had better stay diversified. I prefer to look at things like the GMO forecasts in guestimating future returns.

[Running_Man]

I was surprised he quoted my post here, apparently Wade is very open to relooking at assumptions for his posts. Now in several of the alternative scenarios he is showing that depending on what the cash portion of the portfolio is invested in makes a big difference. With the change from 10 year government bonds the current withdrawal rate is now shown as 8.7%, as his title suggest: grim news.

http://wpfau.blogspot.ca/2012/06/grim-news-another-look-at-
2000-retiree.html#.T-CvB5F7SuI

[Midpack]

Quote:

Originally Posted by Running_Man I was surprised he quoted my post here, apparently Wade is very open to relooking at assumptions for his posts. Now in several of the alternative scenarios he is showing that depending on what the cash portion of the portfolio is invested in makes a big difference. With the change from 10 year government bonds the current withdrawal rate is now shown as 8.7%, as his title suggest: grim news. http://wpfau.blogspot.ca/2012/06/grim-news-another-look-at- 2000-retiree.html#.T-CvB5F7SuI

Wow, that's a very different result isn't it. Congrats RM!

[Lsbcal]

Quote:

Originally Posted by Midpack PE10 seems a pretty well accepted, quantifiable indicator to me. And today's PE10 is considerably higher than all the 14 other periods in his article, wasn't even close. Not arguing, but what do you use?

Hi Midpack, I don't think PE10 can be directly compared to the past because the E10 (denominator in PE10) has a much higher standard deviation then it did historically. This is just a fancy way of saying the earnings collapses in the last 10 years has made this PE10 number suspect.

Here is a quote from Larry Swedroe from Oc1 2011 (Bogleheads):

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It is a backward looking, not forwad looking metric, and one has to be careful to see how you get the figures. So for example, the period now just happens to include 2 big negative periods, when earnings fell sharply 2001-2 and 2008. So the average is not really representation IMO of current valuations -- and remember markets are forward looking.

What do I use? I use a combo of (1) relative returns of stocks to bonds, (2) PE10 with a currently relaxed constraint, (3) yield curve slope.

P.S. I just put in a question of Wade Pfau's blog site about PE10. Hopefully he will answer.

[Gearhead Jim]

Quote:

Originally Posted by Running_Man I was surprised he quoted my post here, apparently Wade is very open to relooking at assumptions for his posts. Now in several of the alternative scenarios he is showing that depending on what the cash portion of the portfolio is invested in makes a big difference. With the change from 10 year government bonds the current withdrawal rate is now shown as 8.7%, as his title suggest: grim news. http://wpfau.blogspot.ca/2012/06/grim-news-another-look-at- 2000-retiree.html#.T-CvB5F7SuI

Since investment results are usually erratic, I'm not so sure that the boost from original allocation into bonds is unrealistic.

I don't think many people would put their entire fixed income AA into cash, putting all or most of it into the bonds seems more likely.

Didn't someone once say that a well-diversified portfolio is a good idea?

[Independent]

Quote:

It is a backward looking, not forwad looking metric, and one has to be careful to see how you get the figures. So for example, the period now just happens to include 2 big negative periods, when earnings fell sharply 2001-2 and 2008. So the average is not really representation IMO of current valuations -- and remember markets are forward looking.

I'm thinking that looking back 10 years also includes some years when reported earnings were overstated, as we learned in 2008.

If I take trailing 15 years, I get almost exactly the same number as trailing 10 years.
If I simply drop the 12 worst months, and take the average of the other 108, I get a number that's about 10% higher.

I don't know if that changes the result a lot.

[mathjak107]

i was looking at raddr's y2k er results.

why no bonds and why 25% t-bills? surely bonds whould have influenced the numbers to look better .