Withdrawal Rates in Paul Merrimans Book

[Hydroman]

I have completed reading Paul Merriman's book "Live it Up without Outliving Your Money".

One thing that has me confused is the rates of withdrawal in retirement. The standard advice of the "experts" seems to be that one should not plan on withdrawing more then 4% of their portfolio on an annual basis. Paul recommends that a persons total portfolio value should be 20 times their annual retirement income requirement, which basically equates to 5% per year withdrawal rate. However in the retirement withdrawal tables he provides in the book, he uses 6% as a "conservative" rate and 8% as an "aggressive" rate. His portfolios are based on historical data starting from 1970 through 2005. The equity portion is allocated 50% Domestic and 50% International. He ran FI/Equity mixes from 90FI/10Eq to 100% equities in 10% increments. At a 6% withdrawal rate adjusted for inflation all portfolios survived the 35 years with money on the table. Starting at the 40% FI allocation, all portfolios either ended with 100% of the principal intact when adjusted for inflation or in many cases ended with twice or 3 times the starting principal. The "agressive" rate of 8% had a number for failures.

Has anyone read the book? Does anyone have any opinions on the chances of putting together a portfolio that has the chance of surviving a 6% withdrawal rate for 35-40 years?

Any opinions on Merriman?

Thanks

 

[perinova]

I haven't read Merriman's book.

If you look at Festernou's book you also find a withdrawal rate much higher than 4%. I think 8% is given as an example there.
I really don't think IMHO that this is a safe withdrawal rate (the term may not even be mentioned I don't remember).
Those advocating this may be basing the withdrawal rate on portfolio return and leaving $0 at the end. The portfolio doesn't have a chance to go up. But what about inflation? And belt tight during down years.

I like the 4% SWR of the initial portfolio adjusted for cpi rule. WIth the 95% rule for down years.

 

[JPatrick]

I found his stats/charts on the joys of international investing to be interesting and useful.  The model portfolios "were good", but perhaps a bit dated today.  He has a decent website.
If you are going to lock in a rate for life I'd say anything north of 5% is a real reach.  Personally, I think the way to go is to establish a varible rate based on some parameters that fit your situation.

 

[Jane_Doe]

Read and enjoyed Merriman's book, but take the withdrawal rate with a grain of salt. What looks too good to be true usually is! The major concensus is that to take over 4% over a long period of time (ER) is risky. Period. IF you are retiring at a later date, don't want to preserve principal, expect to die young, don't mind cutting back on expenditures, etc. - go for it. It's a matter of comfort zone.

I do think that his points showing that you can reduce risk thru diversification are very helpful to show how you can avoid a lot of volatility by simply putting even small percentages of your portfolio into more diverse investments.

Keep reading and reading. When you see something odd like this that sticks out it usually is not as well founded as the info you hear repeated over and over.

Jane

 

[cute fuzzy bunny]

If you have a ~20 year horizon, a couple of million, and plan to skid sideways into the coffin broke, I suppose 6 or 8% would feel pretty good.

If I was looking at 40 years, had 1-2M, and wanted to leave something to the kids to screw up their lives, I'd rethink the 6. I think the 8 is nuts, given the long term returns arent much higher than that for equities, and that inflations going to eat close to half of that.

But the guys trying out 8% should check back in with me in 20 years. I'll be a little older and probably wont feel like mowing my lawn and painting my house anymore.

 

[ats5g]

I think part of the problem is that Merriman is only using data after 1970. Not too mention that Merriman's portfolios are probably a good deal tilted towards small and value, which had higher returns that the studies using S&P 500 only, and unfortunately don't reflect the reduction in return from transaction costs [which are much higher for small caps]. i.e. Merriman is assuming one could've captured the small and value premia, which is a rather large assumption given the lack of data for individuals investors having done so.

See Jared Kizer's Drawing Down and Looking Abroad: International diversification and sustainable withdrawal rates for a study with a longer data series.

- Alec

 

[Nords]

His portfolios are based on historical data starting from 1970 through 2005.
The equity portion is allocated 50% Domestic and 50% International.
Has anyone read the book? Does anyone have any opinions on the chances of putting together a portfolio that has the chance of surviving a 6% withdrawal rate for 35-40 years?

I don't read Merriman-- too simplistic. Of all the financial authors out there, by the time I'm done reading Bernstein, Seigel, and maybe Ferri & Swedroe... life is just too short to chase down the rest of them.

There's a recent rumble that the Trinity study (the source of the 4% SWR) doesn't account for investing internationally. The idea is that newer markets/sectors are even less correlated with Trinity's asset classes and so should result in even lower volatility. Of course international investments seem to be moving toward a closer correlation with the U.S., reflecting the usual change in correlations over time, so there's no way to tell whether international will continue to be such a potent diversifier.

Then you can complicate the diversification part of the SWR studies by examining the correlation of commodities, REITs, timber futures, and beaver cheese hedging.

Next let's talk about data mining. We'll start with a market that shortly blunders into a world-class bear with high inflation and subsequently moves into the mother of all bubbles with extremely low inflation. I bet I could get a 100% beaver-cheese portfolio to handle a 10% SWR under those conditions. Reading "Triumph of The Optimists" gives a much better perspective on a century of returns & inflation over 16 different countries. Merriman's limited data can't hold a candle to their analysis.

So Merriman might actually be right-- 5-6% might work if the future is 1970-2005. If I was in my 60s, staring down mortality, I'd be heartened by those 35-40-year portfolio survival rates. In my 40s I think 4% is a great upper limit.

 

[Mysto]

Seeing as no one has mentioned it yet I'll make the referral to:

http://www.efficientfrontier.com/ef/998/hell.htm

I always go back and check whenever I read something that says I can get larger withdrawals.

 

[Nords]

Seeing as no one has mentioned it yet I'll make the referral to:
http://www.efficientfrontier.com/ef/998/hell.htm

Kindly do a search of this board's threads for the keywords "calculator" and "hell".

 

[perinova]

Very good inputs.
All assuming that we choose a plan and stick to it to the very end. In real life each one of us will make adjustments to the plan as we go along. A bear market and 50% drop in porfolio value may prompt to do some computation, adjust lifestyle by reducing expenses dramatically or by getting a temp job (I would hate to do that though. )
I am glad we have all that data and theories to plan for the best and deal with the worst.

 

[haha]

Very good inputs.
All assuming that we choose a plan and stick to it to the very end. In real life each one of us will make adjustments to the plan as we go along.  A bear market and 50% drop in porfolio value may prompt to do some computation, adjust lifestyle by reducing expenses dramatically or by getting a temp job (I would hate to do that though.  )
I am glad we have all that data and theories to plan for the best and deal with the worst.

It may not apply to the stout-hearted folks here, one but one real life adjustment that is commonly made when a big portfolio drop comes along is to get the hell out of the market, and swear to never go near it again. And then there is divorce also. 

Ha

 

[tomz]

Of course international investments seem to be moving toward a closer correlation with the U.S., reflecting the usual change in correlations over time, so there's no way to tell whether international will continue to be such a potent diversifier.

Funny you should mention that:
http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/15/8376864/index.htm?cnn=yes

"Yet when Pinkernell and Bernstein gave their diversification advice a recent checkup, they discovered that investments prized for diversification have suddenly become highly correlated with U.S. blue chips. They're up when the S&P is up and down when the index falls."

 

[rmark]

"There's a recent rumble that the Trinity study (the source of the 4% SWR) doesn't account for investing internationally. The idea is that newer markets/sectors are even less correlated with Trinity's asset classes and so should result in even lower volatility. "

That lower volatility with international investment would have come with lower past returns and higher costs, if that level of diversification had actually been available, which it wasn't.

Reduced volatility + lower return = pretty much back to 3-5% withdrawals,
before investing costs.

 

[free4now]

Agreed Mark. Even if international offers better diversification, the historical returns are much worse. In order to come up with better SWR from adding international, you would have to assume that returns will be significantly better going forward than what history shows. And if you are using forward looking predictions instead of historical data to calculate your SWR, then I wouldn't even call it a SWR, I'd call it a guesstimate.

 

[Hydroman]

To answer a few questions/comments:

The withdrawal amounts and ending balences in Merriman's tables are inflation adjusted.

He is using DFA funds and states the returns reflect an adjustment for the 1% advisor fee that you have to pay to get access to the DFA funds.

At the 6% withdrawal rate not only was there money still on the table at the end of 35 years, but starting at 40% FI allocation, you ended with more money then you started with even after adjusting for inflation.

Between his book and his websites, Merriman provides a lot of "free" information and includes various portfolios using Vanguard, Fidelity, Schwab et al. However in the end it seems he like what he really is doing is trying to plant the DFA seed and get you hooked into signing his company up to be your "advisor" at 1% of your total portfolio value. My concern, is everything he does including the book seems to be for the purpose of generating leads for his business. His "ultimate buy and hold portfolio" requires you to invest in DFA funds through a fee advisor.

 

[haha]

To answer a few questions/comments:
However in the end it seems he like what he really is doing is trying to plant the DFA seed and get you hooked into signing his company up to be your "advisor" at 1% of your total portfolio value. My concern,   is everything he does including the book seems to be for the purpose of generating leads for his business. His "ultimate buy and hold portfolio" requires you to invest in DFA funds through a fee advisor.

Merriman is local here. Back in the 80s I went to a "free seminar" of his. Very slick and promotional.

Ha

 

[Hydroman]

Semi local for me too. Eastern Washington.

 

[Mysto]

Sorry Nords - I was aware that calculator from hell had been on the board - I was replying to the original poster on the capability of withdrawals in the 5-6% range and not trying to inform regulars. Honest!!!! ;o)