Yahoo "Finance Quiz"

[Walker101]

Warning: Fairly long post.

I've been lurking at this board and its predecessor for several years and have gotten more ideas and answers than I would have believed possible. (I ERed two+ years ago thanks in part to you all.) As a rule, I have gotten the answers before I knew enough to ask the question. Now I have a heretofore unanswered question: The Yahoo finance site(http://finance.yahoo.com/) has a daily (or so) "Finance Quiz" which usually relates to trivia. Yesterday and today there is a question with an answer on it that sounds wrong to me and I wonder if anyone can demonstrate that it is, or should we worry . . .?

Here is the text of the Q&A:

"Q.Bob and Jim retired in 1972 with $1 million each, 100% invested in the S&P 500. Each year thereafter, Bob withdrew $10,000 and Jim withdrew $30,000; withdrawals were adjusted for inflation. By 2001, how did their portfolios compare?
Bob has 1 million USD, Jim has 300,000 USD
Bob has 2 million USD, Jim has 750,000 USD
Bob has 3 million USD, Jim has 1 million USD
Bob has 6 million USD, Jim has zero

The correct answer is:
Bob had 6 million USD, Jim had zero
[Get it right? Or wrong? Save your score to your Quiz Tracker]
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Withdraw too little, and you risk creating hardship for yourself at the very time of life where you are supposed to be enjoying the fruits of your career. Withdraw too much and you risk outliving your funds. This tradeoff is made difficult because two important factors--the return on your portfolio, and the inflation rate--are generally uncertain.

In this example, Bob and Jim begin with exactly the same portfolio and experience the same market return (some very poor returns in the bear market of the 1970s, somewhat higher returns in the 1980s, and exceptional returns in the 1990s). But Jim's need to live off 30,000 real (1972) dollars means that by 2001 he's requiring over 120,000 USD a year to live on, as inflation was particularly notable in this period. As with most things in long-term investing, the effects of this plan then compound over time. By 2001, Bob's portfolio has risen to over 6 million USD. Jim's portfolio, by contrast, runs to zero by the end of 1994.1


1 Market returns for the S&P 500 and consumer price index numbers taken from Global Financial Data. Withdrawals are taken at year-end of the year prior to when they are expended and earn no interest. Ending balance for Bob at 12/31/2001 is 6.1 million USD. By contrast, after 1994 Jim would have needed to borrow to finance his retirement. "

As I read it, Jim is using a withdrawal rate of 3% on a 100% stock investment portfolio, yet it fails miserably. I ran the numbers on FireCalc and according to that (as well as Intercst's and other analyses) the answer Yahoo gives is dead wrong.

Can anyone tell me if I'm missing something?

 

[cute fuzzy bunny]

Firecalc uses the "market as a whole" numbers, which I think are different from the s&p500, but I dont think long run TSM numbers are a lot different, and the S&P numbers are a little better.

I think what firecalc does is it takes your 30k withdrawal, converts that down to whatever 30k was worth in 1979 and then runs it forward. Obviously 30k in 1979 dollars is a lot less. On the other hand, 30k was a pretty fair amount of money in 1979; I was making about 24k a year then and living pretty well...and that was before taxes.

 

[unclemick]

In 1972, I was living high on the hog with a 13k taxable income. 30k is 3% in 1972 dollars for the example and inflation was high as pointed out. Kinda scary since one current fear is that a bout of inflation is on the horizon. Let the number crunchers come forth and explain. At the tender age of 60, and roughly 60/40, I'm looking at 2-4% range for 'my' IRA and using firecalc as a guidepost.

 

[hocus]

I've been lurking at this board and its predecessor for several years and have gotten more ideas and answers than I would have believed possible....The Yahoo finance site(http://finance.yahoo.com/) has a daily (or so) "Finance Quiz" which usually relates to trivia.  Yesterday and today there is a question with an answer on it that sounds wrong to me and I wonder if anyone can demonstrate that it is, or should we worry . . .?

We should worry, Walker101.

I strongly relate to your comment noting the tremendous good that has been done by this board and its predecessor (I am assuming that this is a reference to the Motley Fool board). I have written a book on a new appraoch to money management that I call "Passion Saving" and my assessment is that what I learned at the Motley Fool board made that book ten times more valuable than it would have been had that board community not have been available to me.

The idea of achieving financial independence early in life is generally (not entirely) a new idea. That means that the work done at the various boards enhances the hopes of middle-class workers to achieve their life goals in important ways. The work we do here (and that others do at the other Retire Early/FIRE boards) matters.

For that reason, we should be very worried about how the SWR question has been handled at the various boards. The SWR tool is an extremely powerful one. I have been making use of it since 1996 in my investment planning, and I have discovered dozens of applications for the SWR tool that have never even been suggested yet on the various boards. I believe that the SWR tool is going to be refined and improved for many years to come and that in time it will be put to constructive use by millions of middle-class investors. When that happens, people will be looking back to the work done by the various Retire Early boards since the founding of the first one in May 1999. I have saved copies of just about every on-topic post from every board in my personal files because I recognize the great value these posts will acquire when research on the SWR concept is further opened up in coming years.

What has happened in the past two years re our discussions of SWRs is a tragedy. The SWR concept is a new one. It is now in its early stages of development and is in the process of being refined, developed, and expanded. There is no one on Planet Earth today who is in a position to offer dogmatic pronouncements today on SWRs because the work that would need to be done to justify such pronouncements has simply not yet been done. Yet such pronouncements are common on the various boards. We bring discredit on ourselves when we allow such pronouncements to go unchallenged.

I have discovered not one flaw with the conventional SWR methodology; I have discovered perhaps a dozen. I am all but certain that there are others who in days to come will be discovering more. This is not because the people who developed the conventional methodology are stupid or bad people. It is because it is impossible when examining a question of such complexity to get it 100 percent right in the first take. It is by discovering and correcting mistakes made in the early-draft studies that we learn how to make better use of the SWR concept. We should be happy that we have discovered so many flaws in the work done by those who have gone before us. The discovery of flaws opens up opportunities for us to advance knowledge.

I can't list all the flaws here. But to gain an idea of the sort of thing I am talking about, please consider the claims that Peter Lynch made not too long ago that the safe withdrawal rate for stocks is 7 percent because that is the long-term real return for stocks. Peter Lynch was wrong. The conventional methodology studies proved that he was wrong, and he of course acknowledged this, and learning about SWRs advanced.

Where things stand today is that, just as the conventional studies showed the Peter Lynch claims that the SWR is 7 percent to be wrong, the data-based SWR tool has shown the conventional study claims that the SWR is 4 percent to be wrong. This does not mean that we should be critical of the authors of conventional studies. The conventional methodology was a "breakthrough" methodology (that's William Bernstein's assessment, but I agree with it), and we should be grateful for the work done by the pioneers.

That said, we need to move past the work done by the pioneers. We have only scratched the surface of exploring the insights into effective investing that can be gained through SWR analysis. We hurt ourselves by remaining stuck in the past. To move forward, we need to recognize both the benefits of the conventional methodology AND the limitations of it. We will all feel better about discussing SWRs when we once again aim with our discussions to move forward in our understanding of what the historical data truly reveals re what withdrawal rate is safe.

 

[Jarhead*]

Re: UncleMick comparison of inflation adjusted income.

That point is far from lost on me. My entire working life was during a period of high inflation.
When I see a poster that has a pretty good sized portfolio, at age 39 (Usually due to an inheritence), state that they feel comfortable spending 6 or 7% each year, what I see is a trainwreck waiting to happen.
There are enough parallels in place now, to make anyone slightly uncomfortable. (Substitute Iraq and the Mid East Situation for Vietnam).
During a period of high inflation, real estate has been a pretty good spot to be in. However, because of low interest rate, supply and demand, and I don't know what else, properties in most area of the country has been bid up to unrealistic prices already.
I believe that most posters would be well served in our current environment to have patience, try not to chase yields, stay short, and let the market place dictate what interest rate they are willing to pay. If inflation takes off and becomes anything at all like the 60s and the 70s, the current bond yields (long bonds) are going to feel like finding out your girlfriend is a transvestite

 

[Cut-Throat]

As I read it, Jim is using a withdrawal rate of 3% on a 100% stock investment portfolio, yet it fails miserably.

This is a major example of the need for diversification!

Historical SWR will go up with a Bond/Stock Mix when you have a horizon of over 30 years.

During the early 1980's my checking account was paying over 14% interest and the S&P was going nowhere! Also investing in 1 asset class is foolish also. As emerging, Small Cap and international will also increase Historical SWR.

The Max I'd put into stock during an accumulation phase would be 75%. During the withdrawal phase of a portfolio. I'd max out at 50 - 60 %. And as I got older like 70 or so I'd drop that to 30%.

So while on the surface, this looks like a reason to only withdraw 1% instead of 3 or 4%. In reality it shows you what can happen if you do not diversify into different asset classes.

 

[Jarhead*]

Walker 101:

Regarding retireing in 1972.
Probably the most extreme example that could be picked.
We had a combination of stock mkt. malaize, and tremendous inflation. (If inflation is up to 18% or so, and the mkt. is down 25% or so, it wouldn'''t take long to strip the portfolio down.
Calculators are an interesting guide, but in the final analysis, I believe it is more important to understand yourself, and what makes you comfortable.
In the first place, $30,000 in 1972 was a very good income. (I was supporting my wife and children on about that amount, and doing so quite comfortably.
Assuming the retiree in 1972 had already raised his children, had a home paid for, $30,000 inflation adjusted would have been living the high life.(Hard to believe now)
Although, that is an extreme example, it does give a fair assestment of the effect inflation has on a retirees plans.
If retiring means buying yourself the very valuable commodity known as time, a little commen sense in the outgo dept. will work wonders. If retireing means spending like you were trying to compete with your working brother-in-law, than you probably should keep your skills honed. (Personally, that was never at all important to me, and since I've been retired, the least of my cares).
To sum it up, the guy that retired, was living the high life in 1972 dollars. The other guy was a far cry from being poverty level, and if he had outside interests was able to enjoy himself with the lower amount.

 

[Cut-Throat]

This is a major example of the need for diversification!

To further illustrate that this is more about the failure to diverisify than a high withdrawal rate. I ran firecalc with a 50/50 stock/bond mix and it turns out for 1972 that 4.5% withdrawal rate would also have been just fine. Or $45,000 a year!

Building a balanced portfolio is much more important than whether the Withdrawal rate is 1% or 4%.

Enjoy the money and as John Galt says "don't be a worry wart"

 

[Jarhead*]

Cutthroat:
Re: your post as a reason to diversify:
I doubt if you would get any argument from anyone here, about the importance of that tactic.
But the case presented, was both had parked all their money in stocks. (By the way, as you know, bonds took their own beating during that period of time).
In any case, $l,000,000 (1972) would be worth close to $6,000,000 today. ($1,000,000 was the real high rent district in 1972).
In any case, 1% of 6,000,000 is $60,000. If your home is paid for and you are either receiving Soc. Sec. or will be in the not too distant future, and your children are out of the household and doing o.k. that is more than enough for my wife and myself.
As you stated, it would have worked out better if the individuals had diversified.
But for a retired individual to withdraw the amount he did when extrapolated to todays $s, it was pretty excessive. 3% of 6,000,000 is 180,000.00.
As I stated before, the period of time selected, if not the toughest time in the last 50 years, was close to it.
While I certainly agree, especially as you get older, it is important to deversify, it is also important to use a little commen sense, and remember the most important reason to retire early. (Luxury of freedom).

 

[Cut-Throat]

But for a retired individual to withdraw the amount he did when extrapolated to todays $s, it was pretty excessive. 3% of 6,000,000 is 180,000.00.

Money is all relative ! - $400 is pretty excessive for someone living in the Sudan!

My main point is that a 3% withdrawal rate is NOT
excessive. You just have to make sure you diversify.

Yes, I know both folks were 100% in stocks. And this is as unrealistic as a 1% withdrawal rate!

 

[Jarhead*]

Cutthroat:

You stated that "money is all relative".
I would appreciate it if you would not bring up my relatives
Damn, I hope my knee gets better poste haste, and I can get back to my goof off routine.

 

[cute fuzzy bunny]

What'd you do to your knee...did I miss that?

I was mowing my fiancees lawn on the rider about a week and a half ago. Cut too close to a tree in 3rd gear at full throttle and clipped the edge with the front wheel. BANG! Mower jumped and slammed my left knee into the tree. I looked down at a splinter sticking out just under my knee, started pulling...and pulling...and pulling. Came out with a piece of wood like a long toothpick. Hardly even left a hole.

No pain. Until later. God bless the inventor of Alleve. I can almost walk without a hitch now.

When I can walk well again, I'm gonna go kick that trees ass.

 

[cute fuzzy bunny]

I can relate. I've got the same clicky knees from playing hockey from 4 until about 15, soccer and lacrosse in junior and senior high, and one aborted season at safety in high school. Even at 42 about once a month I have to get up at 3am and wrap a heating pad around one of them. The HMO surgeon: "Yeah, you can use some surgury. I love to do surgury. But in your case the results might be the same. Or better. Or worse. Its hard to tell. Every one goes different.". Uh...yeah.

I cant wait until I'm 70.

On the other hand, they have some cool new surguries around regrowing and implanting fresh knee cartilage.

 

[JWR1945]

I have made a version of intercst's Retire Early Safe Withdrawal Calculator that allows me to vary the extent of dividend reinvestments. I find that I can approximate Yahoo's results only if dividends are totally excluded from the calculations.

To put it simply: Yahoo blew it!

It is not FIRECalc that is in error. It is not the Retire Early findings that are in error. For TH and others: FIRECalc doesn't give Yahoo's numbers because Yahoo's numbers do not make sense. Yahoo's numbers do not reveal a problem hidden within FIRECalc.

Have fun.

John R.

 

[sgeeeee]

. . .
To put it simply: Yahoo blew it!

It is not FIRECalc that is in error. It is not the Retire Early findings that are in error. For TH and others: FIRECalc doesn't give Yahoo's numbers because Yahoo's numbers do not make sense. Yahoo's numbers do not reveal a problem hidden within FIRECalc.

Have fun.

John R.

Thanks John. I had played around a little bit and decided that I didn't trust Yahoo, but it is nice to see this suspicion confirmed.

I am having fun. You have fun too.

 

[hocus]

It is not FIRECalc that is in error. It is not the Retire Early findings that are in error.

John:

I think you are overstating the case here. You have said in a number of earlier posts that you believe that the numbers set forth in the REHP study are wrong, that 4 percent has certainly not been the SWR ever since we entered the level of valuations that we reached in the late 1990s and that 4 percent was probably the wrong number for the SWR before that as well.

I understand that you are in your post here making a more narrow point about the discrepancy between the statement made in the Yahoo quiz and the claims of the REHP study. I am perfectly happy to take your word that on this particular point it is not the conventional SWR methodology that caused the problem. But I do not think that that means that we should not be concerned about the grave flaws that we have discovered in the conventional SWR methodology.

I am not a statistics expert and so I do not wear the hat of a statistics expert in my analysis of any of these questions. There are some ways in which that puts me at a disadvantage. There are other ways in which it puts me at a big advantage to those who tend to focus more on the narrow statistical points.

The reality is that probably 90 percent of the people who look to these boards for insights on how to retire early do not study in detail the statistics supporting the various claims put forward. Most people presume that studies that are frequently referred to in positive terms by other board members are more or less on the mark. They possess neither the skills nor the inclination to check things out for themselves.

Walker101 asked whether he should be "worried" about the confidence he has placed in the claims of the conventional methodology studies. I believe that he should be very worried indeed, if not because of what he saw at Yahoo then for any of a dozen other reasons. The Yahoo quiz results were posted at the Motley Fool board the other day, and the response was similar to what we saw here. A number of posters commented in ways that indicated that they were not sure why there was such a discrepancy.

The reason why many people are not sure what to make of such a discrepancy is that most people do not fully grasp the various assumptions that went into development of the conventional methodology studies. To know whether to place your confidence in those studies or not, you must know how they were developed. It is the only way to know whether the results make sense or not.

We need to get back to zero on the SWR question, in my view. We need to find a way to pretend that we have never heard a word from anyone re what the SWR is, and just examine the question fresh. We need to take community members step by step through the various questions that must be examined to determine an SWR so that when they hear one researcher claim a SWR of 4 percent at the same time that another researcher claims an SWR of 2 percent, they will understand why the two numbers are so far off.

SWR analysis has been sold to us as a mathematical construct. If the various researchers allowed themselves to be bound by the rules of mathematics, different researchers would not be coming up with such wildly different numbers as the result of examining the same historical data. The reality is, the SWR can be anything that anyone wants it to be if he is just willing to define things in such ways that his "research" will produce the desired number.

You used harsh words to refer to the Yahooo quiz. You say that "Yahoo blew it." I know that you agree with me that the authors of the various conventional methodology studies "blew it" too, and the conventional methodology studies are probably going to cause more life setbacks in the future days than the Yahoo quiz will. Since it seems that just about everyone looking at the SWR question until today has in some way or another "blew it," do you think it makes sense that each and every one of us agree to get back to basics and figure out what it is we are trying to determine when we research SWRs before any one of us becomes so bold as to declare on a public discussion board that he or she has determined the take-out number that the historical data reveals to be safe?

 

[cute fuzzy bunny]

By the way, I didnt say firecalc did anything wrong.

What I think it did was recalc the 30k withdrawal into 1972 dollars and then go from there, while the yahoo calcs probably started with 30k. That might be why the yahoo calcs fail and the firecalc runs succeed.

There are "use inflation adjusted dollars" for everything except the withdrawal rate (I think). Perhaps it doesnt work this way, but it probably should. Taking a stated 50k withdrawal rate back to 1880 would be debatable.

Or is what I'm saying just not making sense, or am I way off base?

 

[Cut-Throat]

4 percent has certainly not been the SWR ever since we entered the level of valuations that we reached in the late 1990s and that 4 percent was probably the wrong number for the SWR before that as well.

*****,

I don't understand why you keep beating the SWR dead horse. I think everyone here agrees that there cannot be a SWR - only an HSWR!  You or no one else is going to come up with a SWR formula. No one can predict the future of financial markets!

4% turns out to be a pretty good number for HSWR and for retirement planning

Can we leave it at that?  

 

[hocus]

I think everyone here agrees that there cannot be a SWR - only an HSWR!

Can we all start referring to the results of FIRECalc as the historical surviving withdrawal rate (HSWR) then?

You or no one else is going to come up with a SWR formula. No one can predict the future of financial markets!

I don't want to get into a long discussion of this question on this thread, CutThroat. But it you take a look at the SWR Research Group board (at NoFeeBoards.com), you will see that JWR1945 and I have indeed come up with what appears to be a valid methodology for determining the SWR. It may that there are flaws in it, and if there are, both of us obviously would like to have others point them out before we go too much farther in publicizing the tool. But we have developed a data-based approach to SWR analysis, and the posts describing the methodology and results are available for public inspection by the community of people interested in learning how to put together effective Retire Early investing plans.

4% turns out to be a pretty good number for HSWR and for retirement planning

That number is the historical surviving withdrawal rate. However, for aspiring early retirees with high stock allocations, it is a high-risk take-out number at the valuation levels that have applied in recent years, according to the historical data. It is not just me and JWR1945 that are saying that. William Bernstein is a world-recognized authority on asset allocation stratagies and he says that too. And there are lots of other world-recognized authorities who have done work that lends support to the work done by JWR1945 and me--people like Robert Shiller and Rob Arnott and Peter Bernstein and Andrew Smithers and Ed Easterling and on and on.

I am OK if people want to say "I personally am going to take a 4 percent withdrawal and I think that others should too." So long as we stay within the realm of personal opinion, I think we should be free to say what we please. My concern with the SWR claims is that the SWR is supposed to be a mathematical construct; the researchers who claim to be doing SWR analysis claim to be telling us the number that the historical data reveals as safe. So I think they should be bound to claim as the SWR only a number that is supported by the historical data.

The William Bernstein number (2 percent) is a reasonable one, in my view. I have looked at the data and I can see why he is saying that the number is 2 percent. The people claiming that the number is 4 percent are basing their claims on the results of studies using the conventional SWR methodology, and that methodology has been discredited for purposes of determining SWRs. So I think it would be a good idea if people stopped using the word "safe" when referring to that number.

I am one poster and I only get one vote. The community has to decide as a whole how to proceed. I ask that people think ahead to what the consequences may be in the event that William Bernstein and all the others are right and the 4 percent number really is not at all safe and people suffer serious life setbacks as a result of claims that it is that have been put forward on the various Retire Early boards. We are going to be in a very sticky place at that time. I think we could save ourselves an awful lot of trouble down the road if we would be a little more cautious in the claims that we put forward today.

The conventional studies tell us the historical surviving withdrawal rate but not the safe withdrawal rate, according to the experts. Why not make it a community practice to say it that way, to say it in such a way that we have good reason to believe that what we say will stand up to informed scrutiny for years to come? Doesn't that idea make a certain amount of sense?

 

[Walker101]

Thanks JWR1945. I realize my question turned out to be much broader, but you read my mind and gave me the technical answer I was hoping to get.

Thanks to the rest of you, too. The discussion was interesting and helpful. (Even down to the knees; I've got bum ones, too.)

Add my votes to the diversification, frequent reevaluation of the situation and good old fashioned common sense camps.

 

[Cut-Throat]

The William Bernstein number (2 percent) is a reasonable one, in my view. I have looked at the data and I can see why he is saying that the number is 2 percent. The people claiming that the number is 4 percent are basing their claims on the results of studies using the conventional SWR methodology,

I think you are wrong here *****. Berstein believes that the 'real' return of a stock/bond portfoilo to be in the 3% range going forward.  He has stated this in books that he wrote before the 2002 downturn of stocks. A 2% withdrawal rate would mean that you are  actually saving money.

When I talk about a 4% withdrawal rate, I am talking about something that eats into principal. - My plan only goes for 43 years! - I don't know about you, but I'm actually planning on dying some day!

I am going to spend my principal ! - My perfect financial plan, would be that the check bounces to the undertaker!

Again *****, you and Berstein are making predications. I actually trust the past more than I do anyone's prediction.

 

[cute fuzzy bunny]

Oboy. I think we're headed into the realm of decided what the definition of the word "is" is, and whether a BJ constitutes a sex act.

For the record, is freakin means is and yes, a BJ is a sex act.

What we decide to call it, and remembering to use the correct terminology is all well and good. I think everybody gets it. We're going to use the wrong term on a regular basis.

Now get this: outside of about 10 people, I dont think anybody gives a rats ass.

People smart enough to be able to reach an ER status are going to read the reams of materials out there on this topic, view the calculators and tools, review the agreements and disagreements, and make their own informed decisions regardless of whether we all agree to call it a HSWR or an SWR or 4%, 2%, 1%, 7%, etc.

I dont think most people have a portfolio big enough to live off of 2% unless they like the poverty level. I'm hanging between 3.75 and 4.25. If its 2% or go broke, you'll be seeing me in a shirt and tie again putting together campaigns that make you think things differently than you used to think them.

Nobody wants that.

 

[hocus]

I actually trust the past more than I do anyone's prediction.

That's fine. I of course have no problem whatsoever with any poster deciding that he or she prefers to use the historical surviving withdrawal rate (HSWR) as a guide to his or her personal withdrawal rate (PWR). That is of course a perfectly valid way to go.

You and Berstein are making predications.

The "prediction" that Bernstein and me and the others are making is that changes in valuation levels will continue to affect long-term stock returns in the future just as they always have in the past. Bernstein feels so strongly about his claim that valuation levels affect long-term returns that he says he says that this is so as a matter of "mathematical certainty." That is strong language for a writer like Bernstein to use. I believe that he is right to use that sort of language in this case.

 

[Bob_Smith]

Now get this: outside of about 10 people, I dont think anybody gives a rats ass.

TH, you sum it up well!

I dont think most people have a portfolio big enough to live off of 2% unless they like the poverty level.

Yes. And two percent in my view, is too conservative. Considering the fact that you can get a real return of 2.5% on TIPS, it makes little sense to limit the withdrawal rate to 2%. What would be the point? I'm done saving money.

 

[Cut-Throat]

Yes Bob Smith has once again hit the nail on the head.

*****, Just go for TIPS and you can lock in your 3% SWR now.