# Doom and gloom SWR based on 1965-1982

#### amt

##### Recycles dryer sheets
Given that some people have brought up the idea of SWR in the range of 2%, I tried to use http://www.gummy-stuff.org/sensible_withdrawals.htm to see what the Monte Carlo based SWR could be if we use data from bad years from our recent past (1965-1982). I believe almost everyone here agrees that those yrs are some of the worst in our history in terms of inflation and bad returns sequence combined.

Using 75% s&p and 25% treasuries, the survival rate at 3% for 40 yrs is about 91% and for 30 yrs is 97%. Personally, I believe that's plenty safe.

I am much more concerned that I won't be here to spend the money than I am about running out.
I have back up plans to my back up plans
(double redundancy) to cope with financial trouble.
Dying would negate the need for a plan, but it would
surely annoy me after all I went through just to get
to this stage of life.

John Galt

That was a helpful exercise, amt. Thanks for reporting on your results.

Please note that the number you are coming up with as safe is 3 percent, NOT 4 percent. That's significant. The REHP study claims that 4 percent is "100 percent safe" but the data shows that that is not even close to being so.

The "Calculated Rates of the Past Decade" thread at the SWR board shows the current SWR to be something close to 2.5 percent. Your 3 percent number is not too far off from that, so I don't have too much trouble with someone saying that "3 percent appears to be more or less safe to me." Whether someone wants to go with 3 percent or 2.5 percent is a question of personal judgment. 3 percent does not give you the level of safety claimed in the REHP study. But the odds of 3 percent working from these valuation levels are good enough that someone could make a reasoned judgment that that number is OK for their plan. If you want to know precisely what odds you get for the 3 percent number from taking a more scientific look at the historical data, you would need to ask JWR1945.

What you are doing with your exercise above is taking valuation into account in a rough way. Valuation is an important factor because the historical data shows that, when you start your retirement from a high valuation level, the chances of a poor returns sequence showing up are greater. Your exercise simulates that possibility. You are sticking in some bad returns scenarios from the past and showing that a 4 percent take-out does not work for a good number of those sequences. You are not generating a scientifically precise answer, but you are generating numbers that are more or less in the right ballpark.

The problem with the REHP study (and other conventional methodology studies) is that they make no adjustment for valuation whatsoever. There is no possible way that numbers from the REHP study or from similar studies can be anything close to accurate at times of extremely high valuation. That's why Bernstein says that those studies are "highly misleading" at such times. They produce numbers that are not even remotely in the same ballpark as the numbers you get when you look at the historical data to determine what withdrawal rate is safe.

I'd like to put forward one more observation re your thread-starter, amt. You use the phrase "Doom and Gloom" in your thread title. I think it is worth pointing out that aspiring early retirees who use the data-based SWR methodology to inform their investing strategies do not view the possibility of bad sequences popping up as constituting "gloom and doom."

People think of bad sequences of stock returns as "doom and gloom" because they are focused on the money lost during such returns sequences. There is another side to the story for those using the data-based approach. When stock valuation levels go down, the SWR for stocks go up. So the gloom and doom effect is countered by something very exciting, the chance to participate in an asset class offering a highly appealing SWR.

If stocks perform in the future as they have in the past, they will someday in the not too distant future be offering an SWR of not just 3 percent or 4 percent, but of 5 percent or perhaps 6 percent. I don't think of the possibility that the SWR for stocks may soon be going up from 2.5 percent to something a whole bunch higher than that as "doom and gloom." That increase in the SWR for stocks is going to help hundreds of thousands of aspiring early retirees to achieve their most important life goals.

It is only those who refuse to acknowledge what the historical data says re SWRs who are going to experience a drop in stock valuations to more reasonable levels as a doom and gloom experience. One of my goals in writing so much about the realities of SWRs over the past two years has been to let people know what the data says before we experience the price drops. If people willingly accept the low SWRs that now apply for stocks, that is their business. My goal is to inform as many aspiring early retirees as possible of the realities so that, if they miss out on the higher SWRs that in all likelihood will be available in coming years, it won't be because these boards did not inform them of what the historical data really says on this question.

After putting up my last post, I took a fresh look at the "Calculated Rates of the Past Decade" thread. I thought it might be a good idea to draw people's attention to the following sentence:

JWR1945: "The odds in favor of success are at least 50-50 in all cases with a withdrawal rate of 3.17% and lower. Except for 1998-2002, the odds in favor of success have been at least 50-50 at a withdrawal rate of 4.00%."

JWR1945's analysis does NOT rule out the possibility that a 4 percent take-out number will work from the valuation levels that apply today. Plans with a 4 percent take-out have about a 50 percent chance of working out, according to the historical data.

At the risk of entering into an argument with a fanatic ...

I will point out that a 2.5% or 3% SWR for 40 years is absurdly low. Given long TIPS rates at (yet again) historic low yields of 2.2%, and making reasonable assumptions re liquidation prices and reinvestment, a TIPS only portfolio should allow a 3.75% SWR over 40 years.

Yes, I know there are tax problems and there aren't any 40 year TIPS yadda yadda yadda. We could start arguing about angels on pins too.

a TIPS only portfolio should allow a 3.75% SWR over 40 years.

2.5% is the number that applies for an 80 percent S&P stock portfolio at today's valuation levels. I don't know off the top of my head the precise numbers for TIPS today. But you are quite right to observe that higher SWRs are available by investing in alternative asset classes, NFS.

Got tired of talking to yourself on NFB amongst the tumbleweeds, since everyone left on your account?

Got tired of talking to yourself on NFB amongst the tumbleweeds...

I still post at the NoFeeBoards.com site. I put up a post there just last night.

...since everyone left on your account?

Most of the NFB community left the site as a consequence of ES's decision to reinstate my posting privileges there, that's a fact. It's not something that I wanted to see happen, but it's a fact that it did.

I think that the fact that posters continue to react in this way argues against your claim that the SWR debate is a "tempest in a teapot," TH. SWRs matter. That is why people get so worked up about them. People care about this issue intensely.

Where there is this level of intense desire to know more about a topic, there are grounds for optimism that a lot of learning will eventually take place. We've travelled a rocky road. But we know a lot more about the realities of SWRs today than we knew 26 months ago, and I have confidence that we will know a lot more 26 months from today than we know now.

The bottom line is that I am optimistic about how the debate will turn out. There has always been a mix of good and bad in the discussions. My sense is that we are seeing a higher percentage of good in recent months and a smaller percentage of bad. The community as a whole will work things out in its own good time. Each of us just needs to do the best that he or she can to steer things in a positive direction, and we will all eventually get to the place where we have all long wanted to be.

I have been an active member of these communities for a long time, and I know them well. You wait and see if it doesn't in the end turn out the way I am suggesting it will. I don't have a crystal ball. But I believe that my optimism is well grounded in the realities of what these comunities have always been about--middle-class workers sharing with each other wonderful insights on how to achieve financial independence early in life. So long as that remains the case, I will remain confident that we will find a way to work things out to everyone's satisfaction.

SWR's arent what people care about intensely. In fact, I dont think you care about it either. Its just the rod you use to draw the lightning.

What people care about is the exact behavior that turned me from one of your few supporters into someone who doesnt want to hear any more of it.

Got tired of talking to yourself on NFB amongst the tumbleweeds, since everyone left on your account?

I don't understand the hostility to this particular poster. He is not IMO the only aggravating poster. (There is always me.) And at least what he says is dfferent from the background noise.

No one knows the answer to the question he is bringing up. He may be right, he may be wrong. But if he is wrong, he has suffered only "equity opportunity cost". My judgment, and apparently his also is that that cost is not particularly high now. If he is right, he will have saved himself some real harm. And anyone else who is motivated to proceed with more caution than he otherwise might have will also benefit.

Of course, if you don't believe that there are times to reap, and times to sow- then none of this makes any sense.

My opinions are not based on reading books. I have a graduate degree from the school of "how to F yourself without even trying"

I figured out this morning while lying in bed that I had a good income from 1967 through about 1978. That includes 2 years of military service. I had some part time earned income from 1979 until 1984. In 1984 I decided my personality was too something for me to be happy at work. I started speculating- stocks, options, commodities, property. In retrospect, the property angle held the most promise, but it was almost like a job. Had to hire bulldozers, lawyers, etc. The rest worked well enough though, and I could be home for lunch. I had a few good scores, two in property, and one with the Penn Central Bankruptcy and decided that I could probably continue living in this agreeable way. I never considered myself retired, because I worked every day researching opportunities, and found quite a few.

I believe if had acted sanely, I would have realized that I should get professionally involved in Wall Street, but I didn't.

My wife never worked while she lived with me.

We raised and home-schooled 2 kids. Both are college graduates, and one has a net worth closer to 8 figures than 7. Neither is yet 30 years old. I spent thousands of dollars on computers from the late 70s on- some for me, but mostly for my kids. It paid off big for them, but it did cost a lot of money as the older guys around here will remember.

Our expenses seemed reasonable to us, but we were not frugal by the standards of most ERs. We spent more on groceries in the 80s than many of you report spending now, in 2004. None of us has ever been in a second hand store. It was something of a strain to make my expenses every year, and some years I didn't. If I had good investments that I liked going forward, I used margin draw to live. I wish we had been more frugal, and that I could find it easy to be more frugal now. But if I am wishing, I might as well wish that I had started selling investments. In which case I might now be wearing Armani suits and dating 25 year olds. And I would never have heard of SWR.

Nevertheless, I still don't work, and I have a very respectable net worth, although not one that makes me as happy as I would like to be.

This reasonably ok result I achieved in spite of doing many, many things wrong. ( Some of these mistakes detailed above )

My recipe for survival is "be careful". Stay away from drop-offs. Make large bets when you have a good shot at a big win. But never bet it all. Clear some chips or most of the chips off the table when yoor good sense tells you a lot of things would have to work out for you to be OK.

And always remember the mathematics of contingent probability.

I do believe that if a person or couple can save \$50,000 a year and still enjoy life they could probably forget tactics, adopt some allocation and rebalancing plan and just rely of sheer earning power and frugality to fill any holes delivered by markets. That just wasn't my way.

Mikey

I don't understand the hostility to this particular poster.

Do you know that old saying from New England? If you dont like the weather, just wait a little while?

Just wait a little while.

In short, its a bunch of drama from some drama queens. That old sound and fury signifying nothing.

In long...

He was banned for being a troll from a bunch of early retirement sites. When he came here begging to be able to post, I supported his right to his opinion.

In fact, some of these opinions bear merit, as you noted.

When he was allowed back on another site, most of the users left, and I made no friends by again supporting him. The users protest was that he will poke his nose into any discussion about anything and try to turn it into an "SWR" discussion, or at least something "about him". In fact, he was made a moderator, able to control content.

Which he did. By censoring rational arguments that were unfavorable to his position.

Then by working to have arguments moved entirely into "dead letter" buckets.

Follow that with eye bleeding long post after eye bleeding long post complaining that certain people who dont agree with him should be ejected from the posting communities.

Not to mention that the primary basis for his positions are the ability to value the stock market (which as far as I know, nobody can with complete authority), and the ability to predict the future (ditto).

When its pointed out that his "system", all of 10 years old, has already failed twice, he is nonplussed. In fact his system would have had you avoiding stocks through the entire 1990's run-up, and not owning them at the 'bottom' in 2002. Or 2003. Or now.

When I attempted to bring attention to the gaps in their so called "logic", I became the enemy. The death of a thousand small cuts delivered here there and everywhere.

When I told them to stuff it, that single post in the absence of the rest of it was used to claim I was only there to 'smear' their good name.

Gee, and I was one of the few suckers who supported the guy, just a week or two earlier.

Moral of the story: dont be the next sucker. This tar-baby troll isnt worth the frustration. At the minimum, he's no better and offers no superior treatment than he complains about receiving... :

A lot of people think that all he's doing is trolling for attention. I find it hard to believe someone would put the kind of time into it. But then some people dont have much of a life. He and his alter ego "JWR1945" have been reduced almost to a two way conversation over there on that other board. He must have gotten bored with that, so he's back here again for more fun and games!

By the way, since they always seem to show up on boards one and then the other, and they're the only two pushing this 'agenda', and ***** keeps referring to himself in the 3rd person, I'm strongly of the opinion that both of them are the same guy.

At the end of the day, nobody can really tell whats going to happen in the future. Hence theres no such thing as "safe". But you can look at what happened in the past, then look at whats going on now, put together a plan that should work and then work your plan appropriately as conditions change.

But the whole idea of some massive thinking, planning and tooling session for years on end to produce the holy grail?

Shoot...I'd rather dig up my septic system to see whats in there.

Gee, and I was one of the few suckers who supported the guy, just a week or two earlier.

Moral of the story: dont be the next sucker.  This tar-baby troll isnt worth the frustration.  At the minimum, he's no better and offers no superior treatment than he complains about receiving... :

<snip>

Shoot...I'd rather dig up my septic system to see whats in there.

You get it ... finally.  As one who endured h@cus's SWR Jihad over on the Motley Fool board about 1.5 years ago I experienced this early.  It was always amusing to see people on the other boards go on about how it's not h@cus's fault, that he should be allowed to prosleytize, etc. etc.  Then to see them all change their opinion in about 2-3 weeks.

I think h@cus still has a hard-on for the job of "board general" over at the Motley Fool REHP board.  None of us have ever been able to figure out what the duties of that job are though.

Yep I get it.

Although I really dont care about his blah blahing.

I did care about his ability to whisk away any discord and contrarian opinion.

That he was supported by the board operator was surprising, although his payment was an empty board.

The only reason I cared though, is because I felt it should be ok for him to claim prediction of the future, tea leaves, the end of the world, etc and be free of censorship and repression. I mean, its a frickin internet bulletin board, who really cares? But then he turned out to be worse than what he claimed to have faced. Clearly a little embarrassing to have supported him. Worse that it made me a notch more cynical about trying to "do the right thing".

But at the end of the day, anyone sappy enough to follow his advice without any rational thought and investigation deserves to be dumpster diving in their 70's...

TH,

I admit I didn't know the history. And I am not exactly suporting him. I also find him to be very annoying. But I do appreciate his material trying to coordinate SWRs with valuation levels.

I am a believer in valuation.

Mikey

Me too, and thats why I have slimmed my equity holdings.

But fer chrissakes can we move on now?

I admit I didn't know the history....

If there are community members here who have questions about the procedural history of the SWR discussions, I ask that they please post them at the SWR Research Group board (at NoFeeBoards.com), and I will respond there.

....But I do appreciate his material trying to coordinate SWRs with valuation levels.

I will entertain questions relating to substance either here or at the SWR Research Group board.

If there are community members here who have questions about the procedural history of the SWR discussions, I ask that they please post them at the SWR Research Group board (at NoFeeBoards.com), and I will respond there.
So I can delete anything that exposes our "system" for yet another market timing scheme that will let you go broke
I will entertain questions relating to substance either here or at the SWR Research Group board.
Sorry, its just not that entertaining, but I think there may be a substance involved...

We raised and home-schooled 2 kids. Both are college graduates, and one has a net worth closer to 8 figures than 7. Neither is yet 30 years old. I spent thousands of dollars on computers from the late 70s on- some for me, but mostly for my kids. It paid off big for them, but it did cost a lot of money as the older guys around here will remember.
I don't consider myself one of the older guys, but I remember several computers from the late 70's.  What did you spend thousands on?   My dad gave me a hand-me-down HP-65 in 1977 that got me started (probably around \$700 new), and then I got a real computer in the form of an Apple ][ in 1979 (around \$1000).    The rest is history

Mikey, I'm curious how your multi-millionaire kid is affected by the money.   I know several in that situation that just keep on working on essentially the same stuff they were before they won the software lottery.   Personally, I got burnt out on bit-diddling after 20 years, but I still get an occasional itch....

Personally, I got burnt out on bit-diddling after 20 years, but I still get an occasional itch....

I'm frankly surprised that he hasnt gone blind yet. Or gotten that hairy hand thing.

I don't consider myself one of the older guys, but I remember several computers from the late 70's. What did you spend thousands on? My dad gave me a hand-me-down HP-65 in 1977 that got me started (probably around \$700 new), and then I got a real computer in the form of an Apple ][ in 1979 (around \$1000). The rest is history
I was a kid, but I seem to recall my (well, my dad's) Apple ][+ setup cost \$2000 in 1979. Maybe the \$2k includes the later upgrades from 8k or 16k RAM to 48k RAM and the dual floppy disk drives?

I used to sell 'em when they first came out. One of the first machines to use dynamic ram and whoooo were those babies hot!

Mikey, I'm curious how your multi-millionaire kid is affected by the money.   I know several in that situation that just keep on working on essentially the same stuff they were before they won the software lottery.   Personally, I got burnt out on bit-diddling after 20 years, but I still get an occasional itch....

Wabmester,
My son spends money freely; I think he had enough of frugality growing up. Other than that, he still works 12-16 hour days, and he is never happier than when he is up to his eyeballs in deadlines, with a bunch of team members pulling their hair out. I believe he is still much more motivated by the challenge and the interest of the work than by the money. Burnout has sure been a frequent event among his friends, many of whom are very early ERs. But so far at least not with him.

My other boy was a bit too young to get the big grants of the early days. So he is working for good money, and intellectual stimulation. But I don't think he expects to win the lottery at it.

Re the computers- first was an Altair, then a little Mostek board with a cassette player used to save the machine language or assembly language programs, then a TI 99 with it's own very nice Basic with sprites for animation. That cost the most. I think with a couple of disk drives and some extra memory, which I think we had to buy a board for, that one was around \$2500. Our next was a Dell 286, then a 386 etc etc.

I remember buying a math co-processor for the 286. I could finally recalculate spreadsheets in less than 10 minutes. I think our development software was mostly Borland C. It's been a while.

Mikey

Given that some people have brought up the idea of SWR in the range of 2%, I tried to use http://www.gummy-stuff.org/sensible_withdrawals.htm to see what the Monte Carlo based SWR could be if we use data from bad years from our recent past (1965-1982).  I believe almost everyone here agrees that those yrs are some of the worst in our history in terms of inflation and bad returns sequence combined.

Using 75% s&p and 25% treasuries, the survival rate at 3% for 40 yrs is about 91% and for 30 yrs is 97%.  Personally, I believe that's plenty safe.

Author Dr. William J. Bernstein ( the guy ***** continually misquotes) thinks 80% to 90% survivability using Monte Carlo analysis is plenty safe, too. See link:

http://www.efficientfrontier.com/ef/901/hell3.htm

intercst