I just received my copy of American Funds “Investor” glossy, color, propaganda newsletter for Spring/Summer 2006. It had an interesting article relevant to the discussions here. They compared the performance of their American Mutual Fund (AMF) to S&P500 for a period from 1970 to 2000 and 2005. They found that the fund tracked the S&P pretty well through 2000 with S&P slightly ahead in 2000 but AMF greatly surpassed S&P through 2005. But the BIG difference came if someone was withdrawing retirement funds from AMF and a S&P Index fund. They chose a rate of 5% per year adjusting for inflation at 5% per year. At the end of 1999, AMF had clobbered the S&P An initial 100K investment was worth 1300K for the AMF but only 555K for the S&P. Through 2005 it was even worse: 100K grew to 1700K for AMF but only 347K for S&P. They attribute the difference to less volatility in the AMF fund versus the S&P. Their calculation included sales charges and fund expenses.
I compared my retirement 80% equities portfolio performance to the S&P 500 over the period of 12/31/99 to 12/31/05 without and with hypothetical withdrawals. In a buy and hold scenario, my portfolio beat the S&P by 14%. With a hypothetical 5% withdrawal rate, my portfolio beat the S&P by 30%. In fact using the “safe” withdrawal rate of 4% for the S&P, my portfolio still beat the S&P at a 6% withdrawal rate.
So here are my heretical thoughts:
1). All SWR calculators rely on indexes to predict how a portfolio might perform. In fact I believe it is pretty easy to beat the indexes, and thus any SWR based on a prediction using indexes is likely to be way too conservative.
2). Fund, or index, performance is not the only criteria that is important to calculating a SWR. Volatility matters too.
3). The standard 4% SWR is too conservative. 5% is also too conservative. I will not go out on a limb and state what my opinion of a SWR ought to be but it is a lot more than 4%. I think this is confirmed by the observations that most calculators will show you that while 4% is “safe”, in the vast majority of scenarios you end up with way more money than you started with, even with allowance for inflation.
Now I’ll sit back and let everyone flame me.
I compared my retirement 80% equities portfolio performance to the S&P 500 over the period of 12/31/99 to 12/31/05 without and with hypothetical withdrawals. In a buy and hold scenario, my portfolio beat the S&P by 14%. With a hypothetical 5% withdrawal rate, my portfolio beat the S&P by 30%. In fact using the “safe” withdrawal rate of 4% for the S&P, my portfolio still beat the S&P at a 6% withdrawal rate.
So here are my heretical thoughts:
1). All SWR calculators rely on indexes to predict how a portfolio might perform. In fact I believe it is pretty easy to beat the indexes, and thus any SWR based on a prediction using indexes is likely to be way too conservative.
2). Fund, or index, performance is not the only criteria that is important to calculating a SWR. Volatility matters too.
3). The standard 4% SWR is too conservative. 5% is also too conservative. I will not go out on a limb and state what my opinion of a SWR ought to be but it is a lot more than 4%. I think this is confirmed by the observations that most calculators will show you that while 4% is “safe”, in the vast majority of scenarios you end up with way more money than you started with, even with allowance for inflation.
Now I’ll sit back and let everyone flame me.