SWR of 6.21% for 26 years

I may make a fool of myself here, but I learn more when I do so:

This kind of comparison we're talking about here--that since 4.1% was safe 4 years ago, and that's 6.21% today given the past 4 years and therefore 6.21% is safe--may be like the Stevie Wonder logic disconnect:
  • God is love
  • Love is blind
  • Stevie Wonder is blind
  • Therefore, Stevie Wonder is God
The SWR is calculated based upon yearly (?) samples from market history.

The simplest counter to amt's proposal is that I go to FIREcalc, enter a portfolio of $1mil, a yearly withdrawal of $62,100, lifespan of 26 years and leave all other entries alone and it tells me the success rate based on historical data is 70.5%. It doesn't matter that I used $1mil here, what matters are the percentages, and according to FIREcalc that withdrawal rate would survive any historical 26-year period 70.5% of the time.

I think the logic disconnect here is the assumption that year 4 of this 30-year period is comparable to year 4 in all the sample historical 30-year periods; it is not; in fact it's unique. If we had a hundred or so historical samples where years 1-4 performed exactly as 2000-2004 then maybe we could use those as a guide, but we don't have that data.

Even more simple: If you are confident enough in the historical analysis method that you believe 4.1% is 30-year safe, then why do you suddenly disagree when the same method and the same calculator tells you 6.21% is not 26-year safe?

Here's a project for someone who loves this stuff: Look through the historical data and find 30-year periods where the surviving portfolio of 4.1% is 6.21% in year 4. (I believe this means the overall return from years 1-4 equals the return of 2000-2004.) Find how many periods there are like that and decide if it's statistically significant. If it is, calculate the 26-year survival rate for years 5-30 in those sample periods and tell us the number of samples and the results.

EDIT: Oh yeah, I echo what Bob Smith said. When getting into the numbers and trying to predict the future it's easy to get all wound up and even worried that what we've done isn't good enough. Now that I'm readying to switch from debt reduction to accumulation I find myself wanting to save half my salary until age 65 (I'm 34) to be sure I'm safe, but the truth is that through controling expenses and thoughtful investing we are way ahead of where we were: non sum qualis eram. We can't account for all contingincies, but we're making hay while the sun shines and that's the best we can do, because "the best laid plans o' mice an' men. . ."
 
amt is correct mathematically. If you don't like his conclusion, then you have to reject all conclusions from the FIRECALC program if you are going to be consistent. There are reasons why you may choose to reject historical simulation results (past performance is no guarantee of future results) but rejecting amt's results while accepting a SWR result is inconsistent.

Regarding correlations of performance and inflation over time: Companies make investments today that pay off in days, months and years to come. Companies make investments today that cost them dearly in days, months and years to come. Governments make laws and invest in ways that affect industry in months and years to come. Thus, there is correlation (in fact, cause and effect) between performance today and in the future. It is not direct and is too complex to quantify in an equation, but it is real. If this were not true, then an investor would always be ill-advised to invest in stocks or bonds. When people on this board argue in one breath that they are waiting to invest in real estate or TIPS or . . . till the market improves, but then argue that there is no correlation of performance over time, they are being inconsistent. If there is no correlation, then these investments are as likely to go up as down over any time period.

Similarly, if financial results of today are unrelated and uncorrelated to results of the past, then there is no reason to use a historical simulator. You would be better off just randomly selecting one year's performance after another to assemble a retirement portfolio performance. You could make up an almost infinite number of histories to examine to determine a SWR.

A lot of people who use historical simulators don't seem to be comfortable with the implications pointed out by amt. But if you reject his conclusions, then you must believe that FIRECALC produced invalid results for the retiree who chose to retire in March 2000. Because the retiree who quit then with a 4.1% SWR is currently withdrawing 6.21% from his/her existing portfolio today and still has the same expectation for the longevity of that portfolio.

If you don't feel comfortable using this result in retirment, then don't do it. Like I said, there are reasons to question any result from a historical simulator. But you are wrong if you are looking for a mathematical flaw in the reasoning.
 
My brain hurts from thinking about all this. It really
does not matter much to me since I plan to spend
what I need each year and trust that the Lord
will provide in the future. This arrangement has
worked OK for me for the past 70 years.

Cheers,

Charlie (aka Chuck-Lyn)
 
. . . The problem with the conventional methodology is that it looks at the entire data set for its data, but then uses the results from only a single data point to generate its conclusion. The valuation levels that produced numbers close to 4 were the valuation levels that applied in 1929 and 1966. There are only 2 data points showing that a 4.1 withdrawal worked at the highest pre-bubble valuation levels, not 130.
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That's not really accurate, *****. The historical simulation SWR analysis is based on the assumption that the future is not likely to be any worse than the worst case that ever happened in the past. Since there will only be one worst case in the past, the simulator looks for it and finds it (based on your asset allocation, expense ratios, etc.). By definition there can't be more than one worst case, so the simulator finds it and determines what it would take to retire then. Again, by definition, if your portfolio would survive the worst case, it will survive cases that aren't as bad. But in fact, FIRECALC and other historical simulators I am familiar with go ahead and evaluate the performance of your portfolio for every single available case and let you know how much over-performance your asset allocation and other inputs would have resulted in for each of those cases.

Now. . . for almost all realistic investment allocations, it turns out that the same couple of starting retirement dates proves to be worst case. That hardly seems surprising. In fact, it would be very unsettling if it were otherwise. If there were dozens of equally bad financial histories that RE's needed to worry about, it would imply that the probability of facing tough times in retirement was very high and that almost no strategy would be safe.

. Two data points is just not enough to support reasonable claims that a 4 percent withdrawal at those valuation levels is safe. What JWR1945 and I do with our data-based SWR model is make adjustments for changes in valuation, which permits us to make use of the entire data set in generating our SWR findings. My recollection is that the number JWR1945 tentatively came up with for retirements starting at valuation levels equal to the highest pre-bubble valuations was 3.3, not 4.1. We still have work to do in confirming those tentative findings, but it does not appear to me that the 4.1 number is going to stand even for the pre-bubble period.

In the bubble of the late 1990s, valuations went far higher than where they were in 1929 or 1966. So the SWR we get for retirements beginning at bubble-level valuations is much lower yet.
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There are serious mathematical problems that need to be addressed before you should come to this result. To start, you are going to have to complete a principle component analysis and prove that your valuation metric is correlated to SWR in a statistically significant way. Then quantify the SWR vs valuation distribution. And finally apply that to the valuations that existed in early 2000. When you finish all that, you could conceivably produce a probability that your SWR is higher or lower than the tradional SWR by a given amount. You still have problems with this analysis, however, since the correlation you find in the first part of this analysis would not be valid outside of the range of valuations observed in the past. Your analysis is empirically derived, so cannot be legitimately extrapolated outside the range of empirical data.

. . . The root question is--Do changes in valuation affect the determination of what withdrawal rate is safe or do they not? The data we have assembled reveals a strong correlation between the PE10 (the valuation assessment tool endorsed by Robert Shiller) that applies at the retirement start date and the highest surviving withdrawal rate that ultimately applies for the 30-year historical return sequence that follows (we refer to the latter number as the historical data base rate, or HDBR.)
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Although PE10 is a better valuation metric than simple PE for certain types of analysis, there are serious problems using it to determine modifications to existing SWR. If you do ever get around to performing legitimate mathematical analysis and testing it, you need to keep in mind that a valid valuation metric predicts both the future trend as well as the time frame. This is important for the retirement SWR calculation because the portfolio longevity will varry significanlty for different people. A completely accurate valuation for a 10 year portfolio may well be completely inaccurate for a 40 year portfolio. Your current analysis ignores the importance of time in the valuation entireley.
 
amt is correct mathematically. If you don't like his conclusion, then you have to reject all conclusions from the FIRECALC program if you are going to be consistent.
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But FIREcalc tells me that 6.21% is only 70.5% safe for a 26-year period.

I still think there's a logic error in saying that today's year-4 withdrawal rate for Mr. ER 2000 is a safe 26-year rate for Mr. ER 2004 given the same 2004 balance.

. . .
(lots of thinking and some tinkering with FIREcalc and Excel and a calculator)
. . .

Okay, I think I get it now. To oversimplify it, the argument supporting amt's supposition is that 1929-1933 didn't happen twice in a row or twice with no interim recovery. So if we were safe with the original model then we're safe with the remaining portion of that model.

If I disagree with amt's supposition then I'm basically saying 1929-1933 (or 2000-2004) could happen twice with no interim recovery. If I say that then why did I agree with the model in the first place since it doesn't allow for that happening during the 30-year period?

For 30-year period beginnings, 2000-2004 was better than 1930-1934 and 1929-1933 and falls between the large gap between those and 1937-1940. (Using amt's example of 4.1% of port at start of 2001 is 6.21% of port at start of 2004 and the yearly withdrawal as a percentage of the Yr 3 column in FIREcalc's detail; that's probably a backward way of looking at it.)

Ow, my brain hurts now. I can't decide if this boosts my opinion of amt's supposition or decreases my confidence in the historical comparison method.

EDIT: I think I counted wrong and should've used the year 4 column from the FIREcalc examples, but the oversimplified conclusions remain the same.
 
One problem with firecalc, that has been discussed elsewhere, is the fact that recent years data results are not used as the beginning of a period in the test runs. How do you know that the 4+% withdrawal started in 2000 is not one of the failure cases? In fact, this discussion supports concluding that it is!

One way to add to firecalc is to find a way to complete the runs started in recent years. Some have suggested cycling back to the beginning of the data. I have been a proponent of taking the adjusted balance, withdrawal (adjusted for inflation), etc. and running firecalc for the remaining years in the period....sounds a lot like this discussion, doesn't it!

IMHO, one possibility to consider strongly is that the portfolio of the retiree from year 2000 is in the 5% of the failures. And even if you run at 100% survival rates, there is no guarentee, and you could still be in a failure scenerio. Perhaps retiring in 2004 and withdrawing 6.21% is simply matching that failure scenerio.

Wayne
 
Perhaps retiring in 2004 and withdrawing 6.21% is simply matching that failure scenerio.
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Wayne, I think you are correct. We know intuitively that 6.21% runs a high risk of failure going forward. If we accept that, then we must also accept that 4.21% in 2000 runs a high risk of failure. It seems to me that anything exceeding dividend yield (plus around 1% or so) is automatically suspect.

SG, your analysis is incredibly articulate and thorough. In fact, the brain power displayed by so many in this thread makes me very reluctant to jump in!
 
Just to point out, the 1929 scenario occurred when our market was still somewhat emerging and speculative. The 1964-84 scenario was similarly still in a higher risk/return scenario. The firecalc runs for long durations (like we calculate) dont include full periods for times since 1984 when we would be closer to current dynamics.

Then again, our real rate of return for the last 100 years adjusted for inflation and taxes is a little over 4%. If Bernstein is right and our real rate of return over long hauls is 3-3.5%, then thats our SWR at the high end. With a strong stomach to take long down periods and a sizeable enough portfolio and/or low enough withdrawal rate to survive "bad times".

As far as correlation in returns or anything else from one year(s) to the next year(s), if anyone wants to bet what investment vehicles will return what for the next 5 years, I'll be willing to put my money into those vehicles. If they return the predicted rates (or more), I'll give them half the profit. Otherwise they pay me a fee of 25% of my current portfolio.

Any takers?

I dont want to seem irritating here, but I thought it was already well accepted science among us that "predicting" the market or having a "plan" that produced or predicted results was simple snake oil.
 
If you do ever get around to performing legitimate mathematical analysis and testing it....

I developed the data-based SWR tool in early 1996 and have been using it and refining it ever since. I did not do any formal statistical testing of the concept in the mid-90s. JWR1945 has helped me with the statistical analysis with the work he has done during the two years of the Great SWR Debate, particularly with the work he has put forward at the SWR Research Group board at NoFeeBoards.com.

I am not able to respond to your hard-core statistical points, SalaryGuru, because I lack the background needed to respond effectively. I very much would like to have the questions you raise put to rest, however. I plan to take the Data-Based SWR concept public in a big way in coming months and I am going to make a big fool of myself if it turns out that the claims I am putting forward are not backed by a reasoned analysis of the historical data. I would much appreciate it if you would be willing to take a look at the research that JWR1945 has put forward at the SWR board, and to post any questions you have about the methodology he uses at that board for his review. I very much want to get this right.

I held back from going public with all of this for a long time because I wanted to be absolutely certain before I did so. It is one thing to be revealed as a fool on an internet discussion board, it is something else to be revealed as a fool in an article in Money magazine or in a radio interview or in a book you put forward into the public arena. I am quite sincere in my request of you and any other community member who has doubts about the analytic validity of the data-based SWR tool that they please come forward with any lingering questions or concerns. It's OK with me if you do that here. It's also OK with me if you do it at the SWR board.

My goal from the start has been not so much to win a battle of ideas as to determine for certain which idea is correct. It does not seem posssible to me that both the conventional SWR methodology (which assumes that changes in valuation levels have no effect) and the data-based SWR methodology (which assumes that changes in valuation have a significant effect) could be analytically valid. One of these assumptions is wrong, and it seems to me that the best way to determine which one is wrong is to look at the historical data and see whether changes in valuation have had an effect in the past.

I find your post encouraging. You obviously are not agreeing with my SWR claims. What I like about the post, however, is that you are taking my claims seriously. You are not attacking me as a person, you are attacking the logic of my claims. It is that sort of feedback that I seek when I post at boards like this. So I am grateful for the post. I hope that you will pursue the questions you have put forward in more depth either here or at the other board.

I hope that no one has gotten the idea that I am unwilling to re-examine old positions of mine. I am very much willing to do so. I had 90 percent confidence in the data-based SWR concept on May 13, 2002, and I have 99 percent confidence today because of new things that I have learned in the course of the debate. But there is always that 1 in 100 chance that I messed up somewhere. Any poster who puts something forward which leads me to conclude that that is in fact the case has done me a huge favor. It's because discussion boards provide access to that sort of feedback that I see them as an important communications medium of the future.
 
. . . Ow, my brain hurts now. I can't decide if this boosts my opinion of amt's supposition or decreases my confidence in the historical comparison method.

. . .
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Well. . . at least you're asking the right question.

None of us can be sure of the accuracy of the historical SWR for the future. And I know of no mathematical arguments to change that.
 
Just to point out, the 1929 scenario occurred when our market was still somewhat emerging and speculative.  The 1964-84 scenario was similarly still in a higher risk/return scenario.  The firecalc runs for long durations (like we calculate) dont include full periods for times since 1984 when we would be closer to current dynamics.

Then again, our real rate of return for the last 100 years adjusted for inflation and taxes is a little over 4%.  If Bernstein is right and our real rate of return over long hauls is 3-3.5%, then thats our SWR at the high end.  With a strong stomach to take long down periods and a sizeable enough portfolio and/or low enough withdrawal rate to survive "bad times".

As far as correlation in returns or anything else from one year(s) to the next year(s), if anyone wants to bet what investment vehicles will return what for the next 5 years, I'll be willing to put my money into those vehicles.  If they return the predicted rates (or more), I'll give them half the profit.  Otherwise they pay me a fee of 25% of my current portfolio.

Any takers?

I dont want to seem irritating here, but I thought it was already well accepted science among us that "predicting" the market or having a "plan" that produced or predicted results was simple snake oil.
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Irritating? . . . No, but I am confused. TH, there is a correlation of tomorrows performance results with the performance yesterday. That does not imply that the correlation is 1 (ie completely predictive) or even that I can quantify it.

But you seem to acknowledge this on the one hand, while rejecting it on the other. You seem comfortable with Bernstein's predictions for the market 30 years out. How could any prediction be made about performance in the future if that performance were not correlated to today's financial situation? Don't confuse correlation with detailed predictability.
 
Well. . . at least you're asking the right question.
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Thanks. That's good to hear. This is my first serious foray into the SWR topic; before now I've taken it as a guideline that has been considered and approved by others whose opinions I've come to trust.


After sleeping on it I woke up with this thought: if we accept that periods like 2000-2004 can be eliminated from the sample pool for the next 26 years then our number of historical samples has decreased significantly.

And if it's okay to project backwards from now to 2000, then why did Mr. ER 2000 not project backwards a few years to take what Mr. ER 1996's current SWR is?

I just looked it up: if Mr. ER 2000 projected back 4 years he would find that Mr. ER 1996 who started with a 4.1% withdrawal is at a 2.21% withdrawal rate in 2000.

If Mr. ER 2004 looks at Mr. ER 2000 and takes his 6.21% withdrawal rate, then why shouldn't Mr. ER 2000 have looked at Mr. ER 1996 and taken the 2.21% withdrawal rate?

I'm not awake enough to calculate how many sample periods we've eliminated, my my intuition says we've eliminated between a quarter and a half of the samples.

However, if we're using the past 4 years to eliminate historical 4-year periods from our 26-year period, then aren't we bound to take only 26-year samples in which the previous 4 years behaved similarly to 2000-2004? If that's the case then our sample size has dropped to 4 or so historical periods depending on how closely you want to match the year 1-4 overall return.
 
Irritating? . . . No, but I am confused. TH, there is a correlation of tomorrows performance results with the performance yesterday. That does not imply that the correlation is 1 (ie completely predictive) or even that I can quantify it.

But you seem to acknowledge this on the one hand, while rejecting it on the other. You seem comfortable with Bernstein's predictions for the market 30 years out. How could any prediction be made about performance in the future if that performance were not correlated to today's financial situation? Don't confuse correlation with detailed predictability.
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Ok, I cant be any more confused. How can you know something exists (that has been proven 10 ways to sunday not to exist), but not be able to quantify it? Other than pornography. ;)

As far as the second bit goes, I think its fairly simple and has already been explained many, many times. We can guess where we'll go in the long run, but in the shorter hauls there is NO prediction. But I think what you've said is you believe the opposite...that you can at least somewhat predict the shorter term market movements (ie, 3-5 years?) based on recent history but the long term is unpredictable. Yes?

Anyone else want to chime in on whether Bernstein is on the right track or he and all the data are backwards? :confused:
 
This might help address market predictability. I have posted (real annualized) stock market returns (based on Professor Shiller's numbers for the S&P500) with dividends reinvested and with 0.20% expenses for the years 1871-1980.

Annualized Real Total Returns 100% stocks
http://nofeeboards.com/boards/viewtopic.php?t=2226

For example, the range of real returns at 5 years is from a (9.68%) loss starting in 1916 to a 21.42% gain in 1932.

In contrast, the range of real returns at 30 years is from a gain of 3.05% near 1890 and 3.80% in 1965 to 9.56% starting in 1932.

It turns out that there is little predictability (except for some very short-term momentum) early and a great amount of predictability later on. The long-term variability (or variance) decreases faster than might otherwise be expected. (The variance falls faster than 1/N.) This is because market returns are not entirely independent, but they are loosely related to long-term earnings.

The effect of any individual year is reduced when calculating annualized returns, which involves taking the Nth root of the total number of years (N). That helps explain why short-term variations get suppressed in long-term calculations of annualized return.

Have fun.

John R.
 
How can you know something exists (that has been proven 10 ways to sunday not to exist), but not be able to quantify it? Other than pornography. ;)
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Q: What is a Safe Withdrawal Rate?
A: I'll know it when I see it.

Actually, that about sums it up for this group. ;)

Anyone else want to chime in on whether Bernstein is on the right track or he and all the data are backwards? :confused:
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I am still new to pondering stock return futures, but it seems to me that short term market movements are based on reactionary mass behavior and long term market movements are based on productivity. It may seem easier to "follow the man, not the dog", but what is left out of this equation are political revolutions, plagues, wars, technological revolutions (steam engines, combustion engines, flight, semiconductor electronics, radio, etc.) and extraterrestrial invasions (or whatever).

Besides, after the dog does his business, doesn't the man turn around and go home?
 
Man plans and God smiles.

John Galt
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Not taking away from the thoughtful insight of so many on this thread, but I know of no better quote on this topic. Hurray John!
 
. . . After sleeping on it I woke up with this thought: if we accept that periods like 2000-2004 can be eliminated from the sample pool for the next 26 years then our number of historical samples has decreased significantly..
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I'm not sure why you have concluded that we are throwing out 2000-2004. That's not the case at all. The SWR simulation is looking for the worst case of all past starting retirement dates. The SWR calculator does not "throw out" all years except for 1929 or 1965. All those other years simply are not the worst case. The SWR needs to be at or below 4% to insure 30 years of inflation adjusted withdrawals only for starting retirement dates of 1929 and 1965. So if you look at what the safe withdrawal rate would have been for retirement starting in most of the 1930's, for example, you would get a higher rate than 4%. The person retiring in 1934 could perform the same analysis that amt is applying to 2004 and calculate what the 1929 SWR retiree was currently withdrawing and withdraw at that higher rate.

And if it's okay to project backwards from now to 2000, then why did Mr. ER 2000 not project backwards a few years to take what Mr. ER 1996's current SWR is?

I just looked it up: if Mr. ER 2000 projected back 4 years he would find that Mr. ER 1996 who started with a 4.1% withdrawal is at a 2.21% withdrawal rate in 2000.

If Mr. ER 2004 looks at Mr. ER 2000 and takes his 6.21% withdrawal rate, then why shouldn't Mr. ER 2000 have looked at Mr. ER 1996 and taken the 2.21% withdrawal rate?.
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Mr. ER 2000 can look back 4 years, and if the ER 1996 number is 2.21%, them Mr. ER 2000 can use that rate and be safe. But of course if he believes the underlying assumption of historical SWR simulators, he can also use the 4% SWR and be safe.

Notice that when markets are on the rise, the SWR you calculate using today as the starting point will almost always be higher than the rate you calculate from using previous start dates. When markets decline, however, you are guaranteed that the worst case was in the immediate past, so you will get a less limiting SWR by considering the SWR from the onset of the declining markets.

For example, at the end of 2000, markets had declined significantly. We could not predict whether 2001 and 2002 would provide gains or losses, but we could be sure that the string of years starting in 2000 and moving forward would be worse than any string that started in 2001 or 2002 etc. until the market returned to positive territory. So the worst case that FIRECALC would seek, might ultimately include retirement start date of 2000, but will not include a start date of 2001 or 2002.

I'm not awake enough to calculate how many sample periods we've eliminated, my my intuition says we've eliminated between a quarter and a half of the samples.

However, if we're using the past 4 years to eliminate historical 4-year periods from our 26-year period, then aren't we bound to take only 26-year samples in which the previous 4 years behaved similarly to 2000-2004? If that's the case then our sample size has dropped to 4 or so historical periods depending on how closely you want to match the year 1-4 overall return.
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We're not eliminating any periods. We are searching for the worst case retirement date. If we find the withdrawal rate that is safe for the worst case, then it will be safe for all others.

Ask for clarification if you don't understand what I'm explaining yet.
 
Ok, I cant be any more confused.  How can you know something exists (that has been proven 10 ways to sunday not to exist), but not be able to quantify it?  Other than pornography.  ;). . .
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TH, No one has ever proven that future economic actions are uncorrelated to present economic actions. In fact, the scientific principle known as causality insures that they are. You keep trying to confuse predictibility with correlation.

The weather over your home tomorrow is correlated to all the weather patterns surrounding your home and region today. Yet weather predictions are not 100% accurate. Even when they get temperature highs or cloud cover or precipitation nearly accurate, they may miss on humidity or wind or temperature lows. Sometimes they predict that is going to rain tomorrow evening and it does indeed rain -- but not until the following morning. This is very analogous to financial performance.

As far as the second bit goes, I think its fairly simple and has already been explained many, many times.  We can guess where we'll go in the long run, but in the shorter hauls there is NO prediction.  But I think what you've said is you believe the opposite...that you can at least somewhat predict the shorter term market movements (ie, 3-5 years?) based on recent history but the long term is unpredictable.  Yes?

Anyone else want to chime in on whether Bernstein is on the right track or he and all the data are backwards? :confused:
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No. I don't think I've ever said that. I certainly don't believe it. First, you are playing fast and loose with the issue of correlation here. You want to say that you can "guess" at 30 year performance. But if you are going to have any faith in that guess, it must be based on some analysis. And what is the input for that analysis if it is not the economic conditions of today. So if economic conditions of today will shape the finanical performance over the next 30 years, there must be a correlation between them. You can't claim to be able to predict performance in the future based on today and still deny a correlation.

Now, as far as the 30 year issue goes. I believe that unforseeable major events such as wars, law changes, revolutionary technological developments, etc. are likely to change the financial landscape over any period as long as 30 years. So I question the validity of any predictions that are that long term. I don't recall many people in the 1960s predicting the stock market run up of the 1990's, for example. I have no more faith in Bernstein or Bogle or Buffet or anybody else to predict the performance we will see in 2024 to 2034.

When Bogle described his analysis that predicts stock performance out 10 years, he makes a point of telling you how much those predictions changed over the past 3 years. His discussion of the basis of those predictions as well as his discussion of how events can result in significant changes to those predictions is very enlightening, logical and reasonable.
 
I'm not sure why you have concluded that we are throwing out 2000-2004. [...] The SWR calculator does not "throw out" all years except for 1929 or 1965.
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I'm not saying the calculator throws it out. I'm saying that by definition amt's supposition eliminates historical sample periods to claim a 100.0% success rate for 6.21%. This is going to take a lot of typing to explain:

amt's scenario is Mr. ER 2000 started with $1mil and $41,900 yearly withdrawals (a 100.0% success rate in FIREcalc) and has $674,000 left at the end of 2003. If I count right, that amount is comparable to the year 4 column in FIREcalc. i.e., when the historical data is update in FIREcalc it will look like:
2000 929544 793077 ?----? 674000

This is not important except to help provide context for the following tables.

He says that since that Mr. ER 2000 is on a 100.0% safe 30-year plan and his $41,900 withdrawal rate is now 6.22% of his remaining balance means that we can all use 6.22% or 6.21% if we retire in 2004 and get the same 100.0% safeness for 26 years.

Here are the first few historical sample periods from amt's scenario sorted by worst year 4 results:

1929 911671 739828 480288 426636
1930 813534 529961 472511 628282
1928 1311021 1208022 991669 653985
1937 726818 773848 757081 674853
1931 653002 583719 778033 695139
1881 972714 967214 902092 791911

I ran FIREcalc again, this time with $674,000, withdrawing $41,900 (6.22%) for 26 years. It reports to succeed 70.5% of the time. Here are the failing retirement years in this case: 1899, 1901-1903, 1905-1907, 1909-1914, 1916, 1928-1931, 1934, 1936-1940 and 1959-1973.

I just listed 39 failing historical 26-year periods for a 6.22% withdrawal rate. Let's start with 1899: I could say that 1899 will fail a 6.22% 26-year withdrawal; but you're saying that 1895-1899 had a better return than 2000-2004 so taking 6.22% there isn't a fair comparison. We just eliminated one out of 105 26-year sample periods.

Repeat for all other dates except 1934 and we're down to 67 sample 26-year historical periods to support a 100% safe 6.22% rate.

However, if we eliminate those 38 failing sample periods because they had higher 4-year leading returns than 2000-2004 then why are we keeping all the successful sample periods where the leading 4-year returns were higher? If we follow that logic--which I think we have to statistically to support amt's supposition--we need to eliminate the rest. If you look at the table above, that leaves us with 5 sample 26-year periods--those after 1929-1933, 1930-1934, 1928-1932, 1937-1941 and 1931-1935--that had 4-year leading returns comparable to 2000-2004.

As far as I can tell, amt's claim of 6.22% withdrawal being 100% safe from 2004-2029 is only when supported by 4 or 5 historical samples which is probably not enough for anybody.

It's not FIREcalc or its method that eliminated the samples; it's using the past 4 years to extrapolate the SWR for the next 26 years that requires us to disqualify "invalid" samples whether we do it consciously or not.

FIREcalc doesn't think that way and tells us 6.22% fails 29.5% of the sample periods.

I'm confused about failed 26-year period starting in 1934 looking at the above table; if $41,900 from $1mil was survivable for 1930-1959 then why does 1934-1959 fail as $41,900 from $674000 in our test or $628282 (which is the correct balance for the beginning of 1934)?

Even if I goofed up the math or the calculator usage somewhere I think my point about eliminating statistical samples stands on firm ground.
 
Ask for clarification if you don't understand what I'm explaining yet.
Click to expand...

I think I understand about the rest you said. Perhaps what I'm misunderstanding is what FIREcalc is. My understanding is that FIREcalc runs our proposed SWR through every sample period in our market's history to determine portfolio survivability success in that historical period. It does this without considering recent market action or even when I'm going to retire.

After that point it's the ER's decision how confident they are that the future market fluctuations won't fare worse than the historical sample periods.

However you seem to be modifying SWR by considering recent market movements and applying historical bias to them and then projecting forward.

I see two different methods here. As far as FIREcalc is concerned, 1929's trailing performance can start right now, even after the 2000-2004 decline. If 1929's trailing performance starts now then 6.22% for a new retiree isn't safe. Nor is it now safe for the 2000 4.19% retiree, even though FIREcalc said it was then. Your rise/fall/historical analysis is basically saying that 1929's trailing performance won't happen after 2000-2004's performance because that's worse than history.

I'm not necessarily saing your analysis is invalid; I'm saying I don't think the statistics support it like they support a FIREcalc calculation.

But me using FIREcalc and getting into a SWR discussion is kind of like a 6-year old directing the NASA Mars rovers: we're interested but bound to get something wrong for lack of experience.
 
Re: SWR of 6.21% for 26 yearsThe SWR simulation is

The SWR simulation is looking for the worst case of all past starting retirement dates.  The SWR calculator does not "throw out" all years except for 1929 or 1965.

Say that you have a friend who has been to your house 130 times over the course of the time you have known him. On 128 of those occasions, he drove home without incident. Twice he got drunk at parties you were throwing. On the first of those occasions, he banged into another car at a red light. On the second, he smashed up a neighbor's fender while parking. In neither case did he get himself killed as a result of his drunk driving.

This weekend, he gets twice as drunk as you have ever seen him before. You see him heading to the car and suggest that he sleep over rather than taking a risk of getting himself killed.

He says "I was drunk on two earlier occasions, and I didn't die either of those times. If I bang up another car again this time, I'll just somehow come up with the money needed to pay the bill. At least I can be certain that I won't get myself killed."

You say: "But two times isn't much to go on, and you're a lot more drunk this time. I think there's a real chance you actually will get killed this time."

He says "you're forgetting that I have driven home from your place 130 times. That's an awful lot of times that I drove home from here and didn't get killed. Considering that I've done this 130 times before, I'm 100 percent confident that I can pull it off again this time."

I am not persuaded by this logic. What matters is what happened the two times your friend was drunk. On both occasions when retirees tried to get away with a 4 percent withdrawal at 1929-type valuation levels, their retirements barely survived 30 years. And during the bubble, valuation levels went a lot higher than they were in 1929. I do not think that aspiring early retirees should be placing their confidence in claims that, because on two earlier occasions retirees just barely mananaged to survive on 4 percent withdrawals, it is safe for new ones to try test their luck in hoping this same withdrawal rate will barely squeak by yet a third time. This is especially so when the valuation level at which they are starting their retirements is far higher than it was on the two earlier occasions on which this withdrawal rate squeaked by.

Your friend might survive the ride home no matter how drunk he is this time. Anything is possible. But I don't view it as a safe practice for you to hand him back his car keys.

I believe that the historical data is trying to tell us something important. I think that we should be soberly trying to come to terms with the message it is trying very hard to communicate to us.
 
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