About This Board

Research on Safe Withdrawal Rates


Joined:Mon Dec 02, 2002 12:56 am
About This Board

Post by hocus » Wed Jul 23, 2003 10:57 am

First of all, thanks to ES for providing me the opportunity to set up this board. I have an intense desire to advance the world's knowledge of the realities of SWRs. That desire doesn't do anyone any good unless I have tools available to me to put it to practical, constructive purposes. ES has provided me such a tool, and I am grateful.

JWR1945 started things off with a bang. The posts he put up this morning are among the most important ever posted in the history of FIRE discussion boards. If you care about this stuff, you need to read those posts. Not just once. You need to study those posts, and let the implications sink in. Then, when you are clear on the implications, you need to act on what you have learned.

The SWR issue is not just something nice for aspiring early retirees to talk about. SWR analysis is a powerful tool for putting together a FIRE plan. Properly employed, it is a tool that allows you to retire safer and sooner. Not a little bit safer and a little bit sooner. A lot safer and a lot sooner. SWRs matter.

Because SWRs matter, it makes sense to want to calculate them properly. The same tool that, properly employed, can be a powerful force to aid you in achieving financial independence early in life, can, if improperly employed, cause you terrible life setbacks. Using historical data as a guide to putting together a FIRE plan makes sense. Using an improperly calculated SWR to do so does not.

The purpose of this board is to help aspiring early retirees learn what they need to know to calculate SWRs properly. There has been a lot of great research and insights published at two discussion board communities since May 13, 2002, the day that The Great Debate on SWRs commenced. Too little has been done with that research and those insights in the 14 months of the debate, in my view. I want to change that. I believe that this board can help me in my effort to do so.

What makes this board diffferent is that this is not a board aimed primarily at facilitating talk about FIRE. There are already several boards available that do that. This is an action-oriented board. The goal here is to make things happen. Exciting, enriching, life-enhancing things. If we are lucky, what we do at this board could change the world.

That's a bold claim, but I don't think it is far-fetched. Here's the logic chain: (1) achieving financial indepenence frees people to do more fulfilling things with their lives; (2) the accurate calculation of SWRs allows people to achieve financial independence years sooner; and (3) this board is going to help get information out to people about how to accurately calculate SWRs. This little discussion board is going to take on the world and change it for the better. Good for us.

An SWR is a number. Numbers are boring. In ordinary circumstances, you could not pay me enough to even read such a board as this, much less post to it, much less moderate it. But the number to which we will direct our energies at this board is a special sort of number. Knowing this number liberates you to do new and exciting things with your life. Knowing this magic number sets you free. That makes all the difference, doesn't it?

In earlier discussions of SWRs, I have referred here and there to "the Wave." That's a term I use to refer to the growing interest among middle-class workers in attaining financial independence early in life. For several years, I have been posting to discussion boards about "the soft side" of FIRE, generally how to save for financial independence. That's important; I have spent close to three years of my life writing a book on the subject, so I had better think it is important. But my sense is that this SWR thing holds the potential to become every bit as important as the soft side stuff, possibly even more so.

Why do I say that? Because of the reaction I have seen to the proposal I put forward to calculate SWRs in more realistic ways. I started the ball rolling on this thing with a post I put to the Motley Fool's Retire Early Home Page board (REHP Board) on May 13, 2002. I expected that it was going to prove to be controversial. But now that I have seen the reaction it has provoked, I wish at times that I had spoken up a lot sooner. I knew that the SWR concept was an important one, but I now see that for the years in which I kept what I knew about the realities of SWRs to myself, I had only a weak idea of how important. That post of mine has generated tens of thousands of responses, and the posting has continued now for 14 months. The reaction shows no signs of letting up anytime soon. We have a tiger by the tail.

What the reaction tells us, I believe, is that people sense the importance of the SWR concept. Most (this includes me) do not grasp the complexities. But there is something special about the SWR concept that most people catch on to and that is responsible for the energy you see evidence itself whenever a fresh thought on SWRs is put forward. There are lots of investing tools discussed on a multitude of investing boards, but I have never seen anything remotely similar in nature to The Great Debate on SWRs.

What makes the SWR concept so special? It's a tool that provides objective insights. That's the magic, in my view. There are lots of informed people offering lots of reasonable sounding investing advice in lots of different forums. As often as not, the advice of Expert A conflicts with the advice of Expert B. Which means--what? What are you supposed to do with your money after taking in all this stufff?

The SWR, properly calculated, provides actionable advice. It doesn't predict the future. But it tells you what will work in the future, presuming that the future turns out to be something like the past. That's a valuable thing to know. SWR analysis is not hot air. SWR analysis is data-based, it's rooted in the hard stuff. It's all about numbers, and that's a drag to be sure. But these are NUMBERS THAT MATTER.. The true SWR is a cool, cool number to know.

Here's what William Bernstein says on Page 56 of his book "The Four Pillars of Investing"--"On an intellectual level, most investors have no trouble understanding the notion that high past returns result in high prices, which, in turn, result in lower future returns. But at the same time, most investors find this almost impossible to accept on an emotional level."


And Double Wow.

It's like William Bernstein has been reading my e-mail. He knew. Before it happened. People need to know about the stuff that Bernstein writes about in Chapter Two of the "Four Pillars" book. One of the neat things about being Moderator of this board is that I have the ability to deliver an electric shock to anyone who tries to read posts put to the board without first reading all the words of that chapter with care. Please do not give me cause to make use of this extraordinary power. Read the book, and, when you read it, think about the Deeper Meaning of those words.

People know that valuation levels affect returns. Just about everyone knows this on some level of consciousness. But there's knowing and then there's Knowing, you know? People don't really know.

You know why? Because they don't have a number to put to it. They understand that valuation plays a role in investing success, but they have little idea how much of a role. SWR analysis tells them. SWR analysis gives them the number to unlock the secrets, to make things that never added up before make sense at last.

Sometimes people don't want to know. We have seen a good bit of that in the course of The Great Debate. Sometimes they do. We have seen some of that too. Sometimes you see both drives--the drive to know and the drive not to know--in the same poster! I've seen this scores of times now. The debate that results from this mix of desires to know and not to know is at times an unruly one, a fractious one. Sometimes it seems to be a time-wasting one.

Just when you become inclined to give up hope on it, however, something wonderful happens. Every now and then the clouds break and the sun blasts through and you get one of those wonderful JWR1945 posts or one of those wonderful raddr posts or one of those wonderful BenSolar posts, and there you are again, learning. Learning things you could never learn through investigation of any other investing tool. Learning something special because the tool you are studying is a tool that is data-based and objective and action-oriented and helpful and true.

Except when it isn't.

The SWR concept is great. The SWR reality is kind of a drag. The reality is that there's a thing called the "conventional methodology" that a lot of people have bought into that skews the results, that causes the SWR analysts to pump out numbers that couldn't possibly be true. In the year 2000, at the top of the bubble in stock prices, this conventional methodology thing was saying that the SWR is 4 percent. William Bernstein believes that valuation affects returns as a matter of "mathematical certainty," so he went about the business of calculating the SWR as if valuation mattered, and you know what he found out? The SWR at that time was really 2 percent!


That's a big, big difference. Let me illustrate for you how big a difference we are talking about. Say that you want to live on $60,000. With a 4 percent withdrawal rate, it takes you $1.5 million to pull it off. With a 2 percent withdrawal rate, it takes $3 million. That's a difference of $1.5 million.

A lot of people get bummed out when this hear this seemingly dreary insight. But it is not nearly so dreary an insight as you might at first suppose! First of all, there is no rule of the universe that says that you must start your retirement with a high stock portfolio. You can change your allocation, and push your SWR back up to 4 percent, if a 4 percent SWR is your target. There is no need to remain with an asset class that does not provide you the SWR you are looking for.

But the news gets a lot more exciting than that. The other side of this "valuation affects returns" insight of Bernstein's is that, when valuations go down, the SWR goes up! So a few years down the road, the SWR for a high-stock portfolio might not be 2 percent or 3 percent or even 4 percent. It might be 5 percent! It might be 6 percent! We do not know exactly how high it can go, but I sure hope we are going to put an honest day's work into the project of finding out.

Say that by lowering your stock allocation for 10 years, you can up the SWR for a portion of your portfolio from 2 percent to 6 percent. That's going to provide a huge boost to your hopes of achieving your Financial Independence dream early in life. With a 2 percent withdrawal, it takes $3 million in assets to generate a $60,000 annual income. With a 6 percent withdrawal, it takes $1 million. That gives you some idea of how much sooner you can expect to achieve financial independence using this tool compared to how long it would take not using it.

Now, that's an extreme example I put forward to illustrate the point in a compelling manner, and it skips over some details that add complexity to the discussion but which must be considered when you are putting together an actual plan. That stuff needs to be considered, but not in this particular post. This is the place for selling you on the SWR concept. The example shows how powerful this SWR tool can be in the right circumstances. That's the point I most want to get across to you right now.

Properly calculated, the SWR does these winderful things. What does it do improperly calculated? Improperly calculated, it causes busted retirements. Yuck. Not good. Busted retirements--that's the exact thing aspiring early retirees most want to avoid. That's what we call a Wipeout.

So we want not any old SWR. We want the right SWR.

What makes one number right, and another not right? Data.

How do we get data? Through research.

Thus--the SWR Research Group.

There is already tons of research that has been done. I hope that a lot more is going to be done in the months and years ahead. But that is not the most pressing need we face. The most pressing need is taking the research already out there, research that has been put forward over the 14-month history of The Great Debate, and putting it to good use. We need to do more than just crank this stuff out. We need also to see that real live human beings are investing in different ways because of what they have learned from the research that we are doing. Otherwise, what's the point?.

How do we go about doing that? I have lots of things planned. I expect to write some articles for personal finance magazines. I excpect to give some radio interviews and speeches. I plan to start a web site of my own sometime next year that will contain writings addressing various aspects of the question. I will be writing a report called "The Truith About SWRs" for publication on the internet. I hope to arrange for more "A Special Discussion of SWRs at the NFB Board with...." events. All of these sorts of initiatives will help get the word out on the realities of SWRs, I believe.

But people do not learn all they need to learn about SWRs through a single speech or a single article or a single discussion thread, We need to provide a wealth of information, organized to provide quick guidance to those trying to make sense of the subject in a hurry. So one of my first goals for this board will be just to collect and organize information already provided during the course of The Great Debate.

For example, I might want to put up a thread here on the issue of timing, and collect in one place a dozen insights that have been put forward at different phases of the debate. Telling someone that "timing has been discussed before, go look it up" isn't terribly constructive, I don't think. So I want to use this board as a place for collecting the best stuff produced over the past 14 months in a place where real live people can obtain real live benefits from it. When someone hears one of those speeches, and wants more information, I want to be able to send him or her here to get the full story.

There's other stuff I hope to do with this board, but that's enough for now. I do not expect to be making much of any use of this board for at least six months. So further descriptions of the aims of the board can be held off until a later time, I believe.

For now, read those JWR1945 posts. Think through the implications. Read the Bernstein book. Think through the implications. If you feel too much excitement about the adventure that awaits us to wait until the Winter of 2004 to begin work here, feel free to start organizing material yourself and placing it here beginning right now. I am the Moderator of the board, but anyone wanting to make use of the board for the purposes for which it was created should obviously feel free to do so.


It's an adventure we are embarking on. To do what? To change the world. We have determined that it requires some changing. Most of the things we see about us when we look at the world today are good. But there is one big ugly problem that we have become aware of--it's that convetional SWR methodology! Let's get it! Let's chew it up! Let's make that number work for us the way it is supposed to work for us! Let's do that crazy darn calculation the right way!

There is a Wave. It is getting big. We are at the top of the Wave. Hang on! It's got a nasty curl to it, but if you learn to negotiate that curl, I have a strong feeling that what you are going to get is---

--One fantastic never-to-be forgotten ride all the way in to to the soft and sandy shoreline. As one of the great personal finance advisors of all time once observed: "If you catch a wave, you'll be sitting on top of the world."

Until winter comes---

Much good surfing to everyone!

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