HDBR Switching Results (Initial)
Posted: Wed Oct 22, 2003 10:40 am
HDBR Switching Results (Initial)
I have collected a full set of switching data using the Retire Early Safe Withdrawal [Rate] Calculator (Version 1.61, November 7, 2002). I have presented an abridged, initial summary of results below. This summary compares switching and not switching, albeit imperfectly.
Details
The switching portfolio was run on the Retire Early Safe Withdrawal [Rate] Calculator, version 1.61 dated November 7, 2002, as-is. The portfolio's initial amount was set high ($100000) to reduce round off errors. The time span was 30 years. The stock allocation was 80% when stock valuations were favorable (i.e., whenever the P/E10 was below 12.0) and 20% otherwise. The fixed income alternative to stocks was commercial paper. The expense ratio was 0.20%. The inflation adjustment was the CPI. (The portfolio was re-balanced annually at no cost. Expenses and withdrawal amounts were split in two and then applied equally at the beginning January of each year and at the end of December of each year, which is the default setting.) Historical Database Rates were collected in increments of 0.1%.
For purposes of comparison, I have presented FIRECalc results that I collected for the From Intrinsic Valuations thread. That portfolio consisted of 80% stocks and 20% commercial paper without any switching. I used $1000 for my initial balance (which means that it may have round off errors) and a 30-year portfolio lifespan. Those results were collected in increments of 0.2%. Otherwise, the inputs were the same. FIRECalc does not split withdrawal amounts. It makes only one. (I configured it so that the first withdrawal came at the end of the first year.)
When using switching with the Retire Early Safe Withdrawal [Rate] Calculator, it is important to remember that cells I19 and F20 are not active. The only threshold input that is used is in cell F19. The only stock allocations are those in cells B20 and I20.
Alignment of Data
I have included a column in which I have adjusted the years associated with the Retire Early Safe Withdrawal [Rate] Calculator to line them up with the FIRECalc and with Professor Shiller's P/E10 data. To create that column, I took the year (which corresponds to the FIRECalc and P/E10 data), added one, looked up the Retire Early results for the later year and placed it into the column (back in the original row). I had suspected that such an adjustment would be necessary. I collected comparative data from the Retire Early Safe Withdrawal [Rate] Calculator without switching to confirm my suspicion.
The FIRECalc result (without switching) for 1931 was 5.6%. For 1932 it was 8.0%. The Retire Early Safe Withdrawal [Rate] Calculator results (using my method of data analysis) were 5.0% in 1932 and 6.9% in 1933. The numbers are different because FIRECalc applies expenses and withdrawals only once and the Retire Early calculator applied them in two increments.
I further compared FIRECalc results for 1953, 1964 and 1965 with the Retire Early Safe Withdrawal [Rate] Calculator results of 1954, 1965 and 1966. The comparisons are 8.6% with 8.2%, 4.6% with 4.4% and 4.2% with 4.0%
Notice that an adjustment was necessary to align these data. The jump in the Historical Database Rate from 1931 to 1932 on FIRECalc is dramatic. On the Retire Early Safe Withdrawal [Rate] Calculator, it is seen to occur from 1932 to 1933.
As an aside, the Retire Early Safe Withdrawal [Rate] Calculator does not calculate the results for a retirement that starts in 1871. I think that it could be made to do so by duplicating 1871 column (with its detailed data) and labeling the new column 1870. The reason that 1871 data is not calculated is that the algorithm calculates a stock price increase. There is no data available to use with 1871. A duplicate column would provide the means to make the necessary calculations without modifying the algorithm.
An alternative way to describe the Retire Early Safe Withdrawal [Rate] Calculator is to refer to the 12/31 line. The calculator starts with the initial balance as of 12/31/1871. There is no line for an initial balance as of 12/31/1870, which is needed to make an 1871 calculation.
Tables
These tables show the Year, PE10, Dividend Yield, FIRECalc HDBR for an 80% stock portfolio, RE Safe Withdrawal [Rate] Calculator results for switching between 80% and 20% stock allocations with a P/E10 threshold of 12.0 and the same information with the data aligned to reference the same start years.
An asterisk has been placed all switching results in the adjusted RE column for which switching reported a higher Historical Database Rate than FIRECalc without switching.
Summary
Switching increases the Historical Database Rates (HDBR) when they are lowest. In the 1921-1980 time frame, the minimum HDBR was increased from 4.0% to 4.8%. (If the full set of data is used, the lowest HDBR with switching is 4.7% and 1911 was the most dangerous year for starting one's retirement. That year becomes 1910 when it is adjusted to correspond to FIRECalc.)
As an aside, the data alignment problem may help explain why the strong correlation between P/E10 and Historical Database Rates was not discovered earlier.
Have fun.
John R.
I have collected a full set of switching data using the Retire Early Safe Withdrawal [Rate] Calculator (Version 1.61, November 7, 2002). I have presented an abridged, initial summary of results below. This summary compares switching and not switching, albeit imperfectly.
Details
The switching portfolio was run on the Retire Early Safe Withdrawal [Rate] Calculator, version 1.61 dated November 7, 2002, as-is. The portfolio's initial amount was set high ($100000) to reduce round off errors. The time span was 30 years. The stock allocation was 80% when stock valuations were favorable (i.e., whenever the P/E10 was below 12.0) and 20% otherwise. The fixed income alternative to stocks was commercial paper. The expense ratio was 0.20%. The inflation adjustment was the CPI. (The portfolio was re-balanced annually at no cost. Expenses and withdrawal amounts were split in two and then applied equally at the beginning January of each year and at the end of December of each year, which is the default setting.) Historical Database Rates were collected in increments of 0.1%.
For purposes of comparison, I have presented FIRECalc results that I collected for the From Intrinsic Valuations thread. That portfolio consisted of 80% stocks and 20% commercial paper without any switching. I used $1000 for my initial balance (which means that it may have round off errors) and a 30-year portfolio lifespan. Those results were collected in increments of 0.2%. Otherwise, the inputs were the same. FIRECalc does not split withdrawal amounts. It makes only one. (I configured it so that the first withdrawal came at the end of the first year.)
When using switching with the Retire Early Safe Withdrawal [Rate] Calculator, it is important to remember that cells I19 and F20 are not active. The only threshold input that is used is in cell F19. The only stock allocations are those in cells B20 and I20.
Alignment of Data
I have included a column in which I have adjusted the years associated with the Retire Early Safe Withdrawal [Rate] Calculator to line them up with the FIRECalc and with Professor Shiller's P/E10 data. To create that column, I took the year (which corresponds to the FIRECalc and P/E10 data), added one, looked up the Retire Early results for the later year and placed it into the column (back in the original row). I had suspected that such an adjustment would be necessary. I collected comparative data from the Retire Early Safe Withdrawal [Rate] Calculator without switching to confirm my suspicion.
The FIRECalc result (without switching) for 1931 was 5.6%. For 1932 it was 8.0%. The Retire Early Safe Withdrawal [Rate] Calculator results (using my method of data analysis) were 5.0% in 1932 and 6.9% in 1933. The numbers are different because FIRECalc applies expenses and withdrawals only once and the Retire Early calculator applied them in two increments.
I further compared FIRECalc results for 1953, 1964 and 1965 with the Retire Early Safe Withdrawal [Rate] Calculator results of 1954, 1965 and 1966. The comparisons are 8.6% with 8.2%, 4.6% with 4.4% and 4.2% with 4.0%
Notice that an adjustment was necessary to align these data. The jump in the Historical Database Rate from 1931 to 1932 on FIRECalc is dramatic. On the Retire Early Safe Withdrawal [Rate] Calculator, it is seen to occur from 1932 to 1933.
As an aside, the Retire Early Safe Withdrawal [Rate] Calculator does not calculate the results for a retirement that starts in 1871. I think that it could be made to do so by duplicating 1871 column (with its detailed data) and labeling the new column 1870. The reason that 1871 data is not calculated is that the algorithm calculates a stock price increase. There is no data available to use with 1871. A duplicate column would provide the means to make the necessary calculations without modifying the algorithm.
An alternative way to describe the Retire Early Safe Withdrawal [Rate] Calculator is to refer to the 12/31 line. The calculator starts with the initial balance as of 12/31/1871. There is no line for an initial balance as of 12/31/1870, which is needed to make an 1871 calculation.
Tables
These tables show the Year, PE10, Dividend Yield, FIRECalc HDBR for an 80% stock portfolio, RE Safe Withdrawal [Rate] Calculator results for switching between 80% and 20% stock allocations with a P/E10 threshold of 12.0 and the same information with the data aligned to reference the same start years.
Code: Select all
Year PE10 Yield FIRECalc80% 80/20and12 adjusted RE
1921 5.1 7.11% 11.6% 9.8% 10.6%*
1922 6.2 6.35% 10.2% 10.6% 10.7%
1924 8.0 6.02% 9.4% 9.9% 10.3%
1923 8.1 5.74% 9.0% 10.7% 9.9%
1933 8.7 6.98% 8.4% 7.2% 8.3%*
1980 8.8 5.18% 10.4% 9.2% not collected
1975 8.9 4.99% 8.2% 6.8% 7.7%*
1978 9.2 5.22% 9.2% 6.9% 8.5%*
1979 9.2 5.12% 9.6% 8.5% 9.2%*
1932 9.3 9.55% 8.0% 7.1% 7.2%*
1925 9.6 5.26% 8.4% 10.3% 9.6%
1942 10.1 7.87% 9.0% 6.8% 7.8%*
1943 10.1 5.90% 9.2% 7.8% 7.4%*
1949 10.2 6.18% 11.0% 7.2% 6.8%*
1948 10.4 5.69% 10.8% 6.9% 7.2%*
1950 10.7 6.84% 10.2% 6.8% 6.8%*
1944 11.0 5.19% 8.6% 7.4% 6.7%*
1976 11.1 3.80% 7.2% 7.7% 6.6%*
1926 11.3 4.82% 7.6% 9.6% 8.5%
1935 11.4 4.85% 7.6% 6.4% 6.9%*
Code: Select all
Year PE10 Yield FIRECalc80% 80/20and12 adjusted RE
1947 11.4 4.69% 9.4% 5.9% 6.9%*
1977 11.4 3.97% 7.4% 6.6% 6.9%*
1951 11.8 6.98% 9.4% 6.8% 5.8%*
1945 11.9 4.77% 8.2% 6.7% 6.3%*
1954 12.0 5.73% 9.0% 5.2% 5.2%*
1952 12.5 5.86% 9.0% 5.8% 5.2%*
1934 13.0 4.19% 6.2% 8.3% 6.4%
1953 13.0 5.40% 8.6% 5.2% 5.2%*
1927 13.1 5.19% 7.2% 8.5% 8.3%
1938 13.5 7.02% 6.6% 5.1% 5.5%*
1974 13.5 3.53% 5.8% 6.0% 6.8%
1958 13.7 4.33% 7.0% 4.9% 5.1%*
1941 13.9 6.41% 7.0% 5.7% 6.8%*
1939 15.5 4.10% 6.0% 5.5% 5.5%*
1946 15.6 3.70% 6.8% 6.3% 5.9%*
1955 15.9 4.34% 6.8% 5.2% 4.9%*
1940 16.3 5.06% 6.0% 5.5% 5.7%*
1971 16.4 3.35% 6.8% 5.4% 5.5%*
1931 16.7 6.07% 5.6% 7.2% 7.1%
1957 16.7 3.82% 6.0% 4.8% 4.9%*
Code: Select all
Year PE10 Yield FIRECalc80% 80/20and12 adjusted RE
1936 17.0 3.50% 5.4% 6.9% 5.2%*
1970 17.0 3.50% 4.8% 5.2% 5.4%
1972 17.2 2.98% 4.8% 5.5% 5.7%
1959 17.9 3.15% 5.4% 5.1% 4.9%*
1956 18.2 3.78% 5.8% 4.9% 4.8%*
1960 18.3 3.21% 5.2% 4.9% 4.9%*
1961 18.4 3.26% 5.2% 4.9% 4.9%*
1973 18.7 2.67% 4.6% 5.7% 6.0%
1928 18.8 4.43% 5.8% 8.3% 7.9%
1963 19.2 3.28% 5.0% 4.9% 5.0%
1967 20.4 3.41% 4.4% 4.9% 5.1%
1962 21.1 2.93% 4.8% 4.9% 4.9%
1969 21.1 3.01% 4.2% 5.1% 5.2%
1968 21.6 3.08% 4.2% 5.1% 5.1%
1937 21.6 4.17% 4.6% 5.2% 5.1%
1964 21.6 3.00% 4.6% 5.0% 4.9%
1930 22.3 4.47% 4.8% 7.4% 7.2%
1965 23.2 2.92% 4.2% 4.9% 4.9%
1966 24.0 2.93% 4.0% 4.9% 4.9%
1929 27.0 3.46% 4.2% 7.9% 7.4%
Summary
Switching increases the Historical Database Rates (HDBR) when they are lowest. In the 1921-1980 time frame, the minimum HDBR was increased from 4.0% to 4.8%. (If the full set of data is used, the lowest HDBR with switching is 4.7% and 1911 was the most dangerous year for starting one's retirement. That year becomes 1910 when it is adjusted to correspond to FIRECalc.)
As an aside, the data alignment problem may help explain why the strong correlation between P/E10 and Historical Database Rates was not discovered earlier.
Have fun.
John R.