"Getting Going" or "Going Bust"?

Research on Safe Withdrawal Rates

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JWR1945
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Post by JWR1945 »


JWR1945
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Post by JWR1945 »


Mike
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Post by Mike »

...a life expectancy of 25 years...
Not long enough. Using this algorithm for 40 years yields a 2 1/2% withdrawal rate.
hocus2004
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Post by hocus2004 »

"This addresses one of my pet peeves: the assumption that increased risk guarantees increased returns, which is ridiculous."

I remember once seeing a cover article in Money magazine on What to Do If You Are Getting a Late Start in Financing Your Retirement. The advice was--You need to move more money into stocks than others do. That way you'll be able to use the higher returns to make up for lost time. This way of thinking reminds me of gamblers who are have reached a point where they are afraid to tell their wives how much they have lost, so they begin betting larger stakes in the hopes of being able to make it all back in a short amount of time.

That's not smart gambling and that's not smart investing. There are circumstances in which it is appropriate to take on added risk. But the idea developed during the Bull Market that the risks associated with stock investing are not real risks, that these risks just disappear with the chanting of the phrase "for the long run," is wrongheaded and dangerous.

Risk is real. It exists. It can hurt you. It is indeed in some circumstances possible to diminish stock-investing risk by investing for the long term, and the book "Stocks for the Long Run" offers some valuable insights on how to go about doing this. But the idea that, whenever you want more return for your investment dollar, you should just up your stock allocation, is an exceedingly ill-informed one. As JWR1945 notes above, there comes a point at which you are paid little or nothing for the added risk you are taking on. When you reach that point, you should be lowering your stock allocation to increase your return on your investment dollar, not increasing it. When popular magazines have become so enthusiastic about an investment class that they have become oblivious to its downside, the odds are good that that investment class is well on its way to becoming overbought and overpriced.
hocus2004
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Post by hocus2004 »

Here is a link to a thread at the Motley Fool board at which intercst (author of the SWR study published at RetireEarlyHomePage.com) offers links to the Scott Burns column and to the Rob Arnott article cited in it.

http://boards.fool.com/Message.asp?mid= ... sort=whole

I have three comments.

One, intercst misrepresents Arnott's work in saying that Arnott is claiming an SWR of zero percent for stocks. Arnott says that the return for stocks for investments that are not tax-protected will likely be close to zero percent. He is NOT saying that the SWR for stocks is zero percent. If stocks were to provide zero return for 30 years, the investor would be able to withdrawal 3.3 percent of his portfolio without going bust for that time-period. That's an SWR of 3.3 percent, not zero. Arnott provides an example showing that he understands this (he says that a withdrawal of 4 percent will likely work for 25 years).

A reasonable person could be led to believe by reading the intercst post that intercst doesn't even know what an SWR is, much less how to calculate one. Those of us who have been around the track with this individual for a bit know that what is really going on is that he is engaging in word games and deception, as has become his usual practice since the launching of The Great SWR Debate on May 13, 2002.

Two, I once asked intercst if he would permit me to post honest and informed comments on the topic of SWRs at the discussion board associated with his RetireEarlyHomePage.com web site. His response was that he would not permit challenges to the analytic validity of the REHP study until the poster seeking to post the challlenges could present him with a peer-reviewed study showing that he got the number wrong. Rob Arnott is the editor of the Financial Analysts Journal. He clearly meets whatever standards intercst is presuming to impose on those who offer challenges to his methodology. Arnott's work shows that changes in valuation affect long-term returns. It discredits the assumption at the core of the REHP study, that it is never possible for changes in valuation to have any effect (that it is in fact "100 percent safe" to assume that they never will). If intercst were a man of his word, he would permit challenges to the methodology of his study now that he is aware of the Arnott research.

Three, please make note of the intercst response to Arnott's findings. He entire response is to post a "<grin.>" That's some powerful response given that the possibility we are dealing with here is that hundreds of retirements will go bust as a result of the intercst errors and false claims, huh? This response is very much in line with the response we heard from intercst re the William Bernstein claims that the methodology used in the REHP study is "highly misleading" and that the intercst study got the number wrong by a full two percentage points at the top of the bubble. Intercst owns a web site. Motley Fool has crowned him "Board General" of the Motley Fool board. Dory36 has appointed him "Moderator" of the SWR section of the Early Retirement Forum. He has lots of place to put forward any response he has to the Bernstein claims, and he has now had over two years in which to do so (I posted the "What Bernstein Says" post on August 27, 2002). We have not yet heard one word of reasoned response to Bernstein from intercst yet. I wonder why.

Guess what? We are not going to hear any reasoned response from him re the Arnott research either. He is retired and so he now is far too busy to craft reasoned responses to challenges to his SWR findings, the retirement dreams of his readers be damned. Intercst recently put forward a suggestion that the name of the Motley Fool board be changed to "I'm Retired--Screw You!" so that people would stop coming to the board and asking whether some on-topic posting could pretty-please-with-sugar-on-top be permitted. I don't favor the name change because I don't accept the idea that intercst "owns" a board that was created through the work of hundreds of community members who did possess an interest in the stated subject matter of the board. I have to give him credit, however, for being careful not to encourage any illusions that he is ever going to shoot straight with us. Intercst is a bad hat. But he is pretty darn up front about the fact that he is a bad hat. He doesn't give any reasonable person any basis on which to form an assessment that someday he might be willing to give the desires of community members seeking reasoned on-topic discussions the slightest bit of respect.

We have a decision to make, friends and neighbors. We can be a community that is about helping people to learn what they need to learn to win financial freedom early in life. Or we can be the "Screw You--I'm Retired!" Group. You all know which way I intend to vote when it comes to that. I'd be interested in hearing about the thinking processes of any fellow community members who have come to a conclusion contrary to my own on this point.
JWR1945
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Post by JWR1945 »

hocus2004 wrote:Juicy Burns Quote #3: "Bottom line: Withdraw more than 5 percent a year at your peril."
Even 5% is at your peril. In fact, 5% is dangerous.

I have just posted an analysis that shows that starting with 5% withdrawals at today's valuations ends up reducing your Safe Withdrawal Rate to 2.5% with a balanced portfolio (with 50% stocks and 50% TIPS at 2% interest) or below 1.7% with a high stock portfolio (80% stocks and 20% TIPS at 2% interest).

That is, withdrawals have to be cut sharply later on.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

For the benefit of those who come to read this thread at a later time, here is a link to a thread at the FIRE board at which the Scott Burns column is discussed.

viewtopic.php?t=3150
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