Intercst Article on 2% SWR

Research on Safe Withdrawal Rates

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hocus2004
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Intercst Article on 2% SWR

Post by hocus2004 »

On August 27, 2002, I posted the "What Bernstein Says" thread-starter to the Retire Early Home Page board (REHP board) at the Motley Fool (fool.com) site. Intercst, who is the publisher of the RetireEarlyHomePage.com site and the author of the conventional methodology SWR study that appears there (the REHP study), had prior to that date made many claims on the REHP board that a 4 percent withdrawal from a 74 percent S&P portfolio is "100 percent safe." He started saying this in May 1999, when he founded the board, and had continued until the August 27, 2002, posting of the "What Bernsteins Says" post.

The "What Bernstein Says" post put intercst and the entire REHP board community on notice that it was not just me who had serious doubts about the accuracy of intercst's SWR claims (I had first expressed these doubts in a direct manner in a post that I put to that board on May 13, 2002). Bernstein is a well-regarded expert on portfolio allocation. He says on Page 234 of his book "The Four Pillars of Investing" that the SWR at the top of the bubble was only 2 percent. After publication of the "What Bernstein Says" post, it became highly irresponsible for intercst or anyone else aware of the Bernstein claims to say that a 4 percent take-out (for those with high S&P stock allocations) is "100 percent safe" regardless of the valuation levels that apply on the retirement start date.

Intercst has repeatedly put forward such irresponsible claims in the time since. In the almost 28 months that have followed, he has not offered a reasoned response to the Bernstein claims, or to the claims of JWR1945, who checked out the Bernstein claims and found that the historical data supports them. Instead, intercst has adopted a hard-line policy of blocking honest and informed discussions of SWRs at the REHP board through the use of disruption, deception, intimidation, word games, ridicule, and personal attack. His efforts have caused most posters with an interest in the topic of early retirement to leave the board community, causing a once outstanding learning resource to be reduced to what I think can in all fairness be referred to as a Clown Board.

It is shameful that intercst has not been willing to respond to the Bernstein claims in a reasoned manner. He puts himself forward as an expert on the topic of SWRs. The Bernstein claims are obviously important ones. Two community members, raddr and JWR1945, have done independent research on SWRs that is supportive of the Bernstein claims and which reveals grave flaws in the intercst study. Bernstein says that the REHP study (and all other conventional methodology SWR studies) is "highly misleading" at times of high valuation. Raddr dismisses the intercst SWR claims as "bogus." JWR1945 describes the REHP study as "analytically invalid for purposers of determining SWRs."

Intercst has finally written an article that appears from the title to be responsive to the Bernstein research, the JWR1945 research, and the raddr research. The article is titled "Where Do These Guys Get a 2 Percent SWR?" Here is a link.

http://www.retireearlyhomepage.com/twoperc.html

The article is yet another exercise in evasion. It discusses the flaws of Monte Carlo studies that fail to include a reversion-to-the-mean adjustment. Bernstein's 2 percent claims were the result of his concerns with the failure of conventional methodology studies to include an adjustment for changes in valuation levels. The JWR11945 claims are the result of his inclusion of the critical factor of valuation changes in his analyses. Raddr does indeed use Monte Carlo runs in his research, but raddr's methodlogy includes an adjustment for the reversion-to-the-mean factor. So the points made in the article linked to above do not apply to any of the three researchers who have found that intercst's SWR numbers do not match the numbers obtained from taking an informed look at the historical data..

In short, this article is completely beside the point. Intercst is completely unresponsive in this article to the questions that have been put on the table during The Great SWR Debate re his SWR claims and the methodology employed in the study published at the RetireEarlyHomePage.com site. This is shameful behavior. It reflects poorly on all of us that this individual retains posting privileges at the various Retire Early/FIRE boards. This individual has an obligation to shoot straight on the SWR question, given the fact that some still view him as an expert on the topic and that a failure to shoot straight on this question may well result in a large number of busted retirements in our community.

Intercst: "Should I be using a 2% retirement withdrawal? [these words appear as a sub-heading]

"Probably not. You'll find few reputable analysts suggesting that a retiree limit his or her withdrawals to 2% from an adequately diversifed retirement portfolio."

This individual lacks the integrity required of anyone who offers advice on money questions on internet discusson boards open to the general public. It is a black mark on the integrity of all board communities that continue to permit him to post his deceptions for the purpose of engaging in further trickery of those unfortunate community members who happen to be exposed to them and to place any confidence in their accuracy.
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Post by unclemick »

I read the link - strikes me as a well balanced, well reasoned article.

Of course, I'm going to take something between the SEC yield of my overall portfolio and what common sense tells me. Inflation adjustment will be what is personally experienced.
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Post by hocus2004 »

"I read the link - strikes me as a well balanced, well reasoned article."

Most of the material in the article is fine, UncleMick. The exception is the few words that I quoted in my post above. But that is only a small part of the article in percentage terms.

The shameful part is--Where is the intercst response to the claims that have been put forward by William Bernstein, by JWR1945, and by raddr? Do you not think that he has an obligation to respond to the findings of serious researchers that the number that he has put forward as "100 percent safe" if offf by a clear country mile? I sure do.

Intercst says in the language of his study that he will provide "updates" when necessary. Should there not be an update of the REHP study telling its readers that William Bernstein believes that conventional methodology SWR studies are "highly misleading" at times of high valuation?

People use the REHP study to gain information as to what take-out number to employ in their plans and to determine what percentage of their portfolio to allocate to stocks. Intercst gets the numbers wrong on both these points. Not by a little bit. By a lot. Is he under no obligation to inform his readers that his claims are not supported by people like William Bernstein?

Bernstein said in an e-mail to Ataloss that anyone thinking of using conventional methodology numbers to put together a plan at today's valuation numbers would be well-advises to "FugetaboutIt." Is this not relevant imformation?

He is deceiving people, UncleMick. He is tricking people. If he wants to say that he personally believes that a 4 percent take-out will work, that's his business. Everyone is entitled to a personal opinion about what is going to happen in the future. He is not entitled to say that a 4 percent take-out is "100 percent safe" according to the historical data when he knows that raddr did a standard defviation analysis showing that the odds of the long-term returns which were assumed in generating that number actually coming up are 1 in 740.

This is not an academic exercise we are talking about. There are real live human beings who are making use of this study for real live retirement plans. They deserve accurate statements as to what the historical data actually says about what withdrawal rate is safe for a high-stock portolio. Intercst has not supplied that, and in the event that he is not willing to supply it, he should at a mimimum be directing his readers to sources like Bernstein and raddr and JWR1945 who are willing to supply it.

Intercst has not responded in a reasoned way to the Bernstein SWR findings for over two years now. If you do not think that he is trying to deceive the board community, can you kindly tell me why he is unwilling to give us a straight answer as to why Bernstein says that the number at the top of the bubble was 2 percent and not 4 percent as intercst was telling aspiring early retiees at the time?

The shameful thing is that he has not responded to the Bernstein claims, he has not responded to the raddr claims, and he has not responded to the JWR1945 claims. These are serious people who have done serious research. Their work merits a serious response from this other individual who puts himself forward as some sort of SWR expert. When are we going to hear this response? Why is it taking him so long to come up with one?
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Post by JWR1945 »

I disagree with you, unclemick. The article is an evasion.

intercst has carefully avoided addressing all of the issues brought up by those who have come up with lower numbers.

This comment sidesteps the issue.
You'll find few reputable analysts suggesting that a retiree limit his or her withdrawals to 2% from an adequately diversified retirement portfolio.
It is one thing to assert that it is possible for an investor to obtain a Safe Withdrawal Rate greater than 2%. It is quite different for intercst to claim that a specific allocation of the S&P500 index and commercial paper will do the job.

In terms of William Bernstein's comments, he has a point but he misses the point as well. It is ridiculous to plan your retirement finances with the hope that calamity will happen. Do we really want to winning big by dying early? Let the insurance companies plan for that, but not me. Do we really want to plan for political upheaval?

[We want conditional probabilities, not absolute probabilities.]

Where William Bernstein has a point is that many people claim much more precision than makes sense. I will add that the statistical basis behind claims with high precision are invalid.

As for intercst's numbers: William Bernstein's point is that intercst's claim of 100% probability of success correspond to an absolute probability of success no better than 80%. intercst is interpreting the numbers wrong.

William Bernstein's comments as well as those related to one's mortality are separate from Safe Withdrawal Rate calculations. It applies to the judgment phase, during which one decides how to use the numbers that the calculations provide.

Have fun.

John R.
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Post by unclemick »

Well - perhaps some posters other than us can weigh in - but being blockheaded - I still think it was a well written article.

Last friday - Vanguard Balanced Index(60/40) = 2.46% SEC yield. and my portofolio as of when I last checked (a couple a months ago) = 2.98%.

Plenty of room for debate - and number crunching.
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Post by ben »

I agree with you unclemick - a good article. Cheers!
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
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Post by JWR1945 »

intercst presents survival rates of 100%, 87% and 81% as being the same.

Large differences persist with all withdrawal rates.

If you impose Bernstein's 20% chance of externally caused disasters, these conditional probabilities become 80%, 70% and 65% absolute probabilities.

Bernstein's cautioned against demanding too much precision. He did not say that 80%, 70% and 65% probabilities are (essentially) the same.

The article is an evasion. It is a smoke screen.

Most of all, the article is sloppy engineering.

Have fun.

John R.
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Post by JWR1945 »

Read the article again but keep these facts in mind:

TIPS and/or ibonds at 0% interest guarantee that you can withdraw 3.33% of the initial balance each year for 30 years.

At an interest rate of 1%, they guarantee that you can withdraw 3.87% annually for 30 years.

When you see less than 100% survivability with a 100% TIPS portfolio for 30 years, you know that something is wrong.

What you see in the article is sloppy engineering.

Question: How is it possible for a Safe Withdrawal Rate to fall to 2%? Answer: By having a high stock allocation that loses money in the early years.

Have fun.

John R.
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Post by Mike »

By having a high stock allocation that loses money in the early years.
They are unlikely to fall more than they did during the Great Depression, but retirees back then had deflation to cushion the blow. Now that the fed has taken a determined stance to prevent deflation at all costs, there is the very real danger that the next major bear market will come with inflation in its wake. Since the post 67 period was the worst for retirees because of inflation, despite the market not falling like it did post 29, a bear with inflation could prove to be a real problem for retirees. The lesson of the post 67 period is that inflation is the real retirement killer.

Medical inflation in particular could prove to be a thorny problem if Medicare is "modernized" after Social Security is. That was what happened in Chile, which is President Bush's model for modernization of Social Security.
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Post by hocus2004 »

"Retirees back then had deflation to cushion the blow."

I agree with your point re deflation, Mike. The REHP study is only as good as its assumptions. One of those assumptions is that, since we experienced deflation the first time we were at 1929-level valuations, we will again experience deflation the next time we are at 1929-level valuations. What if we don't?

If we don't, the whole house of cards topples to the ground. There is no slack built into the safety claims of the REHP study. The way it works is that if the retiree has even one dollar remaining in his portfolio at the end of 30 years, the strategy advocated is termed a "success." That means that those using the study to put together their plans are not only counting on us experiencing deflation, they are counting on us experiencing AS MUCH deflation as we did in the 1929 scenario. Any little change can cause a one dollar change in the results, and, because of the way the methodology was constructed, a one dollar change moves the result from the "it works!" column to the "your retirement goes bust!" column.

The reality is that we may again see deflation and we may not. The safe thing to do is to accept that reality and choose portfolio allocations that are likely to work regardless of whether we see deflation or not. That means taking valuations into account. When you take valuations into account, you are not putting all your hopes on the assumption that the future will turn out precisely like the past in all the particulars. With the REHP study, you are looking at the results from one year to determine the SWR (it's two years if you say that the 4 percent number comes from both the 1929 and 1966 retirement start years). With the data-based tool, you are making the valuation adjustments needed so that it becomes analytically valid to consider ALL of the data points in your determination of what is safe, both the retirement start-years in which there was deflation in the early years of the 30-year historical sequence that followed and those in which there was not.

Raddr made this point in a number of posts that he put to the FIRE board in earlier days. He noted that, for the REHP study to work, you must not only get the same sorts of returns that stock investors have obtained in the past, you must get precisely the same sequences of returns. He showed with data that changes in the sequences can cause the underlying portfolios to fail, even where return levels are the same. The raddr methodology addresses this weakness of the REHP study by generating more data points via a Monte Carlo run. Not surprisingly, the raddr methodology generates an SWR nowhere even remotely in the same neighborhood as the REHP study.

It is not the use of one far-fetched assumption that makes the REHP study so dangerous to the hopes of aspiring early retirees. This study has one far-fetched assumption placed on top of another placed on top of another. When you pile that many far-fetched assumptions on top of one another, you get crazy results. The idea that a 74 percent S&P allocation could permit a safe 4 percent withdrawal regardless of valuation levels, regardless of whether the investor is in circumstances where he could maintain his stock allocation in the face of huge price drops, regardless of whether we experience deflation or not, is a crazy idea. Obviously changes in the circumstances that apply cause changes in what take-out number is safe. Studies that report that this is not so, that a 4 percent take-out number is "100 percent safe" regardless of the circumstances that apply, are simply not credible.
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Post by hocus2004 »

"They are unlikely to fall more than they did during the Great Depression"

This is true in one sense and not in another.

I do not know how much stock prices fell in percentage terms in 1929. My recollection is that the number is somewhere in the neighborhood of 89 percent. Let's use that as our number for purposes of discussion.

Are we likely to see an 89 percent price drop? I think that it is fair to say that this is exceedingly unlikely.

Does it follow that it is exceedingly unlikely that we will see a returns sequence as bad as the one that retirees who retired in 1929 experienced? IT DOES NOT.

There is more to a returns sequence than the magnitude of the initial price drop. A fall in prices of 89 percent means little if two months later prices have recovered and from that point remain at their former level or go higher. It would be far worse to have a 50 percent price drop that remained in place for a lengthy period of time.

The historical data DOES NOT show the 30-year historical sequence that began in 1929 to be a horribly bad returns sequence. My sense of things is that it was not a good sequence. But it was not the worst sequence that we have seen. My understanding of things is that there are a good number of worse sequences in the historical record.

The 1929 scenario was a particularly bad one not because the returns sequence was so bad but because the VALUATION LEVEL in 1929 was so bad. I believe that that valuation level might have been the worst on record prior to the late 1990s. If not the worst, it was one of the worst.

The 89 percent drop makes an impression because the experience of such a drop is a dramatic one. But the size of the greatest price drop that one experiences is not really of overriding significance to one's hopes of having one's portfolio survive. What matters is whether the price drop remains in place long enough to cause you to sell a lot of stocks when they are at low price levels. Sell stocks to cover your living expenses, and you do great long-term damage to your hopes of a successful long-term retirement.

The 1929 scenario with its dramatic price drop is not even the worst returns sequences that we have experienced in terms of long-term survivability results. That distinction belongs to the returns sequence that began in 1965 or 1966 (I am not sure which it was). When intercst says that the number is 4 percent, he is NOT taking that number from the 1929 sequence. He is taking it from a sequence that began in the mid-60s.

People should stop a moment and ponder what this means. It means that, when people say that we need to experience a Depression with a capital D for a high-stock allocation to fail, they are revealing that they are uninformed about what the historical data says. Did we experience a Depression in the mid-60s? We did not. What we experienced was high stock valuations. High stock valuation are what cause busted retirements, not Depressions.

High stock valuations ALWAYS damage retiree hopes of enjoying safe retirements. JWR1945 posted a table where he compared the PE10 numbers that applied at the beginning of each 30-year sequence with the historical surviving withdrawal rates that applied for those sequences. The correlation between high PE10 numbers and low HSWRs was clear. When the valuation level goes up, the SWR goes down. Always. No exceptions.

The reason why we do not have HSWRs in the historical record of less than 4 percent is that we have such little experience with extremely high stock valuations. The reality is that we have ZERO experience with valuations levels as high as those we reached in the late 1990s. We entered uncharted waters at that time. The reality is that there are not 130 data points supporting the intercst SWR claims. There are precisely ZERO.

If you want to be lax about this aspect of things and permit consideration of valuation levels that were extremely high but not as high as those we reached in the late 1990s, then we have TWO data points--the data points for 1929 and for the year in the mid 60s that generated the famous 4 percent number. TWO DATA POINTS ARE NOT ENOUGH TO SUPPORT CLAIMS OF "100 PERCENT SAFETY." Not even close.

To determine what is safe, you must have more data points than two. But none of the other years had valuations even remotely in the neighborhood of the valuation levels we entered in recent years, so those data points are irrelevant to the question of what withdrawal rate is safe today. What to do?

What you must do is to MAKE AN ADJUSTMENT FOR CHANGES IN VALUATION LEVELS. When you make an adjustment, you make those other data points relevant to the question you are trying to examine--What withdrawal rate is safe today? Do that, and you can calculate an analytically valid SWR.

People need to get out of the habit of thinking that 1929 was the beginning of a particularly bad returns sequence. It was not the 89 percent drop in prices that caused retirements beginning in 1929 to fail. It was not the returns sequence that followed from that price drop. IT WAS THE VALUATION LEVEL THAT APPLIED IN 1929 THAT CAUSED RETIREMENTS BEGINNING AT THAT TIME TO FAIL.

High valuation levels are death to high-stock allocation retirements. The historical data is clear on this point. We have two cases in which extreme valuation levels applied--1929 and the mid-60s. IN BOTH CASES A 4 PERCENT WITHDRAWAL BARELY WORKED. IN BOTH CASES, RETIREES USING A 4 PERCENT TAKE-OUT WERE ALL BUT WIPED OUT IN LESS THAN 30 YEARS.

There is no reason to believe that the third time that retirees take a chance on a high-risk 4 percent take-out from similar valuation levels that this take-out number will work out again. The historical data is saying that there is a chance that this take-out will work at those valuation levels, but that there is also a good chance that it will not.

Go to even higher valuation levels, and the odds of that take-out surviving drop lower and lower and lower. In 2000, the historical data says that the SWR for an 80 percent S&P portfolio was 1.6 percent.

Are year 2000 retirees going to experience an 89 percent drop in stock prices? I seriously doubt it. Are year 2000 retirees with high S&P stock allocations who adopted a plan calling for a 4 percent take-out going to live to regret doing so? The historical data says that the odds are strong that they will. The Unsafe Withdrawal Rate in January 2000 (that's the withdrawal rate that has a less than 5 percent chance of working) was 4.8. Any retiree who placed his confidence in the REHP study in planning a retirement that began in the year 2000 or thereabouts has placed himself at great risk of experiencing severe life setbacks in years to come.

The time for such retirees to begin taking steps to address the damage that has already been done is now, before prices drop any further. After the next big price drop, it may be too late.
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Post by hocus2004 »

"When you see less than 100% survivability with a 100% TIPS portfolio for 30 years, you know that something is wrong. "

The "something" that is wrong in this particular case is the lack of personal integiry of the individual at the center of this, the individual who posts to our various Retire Early/FIRE/Passion Saving boards under the screen-name "intercst." This individual has demonstrated on countless occasions during the SWR discussions that he lacks the personal integrity required of anyone granted posting privileges in a comnmunity of people sharing ideas on how to win financial freedom early in life.

It is obvious that many community members understand that there are grave flaws in the methodology of the REHP study. There are many differences on the question of what is the right way to calculate SWRs. There are not many who share intercst's publicly stated view that anyone who considered going with an S&P allocation of less than 74 percent at the top of the bubble was suffering from "mental illness." There are not too many who are williing to challenge him in a direct way when he puts forward such nonsense, to be sure. But you don't need to be especially skilled in reading between the lines to pick up that the majority of community members wishes that he would stop spouting nonsense.

The problem that intercst faces is that there is no rational case that can be made for his SWR claims. If he were to post in a rational manner, posters with views contary to his nonsense dogmas would prevail in the court of public opinion. He likes the warm feeling he gets when yes men and yes women tell him that he "invented" the concept of early retirement (is there any community member who ever had to work under a worse boss than intercst?). So reasoned and informed posting is out for intercst. It always will be. Nothing short of a personality transplant can ever change that.

The "solution" to the intercst problem that many community members prefer is that we all pretend that we don't know that intercst is spouting nonsense, that we treat him like the odd uncle who has lost it but for whom we still feel enough affection that we don't want to contradict him in public. This approach might possibly work if intercst were willing to tolerate other community members having discussions among themselves on the SWR issue without him participating. I suggested a long, long time ago that intercst put me in his penalty-box and thereby permit the 100-plus Motley Fool community members to have the SWR discussions they expressed a desire to have at that board. He was not willing to accept this arrangement.

So the idea that we can finesse this issue through some sort of diplomatic "ignore intercst" strategy does not fly. If it is to fly, you need to get intercst's buy-in. Without his buy-in, this idea is a non-starter. We all need to come to terms with that reality, and move forward.

If we don't accept that reality, we are forced into positions where it is our own integrity that is compromised. Raddr says that the intercst SWR claims are "bogus." So why does he engage in smear campagins against anyone who posts in an honest and informed way on the SWR question? Because he is a fan of the "ignore intercst's nonsense" strategy, and he believes that a little bit of deception is justified in pursuing that approach.

A little bit of deception becomes over time a lot of bit of deception. If there is nothing else we should have learned from this thing, we should have learned this. It is deception that got us into this mess. It is not going to be deception that is going to get us out. We get out by rejecting deception. Diplomacy, that's good. Charity, that's good. Respect for opposing viewpoints, that's good. Deception, that's bad. That's the way it is.

Intercst cannot help but post deceptively. He has been doing it for a long time, even before May 13, 2002. The question was always, Is it more prudent to confront him with his deceptions or to focus on the good things about the board experience and build on those? In my judgment, it was best to ignore the deception until February 2002, when intercst led the Smear Campaign that drove Wanderer off of the Motley Fool board. At that point, the effects of the deception had grown too great for a responsible poster with a concern for the future of the board to ignore them. The poison had become too strong, the ugliness had become too ever-present.

The call that I made on May 13, 2002, was a judgment call. I have no problem if someone wants to say, "you were wrong, hocus, you should have come forward long before May 13, 2002," or "you were wrong, hocus, things were not all so bad on May 13, 2002, you should have waited a bit longer." There can be honest differences of opinion on judgment calls. There cannot be honest differences of opinion today, in my view. Things have gone too far at this point for any reasonable person to argue that today the poison is not too strong, that today the ugliness is not too ever-present. If I made a bad call on May 13, 2002, that call is surely the right one today. So the rightness or wrongness of the earlier call doesn't matter any longer. We need to deal with the circumstances that exist today. Today the circumstances require removal of this abusive poster from all of the various FIRE/Retire Early./ Passionn Saving posting communities.

I've put forward just one demonstration of why this is so. In the corner in which he has painted himself, intercst is not able to post honestly on how TIPS work. If he were to acknowledge that TIPS provide for an inflation adjustment, he would need to ackowledge that the TIPS that I own that pay a 3.5 percent real return provide a 30-year SWR of far in excess of 4 percent. For obvious reasons, he does not want to acknowledge this. So his regular practice is to engage in delieberate deception as to how TIPS work. He regularly describes TIPS as a "fixed-income" investment, one with no inflation adjustment. It is false. He knows it is false (he has described how TIPS work correctly in earlier posts and in articles at his web site). He posts falsely and the board community tolerates it.

The "tolerates it" part comes with this "ignore the intercst nonsense" strategy. What people discover over and over again is that the strategy demands more than just the tolerance of nonsense. It oftens requires PARTICIPATION in the dishonesty. Look at the "Yahoo Finance Quiz" on the Early Retirement Forum if you want to see how this plays out in real time. The thread was going bad for intercst because other community members were engaged in honest and informed posting on the SWR question. Intercst stepped in with some deceptions to shut down the discussions. What happened? Did the posters following the "ignore the intercst nonsense" strategy ignore me when I pointed out the obvious deceptions he was posting?

They did not. These posters saw that it would be a bad thing for intercst to be exposed as having engaged in deliberate deception. So they engaged in deliberate deceptions of their own to "respond" to my statements of the obvious reality that TIPS provide an inflation adjustment. "TH" discussed this thread at this site. His posts at the Early Retirement Forum suggested that he did not understand TIPS well enough to know that they contain an inflation adjustmnet. I asked him how he felt to have subsequently learned that intercst had been tricking him on this point. His response was to say that he knew all along that intercst was posting nonsense, that he of course knew how TIPS worked, and that it was OK that he pretended otherwise because all other community members should know enough about TIPS not to be deceived by the intercst trickery. In other words, it is up to the individual community member to see through the intercst deceptions. If they don't, they DESERVE to suffer busted retirements.

I don't buy it. Not all community members know how TIPS work. Certainly not all community members know how SWRs work. When we engage in deception on these issues, we undermine confidence in all that is posted on these boards. How do you think newcomers react when they learn that there are all sorts of deliberate deceptions being posted at our boards because we don't want to point out that the guy who started the first board lacks the personal integrity required to acknowledge that he got a number wrong in a study?

A lot of them walk away. A lot of them never venture forward with their first post. The community's participation in deliberate deception sends a signal re what we are all about as a posting community. It says that we are not really about helping people win financial freedom early in life. What we are really about is building up further intercst's already far-too-inflated ego. It says, as one community member once put it, that we are a "cult of personality," not a group of people interested in learning how to retire early.

We need to stop sending those signals. We need to get back to doing what we once did so well, help ourselves and others learn how to win financial freedom early in life. That is what we are really all about. I know. I was here from the beginning. That is what most of us want, and we need to see some responsible community members step forward and do what needs to be done so that most of us can get what most of us want.

Intercst cannot change. Not on a discussion board, It may be that he can work our whatever issues it is that need to be worked out in the privacy of his personal life. That is where this stuff should be worked out, not on a public discussion board. There are a good number who think that they are acting as friends of intercst by covering up his deceptions. I say they are not. I say that a true friend would want him to work out his issues in a way that preserves the human dignity that he possesses as a living creature created by a good and loving God. The endless continuation of this ugliness is wrong. I should not have to report to the community ten times that intercst has engaged in deliberate deception, much less 100 times. Once or twice should be enough. When a poster is caught engaging in deliberate deception, assurance should be sought that this will never happen again. If such assurance are not quickly forthcoming, the individual needs to make other plans. That's the way it is, and there is nothing that I can do or that anyone else can do in a long-term sense to change it.

Intercst has to go. We all know that. Given that he has to go, it is better that he go now. That's reality.

I am not the only poster that intercst had smeared. He has smeared Wanderer. He has smeared raddr. He has smeared FoolMeOnce. He has smeared JWR1945. He has smeared BenSolar. He has smeared--well, the list goes on and on. If someone posts in an honest and informed manner on the topic of early retirement on a board at which intercst participates, he is going to be smeared. That's reality. That's why you don't have posters aiming to generate on-topic threads at the REHP board anymore. The price of doing so successfully is too high.

Intercst is not deceptive only on the question of SWRs. He is deceptive on the merits of real estate. He is deceptive on whether people who elect to do something with their retirements other than state blankly at the television screen for the next 50 years are truly "retired" or not. He is deceptive on a host of other issues, and that is never going to change (at least not without some things happening that properly should be happening at some place other than a public discussion board).

We are a people that wants to learn what it takes to retire early. That is a wonderful thing to want. We should not be ashamed of wanting it. Intercst is the obstacle that stands in our way of making progress toward accomplishing our goals. We should remove the obstacle. We should feel no shame or fear or reluctance to do so. It is the right thing to do.

We should get back to where we once belonged. We should get back to having fun again. We are a good people. We deserve it.
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Post by hocus2004 »

"TIPS and/or ibonds at 0% interest guarantee that you can withdraw 3.33% of the initial balance each year for 30 years. At an interest rate of 1%, they guarantee that you can withdraw 3.87% annually for 30 years. "

There were two posts put up in recent days at the Early Retirement Forum that, considered together, show how important a point you are making here.

Here are some words that appeared in a thread called "Reasonable Probability?"

"I plan for a 0% after tax real return during retirement.

"so (spending + med ins) x joint life expectancy = portfolio needed

"portfolio divided by initial life expectancy for rate
age 62 1/62 = 3.3% annual draw

"nominal returns just offset inflation

"cheesy, but fairly consistent with past world averages and current U.S valuations. "

There was another post in a thread stated by Cut-Throat that dealt with the question of how valuation-informed investors know when to increase their equity positions in which the poster said something to the effect of "I don't have a choice but to go with equities, I can't achieve my goals any other way."

Both of these posters are smart and conservative investors. Both would gain a lot by developing a stronger understanding of what the historical data reveals re SWRs.

The reality is that a 3.3 percent take-out is not always safe for someone holding an 80 percent S&P portfolio. The SWR for that allocation was 1.6 percent in 2000. It is 2.5 percent today.

The reality is that TIPS in recent years have offered an attractive alternative to stocks for those who understand that owning only stocks does not always offer a compelling value proposition for aspiring early retirees. TIPS were paying a 4.1 percent real return not too long ago. That translates into an SWR of 5.85 percent.

Had we gained our freedom to post in an honest and informed way on SWRs back in May 1999, when the first board was formed, all community members would have been aware of that 5.85 percent SWR when it was available. The only reason why we lost out on that golden opportunity is that intercst started the first board and he prohibited honest and informed posting on the SWR question.

Intercst's formation of the first board was an unfortunate historical reality, nothing more. I wanted to share what I knew about SWRs at the time. Very much. I tried on several occasions. This can be checked by making reference to the Post Archives. Intercst made clear that any poster who posted honestly on this question was going to have hell to pay. Did that not do great damage to the many community members who like the two above are somewhat aware that stocks are not in all circumstances the best bet and who are looking for realistic alternatives that can get them to realization of their Retire Early dreams?

The wonder of discussion boards is the way in which they permit a diversity of viewpoints to be heard and considered and compared. You don't get a diversity of viewpoints on a board at which intercst retains posting privileges. You get the iteration of the same old tied dogmas over and over agaiin. The two community members who put up the posts referenced above deserve better. We all do.
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Post by JWR1945 »

Just in case someone thinks that the original poster was off base when he wrote:
"portfolio divided by initial life expectancy for rate
age 62 1/62 = 3.3% annual draw..
He corrected this later to 1/29 = 3.3%. [That is, he uses 29 years in his plans based upon his age of 62.]

Have fun.

John R.
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Post by unclemick »

Why did the calculator come up with a number less than 100% - if simple arithmetic gives 3.3% for thirty years with TIPs?
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Post by JWR1945 »

unclemick wrote:Why did the calculator come up with a number less than 100% - if simple arithmetic gives 3.3% for thirty years with TIPs?
Standard engineering practice includes sanity checks on calculations. There were no such checks.

I do not know the details of the models, particularly that of the actuaries.

I have to speculate.

When I read of partial differential equations, I immediately think of direct mathematical calculations involving the probability distributions instead of the random sampling associated with a Monte Carlo approach. Buried within such a model are assumptions about probability distributions. Equations replace the sampling, but they do not replace these assumptions.

Gummy has done some outstanding work along these lines. In case you are not aware, he has derived a closed form equation for the current balance. Using that equation, he has come up with a closed form solution when the underlying distribution is lognormal. A lognormal distribution means that percentage gains and losses occur according to the standard, bell-shaped Gaussian probability curve (i.e., the normal distribution). Gummy showed that the probability distribution of his magic sum (i.e., gMS, the gummy Magic Sum) and, therefore, of Surviving Withdrawal Rates is lognormal as well. He was even able to come up with closed form solutions for the mean and variance of the Surviving Withdrawal Rates. Gummy proved a couple impressive theorems in the process. It allows direct calculation of Surviving Withdrawal Rates.

Gummy's work is impressive. But it is necessarily limited by his assumptions. We know, for example, that stock returns are neither normal nor lognormal. (Crestmont has shown that stock returns can be separated reasonably well into two lognormal distributions, one for bull markets and the other for bear markets.) Nor do Gummy's equations include the effects of reversion to the mean. That is, he assumes that variances fall off at the standard 1/N rate, where N is the number of years. In fact, they fall faster.

My guess is that the actuaries assumed an unrealistic probability distribution for TIPS. Since the errors are conservative from an insurance company's point of view, I doubt that they consider them to be critically important.

All of our calculators place their greatest emphasis on the stock market, not on bonds. We always have to be very careful when we look at the fixed income (including variable nominal income/fixed real income) instruments. Both FIRECalc and the Retire Early Safe Withdrawal Calculator treat all such instruments as one-year trading vehicles without any gains or losses or fees from one year to the next. This is OK if your primary concern is with stocks. This is not OK if you wish to lock-in a favorable interest rate.

There is an additional issue with both FIRECalc and the Retire Early Safe Withdrawal Calculator that cannot be fixed. There is a timing mismatch between TIPS coupons and inflation. In the real world, a retiree would adjust his spending to match the interest received. They would behave similar to how workers adjust their spending to match cost-of-living-adjustments. Such adjustments are based on the previous year's inflation, which is after the inflation has already occurred.

The result is a spread in the calculator outputs. The calculators do not show that TIPS at 0% interest provide 3.33% of the initial balance for 30 years. They show a spread because inflation varies from one year to the next. [Rebalancing is what prevents the calculators from fixing this timing mismatch.]

An engineer should know that something is wrong when withdrawal rates of 2% and 3% with TIPS provide anything less than 100% safety over 30 years. At a minimum, we would expect an engineer to address such an anomaly even if he were unable to identify its cause. Instead, such answers were treated as typical calculations.

Have fun.

John R.
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Post by ben »

Eh...Hocus? Was THAT your entire book? :lol: :lol:
happy holidays guys! Cheers, Ben
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Post by unclemick »

JWR

Let's push timing mismatch a little more. Take a balanced fund - presumably rebalancing fairly continuously. What can we surmise if the take out is the SEC yield or lower versus a higher take out where I'm presumably eating some principle periodically. As an aside - aren't 'Tax Managed balanced funds' playing some games along these lines on the bond side as well as trying to match gains/losses on the stock side.

Hmmm - can I surmise that someone like Vanguard is smart enough to recognize some of these effects versus a 'fixed retirement calculator'.

The Target Retirement Series comes to mind - where the end of the sliding asset mix has 25% Inflation Protected securities.
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Post by ben »

Unclemick; I really like the idea of living of the dividends and interest of the portfolio. I believe JWR does too. Not only will the income be better protected but one also avoids selling in bad times. Finaly it has a feel-good factor that makes it easier to actually pull the string and go for FIRE in the first place! :D Cheers!
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Post by hocus2004 »

"Was THAT your entire book?"

No, the book is different. The book is "intercst is the greatest" on one page, and then "I really can't tell you enough how much I learned from this intercst guy" on the next, and then "you know, this intercst guy pretty much INVENTED the concept of early retirement" on the next, and so on.

I'm exaggerating, of course. But I do indeed have some nice things to say about our old friend intercst in the book. I finally gave up on the idea of having his name on one of the blurbs on the back cover (Dory36 was kind enough to help me out by filling up that blank space). I have always believed that intercst's name belonged there because it was his warm welcome to the Motley Fool board that gave me the confidence to begin posting regularly to discussion boards. He did end up getting the first mention on the Acknowledgmens page for his founding of the board that at one time was the most thought-provoking on the face of the internet. There's other stuff about intercst too, in Chapter Three ("Saving Without Sacrifice"). None of the mentions of intercst contain any negative references. This book does not deal with investing or SWRs.

But just wait until the second book! That's a joke. There's some truth in it, though. I have learned a lot from the Great SWR Debate, and I hope to learn more as we head into the final rounds of the third year of discussions and prepare for the beginning of Year Four. I haven't written any of the text of the second book but I have an outline, and it's development of the outline that is the hardest part for me. So my sense of things is that these boards are going to come through for me a second time.

People very much underrate the value of discussion boards. I believe that this is the biggest difference between me and a good number of others. Boards are not perfect. There are lots of flaws in them, as there are in everything else down here in this valley of tears. But boards can help you develop your thinking on questions you are exploring in ways that books and articles and radio shows cannot. The big plus of boards is the diversity of viewpoints that appear at them. With a book or magazine article, you only get one person's take. With a healthy board, that is not so. You get a different take for every single person who participates. That's a big thing. Reality is often a mixture of all the different takes. So getting lots of takes on a topic brings you closer to reality, which is where you want to be.

The help I got from the Motley Fool board community made my first book ten times what it would have been without that help. I will always feel a deep gratitude to every member of that board community, and that of course includes the one who founded it. That said, when I am forced to make a choice between the one who founded it and the community as a whole, my loyalty is with the community as a whole. I believe that in days to come a good number of fellow community members will be seeing that I chose the right way to go on that one.

I had some big concerns re length of the book. I started out with enough material for three average-length books, and I knew that many potential readers were not going to buy a 240,000-word book. One thing I did was to take out some chapters that I really like that I will end up putting out etiher as Research Reports or as parts of later books. I took out the chapter on investing, I took out a chapter that examined my family's budget on a line-by-line basis, and I took out a chapter titled "The Little Black Book of Saving Secrets," which is the best stuff from the 40 (or is it supposed to be 30?) binders.

Taking out those three chapters got the length of the version that I sent to JWR1945 last December down to 103,000 words. I had three editors look at the text this year, and with their help I got the final version's length down to a little under 74,000 words (not counting from and back matter, like the Glossary and Recommended Reading section). I think that works. Anything under 60,000 words looks suspicious, like you don't really have enough material for a book and are trying to pull something. Anything above 80,000 words makes the potential reader wonder whether he is really going to be able to find time to read this thing. So I am happy with how things turned out.

I received the layout of the pages about two weeks ago and have submitted changes, and a few days ago finished the Index (which can't be done until you know the page numbers of the printed version). All that is left is to design the cover and to have the thing printed. I'll begin working with a cover designer next week. I have a few ideas, and she has a few ideas, but we don't know for sure today which idea we like best. She will probably do a few mock-ups and we will see what seems to work. I don't know how long it takes to get one of these things printed. If it is anything at all like every other stage of the process, it will take a lot longer than I expected going in.

I have not made a final decision, but I am leaning strongly toward doing something that I have never seen done before in my promotion of the book. I am thinking of having the first printing serve as an Advance Copy version for the purpose of building enthusiasm for the book and gaining some experience with the various publicity options. If I go with this approach, I won't be offering the book in bookstores or even on Amazon.com, only at my web site. It will obviously sell a lot fewer copies in the short term that way. My thought, though, is that the process of selling it at the web site will help me find out what aspects of the book turn people on. Then, when I begin selling "to the trade," I will have reviews from people who have already made use of the ideas in the book and informed ideas as to how to market it. Again, I haven't made a final decision on this. I need to decide before we finish the cover because if I am going to sell in bookstores I need to put a bar code with a book identification number on it, and I won't do that if I am only gong to be selling through the web site. I will of course down the road be selling at Amazon.com and through bookstores. The idea is just to hold off on that for a year or so so that when the book hits the trade it has a good bit of publicity steam behind it.

Developing, writing, and producing the book has been a big adventure. I am extremely pleased with how it turned out. I wrote a bold book, and I was concerned at times that I might not be able to fully support all of the bold claims that I make in it. I believe that I pulled it off. Whether the book succeeds or fails, it will be succeeding of failing on my terms. This is exactly the book that I intended to write when NowInMaui put the idea in my head with a post he put to the Motley Fool board back in March 2000.

I think of this book as "Our Book." I get to keep all of the royalties (I don't want anyone to get any funny ideas just because I get a little effusive in my expressions of love for the community from time to time!). But I honestly could not have done it without all of you. I could have written a book. But it would not at all be the book that I will be offering for sale at my web site in a few months time. This book has a life to it that just wouldn't be there if it were the product of one guy sitting in a room entering words on a computer screen for 12 months. "Passion Saving" is alive because it is rooted in a community's understanding of the importance of financial freedom, how it is won, and what it can do for the middle-class worker. I see myself as a translator, someone who takes ideas being developed in our community and puts them into language that makes sense to the outside world and thereby makes both the outside world AND our community a good bit richer (one hopes!). I churn out the words, but the community churns out the discussions that give the words meaning and relevance and context and color and shape and direction.

Thanks to all for another year of insights leading us down the road to that magical kingdom known as Financial Freedom World!
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