War games - 2% vs 4% today

Research on Safe Withdrawal Rates

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ben
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Post by ben »

Hi mick; no I have not found an DVY equivalent abroad but I guess a JWR style selection of 5-10 int. high/stable dividend growers could do the job too.
Personally I would prefer both as one would be very dependent on the value of diversification (the one stock crashing/cutting dividends/going bankrupt) in the situation one was living of dividend stream only. Same reason with gov. bonds that pay so much less but people still buy them for the safety/stability/less volatility. Cheers, Ben
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 hocus2004 »

by holding balanced index - I'm buying when the momentum takes the market down and selling into a rising market - to hold a fixed stock/bond ratio.

The work done at this board puts into question the wisdom of aiming o hold a fixed stock/bond ratio. Personally, I favor a variable stock/bond ratio, but one that in ordinary circumstances always calls for some ownership of both investment classes (some other investment class that counters the volatility of stocks could be substituted for bonds, depending on the particular ccircumstanes and investor preferences that apply) and one that is implemented through gradual and non-dramatic shifts in allocation percentages. That said, I believe that it is possible to make a reasonable case for a fixed ratio for investors who are in the accumulation stage.

For those beginning their retirements, two points need to be stressed. One, if you go with a fixed ratio, the percentage of stocks held needs to be a good bit less than 74 percent or you are opening yourself up to a devastating blow in the event that stock prices take a tumble in the early years of your retirement. Two, it is not reasonable for you to expect the same sort of performance from stocks from a retirement beginning at times of high valuation as you could for a retirement beginning at a time of moderate or low valuation; if you insist on going with a high-percentage stock allocation as part of a fixed-ratio approach, you are going to need to save a lot more than most others to be able to finance a reasonably safe retirement.

Chickenheartedness keeps me 75% in balanced index - EVEN THOUGH a dividend strategy looks more attractive at todays valuations.

If you agree that a dividends strategy posseses more intellectual appeal, then it is indeed some emotional factor that is causing you to feel reluctance to move away from the 75 percent balanced index strategy. I'm not sure that I would refer to this factor as "chickenheartedness." The greater risk does not appear to be with the dividends strategy; the greater risk appears to be with the 75 percent balanced index strategy. It seems to me that what you are saying is that you have heard so many people recommend strategies along the lines of the 75 percent balanced income strategy that you have been cowed into sticking with it against your better judgment. Perhaps the thing holding you back is not "chickenheartedness" but the reality that you have not yet had enough time to explore the new approach to feel truly comfortable with it. I don't sense a lack of willingness to engage in independent thinking.

My thought is that the thing to do might be to take small steps, and then revisit the question from time to time. I believe that in time you may come to feel that the truly "chickenhearted" thing to do is to move away from the 75 percent balanced index strategy a bit more than you already have. The truly chickenhearted (that's me!) don't want to be facing down the sorts of circumstances that the historical data indicates will be coming our way in the not too distant future. I do believe that I am chickenhearted myself in this respect. I view the market as having the power of a force of nature.I see it as something like a giant wave (I am here using the wave concept in a different sense than the sense it which I often make reference to it) that can do me a good bit of good. I certainly do not want to swear off waves. But I don't intend to mess around with them too much either. I try to figure out which way the wave wants to go, and then make my own plans accordingly.

I think of myself as a bit of a pirate all the same. I don't think it is a complete contradiction for a self-proclaimed pirate to acknowledge being chickenhearted about the idea of sailing dead straight ahead into a giant wave. This is where the Clint Eastwood line comes up. I like to think of myself as a pirate who knows his limitations. I am a pirate who behaves in a chickenhearted manner from time to time because that is a necessary thing for me to do if I want to continue engaging in pirate-type activities for some time to come.

There is one last point that I think needs to be stressed in discussions of your personal circumstances, UncleMick. You are far enough into your retirement that the sorts of risks generally being focused on at this board don't apply to you. I personally think you would be better off moving a little more in the direction of high dividends and away from 75 percent balanced index funds, but I don't see it as a life-and-death thing for you either way. It's the retirement that is in its early years that is being exposed to huge risks by going with imprudently high stock allocations at such extreme valuation levels. You have already reaped many of the benefits of a long bull market.

The worst that can happen to you now is that you will be giving up some of the gains you accumulated in earlier years. That's not a great thing to have happen. But I don't see that there is anywhere near the cause for alarm in your case as there is in the case of aspiring early retirees who come to these boards hoping to see some reasoned advice and who are told that it is "100 percent safe" to go with a 74 percent S&P stock allocation for a retirement beginning today. It is the person in that sort of circumstance that I am most trying to reach with the words that I put to the various boards. My most important goal is to get word to community members in those sorts of circumstances that "It Just Ain't So!"
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Post by hocus2004 »

I have not found an DVY equivalent abroad but I guess a JWR style selection of 5-10 int. high/stable dividend growers could do the job too.

There are all sorts of thing that can do the job, in my view. There are all sorts of varieties of life goals and financial circumstances, and so there is never going to be One Right Solution. Different types of investors should be taking different sorts of paths to realization of their life goals.

Our key finding is that selling stocks in the early years of a retirement is like going TILT in a game of pinball. It is the one thing you most want to avoid. Get a ball stuck in a trap and you still get to put another ball in play and turn things around. Fail to hit the flipper at the right moment, and it's the same. Go TILT and the game is over and you lose (if I recall correctly how pinball works, it's been some time). Some asipring Pinball Wiazards make it a practice never to push the table even a little because to their minds it just isn't worth the risk of going TILT. Some others figure out what sorts of pushes they can get away with and which sort they can't. There are always going to be different strategies to pinball, and there are always going to be different strategies to investing for early retirement too. There is always going to be more than one way to skin a cat.

That doesn't mean that all possible ways are reasonable ways. The REHP way is NOT a reasonable way. That way courts danger in an entirely unecessary and imprudent way. The REHP way is to put three-quarters of your life savings in a single asset class (an S&P index), an asset class that happens to be one of the most overpriced available for purchase on This Magnificant Planet today. A good idea? No. A very, very, very bad idea.

There will come a day when people will look back at the investing advice that was offered at our various Retire Early/FIRE boards in the past five years and will come to the conclusion that our real goal was to cause as many retirements to go tilt as possible. We all come to these places with lots of smarts and lots of experience and lots of creativity and, when it comes to non-investing questions, we demonstrate that on a daily basis. When it comes to investing, however, we all play dumb, we all act as if we can't figure out whether the REHP study makes sense or not. We throw up our hands and say "Oh, maybe it's sort-of kind-of a not-terrible rule of thumb, it only misses the mark of what the historical data says by two percentage points or so."

Yeah, right. Two percentage points is HUGE! Give up two percentage points, and you run a serious risk of going TILT. There are lots of ways to retire early. One way that we now know is very much likely NOT to work is the REHP strategy. So we allow discussion of that approach and no others at our boards. Make sense? No, not make sense. Not to this boy.

If you invest 50 percent of your assets in TIPS, you have already done a great deal to address the risk question. Can you still get hurt by a downturn in the prices of the assets that make up the other half of your portfolio? Sure. But with 50 percent of your assets in a class that is guaranteed to hold its value, you have some running room to deal with any problems that come up. If worst comes to worst, you can sell some of the TIPS to pay your costs of living rather than selling some of the other asset classes. If things don't get too bad and if you are able to cut costs a bit, you just might get away with it. Then you will still get to reap the long-term benefits of the growth-oriented asset classes. The prices that went down will eventually go back up. You might need the nerves of a pirate to pull it off, but a good number of us at these boards do indeed possess the nerves of a pirate. So it is a strategy that should at least be open to discussion pro and con.

It annoys me when people put forward the suggestion that I am anti-risk. This is directly counter to the reality. What I am against is non-calculated risk. I think that people should take risks to make their lives better, but that they need to do so with their eyes wide open, they need to take risks that make sense for them. What I don't like about the REHP study is that it deceives people about risk, it purports to help people develop strategies that possess limited risk (actually zero risk is the absurd claim put forward) when in reality the strategy being put forward is one of the highest risk strategies that it is possible for the human mind to conceive. There were smart people in our community back in the year 2000 deciding to go with 5 percent take-outs from 74 percent S&P portfolios because of the assurances they picked up from reading the REHP study. Those plans had less than a 5 percent chance of surviving 30 years, according to the historical data. Those people are fellow pirates and we should all be concerned about the many ways in which they were misled at these boards into making decisions likely to cause them some severe life setbacks in days to come.

Something that I see a lot on the boards today is that people have come to referring to their Personal Withdrawal Rates (PWRs) as Safe Withdrawal Rates (SWRs). They will say something like "I will be taking a 4 percent SWR and blah, blah, blah." The take-out number is a personal choice. You can take out 3 percent, 4 percent, 5 percent, 10 percent, anything you choose. Taking it doesn't make it safe, however. Whether it is safe or not depends on what the historical data says about it. The 4 percent plan advocated by intercst calls for a 4 percent PWR, that's fair to say. It sure doesn't call for a 4 percent SWR, however. The REHP study calls for a high-risk 4 percent take-out. It CALLS this take out "100 percent safe" but that part of the study is a lie. Intercst knows perfectly well that the historical data offers no support for the "100 percent safe" claim, and he has elected to lie about what the data says because he is not man enough to acknowledge having gotten the number wrong when he first posted the REHP study to the internet.

That's sad and pathetic, my friends. It's sad and pathetic. If that were all it was, we might be able to let it pass. But it's not only sad and pathetic. It's dangerous too. We advise people on money matters at these boards. If we have a thread where people are talking about old Star Trek episodes, and someone gets something mixed up, it's no biggie. People aren't going to suffer severe life setbacks because someone gave the wrong name for a character in an old Star Trek episode. But when advice on money matters is being put forward, there are minimal standards of veracity that apply. Intercst doesn't meet those standards. He doesn't come close. He falls short by a country mile.

THAT'S why he has to go. It's not because I have some sort of personal grudge against him, or because JWR1945 has some sort of personal grudge against him, or because Wanderer has some sort of personal grudge against him, or because FMO has some sort of personal grudge against him, or because raddr has some sort of personal grudge against him, or because William Bernstein has some sort of personal grudge against him, or any other such nonsense. It is because he doesn't meet the minimal standards that we require of anyone who wants to participate in the discussions held at our various posting communities.

That ain't subjective personal opinion. That's demonstrated objective fact. We need to come to terms with that fact and take the steps that necessarily follow from recognition of it. That's my take.
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Post by unclemick »

Hocus

You've hit the nail on the head. I enjoyed being a 'cheap SOB' (er frugal) so much the first eleven years in ER that there is a reluctance to change - even though we're currently underspending our income and not yet tapping IRA's.

Not ready to give up 'old school' - two philosophies competing in my head - the pie chart wherein you lower the % stocks as you age(market is irrelavant) to damp SD(volatility) in case you must spend down principle; and Ben Graham's adjust your stock % according to 'Mr Market's' price/valuation.

I'm toying with both - consolidating tax deferred into Vanguard Target Retirement Series at a lower than I would normally hold stock % - taking out while I'm in a lower tax bracket(9 years to RMD) and applying any excess to dividend stocks. A series of mini Roth is a third competing thought.

Last thing - to repeat - Mr Market can really move dividend stocks - so have your emotions steeled in advance to focus on the dividend stream.
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Post by unclemick »

One more thing - for those 5% cats with nerves of steel:

Bogle Financial Markets Research Center under archived speeches - The Investment Dilemma of The Philanthropic Investor( October 31, 2002).

Hint - it's 60/40 if you plan to live forever and take out 5%. I like Bogle but trusting my nerves???
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Post by JWR1945 »

In October 2002, the S&P500 index had fallen to 854.63 and P/E10 was 21.95.

Valuations were not good enough to support "60/40 if you plan to live forever and take out 5%." But they were a lot more attractive than they are today.

Have fun.

John R.
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Post by unclemick »

Heh,heh,heh - am I sneaky or what - if you follow Bogle's method of hand grenade arithmatic - you can see some of the same valuation conclusions/difficulties identified by SWR Research. The 5% as defined by the IRS to stay 'philanthropic' - i.e. not taxed - is a tough bogey in today's market.

Bogle stays on message - cut costs, balanced index, stay the course and don't go investing in 'strange places'.

A little friendly data mining - look at his decade forward calc(stocks) from 1999 - 1.8(did anyone say 2% hand grenade wise?) vs his bottom calc ala 2002 - 9% and that's with inflation included. Whether valuation or timing - the distribution phase is - er interesting.
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500,000 retiree

Post by martha »

Going a few steps back, UncleMick mentioned real estate as a possibility for the 500,000 retiree. I have a timely example. One year ago we sold a rental property for 270,000. We had bought it five years earlier for 110,000.

The year of the sale, the gross revenues were 33622. Expenses were 13,249. There was no mortgage interest. Depreciation was 5336. Net income after depreciation was 15,037. Cash flow was 20,373.

In UncleMick's example, the retiree could pay cash for 270,000 and take our about 20,000. He would still have 230,000 left over. As is typical when purchasing a new building, he probably would raise rents as well.

Looks pretty good. You could also argue that we underpriced the building, but that was what our local market would allow.

martha
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Post by hocus2004 »

One year ago we sold a rental property for 270,000. We had bought it five years earlier for 110,000.

Welcome to the community, Martha.

I know nothing about investing in real estate. That is why I am stuck with things like TIPS and ibonds and CDs at times when stock valuations enter the stratosphere. One of the reasons why I wanted to save enough to be able to leave my corporate job was to advance my understanding of how to invest. In the event that I learn about things like real estate investing, it seems possible to me that there might be years when I will earn more from smart investing than I would have earned from slogging away at a corporate job that I did not find too terribly meaningful.

There are spots in our community where real estate investing is derided. It is said to require "work," and that is viewed as a bad thing. Well, it took me a certain amount of work to put together my Retire Early plan. That was work I loved doing. My guess is that a lot of people who invest successfully in real estate enjoy the work they put into that too.

As a general rule, you get out of things what you put into them. It's not always true, but it is often true. In some cases real estate investing requires more effort. In some cases that extra effort is well rewarded. Good for those who elect to invest in real estate!

It's not for those who don't know what they are doing (like me--at least for now). But it seems clear to me from reading the boards that there are a lot of people who reached their financial freedom goals years sooner because they took the time to explore the opportunites opened to them by learning what it takes to make successful real estate investments. I'm grateful for what I have learned from them, and hope to be able to learn more from them in days to come.
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Post by unclemick »

Real estate probably deserves it's own thread. The math is different.

Alas - it seems to be be harder to to discuss. Perhaps the -location ,location,location thing - or maybe us stock cats are just naturally longer winded.

Down payment, cash flow, expenses, depreciation, etc, etc seem straight forward enough. Treating the cap gains is probably more like discusing individual stocks( the location thing versus company thing).

Real estate has played a part in every retiree I know - larger or smaller depending on whom. Factoring that into a forum discussion seems to be difficult. Other than my REIT Index - data seems to be non exsistant or 'local'.

I vaguely remember - there were rules of thumb in books for evaluating rentals.

???? Hmmm!
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Post by martha »

Thanks for the welcome. I have been lurking here lately, a visitor from Dory's forum. The first thing I do here is talk about a topic that belongs in another thread. Real estate is work but to use Unclemick's phrase, it is the horse we road in on. My husband retired early because of real estate but he did not consider himself retired until the rental property was sold.

When buying a property, he would look carefully at expenses and carefully at what expenses had been deferred. Therefore, you need to know real estate to do this well. Does it need a new roof? How is the furnace? How dated is the decor? Etc. He would then estimate what these total expenses should be, and if he was incuring debt, the cost of that debt. He would then look at income, whether rents could increase. He also had a good feel for vacancy rates in the local market and rental rates in the market. Then he made sure that the price he was paying made sense given his estimate of expenses, the need to cover principal and interest on mortgage debt, and put some in his pocket. He did not follow particular rules of thumb, though was familiar with CAP rates and the idea that you should have a return on your cash you put into the property as a downpayment. With real estate valuations increasing in the past few years, he decided he should sell out because people were willing to pay a premium based on their own belief of future appreciation.

Now he is out of the business and the money invested in passive investments.
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Post by JWR1945 »

martha wrote:Thanks for the welcome. I have been lurking here lately, a visitor from Dory's forum. The first thing I do here is talk about a topic that belongs in another thread. Real estate is work but to use Unclemick's phrase, it is the horse we road in on. My husband retired early because of real estate but he did not consider himself retired until the rental property was sold.
Thank you for joining us.

Real estate is OK for this thread. The issue is what early retirees should do today if starting with $500K and if starting with $1.5 million. Real estate is an excellent choice.

There is room for additional threads that are dedicated to real estate. Figuring out what makes sense during retirement (the distribution stage) and before retirement (the accumulation stage) are both good topics.

Have fun.

John R.
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Post by hocus2004 »

There is room for additional threads that are dedicated to real estate.

That's so. But we need to proceed with a little bit of caution all the same. It was a claim that sometimes it makes sense to invest in real estate that got this whole shebang started, remember? It was Wanderer who came forward with that one at the Motley Fool board in February 2002.

Some people blame intercst, and some blame me, and some blame JWR1945. But the three of us are innocent babes compared to the Rasputin-type mastermind who got this giant ball of fire rolling in the first place. It's that Wanderer fellow who is the real trouble-maker, if you ask me.

You always have to keep an eye on the quiet ones.
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Post by JWR1945 »

For newcomers: the previous post was meant to be humorous.

[Humor is very difficult on discussion boards. It is impossible if there is any degree of subtlety whatsoever.]

Have fun.

John R.
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Post by hocus2004 »

And I was worried that the Rasputin thing might make it come across as being too obvious!

The "secret meaning" embedded in that one that I miss Wanderer was not intended as a joke. That part was sincere.
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