Is the 'Safe' Initial Withdrawal Rate Too Safe?

Research on Safe Withdrawal Rates


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Is the 'Safe' Initial Withdrawal Rate Too Safe?

Post by mickeyd » Thu Feb 24, 2005 10:40 am

This article is a few years old but I think that it still presents valid considerations to look at SWR.

This paper establishes new guidelines for determining the maximum "safe" initial withdrawal rate, defined as (1) never requiring a reduction in withdrawals from any previous year, (2) allowing for systematic increases to offset inflation, and (3) maintaining the portfolio for at least 40 years.
It evaluates the maximum safe initial withdrawal rate during the extreme period from 1973 to 2003 that included two severe bear markets and a prolonged early period of abnormally high inflation.
It tests the performance of balanced multi-asset class portfolios that utilize six distinct equity categories: U.S. Large Value, U.S. Large Growth, U.S. Small Value, U.S. Small Growth, International Stocks, and Real Estate.
Two portfolios (65 percent equity and 80 percent equity) are evaluated in conjunction with systematic Decision Rules that govern portfolio management, sources of annual income withdrawals, impact of years with investment losses and withdrawal increases to offset ongoing inflation.
This paper finds that applying these Decision Rules produces a maximum "safe" initial withdrawal rate as high as 5.8 percent to 6.2 percent depending on the percentage of the portfolio that is allocated to equities. ... 4-art6.cfm

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Post by hocus2004 » Thu Feb 24, 2005 11:44 am

Welcome to the community, MickyD. It makes me happy to see you putting up your first post here. You have a sense of humor, and humor is sometimes in short supply on a numbers-oriented board. We need you!

We have discussed the Guyton study before. That doesn't mean that it is a bad thing for you to draw our attention to it again. There are probably some who missed it before, and consideration of it brings into focus a number of interesting questions.

Here is a link to a PeteyPerson thread that discussed the Guyton study. There are links within Petey's thread to some earlier mentions.

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Post by JWR1945 » Thu Feb 24, 2005 12:02 pm

hocus2004 got his response in a little bit earlier. This is what I have put together.

We have discussed this article before. Here are the references.

"Getting Going" or "Going Bust"? on the SWR Research Group board dated Wednesday, Nov 17, 2004.

SB on SWR on the FIRE board dated Thursday, Dec 02, 2004.

CNN Money - Make sure your money lasts on the SWR Research Group board dated Sunday, Feb 13, 2005.

I have extracted the following post from the CNN Money-Make sure your money lasts thread. You should find it interesting. ... 446#p27446
hocus2004 wrote:the average Joe will only see what he WANTS to see: a 6.2% w/r

I'm an average Joe. There was a time when I probably would have thought that a 6 percent withdrawal rate sounded reasonable enough, and, if I saw something in the media making that claim, I probably would have bought into it. What would you have the average Joe do, read all the footnotes to all the studies he sees cited in the media?

A journalist cannot be expected to understand all the ins and outs of the question examined. That's the researcher's job. But when you pass along a reference to a study, you incur a certain obligation to check it out a little bit because you are making more people aware of it and, if it is a bad study, increasing the chance that it will do harm.

I agree with JWR1945 that this Guyton study is a dangerous study. I don't think that the guy has any bad intent, and I don't think that the journalists writing it up have any bad intent either. I see it as a problem of carelessness. But it is a carelessness that may end up costing a lot of people a lot of money.

We aren't talking about one case. What happens is that one media outlet writes up the study with a certain spin and then a good number of others seem to jump on it. We have seen this Guyton thing written up by CNN, and the Wall Street Journal, and the Scott Burns column. I think I might have seen a link somewhere to a reference in Kiplinger magazine too and/or Money. The thing keeps spreading, and it always seems to be that same misleading take being pushed--If You Are Only Taking 4 Percent from a High Stock Portfolio, Perhaps You Are Being Too Cautious!

It's bad journalism, in my view. What happens is that editors from lower-ranking papers see that the Wall Street Journal wrote this up and they say to their reporters "Why didn't we have this?" That used to happen to me and others working with me all the time when I was a journalist. The editor would say: "Why didn't we have this angle written up in the Wall Street Journal." And you would say: "Well, they got it wrong, we reported it different but we got it right." And the editor would say: "That's fine. Now see if you can do a follow-up more in the way the Wall Street Journal wrote it up." It would make you want to scream.

The average Joe thinks that the Wall Street Journal always gets it right. It's an excellent newspaper, but it doesn't always get it right. In this case, I don't think it is the average Joe who is seeing a SWR of 6 percent because that is what he wants to see. I think it is the Wall Street Journal columnist (Jonathan Clements) who saw something he wanted to see and passed it along, and other reporters who passed it along on the thinking that the Wall Street Journal couldn't possibly have gotten it wrong.

The average Joe is not entirely free from blame in this thing. But I see the average Joe as more of a victim than anything else. The reason is that the people with the responsibility for getting it right are the researchers and the editors and the journalists. They are the presumed experts. The average Joe has to put some trust in them. He doesn't have much choice. Most average Joes have jobs of their own to do and doing those jobs takes up most of their time.

In this case, I think that the investing experts have failed the average Joe (and Jane). Big time.
Have fun.

John R.

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