Safe withdrawal ideas, thoughts and provocations

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ataloss
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Post by ataloss »

I do not know the details of how this is done. But the approach seems to me to be a sound one conceptually.

It was a calculation, ataloss


Speaking of absurd internet statements, I am glad that you have stopped insisting that Bernstein somehow indicated that a 4% withdrawal rate was wrong as a matter of "mathematical certitude." OTOH you seem to have a lot staked on a 2% swr that you are accepting as a matter of faith. This seems similar to me to the people who accept intercsts 4% number uncritically. I agree that Bernstein has common sense but this does not mean that we should accept 2% as if it were an imutable law of the universe. If the 2% is a calculation we should have some of the mathematicians on the board check it.
Do you agree with Ataloss that anyone using the Gordon Equation to assess the effects of valuation changes is engaging in an act of pure guesswork?


I am not quite sure what you mean. I have used the term guess since I thought you did not understand the concept of an estimate. I would think that "pure guesswork" implies randomness. Guessing the result of a coin flip. The Gordon equation is better than that. Calculating the circumference of a circle from the radius is an example of a mathematical operation. If you have the right number for the radius you get the right result for the circumference. The Gordon equation is not like that. SWR "calculation" can never give a definitive answer. This is why Bernstein qualifies his estimate/guess with higher withdrawals "might not be entirely safe."
I'm used to it, KenM If you have the data on your side, you keep pounding on people to look at the data.


show mw tha data

I suppose we could try to find some other way of saying it. Is it more acceptable to say "studies using the conventional methodology deliberately mislead readers as to what the historical data says is safe?" I see the word "invalid" as being a short and sweet way of conveying the same basic concept.


Bernstein says that conventional withdrawal rates may sometimes be misleading (like when valuations are at an unprecedented extreme.) I think that although perfectly valid, historical safe withdrawal rates may not be the best guide to future safe withdrawal rates when there is ectreme overvaluation. This is an application problem not a flaw in the studies.
Last edited by ataloss on Sat Jul 19, 2003 7:20 am, edited 1 time in total.
Have fun.

Ataloss
hocus
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Post by hocus »

I am glad that you have stopped insisting that Bernstein somehow indicated that a 4% withdrawal rate was wrong as a matter of "mathematical certitude.

I haven't stopped making note of the "mathematical certainty" claim. I like the way that I say things better than the way that you report to the board the way I say things. I tend to be more careful about the wording, so I hope that board members will use my words to learn what I think on this subject rather than yours. But Bernstein has indeed made a claim about "mathematical certainty" that relates to the SWR question.

Bernstein said that valuation affects returns as a matter of "mathematical certitude." Returns affect SWRs. So valuation affects SWRs. I think those last two statements are logical implications of the first.

Bernstein incorporated an adjustment for valuation into his SWR calculation for the year 2000. The number he came up with was 2 percent.

He didn't make the "mathematical certitude" statement in the same section of the book as where he reported on his SWR calculation. But I don't think it is an accident that the same individual who thinks that valuation affects SWRs as a matter of mathematical certitude also happened to put himself to the trouble of incorporating valuation effects into his SWR calculation. I think Bernstein believes that valuation levels affect what is safe, as do I.

I think that Bernstein and me are on the same page. I hope to bring him here at some future data and find out on which points we agree and on which we disagree. I would not expect that we would agree on every aspect of the question. But I would be very surprised if we did not agree on a whole bunch. We'll see.

Bernstein has not said that studies not inccorporating a valuation adjustment are invalid, as I have. I am going a link further down the logic chain in saying that. I don't see it as a big jump, and I hope to persuade him to endorse my view. But I can't say what his personal view is on that question until I get an opportunity to ask him.
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Post by hocus »

I agree that Bernstein has common sense but this does not mean that we should accept 2% as if it were an imutable law of the universe. If the 2% is a calculation we should have some of the mathematicians on the board check it.

I strongly endorse the suggestion of having the numbers-oreinted people check what Bernstein did. That is a highly constructive suggestion.

I am by no means locked into the 2 percent number. JWR1945 used a different methodology and came up with 2.3 percent. I think that is fine. The reason why I say that the 2.0 percent number is valid and the 2.3 percent number is valid, but the 4.0 percent number is invalid, is that the first two numbers both are the product of methodologies which consider the effect of changes in valuation, while the latter is not.

I don't expect even to participate in discussions of which particular methodology is the best one to use to incorporate valuation changes lnto the analysis. Making decisions on that sort of thing is not something I am good at, and I am sure that there are other board members with a lot more insight to offer on that aspect of the question.

The Gordon equation is better than that.

OK. We agree that it's better than guesswork. It's not pulling rabbits out of a hat. We agree that it is not a perfect tool for solving every possibly problem; there is no such thing. Where do we go from here?

What I think we need to do is determine whether using the Gordon Equation (or some other methodology) to incorporate the effect of valuation changes into an SWR analysis is better or worse than making no attempt to assess the affects of valuation changes whatsoever. If it is always better to incorporate an assessment of the effects of valuation, then I think that people preparing such studies should take account of that reality and include assessments of the effects of valuation changes in their findings on what is safe according to the data.

SWR "calculation" can never give a definitive answer.

You are playing word games, ataloss. When intercst says that the SWR is 4 percent, he is not saying that he knows that you will obtain a 4 percent return. He is telling you what the data reveals the SWR to be. Bernstein is doing the same thing. He gets a different number because he looks at some data points that intercst failed to look at, the data points that permitted him to make use of the Gordon Equation in his analysis. He took account of the effect of valuation changes, and intercst did not.

show mw that data

Read the book.

Historical safe withdrawal rates may not be the best guide to future safe withdrawal rates when there is ectreme overvaluation. This is an application problem not a flaw in the studies.

This statement sums up one of theb key differences of opinion well. You are saying that users of the studies should adjust for valuation effects at the application stage. I am saying that the researchers should adjust for valuation effects when preparing the studies.

If valuation only affected the results a little, or only now and then, I could go along with you. But the data I have looked at suggests strongly that valuation always affects SWRs, and sometimes in very big ways. I believe that a factor that always affects the results of the question being posed should be addressed in the study itself, not dealt with by the user at the application stage.

I don't think that it is proper to put the word "Safe" in the title line of your study unless you have considered all the factors that you know affect the determination of what is safe.
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Post by raddr »

hocus wrote:

You should read the book, raddr. It would help a lot.


Enough with the patronizing commnets, hocus. I HAVE read the book.
Bernstein does not spell out in great detail how he came up with his 2 percent number. He sets forth the number on page 234 and refers the reader back to Chapter Two for an explanation of how he came up with it. Chapter Two deals with the Gordon Equation and related matters.

My understanding is that he used the historical sequence methodology to come up with a number unadjusted for valuation, and then used the Gordon Equation to make an adjustment for valuation. I do not know the details of how this is done. But the approach seems to me to be a sound one conceptually.


Well maybe you should gain some understanding of the details of his work before posting condescending replies about it to myself, Ataloss, and others.
Do you agree with Ataloss that anyone using the Gordon Equation to assess the effects of valuation changes is engaging in an act of pure guesswork?


Yes. See my "Gordon Equation" post. The Gordon equation, while adjusting for valuation does not predict future returns with much accuracy.
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Post by hocus »

Enough with the patronizing commnets, hocus. I HAVE read the book.

You are the one who said last night that you had to "guess" about the context in which a Bernstein quote appeared. There was no reason for you to guess if you had already read the book. I had no way of knowing that you were "just kidding" about this point.

Well maybe you should gain some understanding of the details of his work before posting condescending replies about it to myself, Ataloss, and others.

Ataloss told this board community that Bernstein was engaging in guessing games in his use of the Gordon Equation. This is false. I corrected the record, accurately reporting to the board what Bernstein said on the matter. That's my job, to inform the board of the realities of the matter. I see nothing wrong in offering the board an accurate quote from a book to correct a misstatement by another board member.

I have offered comments to this board about the contents of Chapter Two of "The Four Pillars of Investing." I know the contents of that chapter well. I will continue to offer accurate quotes from Chapter Two in the event that other board members continue to post misstatements of what Bernstein reveals about his views on the Gordon Equation in that chapter.

See my "Gordon Equation" post. The Gordon equation, while adjusting for valuation does not predict future returns with much accurac

Let's talk context, <raddr. Let's return to the matter we were trying to resolve before Ataloss drove the car into a ditch with the funny stuff about guessing games and rabbits coming out of hats.

The context in which the Gordon Equation came up was as part of a discussion to deal with the problem that the conventional SWR methodology fails to make adustments for the effect of changes in valuation levels. Which do you consider a more analytically valid approach to calculating the SWR: (1) the conventional methodology, which makes no adjustment for the effect of changes in valuation levels; or (2) the approach used by Bernstein in his book, which involves use of the Gordon Equation to incorporate data on the effect of valuation changes into the calculation?

Which of these two approaches in your view is more likely to result in busted retirements for the aspiring early retirees making use of them, or is it your view that both approaches suggest withdrawal rates that are perfectly safe?
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ataloss
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Post by ataloss »

Hocus
The language that I quoted in my post above puts the intercst and Bernstein perspectives in direct contradiction. Intercst says the SWR is 4 percent unless the past is different. Bernstein says the SWR is 2 percent unless the past is different. Neither is guessing. Both claim absolute mathematical certitude for what they are saying. Both claims are conditioned on a presumption that the future will be something like the past.

The study says that, unless the future is worse than the past, you can be certain that prices will eventually go up enough for your 4 percent withdrawal to work. William Bernstein is saying that as a matter of "mathematical certitude" that is not so.


Both of these statements are false and based on nohing that Bernstein has written that I have seen. I thought you had more or less accepted Wanderer's correction on this matter. I continue to prefer to assume that you misundertand Bernstein since I don't want to think that you are trying to intentionally mislead. Maybe Petey can check for us if his copy comes today.
Ataloss told this board community that Bernstein was engaging in guessing games in his use of the Gordon Equation. This is false. I corrected the record, accurately reporting to the board what Bernstein said on the matter.


In fact, as I initially stated you have no idea how Bernstein got the 2% number although you prefer to say that you don't have "all the details."

The assertation that the data to calculate the swr is in "4 pillars" is simply wrong.

FWIW I thought raddr's Gordon equation post was very educational. I would not have guessed the the stardard deviation would be so large.
The reason why I say that the 2.0 percent number is valid and the 2.3 percent number is valid, but the 4.0 percent number is invalid, is that the first two numbers both are the product of methodologies which consider the effect of changes in valuation, while the latter is not.


I see that my problem is that I don't speak hocus.

Valid SWR methodology: explicity uses input related to valuation, nature and reliability of the input data and calculation process - not important

Invalid SWR methodology: no explicit use of valuation (even if valuation data is implicit in the data used)

Does the whole issue come down your dream of taking over the REHP board from intercst and a need for an intercst free swr?
I suppose we could try to find some other way of saying it. Is it more acceptable to say "studies using the conventional methodology deliberately mislead readers as to what the historical data says is safe?" I see the word "invalid" as being a short and sweet way of conveying the same basic concept.


This would includ Prof. Cooley et. al. trying to mislead us? Was he in league with intercst?
Have fun.

Ataloss
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Post by hocus »

I thought you had more or less accepted Wanderer's correction on this matter.

If I accept any "corrections," I'll let you know, ataloss. You won't have to guess.

The bottom statement I stand by. Bernstein is saying that as a matter of mathematical certitude valuation levels affect SWRs. An implication of this is that the 4 percent number will not survive in the worst-case scenario. If stocks go down, you might go bust, if the future is like the past.

The top statement had two typos. In both cases, it should read "unless the future is different. The thing that Bernstein claims mathematical certitude about is not the actual return you will receive, but his belief that valuations affect returns. An implication that follows from that is that valuations affect SWRs (since returns affect SWRs).

In fact, as I initially stated you have no idea how Bernstein got the 2% number although you prefer to say that you don't have "all the details."

I say it that way because that's the truth, ataloss. Why is it that you state it that other way?

The assertation that the data to calculate the swr is in "4 pillars" is simply wrong.

JWR1945 has put up a post explaining how he got the number. It is not spelled out as clearly as I would like. But, in Bernstein's defense, there probably aren't too many parsing his words on this subject as carefully as some of us here are.

To me, the important thing is that the conventional methodology gives a number way off the charts of what the data says. That concerns me. Does it concern you, Ataloss? Or do you see the goal of our deliberations here as just and endless and pointless parsing of sentences and phrases leading nowhere in particular?

I see that my problem is that I don't speak hocus.

That comment has the benefit of making a few of your earlier ones appear almost constructive in contrast.

Does the whole issue come down your dream of taking over the REHP board from intercst and a need for an intercst free swr?

Yeah, that's right, Ataloss. You have it all figured out. That's why in all my posts in the early months of this matter I went on and on about how helpful intercst had been to me when I first joined the board, and how I obtained great benefit from his study and recommened it to all aspiring early retirees, and on and on. And that's why, when 90 REHP board members expressed a desire to hear about the realities of SWRs and intercst said no dice, I offered to allow him 100 threads a month mocking me for my views if in return he would permit me one a month played by the Motley Fool posting rules.

And that's why every bit of research that has been put forward in the past 14 months supports the view put forward in my initial post, a view that had not been previosuly expressed on the board, that valuation levels affect SWRs, a view that was recently endorsed at this board by a 10 to 1 vote. And that's why in the poll you recently put up at the REHP board, a vast majority rejected the intercst view that his study is a mathemtaical construct and instead expressed the view that it is a mere "rule of thumb, while in the year 2000 that view had never once been put forward there, showing the influence of my arguments re this matter.

In fact, that's why I came up with the idea of building up the board in the first place back when it was a much smaller entity than it is today.I thought, "Boy, if you put up lots of solid information on how to retire easrly, you might be able to attract a lot of great people to the community, and then when people reallly start learning, you could sucker that intercst guy into tearing the whole thing to the ground and won't all your hard work pay offbig when that happens?

What can I say, Ataloss? You got me. It was all a clever plan to get intercst from the beginning. Buy, he sure fell for it, didn't he?

The way it actually happened is that I annoucned my plans to take over as Board General only after the board had suffered through 10 months of his disruption campaign. 10 months was enough, in my judgment. How long do you think I should have waited before taking some steps to deal with the situation?

Is the FIRE community that congregates there never to be permitted to share honest and informed insights on the subject matter of the board? Is that your preference? Would you like to see that community die out altogether? Would that make you happy? Is the dream of a dead board over there the dream that drives you in this matter?

I have a different sort of dream in mind.
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ataloss
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Post by ataloss »

I suppose we could try to find some other way of saying it. Is it more acceptable to say "studies using the conventional methodology deliberately mislead readers as to what the historical data says is safe?" I see the word "invalid" as being a short and sweet way of conveying the same basic concept.



Were Prof. Cooley et. al. trying to mislead us?
The language that I quoted in my post above puts the intercst and Bernstein perspectives in direct contradiction. Intercst says the SWR is 4 percent unless the past is different. Bernstein says the SWR is 2 percent unless the past is different. Neither is guessing. Both claim absolute mathematical certitude for what they are saying. Both claims are conditioned on a presumption that the future will be something like the past.

The top statement had two typos. In both cases, it should read "unless the future is different. The thing that Bernstein claims mathematical certitude about is not the actual return you will receive, but his belief that valuations affect returns.


I claim certitude about the second part not being a typo. Caught misrepresenting Bernstein you changed your tune :wink:

If you really want to contribute something to swr how about finding a market timing approach that would have worked. Intercst tried and failed (switching to bonds at a specified p/e.) You could actually best him at that.
Have fun.

Ataloss
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