The Great SWR Investigation - Part 1

Financial Independence/Retire Early -- Learn How!
wanderer
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Post by wanderer »

...cleanse your brain of everything you ever thought you had learned about the subject of SWRs by listening to intercst and start over again...

I've been thinking this, too. Sometimes it's more efficient to simply start at zero and build up from the bottom. Like when you're putting together a Bionicle.

Has anyone noticed that "SWRs" bears a striking similarity to "SARS"? I was whizzing through one of the posts and read "valuation levels affect SARS." "First the outer space thing, now this," i thought to myself. :shock::wink:
regards,

wanderer

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therealchips
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Post by therealchips »

The SWR is the answer to bylo's question:

Quote:
"How much of my savings can I withdraw in each year of my retirement without incurring an undue risk of depleting my assets?"


maybe we want to be more precise in the definition of "undue"

Maybe we want to be more precise in using the term "depleting" also. I believe the usual intent is "How much of my savings can I withdraw in each year of my retirement without incurring an undue risk of depleting my assets completely?"

I make that point because my question is different. It is this: "How much of my savings can I withdraw in each year of my retirement without incurring an undue risk of depleting or increasing the inflation corrected value of my assets even partially?"

Also hidden in the original question may be the assumption that the retired person wants the same purchasing power in his withdrawals every year of his retirement. Actually, he may want his withdrawals to go up or down some, or a lot, with the value of his assets. Mine have.

Alternatively, the retired person might want to plan on a slightly declining value of his annual withdrawals if his objective is the maximize the expected total utility of his withdrawals prior to death, given a certain probability of death each year in retirement. Have you read gummy's article on utility theory? I recommend it. The idea here is that the value of a fixed amount of money is not the same for everyone, but depends on how much the recipient already has. So, for example, a ten percent raise should have about the same psychological value to someone making $50,000 a year as it does to someone making $500,000 a year, while the two would value a $5,000 windfall quite differently. The relevant search term is "minimum detectable difference" where the results suggest that human senses work that way in general. For example, a sound might have to be x% louder over most of the hearing range for the listener to detect the difference. This sort of consideration leads to utility functions for money such as the logarithmic. My calculations use Solver in Excel (of course :lol:) to solve this thirty-two dimensional optimization problem. I use a logarithmic utility function for the annual withdrawals, and the standard mortality tables to give my probability of death during each year of my retirement. The resulting optimal annual withdrawals turn out to be corrected for most of inflation but not all of it. This produces a slightly declining after-tax standard of living over the thirty-odd years remaining in my retirement plan. I haven't actually adopted this approach because the withdrawals it suggests are uncomfortably large, even in the first years.

Your mileage may vary.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
WiseNLucky
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Post by WiseNLucky »

hocus:

Thank you for your long and passionate post.
What you are asking is "Is hocus accusing WiseNLucky pf playing games?"


Actually, I was asking JWR if he included me in that categorization. I thought he was the one making that comment. I knew I was not playing games and hoped that he didn't think I was. I have disagreed with you on some issues and always found JWR to be fair in a kind of being a referee way. I personally am more an unfortunate combination of ignorance and naivete. I once thought myself reasonably well educated and intelligent but am now beginning to question that.
but I sure do believe that some others who have posted only on the other board have been playing games


I was a frequenter of TMF on the Index Fund board until the fee went into effect whenever that was. As I've stated here several times before, I have never been back to TMF since then.

I don't remember ever posting on the REHP board but would be interested in finding out if I ever did. I seem to remember at least reading some stuff, but that might have been at the non-TMF REHP place. Isn't there one? I seem to remember something with a long list of articles by month. Then I read that there would be a charge to go there and never went back.

I am more familiar with the 4% result from Scott Burns' discussions of the Trinity Study at his website. He later mentioned that the REHP person more or less confirmed the Trinity work somehow.

At any rate, in relation to this board and TMF, I often feel like I'm listening in on a telephone conversation and am only hearing one half of it. Many of you who frequent both places talk all around conversations going on over there and even post links to TMF posts. Without access to TMF, I mostly have to guess at what the other sides of those conversations are.

With regard to THIS board, I haven't seen any game playing going on. Of course, it could be going on but without access to the other board, I might never realize it.
You want to check out what sort of poster hocus is, you can go check it out for yourself. I will tell you what you are going to find. You are going to find that hocus is a straight shooter.


I have found nothing but that. Again, I have no idea what you have posted at the other site and never will. But nothing you have posted here leads me to believe you are anything but a straight shooter.
Intercst plays games. That's not opinion, that's fact. This is something that can be proven beyond any reasonable doubt by taking a look at the REHP board Post Archives.


For reasons stated above, I'll have to take your word for it.
Ataloss is shooting straight. You are shooting straight. I am shooting straight. Yet we are having trouble communicating. There is distrust in the air. There is a hint of friction. What's that about? It's the result of the poison that was dumped into the water supply of these message boards by intercst.


Or perhaps not. I do not know intercst, but if he said something to the effect that 4% is a reliable SWR, then I strongly disagree with him. I think valuations matter. I think the sequence of returns matter. I think that the history of the 20th century is different, if not unique. I don't know anything for sure but I think so.

I guess what I'm saying is that I don't have any distrust. I believe that one can disagree without being distrustful.
If you have 500 questions to put forward as part of a sincere effort to come to terms with this matter, I will sit here patiently and respond to those 500 posts the best that I am able. So long as your questions are sincere, they deserve answers. . .

What pisses me off are the questions that were not put forward out of a sincere desire to learn.


I promise you that, while some of my time spent here is a form of entertainment, my primary purpose is to learn. My financial future, and that of my family, is VERY important to me. I hold back on some questions because I feel they are too far beneath the flow of the discussion and I struggle mightily to catch up. I will appreciate it if you answer my questions with the patience you have so far shown.
What we need to do today, in my opinion, is to forget that intercst ever existed.


I'm with you all the way on this one. :)
Start out thinking that you would like to see the intercst position vindicated in the end, and we are doomed. It cannot be done. . .

But I honestly do not think we are going to get far if you have the idea in the back of your head that somehow intercst is going to come out of this thing wearing a white hat.


As I said before, I already disagree with him. And I don't care about him. From my perspective, other than as a starting place for our discussion, we can remove him and his hat from this film entirely. :wink:
I would like you to cleanse your brain of everything you ever thought you had learned about the subject of SWRs by listening to intercst and start over again, this time listening to some people (it's not just me)


So, in conclusion, I never listened to intercst. My only real exposure to him, believe it or not, is what has been brought by those of you who hang out over THERE. I look forward to learning whatever I can from all of you that are HERE.

Thank you for the time you spend trying to educate me. I will not always remain so dense. But please allow me to ask questions when I do not understand, and to disagree when I think I do.

And also, to you, hocus, and all of the others that share time at both sites, please don't assume that all here have access to information over there. Don't assume that we are learning anything over there, right or wrong. And please phrase all of your comments and responses as if the other site doesn't exist. For me, El Supremo, and a few others, it really doesn't.
WiseNLucky

I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
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Post by JWR1945 »

Thanks for catching my error. wanderer's replacement for my first sentence:
"The Safe Withdrawal Rate is the best estimate of the initial percentage of a retirement portfolio that, on an inflation-adjusted basis in future years, can be withdrawn without completely depleting the portfolio. It is mathematically calculated based primarily on existing, historical information."

Thanks to therealchips as well. He has pointed out that there can be more than one goal when making the calculation. We do not necessarily need to insist that final balance is zero under worst case conditions.

I will start with wanderer's revision except that I will replace the words the initial percentage with the maximum initial percentage. (I didn't even think of the word maximum until now.)

I think that we should add two more sentences as well. There must be an assessment of the degree of safety. This may be stated in terms of probabilities. As a fine point, the reliability of an estimate and the degree of safety indicated by a calculation are not the same thing.

This is not yet complete. We have to allow for calculations that identify the maximum percentage of a retirement portfolio's current balance that meets some other constraint. (The balance can never fall to zero. Maintaining buying power is not guaranteed. OTOH, we can specify an ending balance. We can even specify two constraints such as satisfying a minimum balance throughout the portfolio's lifetime and staying above a minimal ending balance.)

Thanks for a great start. Give each man a cigar! I agree that we should start at the beginning and do things right. It is better than building upon a messy foundation.

Have fun.

John R.
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Post by JWR1945 »

When I (JWR1945) wrote:
I want to avoid some semantics traps that have been used against hocus. They were laid to create confusion and they have succeeded. We see honorable people of good will falling into these traps and adopting definitions that they should not.

I was not referring to WiseNLucky, nor was I referring to anyone on this board, except possibly as victims. Those who have routinely visited the Motley Fool's discussion boards may be "honorable people of good will [who have fallen] into these traps and [who have adopted] definitions that they should not."

I value the comments that have been made by WiseNLucky and others on this thread greatly.

Have fun.

John R.
hocus
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Post by hocus »

Please allow me to ask questions when I do not understand, and to disagree when I think I do.

Please do that, WiseNLucky, and please never feel a need to apologize even a little bit for asking any sort of question you want to ask. It pains me to think that anything that I said would ever cause someone to hesitate to ask a question.

The first words in your post made me regret that I said anything. You were responding to JWR1945, not me, so there was no need for me to say anything. I understand that you don't know about the baggage from the other board. You have probably picked up that the baggage from the other board has been heavy. It's made me sensitive to the possibility of people asking questions that sound like they might involve a questioning of my motives. I honestly do not mind any question or criticism whatsoever about content, but I am sensitive to questions on motive at this point. In this case I was sensing something that wasn't there. So please just forget the whole thing.

Still, I don't entirely regret my post because it generated your post, which I found highly encouraging. and refreshing. It's been a long time since someone responded to one of my posts in so humane a fashion. It was good to hear an honest, uncanned response.

I really, really, really do not want you ever to hold back on a question or criticism. Questions and criticisms make the wheels go round. We just need to remember that there are human beings on the other side of the table. That's been forgotten at the other board.

Consider yourself blessed not to have seen much of what went on there. I'll do what I can to forget as much of it as I can.
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Post by wanderer »

well, if i may interrupt W&L's and hocus' love fest, I'd like to get back to defining things. You're both good guys, get over it. :wink:

As for daffynitions, it seems like this problem, estimating SWRs, is ideal for linear programming. i find simply calculating the SWR the traditional way necessary but not sufficient. That is, this shows us what an automaton, with pretend access to non-existent investment options at non-existent low cost (for most of recorded market history) would have done. That's the skin of the tuffaha (apple), the first limitation.

We need limitation lines/curves for the fact that humans are not going to react to market declines that way, for valuation, for relative portfolio size (i submit that trc is more impervious to market indigestion in part because of the sheer size of his port [not to mention the SS ain't likely to be pulled in the next coupla years])., etc.

And we need gradations for each of the above. I suspect there is a "law of effect" at work in many of these factors - that there is a peak and then very little noticable change.

Anyway, a couple of thoughts.
regards,

wanderer

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hocus
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Post by hocus »

My question is different. It is this: "How much of my savings can I withdraw in each year of my retirement without incurring an undue risk of depleting or increasing the inflation corrected value of my assets even partially?"

I am glad you brought this up, TheRealChips. This is the way that I use SWR analysis too. I aim to know not the number that will leave me with zero assets at the end of x years, but the number that I can take out and still retain the same level of financial independence.

I see this as a matter of personal preference. In this case, there is nothing invalid about doing the calculation the other way. It is really just a different way of approaching the safety question. If you are depleting your assets over time, you probably need to be more safe in other aspects of your plan. If you are retaining the same level of financial independence, you can probably afford to go with a lower safety percentage for your plan (on the thinking that you have some slack built in).

Also hidden in the original question may be the assumption that the retired person wants the same purchasing power in his withdrawals every year of his retirement. Actually, he may want his withdrawals to go up or down some, or a lot, with the value of his assets.

I update my plan every year. I started out with a plan designed to succeed on a long-term basis. But I update the plan (and also my budget) once a year, again designing it to last on a long-term basis. There are some complications that come into play in doing this.I can see how it might not be a good idea for some people. However, I believe it makes some sense in my circumstances, which I have noted elsewhere are unusual in some respects.

Another wrinkle for me is that I have both a SWR for my entire plan and separate SWRs for different asset classes. My take-out is 4 percent of my overall savings amount. But I do not expect to get 4 percent from each asset class that I own. I expect less than that from some and more than that from others. The 4 percent is an average of the SWRs for all of the various asset classes that I own.

Yet another wrinkle for me is that I view that SWR as applying to a specified amount of money, rather than to a set asset class. For example, if I had $100,000 in certificates of deposit at the time of "retirement," I might aim to get 4 percent out of that $100,000 on a long-term basis. That does not mean that I need to get 4 percent out of that particular $100,000 each and every year. For each year that I earned a little less than 4 percent, there would need to be another year in which I earned a little more than that. I don't worry about there being some unevenness in the earnings over time, so long as the 4 percent take-out is supported long-term.

I do not make any sort of commitment to keeping the $100,000 in CDs for the entire length of my "retirement." I feel free to move it into more attractive asset classes as they appear to me. So, if there are five years in which CDs pay a good return, I take advantage of that. Then if CDs are not paying as good a return at the end of the five-year period, I feel free to move to an asset class paying a more attractive return, so long as the move is consistent with both the earnings and safety requirements of my overall plan.

A final point that it might be a good idea to bring out now is that I assume a 4 percent real return on the value of my residence. I realize that this approach is not the one taken by many others. But I don't believe it is so unreasonable. I believe that my overall plan has enough safety featues that it remains reasonably safe even with the expectation that my home will increase in value.

I am open to arguments that this is a bad idea, and am not opposed to changing the assumption if persuaded that it is not valud. But I am not convinced that it is appropriate to assume zero gain on the value of a home. That strikes me as an excessively conservative assumption.
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Post by wanderer »

A final point that it might be a good idea to bring out now is that I assume a 4 percent real return on the value of my residence.

if it is true that the appreciation in home values was 6% and inflation averaged 4%, then I think, for the average person, this would be an optimistic assumption. I don't know your personal circumstances, local market etc.
regards,

wanderer

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Post by raddr »

A final point that it might be a good idea to bring out now is that I assume a 4 percent real return on the value of my residence. I realize that this approach is not the one taken by many others. But I don't believe it is so unreasonable. I believe that my overall plan has enough safety featues that it remains reasonably safe even with the expectation that my home will increase in value.

I am open to arguments that this is a bad idea, and am not opposed to changing the assumption if persuaded that it is not valud. But I am not convinced that it is appropriate to assume zero gain on the value of a home. That strikes me as an excessively conservative assumption.


Wow. I just sold a home I owned for 16 years and I have no doubt that I had a less than 0% real return if you include the cost of repairs and improvements. I guess I'd be wary of assuming a 4% real return long term from my residence, at least here in N. Texas.
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ElSupremo
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Post by ElSupremo »

Greetings raddr :)

Just to throw another apple on the pile based on my Cincinnati home. With a good neighborhood, decent location and excellent school district I estimate about a 5% annual return based on purchase price, time and current value. If I deduct repair, maintenance and improvements that drops to around 4%. Inflation drops that to about 1%. :shock:Not exactly a blockbuster investment, but at least the money is still there. :D

However If I add in the comfort and quality of life factors along with all the other hidden benefits of home ownership IMO that changes the return on the investment considerably. No regrets. 8)
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Post by hocus »

if it is true that the appreciation in home values was 6% and inflation averaged 4%, then I think, for the average person, this would be an optimistic assumption.

I do not know what the data says on this particular point. I just haven't looked into it, so I do not know. I obviously have gotten a lot better than a 4 percent real return on my home in the years since my August 200 "retirement." But I make no claims as to what I can reaonably expect long term.

Perhaps I should go though the logic chain that led me to this assumption. My purpose in engaging in SWR analysis was to determine a take-out number and an allocation mix. My home was paid off at the time that I started this analysis, so there was never any question of me not having a good portion of my total savings in my home. I was not looking for data re housing because there was no need for data to support any allocation decisions I needed to make. There was no action step generating a need for analysis.

The only thing that would have changed had I used a different assumption is that I might have required myself to save more. It's entirely possible that I "should" have. I make no claims of "100 percent safety" or any such thing for my plan. My safety goal was a lot more modest than that. My life goal was to move to a different line of work without putting my family at any financial risk. So the safety goal for my plan was that my familty's financial future be in better long-term shape than it would have been had I remained in the high-paying job.

My assessment is that my family's financial shape is much better today than it was when I was earning a whole bunch more than I am today but also spending a whole bunch more (and at which I had almost no savings rather than hundreds of thousands in savings). So my plan does what I wanted it to do. It realizes my particular goals, which I acknowledge to be unusual ones.

The reality is that I have otther things providing "safety" in my plan. One I mentioned in a post last night. I do not work from the presumption that my stash will be reduzed to zero at the end of 30 years. My goal is to have my level of financial independence at a minimum stay the same each year, and ideally to be enhanced over time. Following that approach builds in a cushion that may help me deal with any shorfall that results from an improper assumption on increases in the value of my home.

Another safety factor is that I am still "working." I am working in a field that generally does not pay well (freelance writing), but my plan requires only $10,000 in annual earnings from the work that I will be doing full-time for the next 20 or 30 years. My hope is that I will earn more than $10,000. I view the $10,000 target as a slam dunk (based on some study I did of the field before entering it), but I think the odds are good that in the long term I will be earning more than this amount. If that happens, that will cover any problem resulting from the assumption on housing.

A third measure of safety is provided by the fact that I am open to entirely new income-generation possibilities that I have not even considered seriously up to this time. In the event that freelance writing does not pay enough, I have several binders full of alternate income-generation options that I would like to pursue. I have no intent of giving up the joy I find in "work" anytime before I turn 65 at the earliest, and possibly not before I turn 75 or so. So there are all sorts of income streams that I do not even know about today that may end up coming to my aid.

I am not saying that everyone should count on realizing a 4 percent real return on his or her home. I am saying that, at the time I put my plan together, it made sense to me to do that. If I see data persuading me that it is not a good idea, I will change that assumption in next year's plan and make changes in other aspects of the plan to make up the difference.

For example, if I had to, I could change the assumption re annual income from freelance writing to a higher number than $10,000. I think that higher numbers are realisic if I were willing to be more flexible in the sorts of projects I take on. If I needed to earn a higher annual income from writing, I might decide to spend less time on message boards. Right now, I don't see a problem with spending a good bit of time on writing activities that do not produce a direct financial payoff. But if it became a problem, I have options available to me to go in other directions.

My house is worth about $300,000. If I were to change the earnings assumption on the money invested in the house from 4 perent to 2 percent, that would require me to increase earnigs from freelance writing from $10,000 to $16,000.

My plan is a holistic one. Not everyone has the vision of "retirement" that I had (I "retired" from the need to earn a steady paycheck) and that allows for the sorts of assumptions that I made. I don't ask or expect that anyone else follow my plan. I do think, however, that discussion of a variety of approaches is beneficial, and, when there is interest expressed in some aspect of what I have done, I am happy to share. I put my ideas forward as possible solutions to possible problems, not as commandments.

So I am not saying that assuming a 4 percent real return from the ownership of one's residence is a good thing to do. It wasn't a question that was a decision-driver to me, so I put most of my energies into other inquires. I don't think that it makes sense to assume that your investment in your home will yield zero return. I know that a lot of people do that, but I have never quite understood the reasoning for the assumption. It is "safe" to be sure, but I wonder if it it "too safe." I stuck 4 percent in as an assumption because I wanted to assign that amount of money some earning asumption and 4 percent was the overall target for my plan. My assumption was that my house would do no better and no worse than my other investments.

I hesitated to bring the matter up because it pulls us away from the point of the thread. As we started noting wrinkles in the various approaches, however, I thought that maybe this should be placed on the table somewhere.

I think that the assumption I made re my house puts the lie to claims that were made on the other board that I am excessively risk-averse. If anything, I think that I am willing to take on some risks that many others would not feel comfortable with. My thing is to assess risk before taking it on. So long as I know what I am getting into, I feel that I can make reasonable decisions re risk, and I think that taking on a measure of risk is a very good thing.

I spent a lot of time assessing risk in the development of my plan. My focus was on the decisions where I could do myself harm by taking actions that were based on an inadequate appreciation of the risks involved. That's why I spent a lot of energy on analyzing the stock stuff. Whether to be in stocks or not, and how much, was a live question for me. Stocks are my favroite investment class, and it bummed me out that I happened to be putting together a plan at the exact time in history when stocks had the lowest SWR that they have ever had in U.S. history. I believe that the diminishment of risk that I achieved by subjecting stocks to a more complete analysis counters to some extent risks that I took in other areas. This was my intent.

My goal was to achieve a plan that contained some risk, but that was not excessively risky. I think that I have done that, but I have no problem with others concluding otherwise. The thing that I object to is if someone states in dogmatic fashion that what I did was "irrational." (no one has done that here, of course, I am still engaged in a bit of a struggle with ghosts that in my view haunt the larger community of aspiring early retirees). I considered a lot of factors in developing a highly customized plan, and I do not think it is fair to characterize the process that I went though as at all irrational. It may be ultimately proven wrong, as any analysis may ultimately be proven wrong. But it was based on an assessment of many factors, and I believe that the overall product serves my purposes reasonably well.

We need to keep our focus on the point of all this analysis we do. It's a good thing for wanderer to come forward with data showing my housing assumption to be invalid. That sort of input helps me in the process of making sound adjustments to my plan, so it is a plus for me to hear it.

What I found frustrating on the other board is that the level of dogmatism made it impossible to even hold discussions about most of the critical questions. Each aspiring early retiree's circumstances and goals is different, so there is no possibility of anyone putting forward a one-size-fits-all solution. We all have to look at the various analyses and determine which of the various risk options we as individuals want to take on. There is no such thing as life without risk, so we all take on risk somewhere. The question is, what sort of risk is "best" and that is always a highly personal decision in the final analysis.

I hope this response doesn't sound too defensive. I honestly have no objection if people want to come forward and say "this housing assumption of yours is nuts." It is entirely possible that the assumption is nuts. it was not one that I spent a lot of time analyzing before making it, so it is not one that I am even inclined to defend with much energy. My objection is to any claims that the entire plan is "bad" because of one questionable assumption. We all make a number of assumptions in our plans, and we all are probably going to get one or two of them wrong. If we are careful in an overall sense the overall plans will work. We need to consider these sorts of questions in context.

None of this is a reaction to what Wanderer said, His comment was entirely valid. It's a reaction again, unfortunately, to the atmostpherics of the other board. Many of us here came from that board, and, while we obviously do not adopt the same tone here that is present there, I think there is at least a possibility that we have taken in some of the unspoken "rules" of the other place and sometimes allow them to influence our thinking or posting here. I don't think that is entirely in my head. I see this as a very different sort of place, but I think that the realities of that place have inevitably had an influence on this place.

The influence has affected me as much as others, of course. When the thought of posting the information re the housing assumption came to my mind last night, I had a reaction that said "you better not do that, just let it go." Then I asked myself, "why would it be a good thing not to have that assumption out on the table for the board's consideration?" I decided that it was a healtheir thing for the board to have it on the table, and so I went ahead with it.

My point here is that it would do damage to the board if I had allowed that voice of caution to cause me not to post on the matter. I believe that that voice of caution has grown pervasive at the other board, to the point at which there are almost never interesting discussions of a subject matter that is one of the most interesting in the world. We have a completely different environment, but our history (a good number of us having come from there) may cause some of us to hold back from offering certain thoughts because there is a voice saying that they are "taboo" because they aren't supported by a spreadsheet.

I want to get over any tendencies along those lines that have affected my posting in the past. And In the event that there are any others here suffering from those sorts of tendencies (or any still at the other board who would like to be freed of the weight of those tendencies by coming here), I want to encourage them too to break free of them.

Spreadsheets do not make you safe. Spreadsheets are a tool. They can be used as a tool to enhance the effectiveness of your plan, but they can also be used as a tool for you to kid yourself about issues that you do not want to face in a straightforward manner. Spreadsheets can be part of an effective analysis, but it is not good to too quickly jump to the conclusion that the party who has a spreadsheet in hand is somehow more "rational" than the party who does not.

I believe that the other board has suffered from the Tyranny of Spreadhseets for a long time. This board needs to mark a different course. We need to employ spreadsheets in our analyses, to be sure. But we need to add the other stuff that makes the spreadsheet analyses meaningful. I believe that the extent to which we are successful as a board will be largely a function of the extent to which we develop a capacity to employ data in a way entirely different than it has been employed at the other board, as a tool for enhancing our understanding of the realities rather than as a tool for blocking the discussion of realities.
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Post by FMO »

hocus:

I do not know what the data says on this particular point. I just haven't looked into it, so I do not know. I obviously have gotten a lot better than a 4 percent real return on my home in the years since my August 200 "retirement." But I make no claims as to what I can reaonably expect long term.


The national data indicates that housing values have historically outpaced inflation by a percentage point or too. To assume that housing values will outpace inflation by 4% appears to be unfounded. So it would appear that owned housing is a good inflation hedge. The primary value of owned housing (preferably free-and-clear) for those living off of their assets, is that it fixes the bulk of your housing costs. As has been previously noted, rents are subject to inflationary increases in cost. Assets must be accumulated at (pick your own number) about a 25:1 ratio to accommodate this fact. For prospective early retirees, a free-and-clear home is a bargain since it can usually be purchased with far fewer assets.
FMO

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Post by hocus »

I just sold a home I owned for 16 years and I have no doubt that I had a less than 0% real return if you include the cost of repairs and improvements.

I cover the cost of repairs and improvements in separate spending categories, so I don't think it is right to subtract those amounts from the calculation of the income throw-off from the house.

Also, I am not sure that 16 years is a fair test. There have been 16-year periods in which stocks have generated poor returns,. But the gains in the following years can be great enough not only to make up for temporary losses, but to provide a good positive SWR in the long-term. The same thing can happen with an investment in a house.

My gains on my house from August 2000 (my "retirement" date) forward have been phenomenal. My townhouse was worth about $190,000 on my retirement date. I subsequently sold it for $260,000 and moved to a house then valued at $220,000 (pocketing $40,000). The new house is worth close to $300,000 today (I estimate). So I have a total gain since my retirement date of $150,000. That's a large percentage increase starting from an initial investment value of $190,000.

I obviously don't expect to obtain these sorts of returns on a sustained basis. But I could go into a long period where the price of my home does not increase or even goes down a bit and still be way ahead on the 4 percent assumption.

It may be that the data does not support the 4 percent assumption. I honestly do not know. If I determine that it does not, I will adjust the number. The flexibility to make that sort of change is built into my plan. I had no thought at the time of my retirement that I knew all that I was ever going to know about FIRE or about investing or about SWRs. So I always anticipated making adjustments as I went along.

But I do find the idea that I should assume a zero real return on my investment in my house to be excessively cautious. I believe that my house is overvalued today. So I do not think that it has a high SWR on a going forward basis. But I believe that it is entirely possible that my investment in my house had a higher SWR at the time of my retirement than a 74 percent allocation to stocks would have produced. I do not know this to be true, and I am not claiming it to be true. I am saying that I am not certain that it is not true.

My analysis made me feel that I could not "afford" stocks at the prices at which they were being offered in the year 2000. I did not feel the same way about the money invested in my house. I didn't analyze the housing question at nearly the same level of detail because it just wasn't an option to sell the house regardless of what data I managed to come up with. All I was going with re the house was a "sense" that the value it was assigned at the time was on the low side. Given the low value my investment in housing was being assigned in the year 2000, I thought that the odds favored me doing more or less OK with that money on a going forward basis. I still think that there's a good chance that the assumption will turn out to be OK, but I cannot offer a strong defense because I just don't have access to the data that would be required to do that.

My views on the SWR of stocks are data-based. My assumption on the SWR of my particular house is not.
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Post by ataloss »

I am back.

In an effort to avoid attributing innocent motives to those presumed guilty, my friend Bob will present the case for historically based swr. He has access to the REHP website and a copy of the FAQ from the TMF REHP board but doesn't know the contents of more than a few of the >100,000 messages there.

It seems to Bob (an engineer btw) that the term "100% maximum swr"￾ can only refer to past data. He notes that there are stated exceptions in application of the data to the future (especially asteroids) making the result less than 100% safe for the future. Bob searched the FAQ and REHP for a guarantee that the past data would apply to the future unless a giant asteroid struck the earth but couldn't find it. Bob wanted to call the result of this analysis the hswr but I wouldn't let him since this is an emotionally charged term.

I asked Bob if it wasn't misleading that the rehp study didn't include valuations. Bob seemed confused. Bob finds that an analysis of historical data is only one way of estimating future returns. He said "the historical results "are what they are."￾ I suggested that they may not apply to the future therefore they were wrong. Bob was starting to get annoyed. He told me that this was my problem since I insisted on calling the result of the historical study the SWR and also required this term to apply to the future. Bob wants to call the result of the rehp study the hdhswr © and he insisted that the result was correct. He says that applicability to the future is another issue.

Parenthetically, Bob explained that in designing highway bridges it was best not to use only historical data. That is, based on bridge collapses one could certify a bridge for a certain truck weight as the "maximum 100% safe transit weight" since a bridge of that design has never failed under a truck of that weight. Bob did not feel comfortable doing that since environmental and other conditions may vary in the future. He recommended what engineers call a "fudge factor"￾ (did I mention that he went to school a long time ago.)

I suggested to Bob that the REHP study was sort of a poor first draft type effort at estimating a SWR. Bob replied that it was a perfectly valid analysis of its type. I told Bob that I could do much better than the REHP. He pointed out that an attempt was made to improve the study by altering the stock allocation based on p/e ratios but it wasn't very successful. He suggests that if it is so easy to improve on the REHP I should show him some data improving on the hdhswr ©

I told Bob that it was plain to see that a 75% stock allocation wasn't ideal in 2000. Bob concedes this but is insisting that retrospectively timing the market is easier than doing it prospectively.

I am very unhappy about being misled. I tried to enlist Bob in my plan to protest the errors of the REHP and similar studies which have resulted in an incorrect swr (I have a letter writing campaign to have the Trinity authors retract their study.) Bob says that the limitations of the approach were/are obvious (I think he is implying that I was not careful in blindly applying past results to the future.) Further, Bob suggests that the 4% rule hasn't been disproved until it fails. I want to argue with this but I am not sure what to say. (Bob is very annoying.)

I am unhappy because it is clear that the REHP gives too high a SWR. Bob is an optimist and pointed out to me that things were bleak in 1932 but 3.7% worked out. http://www.retireearlyhomepage.com/worstre.html
Have fun.

Ataloss
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Post by hocus »

The national data indicates that housing values have historically outpaced inflation by a percentage point or two.

OK. I agree that, if this is what the data says, it is a strong argument for changing my assumption. I will plan to do that in my next update. I still am inclined to just lower the assumed real rate of return to 2 percent rather than to eliminate it altogether. But I also continue to remain open to other options.

I am surprised to hear that the data shows this. Perhaps it is because I have lived in the DC metropolitan area for so long. I believe that housing prices in this area have done better than the overall data suggests, at least in my lifetime. That particular experience has probably informed my "sense" on this question.

At some point, I would be interested in views as to the "why" of the finding that ownership in a residence produces such a low real return. Does anyone have thoughts as to why this use of capital produces such low returns, compared to most others?
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Post by ElSupremo »

Greetings hocus :)
At some point, I would be interested in views as to the "why" of the finding that ownership in a residence produces such a low real return. Does anyone have thoughts as to why this use of capital produces such low returns, compared to most others?


Expense ratio! :lol:
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Post by raddr »

hocus wrote:

It may be that the data does not support the 4 percent assumption. I honestly do not know.


Nor do I. I'm pretty sure though that long term housing would rise roughly in line with inflation, i.e. close to zero real appreciation.

If, for example, a house worth 100K today appreciates at a real rate of 4% then it would be worth about 330K in inflation adjusted dollars 30 years later. Thus a buyer would have to have greater than three times the real annual income to afford the house. This just can't go on for too many decades. :wink:

I bet wanderer, FMO, or other RE guru can set us straight here. Is it reasonable to expect long term returns much greater than inflation for residential housing?
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Post by ataloss »

JWR1945:
It is much simpler than you think and that is why you are confused.......... ... Valuations matter and higher valuations today mean greater risks going forward. Lower valuations today mean lower risks going forward.

Ah, I do recall Bernstein saying that current valuation (or past return) affects future returns. This is obvious. This is reason for concern. We do not know what the market level will be in 20 years but certainly our CAGR would be higher if we were starting at a lower level now.

Hocus:
Intercst says that you come up with a 4 percent number when you assume that the future will be like the past, and this is just flat-out wrong. It is not just my opinion that it is wrong. It is wrong as a matter of "mathematical certitude.:" The data does not support this assertion. He should stop saying it. All others should stop saying it too. It is an assertion that at this point in time has been proven false beyond any reasonable doubt

I guess it is the unwarranted extension of the certitude to withdrawal rates that is my problem. Bernstein never said that it was a matter of mathematical certitude that the 4% withdrawal rate was unsafe. He suggested that with current market valuations it would be prudent to plan for a lower withdrawal rate- which makes sense to me.
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Post by ataloss »

1. Hi Chips, I am more concerned about the portfolio shrinking and I think I would be very tolerant to it growing (possibly out of control) :wink:


2. JWR1945 I need some help in understanding something. What do you mean by "best estimate." Is this the same as what hocus is saying?

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We can each of us offer our subjective views as to the "best" take-out percentage and the "best" allocation percentage from now until the end of time, and never really get anywhere. When you are speaking subjectively, 4 percent is a good number and 1 percent is a good number and 11 percent is a good number, and they are all good numbers. Who is to say which of the various possibilities is really "best"?

What I like about SWR analysis is that it gets you out of that quicksand. The SWR is a number generated by data You don't have a right to an opinion different from mine on what the data says. It says what it says, and that's that.
Have fun.

Ataloss
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