Future Proceedings on the SWR Matter

Financial Independence/Retire Early -- Learn How!
therealchips
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Location: Henderson, Nevada, USA

Post by therealchips »

When you look at Dory36's outputs, you see that there are very few independent answers. If every start year were independent (as intercst was trying to claim), then the failures (which are displayed in red) would have been distributed randomly. They are not. They are clustered together.

That is the context. Estimating the safety of different withdrawal percentages is a different issue.

Thanks for the clarification, John. I knew I was missing something. Now that I understand the context, it seems to me that this paucity of independent data is a serious problem that will beset if not ruin any approach to analyzing safe withdrawal rates. Even waiting two hundred years to develop a few more independent data points would not help because the economy will change so much in that period. As it is, I'm uncomfortable making plans for the next thirty years based in part on what happened in the rather different US economy of 1871. I'll be happy to be shown some other result.

Don't I recall someone's Monte Carlo approach to address this problem of too few independent sequences by taking a series of thirty random annual returns from the data, and iterating to estimate SWR for a thirty year plan? If I remember correctly, that led to rather low estimates of SWR. That approach, randomizing the order of observed annual returns, would seem to have the handicap that it ignores serial correlation in the original historical data. A possible remedy would be to impose the historically observed amount of serial correlation during each iteration by modifying the randomly selected annual return by some increase or decrease. Is that a legitimate approach?

An aside on my experiment at Dory's site mentioned in my last post, using nominal numbers like a million dollar stash and a thirty year planning horizon: (I think I used 4% inflation too, but I'm not sure.) With the nominal 4% withdrawal rate, Captain Bill said that the median or average final stash in that plan was worth $4,274,913. Correcting that for 4% inflation produces a purchasing power at the end of the plan of $1,256,216. So then, according to this data and my understanding of it, most of the thirty year plans would achieve my goal of not eroding the purchasing power of the initial retirement stash. I would have liked to see Dory's report make explicit that the final four million dollar figure had not already been corrected for inflation, as well as a count of the number of sequences in which purchasing power of the final stash was less than the original amount, or maybe a histogram of what those final values of purchasing power were.

Thanks for your patience. I seem to lose the thread of the conversation sometimes.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
hocus
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Post by hocus »

I found this excellent response to the valuation question:

intercst : The 4% withdrawal rate is not for all time periods. It is for the single worst 30-year pay out period out of the 100 periods examined between 1871-2000. The 4% withdrawal rate is not based on a mix of data from high, low and fairly valued stock periods. It is based on the single 30-year period that produced the lowest withdrawal rate.

I appreciate that this comment appears to be responsive to at least some of the concerns re valuation that I have put forward. My contention is that it is not responsive. He is describing the methodology he used accurately, but that methodology does not adequately take into account the effect of changes in valuation levels. I addressed this in a little more detail in a post I put this morning to one of the other current SWR threads.

I very much need to take my leave of this for four months. Others may continue the discussions in my absense, of course. But I am going to try hard to work my way to the door.

When I return in October, I expect that I will put up two posts setting forth two draft documents. One will be my proposed language for the invitation to the four experts that we will ask to come and discuss SWRs with us. The other will be my proposed language for a "Statement on the Realties of SWRs."

We can go over the statement in detail, line by line if necessary, until all community members agree with some modified version. If there are matters on which we cannot achieve consensus, we can word the statement to reflect that. We can say "the board is deeply divided on Point X." My goal is to sum up the key questions on which guidance is needed for work on enhancing the value of SWR analysis to continue.

We already have a huge head start on the other board, in my view. I believe that if we can structure the discussions a bit, we can do some truly significant work. Structuring the debate is important, I believe, because I think that there are some key points that need to be understood for progress on the less fundamental stuff to be achieved. If we get a few key concepts nailed down, I think the rest will come relatively easy.

It's a process, and I appreciate you putting your skepticism over some of my claims foprward in such forceful terms. That is how people trying to learn do so, through a process of challenge and response, and, ultimately, resolution. I hope that we come closer to agreement at some point, but please don't ever think that I have any objection to the holes in my arguments that you have tried to identify. If I am wrong, I need to know that I am wrong before I take this any further. What matters in the end is that we get it right.
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