May 13, 2002

Financial Independence/Retire Early -- Learn How!
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ataloss
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May 13, 2002

Post by ataloss »

5/13/02 was apparently a very important day for SWR at REHP-TMF:

Prior to The Great Debate, SWR analysis had always been viewed as an objective tool when it was discussed at the Motley Fool board. Prior to May 13, 2002, there were never suggestions put forward that you could define an SWR to be anything you wanted it to be. That idea is something new.

This has been mentioned repeatedly on this board. I did find this perfectly sensible statement by intercst (hopefully he won't mind the quote)

That's correct. "100% safe" in terms of the safe withdrawal studies means that the selected withdrawal rate survived all the pay out periods examined from 1871 to 2000. If you are predicting that something worse than the crash of 1929, World War II, or the Reagan or Clinton presidencies, then the safe withdrawal rates are less than 100% safe. That's all it is saying.

If you find comfort in imagining that something worse than all the things we've experienced over the past 130 years will happen to your retirement portfolio and want to use a lower withdrawal rate that's fine.

http://boards.fool.com/Message.asp?mid=17221010

Bob couldn't have said it better.

I can't find any post prior to 5/13/02 indicating that the swr was guaranteed for the future. I would appreciate a link. I am also interested in the idea that as of 5/13/02 it was stated that you could "define an SWR to be anything you wanted it to be."

I am not sure that many are interesed in what happened on a message board 12.5 months ago but if it really is this pivotal I guess I would like to understand why.
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Post by wanderer »

ataloss -

I can't find any post prior to 5/13/02 indicating that the swr was guaranteed for the future. I would appreciate a link.

you gotta be kiddin' me. people ask the guy "how much is enuf?" and 4%/25X is the answer. umpteen times.

well, i'm fairly sure he'll mind, but here goes... :wink:

from post #7 at that site, http://boards.fool.com/Message.asp?mid=10854600

JackMcFool wrote,

On the subject of retireing early there are many formulas as to how much is enough. Is there anyone who would be willing to share how much they have in assets and what rate of return it's earning and what is being harvested off each year. would 2 million be enough to retire on at age 50? Not enough at 40?

Using the 4% rule of thumb someone with $2 million could draw an inflation adjusted $80,000 per year. ...

... So if you're spending $40,000 per year (including health insurance premiums and taxes) you should start with a $1 million nest egg.

As far as rates of return go, remember the 4% withdrawal rate allows you to survive the "crash of 1929" and still not run out of money. If the crash never comes, you'll have more money than you know what to do with at the end of 30 or 40 years. ...

...If the market goes down, then base your calculation on your previous "all time high" December 31st balance and adjust for inflation only. Since the market goes up about 70% of the time, retirees limiting thier withdrawals to 4% or less can look forward to increasing thier withdrawals faster than inflation in most years.

iirc 1966-1996 was worse, so i think that 1929 statement was already "wrong" (i.e. the "crash" never came but that period generated a lower SWR. those "taking comfort" were simply being prudent ).

note the recommendaton to base your withdrawal on the previous all-time high. wow.

or from post #29

...The $24,000 figure is "90% safe", so there's a 10% chance you'd run out of money in 40 years with the higher withdrawal rate.

you might want to continue the process i have begun - these posts have a nasty habit of disappearing. :wink:

interesting that post #7 was almost three years to the day before hocus' post.
regards,

wanderer

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Post by ataloss »

No one even commented on or objected to this statement:

If you find comfort in imagining that something worse than all the things we've experienced over the past 130 years will happen to your retirement portfolio and want to use a lower withdrawal rate that's fine.

No howls of outrage that this had never been disclosed :wink:

In your quote note the term "rule of thumb" which seems to me to imply somewhat less than a 100% guarantee :wink:
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Re: May 13, 2002

Post by raddr »

That's correct. "100% safe" in terms of the safe withdrawal studies means that the selected withdrawal rate survived all the pay out periods examined from 1871 to 2000. If you are predicting that something worse than the crash of 1929, World War II, or the Reagan or Clinton presidencies, then the safe withdrawal rates are less than 100% safe. That's all it is saying.


I disagree. The likelihood is that stock returns would've been different (lower) if markets had been as liquid as they are now and if low cost index funds had actually been available during the majority of that time period. Apples and oranges, IMHO.
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Post by ataloss »

Intercst could have had too much faith in the stock markets and returns could be lower but I am searching for this fundamental shift in the meaning of swr. This quote was my candidate.
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Post by wanderer »

ataloss -

i like you and i don't have the time to argue. Here's my last reply on this thread to you and "bob" while noting that I've seen you make much stronger arguments:

No one even commented on or objected to this statement:

Didn't know that was required. It's been less than an hour, give folks time. :wink:

If you find comfort in imagining that something worse than all the things we've experienced over the past 130 years will happen to your retirement portfolio and want to use a lower withdrawal rate that's fine.

OK, now put up 5 ridiculing/name calling/whatever posts for balance of coverage purposes. What's your point? That sometimes, people who predominantly engage in spurious debating practices sometimes say things make sense? In fact, such statements might be seen as a cynical ruse to help them bolster their subterfuge by being able to point to "reasonable" statements.

ataloss, you know perfectly well who Borked that "debate". If it's unclear, I'm more than "OK" with us having differences of opinion. Trust me. :wink:

In your quote note the term "rule of thumb" which seems to me to imply somewhat less than a 100% guarantee

Here are the definitions for "guarantee":

One entry found for guarantee.

Main Entry: 2guarantee
Function: transitive verb
Inflected Form(s): -teed; -tee·ing
Date: 1791
1 : to undertake to answer for the debt, default, or miscarriage of
2 : to engage for the existence, permanence, or nature of : undertake to do or secure <guarantee the winning of three tricks>
3 : to give security to
4 : to assert confidently

http://www.m-w.com/cgi-bin/dictionary?b ... guaranteed

i feel confident that the poster you quote, like a certain RIA we know, won't make followers of his advice whole for the losses incurred in employing his sage counsel, so we can throw out the suggestions that people were referencing definitions #1 and 2.

he said, if x doesn't happen "you'll have more money than you know what to do with at the end of 30 or 40 years."

he said, "retirees limiting thier withdrawals to 4% or less can look forward to increasing thier withdrawals faster than inflation in most years."

he said, "...The $24,000 figure is "90% safe", so there's a 10% chance you'd run out of money in 40 years with the higher withdrawal rate."

He "gave security to" and "stated confidently".

I rest my case. :wink:
regards,

wanderer

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Post by wanderer »

oops -

sorry, i left out a response to this:

No howls of outrage that this had never been disclosed

the guy has 9,500 posts. the assertion that he never said anything reasonable on SWRs would be incorrect. So?
regards,

wanderer

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Post by ataloss »

Didn't know that was required. It's been less than an hour, give folks time.

Sorry, I was unclear. I meant on the much noted 5/13/02 thread. Intercst seems polite, respectful and reasonable (I know he was nasty to hocus and others later (or before and later.) I am at a loss to see anything fundamentally new on that thread about the definition of swr. Not even hocus indicated that intercst had changed the definition of swr. I think intercst essentially endorses a lower than 4% payout in this post where he jokes about asteroids.

holzgrafe writes,

Now, having said that, if you think that we are presently at a point equivalent to or worse than just before the crash(es), and "4%" retirements starting at those precise times did in fact result in failure within 30 years, and you think that the market performance in the near future will be as bad or worse than it was then, then certainly you are justified in backing down your planned withdrawal accordingly. That's a pretty gruesome scenario, though, and I believe it requires more than the current P/E ratios to justify. I could be wrong.


I couldn't have said it better myself.

intercst
(still worried about that asteroid. <grin>)

http://boards.fool.com/Message.asp?mid=17225227
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Post by wanderer »

Sorry, I was unclear. I meant on the much noted 5/13/02 thread. Intercst seems polite, respectful and reasonable (I know he was nasty to hocus and others later (or before and later.)

I see. I don't really care when or how i get to the "truth" about how much is enuf to retire (i think we're there but i am unsure about the future), I just want to employ a sound process and want the record accurate.

Not that it really matters, but intercst played nasty with a bunch of us. Once that became clear, I played nasty back. I could play nasty now if I wanted to. Not my cuppa joe.
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Post by ataloss »

i think we're there but i am unsure about the future

As the famous philosopher Yogi Berra said:

It's tough to make predictions, especially about the future

It appears to me that you are being very conservative and essentially planning for a future that may include asteroid like events. I am too.
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Post by hocus »

Ataloss:

You quote Intercst as saying:

If you are predicting something worse than the crash of 1929, World War II, or the Reagan or Clinton presidencies, then the safe withdrawal rates are less than 100% safe.

He says this sort of thing all the time. It is a highly deceptive thing to say in the context in which he says it. The clear suggestion is that, if you do not predict something worse than a crash or a world war, then the withdrawal rate he recommends is safe. It is not. In many circumstances, it is not even close.

If the future turns out like the past, the SWR for the year 2000 is 2 percent. Why bring up talk about things worse than depressions and wars when you don't need such things to occur for your withdrawal rate to fail? The only purpose that I can see for bringing up matters that have zero relevance to the debate is to confuse.

I meant on the much noted 5/13/02 thread. Intercst seems polite, respectful and reasonable (I know he was nasty to hocus and others later (or before and later.)

Intercst was reasonaly polite on the initial thread. I believe that his intial hope was that, if he did not engage too much, interest in the idea I brought to the table would pass and the board would continue to view his SWR claims as plausible.

It was only when it became clear that there was a deep desire on the board to learn the realities of SWRs that he flipped his lid. At that point he came forward and publicly declared that the "board culutre" demanded "ridcule" of anyone who put forward questions re his approach ("loony ideas" was the phrase he used). Form that point forward, things went gradually but steadly downhill.

I can't find any post prior to 5/13/02 indicating that the swr was guaranteed for the future.

Intercst has stated hundreds of times that, if you go with an allocation other than 74 percent stocks, it will take you longer to achieve a safe retirement. If he has no basis for knowing that a 74 percent allocation will in the future support the withdrawal rate he recommends, how could he possibly make this claim?

Intercst has said scores of times that it is "irrational" for any aspiring early retiree to use an allocation other than 74 percent stocks. If he believes that his approach does not accurately predict the future, why does he view it as irrational to go with other approaches? He makes the sorts of statements you cite from time to time, but they are in direct conflict with other statements he makes regularly on that board.

This is not an insignificant point. There have been many times when posters there have tried to make the case for investing approaches other than the one favored by intercst. His regular practice is to dismiss such claims as "irrational." He grants people permission to use them (how generous), but at the same time he claims that the data says they will not work and that it will take longer to retire safely going with any of the alternate approaches.

It makes it hard to generate much interest in an alternate approach when the board guru says that he has done a scientific analysis proving that they do not work, don't you think?
His claims have inhibited debate on alternative investment approaches, costing board members who failed to hear about the merits of those alternatives millions of dollars of accumulated capital.

If he stated accurately what the data reveals, there would be no problem. But the historical sequence methodology does not permit the claims he puts forward. It does not reveal the one rational approach to Retire Early investing. It does not tell you what allocation will get you to a safe retirement the fastest. All it does is tell you what happened in some earlier time-periods. That is not nearly enough information to support the investing claims that intercst regularly puts forward on that board.

Not even hocus indicated that intercst had changed the definition of swr.

Intercst has not changed the definition he employs in his posts on the board. He continues to maintain that his approach reveals the only rational approach to Retire Early investing and that it takes longer to retire safely using other approaches. These extremely irresponsible claims about the scope of applicability of his SWR analysis are the core problem.

If intercst knew the true SWR, his claims would not be so absurd. They would be overstatements. But, given his caveat that the results apply only if the future is like the past, he would not be too wrong to say that his recommended allocation provides the shortest route to a safe early retirement.

However, since he did not incorporate all the factors bearing on the result into his study, his claims are flat-out wrong. In the year 2000, there were several asset classes providing a SWR higher than 2 percent. Those asset classes got you to a safe retirement quicker than the intercst- approved approach.

In that year his claims were flat-out false. To the extent that board members placed ernough confidence in his claims to allow them to influence their allocations, they lost money as a result of these demonstrably false claims.

Intercst has not changed the definition he employs. It is intercst defenders who have changed the definition. Intercst defenders are now saying, "Oh, it's just a rule of thumb, what's the big deal?" Intercst never said that he was putting forward a mere rule of thumb. He has always said that his approach reveals the sole rational investing approach, presuming that the future is not worse than the past.

These are false claims, and these are dangerous claims. He should stop making them.
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Post by ben »

I don't read the Fool board anymore after the payment thing so am probably not that well "wandered" :wink:in the whole story - but the quotes I have seen here - and the ones I sneak peaked (with a bunch of new e-mail adresses) at the board after the payment issue, and again recently (cheap me!) does make me agree with Ataloss and Bob that Intercst makes more sense (to ME!) than a lot of other comments I see here.

Also agree that 13/5 did not revolutionize anything in MY book... :D

Maybe I am just too dumb to get it :roll:.

As for "rule of thumb" I believe it is time to update that dictionary as my understanding, as well as most other I asked, is clearly more like: "an estimate/rule you can use as ball park estimate only/does not fit all circumstances" - oh well - not a born English speaker either :wink:

Anyway; as Wanderer my "muslim" friend says; we can all be here even if we do not agree - and I guess that is the charm of a civilized message board! :D
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Post by ataloss »

I guess that is the charm of a civilized message board!

If we all agree what would we discuss. :wink:I fail to see any big shift in the swr approach or definition as of 5/13/2 ( 13/5/2 in the rest of the world.) I think my difference with hocus is that it was always obvious to me that the "rule of thumb" could work only to the extent that the future is like the past. I think it is implicit. I don't think it really needs to be stated. I wouldn't expect intercst to list all the conditions that might result in a failure. Maybe I just have an odd outlook.

I think that stock values outside the range experienced in the time of the study would raise a concern.


Hocus:
Intercst has not changed the definition he employs. It is intercst defenders who have changed the definition. Intercst defenders are now saying, "Oh, it's just a rule of thumb, what's the big deal?" Intercst never said that he was putting forward a mere rule of thumb. He has always said that his approach reveals the sole rational investing approach, presuming that the future is not worse than the past.


Intercst post 7 REHP( from Wanderer):
Using the 4% rule of thumb someone with $2 million could draw an inflation adjusted $80,000 per year. Even some folks in the Lexus/country club set could live on that.


http://boards.fool.com/Message.asp?mid=10854600

I agree that a 74% stock allocation is a product of retrospective testing and the fact that this varies with timing of withdrawals by month is suggestive that this isn't very solid (maybe another rule of thumb?)

It makes it hard to generate much interest in an alternate approach when the board guru says that he has done a scientific analysis proving that they do not work, don't you think?

Hocus, I have seen people dismiss your posts because everything they need to know about swr is in the intercst study. I have wondered if some of them were taking it on faith based on intercst rather than on a true understanding. (but I don't know what people really think)
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Post by wanderer »

ben -

don't get the "new lawrence" started on those bedouins! ahhh! mein gott!

i was physically forced to go to the graduation. everyone has a combo of a selection of six of the same twelve names: BS in Finance (totally made up name): Abdulla Rami Nasser Mohammed Said Gamel, etc. What westerners don't really realize is that these folks last names are first names. Some of the "99 names of god". 500 Abdullas later we finally stagger out, steam pouring from our ears.

I felt like a Jew - "never again!" i said to myself.

hopefully, ataloss knows the high regard i have for him - i might never have found the re*p without him (send the hate mail to ataloss ). ataloss is a good guy and I (also) don't know where all this SWR hashing is going. It needs to be questioned so please continue until you have satisfactory answers.

And ben, you didn't seem to post much back then - I'm glad you post now. I had hoped to hear more about Agadhir from you, alas no. :wink:

I can be a bit of a bull in a china shop at times. Hopefully you can attribute it to the passion I invest in some of these topics/relationships (I have met and talked extensively with Mr. hocus and have talked extensively and corresponded with ptsurmr - whose running off po'd me no end. same reasons hocus had with my departure. c'est la vie.) But civil with you gentlemen - I reserve my incivility to a select few. :wink:

anyway, back to the regular programming. :wink:..

aside - btw, i don't get terribly involved on the SWR hashing in part because it seems like it will be awfully tough to push it beyond 4% (except in times of extreme undervaluation preceding average or overvaluation - gummy's 11% for 40 years :shock:). i take comfort in knowing that, if it is lower than 3%, it can only fall another 4%. :wink:
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wanderer

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Post by hocus »

Hocus, I have seen people dismiss your posts because everything they need to know about swr is in the intercst study. I have wondered if some of them were taking it on faith based on intercst rather than on a true understanding.

That's an insightful comment, ataloss. There are a number of things going on here. First, people want the humber to be at least 4 percent. Second, they see that intercst went to the trouble of preparing a study on the question, and they rightly feel they can count on him to perform the math correctly. Three, they see that there are a good number of other studies that say esssentially the same thing as the intercst study. And four, they note that a majority of the boad agrees with intercst.

Most people are not SWR experts. They have not independently verified the study results. Many people have never even read the study in detail, or given serious scrutiny to the validty of claims made about it. Add all of these factors up and you have a situation where a good number of people conclude that "the intercst SWR claims must be more or less right." They are not, but it seems reasonable to many to conclude that they must be.

The results of the poll that you put up at the REHP board today are encouraging. You asked "is there one correct SWR or is the analysis only meant to produce a rule of thumb?" The vast majority said "rule of thumb." I have followed the board closely from the beginning, and I doubt that most would have said that pre-May 13, 2002. Most on that board used to take SWR very seriously. Most used to think that the study simply reported what the data on the question tells us, that it was an objective exercise, not a subjective one. My claims have had an influence, although I obviously have not yet made the sale.

It is the warrl comment on the poll thread that focuses on the key point. Warrl says that if you go with some allocation other than 74 percent stocks, you need to save more to make up for going with a non-optimal allocation. The practical significance of our future efforts here is that we will find out whether that statement is true or not.

If someone said on January 1, 2000, at the REHP board that "I am going to go with 50 percent TIPS and 50 percent stocks," the intercst response would have been "That's up to you, but you need to save more to support that allocation as it is sub-optimal." I am saying that's wrong. The data told you on Jan. 1, 2000, that a 50-50 mix had a higher SWR than a 74-26 mix.

If you are going to use SWR analysis to advise people as to the best allocation, you should report what the data that affects the question tells you.. The data says that 50-50 alloweed you to retire with less in the way of assets than did 74-26. I want people to have access to accurate information about what SWR reveals on how to invest.

I would love to see a question on that poll thread asking intercst himself whether the study provides merely a rule of thumb. In the event that he said yes, I would like to know whether he still thinks that 74 percent stocks has been proven to always be the optimal allocation.

If the number is only a rule of thumb, it cannot tell you the optimal allocation. The optimal allocation can be determined only by looking at data. You cannot determine the optimal allocation by putting forward subjective rules of thumb.

One last word. I wish that you would stop referring to the "if the future is no worse than the past" caveat as if it possessed significance in this matter. Intercst and I are in complete agreement that the results of a valid SWR analysis apply only in the event that the future is not worse than the past. There is no disagreement on this point, so I don't think there is any need to bring it up anymore.
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Post by ataloss »

Most people are not SWR experts. They have not independently verified the study results. Many people have never even read the study in detail, or given serious scrutiny to the validty of claims made about it.


As you know the SWR experts real and self-proclaimed will be looking at your final statement on this matter with a very critical eye.

I can agree with Bernstein that historical swr analysis is useful but may be unreliable at times but I have a problem with saying that it is wrong. I guess I would want to see a failure to make such a strong statement. When valuations are outside the range encountered in the study one could doubt its applicability. One could point out conflicting evidence. I have no problem seeing historical analysis as limited but I can't say with certainty that it is wrong.

This may be a minor point but I make a big distinction between probable and certain. Even highly probable and certain. I don't think you can use the Gordon model to derive a withdrawal rate that is certain. Other people may be ok with a highly probable lower return resulting in certain reduction in swr.


Clearly if you use historical returns from one period in a MVO to generate allocation for another period you can expect some contrary results. I would expect that after a long bull market you would get a heavy stock allocation. I am comfortable with the information from the trinity study. There was no attempt to fine tune the analysis to find the optimal allocation. I can see why one would be tempted to do it but the allocation has to be taken with (at least) a grain of salt.

If the number is only a rule of thumb, it cannot tell you the optimal allocation. The optimal allocation can be determined only by looking at data. You cannot determine the optimal allocation by putting forward subjective rules of thumb.

Bernstein says he can't tell optimal allocations (except for the past) so I guess I will be looking forward to seeing how you do it. :wink:


(please note no mention of the author of a certain study in the entire post)
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Ataloss
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Post by ben »

Hi Abdullah, sorry; Wanderer,
I believe my postings always come in lumps - depending on when have the time to reply really.

No need for Aghadir when living in Asia as supply of angels surely outstrips demand... :wink:
The more men that play the Aghadir team the better for the rest of us.
Enu'ff football.....

As for SWR I am (as Ken if I remember correctly) more focused on the real life scenario of practical withdrawels.

I have the 3 budgets: minimum, good life, luxury and will be happy with them matching 3%, 4%, 5% respectively and further can see already on my spending today that I will swiftly cut spending during bad return years as can not stomach a blind set % withdrawal rate anyway.

Personally I believe that somebody starting RE without room for flexibility and an eye for the market returns will take more risk than I want to do.
The 4% is simply a good rule of thumb (argh..here we go again! :D) for me, as the future can always contain stuff that has never happened before - I am however willing to change that stand when a workable time machine is produced by Sony.... then again; everybody would get one and efficient market theory then simply takes even THAT advantage away... hope Sony keeps a low profile....

Have a great weekend!
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Post by ataloss »

then again; everybody would get one and efficient market theory then simply takes even THAT advantage away


a possibility I hadn't considered :)
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Ataloss
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