Is Bernstein changing SWR?

Financial Independence/Retire Early -- Learn How!
Post Reply
tjscott0
* Rookie
Posts: 10
Joined: Tue Dec 03, 2002 3:16 am

Is Bernstein changing SWR?

Post by tjscott0 »

See:http://boards.fool.com/Message.asp?mid=19122926

Bernsein:

"It's not easy. The simplest way to calculate the size of your required nest egg is to divide how much you'll need from it each year by the expected real rate of return. If you'll need $50,000 a year [after taxes] to live on and $20,000 will come from Social Security, that leaves $30,000 you'll need annually from your portfolio. A nice, conservative return assumption is about 3% a year of real return [after inflation], so you'll need a cool $1 million, $30,000 divided by 0.03, to accomplish it."





Original article at WSJ:http://online.wsj.com/article/0,,SB1054 ... l_links_us

Perhaps Bernstein is utilizing .03 for illustrating how to calculating nestegg needed for $30,000/yr needed. I would think he would utilize a SWR that he felt was proper SWR.

I don't subscribe to WSJ. Perhaps someone on this board does. They could read article to gain whether .03 is Bernstein's SWR.
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

good point. sounds like he is doing what jwr recommended - making an estimate based on one set of circumstances (2%+- in 2000) and a different estimate in another (3%+ in 2003).
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
tjscott0
* Rookie
Posts: 10
Joined: Tue Dec 03, 2002 3:16 am

Is Berstein changing SWR?

Post by tjscott0 »

Yes perhaps Berstein agrees with the 94% in ataloss's poll that SWR is a rule of thumb rather than mathamathical calculable number. I am certainly in the 94% catagory. One must make the best calculation possible on the data available; then make the ER jump and hope the d*mn parachute opens. If a person waits for 100% certainty, they will never ER. Just my opinion.
User avatar
ataloss
**** Heavy Hitter
Posts: 559
Joined: Mon Nov 25, 2002 3:00 am

Post by ataloss »

I think prometheuss had a good point:
Technically, Bernstein is not describing a SWR. He is describing returns after inflation and using the 3% in a manner that does not draw any funds from retirement investments--just from the return on those investments.


Bernstein doesn't actually mention inflation adjusted withdrawls. I think he is just giving a "ballpark" figure.
Have fun.

Ataloss
Oliver
* Rookie
Posts: 21
Joined: Wed Dec 04, 2002 4:00 am

.8% equity premium !

Post by Oliver »

I think fundamentally he believes the return on equity will be 3% in the future. This does indeed have an impact on SWR, if he is correct.

If he is correct, the ~2.2% yield on TIPS start to look good again. That is a .8% equity premium before expenses.
2. In planning for our retirement, what's a sensible return to expect from equities?

People tend to confuse economic growth with [stock] price growth. True, the nation's GDP [gross domestic product] grows at an average rate of just over 3.5% a year. But thanks to the investment bankers, we lose about 2% of that to net new-share issuance, so the real per-share increase in dividends and earnings is in the vicinity of just 1.5% a year. Three years ago, no one believed that, but recently it's gotten easier to understand. Add to that a 1.5% dividend, and hey presto, you can expect about a 3% real return from stocks.

Naturally, I'd prefer real portfolio returns, inclusive of expenses, of about 5% a year. I'd also like there to be a Santa Claus.


I am not sure if this holds in a global economy, I hope not!
5. Some have postulated that the wave of retiring Baby Boomers will add selling pressure to stocks for years, just as they added buying momentum before their retirement. Do you buy that idea?

Not only do I buy it, I consider it an accounting identity [fact]. Someone has to be taking the stocks and bonds off the boomers' hands when they want to retire. That's one of the reasons why I quote such low portfolio returns. At the end of the day, stocks, bonds, and Krugerrands are just a medium of exchange between the folks who sell goods and services and the folks who buy them. In a world with more and more retirees and fewer and fewer workers, the amount of goods and services you're going to be getting for your securities will get progressively smaller.


Take care,

Oliver
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Oliver has provided us with some good quotes. I want to draw your attention to this sentence attributed to Bernstein.
In a world with more and more retirees and fewer and fewer workers, the amount of goods and services you're going to be getting for your securities will get progressively smaller.

There is a fine point that the Government's economic statistics people mention. Many of our measures, especially GDP, talk about annual production or income. They do not indicate personal wealth.

This pops up when you read about the national savings rate. Whether it is large or small has very little to do with the economic status of most people. They build up a lot of wealth over the years, especially from their personal residences. Another factor worth noting is that capital gains are excluded from the income side of the accounts (although taxes paid show up as reductions). The fact remains that an existing home that has been properly maintained still has value. It has value long after it is built. It shows up in the economic statistics as wealth. But it no longer shows up as part of the GDP.

This is my point: older people can be drawing down their existing wealth. Not everything that is consumed this year is built this year.

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

ataloss quotes prometheuss whose has said:
Technically, Bernstein is not describing a SWR. He is describing returns after inflation and using the 3% in a manner that does not draw any funds from retirement investments--just from the return on those investments.

Bernstein doesn't actually mention inflation adjusted withdrawals. I think he is just giving a "ballpark" figure.

I am almost certain that prometheuss has it wrong. (I am not a subscriber and I cannot read the source material.)

The new 3% withdrawal rate is entirely consistent with what William Bernstein mentions in The Four Pillars of Investing. It is not consistent with what prometheuss has described.

William Bernstein's was clear about his own usage. He was talking about a withdrawal rate (then 2%) that applied to an initial balance. The withdrawal amount then increased with inflation. The portfolio was expected to last for 30 years (at a high degree of safety...around 95%). I have not seen any withdrawal strategy mentioned by William Bernstein that excludes depleting capital under worst case conditions.

Have fun.

John R.
Oliver
* Rookie
Posts: 21
Joined: Wed Dec 04, 2002 4:00 am

Post by Oliver »

Hello John,

The difference is that on page 72 of The Four Pillars of Investing he indicates that he expects Large US Stocks to return 3.5%. Expected returns of other equity classes were higher, excepting Precious Metal Equity.

Now he is indicating that the expected return on equity is 3%. The most optimistic interpretation is that Bernstein believes that his former estimate of the expected return for Large US stocks was incorrect and the estimate needs to be adjusted downward from 3.5% to 3%.

Oliver
JWR1945 wrote: The new 3% withdrawal rate is entirely consistent with what William Bernstein mentions in The Four Pillars of Investing. It is not consistent with what prometheuss has described.

William Bernstein's was clear about his own usage. He was talking about a withdrawal rate (then 2%) that applied to an initial balance. The withdrawal amount then increased with inflation. The portfolio was expected to last for 30 years (at a high degree of safety...around 95%). I have not seen any withdrawal strategy mentioned by William Bernstein that excludes depleting capital under worst case conditions.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Oliver
Now he is indicating that the expected return on equity is 3%. The most optimistic interpretation is that Bernstein believes that his former estimate of the expected return for Large US stocks was incorrect and the estimate needs to be adjusted downward from 3.5% to 3%.
Ouch! Big time! Ouch, again!

See the last sentence before the first new paragraph on page 234 of The Four Pillars of Investing. It states:
Recall from Chapter 2 that it's likely that future real stock returns will be in the 3.5% range, which means that current retirees may not be entirely safe withdrawing more than 2% of the real starting values of their portfolios per year!


Later, near the top of the following page, William Bernstein indicates that he relies on his Monte Carlo simulations instead of the rules of thumb that he mentioned earlier and that led to the 2% number.

If this interpretation is correct (a la prometheuss), then William Bernstein is estimating that today's Safe Withdrawal Rate is less that 2%.

We have to be careful when reading Bernstein's comments. He is fast and loose when he uses percentages. He loves to generate rough approximations or rules of thumb. These are OK, but they often contain subtle mathematical errors. Those errors can cause problems if you rely on them too heavily.

If his comments were directed to a new estimate of future real stock returns, I would have expected him to make prominent mention of the Gordon Equation. Unfortunately, I do not know what he said since I do not subscribe to the Wall Street Journal.

Regardless of the details, I think that we both come to different conclusions that that suggested by prometheuss.

Have fun.

John R.
User avatar
ataloss
**** Heavy Hitter
Posts: 559
Joined: Mon Nov 25, 2002 3:00 am

Post by ataloss »

Try this:
http://groups.msn.com/Investor/general. ... l_topics=0

You just can't get a 3% inflation adjusted withdrawal from a 3% real return portfolio which WB knows. I think he tends to be a little loose in quotes and predictions with the media while attempting to make his main point that investors need to lower expectations. Prometheus may or may not be right but this quote makes more sense to me if you are withdrawing a constant percentage from the account and letting withdrawal ammount vary. Not that bad an idea for a portion of your income (you still have the canasta money from the social security :wink:)
Have fun.

Ataloss
User avatar
Bookm
Admin Board Member
Posts: 36
Joined: Wed Nov 27, 2002 4:00 am
Location: Norfolk, VA
Contact:

Post by Bookm »

Despite his alleged shortcomings, I'm still a huge fan of WB. He can be humerous and to the point, as these quotes illustrate:
1. What's the biggest misperception people have about retirement investing?

I'd point out three. First, people think they're going to get a 7% real stock return over time. That was a one-time gift [during a bull market], and not many people got it. Second, the overwhelming majority of investors still believe in the Returns Fairy -- that their money managers can beat the market for them. Third, they also believe in the Market Timing Fairy -- that newsletter writers and investment strategists know where the markets are headed.

2. In planning for our retirement, what's a sensible return to expect from equities?

People tend to confuse economic growth with [stock] price growth. True, the nation's GDP [gross domestic product] grows at an average rate of just over 3.5% a year. But thanks to the investment bankers, we lose about 2% of that to net new-share issuance, so the real per-share increase in dividends and earnings is in the vicinity of just 1.5% a year. Three years ago, no one believed that, but recently it's gotten easier to understand. Add to that a 1.5% dividend, and hey presto, you can expect about a 3% real return from stocks.

Naturally, I'd prefer real portfolio returns, inclusive of expenses, of about 5% a year. I'd also like there to be a Santa Claus.


You have to admire a self-taught man.

Bookm
Wall Street investment products suck because it's all about them and their revenue today. It's not about us and our income tomorrow. - Scott Burns
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

3. No matter what our age or net worth, we all have to figure out how much we'll need in retirement and how much we'll have to save to get there. How do we answer both questions?

At last! I had a feeling this is what preceded WB's comment It's not easy.

Maybe he meant off the cuff rots, where you assure septuagenarians that they are "90% safe," are deceptively reassuring... :wink:
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
wanderer
*** Veteran
Posts: 363
Joined: Tue Nov 26, 2002 9:33 am
Location: anytown, usa

Post by wanderer »

You just can't get a 3% inflation adjusted withdrawal from a 3% real return portfolio which WB knows.

nah. but you can get very close if volatility drops to close to zip.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Thanks for the link.
ataloss
You just can't get a 3% inflation adjusted withdrawal from a 3% real return portfolio which WB knows.
I interpret these numbers as referring to different things.

From the link that ataloss provided, it is very clear that William Bernstein expects stocks to provide a 3% real return. The other 3% is a conservative (i.e., safe) withdrawal rate estimate from a retirement portfolio.

Bernstein went on to talk about a 60%/40% allocation between stocks and bonds. Then he went further to divide stocks in various proportions. He has included REITS and foreign stocks as part of this allocation.

The 3% number is very curious since TIPS that are currently available on the secondary market can provide substantially more than a 4% real return for 30 years. (That would leave you with a final balance of zero. If you were to choose a 100% TIPS approach for an initial portfolio, you have a theoretical problem of how to extend the period. If you have restricted your withdrawal amounts to 3%, you should be able to extend the period quite a bit.)

Thanks again for the link. I have found that William Bernstein does not always tie up all of his loose ends at one location. But he seems to provide enough instructions for you to figure out. Kinda like assembling Christmas toys.

Have fun.

John R.
hocus
Moderator
Posts: 435
Joined: Mon Dec 02, 2002 12:56 am

Post by hocus »

I have found that William Bernstein does not always tie up all of his loose ends at one location.

I agree with this comment, JWR1945. I think it is only fair to note, however, that this is true of just about everyone who comments on SWRs. Most of the confusion could be cleared up quickly if people would use terms to mean the same thing in all circumstances. But "safety" means one thing on one day, and something entirely different on another; and "a future worse than the past" means one thing on one day and something entirely different on another; and "optimal" means one thing on one day and something entirely different on another; and so on.

To analyze things reasonably, there needs to be some consistency in the defintions of terms and phrases being employed in the discussion. My personal sense is that there is a reluctance to being consisent because some are concerned that a reasoned discussion will lead to disconcerting conclusions.
User avatar
ataloss
**** Heavy Hitter
Posts: 559
Joined: Mon Nov 25, 2002 3:00 am

Post by ataloss »

Thanks again for the link. I have found that William Bernstein does not always tie up all of his loose ends at one location. But he seems to provide enough instructions for you to figure out. Kinda like assembling Christmas toys.


I think it hard to say everything in a short interview and you can't include footnotes. Some of us have been conditioned to set a standard for swr of 30 years with inflation adjusted withdrawals. This is by no means universally accepted (unless I missed the memo) and is somewhat arbitrary anyway.
Have fun.

Ataloss
therealchips
*** Veteran
Posts: 174
Joined: Sat Jan 04, 2003 4:00 am
Location: Henderson, Nevada, USA

Post by therealchips »

I'm way behind in reading this thread, and my comment is not completely relevant, however, John R. said
The fact remains that an existing home that has been properly maintained still has value. It has value long after it is built. It shows up in the economic statistics as wealth. But it no longer shows up as part of the GDP.
I think that the emphasized part is incorrect.

http://wueconb.wustl.edu/E1043S00/schen ... urces.html
The major part of rental payments to persons is in the form of imputed rent of owner-occupied housing. Imputed rent estimates how much rent people who own their homes would pay if they had to pay rent, and assumes that they then pay this amount to themselves. This is the major class of nonmarket production which GDP includes.


http://members.shaw.ca/elementaleconomics/mac_1_3.htm On measuring GDP by factor income:
Interest and misc. investment income including net interest payments by households, land rent and imputed rent for owner-occupied housing


Hey, this is one of the few points I remember clearly from an economics course I took in 1967. :)
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
User avatar
ataloss
**** Heavy Hitter
Posts: 559
Joined: Mon Nov 25, 2002 3:00 am

Post by ataloss »

Hey, this is one of the few points I remember clearly from an economics course I took in 1967.


it hasn't been quite that long for me but I didn't recall (or perhaps ever know) this
Have fun.

Ataloss
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

I stand corrected. therealchips has it right. Personal residences are treated as business investments for calculating Gross Domestic Product (and Gross National Product as well).

This is done so that the annual production calculations do not vary according to upon who owns a home. For purposes of calculating annual production it makes no difference whether a single person owns all houses and rents them out or whether each occupant owns his house outright. Housing is treated as a product. The value of this housing product is reflected in rents, whether actual or imputed.

There is an analogy in the treatment of machines that are used to make a final product. Building the machine is counted as a product in itself. What it produces is also counted as a product. Depreciation is not counted in the Gross Domestic Product although it is subtracted to calculate the Net Domestic Product (and it is among the items subtracted to calculate National Income, Personal Income and Personal Savings).

(The Net Domestic Product is the Gross Domestic Product minus the Capital Consumption Allowance or CCA. The CCA consists of everything that is consumed in making a new product. Part of that is the Consumption of Fixed Capital or CFC, which is depreciation.)

A new house is part of the Gross Domestic Product and it is valued according to its sales price. An existing house does not enter into this calculation. Both the new houses and the existing homes count toward imputed rents. An important but subtle distinction is that the rental value of a house is not directly related to its purchase price. It is determined from rental market. The imputed rent is determined from rents actually collected from comparable houses.

Obviously, there are measurement difficulties. What a person is willing to pay for his own home often differs substantially to what the general public would be willing to pay.

The Gross Domestic Product emphasizes the production of new goods and services. The treatment of houses is special. If you buy a used car, no matter how new and no matter how expensive, it does not count as part of the Gross Domestic Product. It is not new. If you buy a famous painting, it still does not count, regardless of value, unless yours is the first purchase. Neither shows up as personal savings. They are Personal Consumption Expenditures.

I thank therealchips for getting it right. I always like to get my facts straight. Thanks for the references as well.

My memory is vague. I remember that I missed a question about National Income Accounting in college and that I thought that it was unfair. I am not sure but I think that it was this question. Neither my textbook nor the class lectures stressed the special treatment afforded to housing. As I read through my textbook, it took me several times before I found the relevant passage. It was in the section about Gross private domestic investment. The only thing that was said under the title Rents was: Rents are almost self-explanatory. They consist of income payments received by households that supply property resources.

(Later on, the textbook introduces the specialized term economic rent to refer to land and other natural resources that are completely fixed in their total supply. It is important to understand that land should have a price and that people should pay rent to use it. This is the rationing function of a free market. People are willing to exchange their labor for such assets. The labor based economic theory of Marx missed this point entirely. Charging for the use of land is not the same thing as exploiting people. Just because no man labored to create the beach does not mean that oceanfront property should be priced at zero.)

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Here are some references. I had to use these before I was able to locate the hidden paragraph in my college textbook. These come from the BEA.

An Introduction to National Economic Accounting
Methodology Papers: U.S. National Income and Product Accounts
March 1985
http://www.bea.gov/bea/articles/NATIONA ... thpap1.pdf

From page 11 of 19 of the pdf file or page 9 of the document.

Household savings investment account section.

Although several types of assets might be considered to be household sector investment, they are defined to be either consumption by the household sector or investment by the business sector. For example, household expenditures on durables - automobiles, refrigerators and the like - are defined to be consumption; homeowners' investment in residential property is defined to be business investment.

AND

Alternative Measures of Personal Savings (April 2002).
http://www.bea.gov/bea/ARTICLES/2002/04 ... Saving.pdf

Read the entire article. Take special notice of the box about the Treatment of Owner-Occupied Housing in the NIPA's. It is on page 6 of 12 on the pdf file and page 18 of the document.

These references as well as those provided by therealchips should help us (or, at least, me) get things right.

Have fun.

John R.
Post Reply