Driving Drunk & Other "100% Safe" Actions
Posted: Wed Jul 14, 2004 12:24 am
JWR1945 is the numbers guy. I am over my head talking about that stuff. So I often try to explain the realities of SWRs by making analogies that bring home the point of why there are some ways of reporting what the historical data says re what is safe that are analytically valid and other ways that are not.
I will use this thread as a place to collect various SWR analogies that I have put forward during the first 26 months of the Great SWR Debate. The Drunk Driving analogy set forth below is my favorite because it makes two important points through the use of one story. The two points are that: (1) the conventional methodology was analytically invalid before we entered bubble-level valuations; and (2) the problem got a lot worse in the late 1990s.
This post comes from the "SWR of 6.21 Percent for 26 Years"Â thread at the Early Retirement Forum. That thread is the second most popular thread in the history of that site; I recommend that those with more than a casual interest in the SWR matter read it all. The Drunk Driving analogy appears as Post Five on Page Four of the thread. Here is a link:
http://early-retirement.org/cgi-bin/yab ... 8;start=45
Here is the full text of the Drunk Driving post:
Say that you have a friend who has been to your house 130 times over the course of the time you have known him. On 128 of those occasions, he drove home without incident. Twice he got drunk at parties you were throwing. On the first of those occasions, he banged into another car at a red light. On the second, he smashed up a neighbor's fender while parking. In neither case did he get himself killed as a result of his drunk driving.
This weekend, he gets twice as drunk as you have ever seen him before. You see him heading to the car and suggest that he sleep over rather than taking a risk of getting himself killed.
He says "I was drunk on two earlier occasions, and I didn't die either of those times. If I bang up another car again this time, I'll just somehow come up with the money needed to pay the bill. At least I can be certain that I won't get myself killed."
You say: "But two times isn't much to go on, and you're a lot more drunk this time. I think there's a real chance you actually will get killed this time."
He says "you're forgetting that I have driven home from your place 130 times. That's an awful lot of times that I drove home from here and didn't get killed. Considering that I've done this 130 times before, I'm 100 percent confident that I can pull it off again this time."
I am not persuaded by this logic. What matters is what happened the two times your friend was drunk. On both occasions when retirees tried to get away with a 4 percent withdrawal at 1929-type valuation levels, their retirements barely survived 30 years. And during the bubble, valuation levels went a lot higher than they were in 1929. I do not think that aspiring early retirees should be placing their confidence in claims that, because on two earlier occasions retirees just barely mananaged to survive on 4 percent withdrawals, it is safe for new ones to try test their luck in hoping this same withdrawal rate will barely squeak by yet a third time. This is especially so when the valuation level at which they are starting their retirements is far higher than it was on the two earlier occasions on which this withdrawal rate squeaked by.
Your friend might survive the ride home no matter how drunk he is this time. Anything is possible. But I don't view it as a safe practice for you to hand him back his car keys.
I believe that the historical data is trying to tell us something important. I think that we should be soberly trying to come to terms with the message it is trying very hard to communicate to us.
I will use this thread as a place to collect various SWR analogies that I have put forward during the first 26 months of the Great SWR Debate. The Drunk Driving analogy set forth below is my favorite because it makes two important points through the use of one story. The two points are that: (1) the conventional methodology was analytically invalid before we entered bubble-level valuations; and (2) the problem got a lot worse in the late 1990s.
This post comes from the "SWR of 6.21 Percent for 26 Years"Â thread at the Early Retirement Forum. That thread is the second most popular thread in the history of that site; I recommend that those with more than a casual interest in the SWR matter read it all. The Drunk Driving analogy appears as Post Five on Page Four of the thread. Here is a link:
http://early-retirement.org/cgi-bin/yab ... 8;start=45
Here is the full text of the Drunk Driving post:
Say that you have a friend who has been to your house 130 times over the course of the time you have known him. On 128 of those occasions, he drove home without incident. Twice he got drunk at parties you were throwing. On the first of those occasions, he banged into another car at a red light. On the second, he smashed up a neighbor's fender while parking. In neither case did he get himself killed as a result of his drunk driving.
This weekend, he gets twice as drunk as you have ever seen him before. You see him heading to the car and suggest that he sleep over rather than taking a risk of getting himself killed.
He says "I was drunk on two earlier occasions, and I didn't die either of those times. If I bang up another car again this time, I'll just somehow come up with the money needed to pay the bill. At least I can be certain that I won't get myself killed."
You say: "But two times isn't much to go on, and you're a lot more drunk this time. I think there's a real chance you actually will get killed this time."
He says "you're forgetting that I have driven home from your place 130 times. That's an awful lot of times that I drove home from here and didn't get killed. Considering that I've done this 130 times before, I'm 100 percent confident that I can pull it off again this time."
I am not persuaded by this logic. What matters is what happened the two times your friend was drunk. On both occasions when retirees tried to get away with a 4 percent withdrawal at 1929-type valuation levels, their retirements barely survived 30 years. And during the bubble, valuation levels went a lot higher than they were in 1929. I do not think that aspiring early retirees should be placing their confidence in claims that, because on two earlier occasions retirees just barely mananaged to survive on 4 percent withdrawals, it is safe for new ones to try test their luck in hoping this same withdrawal rate will barely squeak by yet a third time. This is especially so when the valuation level at which they are starting their retirements is far higher than it was on the two earlier occasions on which this withdrawal rate squeaked by.
Your friend might survive the ride home no matter how drunk he is this time. Anything is possible. But I don't view it as a safe practice for you to hand him back his car keys.
I believe that the historical data is trying to tell us something important. I think that we should be soberly trying to come to terms with the message it is trying very hard to communicate to us.