Cancel SWR? Go Target!

Research on Safe Withdrawal Rates

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unclemick
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Cancel SWR? Go Target!

Post by unclemick »

Now that Vanguard Target Retirement Series is out - we can shut off computers, stop reading/investing in other index funds - since they've solved the probem - all we have to do is fish, golf, travel, and enjoy. Oh - and control expenses of course.

Tongue in cheek - but only a little - assuming due diligence on Vanguard's part - What does SWR research have to say about Vanguard's one life cycle fund approach. They have to have made assumptions on retirement age,life expectency, span, market history, take out in retirment, etc. To start, inflation protected securities start to play a big role in 'income', 2005. Wonder what the SD is going to be. Can one discern from the sliding asset changes what assumptions they are making about terminal portfolio values.

By the by - I of course own the fore runner Lifestrategy(you gotta change manually when you get old) and suffer from the incurable putz - dividend stocks, which I'll never give up - heh, heh.
Mike
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Post by Mike »

I was not aware that Vanguard specified what a safe withdrawal rate from their target fund is.
unclemick
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Post by unclemick »

They didn't and they won't - unless you use their financial planning services. But I'd bet money they have assumptions.

Duh? Is it just me or does anyone else see some similarities between Vanguard's use of inflation protected securities and some of the TIP's data posted on this forum in the past?
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Post by Mike »

Vanguard seems to change stock/TIPS allocations based strictly upon age. Recent research is investigating the effects of changing allocations based upon market value.
unclemick
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Post by unclemick »

Mike

Yep - based on age - that's exactly the way I do it. The old school retro pie charts I grew up with when I first started reading about investments along with take the div/interest and let the principle (incl. cap gains) ride is also a method I try to use.
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Post by unclemick »

Ooops

I need to amend my previous post - while I read and bought into the pie chart allocations based on age, - during my accumulation/work years I actually followed Ben Graham's defensive investor 50/50 stock/bond split more than all the other side forays I tryed. Old school enthusiasm overwhelmed me - momentarily - sorry. My respect for the 'value premium' is expressed more in my dividend stocks.

So ?? apparently Vanguard is still using the age progression as a method of changing asset mix thu time WITH the added twist of overweighting inflation protected securities toward the end of the series. What about the accumulation/distribution phases? I would think many ER's don't match Vanguard's assumptions.
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Post by Mike »

I would think many ER's don't match Vanguard's assumptions.
I would guess they base their calculations upon the standard retirement age, with its related life expectency. ERs would have to figure out how to adjust their own allocations based upon their extended life expectency. Recent research on this board would suggest further modification of the allocations based upon market valuation, currently more conservatively with respect to the S&P.
unclemick
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Post by unclemick »

Yep

An ER of great courage(not me) might utilize the P/E10 and TIPs data sets to pick his place among the Target Series and those with truly great courage might shift over time - say a 40 year ER span as valuations/situation changed.

Theorywise - I of course, would key off the SEC yield - because of my personal prejudice.
JWR1945
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Post by JWR1945 »

I believe that my investigations into switching allocations have been mischaracterized.

Just because the strategy that we most frequently examine can end with a balance of zero after thirty years does not mean that our thinking is limited to that condition. It is simply to make better comparisons. By consistently examining a common, standard set of conditions in our studies, we eliminate many superfluous possible causes. Early studies looked at withdrawing a specified percentage of a portfolio's initial balance in real (inflation adjusted) dollar terms. Thirty years was included and it is a good choice for data analysis. We generally include such cases. We are looking for cause and effect relationships. Having numbers helps us with our understanding.

The 30-year Historical Surviving Withdrawal Rates with 50% and 80% stocks mixed with commercial paper have been bounded at 3.9%. That was not necessarily safe even then, however. More careful analysis shows that, with today's valuations (which are very close to those of November 2003), a safe rate with 50% stocks is close to 3.2%. With 80% stocks it is close to 2.6%.

By comparison, a strategy of varying allocations between stocks and TIPS would have produced much better numbers in the past. What was 3.9% in the historical period would have become 5.0% by switching allocations. That is a substantial improvement based on common conditions.

Looking more closely at TIPS, we have been able to buy them recently at (real) yield-to-maturity rates of 2.5% for both 20 and 30-year issues.

Now look at a stock and TIPS allocation switching approach compared to the conventional strategy. With a true 100% safety level, we can withdraw 2.5% from TIPS for 20 or 30 years with no loss of buying power whatsoever while waiting for stocks to become attractive. This is withdrawing almost exactly the same amount as with the alternative of 80% stocks. But the 80% stock portfolio has a real possibility of ending up with nothing after 30 years. Very little is lost to matching 50% while waiting for a good stock buying opportunity. We may have to draw down a little bit of principal, but no all of it.

When placed on an equal basis, sitting on the sidelines and waiting for things to get better is a good choice.

Now let us look at a stock dividend approach based upon the S&P500 index as opposed to individual issues or a more carefully selected index. The dividend yield of SPY is 1.54%. It takes a return of capital to extract more. How about dividend growth? That is likely to help, increasing the dividend amount about 1.3% per year in real dollars. If you withdraw nothing for one year, you are likely to match the interest from TIPS.

How about capital appreciation? It works the other way these days. A real return of zero percent after 15 to 20 years would be attractive based on today's valuations.

Read the Morningstar report that hocus2004 found.
http://www.nofeeboards.com/boards/viewt ... 188#p23188
Here is a link to an article at Morningstar titled "Stock Returns Are Likely to Disappoint."
http://news.morningstar.com/doc/article ... tion=Comm1
As I mentioned on another post, the returns without all dividends being reinvested is not simply a matter of scaling the dividend amount.
http://www.nofeeboards.com/boards/viewtopic.php?t=2861

To be blunt, TIPS and unclemick's hobby stocks look far more attractive these days than his balanced index fund. Because of the vulnerability of the balanced fund to price decreases, TIPS and hobby stocks both look better for the next 15 to 20 years.

Maybe being on the sideline waiting to buy at better prices is not such a bad idea after all.

Have fun.

John R.
Last edited by JWR1945 on Sat Aug 14, 2004 11:26 am, edited 1 time in total.
unclemick
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Post by unclemick »

Ok let's be blunt - could a really, really lazy type - sit with the Income Series (only 20% stock but 25% TIPs) and wait for valuations to change - assuming patience of course (lets say a young ER with a 40 yr span) - and avoid all the work of buying TIPs/hobby stocks?

Simple with a twist? I think the yield on Income is about 3.4% nowadays.
JWR1945
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Post by JWR1945 »

...with the Income Series (only 20% stock but 25% TIPs) and wait for valuations to change...
I do not know what Income Series means.
I think the yield on Income is about 3.4% nowadays.
There is a question about whether this will grow enough to keep up with inflation. There is a question as to what degree the principal amount is at risk.

If we are talking about conventional bonds and/or a conventional bond funds, I am unenthusiastic. I doubt that bond interest rates are sufficiently high so as to compensate for not having an inflation hedge (such as TIPS provide). [Moreover, I am unenthusiastic about bond funds of all types, including those invested entirely in TIPS.]

Have fun.

John R.
unclemick
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Post by unclemick »

Target Retirement Income Series - for the 'really old' 70's plus.

20% TSM, 50% TBM, 25% Inflation protected. Yahoo lists 4.68 yrs duration for the bonds.

Sooo - TIPs and dividend stocks? Hmmm - sounds like you're calculating yourself into a wild swinger, heh, heh. Follow the numbers - who knows. I really would be sceptical of a 10% Hankjoy type result in todays environment though. Beware a data point of one - but I'll stick with my Lifestrategy until I've trounced it with dividend stocks. Since I can live with the 2.26% yield of my balanced index for now, I will delay changing asset mix until 'old age' rather than go to Target and have them do it for me.
JWR1945
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Post by JWR1945 »

I really would be skeptical of a 10% Hankjoy type result in todays environment though.
I interpret that to be 10% nominal and about 6.5% real (after inflation). Regardless, I would not consider this to be a reliable number for planning.

There is some confusion caused by how one reports his returns. There is merit in allowing some reinvestment from dividends or from the growth of dividends. This offsets the risk that a particular income stream will be cut or disappear entirely. As soon as we include such reinvestments, however, each reported result become unique. There is no single number that applies in all situations.

I disagree with those who ignore prices entirely. It is always relevant to know about one's ability to redeploy his funds.

It might be best to think both in terms of long-lasting income streams and the rapid liquidation value of one's investments. This could influence decision making. For example, a holding that produces a given income stream but whose price has increased might be sold (in all or in part) to buy a larger total income stream from other stocks.

There is a tremendous downside risk in stock prices at this time. Focusing on dividend amounts helps with the psychological impact of price drops, but it does not solve the underlying problem completely.

Have fun.

John R.
unclemick
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Post by unclemick »

JWR

I tend to agree - hence, a Merck type stock might be a better place to go fishing - a lower dividend stock, but out of favor, WITH a listed 11.85% DIV. GROWTH. As you pointed out div growth must be added in when trying to maintain a real dollar income stream.

Now with 40 DRIPs, I have the luxury of selling the underperformers while allowing selected dividends to reinvest. That renders my stock set invalid for data. But I suppose a data set could be constructed that would provide insights as to improving a 'unique dividend portfolio'. Ben Graham's - Appdx.3 , pg 314, New Speculation in Common Stocks - 4th ed. Intelligent Investor - basically find solid, stable stocks in the middle - so you don't pay too much. SOO - a little better than average div with div growth not so high as to flame out in the stretch. Merck is no. 108 of 284 in my 2003 edition of dividend achievers. My Eli Lilly bought in 94 is down to 174 but the div yield is not as good as Merck. Exxon and Con ED are further down yet - but given the income stream built up over ten years will probably keep them. Try to improve one stock at a time/yet attempt to monitor total portfolio performance as a real dollar income stream. Interesting problem.
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