seajay wrote: ↑Wed May 19, 2021 6:41 am
willthrill81 wrote: ↑Tue May 18, 2021 9:09 pm
TN_Boy wrote: ↑Tue May 18, 2021 8:57 pm
willthrill81 wrote: ↑Tue May 18, 2021 7:21 pm
seajay wrote: ↑Tue May 18, 2021 6:21 pm
The answer is to have more capital at times of high valuations before opting to retire early. For someone drawing/spending 2% (SWR) then if valuations halve then that in effect rises to 4% to 6% and might continue along OK. Note that the likes of the Trinity Study tend to exclude such bad times/periods so potentially overstate the degree of apparent safety.
What 'bad times' did the Trinity study exclude from their analysis? IIRC, they found that the '4% rule' worked in about 95% of historic cases. They didn't ignore the remaining 5%.
I believe seajay is misinformed. The studies using historical data use .... all the historical data.
The apparent safety is exactly as stated for the historical periods studied using the study parameters.
Yes. I was just trying to see if seajay could find that out for him/herself.
TN_Boy wrote: ↑Tue May 18, 2021 9:00 pm
A low withdrawal rate is always the best defense.
Or dying young, but that's not much fun.
It depends on how you punch out.
Bio-tech looks to be on the verge (generation) of a means to immortality, slowing/reversing ageing. The next-gen might need to be using Perpetual Withdrawal Rates as if biotech advances ahead of ageing 'retirement' could be very long.
The Trinity Study originally spanned 1925 to 1999 I believe and yes (my bad) did include recording failure rates. As part of due diligence I formed my own dataset, spanning from 1825 and unlike the Trinity study factored in costs/taxes assumed to be at the basic/average rate (average Joe/middle class individual). I also broadened to use a more average/global dataset as the US has been a right tail (good) case outcome over the last century+, largely benefited from being the primary reserve currency that others are seeking to replace (or widen, perhaps to use a basket of primary currencies instead).
For the US since 2000
was fortunate in the sense that there have been low cost tax efficient means to invest. Historically much less so the case and taxes have also tended to spike at the worst possible times due to the geopolitical stresses that induced relatively poor investment performance also tended to leave the state needing more tax revenues. In the UK 1960's for instance the Beatles were singing 'Taxman', 19 for you, 1 for me, in reflection of their 95% tax rates. Whilst the average investor was paying 40% taxes on their dividends. Costs were also considerably higher, those for instance that bought/sold via post might have seen the broker/market maker applying 10% or wider spreads. Yet another factor is using historic index 'average' rewards is not the actual average excepting for those that actually held that index. Dow and Jones for instance devised three indexes and only the best case choice has sustained through as the one referenced as a guide to the 'historic average' (Dow Industrial). Real time investors might have perhaps opted to diversify across all three, and as such seen their portfolio lag that Dow Industrial average.
What is the greater concern for retirees is not how good the average reward case is, but rather the risk of being in the 5%/whatever failure set, and how bad that might have been. The above link for instance indicates that all-stock from 2000 with a 4% SWR was down at 26% of the inflation adjusted start date value by the end of February 2009, in effect a former 4% SWR was the equivalent of a 16% SWR at that point. That its continued to sustain is perhaps a factor of not having seen rising/high inflation prior to good/great gains having occurred since, might have been very much different. A third each US/global/bonds was better, being 50% down, the equivalent of increasing to a 8% SWR from February 2009. At 4% SWR both have pretty much stayed down. Change the start date to a 3% SWR and both have recently recovered back to portfolio values comparable to the inflation adjusted start date value.
I think with a reliance upon a 4% SWR that perhaps you should consider it as like buying a annuity, consider the money gone, capital value irrelevant - that you bought a income stream (4% of initial portfolio value uplifted by inflation). Otherwise the likes of seeing the portfolio value down at 25% of former value after a decade might be too tempting to 'save what little remained' dump the portfolio into something else such as just bonds. Considered as a DIY managed 4% portfolio value inflation adjusted annuity, a changed mindset, and you might be more inclined to stay the course in a relatively bad case situation.
A couple of things ... many many SWR studies have been done other than the Trinity studies. The Trinity authors also updated their study a few years ago.
Most of the SWR studies wind up in a similar place -- 4%ish or a bit less for the US. The ones coming up with less tend to do things like assume 1% AUM fees, things like that. We have low cost passive investments in the US so assuming unnecessary fees is not useful. There are also studies that use Monte Carlo simulations versus historical data. Those also tend to come up a bit lower, though it is not clear that the simulations accurately reflect market behavior .... markets do tend to mean revert. Big recession, stocks plummet, economy recovers, stocks recover, etc.
International studies come up with mostly lower SWRs than the US, which has had a pretty good 100 year run. But even those studies come up with numbers more like 3.5% versus 4.0. And you have to take situations like Germany or Japan being destroyed by wars out of the picture. Everybody understands if your economy is destroyed by war (or total government mismanagement ala modern day Venezuela) that your retirement is not going to be easy.
I don't worry that much about taxes. Marginal tax rates have been very high at times. Marginal. Yes, the Beatles might well have been looking at very high tax rates. They were also looking at very very high income. This is not an argument for extremely high tax rates in 1960s UK
or anywhere else, just an observation that massive tax rates have been a problem for only rich people in the US. Even upper-middle class people are not suffering horribly. Not that anybody likes to pay taxes. And all studies around SWR note that expenses -- like taxes -- have to be paid out of that withdrawal.
Under current tax law in the US, you can wind up with surprisingly low effective tax rates in retirement, even with income over 100k. Yes tax laws might change.
This is a comment several posters have made in various threads "What is the greater concern for retirees is not how good the average reward case is, but rather the risk of being in the 5%/whatever failure set, and how bad that might have been." Followed by concerns that today's environment is one of those really bad times (high stock valuations, low bond returns etc).
And that might be true. It might also not be true. The most problematic period in the SWR studies has been the late sixties to early 80s, where a stagnant economy and high inflation decimated portfolios. And 4% still almost worked ......
If one is concerned about 4%, then take it down to 3.5% or a bit less, and/or use one of the variable withdrawal methods to try and be safer. If the US economy ticks along only okay, one is likely to be very safe with such a rate. I think a mixture of US and international stocks plus bonds is safest because of the greater diversification versus US only stocks and bonds (not that international has shined in recent years ....).
I understand your point about behavioral errors, but I think you have to assume for good results "reasonable" investor behavior. "Staying the course" has been very very easy for people the last 11 years or so. Many confident high equity investors are going to be really surprised the next extended bear market. But that doesn't change the math or the logic of the SWR studies. If you don't believe in such things, you either shouldn't retire, or you should become one of those 2% SWR types. I can't think of the portfolio as an annuity, but I also don't believe it is a goal that it doesn't drop in real value during retirement.
(On the biotech thing, I knew people 35 years ago that were pretty excited about biotech and its ability to extend life. We shall see.)