Larry Swedroe: 3% is the new 4%

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Random Walker
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Larry Swedroe: 3% is the new 4%

Post by Random Walker » Sat Feb 02, 2019 9:54 pm

https://player.fm/series/afford-anythin ... ing-expert

This is a podcast interview by a woman named Paula Pant of Larry Swedroe. Larry discusses his most recent book on retirement. Goes way beyond finances into the importance of finding meaning in retirement, importance of mental stimulation, increased life expectancy, long term care, asset allocation, usefulness of Monte Carlo Simulation, early retirement, and more.

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Re: Larry Swedroe: 3% is the new 4%

Post by Riprap » Sat Feb 02, 2019 10:01 pm

What's his rationale? Not interested in listening.

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Re: Larry Swedroe: 3% is the new 4%

Post by Random Walker » Sat Feb 02, 2019 10:08 pm

One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

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Re: Larry Swedroe: 3% is the new 4%

Post by z3r0c00l » Sat Feb 02, 2019 10:40 pm

Or work a bit longer.

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Re: Larry Swedroe: 3% is the new 4%

Post by typical.investor » Sat Feb 02, 2019 11:00 pm

So if you are paying Larry’s firm 0.7% for advice, then you are down to receiving 2.3%?

Or is that you recieve 3% based (after expenses) on a 3.7% withdrawal?

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Re: Larry Swedroe: 3% is the new 4%

Post by arcticpineapplecorp. » Sat Feb 02, 2019 11:01 pm

thanks. just downloaded. I think I heard of Paula through Clark Howard.
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Re: Larry Swedroe: 3% is the new 4%

Post by packer16 » Sat Feb 02, 2019 11:11 pm

I wonder what assumptions he is using because J. Bogle's favorite bond fund (Vanguard Intermediate Term Bond Fund) has yield of 3.26% while the Vanguard Intermediate Term Corp Fund (that has all IG bonds) yields 4.11%?

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Re: Larry Swedroe: 3% is the new 4%

Post by typical.investor » Sat Feb 02, 2019 11:15 pm

packer16 wrote:
Sat Feb 02, 2019 11:11 pm
I wonder what assumptions he is using because J. Bogle's favorite bond fund (Vanguard Intermediate Term Bond Fund) has yield of 3.26% while the Vanguard Intermediate Term Corp Fund (that has all IG bonds) yields 4.11%?

Packer
About 2% of that is inflation though.

So real yields are 1.25-2%. And if you go for the 2%, you could face sequence of return problems in an equity draw down.
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Re: Larry Swedroe: 3% is the new 4%

Post by andrew99999 » Sat Feb 02, 2019 11:16 pm

Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

Dave
Thanks for summarising.

I wish all podcast sites would put a text version as well as a summary version with sub-headings like at whitecoatinvestor. I hate podcasts.
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ » Sat Feb 02, 2019 11:37 pm

Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

Dave
Wade Pfau (and Swedroe to a lesser extent) said "3% is the new 4%" in 2011.

They were wrong.

They might be right this time, but maybe not. Even if the next 10-15 years are indeed bad with low returns, they will likely be followed by 10-15 good years with high returns. The 9%-10% historical long-term stock market return? That INCLUDES the bad years.

And we certainly don't need averages anywhere near that high for 4% to work.

But yes, sequence of returns is important. Starting with a bad 10-15 years can be very harmful to one's portfolio. But 4% worked in the past in such situations. Retire the day before 1929 crash, you still come out fine. Retire the day before 2000 crash, get ANOTHER crash 8 years later, and 19 years in, you're still in decent shape, and it looks like those retirees will make it the full 30 years.

Even retiring in 1966, you got 15 years of basically no stock returns, rising interest rates (so bonds did terrible too), AND high inflation in the late 70s... And, still, 4% worked (okay 3.8%).

We've already seen three horsemen of retirement apocalypse in 1966 and still 4% basically worked. Inflation is far more dangerous than "shaky social security" or "longer life expectancy".

4% already represents the worst case... so far.

Now sure, the NEXT 30 years might be worse than any other in U.S. History, but low bond yields (not that low anymore) and rising interest rates have been seen before, and higher equity valuations have been seen before. Even all at the same time. And still 4% worked. And inflation is currently low (that's the REAL danger, in my mind - bonds would have done fine in the 70s except for inflation)

Again, Swedroe may be right. I'm not saying that he's wrong. I'm just saying it's reasonable to question his predictions.
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ » Sat Feb 02, 2019 11:44 pm

typical.investor wrote:
Sat Feb 02, 2019 11:15 pm
packer16 wrote:
Sat Feb 02, 2019 11:11 pm
I wonder what assumptions he is using because J. Bogle's favorite bond fund (Vanguard Intermediate Term Bond Fund) has yield of 3.26% while the Vanguard Intermediate Term Corp Fund (that has all IG bonds) yields 4.11%?

Packer
About 2% of that is inflation though.

So real yields are 1.25-2%. And if you go for the 2%, you could face sequence of return problems in an equity draw down.
You only need around 1% real for 4% to work for 30 years.

Sequence of returns is the real risk, yes.

But 4% is based around worst-case 30 year periods in the past that saw low real returns, and bad sequence of returns at the start of retirement.

4% is not based around average or good returns. 4% worked in the past when we had low returns, and bad sequences of returns. So when you say "Hey, there's a good chance we might have low returns going forward, and there might be a crash which would cause a bad sequence of returns", I say

"Oh... good thing I'm already prepared for that with my 4% SWR"
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Re: Larry Swedroe: 3% is the new 4%

Post by Watty » Sat Feb 02, 2019 11:50 pm

If you really thought 3% was the best you could do then it would make sense to just put all your money into a 30 year ladder of TIPs.

You could spend 3.33% a year and invest the interest so that you would have some money to live on if you lived more than 30 years.

Of course that would only work well in a retirement account where the ways TIPS are taxed is not a problem.
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Re: Larry Swedroe: 3% is the new 4%

Post by Sandtrap » Sat Feb 02, 2019 11:50 pm

Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

Dave
Perhaps a "shorter" :shock: life expectancy will put the withdrawal rate back up at a comfy 4%.

The other alternative is to have a huge pile of retirement assets far beyond the 25X or other "norm". :shock:
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Re: Larry Swedroe: 3% is the new 4%

Post by bhsince87 » Sat Feb 02, 2019 11:53 pm

I'm about halfway through Larry's most recent book.

I have to remind myself that it was mostly written in 2017 and maybe early 2018.

Stock values WERE higher then. And bond yields were lower.

But then 2018 happened and here we are in 2019.

Stock values are lower and bond yields are higher! So now what?
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ » Sat Feb 02, 2019 11:57 pm

Watty wrote:
Sat Feb 02, 2019 11:50 pm
If you really thought 3% was the best you could do then it would make sense to just put all your money into a 30 year ladder of TIPs.

You could spend 3.33% a year and invest the interest so that you would have some money to live on if you lived more than 30 years.

Of course that would only work well in a retirement account where the ways TIPS are taxed is not a problem.
This.

3.33% has to be the floor as long as TIPs are paying more than 0%.

And SPIAs are always an option too.
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Re: Larry Swedroe: 3% is the new 4%

Post by AlohaJoe » Sun Feb 03, 2019 12:26 am

Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
longer life expectancies
Hm, according to the Social Security Administration's life tables, in 1994 when the 4% rule paper was published the life expectancy at age 65 for a woman was 19.1 years. In 2017, 23 years later, it had grown to 20.7.

I wouldn't have thought that a small change like that -- 1.6 years -- would require cutting spending by 25%.

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Re: Larry Swedroe: 3% is the new 4%

Post by visualguy » Sun Feb 03, 2019 12:48 am

All the SWR studies that I've seen are based on the US market. Many here hold a significant amount of ex-US, but are still relying on SWRs based on US-only stock market history. Not quite sure how much sense that makes...

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Re: Larry Swedroe: 3% is the new 4%

Post by grok87 » Sun Feb 03, 2019 8:36 am

HomerJ wrote:
Sat Feb 02, 2019 11:37 pm
Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

Dave
Wade Pfau (and Swedroe to a lesser extent) said "3% is the new 4%" in 2011.

They were wrong.

They might be right this time, but maybe not. Even if the next 10-15 years are indeed bad with low returns, they will likely be followed by 10-15 good years with high returns. The 9%-10% historical long-term stock market return? That INCLUDES the bad years.

And we certainly don't need averages anywhere near that high for 4% to work.

But yes, sequence of returns is important. Starting with a bad 10-15 years can be very harmful to one's portfolio. But 4% worked in the past in such situations. Retire the day before 1929 crash, you still come out fine. Retire the day before 2000 crash, get ANOTHER crash 8 years later, and 19 years in, you're still in decent shape, and it looks like those retirees will make it the full 30 years.

Even retiring in 1966, you got 15 years of basically no stock returns, rising interest rates (so bonds did terrible too), AND high inflation in the late 70s... And, still, 4% worked (okay 3.8%).

We've already seen three horsemen of retirement apocalypse in 1966 and still 4% basically worked. Inflation is far more dangerous than "shaky social security" or "longer life expectancy".

4% already represents the worst case... so far.

Now sure, the NEXT 30 years might be worse than any other in U.S. History, but low bond yields (not that low anymore) and rising interest rates have been seen before, and higher equity valuations have been seen before. Even all at the same time. And still 4% worked. And inflation is currently low (that's the REAL danger, in my mind - bonds would have done fine in the 70s except for inflation)

Again, Swedroe may be right. I'm not saying that he's wrong. I'm just saying it's reasonable to question his predictions.
THanks.
I'm suspicious of arguments involving valuations etc. seems like market timing.

what is true though is that for a global portfolio- i.e. with equities represented by total world stock index instead of S&P 500 the safe withdrawal rate for 30 years was never 4% anyway, it was 3.5%. will try to find the reference or maybe someone else has it.

Personally i'm going with 3.33%, i.e. Risk Portfolio = 30x draw. because i'm factoring in that i may need to draw from my risk portfolio for more than 30 years. Also the draws from my risk portfolio will only be 1/3 of my retirement income, with social security, employer pensions and a tips/ibond ladder making up the other 2/3.
As discussed here.
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Re: Larry Swedroe: 3% is the new 4%

Post by grok87 » Sun Feb 03, 2019 8:37 am

visualguy wrote:
Sun Feb 03, 2019 12:48 am
All the SWR studies that I've seen are based on the US market. Many here hold a significant amount of ex-US, but are still relying on SWRs based on US-only stock market history. Not quite sure how much sense that makes...
for an global portfolio the 30 year safe withdrawal rate was never 4% anyway but 3.5% will try to find the reference.
RIP Mr. Bogle.

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Re: Larry Swedroe: 3% is the new 4%

Post by Call_Me_Op » Sun Feb 03, 2019 8:46 am

I thought this interview was excellent. If you want a good summary, start listening at 1:00 hrs, at which time the host gives a very good summary.
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Re: Larry Swedroe: 3% is the new 4%

Post by averagedude » Sun Feb 03, 2019 9:13 am

Im sticking with 4%. There are many people who retired in 1999 and have withstood 2 huge bear markets, and have actually increased their account balances. Assuming you have no debts with your mortage paid off, their are several levers you can pull during market declines, such as spending less, working part time, and making distributions from fixed income. I just don't see many examples where someone retires with 25 times their expenses, and are struggling financially in their nineties, unless they have had long term care issues. If you are middle to middle-upper class, i don't care if you have 50 times your expenses, if you spend 20+ years in a long term care facility, you aren't going to have enough.

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Re: Larry Swedroe: 3% is the new 4%

Post by MikeG62 » Sun Feb 03, 2019 9:53 am

HomerJ wrote:
Sat Feb 02, 2019 11:37 pm
Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

Dave
Wade Pfau (and Swedroe to a lesser extent) said "3% is the new 4%" in 2011.

They were wrong.

They might be right this time, but maybe not. Even if the next 10-15 years are indeed bad with low returns, they will likely be followed by 10-15 good years with high returns. The 9%-10% historical long-term stock market return? That INCLUDES the bad years.

And we certainly don't need averages anywhere near that high for 4% to work.

But yes, sequence of returns is important. Starting with a bad 10-15 years can be very harmful to one's portfolio. But 4% worked in the past in such situations. Retire the day before 1929 crash, you still come out fine. Retire the day before 2000 crash, get ANOTHER crash 8 years later, and 19 years in, you're still in decent shape, and it looks like those retirees will make it the full 30 years.

Even retiring in 1966, you got 15 years of basically no stock returns, rising interest rates (so bonds did terrible too), AND high inflation in the late 70s... And, still, 4% worked (okay 3.8%).

We've already seen three horsemen of retirement apocalypse in 1966 and still 4% basically worked. Inflation is far more dangerous than "shaky social security" or "longer life expectancy".

4% already represents the worst case... so far.

Now sure, the NEXT 30 years might be worse than any other in U.S. History, but low bond yields (not that low anymore) and rising interest rates have been seen before, and higher equity valuations have been seen before. Even all at the same time. And still 4% worked. And inflation is currently low (that's the REAL danger, in my mind - bonds would have done fine in the 70s except for inflation)

Again, Swedroe may be right. I'm not saying that he's wrong. I'm just saying it's reasonable to question his predictions.
+1. I see it precisely the same way HomerJ.

Could not have said it better myself actually.

Too much fear mongering goes on.
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Re: Larry Swedroe: 3% is the new 4%

Post by zaboomafoozarg » Sun Feb 03, 2019 10:01 am

Personally, I wouldn't consider retiring with a 4% withdrawal rate. But I am shooting for an early retirement age and 40-50 years of retirement if I'm lucky.

Currently debating between 2.5% and 3% withdrawal, but haven't decided. I've got maybe 10 more years to figure it out.

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Re: Larry Swedroe: 3% is the new 4%

Post by larryswedroe » Sun Feb 03, 2019 10:17 am

Just few thoughts to be helpful
First, the lower number is based on combination of things. Higher equity valuations (now lower than when wrote the book as someone noted, especially outside US) and much lower bond yields. Then add on not only longer life expectancies but life expectancies are persistently rising (so should not really use TODAY's estimates) but one other item people are missing, as we age the risks and costs of long term care (and cognitive decline causing that need) jump dramatically. As the book demonstrates the percentage of people who will need LTC and who will suffer cognitive decline are going to be big surprise I believe to most. Those are the four horsemen. In the book we note a fifth, you should not count on fully getting SS, as if nothing changes in about 14 years will be paying out 75%.

But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.

Finally, the roughly 3% (typically use round numbers) is the result of running MCS based on the inputs (which are based on current valuations, yields). So it's not someone's opinion. Remember you also cannot straight line results (which is why need to run MCS) due to sequence risk. Like Wade Pfau and others like Michael Kitces who have looked at the data and run the numbers, most conclude while 4% is likely to succeed, it's not really safe in the sense that it's almost certain. For some, that is what is needed because they don't have options they can exercise if the left tail risk shows up.

BTW-saying Pfau and others were wrong is incredibly foolish. Remember they consider possible outcomes. That means for example that 4% might have been 90% odds of success. For some that is acceptable, for others not. Pfau and others never said 4% would fail. Also that is judging by outcomes without considering what alternative universes might have shown up. It's like saying you don't buy insurance and your house didn't burn down boy was that smart decision.

I hope above is helpful as the Bogleheads consider what is the right (safe) withdrawal rate for each one personally

Best wishes
Larry

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Re: Larry Swedroe: 3% is the new 4%

Post by notinuse » Sun Feb 03, 2019 10:29 am

zaboomafoozarg wrote:
Sun Feb 03, 2019 10:01 am
Personally, I wouldn't consider retiring with a 4% withdrawal rate. But I am shooting for an early retirement age and 40-50 years of retirement if I'm lucky.

Currently debating between 2.5% and 3% withdrawal, but haven't decided. I've got maybe 10 more years to figure it out.
That makes sense, since the original basis for the 4% guideline was a 30 year retirement. Not 40-50 years.

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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo » Sun Feb 03, 2019 10:33 am

larryswedroe wrote:
Sun Feb 03, 2019 10:17 am
Just few thoughts to be helpful
First, the lower number is based on combination of things. Higher equity valuations (now lower than when wrote the book as someone noted, especially outside US) and much lower bond yields. Then add on not only longer life expectancies but life expectancies are persistently rising (so should not really use TODAY's estimates) but one other item people are missing, as we age the risks and costs of long term care (and cognitive decline causing that need) jump dramatically. As the book demonstrates the percentage of people who will need LTC and who will suffer cognitive decline are going to be big surprise I believe to most. Those are the four horsemen. In the book we note a fifth, you should not count on fully getting SS, as if nothing changes in about 14 years will be paying out 75%.

But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.

Finally, the roughly 3% (typically use round numbers) is the result of running MCS based on the inputs (which are based on current valuations, yields). So it's not someone's opinion. Remember you also cannot straight line results (which is why need to run MCS) due to sequence risk. Like Wade Pfau and others like Michael Kitces who have looked at the data and run the numbers, most conclude while 4% is likely to succeed, it's not really safe in the sense that it's almost certain. For some, that is what is needed because they don't have options they can exercise if the left tail risk shows up.

BTW-saying Pfau and others were wrong is incredibly foolish. Remember they consider possible outcomes. That means for example that 4% might have been 90% odds of success. For some that is acceptable, for others not. Pfau and others never said 4% would fail. Also that is judging by outcomes without considering what alternative universes might have shown up. It's like saying you don't buy insurance and your house didn't burn down boy was that smart decision.

I hope above is helpful as the Bogleheads consider what is the right (safe) withdrawal rate for each one personally

Best wishes
Larry
Larry,

Thanks for dropping in and providing a detailed explanation.
Curious if the MCS you reference included adjustments to account for some correlation of returns (reversion to mean)? Otherwise, MCS tends to generate some overly optimistic, as well as overly pessimistic scenarios. Which, when looking at high (95%) success scenarios, can shift the corresponding SWR.
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Re: Larry Swedroe: 3% is the new 4%

Post by Random Walker » Sun Feb 03, 2019 10:35 am

I’m going to make a plug for Monte Carlo Simulation here. The results can be very enlightening, and I think the exercise makes one focus in on distinguishing needs from wants. For many of us, the more aggressive plan that maximizes terminal wealth will not be the plan that minimizes the likelihood of outliving our assets. The sensitivity (or lack of) of success rates to changes in asset allocation can really open the eyes. Same is true for the spending analysis.

Dave

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Re: Larry Swedroe: 3% is the new 4%

Post by larryswedroe » Sun Feb 03, 2019 10:52 am

Marco
The MCS we use does in fact consider correlations, in the book we show what the inputs/assumptions are
horizon, initial investment, AA, withdrawals, retirement income, inflation, correlations of returns of the assets and the return distributions of the portfolio.

I would just add that when managing risks it is critical to consider that the consequences of your decisions should dominate the probabilities of the outcomes, regardless of what you think the odds are (since in many cases we don't even know the odds, can only at best estimate them). The Pascal's Wager bet is the great example. You also must consider, as we discuss in the book, what if any Plan Bs you have which you can implement if the risks do show up. If you have ability to adjust spending then clearly can take more risks, so a 4 or 5 or even 6% withdrawal rate might be acceptable. On other hand if have little to nothing which could and would be willing to cut, then you want as close to 100% as you can get, and that today might be 3% or bit higher.
Hope above is helpful

Of course always happy to answer questions from readers, just email me at lswedroe@bamadvisors.com

Larry

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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy » Sun Feb 03, 2019 11:09 am

visualguy wrote:
Sun Feb 03, 2019 12:48 am
All the SWR studies that I've seen are based on the US market. Many here hold a significant amount of ex-US, but are still relying on SWRs based on US-only stock market history. Not quite sure how much sense that makes...
SWR for the post 1950 period (haven't seen sutdies) goes up as you add international due to diversification (i.e. international did a lot better than the US in the rate limiting years of the 60s/70s). Same thing if you hold small caps. The 4% rule would be the 4.5% rule if Bengen had started out with a more diversified portfolio.


Larry might be right and that 3% will be the new number. But it is important to remember what that means. Most likely it means over the next 50 years there will be 1 year where you get 3%, 2-3 where you get <3.5%, maybe another 10 where you get 3.5 to 4, and a bunch more where you get 4%+.

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Re: Larry Swedroe: 3% is the new 4%

Post by garlandwhizzer » Sun Feb 03, 2019 11:11 am

No one predicts the market's future with reliable accuracy. Having said that, I tend to agree with Larry's assessment of expected future portfolio returns and safe withdrawal rates being lower than historical averages. Based on the current bond yields and current equity valuations 3% seems a more likely outcome than 4%. This of course is just a guess but it's as good a guess as current data provides.

Garland Whizzer

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Re: Larry Swedroe: 3% is the new 4%

Post by cherijoh » Sun Feb 03, 2019 11:13 am

larryswedroe wrote:
Sun Feb 03, 2019 10:52 am
You also must consider, as we discuss in the book, what if any Plan Bs you have which you can implement if the risks do show up. If you have ability to adjust spending then clearly can take more risks, so a 4 or 5 or even 6% withdrawal rate might be acceptable. On other hand if have little to nothing which could and would be willing to cut, then you want as close to 100% as you can get, and that today might be 3% or bit higher.
Larry
I think Larry hit the nail on the head. IMO, this is always the challenge when discussing safe withdrawal rates. Just in the posts I have read here in Bogleheads we have both ends of the spectrum:
  • People who include a fudge factor of 30% for discretionary spending then assume no more than a 2.5% SWR. These folks probably could have safely retired years before they actually do so.
  • People who forecast they will be able to achieve optimistic rates of return (e.g., 5% real even with an appropriate retiree AA) and a 4+% withdrawal rate while they won't have their mortgage paid off until 15 years after they retire.

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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy » Sun Feb 03, 2019 11:20 am

larryswedroe wrote:
Sun Feb 03, 2019 10:17 am

Finally, the roughly 3% (typically use round numbers) is the result of running MCS based on the inputs (which are based on current valuations, yields). So it's not someone's opinion.
Your MCS is someone's opinion on how the market will perform that has been encoded in a program. It is an educated opinion but it is still an opinion.

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Re: Larry Swedroe: 3% is the new 4%

Post by BanquetBeer » Sun Feb 03, 2019 11:29 am

I read a lot of these posts and they always push my emotions maybe I should be more/less worried about my plan. Then I take a breath and think 1) I have 10-15 years for this to shake out until I retire. If gains are low for the next 10 years, I should actually be in a great place to retire. 2) I’m projecting what seems like middle of the road here 3.5% and I have the ability to cut 25-50% for a couple years and while that won’t be super fun, I’d probably implement the same approach with more money and the 1-3 years of cuts * probability of having to do so would be better than 1-3 years of work * 100% certainty of working.

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Re: Larry Swedroe: 3% is the new 4%

Post by TheTimeLord » Sun Feb 03, 2019 11:31 am

larryswedroe wrote:
Sun Feb 03, 2019 10:17 am

But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.
Maybe I foolishly discount the Japan scenario because their market was ridiculously priced in relation to the growth of their companies, even outstripping our Dot Com bubble if memory serves which had a PE around 40 if memory serves. Am I finding comfort in an irrelevant piece of data?
In early 1989, the average price-to-earnings (P/E) ratio for all stocks on the Tokyo Stock Exchange first section was around 58.
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Re: Larry Swedroe: 3% is the new 4%

Post by JBTX » Sun Feb 03, 2019 11:36 am

larryswedroe wrote:
Sun Feb 03, 2019 10:17 am
Just few thoughts to be helpful
First, the lower number is based on combination of things. Higher equity valuations (now lower than when wrote the book as someone noted, especially outside US) and much lower bond yields. Then add on not only longer life expectancies but life expectancies are persistently rising (so should not really use TODAY's estimates) but one other item people are missing, as we age the risks and costs of long term care (and cognitive decline causing that need) jump dramatically. As the book demonstrates the percentage of people who will need LTC and who will suffer cognitive decline are going to be big surprise I believe to most. Those are the four horsemen. In the book we note a fifth, you should not count on fully getting SS, as if nothing changes in about 14 years will be paying out 75%.

But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.

Finally, the roughly 3% (typically use round numbers) is the result of running MCS based on the inputs (which are based on current valuations, yields). So it's not someone's opinion. Remember you also cannot straight line results (which is why need to run MCS) due to sequence risk. Like Wade Pfau and others like Michael Kitces who have looked at the data and run the numbers, most conclude while 4% is likely to succeed, it's not really safe in the sense that it's almost certain. For some, that is what is needed because they don't have options they can exercise if the left tail risk shows up.

BTW-saying Pfau and others were wrong is incredibly foolish. Remember they consider possible outcomes. That means for example that 4% might have been 90% odds of success. For some that is acceptable, for others not. Pfau and others never said 4% would fail. Also that is judging by outcomes without considering what alternative universes might have shown up. It's like saying you don't buy insurance and your house didn't burn down boy was that smart decision.

I hope above is helpful as the Bogleheads consider what is the right (safe) withdrawal rate for each one personally

Best wishes
Larry
This is excellent advice. Given where we are, I'm just not comfortable with the what has worked in the past will definitely work in the future. It very well may, but there is a materially greater than zero chance it won't. The current market valuations are comparably high, corporate earnings are at record highs in the US, bond rates are historically low, debt levels of all types are high and future entitlements are underfunded as they stand now. Add in some less than favorable demographics going forward.

Of course, having a flexible approach always makes sense, if you are confident that you and spouse can cut back if needed. Sometimes that is easier said than done.

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Re: Larry Swedroe: 3% is the new 4%

Post by averagedude » Sun Feb 03, 2019 11:42 am

Everyone has to come up with their own personal safe withdrawal rate. I do agree with most of Larry's arguments for reducing it to 3%, but really no one really knows what it will actually be. I would like to point out that if someone changes their personal number from 4% to 3%, they may find themselves working 10 extra years and regret doing so. Optimistic investors who have used the 4% withdrawal rate in the past, have been rewarded nicely, and so have their heirs of their estates.

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Re: Larry Swedroe: 3% is the new 4%

Post by whodidntante » Sun Feb 03, 2019 11:49 am

A gut wrenching downturn would have the potential to greatly improve expected returns for USA equities. :twisted:

Larry was quite upbeat on expected returns of foreign equities. His argument is based on valuations.

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Re: Larry Swedroe: 3% is the new 4%

Post by JBTX » Sun Feb 03, 2019 11:51 am

TheTimeLord wrote:
Sun Feb 03, 2019 11:31 am
larryswedroe wrote:
Sun Feb 03, 2019 10:17 am

But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.
Maybe I foolishly discount the Japan scenario because their market was ridiculously priced in relation to the growth of their companies, even outstripping our Dot Com bubble if memory serves which had a PE around 40 if memory serves. Am I finding comfort in an irrelevant piece of data?
In early 1989, the average price-to-earnings (P/E) ratio for all stocks on the Tokyo Stock Exchange first section was around 58.

Maybe, maybe not.


https://www.macrotrends.net/2593/nikkei ... chart-data

The nikkei is still only at about 60% of its peak 30 years ago. You can go all the way to 2000 as a starting point and even adding in a very small dividend yield the returns are still miserable. Also, while US valustions are lower, US earnings are at record highs compared to GDP. Perhaps that continues forever. Or maybe it doesn't. Who knows.

There are some key differences in Japan then and the US now, but there are enough similarities that it should provide some food for thought.

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Re: Larry Swedroe: 3% is the new 4%

Post by DaufuskieNate » Sun Feb 03, 2019 11:53 am

There can be a big difference in a MC analysis depending on the assumptions. One of the most important assumptions is the asset allocation and the expected return and volatility of the portfolio. Let's say that one accepts the logic of a 3% withdrawal rate for a standard 60/40 U.S.-only portfolio given today's valuations (I know this is controversial but it's an assumption.) What happens to the withdrawal rate, all else equal, if one adds factor diversification, international equities where the valuations are lower and alternative sources of return with low correlation to equities and bonds?

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Re: Larry Swedroe: 3% is the new 4%

Post by EnjoyIt » Sun Feb 03, 2019 11:54 am

larryswedroe wrote:
Sun Feb 03, 2019 10:17 am
Just few thoughts to be helpful
First, the lower number is based on combination of things. Higher equity valuations (now lower than when wrote the book as someone noted, especially outside US) and much lower bond yields. Then add on not only longer life expectancies but life expectancies are persistently rising (so should not really use TODAY's estimates) but one other item people are missing, as we age the risks and costs of long term care (and cognitive decline causing that need) jump dramatically. As the book demonstrates the percentage of people who will need LTC and who will suffer cognitive decline are going to be big surprise I believe to most. Those are the four horsemen. In the book we note a fifth, you should not count on fully getting SS, as if nothing changes in about 14 years will be paying out 75%.

But then would add that US has been what has been called the triumph of the optimists (the winner) and while 4% might have worked in past looking at historical data, you would find in other countries (i.e. Japan say starting in 1990, with Nikkei now at about half what it was then) that it did not work.

Finally, the roughly 3% (typically use round numbers) is the result of running MCS based on the inputs (which are based on current valuations, yields). So it's not someone's opinion. Remember you also cannot straight line results (which is why need to run MCS) due to sequence risk. Like Wade Pfau and others like Michael Kitces who have looked at the data and run the numbers, most conclude while 4% is likely to succeed, it's not really safe in the sense that it's almost certain. For some, that is what is needed because they don't have options they can exercise if the left tail risk shows up.

BTW-saying Pfau and others were wrong is incredibly foolish. Remember they consider possible outcomes. That means for example that 4% might have been 90% odds of success. For some that is acceptable, for others not. Pfau and others never said 4% would fail. Also that is judging by outcomes without considering what alternative universes might have shown up. It's like saying you don't buy insurance and your house didn't burn down boy was that smart decision.

I hope above is helpful as the Bogleheads consider what is the right (safe) withdrawal rate for each one personally

Best wishes
Larry
Mr. Swedroe,
Thanks for chiming into this discussion. Over the years I have read much of your work and greatly respect your opinions on the subject. Though here are mine:

Monte Carlo uses someone’s crystal ball to create future returns. Is that person’s crystal ball really any better than what past returns offer?

Rounding to 3% is a bit deceiving as 3.25 is a big difference when it equals an extra year or more working for money you will likely never need.

You mentioned it, what is safe? Can we really have 100% safety? Is it really worthwhile working so many extra years just to feel safer? That is a very personal question that I think is extremely difficult to answer. Personally and this is my opinion, I think human nature adds to our safety. People simply spend less when the market is doing worse. Just recently in the last 4 months we found ourselves spending less when retrospectively reviewing our expenses. It is these small human nature shifts which start to add more security to one’s portfolio. But heck. We are just one small anecdote in a sea of opinions.

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Re: Larry Swedroe: 3% is the new 4%

Post by dbr » Sun Feb 03, 2019 11:55 am

There may be enough uncertainty in how to get these numbers that 3% and 4% are both within the error of what we can guess the future will be. I can't ever remember seeing an SWR with error bars on the estimate. In MC simulations one can explore this by varying the input assumptions. One should also do a sensitivity study to see how large the effect variation in the assumptions really is on the output.

It is still a fundamental dilemma that worst case analysis of a highly variable outcome is problematic to interpret as a planning tool. A lot of respectable people prefer to address how to reduce the uncertainty rather than try to estimate how bad the worst is.

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Re: Larry Swedroe: 3% is the new 4%

Post by cherijoh » Sun Feb 03, 2019 11:57 am

averagedude wrote:
Sun Feb 03, 2019 11:42 am
Everyone has to come up with their own personal safe withdrawal rate. I do agree with most of Larry's arguments for reducing it to 3%, but really no one really knows what it will actually be. I would like to point out that if someone changes their personal number from 4% to 3%, they may find themselves working 10 extra years and regret doing so. Optimistic investors who have used the 4% withdrawal rate in the past, have been rewarded nicely, and so have their heirs of their estates.
IMO, the elephant in the room is health care spending. I don't want to get this thread locked by speculating about future changes to safety net programs so i'll leave it at that. But I have plenty of former coworkers who retired with the expectation of retiree healthcare which disappeared before they were eligible for Medicare. That turned out to be a real budget buster.

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Re: Larry Swedroe: 3% is the new 4%

Post by dbr » Sun Feb 03, 2019 11:59 am

cherijoh wrote:
Sun Feb 03, 2019 11:57 am
averagedude wrote:
Sun Feb 03, 2019 11:42 am
Everyone has to come up with their own personal safe withdrawal rate. I do agree with most of Larry's arguments for reducing it to 3%, but really no one really knows what it will actually be. I would like to point out that if someone changes their personal number from 4% to 3%, they may find themselves working 10 extra years and regret doing so. Optimistic investors who have used the 4% withdrawal rate in the past, have been rewarded nicely, and so have their heirs of their estates.
IMO, the elephant in the room is health care spending. I don't want to get this thread locked by speculating about future changes to safety net programs so i'll leave it at that. But I have plenty of former coworkers who retired with the expectation of retiree healthcare which disappeared before they were eligible for Medicare. That turned out to be a real budget buster.
Yep, we just scraped in under the bar on that one. But you could see it coming.

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Re: Larry Swedroe: 3% is the new 4%

Post by larryswedroe » Sun Feb 03, 2019 12:10 pm

cherijoh
First, using valuations and yields is not an assumption, it's math. And we do know that valuations and yields are the BEST (though not great) metrics for estimating future returns. There is consensus on that in the academic literature, with about equal abililty in current valuations and CAPE metrics.
Using historical returns literally makes no sense unless the current valuations are about historic values. Perfect example is forecasting in 2000 when historical stock returns were in excess of 11% vs. say the 6% they were 70 years ago. That huge gap was to a large extent caused by rising valuations. And of course today real bond yields about half the historical average. And current yield curve are best estimate of future returns we have.

Second, it is exactly because we don't know that is the reason to be conservative, because the consequences of being wrong are literally unthinkable, while the alternatives are more acceptable. Note that most of the investment risk occurs in the first five years, but then as I explained much of the spending risk occurs later, assuming you live long enough, due to risks of needed long term care and especially when you look at odds of having serious cognitive declines. I cannot tell you how many families I have seen this occur to and wipe out their retirement plans or that of their parents.

And to others, yes excluding Japan is serious error IMO. There are many arguments one could make for US future economic growth being well below long term data, [OT comment removed by admin LadyGeek]. So failures can come from not just high valuations but declining economic growth as well.

Best wishes and good luck. Just remember that the consequences of your decisions should dominate the probability of the outcomes, whatever you think those odds are (and it's likely you are overconfident of those odds if your average human being


Larry

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Re: Larry Swedroe: 3% is the new 4%

Post by cherijoh » Sun Feb 03, 2019 12:11 pm

dbr wrote:
Sun Feb 03, 2019 11:59 am
cherijoh wrote:
Sun Feb 03, 2019 11:57 am
averagedude wrote:
Sun Feb 03, 2019 11:42 am
Everyone has to come up with their own personal safe withdrawal rate. I do agree with most of Larry's arguments for reducing it to 3%, but really no one really knows what it will actually be. I would like to point out that if someone changes their personal number from 4% to 3%, they may find themselves working 10 extra years and regret doing so. Optimistic investors who have used the 4% withdrawal rate in the past, have been rewarded nicely, and so have their heirs of their estates.
IMO, the elephant in the room is health care spending. I don't want to get this thread locked by speculating about future changes to safety net programs so i'll leave it at that. But I have plenty of former coworkers who retired with the expectation of retiree healthcare which disappeared before they were eligible for Medicare. That turned out to be a real budget buster.
Yep, we just scraped in under the bar on that one. But you could see it coming.
My former employer had a generous retirement formula that allowed anyone with age + years of service of 85 or more to retire at 55 with a DB pension at 100% (i.e., no early retirement penalties). Some friends retired with the expectation that they would pay 30% of the total cost of the health insurance until they hit 65. It then went to 40% the next year, then 50% the year after that, then it disappeared IIRC. Since premiums were also increasing by double digits each year, the amount they paid increased by 60% or so the second year.

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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ » Sun Feb 03, 2019 12:26 pm

larryswedroe wrote:
Sun Feb 03, 2019 10:17 am
BTW-saying Pfau and others were wrong is incredibly foolish. Remember they consider possible outcomes. That means for example that 4% might have been 90% odds of success. For some that is acceptable, for others not. Pfau and others never said 4% would fail.
This is correct. I concede your point.

The calculations may have been correct, and we just got lucky. That's absolutely true.

But here's my point.

We didn't just barely beat the predictions. We crushed them.

The historical average return has been 7% real, and you guys did the math, and said in 2011, based on valuations and our models, one should only expect 4.5% real going forward, so be careful everyone!

If we then we got 6% or even 8% real instead, I'd give the calculations more of a pass, and say well, 4.5% was just the midpoint of a range of possibilities.

But we've gotten more than 11% real over the past 8 years since those predictions.

That's like a two-sigma event.

Again, it still lies within the range of possibilities (barely). Maybe the model is still correct, and we didn't just get lucky, maybe we got really really lucky.

That's absolutely possible.

But it's also possible the model is broken. That not all variables are accounted for. Economics is messy, human-driven, constantly changing. Building a good return prediction model is HARD, I'd say nearly impossible.

If someone did a model of weather, and said water rising THIS high is a "1-in-a-hundred-year flood", and then it happens 3 times in the next 12 years, it's perfectly reasonable to wonder if the model is incorrect. If some variable has changed.

You're predicting a 30-year period going forward that is worse than other 30-year period in U.S. history. It's possible, you may be right, but you have to admit it's an extreme prediction. And since this same prediction was made in the past by Pfau, and it didn't happen (in fact the exact opposite happened - we had 8 GREAT years), it's even harder to believe the math and the model now.
Last edited by HomerJ on Sun Feb 03, 2019 12:33 pm, edited 1 time in total.
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Re: Larry Swedroe: 3% is the new 4%

Post by nedsaid » Sun Feb 03, 2019 12:26 pm

larryswedroe wrote:
Sun Feb 03, 2019 12:10 pm
cherijoh
First, using valuations and yields is not an assumption, it's math. And we do know that valuations and yields are the BEST (though not great) metrics for estimating future returns. There is consensus on that in the academic literature, with about equal abililty in current valuations and CAPE metrics.
Using historical returns literally makes no sense unless the current valuations are about historic values. Perfect example is forecasting in 2000 when historical stock returns were in excess of 11% vs. say the 6% they were 70 years ago. That huge gap was to a large extent caused by rising valuations. And of course today real bond yields about half the historical average. And current yield curve are best estimate of future returns we have.

Second, it is exactly because we don't know that is the reason to be conservative, because the consequences of being wrong are literally unthinkable, while the alternatives are more acceptable. Note that most of the investment risk occurs in the first five years, but then as I explained much of the spending risk occurs later, assuming you live long enough, due to risks of needed long term care and especially when you look at odds of having serious cognitive declines. I cannot tell you how many families I have seen this occur to and wipe out their retirement plans or that of their parents.

And to others, yes excluding Japan is serious error IMO. There are many arguments one could make for US future economic growth being well below long term data, [OT comment removed by admin LadyGeek]. So failures can come from not just high valuations but declining economic growth as well.

Best wishes and good luck. Just remember that the consequences of your decisions should dominate the probability of the outcomes, whatever you think those odds are (and it's likely you are overconfident of those odds if your average human being


Larry
Larry, the problem is that valuations are a moving target. The definition of earnings by Generally Accepted Accounting Principles have changed over the years. Some of this is timing, like amortization of goodwill. Another thing that changed was expensing of stock options, had we done that during the 1990's, the fantastic earnings of big tech would have been a lot less impressive. Warren Buffett talked about this. Pretty much, big tech was able to hide a large part of its compensation expenses. From what you have written, my guess is that a 1970 P/E ratio of 15 then would be about 19 today. So when you say stocks are expensive today compared to historical valuations, are you talking about 2019 or 1970 definition of earnings?

Also, intangible assets are of increasing importance and these are very difficult for accountants to value, so the market has to do it. The accountants value Microsoft at $9 a share and the market values Microsoft at over $100 a share. Do I believe the market or do I believe the accountants? Even though I am an accountant by trade, I will believe the market. Not because I think the accountants to be idiots, indeed they are bright people, but because of the limitations of what accounting can capture.

There is a going concern value for a business. After a while, a business will develop a momentum and a life of its own. Hard to quantify exactly, but the life of a business has value. Pretty much, the market puts a multiple upon the cashflows generated by the business and that solves the problem that accounting has not.

So book value is of decreasing importance as a valuation measurement as intangible assets such as intellectual property become more important. Indeed, the fact that the mixture of assets tilting from tangible to more intangible has probably changed earnings as well. Companies are growing faster in market value than retained earnings on the balance sheet and the gap grows by the day. Something out there is happening that the accountants are not capturing.

My thesis is that there have been big changes in the business world, which accounting is having a hard time adjusting to. For one thing, you have written about profit margins being at an all-time high and you believe that to be unsustainable. Well, perhaps Artificial Intelligence and Automation are making traditional benchmarks of labor costs as a percentage of revenue less and less relevant. Perhaps the world really has changed. 1970 benchmarks don't work very well for 2019.
A fool and his money are good for business.

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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ » Sun Feb 03, 2019 12:31 pm

larryswedroe wrote:
Sun Feb 03, 2019 10:52 am
I would just add that when managing risks it is critical to consider that the consequences of your decisions should dominate the probabilities of the outcomes, regardless of what you think the odds are (since in many cases we don't even know the odds, can only at best estimate them). The Pascal's Wager bet is the great example. You also must consider, as we discuss in the book, what if any Plan Bs you have which you can implement if the risks do show up. If you have ability to adjust spending then clearly can take more risks, so a 4 or 5 or even 6% withdrawal rate might be acceptable. On other hand if have little to nothing which could and would be willing to cut, then you want as close to 100% as you can get, and that today might be 3% or bit higher.
By the way, I 100% agree with this. Excellent post.

I too would not tell someone to ever blindly believe in 4% withdrawals, and ESPECIALLY if it represented bare-bones survival.

4% is the current historical worst-case, and I can skip some vacations and put off a new car purchase if the next 30 years are the worst in U.S. history, and 4% turns out to be too high.

But i think it would be silly of me to work another 5 years to get to 3% withdrawals to cover the (very?) small chance that I might have to skip a vacation or two (especially since my wife is the one who likes to travel, not me...) :)
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Re: Larry Swedroe: 3% is the new 4%

Post by nedsaid » Sun Feb 03, 2019 12:36 pm

HomerJ wrote:
Sun Feb 03, 2019 12:26 pm
larryswedroe wrote:
Sun Feb 03, 2019 10:17 am
BTW-saying Pfau and others were wrong is incredibly foolish. Remember they consider possible outcomes. That means for example that 4% might have been 90% odds of success. For some that is acceptable, for others not. Pfau and others never said 4% would fail.
This is correct. I concede your point.

The calculations may have been correct, and we just got lucky. That's absolutely true.

But here's my point.

We didn't just barely beat the predictions. We crushed them.

The historical average return has been 7% real, and you guys did the math, and said in 2011, based on valuations and our models, one should only expect 4.5% real going forward, so be careful everyone!

If we then we got 6% or even 8% real instead, I'd give the calculations more of a pass, and say well, 4.5% was just the midpoint of a range of possibilities.

But we've gotten more than 11% real over the past 8 years since those predictions.

That's like a two-sigma event.

Again, it still lies within the range of possibilities (barely). Maybe the model is still correct, and we didn't just get lucky, maybe we got really really lucky.

That's absolutely possible.

But it's also possible the model is broken. That not all variables are accounted for. Economics is messy, human-driven, constantly changing. Building a good return prediction model is HARD, I'd say nearly impossible.

If someone did a model of weather, and said water rising THIS high is a "1-in-a-hundred-year flood", and then it happens 3 times in the next 12 years, it's perfectly reasonable to wonder if the model is incorrect. If some variable has changed.

You're predicting a 30-year period going forward that is worse than other 30-year period in U.S. history. It's possible, you may be right, but you have to admit it's an extreme prediction. And since this same prediction was made in the past by Pfau, and it didn't happen (in fact the exact opposite happened), it's even harder to believe the math and the model now.
Homer, I agree with you here. The model IS broken, something is happening that the accountants are not capturing and it is not all speculative fervor on the stock market. Value is being created and accounting just is just not capturing it.

Pretty much, I am saying that valuations matter and I agree with Larry there. Where I agree with you is that stocks are not as expensive as we think they are. Something out there has changed though I am not articulate enough to express it very well. For example, those "unsustainable" profit margins have persisted for quite a while now. A decade now? We keep looking for high margins to fall but they stubbornly resist. I think it is more than companies being mean to their employees. There are efficiencies and productivity improvements that have been made but we don't seem to realize it yet.
A fool and his money are good for business.

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Re: Larry Swedroe: 3% is the new 4%

Post by visualguy » Sun Feb 03, 2019 12:41 pm

When the SWR becomes significantly lower than 4%, the investment strategy becomes a lot more questionable in my opinion. It starts being a lot more attractive to do something like 50% or less Boglehead (mostly in tax-deferred) and 50% or more in direct real estate, which is pretty much what many of my friends and colleagues do.

By the way, I think under-estimating financial needs is more prevalent than over-estimating the SWR. It's convenient not to factor in sufficiently costs of health care/insurance, LTC which can be huge, and various big-ticket items which aren't part of routine expenses (house renovations, something happening that isn't fully covered by insurance, family needing critical financial help suddenly, etc.)

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