WSJ article on "The 4% Rule" Here is the link.

[allocator]

"Say goodbye to the 4% rule". Those of you planning for, or are in, retirement (I'm guessing that's just about all of us ) might find this interesting.

http://online.wsj.com/article/SB1000142 ... =rss_Money

SORRY!

[Ever Ready]

Where's the link?



found a couple:

WSJ: http://online.wsj.com/article/SB10001424127887324162304578304491492559684.html


Marketwatch: http://www.marketwatch.com/story/say-goodbye-to-the-4-rule-2012-11-13

[FillorKill]

http://online.wsj.com/article/SB1000142 ... 59684.html

[nisiprius]

Yeah, but see, I object to the switcheroo implied by this statement:

In recent years, the 4% rule has been thrown into doubt, thanks to an unexpected hazard: the risk of a prolonged market rout the first two, or even three, years of your retirement. In other words, timing is everything. If your nest egg loses 25% of its value just as you start using it, the 4% may no longer hold, and the danger of running out of money increases.

An "unexpected hazard? All of those old studies purported to be allowing for just such a contingency. And they were not "beautiful," they were at the time considered bad news. The conventional wisdom had been amortization calculations, and Peter Lynch claimed 7% for a 100%-stocks portfolio.

4% was supposed to allow for the stock market fluctuation--for the full range experienced historically, and/or in Monte Carlo simulations. And it was supposed to have enough of a safety margin to be a reasonable planning guide for thirty years into the future. And less than 15 years later they are saying "oops?"

[downshiftme]

So the last suggestion is adapting the withdrawal rate to the PE of the stock market. Depending on PE you might draw between 4.5% and 5.5% So I don't understand how this can possibly be safer than a 4% draw. It's sensitive to market conditions, but in every case it's a larger draw than the Trinity 4% would be.

[Johm221122]

It seems on this post, many people have done well in retirement
viewtopic.php?f=10&t=99278
From the article
"you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds rebalanced each month, with the first year's withdrawal amount increased by 3% a year for inflation, your portfolio would have fallen by a third through 2010, according to investment firm T. Rowe Price Group. And you would be left with only a 29% chance of making it through three decades, the firm estimates."

Cherry picking one date?

[midareff]

Yeah, but see, I object to the switcheroo implied by this statement:

In recent years, the 4% rule has been thrown into doubt, thanks to an unexpected hazard: the risk of a prolonged market rout the first two, or even three, years of your retirement. In other words, timing is everything. If your nest egg loses 25% of its value just as you start using it, the 4% may no longer hold, and the danger of running out of money increases.

An "unexpected hazard?

Seems like he has read Otar.

[allocator]

Sorry about the link .

With respect to withdrawals being pegged to P/E ratios, the research was based on a 60/40 stock/bond allocation. How many of us will be going into retirement with 60% in equities?

[ResNullius]

I read this article earlier today, and I thought there was one major flaw. The data on which the 4% SWR is based includes the 30 and 40 year periods following the start of the Great Depression. It's hard to imagine that current or anticipated future events, other than a total financial collapse around the world, would be worse than the 30 to 40 year period following 1929.

[richard]

I read this article earlier today, and I thought there was one major flaw. The data on which the 4% SWR is based includes the 30 and 40 year periods following the start of the Great Depression. It's hard to imagine that current or anticipated future events, other than a total financial collapse around the world, would be worse than the 30 to 40 year period following 1929.

The S&P 500 is about where it was in 1999 in real terms. How hard is it to imagine that 14 years of zero real returns won't stretch to 30 or 40 years?

If you invested $1,000 in the S&P 500 in Jan 1929, you'd have $6,593 in Jan 1959 and $13,477 in Jan 1969, in real terms, including reinvesting dividends.

The foregoing is based on Robert Shiller's data set, which includes real prices and real dividends for the S&P 500. Data is monthly (dividends are annual, so I adjusted by dividing by 12). I calculated growth each period as: start_value * (1 + (end_price - start_price)/start_price + dividend/start_price)

Bond yields are very low, which means bond holders are not likely to get much return from interest payments or principal increase from falling yields.

S&P 500 growth in $1,000


The future is unknowable and projecting the recent past into the future is usually a mistake. However, the question is how hard is it to imagine a worse 30 or 40 year period. Apologies for any math errors

[statsnerd]

I know options are very anti-Boglehead and I've never partaken in them myself, but being that it's the first few years of retirement where you have the biggest risks of a market down turn really eating into your investments, what about if you bought far out of the money puts on the S&P500 as a hedge? I'm not sure how much it would cost, but just to prevent an extreme 40-50% loss in equity.

[EternalOptimist]

To over simplify, with the 4% withdrawal, you are saying your assets would last 25 years--ie, 100%/4%= 25 years. This, of course, assumes no growth over 25 years which is hard for me to believe. We are all adults but I prefer to believe I will be just fine. Of course there are those who are more fear-driven who believe they won't

[1210sda]

4% was supposed to allow for the stock market fluctuation--for the full range experienced historically, and/or in Monte Carlo simulations. And it was supposed to have enough of a safety margin to be a reasonable planning guide for thirty years into the future. And less than 15 years later they are saying "oops?"

You nailed it once again Nisi. I guess they are expecting worse times than we had during the Great Depression.

1210

[richard]

To over simplify, with the 4% withdrawal, you are saying your assets would last 25 years--ie, 100%/4%= 25 years. This, of course, assumes no growth over 25 years which is hard for me to believe. We are all adults but I prefer to believe I will be just fine. Of course there are those who are more fear-driven who believe they won't

Stocks have had zero real growth over more than half of the past 25 years. Treasuries are yielding something close to zero in real terms (depending on maturity). How hard is it to believe in 25 years of no growth?

[ResNullius]

4% was supposed to allow for the stock market fluctuation--for the full range experienced historically, and/or in Monte Carlo simulations. And it was supposed to have enough of a safety margin to be a reasonable planning guide for thirty years into the future. And less than 15 years later they are saying "oops?"

You nailed it once again Nisi. I guess they are expecting worse times than we had during the Great Depression.

1210

I don't pray at the alter of the 4% SWR, but I also get tired of reading stories by so-called financial experts who sit back and conjure up situations that bear no rational relationship to past or reasonably anticipated future events. It's very difficult to imagine that there will be a 30-year period that is worse than what followed 1929. To be worse, it would require the virtual end of the world as we know it. In order to have enough to be rich throughout such a period of time would require a starting balance of tens of millions of dollars, which is totally out of reach of 99.9% of society.

[richard]

4% was supposed to allow for the stock market fluctuation--for the full range experienced historically, and/or in Monte Carlo simulations. And it was supposed to have enough of a safety margin to be a reasonable planning guide for thirty years into the future. And less than 15 years later they are saying "oops?"

You nailed it once again Nisi. I guess they are expecting worse times than we had during the Great Depression.

Another interpretation is that relying on less than 100 years of data to predict 30 years into the future is not a very good technique. We have fewer than four independent 30 year data points. Would you roll a six-sided die four times, get 1, 3, 5 and 6 and declare the odds of rolling a 2 are minimal?

As to comparisons to the 30 years following the Great Depression, see my post above.

[ThePrune]

I don't pray at the alter of the 4% SWR, but I also get tired of reading stories by so-called financial experts who sit back and conjure up situations that bear no rational relationship to past or reasonably anticipated future events. It's very difficult to imagine that there will be a 30-year period that is worse than what followed 1929. To be worse, it would require the virtual end of the world as we know it. In order to have enough to be rich throughout such a period of time would require a starting balance of tens of millions of dollars, which is totally out of reach of 99.9% of society.

The 30 year period starting in 1966 is typically used for retirement income "Stress Test" purposes. The high inflation in the late 70's makes it a worse historical sequence than starting in 1929.

[nisiprius]

...Another interpretation is that relying on less than 100 years of data to predict 30 years into the future is not a very good technique...

Indeed. Now throw into the pot the fact that the CRSP--the source of almost any data for which the starting date is 1926--was created in order to provide Merrill Lynch with numbers it could use in an advertisement. As with drug studies funded by drug companies, it would be churlish to suppose that the Chicago School of Business was in the bag; I have no doubt that the researchers saw it as an opportunity to do what they wanted to do anyway, and did it with skill and integrity. But it would also be idealistic to assume that there was no funding bias at all.

[EDN]

...Another interpretation is that relying on less than 100 years of data to predict 30 years into the future is not a very good technique...

Indeed. Now throw into the pot the fact that the CRSP--the source of almost any data for which the starting date is 1926--was created in order to provide Merrill Lynch with numbers it could use in an advertisement. As with drug studies funded by drug companies, it would be churlish to suppose that the Chicago School of Business was in the bag; I have no doubt that the researchers saw it as an opportunity to do what they wanted to do anyway, and did it with skill and integrity. But it would also be idealistic to assume that there was no funding bias at all.

Except that, it turned out to almost exactly correspond to the returns calculated on the S&P 500 and it's predecessor S&P 90, or whatever it was. Given that there are no meaningful differences between TSM (CRSP 1-10) and the S&P 500, that's exactly what you'd expect. I think we can relegate the conspiracy theories to Roswell and Nessie!

Eric

[FinancialDave]

Unfortunately,
there was really nothing new in the article -- I just found myself remembering -- gee, there's Wade's article touting how to use annuities in place of sound investing, that I read a week ago somewhere else, there is that RMD method that I read in AAII journal last year, and Morningstar did a complete review of the 4% strategy a few months ago as well.

In the end nothing has changed all that much in the investing world that makes the 4% rule invalid -- except if your risk tolerance puts you in CD's or 80%+ of bonds, then I think it could be a bit of a challenge.

fd

[Orion]

I had the same impression - a bunch of alternatives that have been discussed for some time wrapped up with a catchy headline.

[EDN]

"Say goodbye to the 4% rule". Those of you planning for, or are in, retirement (I'm guessing that's just about all of us ) might find this interesting.

http://online.wsj.com/article/SB1000142 ... =rss_Money

SORRY!

This whole sustainable withdrawal hysteria has really reached a point of absurdity. Yes, LG stock returns have been paltry (TSM, TISM) since 2000 (but great from 1990-1999, and completely average from 1990-2012), and bonds are priced to yield 0% or less real returns going forward. But even assuming terrible timing and a retirement starting on January 1st of 2000, a $1M portfolio calling for $40K in year one and adjusting for future years inflation that is split 42% TSM, 18% TISM, 20% TBM, 20% TIPS (Russell, MSCI, Barclays Indexes) ended 2012 at $997,500. Has anyone actually stopped to check these things out, or are we just assuming portfolio implosion because of a visceral reaction to the extended lost decade?

So you've basically treaded water for 13 years...having reviewed more Monte Carlo sims than I care to remember, I'm fairly certain no portfolio growth in excess of withdrawals is not unheard of over some periods of time. Normally they happen to balanced portfolio's whose stock allocation is heavily weighted towards larger/growth companies AND the period begins with extremely high stock valuations. You need not necessarily do the former, and we know today doesn't correspond to the the later.

But let's go with this and say for the next 17 years (for a full 30 year retirement), the 60/40 portfolio above earns 0% real returns (significantly worse returns than we've seen from 2000-2012). Even with this extreme left tail outcome, and still continuing to pull out annual income, you still don't run out of money.

Finally, even this difficult 2000-2012 period is somewhat self-inflicted given the strong returns for almost every stock asset class outside of US and Int'l developed LC (TSM). Including US and Foreign large and small value along with 5YR t-notes has produced an ending portfolio value north of $1.8M over this period, net of withdrawals. 2013's effective withdrawal rate is now under 3% in this scenario, and it continues to look like smooth sailing ahead.

"Death of the 4% SWR" probably sells a lot of magazines and newspapers, and the commissioned based annuity guys eat it up, as do the RIAs who are constantly trying to layer in complexity to justify their existence, and a few ivory tower academics who've never actually implemented a retirement plan and all its variabilities have gotten in on the act, but precious little has changed. Flexibility is key (SPIAS don't work for most because of this), you cannot afford to go overboard with bonds, leaving a legacy today (depending on goals and allocation) is a maybe, not a probably, and you could be forced to trim spending a bit--especially when another bear market hits. Beyond that, you just keep doing the same things that have always worked: balanced portfolios, going for appreciation and stability, keep costs low, and stay disciplined. It'd put the WSJ out of business if they admitted this, but its true.

Eric

[EDN]

So in the post above I asked:

Has anyone actually stopped to check these things out, or are we just assuming portfolio implosion because of a visceral reaction to the extended lost decade?

And then I realized that, if pressed, I couldn't say for sure exactly what percentile outcome the 2000-2012 results would be in terms of a Monte Carlo simulation using historical risk and return figures. So I checked it out.

In short, for TSM based plans, you'd hope to have been further along than this by now, but not all is lost. This portfolio balance (about $1M) after 13 years lands in the bottom 20th percentile as far as outcomes go. The good news: if we run the 20th percentile simulation through to a 30 year retirement, after 10K simulations, we see an ending portfolio value of almost $1.3M. Of course current market conditions may or may not jive with this result, but whose to say what the real return for stocks will be or what the trajectory for interest rates will be for the next two decades.

As devastating as 2000-2012 seems, its part of the plan.

Interestingly, my hunch above that this period has been much more normal for an investor with a balanced portfolio spread more evenly across large/small and growth/value was also confirmed. The ending portfolio value after 13 years of about $1.8M lands right at the 45th percentile according to MC simulation...about as average as one could expect. And on the way, after 30 years in MC terms, to a terminal value of $2.75M (assuming the 4% SWR continues).

Eric

[EternalOptimist]

To over simplify, with the 4% withdrawal, you are saying your assets would last 25 years--ie, 100%/4%= 25 years. This, of course, assumes no growth over 25 years which is hard for me to believe. We are all adults but I prefer to believe I will be just fine. Of course there are those who are more fear-driven who believe they won't

Stocks have had zero real growth over more than half of the past 25 years. Treasuries are yielding something close to zero in real terms (depending on maturity). How hard is it to believe in 25 years of no growth?

In 1988, S&P was 267 and today 1522...seems like it grew to me. Read what I said.

[richard]

To over simplify, with the 4% withdrawal, you are saying your assets would last 25 years--ie, 100%/4%= 25 years. This, of course, assumes no growth over 25 years which is hard for me to believe. We are all adults but I prefer to believe I will be just fine. Of course there are those who are more fear-driven who believe they won't

Stocks have had zero real growth over more than half of the past 25 years. Treasuries are yielding something close to zero in real terms (depending on maturity). How hard is it to believe in 25 years of no growth?

In 1988, S&P was 267 and today 1522...seems like it grew to me. Read what I said.

I read what you said. You're talking in nominal terms, which doesn't seem an appropriate benchmark for inflation adjusted (i.e. real) withdrawals.

Read what I said. It hasn't grown in real terms (including dividends) in the past 13 years. 13 is more than half of 25.

[richard]

...Another interpretation is that relying on less than 100 years of data to predict 30 years into the future is not a very good technique...

Indeed. Now throw into the pot the fact that the CRSP--the source of almost any data for which the starting date is 1926--was created in order to provide Merrill Lynch with numbers it could use in an advertisement. As with drug studies funded by drug companies, it would be churlish to suppose that the Chicago School of Business was in the bag; I have no doubt that the researchers saw it as an opportunity to do what they wanted to do anyway, and did it with skill and integrity. But it would also be idealistic to assume that there was no funding bias at all.

Except that, it turned out to almost exactly correspond to the returns calculated on the S&P 500 and it's predecessor S&P 90, or whatever it was. Given that there are no meaningful differences between TSM (CRSP 1-10) and the S&P 500, that's exactly what you'd expect. I think we can relegate the conspiracy theories to Roswell and Nessie!

If nisi is correct that CRSP is "the source of almost any data for which the starting date is 1926", that would include S&P data, so you're just looking two versions of the same underlying data. It would not be surprising that two versions of the same underlying data agree.

[richard]

But let's go with this and say for the next 17 years (for a full 30 year retirement), the 60/40 portfolio above earns 0% real returns (significantly worse returns than we've seen from 2000-2012). Even with this extreme left tail outcome, and still continuing to pull out annual income, you still don't run out of money.

If you earn 0% real returns and withdraw 4% adjusted for inflation each year, you run out of money after 25 years, which is a bit quicker than 30 years.

[richard]

Unfortunately, there was really nothing new in the article

The problem is that there never was a solid basis for the 4% rule. It's just a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future.

[EDN]

...Another interpretation is that relying on less than 100 years of data to predict 30 years into the future is not a very good technique...

Indeed. Now throw into the pot the fact that the CRSP--the source of almost any data for which the starting date is 1926--was created in order to provide Merrill Lynch with numbers it could use in an advertisement. As with drug studies funded by drug companies, it would be churlish to suppose that the Chicago School of Business was in the bag; I have no doubt that the researchers saw it as an opportunity to do what they wanted to do anyway, and did it with skill and integrity. But it would also be idealistic to assume that there was no funding bias at all.

Except that, it turned out to almost exactly correspond to the returns calculated on the S&P 500 and it's predecessor S&P 90, or whatever it was. Given that there are no meaningful differences between TSM (CRSP 1-10) and the S&P 500, that's exactly what you'd expect. I think we can relegate the conspiracy theories to Roswell and Nessie!

If nisi is correct that CRSP is "the source of almost any data for which the starting date is 1926", that would include S&P data, so you're just looking two versions of the same underlying data. It would not be surprising that two versions of the same underlying data agree.

Nisi is not correct. The S&P 90 was compiled and tracked weekly starting in the early 1920s, not backfilled. They also tracked another 400 stocks and their returns that weren't included in the index. In the 1950s, the S&P 90 was expanded to the S&P 500. CRSP attempted to compile a measure of the returns of the "total" stock market that included another thousand or two thousand stocks in the 1960s. They found....wait for it....the same returns as the S&P 500! Cap weighting is cap weighting whether you hold 500 or 5000 stocks. The conspiracy theorists who would posit that CRSP was created to make stocks look better than they were have it all wrong...they didn't turn out to do any better/worse than we already knew!

It was a major let-down for those who were looking for anything more robust than the S&P 500. And continues to be for many -- institutions in many cases still refer to the S&P 500 as the market.

From 1979-2/2013, the return on the Russell 3000 Index was +11.56%. The return on the S&P 500 was...+11.56%.

Eric

[EDN]

But let's go with this and say for the next 17 years (for a full 30 year retirement), the 60/40 portfolio above earns 0% real returns (significantly worse returns than we've seen from 2000-2012). Even with this extreme left tail outcome, and still continuing to pull out annual income, you still don't run out of money.

If you earn 0% real returns and withdraw 4% adjusted for inflation each year, you run out of money after 25 years, which is a bit quicker than 30 years.

Well, that has almost nothing to do with my quote. I already accounted for the first 13 years of a 30 year retirement (2000-2012) with the beginning bias of a 2000 start date (not 1998, not 2003, etc.). And I showed that you'd been able to pull over $600K out, and still have about your original portfolio value. So clearly, real portfolio returns haven't even been 0% since 2000, and we began with a period where equity valuations were as high as they've ever been! 0% going forward, that is a left tail 1% probability, not the base for which you plan a retirement around.

Eric

[EDN]

Unfortunately, there was really nothing new in the article

The problem is that there never was a solid basis for the 4% rule. It's just a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future.

Nothing's reliable enough for some. 85 years of US data doesn't have enough independence. A global equity index set that is within 1% real of the US result, still not enough. Monte Carlo tests run on thousands of simulations? Worthless.

Yet the alternatives (SPIAs and bond heavy portfolios) provide greater assurances...and those assurances look infinitely worse--a proverbial retirement straightjacket, or copious amounts of purchasing power risk and a laughable probability of any legacy leave-behind.

So until 2500 comes around, I'll choose to rely on what data we have, basic financial principles of risk and return, piggy-back on the benefits of broad diversification, and stay as balanced and flexible as possible with the expectation that sound portfolios will continue to produce modest and acceptable future returns with the occasional speed-bump/fender-bender. And above all--tune out all the hysteria, skepticism, and recency bias ridden points-of-view, except to occasionally engage them on internet chat sites.

Eric

[Clearly_Irrational]

Personally, I think that the safe withdrawal rate is the actual yield. Currently 2.02% for VTI and 2.74% for BND. Anything more than that and you're guessing to see if you can withdraw more without running out before you die. You'll probably get lucky, but you may not. The main reason people aren't satisfied with that is that means you have to save up a staggering amount of money. Additionally you'd usually end up leaving a large inheritance which means you lived more frugally than you needed to. As great as the market is in the accumulation phase, it's pretty terrible in the drawdown phase due to sequence of returns risk.

[nisiprius]

EDN: in September, 1995, in a Worth magazine article entitled "Fear of Crashing," Peter Lynch recommended a 100% stocks portfolio--preferably individual stocks chosen from among Moody's Dividend Achievers, but "You could do this the easy way and invest in an S&P 500 index fund, currently yielding about 3 percent." He stated that you could safely withdraw 7% of the portfolio per year, and gave an illustration (reproduced below). He says this is an investment strategy he described in his book, Beating the Street, which I have not read.

(Note that his 7% is different from the Trinity study's "4%," which means 4% of initial value and then COLAed every year, regardless of portfolio value. Lynch is saying 7% of whatever the portfolio value is, and it will hopefully that 7% withdrawal will not fluctuate intolerably and will keep pace with inflation).

Do you agree with Lynch, or would you judge he was being imprudently optimistic? In your opinion, is an annual 7%-of-portfolio withdrawal from a 100% S&P 500 portfolio a safe, sustainable rate or is it imprudently high?

[EternalOptimist]

To over simplify, with the 4% withdrawal, you are saying your assets would last 25 years--ie, 100%/4%= 25 years. This, of course, assumes no growth over 25 years which is hard for me to believe. We are all adults but I prefer to believe I will be just fine. Of course there are those who are more fear-driven who believe they won't

Stocks have had zero real growth over more than half of the past 25 years. Treasuries are yielding something close to zero in real terms (depending on maturity). How hard is it to believe in 25 years of no growth?

In 1988, S&P was 267 and today 1522...seems like it grew to me. Read what I said.

I read what you said. You're talking in nominal terms, which doesn't seem an appropriate benchmark for inflation adjusted (i.e. real) withdrawals.

Read what I said. It hasn't grown in real terms (including dividends) in the past 13 years. 13 is more than half of 25.

Believe what you wish

[Mel Lindauer]

Unfortunately, there was really nothing new in the article

The problem is that there never was a solid basis for the 4% rule. It's just a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future.

Precisely. It showed what worked IN THE PAST and didn't guarantee that history would repeat itself.

[richard]

Nothing's reliable enough for some. 85 years of US data doesn't have enough independence.

Do you understand the objection? The problem is that there are only about three independent 30 year data points in 85 years of data, not that the entire data set isn't independent of something.

A global equity index set that is within 1% real of the US result, still not enough.

So?

Monte Carlo tests run on thousands of simulations? Worthless.

Monte Carlo simulations are entirely dependent on their inputs, no matter how many times they are run. If you knew future returns, distributions, correlations, etc., then MC would help in predicting the future. OTOH, if you had this information, you wouldn't need to run MC models.

MC simulations are mainly useful as a teaching tool - how might changing this number (returns, allocations, correlations, whatever) change outcomes. They don't add much to our ability to predict the future.

[ObliviousInvestor]

To over simplify, with the 4% withdrawal, you are saying your assets would last 25 years--ie, 100%/4%= 25 years. This, of course, assumes no growth over 25 years which is hard for me to believe.

I agree that this is an oversimplification. Because of sequence of returns risk, you can come up with scenarios in which a portfolio has a time-weighted 0% real return over 25 years, but still runs out of money because its dollar-weighted return is significantly below zero.

[ObliviousInvestor]

MC simulations are mainly useful as a teaching tool - how might changing this number (returns, allocations, correlations, whatever) change outcomes. They don't add much to our ability to predict the future.

This statement is very interesting as a sort of litmus test. Personally, I agree with it wholeheartedly. But there are also people who would read it and think you're unreasonable for believing such a thing.

[Clearly_Irrational]

MC simulations are mainly useful as a teaching tool - how might changing this number (returns, allocations, correlations, whatever) change outcomes. They don't add much to our ability to predict the future.

This statement is very interesting as a sort of litmus test. Personally, I agree with it wholeheartedly. But there are also people who would read it and think you're unreasonable for believing such a thing.

I would argue that they're pretty good at telling you what strategies are obviously bad, however the remaining ones aren't necessarily good.

[Cut-Throat]

This is rather amusing. Maybe this is the ultimate contrarian indicator.

And if you really want to be a contraian 'Go All in' on Long Bonds......No one likes them.

[nisiprius]

[The S&P] hasn't grown in real terms (including dividends) in the past 13 years.

Believe what you wish

Well, this shouldn't be difficult to check out. Step 1: Let Morningstar show us the growth in VFINX, and along with it, it will show use the growth in the index itself, including dividends. I will get as close as possible to "today" and "13 years" as Morningstar will let me.



From 3/3/2000 to 3/3/2013, it is showing me that a $10,000 investment in the S&P total return index including reinvested dividends, would have grown to $13,744.22.

Now, off to look up CPI-U, at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

At end of February, 2000 it was 169.8.
It only goes to end of January, 2013, 230.28, and "February 2013 CPI data are scheduled to be released on March 15, 2013" says their front page. I'm going to say inflation is running around 2.4%/year or 0.2% per month and increase that 230.28 by 0.4% to 231.2.

$10,000 thirteen years ago is equivalent to $10,000 * 231.2/169.8 = $13,616 today. The S&P total return index did just a hair better. At the end of all thirteen years, the 13-year total was 0.93% for the S&P, for an annualized real return of 0.07% per year.

I don't want to get into a shouting match over whether 0.07% can be regarded as "hasn't grown." But it hasn't grown much, and here is a relevant comparison.

I actually personally bought $10,000 of series I savings bonds in May of 2000, and they are currently worth $20,496. That is considerably more than $13,744.22, and it works out to be about a rate of about 3.2% real per annum.

[FinancialDave]

Unfortunately, there was really nothing new in the article

The problem is that there never was a solid basis for the 4% rule. It's just a general rule of thumb based on historical data that's not sufficient to be a reliable predictor of the future.

You mean solid basis - as being able to predict the future? That is not really possible - but never the less it has still been studied to death over the last 15 years, and I have done a study or two myself. In the end in my retirement, I use an income stream that does not require I pull money from the principal and is pretty conservative anyway -- so I'm no where near even the 4% rule.

fd

[EDN]

Do you understand the objection? The problem is that there are only about three independent 30 year data points in 85 years of data, not that the entire data set isn't independent of something.

==============================

Monte Carlo simulations are entirely dependent on their inputs, no matter how many times they are run. If you knew future returns, distributions, correlations, etc., then MC would help in predicting the future. OTOH, if you had this information, you wouldn't need to run MC models.

MC simulations are mainly useful as a teaching tool - how might changing this number (returns, allocations, correlations, whatever) change outcomes. They don't add much to our ability to predict the future.

Yes Richard, I understand independent periods, just as I appreciate the ability and usefulness in using this historical data in bootstrap simulations that eliminate many of these concerns (that come to similar conclusions). But I'm guessing you prefer we forget about those too (and their results).

Your last comment is a telling one. I think your (and others) issue is you are looking for all these planning tools and techniques to tell you precisely what the future will look like, removing all uncertainty from the equation. That isn't retirement planning. Instead, RP is using all of the tools at our disposal (robust financial theory, historical analysis, and statistical modeling including MC and bootstrapping, to name just a few) to build the most realistic expectations about a future that will always be uncertain and unpredictable so that we may make the best decisions possible with the highest probability of success and an appreciation of what could/will go wrong. Nothing more.

You and I apparently have a different perspective on the utility of these tools, especially in the aggregate. You seem to believe "we know nothing and none of these considerations matter a bit", I have more confidence in the tools we have even considering their short-comings, and I also think "markets work", which allows me to have a perspective that isn't predicated on having all the answers. To this point at least, my view has been a very successful one.

Eric

[EDN]

EDN: in September, 1995, in a Worth magazine article entitled "Fear of Crashing," Peter Lynch recommended a 100% stocks portfolio--preferably individual stocks chosen from among Moody's Dividend Achievers, but "You could do this the easy way and invest in an S&P 500 index fund, currently yielding about 3 percent." He stated that you could safely withdraw 7% of the portfolio per year, and gave an illustration (reproduced below). He says this is an investment strategy he described in his book, Beating the Street, which I have not read.

(Note that his 7% is different from the Trinity study's "4%," which means 4% of initial value and then COLAed every year, regardless of portfolio value. Lynch is saying 7% of whatever the portfolio value is, and it will hopefully that 7% withdrawal will not fluctuate intolerably and will keep pace with inflation).

Do you agree with Lynch, or would you judge he was being imprudently optimistic? In your opinion, is an annual 7%-of-portfolio withdrawal from a 100% S&P 500 portfolio a safe, sustainable rate or is it imprudently high?

Nisi,

Here is my pearl of free advice for the day: "don't read financial porn and don't listen to active managers". And I'd also add: "don't wager on financial conspiracy theories". That will take you a long way.

Eric

[baw703916]

4% is just the historical average return of a typical retirement portfolio. Let's see, if bonds have a real return of 2% and equities have a real return of 7%, and you hold 35% equities and 65% bonds and rebalance. Yes, 4% is a reasonable number (historically).

In answer to Nisi's observation about the 4% taking the fluctuations of equities into account: yes it does. What it does not take into account is a negative real return of bonds. If safe bonds have a negative real return, the SWR (in terms of being sustainable indefinitely) is pretty close to zero. I'm guessing that they don't stay this low indefinitely, but what do I know?

[nisiprius]

Do you agree with Lynch, or would you judge he was being imprudently optimistic? In your opinion, is an annual 7%-of-portfolio withdrawal from a 100% S&P 500 portfolio a safe, sustainable rate or is it imprudently high?

...Here is my pearl of free advice for the day: "don't read financial porn and don't listen to active managers"...

I would like to infer that you do not agree with Peter Lynch's 1995 article, and that you do not think a 7%-of-portfolio annual withdrawal from a 100% S&P 500 portfolio is sustainable... because that would mean that you and I agree.

[nisiprius]

...In answer to Nisi's observation about the 4% taking the fluctuations of equities into account: yes it does. What it does not take into account is a negative real return of bonds. If safe bonds have a negative real return, the SWR (in terms of being sustainable indefinitely) is pretty close to zero. I'm guessing that they don't stay this low indefinitely, but what do I know?

Why wouldn't they take that into account? Nominal bonds had a rather bad negative real return from 1940 to 1980, well within the range of historical data these studies usually claim to include. I don't know what data Bengen used, but the Trinity authors said they used data from 1926 to 1995.

[walkinwood]

Two of the authors assumptions seem to bolster his case
- monthly rebalancing while studies use annual rebalancing
- constant 3% inflation while studies use actual inflation - and sequence of inflation matters.

If you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds rebalanced each month, with the first year's withdrawal amount increased by 3% a year for inflation, your portfolio would have fallen by a third through 2010, according to investment firm T. Rowe Price Group.

Here's Wade Pfau's data on the 2000 retiree. While the situation is dire, it isn't by any means, the worst historic case. It shows that real portfolio value would have fallen by a third while nominal value declined by 12%.

http://wpfau.blogspot.com/2012/06/updat ... irees.html

[wade]

Just a quick note about Great Depression retirees.

I don't mean to take anything away from those living to that time. Of course circumstances were very dire.

But when you simply plug that data into a safe withdrawal rate study, the Great Depression doesn't look so bad. Though stocks had quite a rough time, the real value of bonds doubled in the 10 years after 1929, and deflation provided a lot of relief for spending for a study that uses inflation-adjusted withdrawals. The sustainable withdrawal rate for today's retirees could still be lower than at that time even if unemployment never gets anywhere near 25%, etc.

[nisiprius]

Wade, looking for your personal opinion here. There's a real catch-22 in looking at long-term data, because just about the time a block of data starts to be long enough to mean something, it starts to be long enough that I start to wonder about continuity of the underlying thing. Was the stock market before the SEC and the Investment Company Act of 1940 the same thing as the stock market of today? Should one really expect it to display similar statistical behavior and statistics? Or are apparent watershed events really just what they seem, dividing different eras with different statistics on each side?

So, I'm asking you: in your opinion, was the stock market of the 1920s similar enough in its general financial economics and dynamics?

My own spin is that financial data may be too episodic to do statistics on--i.e. Mandelbrot was right--and that long-term statistics may not be any more reliable than, say, statistics on the "average war."

This is how Frederick Lewis Allen, writing in the 1930s (Only Yesterday) saw it. Does this stock market have the same mean and standard deviation as the stock market of today?

...a group of powerful speculators with fortunes made in the automobile business and in the grain markets and in the earlier days of the bull market in stocks--men like W. C. Durant and Arthur Cutten and the Fisher Brothers and John J. Raskob--were buying in unparalleled volume.... The big bull operators knew, too, that thousands of speculators had been selling stocks short in the expectation of a collapse in the market, would continue to sell short, and could be forced to repurchase if prices were driven relentlessly up. And finally, they knew their American public. It could not resist the appeal of a surging market. It had an altogether normal desire to get rich quick, and it was ready to believe anything about the golden future of American business. If stocks started upward the public would buy, no matter what the forecasters said, no matter how obscure was the business prospect.