marcopolo wrote: ↑
Tue Sep 11, 2018 11:43 am
Ron Scott wrote: ↑
Tue Sep 11, 2018 11:33 am
willthrill81 wrote: ↑
Tue Sep 11, 2018 10:25 am
Ron Scott wrote: ↑
Tue Sep 11, 2018 3:01 am
willthrill81 wrote: ↑
Mon Sep 10, 2018 7:34 pm
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.
Now you might argue that 4% isn't conservative enough
, but I see no valid way to say that 4% isn't conservative at all
. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.
R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.
The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.
The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it.
But I'll leave you with this quote.
"History doesn't repeat itself, but it often rhymes."
- Mark Twain
Adopting a set of beliefs commonly held by an in-group, using them to make major decisions, and refusing to engage in a discussion that challenges them because the challenge comes from someone with a different perspective is an increasingly popular approach to discourse in America. I do not think it advances understanding but I respect your decision.
I'll see your quote and raise you one:
"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
- Mark Twain
I will bite.
I have kind of had this exchange with you before. If you don't rely on history, then it is still not at all clear to me what it is that you rely on to plan. I recall from a previous discussion you stated that you simply assume that your investments will keep pace with inflation. But, on what do you place that faith? Sure, historically that has been the case in many, but not all situations. What if we become another Zimbabwe, with runaway inflation? What makes you believe 0% real is reliable, but people relying on 3% real are basing it on fundamentally flawed assumptions. Your assumption are certainly more conservative, and that is a good thing. But, i don't see how that is any more fundamentally sound. There are no laws of physics entitling you to 0% real either. The only thing you really have is that historically, that has been a conservative assumption.
I would first say this: My failure to produce a magic bullet does not validate the use of 20th century American market data to predict returns for specific 30-year periods in the 21st century. "For every complex problem there is a simple solution, and it is wrong."
What I use to plan is a combination of healthy skepticism that we can expect returns to be as high as they've been in the past and a conservative approach to preparing for retirement (saving more and/or working longer). Assuming 0% real, even in a capitalist democracy in which corporations are strongly incented to produce returns above inflation, is not a panacea and the future can certainly do worse, but US fundamentals appear reasonably strong and I can sleep with that assumption. (If I were to bet you, I'd say 2-3% real over 30 years with lower returns in the beginning, but this exercise is about retirement planning, not gambling
Another part of my plan involves 40-60 strategy at the beginning of retirement and leaving stocks to heirs (or, if you prefer, not placing myself in a position of having to sell stock to live). This is both expensive and may well result in underspending, if returns are higher than planned. And since it may result in living below my means it is decidedly un-American. 'cest la vie: better safe than sorry.
Finally, that fact that you and I might see my approach as conservative does not mean that we won't both go broke, or that anyone should rely on that old market data for anything but a history lesson. Don't look back.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.