CFM300 wrote: ↑
Thu Nov 07, 2019 9:50 pm
You might find this link interesting and useful:
Not only does it explain (albeit briefly) the back-testing methodologies employed in previous studies, it has a fantastic calculator that allows you to see both the safe withdrawal rate (which means "did not run out of money in worst case") and the perpetual withdrawal rate (which means "sustained initial principal in worst case").
The default setting is 60/40 (TSM / intermediate-term bonds). It shows a safe withdrawal rate of 4.5% and a perpetual withdrawal rate of 3.5% over 30 years.
I'm sorry. There must be some sort of disconnect.
By "did not run out in the worst case" they mean the worst case "based on real-life sequence of returns". "Perpetual withdrawal rate", changes the constraint from "still having money after 30 years" (which can mean having as little as $1) to "still having the initial capital after 30 years" (which, effectively means "in perpetuity" since one can start another 30 years). This also is based on "based on real-life sequence of returns".
The Trinity Study, which many like to cite here, had a yet different (and looser) constraint "still having money after 30 years in at least x% of cases". Obviously, the Trinity Study cannot be based on the "worst possible case" historically based or not. It is instead based on all
historical returns series, good and bad.
Once we accept the above, my objection is that past history average stock returns has been 10% and bond return has been 7%. This is obviously true for the 90 years of recorded history, for 40-year long periods, and for most 30-year long ones, which are relevant for retirement planning purposes. It is not true for 10-years long periods; there are many with quite different average returns, but those are not
too relevant for retirement purposes.
Now, drum-roll, things are different for developed markets. They have been different for Japan for the last 30 years. They will be different for Europe and the US, until monetary policies (i.e. loose money) change and there is no reason why they should change. We can discuss this separately.
Present and foreseable monetary policies tell us that we can only dream of 10% average returns for stocks and, above all, bond returns will be close to zero real.
That means average balanced portfolio returns won't be able to sustain past "safe" withdrawal rates with the same chance of success for two reasons: lower average returns and highe portfolio volatility (stock returns will be lower, but not their volatility !).
Continue to plan for 4% SWR being oblivious of this fundamental change in financial markets and your chances of disappointment will be higher.