I emailed Professor Philip L. Cooley, senior author of paper, Cooley, Philip L., Carl M. Hubbard and Daniel T. Walz (1998) "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable," AAII Journal February 1998, Volume XX, No. 2. It's often referred to in this forum as "the Trinity study" and is one of the sources for the "4% rule."
I can't imagine why I never thought of this before. I have to credit Market Timer for his remark in another context, that "We need not debate about what [so-and-so] meant as if this were a freshman poetry class." I emailed him on 4/21/2010 and asked:
He replied later that day:I recently posted this remark and I wonder if you'd care to comment on it, or if you have any papers or aticles that explain more about how you expected your study to be used.
If I've completely misinterpreted you, my apologies. Is the following remark more or less right?
The more I read the Trinity study, the more I think people misinterpret it. The most important sentence is:
"The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."
What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity.
I think all the authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while. They also meant to warn people against the much higher withdrawal rates that had been formerly recommended by people using simple amortization calculations that didn't take account of the "order-of-returns" effect.
Philip L. Cooley wrote:You have hit the nail on the head!
I've tried to explain that thought to journalists but they don't seem to get it. You've got it.
Stay flexible my friend!, which is the advice we should give to retirees.
Philip L. Cooley, Ph.D.
Prassel Distinguished Professor of Business