"It's obviously not a rule of economics that these SWRs work - they may not, even without huge wars or other disasters."
visualguy wrote: ↑
Tue Feb 13, 2018 5:37 pm
True, and the SWR for the US or US+ex-US may be lower in the future than the 4%, 3.5% or even 3% that many of us assume. It's obviously not a rule of economics that these SWRs work - they may not, even without huge wars or other disasters. It's enough if there's a very long period of stagnation due to bad government policies, aging populations, or a big economic shift to new players (e.g. China, India) where it's hard for us to participate in the economic growth through stock market investment.
The question is what to do about this uncertainty... One option is to work longer and save more. It's not always an option... Many careers have a limited time span, people burn out, etc. Also, even though it's possible that the SWR won't work, the probability seems low, so I think it's reasonable to be reluctant to spend more years working if you aren't happy doing that and if the probability that you will need that extra money is low.
An alternative is to diversify into direct real estate which adds another asset class. Instead of having almost everything in a stock/bond portfolio, have some in that and some in direct real estate investments. It requires some work, but I think it's overall the least painful approach to mitigating the risk of a stock/bond portfolio not meeting its expectations. Good returns in the right locations (which are not that difficult to find), good tax treatment, and somewhat different characteristics than the stock/bond markets. It may or may not work better, but it can be an effective way to reduce risk.
Right. US in 1965-66 had high valuations followed by stagflation and the 4% rule failed, without invasion/disaster. Japan in 1989 again had high valuations, followed by balance sheet recession and eventual deflation. The Nikkei total real return is still negative almost 30 years later, without invasion/disaster.
The historical sample size with the current combination of high stock and bond valuations is de minimis. I'm going to speculate that if we had an "n" of 10,000 with the current combination of high stock and bond valuations, then the failure rate would be significant even with a 3% SWR. High starting valuations cause lower prospective returns and a higher risk of large drawdowns (thus increasing sequence of returns risk).
"The question is what to do about this uncertainty"
I think this depends on your options and how much you love/hate your job.
I quit a very lucrative career in 2001 because the workload was not sustainable. I had to get out -- immediately. It didn't matter if I had enough money.
I eventually found my way back to another good position, and I'm working to make the job more sustainable over time. My employer has been amenable to gradual changes that have improved the workload.
If I wasn't able to find a more tolerable position, then I would have been forced to live a more bare-bones lifestyle. That wouldn't have been the end of the world, but I prefer working in my current position to that alternative.
I agree a motivated investor is likely to find better returns in direct real estate investing than the stock and bond markets, but that is also a job; one that I might consider if I could have a mulligan on 2001.