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Author: JWR1945 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 726163  
Subject: It is safe now. Date: 7/16/2002 11:08 AM
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It is now safe to use the 4% safe withdrawal number.

Does that seem strange to hear? Consider this. The Retire Early Safe Withdrawal Rate study and its related calculators produce results that are accurate to the extent that the historical data can be used to predict the future. When the calculators state that a certain withdrawal percentage and investment mix produce a 100% safe withdrawal rate, that estimate is constrained by the underlying logic behind the calculation.

There is quite a bit of merit to assuming that the next three or four decades of investment results will fall within the bounds of history. What has bothered me, however, is that...as I have looked more and more deeply into the matter...I keep on finding things that really are new...or, more accurately, they really were new when they first happened. The events of both the depression era and the stagflation era were new when they wiped out retirement portfolios. It always seems to have been the unanticipated events that have caused disasters. Even real estate has been hit. At one time it was thought that the prices of homes would always rise (with a few obvious exceptions, of course). Then there was the disaster in the oil patch. So although having the safe withdrawal rate study fail has been likened to going through a nuclear war, I do think that it is worthwhile to consider such a possibility.

There has been much talk about the high valuations afforded stocks in the last decade. And although there is credible evidence that the Price to Earnings (P/E) ratio of the S&P 500 is a poor measure of valuation for predicting the safety of a withdrawal rate, I do use it here...because I don't have anything better.

What is different now...or, actually, what was different until recently...is that the S&P 500 P/E is higher than ever before and for an extended length of time. I refer to (Professor) Shiller's data that intercst has provided to us. (See post 67026 dated 5-20-02.) IIRC, Dr. Shiller averaged the earnings over ten years to smooth the data. Averaging also tends to reduce the overall P/E number. The P/E had never exceeded 30 except for two months in 1929 data prior to 1997. It stayed above that level for about 4 years. Today, of course, the P/E ratio of the S&P 500 is within normal bounds. (I have not been able to calculate this exactly via Dr. Shiller's method because I do not have recent earnings data. I have estimated the number in two different ways. The answers are both close. The simpler method is to take Dr. Shiller's December 2001 values of the S&P 500 and its P/E and scale by today's S&P 500 number...roughly speaking, this is (900/1140)*(30.27) = 23.90.) In addition, dividends are becoming popular again (at least for the many investors on this board that have bought REITS for retirement income and for others buying stocks inside IRAs and other tax favored accounts). I expect corporations to respond to this change. I expect dividends to increase.

Simply put, I think that things are normal again...at least in regards to the Retire Early Safe Withdrawal Study. I think that those who retire now and withdraw from their investments at rates according to the study really are safe and they really can feel secure. I also anticipate that they will be able to increase withdrawals via the Pay Out Period Reset (POPR) and/or the other standard approaches. Do realize that I am talking of a Safe Withdrawal Rate in a generally understood sense. This differs from the use of the phrase (along with its precise definition) as found in the study.

Have fun and Fool on.

John R.


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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70459 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 11:18 AM
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JWR1945 wrote:
It is now safe to use the 4% safe withdrawal number. Does that seem strange to hear? Consider this. The Retire Early Safe Withdrawal Rate
study and its related calculators produce results that are accurate to the extent that the historical data can be used to predict the future. When the calculators state that a certain withdrawal percentage and investment mix produce a 100% safe withdrawal rate, that estimate is constrained by the underlying logic behind the calculation.<snip>


But the 4% SWR wasn't safe before? How not? Why not?

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Author: Daryll42 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70464 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 11:41 AM
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While I tend to agree that it's SAFER to begin 4% withdrawals NOW than at the end of 1999, in theory you could begin retirement NOW and withdraw MUCH MORE than 4%. That's because it's 1932...no longer 1929.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70467 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 11:48 AM
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Daryll42 wrote:
While I tend to agree that it's SAFER to begin 4% withdrawals NOW than at the end of 1999, in theory you could begin retirement NOW and withdraw MUCH MORE than 4%. That's because it's 1932...no longer 1929.

How do you know this? Is there something in the SWR study that I've overlooked or misunderstood?

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70477 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 12:52 PM
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galeno asks,

<<<<Daryll42 wrote:
While I tend to agree that it's SAFER to begin 4% withdrawals NOW than at the end of 1999, in theory you could begin retirement NOW and withdraw MUCH MORE than 4%. That's because it's 1932...no longer 1929.>>>>

How do you know this? Is there something in the SWR study that I've overlooked or misunderstood?


Daryll42 is assuming that 1999 was "1929" and that today, 3 years later is, "1932". You can use my "P/E vs. safe withdrawal rate study" to find the 30-year safe withdrawal for a retirement starting in any year from 1871-1970, see link:

http://rehphome.tripod.com/pestudydata.html

The 30-year safe withdrawal in 1929 is 4.4%. If you started in 1932 it's 7.0%. Of course there's no way to know this for sure ahead of time, so my preference is to use 4% and have more money than I know what to do with when I get older. <grin>

intercst



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Author: Daryll42 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70489 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 1:41 PM
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Galeno Quoted Me As Follows: Daryll42 wrote: While I tend to agree that it's SAFER to begin 4% withdrawals NOW than at the end of 1999, in theory you could begin retirement NOW and withdraw MUCH MORE than 4%. That's because it's 1932...no longer 1929.

How do you know this? Is there something in the SWR study that I've overlooked or misunderstood?


Of course I DON'T know this...in fact, I HOPE it's true! However, since I have been around this board since before 1999, I can remember people setting up FI/RE plans based on the worst-case scenario from that time. Unfortunately, that worst case scenario has pretty much come true for those who have a frame of reference that puts the peak of the bubble as the starting point. And it's VERY analagous to the 1920-1932 period, especially if you were heavy in tech. I do agree, however, that there A LOT more damage that COULD occur, and perhaps it's only 1929 NOW! SCARY! <One difference is that the Fed is working to keep the pump churning NOW vs 1929 when the Fed shifted gears the wrong way...not that something catastrophic couldn't still happen>

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70506 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 4:44 PM
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>> In addition, dividends are becoming popular again (at least for the many investors on this board that have bought REITS for retirement income and for others buying stocks inside IRAs and other tax favored accounts). I expect corporations to respond to this change. I expect dividends to increase. <<

There's just one obstacle to this: the double taxation of dividends. Paying out a dividend effectively reduces after-tax shareholder return by as much as one-third on that payout.

Unless you're investing ONLY for current income, the current tax laws are an extreme disincentive to pay significant dividends. And that's a shame, because dividends in a strong, well-established company can put a very firm floor under a stock's valuation even in a crummy market.

As long as some politicians can demagogue the issue into a "tax break for the rich," it won't happen.

#29


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70507 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 4:50 PM
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ziggy29 writes,

>> In addition, dividends are becoming popular again (at least for the many investors on this board that have bought REITS for retirement income and for others buying stocks inside IRAs and other tax favored accounts). I expect corporations to respond to this change. I expect dividends to increase. <<

There's just one obstacle to this: the double taxation of dividends. Paying out a dividend effectively reduces after-tax shareholder return by as much as one-third on that payout.

Unless you're investing ONLY for current income, the current tax laws are an extreme disincentive to pay significant dividends. And that's a shame, because dividends in a strong, well-established company can put a very firm floor under a stock's valuation even in a crummy market.

As long as some politicians can demagogue the issue into a "tax break for the rich," it won't happen.


That's not true if you invest in an IRA or 401k. Everything is deferred and taxed as ordinary income no matter where it comes from.

So it's OK to put your dividend paying stocks in your IRA even if you're years from retirement.

John G


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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70511 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 5:08 PM
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>> That's not true if you invest in an IRA or 401k. Everything is deferred and taxed as ordinary income no matter where it comes from. <<

Yes. But there are still enough stock investments in taxable accounts that it may influence corporate policy about increased dividends.

#29


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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70519 of 726163
Subject: Re: It is safe now. Date: 7/16/2002 6:08 PM
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That's not true if you invest in an IRA or 401k. Everything is deferred and taxed as ordinary income no matter where it comes from.


And if it's in a Roth IRA, it's tax-free.

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Author: ariechert Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70675 of 726163
Subject: Re: It is safe now. Date: 7/17/2002 11:43 PM
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"Daryll42 wrote:
While I tend to agree that it's SAFER to begin 4% withdrawals NOW than at the end of 1999, in theory you could begin retirement NOW and withdraw MUCH MORE than 4%. That's because it's 1932...no longer 1929."


So if I started to take out 4% on March 10, 2000 I would be ok now? How about if I start to take out 4% of the March 10, 2000 value in March of 2003, even though my portfolio has lost 35% of it's 3/10/2000 value? - Art



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Author: peteyperson Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70687 of 726163
Subject: Re: It is safe now. Date: 7/18/2002 5:27 AM
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There is also established evidence that corporations are often poor investors of your own money. Their arrogance that they can invest profits better than you can elsewhere causes that in part. Stock buybacks often fund director & staff stock payoffs.

Growth rates have averaged 1.4% over the years with dividends making up the difference. If growth rates remain historically the same and dividends remain low, then real returns will drop dramatically over the long term as will the safe withdrawal rate.

Petey


There's just one obstacle to this: the double taxation of dividends. Paying out a dividend effectively reduces after-tax shareholder return by as much as one-third on that payout.

Unless you're investing ONLY for current income, the current tax laws are an extreme disincentive to pay significant dividends. And that's a shame, because dividends in a strong, well-established company can put a very firm floor under a stock's valuation even in a crummy market.

As long as some politicians can demagogue the issue into a "tax break for the rich," it won't happen.

#29

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Author: Daryll40 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70700 of 726163
Subject: Re: It is safe now. Date: 7/18/2002 8:09 AM
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Daryll42 wrote: While I tend to agree that it's SAFER to begin 4% withdrawals NOW than at the end of 1999, in theory you could begin retirement NOW and withdraw MUCH MORE than 4%. That's because it's 1932...no longer 1929." So if I started to take out 4% on March 10, 2000 I would be ok now? How about if I start to take out 4% of the March 10, 2000 value in March of 2003, even though my portfolio has lost 35% of it's 3/10/2000 value? - Art

Art, that is EXACTLY the point I was trying to make. Exactly. If you were safe on March 10, 2000, then that same amount withdrawn is safe today. THE MONEY DOESN'T KNOW that you didn't REALLY start withdrawals then. (Actually, you'd be even a little better off because those 3 years of withdrawals you'd still have.) I guess you would have to make an adjustment at the end...if you expected your money to last 30 years, somone could make the case that it would now only last 27, although this would be offset, somewhat, by the money not withdrawn from March 2000-March 2003.

But, again as you asked, it seems to me that those who retired recently or who will retire soon can ignore the 40% slide in the S&P and start their withdrawals at 4% of their March 2000 amount. <I admit, I would not be comfortable doing this myself, but if you believe in the 4% rule, then you should believe this as well>. RIGHT INTERCST?











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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70716 of 726163
Subject: Re: It is safe now. Date: 7/18/2002 11:07 AM
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Daryll40 asks,

Art, that is EXACTLY the point I was trying to make. Exactly. If you were safe on March 10, 2000, then that same amount withdrawn is safe today. THE MONEY DOESN'T KNOW that you didn't REALLY start withdrawals then. (Actually, you'd be even a little better off because those 3 years of withdrawals you'd still have.) I guess you would have to make an adjustment at the end...if you expected your money to last 30 years, somone could make the case that it would now only last 27, although this would be offset, somewhat, by the money not withdrawn from March 2000-March 2003.

But, again as you asked, it seems to me that those who retired recently or who will retire soon can ignore the 40% slide in the S&P and start their withdrawals at 4% of their March 2000 amount. <I admit, I would not be comfortable doing this myself, but if you believe in the 4% rule, then you should believe this as well>. RIGHT INTERCST?


That's correct.

intercst


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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70731 of 726163
Subject: Re: It is safe now. Date: 7/18/2002 3:03 PM
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Daryll40 asks,

Art, that is EXACTLY the point I was trying to make. Exactly. If you were safe on March 10, 2000, then that same amount withdrawn is safe today. THE MONEY DOESN'T KNOW that you didn't REALLY start withdrawals then. (Actually, you'd be even a little better off because those 3 years of withdrawals you'd still have.) I guess you would have to make an adjustment at the end...if you expected your money to last 30 years, somone could make the case that it would now only last 27, although this would be offset, somewhat, by the money not withdrawn from March 2000-March 2003.

But, again as you asked, it seems to me that those who retired recently or who will retire soon can ignore the 40% slide in the S&P and start their withdrawals at 4% of their March 2000 amount. <I admit, I would not be comfortable doing this myself, but if you believe in the 4% rule, then you should believe this as well>. RIGHT INTERCST?
--------

intercst replies,

That's correct.



Only as long as the withdrawal rate is a 100% safe witdrawal rate. If you are using a witdrawal rate that is less than 100% safe initially I think it could be safely argued that you are probably below that initial safety rate. This is because you are quite possibly already down the path that is more likely to lead to failure. It is still not certain failure because the future return sequence is still unknown. If you had started with a 95% safe withdrawal it may be that you are down a sequence that is more likely to fail and so are at only 80% or maybe 50% chance of success.

Hyperborea

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Author: JWR1945 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70783 of 726163
Subject: Re: It is safe now. Date: 7/19/2002 10:54 AM
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ariechert made an excellent observation when he wrote the following on this thread. It is a sanity check.

So if I started to take out 4% on March 10, 2000 I would be ok now? How about if I start to take out 4% of the March 10, 2000 value in March of 2003, even though my portfolio has lost 35% of it's 3/10/2000 value? - Art

The underlying technical issue involves extrapolation. You can generally have a very high confidence if you make a small extrapolation. As you make larger extrapolations, however, your confidence level decreases.

There are credible reasons to consider the possibility that historical results will not predict the future. You can find many of these from the sources referenced in the link that intercst has provided in post 70676 dated 7-17-02 on “Future Stock Market Returns.” Of course, to the extent that historical results do predict the future accurately, it is by definition always true that an estimated 100% safe withdrawal rate number remains 100% safe. However, that information does not mitigate risk in case the extrapolation fails.

There are numerous questions that are worth answering. In all cases we want to mitigate risk in the event that the historical data fails to predict the future. Here are some:
1) How can you recognize that something is going wrong?
2) How soon will you know that you must take remedial action...such as working part time?
3) Do we have to take preemptive action...such as delaying retirement?
4) What changes should you make to your withdrawal approach (or tactics or strategy or policy) based on new information? (There have been several excellent approaches developed so far. Certainly, there can be many others...each appropriate for different individuals.)

It is important to understand that credible risk issues exist. It is much better to address them early than to ignore them. Opportunities abound for doing useful research and for providing useful information.

Having fun,

John R.








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Author: ariechert Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70902 of 726163
Subject: Re: It is safe now. Date: 7/19/2002 10:40 PM
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"Opportunities abound for doing useful research and for providing useful information. Having fun," John R.

I appreciate all the hard work all you math geniuses have done. And, it has made an impression on me. However, I didn't start taking 4% out of my 403b back in March, 2000 because I read so many articles that said the market was "overvalued." I have to admit, back then I was infected with a lot of greed, like I'm sure many others were. Towards the end of 2000 I was hearing, from credible sources, that we were near the end and the market would start to come back by December, 2000. As you well know, that hasn't happened. My point is, that no matter how much math you have done, and how good your calculations, we can never be 100% sure that the market is going to perform as in the past. One thing, I've learned though is to never ever believe the saying, "this time it's different." It's never the same and at the same time, it's never different. I have scraped by with a couple of jobs since being laid off in June, 98. And, it's been fun. But, now I'm in the process of applying for a job back with the University. If I get it I will stay with it as long as possible, but if I don't get it, I can get by with what's left in my portfolio. That's a nice position to be in!
I've learned a lot about investing and the stock market with what's happened since this bear markets started. I'm very very thankful that I didn't start taking distributions back in March, 2000. - Art








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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70924 of 726163
Subject: Re: It is safe now. Date: 7/20/2002 6:28 AM
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ariechert wrote:
I appreciate all the hard work all you math geniuses have done. And, it has made an impression on me. However, I didn't start taking 4% out of my 403b back in March, 2000 because I read so many articles that said the market was "overvalued." I have to admit, back then I was infected with a lot of greed, like I'm sure many others were.

Understanding the MATH of how the stock market works long term is what helps to keep a guy rational during irrational times. It also helps to have a rational strategy in place.

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Author: golfwaymore Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70977 of 726163
Subject: Re: It is safe now. Date: 7/21/2002 10:20 AM
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There's just one obstacle to this: the double taxation of dividends. Paying out a dividend effectively reduces after-tax shareholder return by as much as one-third on that payout.

To be contrasted with reducing your return by two-thirds [or more] with AMZN, CSCO, SUNW, etc....... <grin>

Golfwaymore


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