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From my web site (edited):

They Got It Wrong

The original Safe Withdrawal Rate studies broke new ground. They advanced our knowledge of retirement finances tremendously. Yet, it is amazing how many things they got wrong.

What They Got Wrong

Early researchers tried to avoid probability and statistics. This leads to serious errors as valuations approach extremes, as they do today.

Early researchers did not attempt to find a measure of valuations, nor did they seek to exploit such a measure. Yet, introducing valuations is the most important factor by far.

Early researchers treated bonds simply as single year trading vehicles, sometimes including the effect of capital gains and losses, but more often simply varying the single year interest rate. This led them to overlook the true benefits of fixed income securities. They missed out on powerful alternatives to stock portfolios.

Early researchers rebalanced portfolios annually. This eliminates the upside and offers very little protection on the downside. Compared to using valuations, this is a horrible mistake.

Early researchers estimated the 30-Year Safe Withdrawal Rate to be 3.9% or 4.0% (plus inflation).

What They Got Right

The original Safe Withdrawal Rate researchers invented the historical sequence method. This gives us tremendous insight as to why retirement finances fail. The key failure mechanism: selling shares when prices are depressed.

What Others Got Wrong

The most serious error was freezing the research at its original findings. The original findings suggest using a high stock allocation with annual rebalancing. This turns out to be a horrible choice for today’s retirees.

Freezing the research also froze out the solutions. Knowing that selling shares at depressed prices causes failure, a much better alternative would be to rely on dividend strategies that avoid the need to sell. This turns out to be far superior to the liquidation strategies.

Not treating bonds properly caused researchers to overlook realistic bond alternatives. A TIPS ladder or a corporate bond ladder, with care to lock in higher interest rates, makes a lot of sense. Both approaches offer powerful alternatives to the traditional stock/bond portfolios.

Have fun.

John Walter Russell
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