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No. of Recommendations: 10
Hello all,

I've been reading some of the earlier posts from this newish board and I wanted to add some ideas of my own.

I think that whilst the ideas put forth by Larry Waschka in The Complete Idiot's Guide to Getting Rich are interesting, I don't think they are all that useful.

Example from the quoted book:

Stage 1: You spend less than you earn and save the difference. You are accumulating wealth.

Stage 2: Your savings appreciates in value (not including new contributions) an equal or greater amount than what you contribute. i.e. You have a $100,000 port earning 10% and your annual savings are $9000. Your port is appreciating by more than what you are saving, and if you wanted you could stop saving so much.

Stage 3: Your savings appreciate in value an equal or greater amount than your annual income. At this point you are essentially FI without the safety net of 25x spending.

As one's gross salary increases, the goalposts keep moving on you when you attempt to build up a net worth of one year's gross income. This can be very discouraging as some posters noted. Such a measurement has little relevance to FIRE. A better measurement would be to prepare a FIRE budget and compare last year's savings to the budget to see what multiple you managed to save. You could also compare total gains in your portfolio from market returns and new investments against the same measurement. Lastly, if you want to compare total net worth to something, then compare it to your future FIRE budget and not a variable gross salary which has little connection to your actual spending. Your saving is to support future spending and the measurements of progress used should reflect that.

For instance:

FIRE Budget $25,000

Net Worth: $37,500

FIRE multiple: 1.5x

As most people ultimately are working towards a multiple of your FIRE budget, intercsts's often quoted and mostly incorrect 25x, it is a far better measurement of your progress. Many will save their pay rises above inflation and so the movement of salary over the years won't change the calculation other than inflationary adjustments. Additionally, you could track what multiple of a year's FIRE budget last years new investments and return (above inflation) delivered.

This approach is modelled after your FIRE goals rather than an arbitary basis which has little relevance to your specific situation.

Hope it helps.

Petey
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Hmmm, this gives me something to think about. I guess right now, our FIRE mulitple is about 12X. We still have a ways to go, but this is an interesting way to measure it.

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Hmmm, this gives me something to think about. I guess right now, our FIRE mulitple is about 12X. We still have a ways to go, but this is an interesting way to measure it.

I just spit out those numbers. I actually think it's probably quite a bit less now that I think about it a little more. I was thinking we could live on 30K/year, but didn't count inflation. That might be a little low. Property taxes keep rising, as does health insurance.

I was also including home equity as part of our net worth. I suppose it is, but if we live in our same house, in the same city, the home equity looks good on paper, but isn't going to do us much good unless we sell and move someplace cheaper.

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Well according to intercst, the safe withdrawal rate is 4% and you would need 25x your FIRE budget to retire. Other than a rather large question as to whether that is remotely accurate long term (a diversified portfolio of US stocks, real estate and international/emerging market stocks is unlikely to deliver the same results in the past and so the withdrawal rate figure is wrong. 2%-2.5% is much more likely making the FIRE multiple 40-50x FIRE budget and not 25x), the target is whatever multiple you are aiming for based on what you assess your asset allocation will deliver long term. Current gross salary is only a means to make that happen.

The reason a dummys book uses the more obvious methodology of gross salary is because it is easy to calculate and most people have that information. But you need to work out what your investments deliver and see what multiple of annual budget you need. Once you have that, you then know what your goal is. Not before. It is a bit like how Dave Ramsey, the radio host & author, forever quotes how a growth stock mutual fund makes 12% and if you invested x over x number of years you'd have enough to live off. His assumption of 12% annualised return is far too high, 6-8% is what is used today. He discounted any taxes (not all investments are held in tax-protected accounts) and he ignores the considerable effects of sales load & yearly management fees on mutual fund investments, as well as the little matter of inflation. Combined this drops the likely 6.5% return down to 4.5%-5% after investment costs and before taxes & inflation. Ignoring taxes, real growth may be 2.5% upwards per year. That is conservative and could be a couple of points highter if you're invested with low-cost Vanguard but it is nowhere near his quoted 12% which he uses on the radio to say when someone will be a millionaire saving at their present rate. Many financial examples are unfortunately kept intentionally basic so as not to confuse readers/listeners but in the process can be dangerously inaccurate!

Petey

Hmmm, this gives me something to think about. I guess right now, our FIRE mulitple is about 12X. We still have a ways to go, but this is an interesting way to measure it.

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intercsts's often quoted and mostly incorrect 25x,

Mostly incorrect? Why is that? It seems as if he has quite a bit of data and analysis to back him up.

Volucris

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He drowned out anyone who disagreed with him or was interested in other investments including real estate to build wealth. Many people have subsequently found that 4% if far too optimistic in the current environment where many including Warren Buffett say expect no better that 6-7% over the next decade. With a mixed investment portfolio, after deducting mgmt costs and holding back enough to cover inflation, you won't have 4% left. Simple math.

Visit nofeeboards.com and join the discussion on the FIRE board there. Many of the best Fools who wanted a broader based discussion moved there and the amount of noise and off-topic posts are massively reduced.

Petey


Mostly incorrect? Why is that? It seems as if he has quite a bit of data and analysis to back him up.

Volucris
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Petey, I think that's a rather skewed version of what actually happened. I also would not call the likes of h*cus one of the "best fools", although there were some (like Wanderer) who it was a shame to lose.

I guess I also take issue with your assertion that the studies backing up the "safe" withdrawal rates were somehow incorrect. As with all studies, you have to pay attention to the assumptions used and methodology followed. Those who couldn't grasp this denigrated intercst's work, but never came up with viable alternative studies or even data on alternative asset classes. So far as I can see, intercst has provided the most thorough, robust studies on safe withdrawal rates that I have seen.
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Hi Evelynk,

Very good observations.

Your home should be consider just that, a home, unless you sell it and move somewhere cheaper. In which case you update your FIRE funds after you have the spare funds in hand, not before. Figure things on investments you current have.

Petey
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Brewer,

Petey, I think that's a rather skewed version of what actually happened. I also would not call the likes of h*cus one of the "best fools", although there were some (like Wanderer) who it was a shame to lose.

hocus is not a mainstay of the nofeeboards, he has an offshoot board from that which most including wanderer refuse to visit. I would not let hocus color your views of the group which include raddr, FMO, ataloss, therealchips etc. Many retired folks actually living the dream and happy to share their asset allocations, approach to inflation and what/how they weathered the market drops and are still up 3 years later but without risky investments! This as opposed to investors focused 100% in the US markets who are down 40%..

I guess I also take issue with your assertion that the studies backing up the "safe" withdrawal rates were somehow incorrect. As with all studies, you have to pay attention to the assumptions used and methodology followed. Those who couldn't grasp this denigrated intercst's work, but never came up with viable alternative studies or even data on alternative asset classes. So far as I can see, intercst has provided the most thorough, robust studies on safe withdrawal rates that I have seen.

The studies are fine as they are. They are based on historical performance and a mix of US stocks and US bonds.

Many informed people include Warren Buffett and William Bernstein look at the current market valuation and see that it isn't likely to deliver historic returns because it is still 40% overvalued. Prices need to correct overnight to get back to real intrinsic values or a slow correction over time which will reduce returns for that time. Buffett, Bernstein and others predict 6-7% for the next decade or two because of these factors. Secondly, during FIRE you need assets invested across a range of asset classes include international, emerging markets and other classes like real estate. This spreads your investments across different investment cycles where when the US stocks are down, international may be up and real estate delivers a nice dividend and overall your assets may not be down. This can reduce your overall return as some asset classes don't deliver as much as historical but others like emerging markets are expected over decades to deliver better results.

Markets can only mature and be richly valued so far before you reach a ceiling on growth. The more mature the economy, the lower the growth rate. The less mature, the higher the growth rate. An all US investment going forward, which is what the FIRE w/d rate reports are based upon, will deliver a lower return and at higher risk because you're not diversified to assets you can sell off to fund FIRE when your US assets have lost 40% temporarily in a recession. I would recommend you read William Bernstein's Four Pillars to move away from the twisted thinking that intercst puts forth. This board is a chance to blast away the myth of the "safe" 4% w/d rate which is highly misleading and will likely lead to disaster.

Petey
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Spare me the patronizing, petey. After all, I didn't suggest that you read anything, did I?

As I said before, there is no "myth" of a 4% safe withdrawal rate. That number is just what came up based on very thorough tests of the historical data using a particular methodology. If investors and would-be FIREees can't understand what the number means, it is hardly intercst's fault, now is it?

FWIW, I would actually agree with you that one should probably be more diversified than US stocks and US bonds. However, the safe withdrawal studies were not done with other asset classes, so when I am ready to cash in my chips, I will be either looking for a relevant published study or doing my own multi asset class safe withdrawal study.

BTW, it is very nice that some folks weathered the storm. Good for them! However, you cannot expect me to believe that their experiences are more than anecdotal. Furthermore, we are talking about a time period of about three years. I sure hope my retirement is longer than that! I did very well myself over the past three years, but I have no idea if I was lucky or if I actually am a better asset manager than most fund managers. I will have to wait 10 or 20 years to have a better idea.
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As I said before, there is no "myth" of a 4% safe withdrawal rate. That number is just what came up based on very thorough tests of the historical data using a particular methodology. If investors and would-be FIREees can't understand what the number means, it is hardly intercst's fault, now is it?

And I think that intercst has been quite careful in this regard. One person (ok hocus) has claimed that by 100% safe intercst meant to refer to 100% future safety. I can't find anything to support this on rehp. I am not sure how this misconception arose.

FWIW, I would actually agree with you that one should probably be more diversified than US stocks and US bonds. However, the safe withdrawal studies were not done with other asset classes, so when I am ready to cash in my chips, I will be either looking for a relevant published study or doing my own multi asset class safe withdrawal study.

The way I see it if I can get asset classes with expected returns similar to us stocks but with less than perfect correlation, the it makes sense to diversify (unless expenses are totally out of line.) The longest data series is for us stock indexes so it makes sense to use this for swr studies as intercst has done.
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Brewer,

I expect that several people will be reading the thread, not just you. The recommendation was for anyone interested in forming their own wider view on the subject.

The timeline of some of the posters on the nofeeboards goes back a long way. I was simply giving a recent 3 year example. The logic of the answer I gave still stands, if you put everything into the US market then you're subject to the US market and are not well diversified even if you have some assets in bonds and some in stocks. Diversifying away into international and other asset classes in general will allow you to weather bad investment results in some markets. Overvaluation on the US market lowers future returns. The SWR studies are based on safe withdrawal rates for past much higher historical returns, therefore they are inaccurate going forward because US results will be materially lower. Diversification away from overvalued markets will allow for increased returns, less risk, less volatility and high withdrawals but you have to know to do that. Most here don't.

I'm broadening out the discussion on the board to wider themes and avoiding one set view of a 4% world that has been put out there and far too many have swallowed. Sorry if you dislike that. intercst did not allow alternative views on his board, I'm adding some here for Fools to consider who wants to view all sides of the issue. I'm sure many have joined the board because they have an interest in such.

Regards,
Petey

Spare me the patronizing, petey. After all, I didn't suggest that you read anything, did I?

As I said before, there is no "myth" of a 4% safe withdrawal rate. That number is just what came up based on very thorough tests of the historical data using a particular methodology. If investors and would-be FIREees can't understand what the number means, it is hardly intercst's fault, now is it?

FWIW, I would actually agree with you that one should probably be more diversified than US stocks and US bonds. However, the safe withdrawal studies were not done with other asset classes, so when I am ready to cash in my chips, I will be either looking for a relevant published study or doing my own multi asset class safe withdrawal study.

BTW, it is very nice that some folks weathered the storm. Good for them! However, you cannot expect me to believe that their experiences are more than anecdotal. Furthermore, we are talking about a time period of about three years. I sure hope my retirement is longer than that! I did very well myself over the past three years, but I have no idea if I was lucky or if I actually am a better asset manager than most fund managers. I will have to wait 10 or 20 years to have a better idea.
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Hi ataloss,

I think where you get a problem with intercst's information is that people here and on the REHP now take the 4% and 25x spending as a rule rather than one possible result based on the past. A recent thread here had many discussing how close they were to 25x and it seems to have become the norm for that to be the goal. However carefully you feel intercst has put his words (I think not carefully at all when he states categorically the safe w/d % to two decimal places), it is dangerous for people to treat that as gospel, past results based on a poor asset allocation model that is not appopriate for a FIREd investor.

Just because that was all the reliable information intercst could find, does not make it correct or a suitable example for modern times. It makes it limited and a poor example which many have now regrettably grabbed onto as their saving target without a knowledge of the limitations, the unliklihood of past returns being as good lowering the w/d rate and increasing the multiple of annual budget needed to FIRE.

Petey

ataloss posted:

As I said before, there is no "myth" of a 4% safe withdrawal rate. That number is just what came up based on very thorough tests of the historical data using a particular methodology. If investors and would-be FIREees can't understand what the number means, it is hardly intercst's fault, now is it?

And I think that intercst has been quite careful in this regard. One person (ok hocus) has claimed that by 100% safe intercst meant to refer to 100% future safety. I can't find anything to support this on rehp. I am not sure how this misconception arose.

FWIW, I would actually agree with you that one should probably be more diversified than US stocks and US bonds. However, the safe withdrawal studies were not done with other asset classes, so when I am ready to cash in my chips, I will be either looking for a relevant published study or doing my own multi asset class safe withdrawal study.

The way I see it if I can get asset classes with expected returns similar to us stocks but with less than perfect correlation, the it makes sense to diversify (unless expenses are totally out of line.) The longest data series is for us stock indexes so it makes sense to use this for swr studies as intercst has done.

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"The SWR studies are based on safe withdrawal rates for past much higher historical returns, therefore they are inaccurate going forward because US results will be materially lower."

This only holds if you realy think that US markets are more over-valued than they were at any time in the past hundred years or so. I don't know about you, but my crystal ball is in the shop. Since that is the case, I believe that historical experience is probably a reasonable guide to the future. If you disagree, fine, but don't present your guess about future returns as fact.

"Diversification away from overvalued markets will allow for increased returns, less risk, less volatility and high withdrawals "

This may be true, but only if what you are diversifying into is less overvalued and uncorrelated with US markets. Given the increasing tendency of developed markets to trade together, I think that one should probably devote considerably time and analysis to see if ex-US stock and bond holdings make up for the increased cost these investments would entail.



I don't have a problem with presenting alternatives. Lets just be careful how we present things and avoid sloppiness that could be hazardous to one's FIRE status.
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>> This only holds if you realy think that US markets are more over-valued than they were at any time in the past hundred years or so. I don't know about you, but my crystal ball is in the shop. Since that is the case, I believe that historical experience is probably a reasonable guide to the future. If you disagree, fine, but don't present your guess about future returns as fact.

The likely future return being lower is due to current overvaluation. Many knowledgeable people understand the connection between overvaluation and lower future returns. You're sort of hoping it all evens out in the wash, however as markets become more mature future returns will naturally lower over time.

>> This may be true, but only if what you are diversifying into is less overvalued and uncorrelated with US markets. Given the increasing tendency of developed markets to trade together, I think that one should probably devote considerably time and analysis to see if ex-US stock and bond holdings make up for the increased cost these investments would entail.

It is entirely possible that other investments will deliver lower than historical performance, in fact I would plan for that. Planning for the best case scenario and being FIREd when results prove over time to be less than the best case is risky. Especially with the tendency for markets to mature and deliver lower returns over time because their markets are less risky now.

Petey
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Today, off a solid 25% rebound from that low, the S&P 500 is at 985 with the dividend yield now at 2.0%, plus a still-expected (hoped-for?) 6% earnings growth, the investment return on stocks during the coming decade would be 8%. The P/E has risen to about 19 times on projected operating earnings (I know that's a stretch) and it's hard to see much upside. If we assume it eases the 18 times ten years from now, speculative return would take away about one-half a point from the investment return. Result: Reasonable expectations suggest to me an annual return on stocks of about 7½%—say, 6% to 9%—in the decade that lies ahead. (You don't agree? Just to insert your own expectations for earnings growth and P/E change, and then extend the simple math.)


Bogle is suggesting lower future stock returns (and Bernstein and Buffett) although it doesn't mean that it is going to happen that way I am not comfortable assuming that it won't

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"The likely future return being lower is due to current overvaluation. Many knowledgeable people understand the connection between overvaluation and lower future returns. You're sort of hoping it all evens out in the wash, however as markets become more mature future returns will naturally lower over time."

*************************

Again, be careful when you assert things like these. Assertions are NOT facts, regardless of how widely they are believed. "Many knowledgable people" also suggested that gold would rule forever back in the 70s, that IBM would always be king of the world in the 80s, and that investors were idiots for buying anything other than tech in the late 90s. Guess what? They were wrong, despite the fact that many of them were respected and thought knowledgable.

I understand the connection between overvaluation and lower future returns, but I don't see how this pertains to the US markets today. Valuation is in the eye of the beholder. If everyone agreed that the markets were overvalued, we'd all go short and the markets would plummet. Mysteriously, this has not happened in 2003. I'm not "sort of hoping it all evens out in the wash"; rather I am saying that I don't know what is going to happen in the future. Since I don't know what is going to happen, I use the historical data as a guide, since it is the best guide I have.

Do yourself a favor, petey: don't talk down to people you are debating with. All it does is annoy your sparring partner and detracts from the otherwise reasonable debate.

After all this back and forth, I'm very curious what you are investing in. Emerging markets equity? Real estate? Something else? Where do you find value? Personally, I haven't liked the valuations or lack of clarity in the US markets for a long time, so I have stuck to small caps that I can clearly understand and see where the "levers" in the business are. I also like low beta stocks and (until recently) REITs, although I think that the latter are overpriced now.
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Many people have subsequently found that 4% if far too optimistic in the current environment where many including Warren Buffett say expect no better that 6-7% over the next decade

Ok, I'm not locked onto the 4% rate as a fact, but am more than willing to listen to opposing points of view. My own personal withdrawal rate was/is going to be 3.5%. What do you think a safe number is, and why? Telling me intercst is wrong without an opposing viewpoint is not entirely helpful to debate.

Volucris
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Bernstein
Finally, we are able to estimate stock returns. Recall, the dividend yield of the market is currently only 1.5%. And, as we've already seen, the annualized growth of dividends is about 4.5%, for a nominal expected stock return of 6%.

http://www.efficientfrontier.com/ef/403/fairy.htm
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Brewer,

It comes down to hope for the best, plan for the worst. Or in this case, plan for a sort of middle ground.

Whether you want to accept that low predicted returns for the next few years is true or not, or instead believe that that is taken into account with the SWR studies, it can simply come down to it not being safe to plan on the best case scenario of what is safe based on high past returns. Discounting future returns looking lower, should you not seek a margin of safety on expected future returns that you need to live off because when you've quit your job there is not necessarily an easy way of going back to work on the same pay as many retirees found who are now working at Wal-Mart and not able to save the difference of what they have vs. what they need.

In life, how many times do you get the best case scenario? Not often. Usually, you get about average. Planning for 100% of the annualised return received this past century doesn't leave any wriggle room for a few bad years. Intercst's study has you spending down the money over 30 years. Retirees age 50 may live 50 more years meaning the study isn't appropriate for them. If you get a bad first 10 years once FIREd, the money won't last 30 years, more likely 20 years, leaving your broke at 70, crawling back to Wal-Mart. Do you really want to be working a tough bunch of hours a day at age 70 dealing with snippy tired customers and worried about how long they will employ you before saying you're too old or you get too old to work? Planning for a lower expected return is therefore a far more prudent approach to take, where you don't spend down your capital but instead live off their returns above inflation. This works for people FIREd at any age and if you do better than your more modest/ realistic estimates, you have a little more cash to spend. But if you don't, you're still okay.

Putting out a study which doesn't provide for this kind of planning is irresponsible if people aren't clear what it does and doesn't include. Intercst's numbers may well be right as other SWR analysis prior have borne out but the approach & assumptions are inappropriate for smart FIRE investors. With improved healthcare, life expectancy is increasing and early retirement covering 30 years if markets are good and less if markets are bad doesn't cut it. It is at best, highly misleading.

Petey



I don't have a problem with presenting alternatives. Lets just be careful how we present things and avoid sloppiness that could be hazardous to one's FIRE status.
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Volucris,

I have actually laid out my thinking in a number of posts. I haven't simply said intercst is wrong. My most recent reply has explained further why a margin of safety is a smart play and planning to live off assets rather than spend them down to zero is always a more prudent course. The w/d rate will vary with people depending on their asset allocation, the expected return of each asset class, the costs of the investment and how percentage is allocated where. It is not possible therefore to say whether your 3.5% planned w/d rate is a good one, it would depend on what you are invested in and what assumptions you have made.

Petey


Ok, I'm not locked onto the 4% rate as a fact, but am more than willing to listen to opposing points of view. My own personal withdrawal rate was/is going to be 3.5%. What do you think a safe number is, and why? Telling me intercst is wrong without an opposing viewpoint is not entirely helpful to debate.

Volucris
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I think where you get a problem with intercst's information is that people here and on the REHP now take the 4% and 25x spending as a rule rather than one possible result based on the past.

The future may be different (not in a good way) as compared to the past.
Intercst never gave guarantee. I guess I agree with brewer that people need to engage their brains before jumping ship with x25 : )

I "liked" this representation of p/e ratio and secular bear markets suggesting that we may be in for trouble


http://csf.colorado.edu/authors/Alexander.Mike/PE-bearfig.gif
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Hi Brewer,

You seem happy to ignore overvaluation at present, partially commenting that people aren't shorting the market therefore it might not be overvalued. Shorting is a high risk investment strategy, therefore you cannot make that assertion fairly.

If you refer to my other post I think you'll hopefully find some other ideas to consider. I am laying out some other thoughts, not talking down to anyone. You are free to disagree or put forth opposing views, that is what the forum is for. No one can forecast the market with certainty, they can only look at present values on P/E ratio average of 14.1x earnings and other measurements like price to book and see where the market is. Small-cap as you say is in a better place valuation wise, Large-cap less so. Historical returns are indeed a starting point but when the market is still in a bubble, it would perhaps be unwise to base plans on the past. As ataloss has indicated with links to several other noted professionals who believe the market is overvalued and returns will be materially lower going forward, that still planning on historical returns is not something he is happy to do. Nor I.

Petey


I understand the connection between overvaluation and lower future returns, but I don't see how this pertains to the US markets today. Valuation is in the eye of the beholder. If everyone agreed that the markets were overvalued, we'd all go short and the markets would plummet. Mysteriously, this has not happened in 2003. I'm not "sort of hoping it all evens out in the wash"; rather I am saying that I don't know what is going to happen in the future. Since I don't know what is going to happen, I use the historical data as a guide, since it is the best guide I have.

Do yourself a favor, petey: don't talk down to people you are debating with. All it does is annoy your sparring partner and detracts from the otherwise reasonable debate.
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ataloss,

>> Intercst never gave guarantee.

I agree intercst never gave a guarantee. I am not suggesting he did. Whoever's fault it is, basing FIRE plans on a spend down your nestegg fashion, planning for best case results of the past with little margin for error is to me a piss poor plan. It could be Santa's plan but it would still be a bad idea!

>> I guess I agree with brewer that people need to engage their brains before jumping ship with x25 : )

My posts initiated the commentary and assertion that jumping ship with 25x was questionable and a wide view should be consider beforehand. Not brewer :)

Petey
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I "liked" this representation of p/e ratio and secular bear markets suggesting that we may be in for trouble

http://csf.colorado.edu/authors/Alexander.Mike/PE-bearfig.gif


Thanks for the link, ataloss. I hadn't seen that before.

It takes a while to sink in that, yes, even 3.5 years into this bear we are still at historically high valuations. In fact, the graph leaves off the rebound of this spring/summer which has us at current PE-10 of 25.5.

PE-10 of 25.5 is higher than any other time in history outside of 11 months in 1929 and the recent bubble.

Shiller has quite a few excellent papers exploring the predictive power of PE-10. He concludes that it is the best valuation measure we have. Papers and data are available from his home page: http://www.econ.yale.edu/~shiller/

Ben
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Finally, we are able to estimate stock returns. Recall, the dividend yield of the market is currently only 1.5%. And, as we've already seen, the annualized growth of dividends is about 4.5%, for a nominal expected stock return of 6%.

http://www.efficientfrontier.com/ef/403/fairy.htm


I'm not sure he's wrong, but he seems to be messing with the numbers a bit in order to get his desired result. It's not growth in dividends which should be the fundemental benchmark, but growth in earnings. Microsoft is a giant that hasn't paid dividends until recently, and it became that way by retaining earnings. I can't really argue this since I don't have numbers to back this up, but this argument would be invalid if the dividend payout ratio has been decreasing over the same period.

The thing that clued me into the idea that he was likely being intellectually dishonest was this:

Over the past century, the per-capita growth of GDP in the U.S., the world's most successful economy, has been about 2% after inflation and shows no sign of acceleration in the past quarter century.

If the per-capita growth in the GDP was 2%, how was it that dividends gained 4.5% in the same period? He flat out states that It is impossible for long-term corporate growth to be higher than GDP growth for this would entail corporate profits eventually growing larger than the economy itself. So how is it possible that dividend growth has been greater than GDP growth, which is impossible?

Well, the key word is per capita. Earnings growth is tied to gross GDP growth, not per capita growth. The population of the US has increased during that period.

He's also neglecting inflation, which is a serious sin. What is the gross GDP growth over the last century for the US in constant dollars? I'm sure it's not 0%. Yet I'm also sure that inflation has been more than 2% over that period - I think that 4% is the usual historical figure bandied about, though it's currently less than that. If we assume 4% inflation, the real earnings growth, in constant dollars, is probably significantly greater than the 4.5% he quotes.

In short, I think this article is dishonest and biased. I wouldn't be surprised if the real return after inflation has been around 6% historically. If we are currently seeing nearly zero inflation, 6% isn't something to moan about.

- Gus
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Petey, I don't know how to make it any simpler for you. I never suggested that 4% was a magic number that is suitable for everyone. I also have tried to make it clear that you do not know whether the US equity market is currently overvalued (neither do I, or anyone else).

If you aren't happy with a retirement plan that invades principal, then come up with something else better that you are comfy with. Intercst's study was intended to identify what the maximum withdrawal you could take was and still end your selected time period with at least $1. If you want to see the rate that shows you ending with your original balance in all historial periods, go ahead and do the research.

I also never said (or even implied) that one should plan for the best case scenario. intercst's studies specifically concentrated on the most unfavorable outcomes in history for a retiree, and that 's pretty much what every retirement plan should be based on.

The SWR studies are simply a useful tool, not God's revealed wisdom. You want a guarantee? Buy an annuity from a Aaa-rated insurance company. Or split your money between several insurance companies. Either way, you'll be working for a lot longer than you have to.
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I'm not sure I follow the whole argument here. I think 4% is a bogey. I can get better than 4% right now in dividends through a selective and balanced basket of US stocks. Appreciation is gravy. It may not be 100% safe, but it's pretty close and can easily be corrected if things go south. 4% isn't that difficult to achieve. REITs will return that today even as the stocks are under pressure. Municiple Bonds used to (may still) had you bought them back a few years. 30 year T-bills when they were available paid that as well. I've got some I Bonds that pay that. 4% isn't a very high bar.

So is it two percent? You can get a lot of products that will give you that return. I'm not sure what the argument is about. If I can get 4% and not touch the principle it should last indefinately. Appreciation should match or beat inflation and take care of taxes.

Thats why Intercst is using a 1% withdrawl rate. He can't spend the other 3% in a year. A few years of good planning or good luck and conditions improve greatly. There's a very good chance you'll die with a whole bunch of money you never got a chance to spend. The 4% rule of thumb is the safety limit for the most severe conditions. The worst possible scenario. I'm not really planning for that long term. So the first few years I'll probably stick to something aroung 4%. After that I'll adjust with the market.

nmckay
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The thing that clued me into the idea that he was likely being intellectually dishonest was this:

"Over the past century, the per-capita growth of GDP in the U.S., the world's most successful economy, has been about 2% after inflation and shows no sign of acceleration in the past quarter century."

If the per-capita growth in the GDP was 2%, how was it that dividends gained 4.5% in the same period? He flat out states that It is impossible for long-term corporate growth to be higher than GDP growth for this would entail corporate profits eventually growing larger than the economy itself. So how is it possible that dividend growth has been greater than GDP growth, which is impossible?


Hmm, I've found Bernstein to be about as far from intellectually dishonest as any writer I've read. The source of the apparent contradiction that you cite is that in the instance of 4.5% dividend growth he is talking about nominal (non-inflation adjusted) growth:

Recall, the dividend yield of the market is currently only 1.5%. And, as we've already seen, the annualized growth of dividends is about 4.5%, for a nominal expected stock return of 6%.

That as opposed to the GDP growth which he uses that is real (inflation adjusted):

Over the past century, the per-capita growth of GDP in the U.S., the world's most successful economy, has been about 2% after inflation

You also wrote:

He's also neglecting inflation, which is a serious sin. What is the gross GDP growth over the last century for the US in constant dollars? I'm sure it's not 0%.

As he noted the inflation adjusted GDP is 2%. If you read more of Bernstein's writing you will see that he typically does work with real (inflation adjusted) figures, why he mainly used nominal in this one is anyones guess. At any rate, real dividend and earning growth in the past has been 1-2%. Add that to your dividend yield to get the 'fundamental real return' predicted for the future: 1.5% dividend yield + 1-2% real growth = 2.5-3.5% predicted real long term returns for the S&P 500.

Then cap that off with the fact if we revert to the mean valuation then our 'speculative return' will be negative until we drop to normal valuations, and you can see that long term returns are looking mighty slim indeed.

Ben
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I just wanted to add that while predicted returns look quite poor for the S&P 500, I don't think that 1 or 2% withdrawal is the answer. I think that broad diversification is the answer. A portfolio with good doses of international, international value, emerging market, REITs, small cap value, large cap value, inflation indexed bonds, regular bonds, and perhaps a smidge of the metals industry, and the kitchen sink, should provide higher returns and less volatility than a large dose of S&P 500 alone and some small amount of bonds.

I think even in todays environment 3-4% is reasonable with such a portfolio.

I also think that those of us still accumulating can hope to retire when markets are more fairly valued, and if the valuation looks good, then 4-5% is reasonable.

Any withdrawal plan should have fallbacks and failsafes, of course. No one in their right mind will keep mindlessly taking 4% inflation adjusted as their portfolio plummets early on in their retirement.

Ben
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brewer12345 writes:

I guess I also take issue with your assertion that the studies backing up the "safe" withdrawal rates were somehow incorrect.

Doesn't the REHP study assume tax-free rebalancing and reinvestment of dividends? I have never received an adequate response to my concerns in this area. No one that I know has 100% of their retirement stash in tax-deferred accounts. The average dividend yield of the S&P 500 is in excess of the oft-quoted 4% "safe withdrawal rate". The dividend rate in the past has approached 7% on occassion. Unless you are 100% tax deferred, you will incur taxes on part of these dividends and on gains which must be declared upon rebalancing. The REHP study ignores these taxes and compounds the ommission over long periods. Yes it is true that current dividend yields are very low, but that is not the point. The REHP study yields results which are predicated on an unreralistic scenario with regard to taxation. The results are therefore incorrect for anyone who applies them wholly or in part to taxable accounts. Is the study incorrect or am I?

Regards,
FMO
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Doesn't the REHP study assume tax-free rebalancing and reinvestment of dividends?

*******************

I think so, but I'd have to go back and look to be sure. If one has substantial non-qualified assets, I would imagine that the tax issue is something to include in one's planning. However, unless you take pretty big withdrawals, I suspect that your tax bill would be pretty low, especially if much of your income was coming from tax-favored stuff like dividends and LT capital gains, no? The approaches I have seen taken on the REHP board seem to have been just including taxes as an expense item in one's budget.
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Volucris,

Just thinking over your reply a bit more to see how I could put up a post that might be useful to a number of readers on the board.

Intercsts's study over at the REHP board puts forth that you can live off 4% withdrawal rate with 25x annual spending and that you spend down your assets to $0 at the end of 30 years. It calculated this based on historical returns and starting at any retirement date for any bunch of years, would your money have survived the 30 years at a 4% withdrawal rate fully invested in a mix of US stocks and US bonds, the allocation is usually around 75/25 stocks/bonds.

I would suggest that you ask yourself whether you are comfortable with spending down your investments to zero. This is done on the basis that you live partially on their income and partially on principle by selling some shares etc. If the returns are low or negative in the early years, you'll be selling more shares and lowering your principle faster than planned. The market will likely rise back up in a few years time but sadly you've already sold extra units of your mutual fund or extra shares that had dropped in value in order to live, so your portfolio won't rise back up to previously planned. As you have less assets now, your income from them is reduced forcing you to sell even more shares than expected in your original spend it down to zero plan. Soon you'll run out of money even if the market comes back to a stellar valuation because you had to sell more in the early years.

On a spend down to zero scenario, there is a line curve as your nest egg drops over the 30 years. In the early years you have most of your principle in tact and so mostly you're living off investment return, a little of the principle. Later you have less and live more off asset sales and less of returns because you have less assets remaining. If you get a batch of bad results in the early years however, that curve gets ever steeper and money runs out sooner. You sell too many assets early on and later have too little remaining to deliver much income and so are forced to sell at an accelerated rate. That's what can happen when you spend down your nest egg and there's nothing you can do to stop it if you take that approach.

Does that sound good to you? Does that sound like a safe plan for you and those you care about?


If you decide that it sounds too risky, then an alternative would be to plan to keep your principle, your total portfolio, and live off the real returns it provides. Real meaning after inflation returns. Some years are better than others and some markets can be down for many years, so here is where the idea to diversify to markets other than just the US comes in. Investing internationally and in other non-correlated asset classes, things that may go up when your US investments go down. This can smooth out your returns each year, lower your risk overall and provide a reasonably predictable income over time. US stocks and US bonds are on a similar investment cycle, if the US has problems then all your assets start to slide downwards making them harder to live off. This way you keep hold of your mutual fund unit allocation & individual shares and are able to ride the prices down and then back up again comfortably. The volatility of any one market doesn't much affect you because you're invested 20% here, 20% there etc. Rarely are all stock markets down all year and all real estate and bonds and cash. This way you don't get crippled because you don't have all your eggs in one basket (the USA) and you don't have to sell investments at half their value because they've dropped in price and you need to live.

Looking back at the spend your money down to zero, take out 4%, have 25x your spending in investments before quitting intercst plan, the 4% withdrawal plan is because part of your annual budget is coming from principle sales and part from returns. If you think sliding your assets down to zero in an uncontrollable manner is unsafe, then the basis of intercsts study and findings don't suit you at all. He's spending his capital down, you're not. This means the much relied upon 4% is wrong for you, it is based on extra returns coming over the short-term from selling lots of shares to reduce your principle down. This boosts the withdrawal rate in the short-term whilst adding the kind of risks discussed above. Furthermore, his study uses US historical investment returns. To be able to live off your investments spread into a mix of asset classes, the returns aren't exactly the same and so the data he used isn't completely applicable to you. You would want to use data that reflects your asset allocation mix and not assume it is all US stock and US bond returns. The market is also overvalued, so future expected returns in some markets like the US are expected to be lower for some few years. This may affect your planning too.

This is the kind of broader real-life thinking that is frequently discussed over at the www.nofeeboards.com, full of previous Fools who saw the flaws in the implications of intercsts study where his numbers were right, but FIRE methods wholly inappropriate for most investors. I'm happy to discuss your thoughts here but anyone is most welcome there who has a keen interest in the subject matter. I just could say nothing when I saw 4% w.d rate being manded around at a goal and the likely lack of understanding why that is so risky.

Petey



Ok, I'm not locked onto the 4% rate as a fact, but am more than willing to listen to opposing points of view. My own personal withdrawal rate was/is going to be 3.5%. What do you think a safe number is, and why? Telling me intercst is wrong without an opposing viewpoint is not entirely helpful to debate.

Volucris
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brewer12345 writes:

I think so, but I'd have to go back and look to be sure. If one has substantial non-qualified assets, I would imagine that the tax issue is something to include in one's planning. However, unless you take pretty big withdrawals, I suspect that your tax bill would be pretty low, especially if much of your income was coming from tax-favored stuff like dividends and LT capital gains, no? The approaches I have seen taken on the REHP board seem to have been just including taxes as an expense item in one's budget.

Can't disagree with you with regard to the impact of taxes in the future. I am speaking with regard to the historical record which is used as a basis for the calculation of safe withdrawal rates. If your stocks yield 7% (as they have during past periods) and you take a 4% withdrawal (even if entirely from the equity component), 3% of the value of your equity holdings would have been subject to taxation if held in a taxable account. The REHP study assumes that the amount that would have been paid in taxes remains in the portfolio to compound. It clearly cannot. This will inevitably lead to the production of "safe withdrawal rates" which are erroneous. Regardless of your tax situation in retirement, the results of the REHP study reflect the absence of taxation which for most people could not have been avoided during the historical period examined by the study. I have other misgivings about the study, but this item alone cause me to have severe reservations about the results.

Regards,
FMO
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Many people have subsequently found that 4% if far too optimistic in the current environment where many including Warren Buffett say expect no better that 6-7% over the next decade. With a mixed investment portfolio, after deducting mgmt costs and holding back enough to cover inflation, you won't have 4% left. Simple math.

Most FIRE'ees have a time frame of 20, 30, 40 years or more. What does Buffett say about that horizon? The reality is that our predictive tools about the stock market will do that far in the future are so weak as to be almost useless. I suspect that over the next 30 years, the stock market will average 8-10%, because that's about what its always averaged over a 30 year time frame. I defy anyone to come up with a better prediction than that.

How does this apply? If you believe 4% will be safe in the future, then you need 25X income. If you think 2% will be safe, you need 50X. Personally, I would love the extra security of having 50x income in the bank, but I won't be able to do it and retire early. Therefore, to be FIRE'd, I'm going to have to make the 25X number work.

One thing that all early retirees say is that "I wish I would have the courage to do it sooner." I think obsessing over unknowable details like if the future SWR will be 3 or 4% is just not productive.

Now, I fully believe my prediction could be wrong. If that's the case I can make adjustments. I can move to an area with a lower cost of living. I could downsize my house. I could work part time. I can reduce my expenses in other ways. It won't be the end of the world if I took 4% instead of 3.327%.

I check into the nofeeboards occasionally and I haven't seen anything that suggests the 4% won't work in the future (long term of course). I've seen some good threads, but I have seen lots of threads like this one, where people argue over definitions of words:

http://nofeeboards.com/boards/viewtopic.php?t=1407&postdays=0&postorder=asc&start=0

Ugh. If someone can tell me what the market will do over the next 30 years I'm all ears. Arguing about fSWR and hSWR is unappealing to me. I see that Hocus' obsession with intercst has pretty well worn out his welcome over there too.






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If you decide that it sounds too risky, then an alternative would be to plan to keep your principle, your total portfolio, and live off the real returns it provides.

*********************

Sounds like fantasyland. Let me ask you, perfesser: what happens when you have a negative real return? Do you live in a cardboard box? No thanks.

Seriously, is that you, h*cus?
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brewer12345 writes:
As with all studies, you have to pay attention to the assumptions used and methodology followed.

FMO writes:
Doesn't the REHP study assume tax-free rebalancing and reinvestment of dividends?

brewer12345 writes:
I think so, but I'd have to go back and look to be sure.


You should probably do that since you you would then be following your own advice.


brewer12345 writes:

intercst's studies specifically concentrated on the most unfavorable outcomes in history for a retiree, and that 's pretty much what every retirement plan should be based on.

I assert that the study cannot be considered to have concentrated on the most unfavorable outcomes if it ignores taxation. Only a fool counts his money before having passed it through the strainer of taxes.

Regards,
FMO

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"If you decide that it sounds too risky, then an alternative would be to plan to keep your principle, your total portfolio, and live off the real returns it provides."
*********************

Sounds like fantasyland. Let me ask you, perfesser: what happens when you have a negative real return? Do you live in a cardboard box? No thanks.

Seriously, is that you, h*cus?


I can assure you that petey is not hocus. The suggestion is comical given some of the recent exchanges at NFB. LOL.

I will also say that planning your withdrawals such that the stash does not decline over time is a realistic goal that some retirees do aim for. One of intercst's studies showed that the 'infinite term' withdrawal rate is only slightly less than the 60 year term withdrawal rate. The 'die broke' approach does obviously add a bit of risk due to the impossibility of predicting when you will die.

Ben
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I haven't bothered to reexamine the study because I am a long way from FIRE (I'd guess about 15 years), so it isn't worth worrying about until I am at least in the ballpark.

As far as the taxation thing goes, I suspect that its not all that significant. In any case, I suspect that it was largely ignored due to lack of data. After all, how many times did the tax code change over the past 100 years? Some 10 year periods didn't even have a tax code. In any case, if you are really worried about it, there is an easy solution. Simply set up your portfolio in a set of non-qualified variable annuities with a low cost provider like TIAA-CREF or Vanguard. Voila! You can rebalance all you like without incurring any tax liability.
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Intercsts's study over at the REHP board puts forth that you can live off 4% withdrawal rate with 25x annual spending and that you spend down your assets to $0 at the end of 30 years.

Well no, that's really not true. Getting to $0 at the end of 30-years is definitely not a requirment or assumption of the REHP study. If you look at the pay out periods, what happens is that most of the time is that after 30 years the portfolio is worth several times its initial value. IIRC, about of 100 periods examined, there was only one period when the port wound up with less than its original value after 30 years.

So while the "uncontrollable slide to zero" you talk about is certainly possible, it doesn't seem very likely. Again using history as our guide, the most likely result is that after 30 years is that you wind up quite a bit richer than you started, in some cases a lot richer.

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brewer writes:

As far as the taxation thing goes, I suspect that its not all that significant. In any case, I suspect that it was largely ignored due to lack of data. After all, how many times did the tax code change over the past 100 years? Some 10 year periods didn't even have a tax code. In any case, if you are really worried about it, there is an easy solution. Simply set up your portfolio in a set of non-qualified variable annuities with a low cost provider like TIAA-CREF or Vanguard. Voila! You can rebalance all you like without incurring any tax liability.

I agree it would be decidedly inconvenient to attempt to properly reflect the impact of taxation on the results of the SWR study. I disagree that we can safely ignore the impact and declare as emminently correct the study results. I'm not worried about it as I will not be using the SWR study. I worry more for others who rely on its results.

I also disagree that the effect is insignificant. This has not been demonstrated. In a year in the historical record that dividends were 7%, a $1M portfolio with a 4% withdrawal would incur taxation on about $30,000. At 25% the tax would be $7500. At the very least, in any year where the portfolio is deemed to have survived by having a positive balance of $7500 or less, the portfolio actually failed. And this is without even considering the compounding effect of leaving this $7500 in the portfolio as if it had never been taxed.

Regards,
FMO
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I'm not worried about it as I will not be using the SWR study.

********************

FMO, how will you determine when you have "enough"? I will likely use the findings of the SWR study, but I will also be doing my own research when I get closer.
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If you look at the pay out periods, what happens is that most of the time is that after 30 years the portfolio is worth several times its initial value. IIRC, about of 100 periods examined, there was only one period when the port wound up with less than its original value after 30 years.

So while the "uncontrollable slide to zero" you talk about is certainly possible, it doesn't seem very likely. Again using history as our guide, the most likely result is that after 30 years is that you wind up quite a bit richer than you started, in some cases a lot richer.


Yes, the Trinity study (the first study along these lines) and the REHP study were designed so that they identify the highest withdrawal rate that will leave a $1 in the stash after the worst sequence. So that means all other start years in history were better. If I'm not mistaken, though, your comment about only one year finishing lower than the start value is incorrect. There are a number of bad start years that threaten busts: 1929, 1965, 1966 being the worst.

If you look at the data with a broader lens, then you see that the bad start years (and months if you look at that level) come in clumps. Those clumps are all when valuation was very high, as it is today. So to ignore this particular piece of the historical data and assert that one is likely to die rich if one takes 4%, is to ignore a vital bit of information, and to draw unwarranted conclusions if you are talking about a start year with very high valuations.

Of course, we on this board are generally still accumulating, and FIRE is a ways off. Valuation may be substantially better when we hit our targets and call it a day. We should all be rooting for lower prices now and until we retire so we can accumulate them cheaply and retire with excellent prospects of price appreciation.

Burn baby, burn! LOL

Ben
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brewer writes:

FMO, how will you determine when you have "enough"?

I will retire in a few years with a Federal Government inflation-adjusted defined- benefit pension sufficient to fund 150% of my living expenses. Think of it as a gigantic TIPS. My non-pension investments are about 1/3 in tax-deferred accounts with the balance in real estate and taxable accounts. These assets will be allowed to grow unfettered by the necessity to make withdrawals to fund living expenses. I have determined that I have enough without the need to resort to the use of unrealsistic studies. If I were faced with a situation where I was required to live off my non-pension assets I would probably just pay off my house and invest primarily in income producing real estate which is capapble of generating spendable cash flows far in excess of that which can be safely withdrawn from an equities portfolio. The balance would be in fixed income vehicles and stocks. The stocks will not comprise more than 20% of my portfolio. Contrary to common knowledge, I feel that they are simply to volatile for folks living off their assets.

Regards,
FMO
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That is generally hocus's fault. He's been banned from the Fool and now causes trouble on nofeeboards. He's usually at fault. If you avoid him, there is far more useful discussion that on the Fool.

Petey


I check into the nofeeboards occasionally and I haven't seen anything that suggests the 4% won't work in the future (long term of course). I've seen some good threads, but I have seen lots of threads like this one, where people argue over definitions of words:

http://nofeeboards.com/boards/viewtopic.php?t=1407&postdays=0&postorder=asc&start=0

Ugh. If someone can tell me what the market will do over the next 30 years I'm all ears. Arguing about fSWR and hSWR is unappealing to me. I see that Hocus' obsession with intercst has pretty well worn out his welcome over there too.
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That's not what the research shows.

Petey


Well no, that's really not true. Getting to $0 at the end of 30-years is definitely not a requirment or assumption of the REHP study. If you look at the pay out periods, what happens is that most of the time is that after 30 years the portfolio is worth several times its initial value. IIRC, about of 100 periods examined, there was only one period when the port wound up with less than its original value after 30 years.

So while the "uncontrollable slide to zero" you talk about is certainly possible, it doesn't seem very likely. Again using history as our guide, the most likely result is that after 30 years is that you wind up quite a bit richer than you started, in some cases a lot richer.
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This sort of comment is typical of the REHP boards and hopefully not a Fool board wide problem.

Please stick to reasoned responses rather than hyperbole and ridicule.

Petey


Sounds like fantasyland. Let me ask you, perfesser: what happens when you have a negative real return? Do you live in a cardboard box? No thanks.

Seriously, is that you, h*cus?
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Nice to see another message board fracturing itself over this issue.

This board purports to be for wanna-bes. There are probably a few people here who are far enough along in their FIRE plans that the difference between accumulating 25 times expected expenses and accumulating 50 times expected expenses is relevant right now. For them, it's important. But if you've got less than 10 times expected expenses saved up, then it makes more sense to focus on how you're going to accumulate and grow your wealth than to obsess over what your final target number is going to be.

I've never understood why this issue was so contentious. The idea of an absolutely fixed withdrawal rate is incredibly unrealistic, because I don't know anyone who wouldn't tighten their belt a little when things are tough or feel a little freer with their money when things are going well. Once you introduce these fluctuations, the simple studies don't really apply anymore, unless you make major modifications. Even then, unless you are the type of person to be rigidly mechanical about financial decisions, all the studies in the world won't necessarily tell you how to deal with your own comfort level and needs.

I don't mean to dissuade those of us who are working to understand withdrawal rates better. It's a fascinating intellectual exercise, and the complexities of various hypotheticals make it clear to me that there's a lot of insight beneath the surface. But not everyone will want to get that much into it - they'll be happy with a simple rule even while understanding that it may be flawed. That said, my main objection has been to people who say that no one should look beyond the simple rule because there's no more to be learned by further analysis. That's a ridiculous statement.

The board has gotten through nearly a thousand posts without ripping itself apart. Let's get through this and get back to the quality posts that give us wanna-bes the will to keep walking down the long road toward retirement.

dan
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That's not what the research shows.

If I'm wrong, please show me where. I'm not being combative, I'm genuinly curious.
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I've never understood why this issue was so contentious. The idea of an absolutely fixed withdrawal rate is incredibly unrealistic, because I don't know anyone who wouldn't tighten their belt a little when things are tough or feel a little freer with their money when things are going well.

quite true

Retirement withdrawals rose to more than 10% assets well before the half-way mark in 1981 and breeched 20% of the portfolio balance by 1990, six years before the portfolio was depleted in 1996 at the end of the 30-year period. Few retirees would sleep well at night at a 10% withdrawal rate knowing they needed their money to last another 15 years or more -- especially if they understood they were testing the outer limits of these historical "safe withdrawal" studies.

intercst on retiring in bad times (and before tips)
http://rehphome.tripod.com/novtips.html

here is an excellent page where intercst shows the worst times to retire in the past and suggests looking at annual withdrawals as a % of portfolio to see how a current (or March 2000 retiree is doing comparatively)
http://www.retireearlyhomepage.com/worstre.html

intercst
Since historical safe withdrawal rate analysis assumes that "the future is no worse than the past" (in this case, the past 130 years of stock market history), it would be nice if there was some way to fortell the future.

Lacking the crystal ball I am increasing diversification and preparing for a lower withdrawal rate. Lower chance of going bust but a higher chance of working too long <grin>


sorry that gusmed (and probably those who recced his post didn't understand Bernstein) Oh, well
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I check into the nofeeboards occasionally............ I've seen some good threads, but I have seen lots of threads like this one, where people argue over definitions of words:

The "solution" to the REHP board's problem contributed to the start of nfb's troubles
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Hi galagan,

Nice to see you posting.

I think it is important when setting out on the road to FIRE to aim at the right goal and to be motivated in the right way towards that end. That was the reason why I posted originally suggesting what I felt was a better comparison than comparing net worth to gross pay, moving the measurement instead to something of real value to those interested in FIRE like a comparison of net worth to the multiple of your planned FIRE budget.

Whilst clearly the situation may have changed by the time you get closer to FIRE, I think there is merit in exploring to some degree whether a much accepted 25x is wise, especially if people are saving and investing towards that goal. For instance, decisions may be made now about what percentage to put aside for the future when aiming to FIRE at age 50, based upon the 25x idea. You may decide to spend more than you might have otherwise safe in the knowledge that you've taken care of the FIRE issue when in fact you have bad information and you're not putting enough away. Far better I think to set a more accurate goal now than mislead yourself. So I think it does have merit. I agree you need flexibility in your planning to cut back on occasion when FIREd, but this only raises the issue of building in more flexibility on the amount your withdraw in good & bad years, and that flexibility is provided for with a higher multiple of spending stashed away. Sticking your head in the sand and sticking to a 25x approach because you don't think you can manage more just won't cut it and intercst has done a grave disservice with popularizing this idea.

It is also important to understand how far your investments are beyond a reasonable intrinsic value. Many people retired with what seemed like enough money but with stocks that were at twice the historical norm of 14.1x P/E. The stocks then fell back and they were left with half what they needed to live, looking around dazed saying to the papers, " What happened here? " What happened was they didn't pay attention to the fundamentals, the market mean reverts periodically and you need to re-adjust your portfolio value to reflect its true value before making the decision to quit.

I know myself that I could quite likely retire at 65 with 2/3rds of the desired sum and rely on investment returns plus capital sales to live. It would be a far riskier strategy that having more and living off the investment return above inflation (and after investment fees). The latter allows for an unlimited FIRE (medicine is improving sufficiently that it is not necessarily true that a 30 year retirement will be typical, it may well get longer as longevity increases with health advances) and also provides your loved ones with a nice inheritance. Setting the higher goal is the one to go for, the lesser sum the fallback position that carries considerable risk.

Saving and investing is certainly important as the main message, but success also lies in the details with goal setting that is realistic and accurate.

Petey


Nice to see another message board fracturing itself over this issue.

This board purports to be for wanna-bes. There are probably a few people here who are far enough along in their FIRE plans that the difference between accumulating 25 times expected expenses and accumulating 50 times expected expenses is relevant right now. For them, it's important. But if you've got less than 10 times expected expenses saved up, then it makes more sense to focus on how you're going to accumulate and grow your wealth than to obsess over what your final target number is going to be.

I've never understood why this issue was so contentious. The idea of an absolutely fixed withdrawal rate is incredibly unrealistic, because I don't know anyone who wouldn't tighten their belt a little when things are tough or feel a little freer with their money when things are going well. Once you introduce these fluctuations, the simple studies don't really apply anymore, unless you make major modifications. Even then, unless you are the type of person to be rigidly mechanical about financial decisions, all the studies in the world won't necessarily tell you how to deal with your own comfort level and needs.

I don't mean to dissuade those of us who are working to understand withdrawal rates better. It's a fascinating intellectual exercise, and the complexities of various hypotheticals make it clear to me that there's a lot of insight beneath the surface. But not everyone will want to get that much into it - they'll be happy with a simple rule even while understanding that it may be flawed. That said, my main objection has been to people who say that no one should look beyond the simple rule because there's no more to be learned by further analysis. That's a ridiculous statement.

The board has gotten through nearly a thousand posts without ripping itself apart. Let's get through this and get back to the quality posts that give us wanna-bes the will to keep walking down the long road toward retirement.

dan
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Of course, we on this board are generally still accumulating, and FIRE is a ways off. Valuation may be substantially better when we hit our targets and call it a day. We should all be rooting for lower prices now and until we retire so we can accumulate them cheaply and retire with excellent prospects of price appreciation.

Excellent post. Just because 4% worked in the past doesn't mean you can safely shut off your brain. The future might be kind of crappy, and in re-reading my post it sounds like I'm poo-pooing that thought. Someone retiring today should definitely take into account today's historically high valuations. I'm a few years from FIRE, so what's going on right now is if less concern to me in that regard.

Here's to lower prices!
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<i.Well according to intercst, the safe withdrawal rate is 4% and you would need 25x your FIRE budget to retire. Other than a rather large question as to whether that is remotely accurate long term (a diversified portfolio of US stocks, real estate and international/emerging market stocks is unlikely to deliver the same results in the past and so the withdrawal rate figure is wrong. 2%-2.5% is much more likely making the FIRE multiple 40-50x FIRE budget and not 25x),

Perhaps you would care to explain exactly why are you so confident that long-term results of the stock market in the future will be only about half the level of the worst 30-year period in the past 100+ years?

Or, to put it in perspective, why we will be looking at the Great Depression and the stagflation 70s as high-growth periods?

Intercst never advertised the 4% rate as "accurate long term". He advertised it as giving a high confidence of being able to continue through the worst 30-year period in the history he could accumulate. Naturally this implies that if future returns are a bit better than the historical worst, you'll end the 30-year period with a spot of change in your pocket - if future returns match the historical average, you'll be filthy rich. But his concern was for the worst one could reasonably expect.
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He drowned out anyone who disagreed with him or was interested in other investments including real estate to build wealth. Many people have subsequently found that 4% if far too optimistic in the current environment where many including Warren Buffett say expect no better that 6-7% over the next decade.

If you consider his occasionally saying "I couldn't find historical data therefore I cannot include it in the study" to be drowning out the HUNDREDS of discussions of real estate that have occurred on this board over the past couple years, then yes, he's drowned out other investments.

And no, nobody has "found" that 4% is far too optimistic in the current environment. Making such a "finding" would require actually knowing what market returns for both stock and bond markets will be over the next 30 years. Even Warran Buffett's expressed opinion (not finding) is only for 10 years, not 30.

And 6% growth over the next 10 years is far better than what happened in the stock market over the 10 years beginning January 1929. The 4% withdrawal rate was good enough for that period and the 20 that followed.
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Brewer,

It comes down to hope for the best, plan for the worst. Or in this case, plan for a sort of middle ground.

Whether you want to accept that low predicted returns for the next few years is true or not, or instead believe that that is taken into account with the SWR studies, it can simply come down to it not being safe to plan on the best case scenario of what is safe based on high past returns.


I agree - how about if we do the opposite?

How about if we plan on the WORST case scenario of what is safe based on LOW past returns? Specifically, the worst 30-year period in the past century (and longer)?

If you do that, you get...

Intercst's safe-withdrawal-rate study.

The one you say is wrong.

The one that says an initial withdrawal rate of a bit under 4% (with the withdrawal amount adjusted for inflation in subsequent years) from an efficient-frontier portfolio, survived the worst 30-year period in the past century (and more) with the final-year withdrawal unmolested.

The one that doesn't talk about best case, and doesn't say much about average case, but is heavy on worst case.
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<Sticking your head in the sand and sticking to a 25x approach because you don't think you can manage more just won't cut it and intercst has done a grave disservice with popularizing this idea.>


I'll try to focus my comments on the wannabees, whether they are in the early or late stages of accumulation.

The study is what it is, no more and no less. There was entirely too much wheel spinning on this subject. IMHO, it is a simple tool and should be especially useful to a FI/RE wannabe. You look at the parameters and the set of assumptions made and it spits out a result. Change the parameters a bit and the answer changes. So, if one decides that 0/100 is the only allocation they feel comfortable with, it spits out a 2.3% SWR (or roughly 42X).

I believe attempting to understand the study and the implications it may have on your plans is time well spent. I believe that any attempt to come up with a number for the future that you can cast in stone is an exercise in futility. It is much more crucial to spend your time on understanding the tradeoffs you are or are not willing to make along the way (job, family, kids, education or training, medical history, where to live, rent or buy, etc). You should also be spending a lot of time developing an asset allocation you are comfortable with. You should also be sure you have a good understanding of what your expenses will look like. You should be able to break them down into things that are absolutely needed, things that would make you comfortable and things that are pure extras. All of these factors will be different for each individual. It is infinately more imortant to focus on these than it is to go round and round trying to wrestle a firm SWR to the ground.

The math of the study is incredibly simple. It takes all the 30 year periods and tells you what the SWR were at the efficient frontier. It give you a number that would have survived (meaning it did not run out) the worst case. In most cases you had at least the amount you started with. In many cases you had much more than you started with. It does not tell you a damn thing about what it will be in the future, nor was it intended to. Maybe it will be 1%; or 6%; or maybe the asteroid hits us and it doesn't matter; or maybe someone gets so hysterical about the argument that they keel over from a heart attack, negating the need for it in the first place.

Some people have mentioned investment real estate as an option. It too is perfectly valid IMHO. It isn't part of the study, but so what? My assumptions in making that statement is that it is clearly not for everyone and that anyone following that line will have done as much DD as they would have on any stock investment. Where the real meat and potatoes are for a wannabe is in the major life decisions they make. Do you LBYM or not? Do you want to buy a modest house or do you want people to be impressed with your address? Are you satisfied having good reliable transportation or do you want others to do a double take when you drive by in your expensive sports car or SUV? When it comes time to settle down with a SO will you completely ignore that they are up to their eyeballs in CC debt because you are madly in love? Will this person always be looking out for you or will they slowly bring you down? Are there any family medical histories that you may be able to offset by modifying your behaviour (ie: smoking, exercise, diet, etc)?

I havent come close to hitting on all of the important questions, but I hope I made my point clear enough. I think any serious FIRE candidates will want to get used to working both sides of the equation. If you can improve your job prospects through further education or specialized training go for it. You also cannot take you eye off of the expense side of things. Finding the right balance for all of these ideas takes a lot of discipline. Finally, it makes no sense at all to totally deprive yourself from enjoying your life today in order to save everything for tomorrow.


BRG
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I also disagree that the effect is insignificant. This has not been demonstrated. In a year in the historical record that dividends were 7%, a $1M portfolio with a 4% withdrawal would incur taxation on about $30,000. At 25% the tax would be $7500. At the very least, in any year where the portfolio is deemed to have survived by having a positive balance of $7500 or less, the portfolio actually failed.

Are taxes not part of your living expenses? Did you not plan for them when setting your withdrawal amounts?

What you try to do is achieve most of your rebalancing (as well as funding your expenses) by NOT reinvesting either dividends or interest, and by picking the asset category to sell from for current expenses.
So let's say that this is $20K dividends and $10K interest, and because stocks are doing well relative to bonds you reinvest the $10K interest into more bonds and stuff the $20K in your pocket. You still have to count the whole $30K as taxable ordinary income (or at least you did until recently). However to fund your $40K (4%) withdrawal you must then sell stock totalling another $20K. Let's say a quarter of this is principle; this leaves $15K taxable as a long-term capital gain. As I recall, the top tax rate for ordinary income is 33% while for long-term cap gains it's 20%. That would make the $15K equivalent, for tax purposes, to about $9K of ordinary income.

That's $39K of ordinary income you're paying income tax on. Whereas a wage-earner with $40K wages would be paying income tax on $40K, plus social-security tax on $40K. You're clearly paying less tax than he is.

Now in a year when stocks are doing less well, you get the same investment income; but you put both the dividends and interest in your pocket, and sell $10K worth of bonds - ALL of which is principle. So you only have $30K of taxable ordinary income.

See, taxes can be paid WITHOUT any additional withdrawals, and you'll be paying less in taxes than a no-investments worker with similar income.
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I am giving up on this thread. Petey won't respond rationally and the debate is largely academic at this point for the wannabes. After all, if you are 10 or more years away from FIRE, a whole lot could change by the time you get there, much of which will affect your desired income, risk tolerance, etc.
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http://boards.fool.com/Message.asp?mid=19621409&recscode=2

OUTSTANDING POST!!

I'd marked a bunch of recent posts to reply to, but you have covered every point I wanted to make.

thanks!
Vickifool
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Petey: I think it is important when setting out on the road to FIRE to aim at the right goal and to be motivated in the right way towards that end.

I understand what you're saying. But the fact is that all the assumptions in the world aren't going to give you a precise or accurate answer to the question of what your exact goal should be. You can run the spreadsheets and make various return assumptions, but you can't be sure that you'll end up with a million dollars at the end of 40 years just by investing the magic value of $3,561.49 each year (unadjusted for inflation, 8 percent return). What if you don't make 8 percent? Oops. And I promise you that whatever benchmark you pick, you will not make exactly that amount.

So what frustrates me about the whole exercise is that people are looking for artificial precision about something that (for wanna-bes) is way in the future. You can't get that precision. The sooner people realize that, the sooner they can make assumptions they're comfortable with.

It seems to me the best solution is to save all that you possibly can and see where you end up, rather than saving less and hoping that your projections work out favorably.

By all means, understand what the numbers tell you. But also understand that you can't realistically hope for the perfect world in which those exact numbers will be the right ones.

That was the reason why I posted originally suggesting what I felt was a better comparison than comparing net worth to gross pay, moving the measurement instead to something of real value to those interested in FIRE like a comparison of net worth to the multiple of your planned FIRE budget.

Ordinarily I'd agree. But your ratio is just the reciprocal of the withdrawal rate needed to pay expenses, and so discussions of your ratio will necessarily involve the same discussions about SWR that are going on elsewhere. People have fanatical responses to this discussion, and reason flies out the door. I agree with you completely that assuming that 25x/4% is the right answer is foolhardy. But others disagree, and they react the same way that anybody does if you call them foolhardy.

The helpful way to do this is to present data and analysis and let people make their own decisions. I cringe every time somebody makes a value judgment at the end of their analysis that purports to apply to every single person who will ever retire early. I hate when posts make references to particular individual posters and their theories - it makes it sound as if followers are preparing for jihad against each other. TMF is supposed to be about people helping other people, not people cramming help down other people's throats - even with the best of intentions.

Could we just try it once? Could we all agree to present data and factual conclusions while leaving out the usual snubs toward existing studies and individuals? If we can, we would distinguish this board favorably from those that have come before us.

dan
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http://boards.fool.com/Message.asp?mid=19621415

Good post, warrl.
There goes the other reply I wanted to make.

Vickifool
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What you try to do is achieve most of your rebalancing (as well as funding your expenses) by NOT reinvesting either dividends or interest, and by picking the asset category to sell from for current expenses.

But what do you do when dividends and interest are higher than your withdrawal? They are reinvested minus tax. This effect is not shown in the study.

As FMO pointed out, the very low dividend yield we see today is very unusual. 4% or more dividend yield was common in the historical data. Add interest from your fixed income holdings, it is not at all unreasonable to think that the two exceeded the withdrawal rate during quite a bit of the historical record.

I don't know how big the effect is. It could be that it is not a big deal, or it could affect things significantly. It would certainly be a thorny issue to address, and would involve a lot of assumptions.

It could well be less significant in the worst case scenarios, because those are the ones where dividend yield started out low. So, it could be that, in those worst case scenarios, there were never periods where the withdrawal was significantly less than the dividends and interest.

Ben
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warrl,

I won't try and respond to your staunch defence of intercst and his methods. Your position has always been very clear.

My explanations to date have been expansive and you're more than welcome to keep to the party line.

Petey


If you consider his occasionally saying "I couldn't find historical data therefore I cannot include it in the study" to be drowning out the HUNDREDS of discussions of real estate that have occurred on this board over the past couple years, then yes, he's drowned out other investments.

And no, nobody has "found" that 4% is far too optimistic in the current environment. Making such a "finding" would require actually knowing what market returns for both stock and bond markets will be over the next 30 years. Even Warran Buffett's expressed opinion (not finding) is only for 10 years, not 30.

And 6% growth over the next 10 years is far better than what happened in the stock market over the 10 years beginning January 1929. The 4% withdrawal rate was good enough for that period and the 20 that followed.
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Hi galaghan,

Both good replies.

I am happy that I have posted some alternative information and thoughts on why working towards a goal of 25x your spending is shortsighted. Anyone here is now free to consider these views and draw their own conclusions rather than to just select that goal which seem so popular and so wrong for the reasons I laid out. Reasoning and data in the form of links to research & opinion were included for consideration. Several posters from REHP came to try to disrupt the discussion but I had expected no less from them.

Lastly, I don't believe that a single thread on the validity and usefulness of a study that will tend IMHO to mislead people looking to FIRE in the future to be taking the board down the slippery path to being REHP 2. I think it enhances the benefits, it allows for opposing views to be heard & considered, and I'm glad this is not REHP 2 and I was able to do that.

Regards,
Petey


The helpful way to do this is to present data and analysis and let people make their own decisions. I cringe every time somebody makes a value judgment at the end of their analysis that purports to apply to every single person who will ever retire early. I hate when posts make references to particular individual posters and their theories - it makes it sound as if followers are preparing for jihad against each other. TMF is supposed to be about people helping other people, not people cramming help down other people's throats - even with the best of intentions.

Could we just try it once? Could we all agree to present data and factual conclusions while leaving out the usual snubs toward existing studies and individuals? If we can, we would distinguish this board favorably from those that have come before us.

dan


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He drowned out anyone who disagreed with him or was interested in other investments including real estate to build wealth. Many people have subsequently found that 4% if far too optimistic in the current environment where many including Warren Buffett say expect no better that 6-7% over the next decade.

If you consider his occasionally saying "I couldn't find historical data therefore I cannot include it in the study" to be drowning out the HUNDREDS of discussions of real estate that have occurred on this board over the past couple years, then yes, he's drowned out other investments.


oops, bit of a mistake on my part. The real-estate discussions I was referring to were on the "retire early home page" board.
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Here's my take on SWRs: I don't really care!

Why? I'm saving as much as I possibly can right now, and what I hope to do is downshift rather than retire outright and maybe even continue saving money into the FIRE fund from odd jobs and freelance writing. I don't know what the economy will do over the next 10-20 years. I don't know what *I'm* going to do over the next 10 years, let alone the 50+ years before I die. I'm slowly shifting my asset allocation because I'm getting older, but I'm not going to worry about the minutae of SWRs. It's a guideline. That's all.

There's a reason why my portfolio is a Couch Potato portfolio. I'd rather spend most of my time living my life rather than waste so much time and energy trying to pin certainty on something that's inherently uncertain.

CK
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warrl writes:

Are taxes not part of your living expenses?

Irrelevant. You are confusing the issue by preferring to deal with the effects of taxation outside of the model. Let's say I have decided that when I retire, I will need $50K per year pretax. I am assuming that my personal tax burden will be 15% leaving $42.5K to live on. But I still need the $50K. If the SWR study tells me that I need a $1250K starting nut to allow a safe $50K withdrawal, there is a strong possibility that it is incorrect. Why? Because all of my funds are not in tax-deferred accounts and there have been many times in the historical record (upon which the analysis is based) that the taxable income generated by such a portfolio would have been in excess of 4%. The study pretends these taxes don't exist and compounds the error over time.

It is my understanding that the SWR methodolgy rebalances yearly by performing the mathematical equivalent of selling everything (tax-free of course), making the required withdrawal, and then rebalancing to the efficient frontier determined at the time of first withdrawal. In a taxable account, using this methodology, any taxable income (not to mention capital gains) in excess of the withdrawal rate will be subject to taxation. The model makes two errors: It fails to acknowledge the taxation and it allows funds which would have been removed to compound in the portfolio.

The model doesn't "try to do" anything. It doesn't "pick and choose" from asset categories. It applies a strict mathematical procedure (which no one seems to understand) to perform annual rebalancing. The results follow directly from this procedure. If the procedure fails to acknowledge taxation, it will affect the results. If any portion of your retirement stash is in taxable accounts, you cannot take the study results at face value.

Regards,
FMO
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BenSolar writes:

But what do you do when dividends and interest are higher than your withdrawal? They are reinvested minus tax. This effect is not shown in the study.

It could be that it is not a big deal, or it could affect things significantly.


Thank you Ben. You obviously clearly understand that it makes no difference what you assume your rate of taxation to be once you start distributing. You still require a certain sized withdrawal from the portfolio. Many of the adherents of the SWR study either fail to understand this or prefer to pretend it doesn't exist. Wishing it away will not work. It is a methodological flaw which may have an impact on those who don't exist exclusively in tax-deffered accounts (most of us). Welcome aboard.

Regards,
FMO


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I am giving up on this thread. Petey won't respond rationally and the debate is largely academic at this point for the wannabes. After all, if you are 10 or more years away from FIRE, a whole lot could change by the time you get there, much of which will affect your desired income, risk tolerance, etc.

Brewer,

I've kept out of this thread because I've already done my service in the SWR trenches but I think it's important for the wannabes to realize that trying for a "much safer" rate of 2% will require that you work and save for somewhere between 1 and 2 times as long as getting to a 4% withdrawal retirement. It's not double because (hopefully) you'll have investment gains on the way. That could push your "early" retirement date out from 45-50 until 65.

I think a better approach is to consider fallbacks for safety rather than reducing the withdrawal rate. Think about part time work if the returns are particularly bad (especially in the first 5-10 years of retirement), variable withdrawals (Gummy's sensible withdrawals), and broader diversification (unfortunately not currently possible to model well because of the lack of data).

Hyperborea
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The taxation issue in SWR calculations is a vexing one. The math model is pretty simple. It says, add back to your portfolio the sum of the dividends and interest minus your inflation adjusted withdrawal. It is understood that the quantity you "add" back may be negative. This ignores taxes but doesn't really assume that the savings are in tax deferred accounts. For example, it doesn't have any provision for taxation of withdrawals for annual expenditures.

The rationale, as I understand it, is that tax situations are so different and variable over time that the individual should modify it for his case. Or just take the study for what it is, something to consider but not the final word and certainly not to 3 decimal places precision.

On this issue, I agree with CK. I am basically FI but I continue to do some work because I enjoy it and the money it generates. So long as I enjoy it, I will continue but if not I can stop if I want. That makes saving a good part of my income worth it to me and then some.

The study is useful because it gives a round number to consider during accumulation phase. For example, 7-8% withdrawal, as once proposed by Peter Lynch then retracted, is quite risky. 1-2% is probably not very risky. Choose what makes you comfortable and how anxious you are to quit or modify your job.

ayduda

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Fortunately, I can crunch the numbers and see that under extremely reasonable assumptions, taxes are already fully accounted for.
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Hi CK,

In essence I agree with you, however my own working of a SWR is around 2.5% depending on my allocation and a not overly optimistic estimate of future results (leaving plenty of potential upside). This makes the multiple more like 40 times spending rather than 25 times. Though you're correct things can always change and it is by no means exact or a science, that is too big a difference of sum of money to ignore and just take the party line of 25 x budget. To do that would give me an entirely false goal and lead me to believe I will independent way before that is actually true.

Petey


Here's my take on SWRs: I don't really care!

Why? I'm saving as much as I possibly can right now, and what I hope to do is downshift rather than retire outright and maybe even continue saving money into the FIRE fund from odd jobs and freelance writing. I don't know what the economy will do over the next 10-20 years. I don't know what *I'm* going to do over the next 10 years, let alone the 50+ years before I die. I'm slowly shifting my asset allocation because I'm getting older, but I'm not going to worry about the minutae of SWRs. It's a guideline. That's all.

There's a reason why my portfolio is a Couch Potato portfolio. I'd rather spend most of my time living my life rather than waste so much time and energy trying to pin certainty on something that's inherently uncertain.

CK
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Sounds like you found a method that works for you. For me, if I waited until I had 40x expenses before downshifting, I'd likely be dead or disabled from job stress.

Like I said, when I downshift I'll still be able to live off the money I make working part-time and still save toward FIRE, albeit at a slower rate. But I do need that initial cushion for comfort's sake.

Who knows? Maybe I'll end up writing a bestseller that will be optioned for a movie for 7 figures. I don't know! That's why I'm staying extremely flexible, trying to balance things out, and saving like crazy.

CK
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<<He drowned out anyone who disagreed with him or was interested in other investments including real estate to build wealth. Many people have subsequently found that 4% if far too optimistic in the current environment where many including Warren Buffett say expect no better that 6-7% over the next decade. With a mixed investment portfolio, after deducting mgmt costs and holding back enough to cover inflation, you won't have 4% left. Simple math.
>>


I don't think that any short term trends are very predictive.

Intercsts theories at least have the virture of being reasonably well grounded in historical fact. The big question to me is whether the past hundred years of rapid economic growth in the United States is likely to continue for additional decades.

It might, but it's reasonable to suppose that the abundant resources on which it was based, and even the hard working labor force may all be in decline, with government increasingly siphoning off resources to pay out to unproductive people.

I think the intercst model is a useful guide, but I wouldn't bet my life on its optimistic supposition that the future will be as good as the past.



Seattle Pioneer
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<<Nice to see another message board fracturing itself over this issue.

This board purports to be for wanna-bes. There are probably a few people here who are far enough along in their FIRE plans that the difference between accumulating 25 times expected expenses and accumulating 50 times expected expenses is relevant right now. For them, it's important. But if you've got less than 10 times expected expenses saved up, then it makes more sense to focus on how you're going to accumulate and grow your wealth than to obsess over what your final target number is going to be.
>>


Good observation. The human variable may well have a more decisive effect on decision making than theories about safe withdrawal rates.


Think about Art's posts about his worn out body on the REHP. He has chosen to retire on a rather marginal basis because working would be painful if not actually disabling. That kind of choice may make decision making easier.


In my case, I've been financially independent for four years or more, but continue to operate my repair service in part because I enjoy it. A person who finds they can turn a hobby into a paying income or their trade into a hobby may make complete retirement unnecessary or undesireable. The ability to keep earning some income may permit a form of FIRE with much less in the way of accumulated assets and perhaps greater financial safety as well (sidestepping questions about safe withdrawal rates).


So there may be a variety of ways to avoid having to confront the hard facts of uncertainties about safe withdrawal rates.



Seattle Pioneer
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Hello SeattleP.,

I do agree that short term trends are not very predictive. Behavioral psychology causes people to have overly gloomy forecasts at difficult times and overly optimistic forecasts in the best of times.

In line with your thinking, markets do develop much like companies do. Starting with periods of high growth, peaking and later settling down to a reasonable return over long periods of time. It is therefore likely with the reduced workforce both here and in the US as the boomers leave the workforce that productivity, profitability & growth rates will slow. I use a figure of 7% nominal returns for mature markets because it is significantly lower than historical returns and yet is on par with the last decade in the US, UK & the rest of Europe which produced 6.95% CAGR gross. This included particularly volatile periods of overvaluation and sharp corrections which would have further reduced returns during the last decade by virtue of the additional growth needed to counter steep declines where a 50% drop requires a 100% gain to return to the same level exc. inflation.

With FIRE planning, I think you want to err on the side of being a little pessimistic rather than be FIREd and constantly falling short of the income you need to live comfortably. Choosing the average long term return over the last 70 years wouldn't match such a criteria.

Thanks for your post.

Petey


I don't think that any short term trends are very predictive.

Intercsts theories at least have the virture of being reasonably well grounded in historical fact. The big question to me is whether the past hundred years of rapid economic growth in the United States is likely to continue for additional decades.

It might, but it's reasonable to suppose that the abundant resources on which it was based, and even the hard working labor force may all be in decline, with government increasingly siphoning off resources to pay out to unproductive people.

I think the intercst model is a useful guide, but I wouldn't bet my life on its optimistic supposition that the future will be as good as the past.



Seattle Pioneer
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