My blog entry for May 23, 2006, set forth the text of an e-mail sent to me by Wall Street Journal Columnist Jonathan Clements. In the e-mail, Clements defended Bill Sholar’s FIRECalc retirement planning tool from my criticisms of it, while acknowledging that FIRECalc “may not be the last word in safe withdrawal rates.” Set forth below is my response to Clements’ e-mail:
Thanks for your response.
I agree that the conventional methodology studies have served to lower expectations and that that is a good thing. Bernstein described the Trinity study (the grandfather of conventional methodology studies) as “breakthrough research.” I agree with that assessment.
The fact that there has been one breakthrough in the safe withdrawal rate field does not rule out further breakthroughs. I hope you will take at least a quick look at Russell’s site. He has done some amazing work.
If it would help you to look at summaries of major findings, please let me know the sorts of questions in which you have the greatest interest. I can’t do the statistical work that Russell does. But I am writing a book on his findings. So I very familiar with his work and its implications.
You hint at one of the most important findings with your reference to TIPS. Given the valuations that apply to stocks today, a strategy of shifting a good bit of one’s portfolio to TIPS until such time as valuations return to moderate levels is highly appealing, given what the historical data says about the long-term returns likely to be provided by stocks from today’s valuation levels.
Please let me know if it is okay with you to quote your response to my e-mail in my blog. The question of the analytical validity of FIRECalc is a matter of considerable controversy at the Financial Freedom Community boards. So I set forth the text of my e-mail to you in my blog entry for today. I would like to set forth the text of your response as well (in part in fairness to Sholar and his supporters since to some extent you are defending the FIRECalc tool from my criticisms of it), but I of course will not do so unless you give me permission to do so.
Russell and I are in the process of constructing a calculator that uses the historical stock-return data to generate “predictions” of the range of stock returns we will likely see over 10-year, 20-year and 30-year time-periods and to assign rough probabilities to various points on the spectrum of possibilities. I have hopes that the calculator will be up at my site within three or four weeks. I will send you an e-mail letting you know when it is available. It is the work we did together on safe withdrawal rates that led to our study of the effect of valuations on long-term stock returns, which is of course an issue of even more far-reaching import.