An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on September 23, followed by the text of an addendum that I sent the next day.
Your safe-withdrawal-rate project is a great idea.
You might want to take a look at the following two articles at John’s site in which he explores the use of timing strategies to enhance the safe withdrawal rate (the second article supplies the data):
Please also note that The Retirement Risk Evaluator permits exploration of two timing strategies. If you enter into the calculator today’s P/E10 level (20), an 80 percent stock allocation, a 2.0 percent TIPS (or equivalent) rate, and a 30-year percentage balance of zero, the SWR is: 3.92. If you enter the same inputs but change the allocation to Switching Strategy A, the SWR moves up to 4.69. If you use Switching Strategy B, the SWR moves up to 4.78.
With Switching Option A, the retiree uses a 25 percent stock allocation when P/E10 is above 21, moves to a 40 percent stock allocation when the P/E10 is above 11 and below 21 and moves to a 75 percent stock allocation when the P/E10 is below 11.
With Switching Option B, the retiree uses a 0 percent stock allocation when P/E10 is above 24, moves to 20 percent stocks at a P/E10 below 24, moves to 30 percent stocks at a P/E10 below 21, moves to 50 percent stocks at a P/E10 below 12, and moves to 100 percent stocks at a P/E10 below 9.
This is an addendum to the e-mail I sent yesterday providing another link to John’s material on Switching Strategy A and Switching Strategy B and their effects on SWRs. This has two graphics comparing the switching strategies with the percentage earnings yield.