I’ve posted Entry #10 for my Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s entitled The Monster That Ate the U.S. Economy.
Juicy Excerpt: Consider the alcoholic. He ruins his health. He loses his job. His money is washed down the drain. His wife walks out on him. His kids cannot stand him. Was there ever a moment in which he formed a deliberate intent to cause all this self-destruction? Of course not. The fellow was feeling a little down, he took a few extra drinks for the temporary comfort they brought him and then over time it became a habit. So it is with Buy-and-Hold and our economic crisis. No one planned to let stocks get overvalued by $12 trillion. The level of overvaluation that was certain to crash our economy just sort of snuck up on us, you know? These things happen from time to time down here in the Valley of Tears.
Evidence Based Investing says
Bill Bernstein commented today at Bogleheads on a thread entitled “Safe Withdrawal Rate May be Changing”
http://www.bogleheads.org/forum/viewtopic.php?t=57393
Hi All:
As usual, Scott is spot on.
The Trinity and Bengen studies–the “4% Rule” came from the latter–were done with historical post-1926 stock returns in the US, a cherry-picked sample if there ever was one, with nominal equity returns in the 10% region.
We’re now looking at forward nominal returns of around 7%: a 2% dividend yield plus 5% of nominal per-share growth: if you’re a wild-eyed optimist, maybe 8%. So, in my mind, a 4% SWR goes out the window; even 3% may be a stretch.
Bill
Rob says
Thanks for noting that, Evidence.
I plan to link to the Scott Burns column as the “Today’s Passion” feature for Friday and then to the Bogleheads thread containing the Bernstein comment for the Monday item.
Rob
Gonna get moderated says
I’m sure Rob will moderate this post, but here is what Bengen himself recently said:
“Since beginning my research into sustained withdrawals from investment portfolios almost 15 years ago, many papers and articles on this topic have appeared. Virtually all of them, including mine, have treated the client’s investment portfolio as if it were a laboratory animal, independent of the rest of the client’s retirement resources. Using various analytical techniques, we have poked and prodded the poor critter, testing withdrawal rates under a variety of assumptions about rates of return, inflation, tax rates, time horizon, desired legacy, investor skill and so on. We have emerged with a plethora of numbers—initial withdrawal percentages, such as 4.2%, or 4.7% or 5.8%—which reflect the capacity of the client’s portfolio to survive under the stated conditions.
Are we ready to apply these withdrawal percentages directly to a client’s retirement portfolio? Can we be confident that these withdrawal rates will work in practice, as well as they have in the laboratory?
My answer to both questions is a resounding “No!” If you feel otherwise, I strongly recommend that you increase the limits on your E&O policy.
The fact is, virtually all prior research has assumed that the client’s other cash flows during retirement will vary with inflation. That is probably true for Social Security. But what of fixed pension plans, whose payments do not increase with inflation? Or lump-sum items, such as inheritances or one-time expenses? And how about IRA distributions, whose tax liabilities can accelerate dramatically after age 701/2 because of required minimum distribution (RMD) rules?
The fact is, many clients experience irregular cash flows during retirement. That means the demands for withdrawals from the client’s portfolio will not grow smoothly with the inflation rate over time, but will fluctuate. For example, I recently used my “Layer Cake” technology to predict an initial withdrawal rate of 4.3% for a married couple. However, after considering all other aspects of their retirement situation, I adjusted that rate downward to 3.8%.— a very significant difference.
Does this mean we should throw away all our earlier research? Not at all. That research is still essential as the starting point for establishing “raw” withdrawal rates.”
Gonna get moderated says
Also:
“in an uncertain world, it’s the best we got”
(The entire article is an awesome read)
http://moneywatch.bnet.com/retirement-planning/blog/financial-independence/how-to-make-your-retirement-money-last/937/
Rob says
Thanks much for posting both the excerpt and the link, Gonna Get Moderated. Those are extremely helpful.
The key words in the Bengen passage are these: “Can we be confident that these withdrawal rates will work in practice, as well as they have in the laboratory? My answer to both questions is a resounding “No!” ”
This has of course been known throughout the Retire Early and Indexing discussion-board communities and throughout much of the Personal Finance Blogosphere for many years now. There have been thousands of community members who have expressed a desire that honest posting on SWRs and on many other critically important investment-related topics be permitted at all of our boards and blogs. I applaud the community members who have spoken out and urge all who have not until today worked up the courage to do so to make the jump today. The water is fine! There obviously is zero benefit to anyone in keeping the Ban on Honest Posting in effect any longer.
I think it is fair to say that every last one of the thousands who have expressed a desire that honest posting be permitted are grateful for the work done by the experts who developed the Old School SWR studies. We obviously wouldn’t know what we know today had it not been for the fine efforts of those who came before us. Take a bow, Bill Bengen! Take a bow, Trinity authors! Take a bow, John Greaney! Take a bow, Bill Sholar!
I also of course think it is fair to say that not one of the thousands who have spoken out feels even a tiny but comfortable with the tactics that have been employed by the internet predators who have posted in “defense” of Mel Lindauer and John Greaney and their Campaign of Terror against the various communities.
I stand ready to work with Bengen, Bogle, Bernstein, Clements, Burns, Kitces, Schultheis and any others who evidence a sincere desire to put the interests of the investors following their advice ahead of marketing considerations or personal ego considerations long enough to work through these questions in productive and warm and friendly and positive and life-affirming discussions. I will continue to post honestly on what the historical data says re safe withdrawal rates in any event. I will not permit the terrorist tactics or the blacklisting being supported today by a number of big-name personal finance bloggers pressure me into selling out the many fine community members who have participated constructively and bravely in our discussions.
I encourage Bengen and all others who have come to realize with time the mistake they made in being so arrogant and stubborn and narrow-minded in their unwillingness to correct the errors they made in their earlier SWR claims when they were first brought to their attention to join me in calling for a national debate on the realities of stock investing and on the implications of the academic research published 30 years ago showing that Buy-and-Hold has precisely zero chance of ever working out for the long-term investor.
Such a national debate is long overdue given the huge amount of human misery that has been caused by the level of overvaluation that we as a society permitted to take place in the late 1990s (with both the experts and the ordinary investors listening to their advice sharing in the blame). There’s nothing like taking serious action to bring an economic crisis to an end to get a whole big bunch of people feeling better about just about every subject on their minds. Let’s turn the corner on this thing. Let’s stop walking deeper into the darkness and take our first tentative steps together in the direction of the light. That’s when the real fireworks (the good kind!) begin!
I am confident that Bengen’s understanding of SWRs would improve dramatically if he gave up his belief in Buy-and-Hold. He is not alone in that belief, to be sure. There are millions of good and smart people who believe. If they believe wrongly (and the behavior of Bogle and many other lead Buy-and-Hold advocates certainly evidences at a minimum a lack of confidence in this model at this time even among its strongest advocates), they need to find this out.
The best way for as many as possible to discover the realities quickly is for us all to participate actively in a national debate aimed at working through what we have learned or should have learned from the important research done by Shiller, Russell and many others over the past 30 years. A deepening of the economic crisis is to precisely no one’s benefit. (As a side note, it is always amazing to me that such words as those in that last sentence even need to be put forward — Yak!)
I’ve said it before and I’ll say it again — We’ve got a tiger by the tale with this one! We’re deep into Year Eight and The Great Safe Withdrawal Rate Debate is not showing signs of slowing down a tiny bit! Holy moly! Heaven help us all!
Let’s get back to Learning Together!
Let’s get back to Having Fun!
Starting —
Now!
Rob
sadface says
Rob, your pep-talk was really great. Good luck with that.
Rob says
What?
You can’t say that it was great! If you say that it was great, I don’t get to give another pep talk!
No fair! That’s cheating!
What if everybody did that, SadFace? How much longer would The Great Safe Withdrawal Debate continue in those circumstances? Have you thought through the consequences of what you are suggesting here?
Rob