Set forth below is the text of an e-mail that I recently received from Bjorn Amundson, a Certified Financial Planner, followed by my response:
Thanks so much for all the work you do and your great calculators on your site!
I stumbled onto Shiller’s study probably 2 years ago. I was instantly struck with the huge implications it had for my work as a financial planner. Even better, I found out that someone had already gone and done all the legwork I imagined doing and creating the tools I had daydreamed about having!
I’ve been at too many places that love the 4-5% rule. The inherent contradiction in this rule (or trap) is that if you can spend 5% no matter what year you retire, then if the stock market goes up a lot, then you can “reset” your spending rate at this new 20% higher rate! So, spending goes up with the stock market returns, but…then …isn’t supposed to go down with it….
The next level of your calulators/ideas will be applying this across different markets as well. Imagine if Australia is at a PE10 of 9 while the US is at 25 or something. I’ve searched the web far and wide and have had a VERY difficult time coming up with international data…Do you know of any?
Also, I have spent a long time creating a formula that adjusts allocation according to the PE10 raio as well. It historically outperforms the market (no shocker)with less volitility. However, it doesn’t work in all decades and is primarily useful at the extreme margins.
Anyways, thanks again and I’ll keep reading your stuff.
Thanks for your kind words and for your interest in my work.
There’s not a lot of international material. I believe that the problem is that a market needs to be stable for some time for predictions to work. This won’t work for emerging markets or for markets in dying economies. Chapter Six of Shiller’s “Irrational Exuberance” book is titled “New Eras and Bubbles Around the World.” That gives a bit of information about foreign markets but not a great deal.
Here are four links to discussion threads at the SWR Research Group board that make reference to international questions. It might be that you would come across some useful references by checking these out:
You are absolutely right about the logic flaw in having SWR resets go only in one direction. The insanity of this drives me crazy. There are lots of otherwise smart people who think it makes sense to proceed in this way, however.
John Walter Russell tested some switching formulas at his www.Early-Retirement-Planning-Insights.com site. It certainly can be a stimulating intellectual exercise to do this. However, I personally don’t think that all answers can ever be obtained from formulas. One problem is that the return available from super-safe asset classes is ever-changing. In some circumstances, it might be worth investing heavily in stocks selling at a certain P/E10 level and in other circumstances this would not be so. There are several different moving pieces in this puzzle. I certainly wish you the best of luck with your efforts in this regard, however, and would always be interested in knowing how things turn out.
Thanks for your feedback and questions. I hope that we will be back in touch from time to time.