Set forth below are some words that I posted as a comment in the discussion thread for my recent Guest Blog Entry titled Stock Investing Without All the Drama.
Thanks for your kind comment, RetireByForty.
Yes, this is ideal for retirees. People are often impressed that VII can provide a portfolio of double the size of a Buy-and-Hold portfolio at the end of 30 years. But the real magic here is that it does this at dramatically less risk. This is a win/win/win — greater returns and less risk for the investor and a more stable economy for all of us, even non-investors.
My research into this began when I was putting together a Retire Early plan for myself. I looked into the studies that say that the safe withdrawal rate (the percentage of a portfolio that can be used to cover living expenses with virtual certainty that the portfolio will last 30 years) is always 4 percent. It seemed illogical to me to say that the SWR is a constant number if valuations affect long-term returns (as Shiller’s research shows). So I asked for help on a Motley Fool discussion board to figure out the true (valuation-adjusted) SWR.
It turns out that the SWR can drop to as low as 2 percent at times of high valuations and can rise to as high as 9 percent at times of low valuations. We are going to see millions of middle-class people suffer failed retirements in days to come because of the analytical errors in those studies.
Numerous big-name experts have confirmed my findings. But it has been an exceedingly difficult task to get the word out to middle-class investors. There’s a Social Taboo in this field against pointing out errors made by the people who do investing studies. I view this as a terrible thing! I have been speaking out against it for nine years now.
Do you know what the SWR was for retirees going with a 100 percent TIPS portfolio in 2000? It was 5.8 percent. The SWR for an 80 percent stock portfolio (there were people telling retirees that it was a good idea to go with 80 percent stocks at that time) was 2.0 percent. For someone who retires with a $1 million portfolio, that’s the difference between being able to spend $58,000 per year or being able to spend $20,000 per year! That’s every year for 30 years running!
Do you know what Dallas Morning News Columnist Scott Burns told me about my efforts to fill middle-class investors in on the realities of safe withdrawal rates? He said that it would prove to be “catastrophically unproductive” because The Stock-Selling Industry does not want this getting out. He said that I wasn’t the first person to learn about the errors in the retirement studies and that the reason why the media doesn’t report on them is that “It is information most people don’t want to hear.”
They think we’re stupid! They think we’re irresponsible! They think their job is to tell us fantasies that make us all believe that our temporary bull market gains are real rather than the true realities of stock investing.
It’s a bad situation! I think it is going to get better over time and I am beginning to see some positive signs. But there’s a lot going on in InvestoWorld today that is not even a little bit right and retirees are especially vulnerable to being hurt by the fairy tales that are told to middle-class investors by most of the big names in this field.
We need to begin thinking of ways to take care of ourselves, in my view. rather than just posting the stuff that comes from the marketing departments of The Stock-Selling Industry as if it were gospel. If we don’t, things are going to get a lot worse in our economy in days to come.
Sorry for the sermon. I have a lot of friends at all of the various Retire Early boards who have been hurt in serious ways by those Old School SWR studies. Not one of them has yet been corrected, by the way. People who google the term “safe withdrawal rate” still turn up links to the Old School studies I have a New School (valuation-adjusted) SWR calculator at my web site) called “The Retirement Risk Evaluator.”