I’ve posted Entry #52 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Realities of Overvaluation Are Hard to Accept.
Juicy Excerpt: Ben’s reaction was telling. He refused to believe the numbers! He agreed that a valuations adjustment was required to compute the SWR accurately. And he had full confidence in Russell’s work, having worked with him over a long period of time and having learned that he was a careful straight-shooter of a guy. Still, Ben could not accept a 1.6 SWR. “That just cannot be right!” he exclaimed.
I related to the feeling. Having been the person who advocated the effort to calculate the retirement numbers correctly, I was in no position to deny the mathematical reality when it was reported to me. Still, I did acknowledge that the number shocked me. I encouraged any community members who could find any flaws in Russell’s methodology to please speak up. No one did. So over time I came to acceptance of the new number. But it was a hard thing to do so, even for someone who believes strongly that Shiller is right about valuations.
I faced an even more shocking reality a short time later, when Russell identified the SWR that applied for those who retired in the early 1980s. It’s one thing to tell retirees that they should not place confidence in claims that it is safe to withdrawal 4 percent even at times of insanely inflated stock prices. At least in those circumstances the person arguing for the New School methodology is arguing for greater caution, generally a good thing when it comes to retirement planning.
But valuations do not only pull the SWR down at times of insanely high valuations, They also pull the SWR up at times of insanely low valuations. If we believe that the numbers really do reveal anything of value, we need to be willing to let retirees know when the Old School claims are causing them to be excessively cautious as well as when the Old School claims are causing them to take on crazy risks. The same historical data that shows that the SWR can drop to as low as 1.6 percent also shows that it can rise to a number a lot higher than 4 percent.
That’s the number.