I am the person who discovered the error in the Old School safe-withdrawal-rate studies. The error is that the studies do not contain an adjustment for the valuation level that applies on the day the retirement begins. Yale Economics Professor Robert Shiller published research in 1981 showing that valuations affect long-term returns. The error in the Old School SWR studies is likely to cause millions of failed retirements in days to come, in the event that stocks perform in the future anything at all as they have always performed in the past. I went public with what I knew in a post to a Motley Fool discussion board on the morning of May 13, 2002.
For most of the next ten years, the “experts” in this field either denied that the studies were in error or ignored the problem. Since the 2008 price crash, it has become increasingly clear that we are going to see millions of failed retirements and that lawsuits in the hundreds of billions of dollars (collectively) are going to be brought against those responsible for the ten-year cover-up. So we have seen numerous articles in big-name publications in recent months acknowledging that it is not possible to calculate the SWR accurately without taking valuations into consideration.
But we have not yet seen a single one of the Old School studies corrected. The new company line is that the studies are obviously in error but that there is no need to correct them.
I take strong exception to the continued cover-up for five reasons.
One, there are still people finding these studies as the results of internet searches. The searches those people run may not pull up the articles reporting on the errors in the retirement studies. By failing to correct the studies, we are causing additional failed retirements.
Two, many of the people who placed their trust in the “experts” who encouraged them to make use of the long-discredited retirement studies could still save their retirements if we told them how they must change their stock allocations to do so. Corrections of the studies would need to be accompanied by suggestions re what to do now. Those suggestions might spare hundreds of thousands of middle-class retirees from suffering one of the worst life setbacks imaginable.
Three, corrections would clarify the cause of this national catastrophe. Many of the articles acknowledging the errors have employed mumbo-jumbo language that fails to identify the key problem — that Shiller’s research showed that the Buy-and-Hold Model for understanding how stock investing works is flawed right down to its core and needs to be junked and replaced by the Valuation-Informed Indexing Model (Valuation-Informed Indexing is Buy-and-Hold corrected for the errors discovered by Shiller).
Four, investors’ discovery of the ten-year cover-up of the errors in the retirement studies is likely going to cause a political explosion. The sooner those responsible for the cover-up come clean, the better we will be able as a nation to manage and survive the crisis.
Five, acknowledgment of the error presents the opportunity for an amazing learning experience. I was a Buy-and-Holder on the morning of May 13, 2002, when I put forward the post reporting on the error in the studies. I abandoned my belief in Buy-and-Hold on the evening of August 27, 2002, when John Greaney, the author of one of the discredited studies, threatened to kill my wife and children if I continued to press for corrections in the retirement studies and over 100 Buy-and-Holders cheered him on. My reaction to that experience was that Buy-and-Hold must be a fatally flawed strategy to generate such strongly negative emotional reactions in such a high percentage of the investors who follow it. It was because of my abandonment of Buy-and-Hold that I was able to develop the scores of powerful investing insights I have reported on in the ten years since. All of the experts in this field and all investors can share in these insights once we stop doing battle over the absurd question of whether retirements studies that get the numbers wildly wrong should be corrected or not and instead direct our energies to learning what our experience with this situation teaches us about the dangers that follow from heavy promotion of Get Rich Quick investing strategies.
Academic Researcher Wade Pfau came close to being a hero re this issue. I had been trying for close to ten years to persuade the experts in the investing field to press for corrections. Wade was the first person to take me up on the idea. He sent an e-mail to the three authors of the Trinity study, a much cited Old School SWR study. The Greaney Goons, a group of highly abusive internet posters who have worked for 10 years to keep investors from learning of the errors in the retirement studies, threatened to send defamatory e-mails to Wade’s employer with the aim of getting him fired from his job for the “crime” of acting with honesty re this matter. Wade has had much experience both with the Goons and with experts in the investing field who advocate Buy-and-Hold strategies and who have tolerated and even encouraged the Goons on numerous occasions. Fearing for damage that might be done to his career as a result of his honesty on the SWR matter, Wade adopted the Goon-approved position that the studies are indeed in error but that there is no need for them to be corrected.
Several years ago I developed a calculator (“The Retirement Risk Evaluator”) that uses an analytically valid approach to identifying the safe withdrawal rate. In earlier days, Wade offered numerous positive comments about the methodology used to develop the calculator. But his current public position is that there is no need to know the safe withdrawal rate or perhaps no possible way to know it. Wade and other experts seeking to hide from millions of middle-class investors the irresponsibility of the 10-year effort to cover up the error in the Old School studies are suggesting that the SWR concept be abandoned.
This is a terrible mistake.
Wade has done research on “safe savings rates.” He promotes this concept as an alternative to the safe withdrawal rate concept. It is not that. It is a supplement to the safe withdrawal rate concept. The safe savings rate concept certainly has value. Wade certainly should be encouraged to continue his research along these lines and applauded for the many insights he has developed with his work in this area. But there is no justification for abandoning the safe withdrawal rate concept. The SWR concept does something different from what is done with the safe savings rate concept. Those seeking to plan retirements effectively need to make use of both concepts.
Identifying the safe withdrawal rate answers a unique question — What inflation-adjusted percentage of my retirement-date portfolio amount may I take out to cover living expenses each year with virtual certainty that I will have enough assets for my retirement to last 30 years? Many aspiring retirees need to know the answer to that question. There is no way to answer it other than through use of a valid SWR methodology.
Wade’s safe savings rate tells investors how much they need to save each year to achieve a well-financed retirement plan many years later. People need to know that. But people also need to know the safe withdrawal rate that applies for their retirement plan.
Another idea that has become more popular since the error in the SWR studies was widely acknowledged is the idea of retirees setting up multiple pools of savings, with one pool being used to cover essential spending and being invested in safe asset classes and with another being used to cover luxury spending and being invested in risky asset classes. This is another excellent concept that should be explored in depth. But this concept also is not a replacement of the SWR concept. A retiree who employs the multiple-pools-of-saving concept still needs to know what the remaining value of the pool invested in risky asset classes will be in a worst-case return scenario. Few retirees want to live the rest of their lives with zero ability to spend on luxuries. It is the SWR concept that aims to answer this question.
There was never anything wrong with the SWR concept. The concept was a big advance at the time the Old School studies were developed. The mistake was the failure to include a valuations adjustment in the calculations. Shiller’s “revolutionary” (his word) research shows that it is impossible to analyze any investing question effectively without taking into consideration the effect of valuations. The argument that we no longer need to know the SWR takes us backwards rather than forwards. It’s not SWRs we need to avoid, it’s improperly calculated SWRs we need to avoid.
It was my effort to learn how to calculate the SWR properly that led to the investigations through which I developed the Valuation-Informe Indexing model for understanding how stock investing works. Most investors have little idea how big an influence the valuations level that applies on the day they buy stocks has on their long-term return. Comparing the SWR that applies for a retirement that begins at a time of low valuations (1982) with the SWR that applies at a time of high valuations (2000) illustrates the importance of taking valuations into consideration in every investing decision. The SWR for a high-stock portfolio in 1982 was 9 percent. The SWR for a high-stock portfolio in 2000 was 1.6 percent. This means that an retiree with a $1 million portfolio could with complete safety take out $90,000 every year of his remaining life if he retired in 1982 but only $16,000 if he retired in 2000.
That’s a shocking difference!
But it shouldn’t be!
To those who understand the implications of Shiller’s research, the difference in SWRs makes perfect sense. Stocks were priced at one-half their fair-value price in 1982 and at three times their fair-value price in 2000. The SWR should be six times larger in 1982, if Shiller is right that valuations affect long-term returns. Round down the number 1.6 to 1.5 to make the math easy and then multiply by six and you get 9 percent. The SWR changes in response to valuation shifts in precisely the way we would expect if we were analyzing how stock investing works with logic and not with the out-of-control Get Rich Quick emotions that make Buy-and-Hold strategies so appealing to so many.
Those who retire at a time when stocks are priced as they were in 2000 need to know that they need to accumulate a portfolio of six times the size of the portfolio they would need to accumulate for a retirement beginning in 1982 to have the equivalent in income-producing assets financing their retirements. Properly calculated, the SWR illustrates the essential point in a compelling way. We should not be denying investors the SWR concept to keep the long-discredited Buy-and-Hold concept alive another week, another month, another year. We should be reporting the SWR accurately and honestly and using the differences that apply in times of low valuations and high valuations to teach investors that they should not take the numbers on their portfolio statements even a little bit seriously when those numbers are the product of the mass promotion of Get Rich Quick/Buy-and-Hold investing strategies. It is not the SWR concept that should be abandoned but the profoundly dangerous Buy-and-Hold “idea” that there is no need for investors to practice price discipline when buying stocks.
Perhaps the internationally renowned portfolio strategists Danny and the Juniors put it best when they argued in an influential 1958 paper that:
I don’t care what any experts say —
The Safe Withdrawal Rate is here to stay!