Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
In your most recent article at Value Walk https://www.valuewalk.com/using-historical-surviving-withdrawal-rate-planning/ you state “But the number that Buy-and-Hold studies identify is not a random number. It is the Historical Surviving Withdrawal Rate (HSWR). <b>That’s essentially the average of all the possible safe withdrawal rates</b>.”
It is not the average of anything. It is the single lowest withdrawal rate that survived the periods examined.
It’s two ways of stating the same thing.
If the market were efficient, the lowest withdrawal rate that survided the periods exaimed would indeed be the safe withdrawal rate. if the market were efficient, overvaluation would be a logial impossibility and mrket timing would not be needed to correct for overvaluation. Shiller showed with his Nobel-prize-winning research that the market is NOT efficient. So overvaluation IS possible and market timing IS required and you can’t identifty the safe withdrawal rate without taking valuations into consideration.
When you do the math correctly, you learn that the safe withdrawal rate is a number between 1.6 percent and 9.0 percent, depending on the valuation level that applies on the day the retirement begins. 4.0 is a number between those two extremes. If we had thoudsands of years of data rather than just 150 years of data, the numbers would be more precise and the historical surviving withdrwal rate would come closer to being the average of all the safe withdrawal rates that apply.
When you take valuations (the most important consideration in determining what is safe) out of the story, the number you come up with could be just about anything. In some cases, it is a wildly high number. In other cases, it is a wildly low number. In still other cases, it is not too terribly off the mark. It is essentially a random number. It is the number that would apply in a world in which valuations did not affect long-term returns, a world that those who follow the peer-reviewed research should have stopped worrying too much about in 1981. The 4.0 percent number is the safe withdrawal rate for the dark ages of the investing advice field, the safe withdrawal rate for a time-period in which Shiller’s amazing research did not yet exist.
My sincere take.
Rob
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