An earlier blog entry described the background of some recent e-mail correspondence between Michael Kitces and I on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that Michael sent my way on the afternoon of August 21.
Rob,
Thanks so much for the feedback! My deepest sympathies on your computer problems – I feel like I live and breathe by my computer and internet connection these days, so I definitely understand your pain!
Feel free to draw from my email for your blog if you’re so inclined, to advance the conversation.
Regarding the status of retirees who are on a “bad” track because they retired based on a 4% SWR early in the decade – well, from the financial planner’s perspective, this is WHY we work with clients on an ongoing basis and monitor the status of their retirement plans. To avoid those precise disasters. My concern, of course, would be for all those who don’t work with planners, who aren’t as necessarily plugged into “monitoring” their own financial situation, and who may end out too far down a road that has at best some painful choices ahead.
On the other hand, I have to admit that, based on my professional experience, many clients automatically tend to moderate their spending in difficult markets anyway. In other words, I find that many clients moderated their spending somewhat during the last bear market, EVEN IF they “thought” their spending was “safe”, and we are seeing the behavior again from some clients already in this bear market. Unlike almost every other investor behavior that is financially damaging, this tendency to moderate spending in difficult market and economic environments, regardless of whether it’s “necessary”, puts a helpful damper on the bear market drawdowns anyway. Of course, that doesn’t help everyone, and some people also exhibit the “bad” behavior of ratcheting spending up too much in bull markets (and then get caught unprepared in the next bear market), but I hope that the tendency to moderate spending in difficult environments (consciously or subconsciously) will help a little.
In the meantime, I agree with you that the more consumer education, the better!
With warm regards,
Michael
Michael Kitces is right about cutting back when stock prices drop. I remember doing so in 2002 even though my pension met all of my retirement financial needs.
On the other hand is the magnitude of the drop. Those retiring in Year 2000 would have had to cut back much more than their comfort would allow. I suspect that many went back to work.
Have fun.
John Walter Russell
Michael Kitces is right about cutting back when stock prices drop.
I agree that he is right that people cut back when prices drop.
If the safe withdrawal rate were reported accurately and the retirements were genuinely safe, there would not be a need to cut back.
I don’t see it as a justification to report the number inaccurately to say “oh, well people can cut back.” The goal of retirement planning is to avoid these nasty surprises. A methodology that insures that lots of retirees will need to endure lots of nasty surprises is a gravely flawed methodology.
Rob
The goal of retirement planning is to avoid these nasty surprises.
I agree.
In addition, we need to know something about the magnitude of bad outcomes ahead of time. There is little room for error after a retirement has begun.
Have fun.
John Walter Russell
we need to know something about the magnitude of bad outcomes ahead of time.
And of course the good news is that accurate reporting of the numbers provides the aspiring retiree the information that he or she needs to avoid even taking on a significant risk of seeing a bad outcome. One can use an analytically valid safe-withdrawal-rate study to decide on a stock allocation that makes strategic sense.
All of the retirements that are likely to fail because they were constructed by making reference to the Old School studies would be sound had the retirees shifted to high TIPS allocations. It’s a rare time when there isn’t some allocation that yields an acceptably high safe withdrawal rate. One of the problems with the Old School studies is that the numbers generated by them are so far off the mark of the numbers generated by using an analytically valid methodology that they encourage investors to invest heavily in stocks at just the worst possible time for doing so!
Rob