An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that Michael sent to me on September 22.
Rob,
I finally managed to get a brief blog post up on this issue on my site. I thought you might be interested.
I hope that all is well with you these days! Thanks again for the great
dialogue on this!
With warm regards,
– Michael
Juicy Excerpt: For those who already retired at the start of the decade following the 4% rule, it may be time to sit down and update the plan, and face some hard facts given that the portfolio will almost assuredly be underperforming any original projections at this point. If Russell’s projections of a sub-2% withdrawal rate prove to be true, or are anywhere close, those who retired back in 2000 may ultimately find that the “4% safe withdrawal rate” was still far too aggressive, making the point once again about how critical it is to incorporate market valuation into retirement projections!
Michael Kitces wrote:
So what should we do from here? Well, the “good” news is that today’s valuations are no longer anywhere near the year 2000 extremes. Instead, we’re merely in the “high” valuation environment that produced the kind of 4% safe withdrawal rates we’ve seen at similar high valuation points in history – which means we should be comfortable with the 4% safe withdrawal rates being applied today.
It has become even better for someone starting out today. Look at the dividend yields of GE, PFE and MRK (General Electric, Pfizer, Merck). All are well above 5%.
Today’s P/E10 is below 17.
TIPS yields to maturity are all above 2%, most above 2.5%.
Those who have waited will be rewarded.
Have fun.
John Walter Russell
Passive Investors are depressed today. Rational Investors are excited.
That’s the difference between living in reality and living in a fantasy world. When you live in a fantasy world, you always have that dark cloud over your head, your worry that reality is going to intrude and send everything crashing down.
I don’t say that to rub it in to my many Passive Investor friends. I say it because I believe that it is only by learning how stock investing works in the real world that any of us can earn and hold onto a successful early retirement. A lot of Passive Investors are hoping today that something in going to happen in the market that will make them feel good again. That’s, well, a passive way to respond to today’s problems. The better way is to take matters into your own hands, invest rationally, and make things better through your own efforts. You don’t have to wait for the market to change. Change yourself. That’s the most effective change possible.
Once you do that, you do indeed see that stocks offer a better long-term value proposition today than they have at any time dating all the way back to 1991. That’s 17 years! That’s exciting stuff for those who are positioned to take advantage of it (and anyone can become so positioned merely by giving up on Passive Investing and coming over to the Rational Investing way of understanding things).
Stocks are great. Today’s valuations are not at all bad. The problem that investors suffer from today is a problem that resides within their own heads (I of course do not mean to make light of our economic problems, only to point out that they need not effect us as investors — it is the Passive Investing model that doubles the impact of our economic problems by making them investing problems as well).
Rob