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 24.
Rob,
Very interesting! Thanks for sharing this material!
I think this is the exact road that I would look to go down as well. From the financial planner’s context, I don’t think that Switching Strategy B is likely viable – the planning community would view those changes as being “too extreme”. But something along the lines of Switching Strategy A is exactly what I had in mind, where equities might range from 25% to 75% or something along those lines, with an upper and lower P/E10 threshold.
Of course, it’s a lot for the planning community to absorb, because it challenges both the withdrawal rate beliefs as well as the passive investing beliefs. But I don’t mind making waves like that from time to time. 🙂
To say the least, I’m quite encouraged that with John Russell’s results, it seems pretty likely I’ll get similar results and will have something interesting to report from my perspective as well. After all, aside from some slight adjustments in assumptions, I’ll probably be building this in a very similar manner from the same Shiller data set!
Thanks again for sharing this!
With warm regards,
– Michael
Retiring Soon says
Rob
While reading the latest entry at the Get Rich Slowly Blog, I came across these words that were attributed to you (see below). Is that an endorsement of the 4% SWR? I am feeling confused.
Use the multiply-by-25 rule to determine how much it takes to finance “for life” each of your spending categories. This one’s a little esoteric. We haven’t talked much about early retirement and “safe withdrawal rates” yet at Get Rich Slowly, but roughly it’s assumed that a person can pull about 4% from saved assets each year without depleting them. For every $1000 you invest, you can theoretically withdraw $40 per year (which is 4%, or 1/25th) without touching your starting capital. So, if you spend $40/year on a newspaper subscription, $1000 in savings pays for that subscription for the rest of your life.
Rob says
Is that an endorsement of the 4% SWR?
No.
The Multiply-by-25 Rule assumes that you can earn a 4 percent real return on your investments.
The Old School SWR studies say that you can take out 4 percent from a high-stock-allocation retirement portfolio each year and be virtually certain that you will not run out of money within 30 years. This calculation is based on an assumption that the retirement account will be permitted to diminish to zero at the end of the 30 years (but not before that). A return of 0 percent would permit a 3.3 percent SWR. So the Old School studies are assuming a return of not much better than zero (they are examining the worst-case scenario that we have seen in the historical record). They are certainly not assuming a return of 4 percent real. If you earned 4 percent real and were permitting your portfolio balance to diminish to zero, you could obviously take out more than 4 percent each year.
There is sometimes confusion over this because both rules use the numeral “4.” But the questions being examined are not the same.
Rob
John Walter Russell says
Look at P/E10=15, an 80% stock allocation and a Year 30 balance of 100% on the Retirement Risk Evaluator.
The 4% rule applies at today’s valuations.
Have fun.
John Walter Russell
J. Money says
Hey, your blog is looking great! I’m glad it’s all working out 🙂
Rob says
Thanks for those kind words, J.
J. is the publisher of the Budgets Are Sexy blog. That’s one of my favorite blog titles of all time.
Rob