“If the U.S. Economy Became More Productive Than It Has Been in the Past, It Could Support a Higher Average Long-Term Stock Return Than the 6.5 Percent Real That It Has Supported for the Past 150 Years.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Long term with more people putting more money into the market by payroll deduction it does make sense for valuations to go up. Then you have to consider the effects of globalization. America’s multinationals benefitted more from globalization than any single entity other than perhaps the Chinese Communist Party.

If the U.S. economy became more productive than it has been in the past, it could support a higher average long-term stock return than the 6.5 percent real that it has supported for the past 150 years. But some would say that the 20th Century was the American Century and that it is likely that the average long-term return will be a bit less in the future than what is has been in the past. That’s a judgment call for the individual investor to make.

Are you suggesting that Greaney is expecting U.S. productivity to take a leap large enough to pull the safe withdrawal rate up from 1.6 percent (a number that assumes that stocks will perform in the future at least somewhat as they have always performed in the past) to 4.0 percent for retirement beginning at the valuation level that applied in January 2000. That would be an amazing leap. If that’s the assumption, he should tell people that so that they know what assumptions they are buying into when they use the 4 percent number. He certainly shouldn’t say that 4 percent is “100 percent safe” without noting that the calculation is rooted in an assumption that many would consider pretty darn wild.

I don’t doubt that there would have been some who would have used the 4 percent number in their retirement plans even if he did say that. But I am certain that there would have been some who would have gone with a lower number if they knew that that was the assumption. I believe strongly that these sorts of things should be disclosed to people.

Personally, I am inclined to go with a number that assumes that stocks will continue to perform in the future somewhat as they have always performed in the past. Not because I know that that will happen. Because that strikes me as the most neutral option. To the extent possible, I like to take my personal subjectivity out of it. But I have zero problem with others doing otherwise. My problem is with the idea of people being sold the 4 percent number without being told of the assumptions that produced it. I don’t recall Greaney ever saying that his study was rooted in an assumption that productivity would be higher in the future than it has ever been in the past.

This points to another benefit of opening every site to honest posting. When studies are scrutinized from many different angles, we all come to a better understanding of how they were put together and we can then have more confidence in them. It’s our retirement money that we are talking about here. We should all want to heat as many different perspectives re these matters as possible, in my assessment. I get the willies when I see all perspectives other than the one held by the author of a study being suppressed.

Rob