A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #683: Is There a Case for Using the Historical Surviving Withdrawal Rate for Planning Purposes?

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I’ve posted Entry #683 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is There a Case for Using the Historical Surviving Withdrawal Rate for Planning Purposes?

Juicy Excerpt: But the number that Buy-and-Hold studies identify is not a random number. It is the Historical Surviving Withdrawal Rate (HSWR). That’s essentially the average of all the possible safe withdrawal rates.

Comments

  1. “But the number that Buy-and-Hold studies identify is not a random number. It is the Historical Surviving Withdrawal Rate (HSWR). That’s essentially the average of all the possible safe withdrawal rates.”

    It is not an average of anything, it is the single lowest withdrawal that survived in the historical record.

    In your “famous post” you suggested dividing withdrawal rates into 3 groups, from times of high, medium and low valuation and suggested that doing so would result in a number lower than 4. You didn’t understand the studies then and you don’t now. If you have a bunch of numbers, the lowest of which is 4 (and others are higher), then the average will be higher than 4.

  2. The key word is in your first sentence — “survived” is not the same as “safe.” To know what is safe, you need to take valuations into consideration. Greaney IGNORED valuations. So — surprise! surprise! — he got the numbers wildly wrong.

    Why not do the calculations honestly and accurately? Then you would get very different numbers, accurate and honest numbers.

    That’s why Greaney hates the idea of permitting honest posting re the peer-reviewed research so much. When people hear the honest, accurate numbers, they loss confidence in the loony tunes claims that he makes in his retirement study. Which would be a good thing. But Greaney doesn’t want that good thing to happen, he wants to maintain confidence in the loony tunes numbers generated by his “study.”

    That’s where I’m coming from re this one, in any event. I would permit honest posting at every site, without a single exception. The Buy-and-Hold/Get Rich Quick stuff is not for me. I’m a research-based guy. Sue me, you know?

    Rob

  3. What do you mean by “safe”?

    Survived is easy to define. Did you run out of money before the last day of the period? If you didn’t then your portfolio survived. That is why all the SWR come up with roughly the same number, 4% because they are all using the same definition.

    Your definition (or lack of definition) of “safe” is impossible to test because it is undefined.

  5. By “safe” I mean “safe.”

    “Survived” is something very, very, very different. If you look at the historical data, you see that the withdrawal rate that survives drops dramatially when valuations are at insane levels. That 4 percent number resultes from retirements that began in 1929, when valuations were at insane levels. Stocks generate an average return of 6.5 percent real. You would think that you could take out more than 4 percent each year. But that high valuation level pulled the number that SURVIVED all the way down to 4 percent. The times when 4 percent barely survived do not turn up randomly. They turn up when valuations are at crazy levels. The valuation level that applies on the day when the retirement begins is the biggest factor determining both what survived and what is safe.

    Looking at survival alone can never tell you what is safe. There are only a tiny number of cases in which prices got to insane levels that caused 4 percent to come within a whisker of failing for 1929 retirements. Does the fact that a 4 percent withdrawal SURVIVED in that tiny number of cases show that a 4 percent withdrawal is “100 percent safe” (Greaney’s claim) even when valuations are at insane levels? Obviously not. The fact that 4 percent barely survived when prices were at insane levels shows that 4 percent is an extreme high-risk withdrawal rate for retirements beginning at insanely high valuation levels.

    The 4 percent withdrawal survived for 1929 retirements because we had a lucky returns sequence starting in 1929. Of all the returns sequences in the historical record, that returns sequence was in the middle of those we have seen. So a retiree who took a 4 percent withdrawal had a 50 percent chance of it surviving 30 years. It did survivce. Because it was safe? Hardly. Because it was lucky.

    To determine what is safe, you have to go into the thing with a desire to determine what is safe. We know that valuations are the most important factor BY FAR. When you take valuations into consideration, you learn that the SAFE withdrawal rate is a number between 1.6 and 9.0, depending on the valuation level that applies on the day the retirement begins.

    How do we get the safe withdrawal rate up to 4 percent? With market timing! If all investors religiously practiced market timing, we would never see the safe withdrawal rate drop to 1.6. It’s crazy that the safe withdrawal rate for an asset class that generates returns of 6.5 percent real could ever drop that low. How could such a crazy thing happen? It’s IRRATIONAL exuberance that does it. How do we rein in irrational exuberance. Buy encouraging market timing at every site. Market timing/price discipline is the mortal enemy of irrational exuberanxe. It kills it.Investors want to act in their self-interest and, if they are informed of the importance of it, most would be happy to practice ir regularly.

    To calculate what is safe, you need to be willing to be RATIONAL in how you set up your calculations. That means always taking price into consideration when making a purchasde. The OPPOSITE of what the Buy-and-Holders advovcate.

    My sincere take.

    Rob

  6. Is it “safe” to be in your 60’s and not have a fully funded retirement account?

    It’s honest. And it shows concern for my fellow community members that I eventually worked up the courage to point out the error in the Greaney retirement study.

    If Buy-and-Hold were a real thing, we never would have seen a single abusive post, much less any of the criminal stuff. and I would be on easy street today. I’m not the guy who got an important number wrong in a retirement study posted at my web site. That was the other fellow. I offer no apologies for pointing out the error. I only regret not doing it sooner.

    Rob

  7. You have been asked thousands of times as to when 4% never survived over a 30 year period and you have failed to do so. Now, you want to use your typical word salad and tell us that you want to decide the definition of safe. If you want to have your own definition as to what safe means, then you feel free to do so. Once again, no one else has to do what you say or believe what you say. Regardless of what you say, 4% has always worked and nothing you say will change that fact. Meanwhile, you are sitting here trying to lecture people on investing, when you are completely broke and lack any education or credibility in the field of investments.

  8. Okay, Anonymous.

    I naturally wish you all the best that this life has to offer a person, in any event.

    Hang in there, old friend.

    Rob

  9. “ It’s honest.”

    You ignored my question. Is it safe to be in your 60’s and not have a fully funded retirement account?

  10. I like to think that I give ethical considerations a higher priority than financial considerations. I want to be able to sleep at night. That’s important to me. If I were king of the world, there never would have been a single abusive post and we all would have enjoyed an amazing learning experience. I can’t not care about my fellow community members. That’s just not in the cards.

    And I believe that posting honestly re these matters will pay off for me financially down the line. That’s not my driver. But, if we are a good people — and I believe that we are — it would follow that there is going to be a huge financial payoff for my efforts somewhere down the line a bit.

    My best wishes to you and yours.

    Rob

  11. “ I like to think that I give ethical considerations a higher priority than financial considerations.”

    You wanted to debate the word “safe”, but then you don’t want to talk about it when it applies to your situation. Got it.

  12. If I truly believed that the Greaney study contains a valuation adjustment, I would say that that’s what I believed.

    Rob