“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.”

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

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.

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