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 me on October 18.

Rob,

Thank you so much for your response here. My apologies that my response will be relatively brief, but unfortunately I am wrapping up things here in the office because I am on the road for most of the week for speaking engagements. Ironically (in the context of this conversation), this trip also includes one presentation speaking about the details of how the existing safe withdrawal rate research works (the “Old School”) in your language, with a strong focus on the caveats and risks of applying that research blindly.

I must confess that I am still lost as to why you continue to attribute this belief to me that because I respect the foundation of the old school research that “it holds me back” or that I “don’t wish to warn people”. It is not accurate at all. It is simply that I do not find the Old School studies to be “analytically invalid”. To the extent that I do share your concern with them, which I do, it is because I have concern that they may be improperly APPLIED to scenarios in which their foundation may not hold. The Old School research was, in effect, predicated on evaluating the safe withdrawal rate for all historical scenarios under a P/E10 of about 30 (because that was the highest we had ever seen in history prior to the late 1990s). So broadly speaking, I have a lot of concern any time someone wants to use the Old School framework when the P/E10 ratio is over 30. Under 30, I find it still to be quite analytically valid – except that I am concerned that in low P/E10 environments, it may actually be too conservative, and thus the reason why I published my own research on this in my newsletter earlier this year. Likewise, I do share your concern that they may be overstated in ultra high P/E10 environments, and thus the reason why I also published on this aspect of the research in my blog. In any event, yes you have my permission to publish my email from this weekend on your blog to clarify this.

The reality is that in the past century, we’ve had one instance of P/E10 ratios significantly above 30. As we know, it was the stretch in the late 1990s and very early 2000s when the P/E10 ratios got much higher. Is it risky to have applied the Old School safe withdrawal rate value in this environment? Yes, because that valuation environment was outside the scope of anything ever studied in the Old School research. Does that mean the Old School research is invalid? No, it’s not. It simply means you have to be careful where you apply it, and not to apply it in a situation where it may still have risk. Does that mean the 2000-2029 retirement time period will actually invalidate the Old School safe withdrawal rate value? Perhaps. We’ll see. I do have concern that it might do so, for all the reasons about the normal progression of P/E contraction on returns, of which we’re both well aware.

All that being said, frankly the reason I do not seem to have the alarm that you do is because I just don’t see the impact that you do. The extra-ordinary P/E10 ratios that crossed outside of the bounds of the Old School research have been gone for several years. In point of fact, we’ve gone through such a P/E10 contraction in the past 3 months, that we’re suddenly coming closer to the point where the Old School safe withdrawal rate may be too conservative, not too aggressive. The primary and sole damage here is really just for those who actually retired right around 1998 to early 2001, when the P/E10 ratios really spent a lot of time way above 30, where the Old School safe withdrawal rate may be undermined. Just for clients that retired in those years. And I have to tell you, as someone who has spoken on this topic for a few thousand financial planners over the past several years, I have yet to EVER see a single planner and client that are walking like lemmings off a cliff insistently maintaining a 4% withdrawal rate based on an account balance circa 1999. They have all monitored and made adjustments since then, in some way, shape, or form, whether it was moderating spending for a few years, shifting other goals, or making portfolio changes. Yes, in point of fact this does mean that a few people may have had to cut spending a little more than anticipated (since they were theoretically not supposed to need to cut at all since it was THE safe withdrawal rate), but they’re managing through this environment. And frankly, given the relatively short span of years, the different just isn’t that great to begin with. The client who retired in 2000 and started withdrawing $40,000 from a $1,000,000 portfolio, when they perhaps should have been spending $25,000 to $30,000, still only spent an extra $20,000 – $30,000 cumulatively over the first few years before likely considering an “adjustment” due to the severity of the bear market. Granted, those extra withdrawals do add up over time, but at the end of the day we’re only talking about cumulative spending of 2% to 3% of the original portfolio over those first few years. Frankly, for most clients, poor investment selection would have had *FAR* more of an impact on their retirement success than this extra spending in the first couple of years. And again, for all the clients I’ve seen from planners across the country, they’ve been making some kind of adjustments since then. They’re not lemmings walking off the cliff. Now, I don’t know what the general public who doesn’t work with a financial planner is doing – that’s beyond my scope of awareness – but I have trouble believing that much of the general public is walking like lemmings into retirement spending oblivion either. Frankly, I have found almost no one who doesn’t work with a planner who has enough familiarity with safe withdrawal rates to place such blind, unequivocal trust in the system in the first place, so I have to admit I am skeptical that the impact is anywhere near as broad as the “millions” you indicate in your email.

Of course, that doesn’t mean I don’t value the importance of developing the research further, and getting the word out about these issues; my point is simply that the “failure” time zone where the Old School studies may actually cause failure was relatively brief, that most individuals seem to have already adjusted themselves (if only because they didn’t have THAT much faith in the original research to begin with), and that I am skeptical about whether we will ever again in our lifetimes see P/E10 ratios significantly above 30 again (which means the Old School research may continue to be relevant for every retiree I ever meet for the rest of my life). On that basis, I certainly think that developing the body of research is important, and I have no qualms about seeing old research debunked or to otherwise evolve into better models. It’s just that I don’t find them to be THAT broken when I look prospectively at how to advise clients going forward, and the clients from the past that might have gotten into trouble seem to already be making adjustments.

To answer your original question about how this came to my attention – someone contacted me through my website because they read your quote (which I cited below) on the message boards here: http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1224342317, and was shocked to hear that I would state I don’t want to warn people about risks because it would disrespect past studies. I responded to him, as I responded to you, that it is not at all an accurate characterization. I have never, ever said that I don’t think this area is an issue, and I most certainly have NEVER said that I am reluctant to speak about it for fear of “disrespecting” past research. To the contrary, I have both written to point out these issues, and regularly address them in my speeches on this topic at numerous conferences throughout the country all year long.

Sorry I don’t have time to write more, but I hope that helps a little!

With warm regards,

– Michael

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 I sent to Michael on October 19.

Michael:

Thanks for touching base. I am always glad to hear from you. As you note in your e-mail, I have always found your comments helpful and valuable. And, yes, we do agree on much re both the safe withdrawal rate (SWR) issue in particular and re the investing project in general. As the thrust of your e-mail suggests, we do not agree on everything. I certainly see no reason why that should mean that we cannot remain friends or that we should not continue to learn from each other by sharing out thoughts and perspectives with each other.

How did the message-board comment come to your attention? Did you note the tactics employed at the message board at which this comment appeared to intimidate those posting honestly on the SWR topic? How do you feel about what you see when you look at the content of that board?

This question goes to the heart of what we are discussing here. I think it would be fair to say that the people posting abusively at that board are in great pain. The owner of the board is John Greaney, the author of one of the Old School SWR studies. John is a friend of mine. John started the Retire Early board at the Motley Fool site and I built that board into the most successful in the history of the Motley Fool site. When I posted about the problems with the Old School studies, John freaked out. He has now spent the last six years of his life going from discussion board to discussion board, from blog to blog, to insure that no one on Planet Earth can discuss SWRs in a reasonable manner. Does this seem to you to be a constructive use of John’s time? It sure does not seem like such to me.

Everyone who has looked seriously at this issue has come to the same conclusion. The Old School studies tell us the Historical Surviving Withdrawal Rate (HSWR). There is no question whatsoever that they report this number accurately. It is equally obvious that they do NOT report the SWR accurately. To identify the SWR, one must take the effect of valuations into account. William Bernstein said once that anyone giving thought to using one of the Old School studies to plan a retirement would be well-advised to “FuhGedDaBouDit!” I think it would be fair to say that Bernstein does not believe that the Old School studies report the SWR accurately.

Yet, like you, Bernstein is reluctant to say the words that need to be said — “The Old School studies are analytically invalid for purposes of determining the SWR and need to be corrected immediately.” Asked directly whether the Old School studies are analytically invalid, Bill said that it is his view that they ARE analytically valid. That’s the state of play on this question today. There are others who have said similar things. Scott Burns has reported on the New School SWR findings in three of his columns. Yet he continues to link to the Old School studies. He told me once in an e-mail (which he permitted me to publish at my blog) that he views my claims that the Old School studies get the number wrong and need to be corrected as “catastrophically unproductive.” I could go on and on.

I have not quoted you incorrectly. I do not even quote you in the words you cite in your e-mail. I say that “Michael Kitces also said something along these lines…” I published the full text of your e-mail at my site so that anyone who wants to check the precise wording may do do. I have been as fair to you as I can possibly be and I will of course continue to be — I view it as critical that journalists work hard to be fair. Do I have your permission to publish the text of your new e-mail at my blog? Doing that provides you a perfect way to get your precise message out to people in the precise words that you want to use to convey it. Please just let me know and I will be sure to do that.

I am unable to make sense of your lack of alarm over the effects of the Old School studies on real live investors, Michael. We talked a bit earlier about the need to abandon the Passive Investing model now that it has been discredited. It is the sort of confusion you are pointing to in your e-mail that convinces me so strongly that the Passive Investing model simply must be abandoned if humans are ever again to make sense of the investing project. This model is rooted in confusion (the idea that it is not necessary for investors to adjust their stock allocations when prices go to dangerously high levels is obviously based on a premise that valuations do not affect long-term returns and this premise has been rejected by most of the best-informed experts in the field) and the longer we try to make sense of things without putting the discredited model behind us, the more confused things get.

You have agreed that people will suffer losses because of the Old School studies, right? That’s obviously a bad thing, right? So why don’t we all get about the business of fixing them? There are millions of people who have used these studies to plan their retirements. These retirements are at grave risk of failing in days to come in the event that stocks perform in the future anything at all as they always have in the past. Are you able to think of any possible constructive purpose served by failing to get the word out to people as quickly as this can possibly be done?

I asked you this question in one of my earler e-mails and you did indeed say in your e-mail of August 24 that: “I still feel compelled to show some respect to research implying a safe withdrawal rate that really WOULD have genuinely survived every historical scenario our markets have ever actually followed.” You have said that you respect this research, Michael, and that your respect for it holds you back from doing more to warn people of the dangers of planning a retirement by making reference to it. Is this not a fair statement?

There’s a point to which I share your respect for the Old School research. The Old School research was a big advance over what was available to us before it came along. Bernstein described it as “breakthrough research” and I share that view. But, as I noted in an earlier e-mail, humankind learns by discovering things it has gotten wrong and moving forward. We learned that the Old School studies get the SWR wrong back in May 2002 (or arguably even before that). Our failure to spread the word far and wide about the analytical errors in these studies has slowed progress on the development of New School research. Are you able to think of anyone who benefits from this delay in our Learning Together experience? I sure am not.

You note in your e-mail that the New School research is rooted in theory. This is obviously so. ALL research is rooted in theory. The Old School research is rooted in theory too. The difference is that the New School research is rooted in a perfectly reasonable theory (that the SWR changes with changes in valuations) while the Old School research is rooted in a perfectly absurd theory (that the SWR is the same for retirements beginning at wildly different valuation levels). Bernstein said that the Old School studies have “embedded” within them an assumption that the average return of 6.5 percent real applies at all times. I know that you do not believe this to be so. So it logically follows that you do not accept the theory behind the Old School research. It might be reasonable to say that the New School theory has not been proven beyond any reasonable doubt (I think it has been, but I think a case can be made that it is not entirely unreasonable to believe otherwise). Any weaknesses detected in the New School theory do not do anything to address the obvious flaws in the Old School theory. We have very good reason to believe that the New School theory proves out. We know with certainty that the Old School theory is false. Are you able to point to any sliver of evidence whatsoever that valuations have ZERO effect on long-term returns (the Old School studies make no adjustment for valuations whatsoever)?

The title of the book that I am working on is “Investing for Humans.” I am a big believer in the merit of bringing things down to the human, practical level from time to time. I have discussed the flaws of the Old School studies at numerous discussion boards. I have heard positive comment from hundreds of middle-class investors. A good number have avoided the busted retirements that are almost certainly going to follow from use of the Old School studies by taking advantage of the research done in the Retire Early and Indexing communities over the past six years. Despite all that, there are a number of Goon posters who have led a vicious Campaign of Terror against these board communities in an effort to block honest examination of the SWR topic. Honest posting has been banned at the Motley Fool site, the Early Retirement Forum, the Morningstar.com site, and the board at Bogleheads,.org. What do you make of this? I think it is fair to say that it says something very troubling about the Old School research and about the Passive Investing mindset that prompted the analytical errors made in it and that encourages an attitude of indifference to the need for publicizing those errors and what we have learned from our discovery of them.

When real live people try to determine the SWR today, they often find themselves looking at the findings of the Old School studies. These studies make zero adjustment for valuations. Do you see this as a good thing or as a very, very, very bad thing? I think it would be fair to say that that is the root question here. I obviously see it as a very, very, very bad thing. My goal in getting the Old School studies corrected is to open up the field for discussion of the New School research. I obviously have no problem with the discussion of any weaknesses identified in the New School research. I encourage this strongly. But I do think it is imperative that the New School research be widely publicized before more middle-class investors experience more busted retirements as a result of the demonstrably false claims of the Old School research.

You use the phrase “empirical fact” in connection with the Old School studies. Surely you do not mean to suggest that the Old School studies get the SWR right as a matter of “empirical fact.” I presume that you are saying that the Old School studies report the Historical SURVIVING Withdrawal Rate as a matter of empirical fact. We of course agree on this point. I am not aware of anyone ever disputing the point. Can we get past this trivial point and focus our attention on the need to warn the many people who have been taken in by the false claim that it is possible to identify the SAFE withdrawal rate without taking valuations into account? We are in agreement that this is not possible, no?

I certainly stand by my statement that your blog post will do a lot of good for a lot of people. You may recall that my initial blog post about your research described you as being half in the Old School and half in the New School. My goal is to get you entirely over to the side of the good guys!  We need you, man! If you would like to pursue this in further e-mail correspondence for publication at my blog (and at yours too, if you like), I am all for it. People need to see more of these sorts of discussions to make sense out of this critically important issue. If you would like to publish an article or research at my site, I am also happy to make my pages open to you to do so. I offered in an earlier e-mail to speak to the SWR conference that you will be moderating. It seems to me that that conference represents a great opportunity to get these ideas out before more of today’s SWR “experts” and to see how they respond. I have studied this matter in great depth. It amazes me how much trouble many incredibly smart people have grasping some issues which to me seem basic. It’s an exceedingly odd phenomenon. I have come to believe that the root problem is the confusion caused by even partial acceptance of the Passive Investing model. In any event, I am completely open to doing anything that I can to help people come to a better understanding of the underlying realities (and I of course am grateful for the learning experiences that I inevitably enjoy myself when I am graced with an opportunity to interact with people who come at these questions from a somewhat different perspective).

I do not believe that I have been even a tiny bit unfair in my descriptions of your viewpoint, Michael. However, I am completely fine with the idea of publishing both your e-mail and my response to it so that people can take a look at your own characterization of your viewpoint and decide for themselves whether I have in some way indeed been unfair or not. I would like to explore these issues with you (and with others, such as those attending the conference you will be moderating) in more depth and I will remain open to doing so at any time you believe that will be helpful. If you have particular questions about any of this, please just ask. As I noted in an earlier e-mail, John and I have done a tremendous amount of work in this area. The odds are that any questions that are concerning you today relate to points that we have examined at some earlier time.

Thanks again for all your help with this and for checking in with me again. W’e’re still working on the new calculator; I will certainly drop you a note when it is available in the event that I do not hear from you again prior to that time.

Rob

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 me on October 18.

Rob,

I wanted to touch base with you, because the following quote message board quote just came to my attention:

“Michael Kitces also said something along these lines when he said that, while he agrees that many will suffer financial losses because of the errors in the Old School studies, he does not want to warn people about them because this would be to “disrespect” these studies.”

PLEASE be more careful with how you attribute statements I have made and the context in which I made them. This is not an accurate reflection of what I have stated, nor of my beliefs themselves.

First of all, your statement about my beliefs in the value of warning people about this issue goes against both what I have written you, and what I have written publicly. For instance, my blog post last month on this issue itself (http://www.kitces.com/blog/index.php?/archives/29-Is-the-Safe-Withdrawal-Rate-too-safe-Or-too-aggressive!.html), contradicts the statement you attributed to me. I have to admit I am more than a little bit shocked and dismayed that you would say I don’t think we should warn people about these risks, especially when I took the time to specifically write you to point out this blog, and your first response was “That’s an extremely helpful and important blog post. I believe that that will do a lot of good for a lot of people.”

As for the “respect” issue itself… What I wrote to you originally was simply to acknowledge that the framework that future withdrawal rates MAY be lower because of the outsized valuations of the early 2000s is a theory. The safe withdrawal rate research that exists (a la Bengen) is based on the historical record, and is a matter of empirical fact. I believe we have to respect the empirical facts that exist, and cannot entirely throw them out for a theory that hasn’t yet been ACTUALLY tested. That doesn’t mean we can’t challenge prior research – we should, and I support that. And I’ve written about it as you have. It simply means that I don’t think it’s appropriate to say that every piece of data we ACTUALLY have should be thrown out, and that we should place 100% of our faith in a theory that has never before been tested for the valuation levels to which they are being applied. The empirical record of the past, and theoretical models for the future, should BOTH have a place in the body of research. That is all I stated to you originally about “respecting” prior research, and I most definitely did not EVER state that I believe we shouldn’t provide people information about the risks (i.e., to “warn” them), for any reason.

I appreciate your efforts in getting the word out on these issues, and I believe our views are actually quite close on many of these issues. But I would greatly appreciate it if you would be more cautious in your efforts to quote my views, especially when they contrast what I have already publicly written (my blog post came out nearly a month ago) and be especially cautious when you attribute to me motivations (like not wanting to warn people to avoid disrespecting prior research) that are not accurate and that I have never stated myself.

 Best wishes and warm regards,

– Michael

An early 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 I sent to Michael on September 24, followed by an e-mail that he sent to me later the same day.

Michael:

I forwarded your e-mail to John. He suggested that I share two additional links that relate a bit to what you are saying below:

http://www.early-retirement-planning-insights.com/HSWR50T2-Graph.html

and

http://www.early-retirement-planning-insights.com/currentresearchb.html

Make waves! Make waves! We need more wavemakers in InvestoWorld (in my humble opinion, to be sure!)!

Rob

Rob,

Thanks for passing this along! I’ll take a look!

With much thanks and warm regards,

– Michael

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

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 I sent to Michael on September 23, followed by the text of an addendum that I sent the next day.

Michael:

Your safe-withdrawal-rate project is a great idea.

You might want to take a look at the following two articles at John’s site in which he explores the use of timing strategies to enhance the safe withdrawal rate (the second article supplies the data):

http://www.early-retirement-planning-insights.com/switchingswrs.html

http://www.early-retirement-planning-insights.com/switchingswrsdata.html

Please also note that The Retirement Risk Evaluator permits exploration of two timing strategies. If you enter into the calculator today’s P/E10 level (20), an 80 percent stock allocation, a 2.0 percent TIPS (or equivalent) rate, and a 30-year percentage balance of zero, the SWR is: 3.92. If you enter the same inputs but change the allocation to Switching Strategy A, the SWR moves up to 4.69. If you use Switching Strategy B, the SWR moves up to 4.78.

With Switching Option A, the retiree uses a 25 percent stock allocation when P/E10 is above 21, moves to a 40 percent stock allocation when the P/E10 is above 11 and below 21 and moves to a 75 percent stock allocation when the P/E10 is below 11.

With Switching Option B, the retiree uses a 0 percent stock allocation when P/E10 is above 24, moves to 20 percent stocks at a P/E10 below 24, moves to 30 percent stocks at a P/E10 below 21, moves to 50 percent stocks at a P/E10 below 12, and moves to 100 percent stocks at a P/E10 below 9.

Rob

Michael:

This is an addendum to the e-mail I sent yesterday providing another link to John’s material on Switching Strategy A and Switching Strategy B and their effects on SWRs. This has two graphics comparing the switching strategies with the percentage earnings yield.

http://www.early-retirement-planning-insights.com/Switching-Graphs.html

Rob

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 I sent to Michael on September 22, followed by the text of one that Michael sent to me later the same day.

Michael:

Thanks for letting me know. That’s an extremely helpful and important blog post. I believe that that will do a lot of good for a lot of people.

I’ve posted a number of the e-mails at my blog and still have a number more to go. I was recording a podcast the other day and there was a moment that came up in which I wanted to make note of a point that you made in one of your e-mails and I was not sure that I pronounced your name correctly. I’d be grateful if you could help with that. I hate to get something like that wrong.

John and I are now at work on a fourth calculator — the Buy-and-Hold Reality Checker. The idea here is to give percentage odds of success for various investing strategies, using a valuation-informed analysis of the historical return data to assign odds to various possible outcomes. Early versions look exciting but there have been technical hangups in getting things presented properly. I’ll send you a link
when we get it finalized.

Rob

Rob,

Thanks so much for the feedback!

For your podcasting – my name is pronounced Kit’-sis. Another one of those names that didn’t get translated into English as phonetically as one might have hoped. 🙂

As for the fourth calculator – please keep me posted! I’ll be very curious to see how it comes out! I’ve already been starting to play with some follow-up research of my own applying some basic investment rules based on valuation to see if it enhances safe withdrawal rates. I’ll be very interested to see what you and John develop!

Thanks again for the great dialogue on this topic!

With warm regards,
– Michael

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!