Raddr's Early Retirement and Financial Strategy Board

[wanderer]

I'll be updating my spreadsheet soon with the 75:25 mix of S&P500:FI (4% inflation-adjusted withdrawals) that was widely touted as being "safe" in 2000. The numbers will be much uglier than those Ben cited above. This portfolio is doomed to failure, probably quicker than any in history.

The folks who touted that are as unapologetic as the sleaziest corporate bail out scam artiste.

[raddr]

Well here's the Y2K Retiree update for 2008. It ain't pretty:



In constant 2000 dollars the initial $1M portfolio has eroded to $382K and our retiree is now in a position of having to withdraw over 10% of that amount in order to keep living on a 4%/yr inflation-adjusted withdrawal rate.

I ran a historical comparison on firecalc and found that this portfolio in year 9 has the third lowest balance of any since 1871. Not only that, just as importantly, valuations now are at best only in line with historical norms with regard to PE10 and still overvalued with regard to dividend yield. In the past the portfolios that ran into trouble during the first 9 years could count on low, bargain-basement valuations at the end of the bear market to resuscitate their portfolios. But this is not the case for the hapless Y2K retiree who bought the safety argument for a stock-heavy S&P500-based portfolio in the heady days of the dawning of the new millenium. Clearly, this portfolio is in huge trouble and it would take a miracle to make it the full 30 years before failure. Hopefully our poor retiree can develop a taste for cat food in the near future.
_________________
"I brew therefore I am."
-raddr

[james22]

[raddr]

[ataloss]

ouch!
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Ataloss


Have Fun

[DRiP Guy]

[Rodmail]

There is a saying about random processes that describes that which is truly random and that which is not:

"The dice have no memory."

They don't know you rolled a 7 fifteen times in a row. The odds of a 7 are the same each time.

The Firecalc concept differs from typical (not all) Monte Carlo in precisely this way. We presume the markets have memory and therefore are not random. Or we presume the markets reflect something or other beyond human whim . . . and therefore are not random.

Overall we have a ton of reasons why we presume the markets are not random. Lucky us.

Anyway, I did a Firecalc run for this guy with a 21 years-til-death duration at $492,000 (2008 vintage) initial total and withdrawing $51,000 (2008 vintage) year 1 of the 21 remaining. Here's what he gets with $0 SS, $0 Medicare, no other dollars coming in, 5 year gov't bonds for FI and 3%/yr inflation.

70/30
10% success

50/50
0% success

30/70
0% success

He has to go to 100% stocks to get to 20% success odds.

Resume time for this guy.

[raddr]

[DRiP Guy]

Ouch.

Hey, I did say that $5 was going to be paid in 2008 dollars, not inflation-corrected dollars upon failure, right?!

[raddr]

[wanderer]

And finally, this may be a little late to post an objection, but back to the original post-starter - -was this really being touted as "100% safe" on some boards? While not doubting the point, I'd love to have a link to a reference of such an absolutist statement. It certainly seems rash now, and hopefully would have appeared so at the time as well, since I believe Trinity, the initial study in this now burgeoning area, was looking at a 95% confidence level, no?

Hey Drip Guy,

That was definitely the tenor of the first 30k-40k of the posts at the REHP on TMF. I would be astonished if one didn't come away from the discussions there with the conclusion that the 'data' supported a 4% withdrawal rate at 75 or more(!)/25 allocation. As I recall, there were quite a few 'thank yous' to the provider of that advice. Dunno what those folks say now... Maybe, 'Did you get the number of that asteroid?'

[raddr]

[Rodmail]

[raddr]

[snowback96]

Obviously 75% equity was too high in Y2K. It may even be too high now (although I doubt it). I recently saw a study (by Michael Kitces?) that used PE10 as a guide to the appropriate SWR and equity allocation (e.g. low PE10 = higher equity and/or higher SWR). I found it an interesting read and following that advice might have lessened the odds of a Y2K FIRE disaster. It got me thinking about more sophisticated methods than the arbitrary 4% SWR regardless of valuation levels.

So here's my question: Has anybody looked at using dividend yield as a guide for SWR in either an all equity (or high equity) portfolio? In other words, current dividend yield on S&P is ~2.8%, global markets somewhat higher, so let's say the current dividend yield on an all equity portfolio (after expenses) is ~3%. Would a 3% SWR be virtually bullet proof today?

[For example, using the dividend yield method, our Y2k friend would have only been able to retire safely at ~1% withdrawal given the low yields on the S&P at the time. And probably closer to 2% with a mix of other equity asset classes. This method would almost certainly have kept the sorry sap working for a few more years.]

Has there ever been a point in time where retiring with high equity and a W/D rate equal to dividend yield (at the date of retirement) would have failed? (W/D's are adjusted for inflation of course.) Surely somebody has has looked at this.

p.s. Happy new year!
_________________
Bob Porter: Looks like you've been missing a lot of work lately.
Peter Gibbons: I wouldn't say I've been missing it, Bob!