The Ultimate Guide to Safe Withdrawal Rates – Part 12: Six reasons to be suspicious about the “Cash Cushion”

When we read about withdrawal strategies in early retirement, the cash cushion is often one crucial ingredient. Simply keep a little bit of cash sitting around on the sidelines, dig into that cash during an equity market drawdown and avoid selling equities until the next recovery. How much cash? Well, the Global Financial Crisis raged for “only” 18 months and the average garden-variety recession should last a year or even less. Thus, even if we assume that the equity market takes a little bit longer to recover it will take only very little cash and very little opportunity cost to achieve this. The whole issue of Sequence of Return Risk is solved! Who knew this was so easy? This is almost too good to be true! Well, unfortunately, it might be just that; too good to be true.

Here are our top six concerns about the cash cushion:Read More »

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The end of CAPE Fear? What happens to the Shiller CAPE ratio when we roll out the weak 2008/09 earnings?

In last week’s post on dynamic withdrawal rates, one of the withdrawal rules we actually liked quite a bit was based on the Shiller CAPE ratio. One disadvantage of any such rule: The CAPE is at a high level by historical standards, 29.30 to be precise as of this morning (March 22, 2017). Today’s CAPE-based withdrawal rates will be very stingy, only around 3% per annum.

So, what to do about our CAPE Fear? One reader recently made an interesting observation: The CAPE uses ten-year rolling S&P500 earnings. So, once we roll out the low earnings from the Global Financial Crisis (GFC) in 2008/9, average earnings should move up again and the CAPE should come down. But by how much? Probably not below 20. Still, how much of a decline in the CAPE can we realistically expect: 10%? 20%? We have to start a new Excel Spreadsheet for that. Let’s get cranking!

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The Ultimate Guide to Safe Withdrawal Rates – Part 11: Six Criteria to Grade Withdrawal Rules

After a three week hiatus from our safe withdrawal rate research, welcome back to the next installment! If you liked our work so far make sure you head over to SSRN (Social Science Research Network) and download a pdf version. It’s a free 47-page (!) pdf working paper covering parts 1 through 8:

Our SSRN working paper

But let’s move on to part 11. In our previous posts (Part 9 and Part 10), we wrote about the Guyton-Klinger dynamic withdrawal rule and why we’re not great fans. Add to that our two-month-long bashing of the static 4% rule and people may wonder:

What withdrawal rule do we like?

True, we proposed a lower initial withdrawal rate (3.25-3.50% depending on future Social Security income), but that’s just the starting point. We have written here and elsewhere that this withdrawal rate is not set in stone. How do we go about adjusting the withdrawals in the future? How did different dynamic withdrawal rules perform in the past? How do we even measure how much we like a withdrawal rate rule? Today, we like to take a step back and gather a list of criteria by which we like to evaluate different (dynamic) withdrawal rules. Then simulate a bunch of withdrawal rules and assign grades.Read More »

Happy Birthday, Bull Market!

If you’re waiting for part 11 of the Safe Withdrawal Rate series, please be patient. It’s scheduled for next week and will dive deeper into variable withdrawal rate rules! For this week we have some other pressing business because tomorrow will be the eighth birthday of a very good friend of ours:

The Bull Market that started on March 9, 2009.

Almost eight years ago to the day we saw the trough of the stock market during the Global Financial Crisis when the S&P500 index closed at 676.53 and the Dow Jones Industrial at 6,547.05. The intra-day low on March 6 was even a bit lower – the very ominous 666 points in the S&P500. Everyone pretty much thought the world would end soon!

wsj-screenshot-2009-03-09
Screenshot from the WSJ.com on March 9, 2009: The Dow Jones hit a low (6,547.05) on March 9, 2009, and some pundits warned of a fall all the way to 4,000!

How bad was the March 2009 trough?

  • From its previous high in October 2007, the S&P 500 index fell by almost 57% and even with dividends reinvested the drop was a still staggering 55%.
  • This drop was even more severe and at a faster pace than the Dot-Com bust in the early 2000s, which was “only” a 49% drop over 2.5 years!
  • In March 2009, the S&P500 fell all the way back to its September 1996 (!) level, so it wiped out 12 years worth of equity gains.
BullMarketChart1996-2017
S&P500 index 1996-2017: What a ride!

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An addition to the ERN family portfolio: Preferred Stocks

Last year in December we noticed that one of our Municipal Bond mutual funds had short-term losses. That’s not a huge surprise after the post-election bond yield surge and hence it was time to harvest those losses. If you’re not familiar with Tax Loss Harvesting, we wrote two earlier posts on the topic, one dealing with the general concept and one dealing with the implementation. In any case, after we sold the underwater tax lots, where do we put the money? For 30 days we can’t invest in the same fund (or different fund with identical benchmark) or we’d run afoul with the IRS wash-sale rule. There was one asset class that we had never owned but had definitely been on our radar screen for a while. Finally, we took the plunge and invested in… drumroll …

Preferred Stocks!Read More »