March 25, 2020
In my post last week, I looked at how the 2020 Bear Market will impact folks saving for (early) retirement. But I deferred my recommendations on how current retirees will optimally adjust to the new realities. So, here we go, a new installment of the Safe Withdrawal Series, now 37 posts strong!
Nothing I write here today should be shocking news to people who have read the other 36 parts, but having it all summarized in one place plus some new simulations and perspectives is certainly a worthwhile exercise. In a nutshell, I argue that if you’ve done your homework before you retired, not even a bear market, not even this bear market will derail your retirement. Depending on what approach people chose, some retirees might even increase their spending target now.
Let’s take a look…
Recap: How bad is the current bear market for retirees?
I know that the S&P 500 daily all-time high occurred on February 19, 2020, but looking at the month-end values, just as I do in my withdrawal rate simulations, the stock market peak was actually on 12/31/2019. Since then, the market dropped by about 30% to the low-point on March 23, and about 25% to yesterday’s closing on March 24.
If you heeded my advice here on the blog and kept some bonds for diversification you should have significantly cushioned the fall. But not all bonds are created equal. In the chart below, I plot the performance of a few fixed-income ETFs:
- Intermediate Treasury Bonds (e.g., the iShares IEF ETF). This is the asset class that I use as my bond allocation in all of my simulations.
- The U.S. total bond market (e.g., the BND ETFs). This is the index of all U.S. Treasury bonds (all maturities) plus investment-grade corporate bonds. (Side note: Investment Grade = Credit Ratings AAA all the way through BBB)
- U.S. Investment-Grade corporate bonds (e.g. the LQD ETF). Drop the government bonds and concentrate on corporate bonds, but again only the higher-grade bonds.
- U.S. High-Yield Bonds a.k.a. Junk Bonds (e.g. the HYG ETF). Instead of the investment-grade, use the lower-rated bonds with a higher yield but also more risk. Credit Rating BB and below!
- U.S. Preferred Shares (e.g. the PFF ETF). Not exactly bonds. Much riskier but also potentially much higher yields than a bond!
- I also added the S&P 500 index ETF (iShares IVV) for comparison.
I was surprised about badly the non-Treasury ETFs performed. Not a pretty picture, especially the major nosedive in March. In March, most of the riskier bond ETFs are down roughly by the same percentage as the equity index. Not much diversification from LQD, HYG and PFF in March!
So, let’s look at how a 75/25 portfolio would have performed year-to-date through March 24, see the chart below. Not a big surprise here, the more risk you took with your fixed-income allocation the worse your performance. I also distinguished between rebalancing vs. not rebalancing, and you can clearly see that rebalancing would have slightly hurt you when equities keep going down and IEF keeps going up, i.e., you shift money from Treasurys with positive momentum to equities with negative momentum.
Also, the charts didn’t consider withdrawals yet, so a retiree who started withdrawing money on 12/31, 1/31 and 2/29 would be looking at about an additional drop of about one percentage point!
In any case, if you had kept enough safe Treasury Bonds in your portfolio then the drop in the portfolio still looks OK. If you had replaced too much of the safe assets with higher-yielding assets you could have lost a lot more. But remember, when I debunked the infamous”Yield Shield” approach I very explicitly warned of chasing after higher ETF yields, especially on the fixed income side:
“[T]he three bond alternatives to the low-yielding IEF all have higher correlations with the equity indexes. Not only that, moving to higher and higher yields (IEF to [BND] to LQD to PFF) you increase the equity correlation in exactly that order!” (Part 29)
“We can say with near-certainty that the fixed-income portion of your portfolio will behave very similarly to the 2008/9 episode once the next big bad bear market comes along. In other words, in the next big recession, higher-yielding corporate bonds will underperform the safe and low(er)-yielding government bonds.” (Part 30)
“The fixed income recommendations of the Yield Shield are just plain bad. The credit premium that gives you the higher yield will backfire in a bear market because this is essentially backdoor equity beta.” (Part 31)
So, how would a retiree who had the misfortune to retire on 12/31/2019 have fared in this bear market? That depends on how they approached their retirement. Let’s take a look at several methods:
Method 1: Fail-safe withdrawals based on historical simulations
Let’s go through a simple numerical example to be used in the Google Sheet as introduced in Part 28.
- A $2,000,000 initial portfolio, 75% Stocks, 25% Bonds (Interm. U.S. Treasury)
- A 30-year horizon
- The retiree plans to have one quarter ($500,000) of the initial capital at the end of the horizon (in real, CPI-adjusted $!!!)
- No additional supplemental cash flows for the duration of the 30 years
The reason I like this example is that it’s a nice generic example for both traditional and early retirees. You might be a traditional retiree at age 65 and plan to supplement your Social Security and pension with your portfolio over the next 30 years and plan to leave a small bequest to your kids. Or you might be an early retiree at age 40, and you try to bridge the 30 years until you receive (full) Social Security benefits and pensions, so you plan to have 25% of the initial capital left at that time.
To implement this into the Google Sheet, here are the parameters in the main sheet
And here are the results, specifically, the historical fail-safe withdrawal rates (by decade):
It looks like the 4% was not safe in this example. 3.58% was the true safe withdrawal rate that survived even for the worst historical retirement cohorts (i.e., September 1929 and the mid-to-late-1960s).
If we now assume you had used this very, very conservative withdrawal rate, where would you stand on March 24? Here’s the calculation, see the table below. Wow, this bear market did a trick on the portfolio. It’s down by $350k or about 17.5% in real terms.
If you keep withdrawing that same retirement budget of 3.58% of the initial amount this now represents a 4.33% annual withdrawal rate relative to the 03/24/2020 portfolio value. Whoa, danger zone! We’re withdrawing more than 4%! A 4.33% withdrawal rate had a historical 13.6% failure rate!
But is that so bad? Do we really have to reset our withdrawal amount to 3.58% of that new $1,651,856 portfolio value on March 24, 2020? That’s $4,928 per month, more than $1,000 lower than the initial withdrawal.
Fortunately, that’s a fallacy. So, I like to go back to my Google Sheet and now recalculate my withdrawal analysis for someone who has a $1.65m portfolio, a 357-month horizon, a $500k final asset target, and the same 75/25 asset allocation. Notice that the final asset target is now a bit larger than 25% because 500/1,652=30.3%!
So, I punch in those parameters into my Google Sheet and now look at the Fail-Safe withdrawal rates. But after this steep equity drop we don’t look at the overall fail-safe rate, but conditional on the equity market having dropped 24% since the peak. Then, not only is the current effective WR of 4.33% safe in the historical simulations. You could even increase the withdrawals to 4.52%, or about $6,222 per month. That’s 4% above the initial withdrawal amount. How is that possible? Very simple, if you calibrate your initial withdrawal rate to the historically worst-case scenario, then as long as the current market conditions don’t reach the depths of the 1930s or 1970s, you can slowly move up your withdrawals.
So, the lesson here is that the 4% Rule fails only if we’re at or very close to the equity market peak. After we’ve already fallen by 20+% we can be a lot more generous with our safe withdrawal rates. Historically, you can use withdrawal rates well in excess of 4% if the stock market is down as much as today!
Method 2: The naive 4% Rule (and scary “5% Rule and crazy 7% Rule)
Sometimes it’s instructional to go through an example illustrating how not to do it. Let’s assume you’d never heard of my blog and you had just followed the naive 4% Rule. Or the really bad advice out there from the personal finance clowns advocating that you can use even a 5% or even 7% initial withdrawal rate “if you’re really flexible.” Let’s study how that would have worked out for the 12/31/2019 retiree, see the table below.
- Not surprisingly, the portfolio values differ by only a few thousand dollars because there were only 3 withdrawals so far in December, January and February.
- But there is a big difference in the current effective withdrawal rates. Your 4%, 5% and 7% initial withdrawal rates have now grown to 4.85%, 6.08% and 8.55% as of late March.
- If you were to recompute the withdrawal analysis now (using a horizon of 357 months and an unchanged $500k final asset target) then those new effective withdrawal rates would have some pretty hard to digest failure probabilities in historical simulations: about 11%, 52% and 82% failure rates. (and yes, these failure probabilities already take into account the equity drawdown. The unconditional failure probabilities would have been significantly larger!)
- If you now wanted to adjust to the new realities and pick the historical fail-safe withdrawal rate calibrated to today you’d have to lower the withdrawal amounts by between 7% and 47%. Not everybody will be flexible enough to do that! Though, tightening the belt by 7% seems doable, so the naive 4% Rule wasn’t that bad. But belt-tightening under the scary 5% Rule and crazy 7% Rule will be harder to stomach.
Method 3: Sustainable withdrawal rates based on the Shiller CAPE
If you remember Part 18, I illustrated why I’m really intrigued by CAPE-based withdrawal rules. Let’s go through a simple example with one such rule, where we set the withdrawal rate to a+b/CAPE and a=1.5% and b=0.5. I’ve previously even advocated more aggressive rules with a=1.75%, but let’s be a little bit more cautious for this example.
So, every month-end we look at the CAPE and calculate a “provisional” withdrawal rate. For example on 12/31/2019, the CAPE was 30.85 and thus the SWR was:
CAPE-SWR = 0.015 + (0.5 / 30.85) = .0312 = 3.12%
Provisional because the CAPE withdrawal rates are calibrated to target capital preservation, while in this example we’re happy to deplete 75% of the capital. To translate the capital-preservation WR to a capital-depletion WR we do a simple calculation, very similar to the Bogelheads VPW approach. In Excel, we use the PMT function to compute the monthly withdrawal with capital depletion as:
Which is just above $7,700 a month on 12/31/2019 or 4.62% of the initial capital. Then you iterate this forward with the changing portfolio values and CAPE ratios, and also a shrinking horizon (though shortening the horizon from 360 to 359 and 358 and 357 months makes very little difference). The results are below:
- Even though the portfolio drops by a total of 17.6%, the monthly withdrawals drop by 11.6%, so significantly less than one-for-one. About 0.65% for every 1% in the portfolio drop.
- Again, the reason is the higher expected portfolio return in light of more attractive equity valuations after the large drop that brings equity multiples more in line with historical averages.
So, in a nutshell, if you use the CAPE-based rule your portfolio took a hit, but because of the lower CAPE ratio and thus the increased equity expected return you can now withdraw a larger percentage. A larger percentage of a smaller portfolio will still work out to be a net cut in your retirement budget. So the CAPE-rule does require a certain degree of flexibility. It’s because the CAPE-based withdrawal rate is calibrated not to the worst-case scenario, but the average-case scenario. So, you can afford a higher initial withdrawal rate than the fail-safe but you also have significant downside risk. It’s for the more flexible retiree!
Is now the time for retirees to shift to 100% equities?
This is a question I’ve gotten several times now via email. The idea here is that, if you’re sitting on a nice big fat bond cushion now, say 25-40% of your portfolio, wouldn’t it be tempting to shift those bonds into stocks now that the market is so beaten down? I don’t blame you for an itchy trigger finger. If the worst is over and this current 24% drop is all we have to suffer and the market will recover soon, then maybe now is the perfect opportunity to time the market.
A word of caution, though. If we look back at previous bear markets, the initial drop is rarely the trough of the bear market! Case in point the 2000 stock market peak and the bear market that followed. In the chart below, notice how the trough was not reached until late 2002. There was even a point in the spring of 2003, 2.5 years(!!!) after the start of the bear market, where it looked like we’re going hit another low point. In other words, even the post-9/11 panic selling was not the trough. The uncertainty about the weak recovery and talk about a “double-dip” recession caused further declines even worse than 9/11!
Will there ever be a good time to go all-in? Let’s plot the historical fail-safe withdrawal rates for the numerical example above (360-month horizon, 25% final asset target) for different asset allocations (75/25, 90/10, 100/0) as a function of where the S&P 500 sits relative to its recent all-time-high. It turns out that historically, 75/25 still performed better unless the S&P500 was more than 50% below its recent peak. Even then, you’d prefer a 90/10 over a 100/0.
In summary, I don’t want to hold you back when you think this is a great market timing opportunity. Maybe you’re a U.S. senator with inside information and you know things will turn around soon. Make sure you share your info from your secret Senate meeting with your old buddy Big Ern! Use a prepaid phone, though! 🙂
But for everyone else, this could backfire! Even with the nice bounce in the stock market on March 24, there’s no guarantee that we’re out of the woods yet! There have been too many false rebound signals in history!
Clarification (3/25/2020, 8:15 AM PDT): This analysis is for retirees. I’ve pretty consistently advocated for retirement savers to be at or close to 100% equities. If you’re still saving for retirement and you shift into 100% stocks now, sure you also face the risk of a renewed meltdown. But savers would then Dollar-Cost-Average. Retirees would face Sequence Risk. So, in summary: for savers, 100% can work pretty well, for retirees 100% equities seems way too risky!!!
Talking about 100% equities…
While we’re at it, here’s a quick additional word about 100% equities in retirement. I know that many of my fellow FIRE bloggers maintain a 100% equity allocation in retirement. For everyone who retired, say, 5 years ago, that turned out to be a great decision in hindsight. Even with the big drop so far, you will still be far ahead of someone who kept a more conservative allocation. Congrats and good for you. You deserve the extra money as compensation for the volatility we’ve been through. But please don’t advertise this as something that other retirees should replicate! Maybe put this disclaimer on your blog:
Disclaimer: I’m what you call a professional personal finance blogger. If you don’t have income from a blog and/or from your spouse’s six-figure income you probably don’t want to try this 100% equity allocation in retirement yourself!
The reason is that your blog and/or your spouse’s income is effectively like a bond allocation. If you were to call the sum of those discounted cash flows an implicit bond allocation you’re no longer at 100% equities. You might be down to 50% equities! In contrast, for people who are fully retired – both spouses – and who don’t have a blog or podcast, or other income, going through this Bear Market with 100% equities is really downright irresponsible!
Oh, and by the way, just to clear up any ambiguities: Personally, I can’t live off my blog income alone. Advertising and affiliate income generate about 10% of our retirement budget. Even if I could fund my entire retirement from my blog income, I would never recommend my readers to hold 100% equities.
If you’ve planned your retirement well, there’s nothing to worry about (yet). If you tailored your withdrawal strategy to withstand the worst market events in history then as long as the current Bear Market is not getting worse than, say, the Great Depression or the 1970s then you should be OK. In fact, quite the opposite, if 2020 turns out to be less dramatic (depth and length!) than the Great Depression and the 1970s, you’ll likely be able to walk up(!!!) your withdrawal amounts once the dust settles. In contrast, if you were careless and listened to some crazy advice about how you should just wing it with a 5% or even 7% withdrawal rate, then, good luck winging it! (not that I believe any readers here fall into that category!)
And yeah, I know, some people will argue that this could be worse than the Great Depression. We will certainly see some ghastly Q2 GDP numbers. But the Great Depression took more than a decade to recover. This will hopefully be a temporary disruption in 2020 with a decent restart, maybe as early the second half of 2020.
Hang in there, everybody and stay healthy!
Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!
Title Picture Source: Pixabay.com
99 thoughts on “Dealing with a Bear Market in Retirement – SWR Series Part 37”
Another great piece in a fantastic series. Thank you so much!
Thanks, Jon! 🙂
Most of the articles/blog posts I see talk about recovery periods following bear markets for the S&P 500. How do recovery periods differ for portfolios that contain globally diversified equity components together with Treasuries in a fixed income component, say a 60/40 or 50/50 split? Seems like that would be more useful information for the average retiree. Thanks
The drop is cushioned with Treasurys. But the recovery is also slower with a 60/40 or 50/50 once interest rates go up and bond returns are low.
You can compare different allocation easily and specify your own preferred allocation on:https://www.portfoliovisualizer.com/
There’s considerable co-movement in international stocks on the way DOWN:
In the recovery period, there’s considerable variation and thus diversification potential. Post 2001, international stocks helped you. Post 2009, international stocks were an unmitigated disaster. It remains to be seen how this recovery will work out.
What do you recommend for asset allocation for the early retiree? I know the basic equities/bond glidepath is a good one but I believe you also have RE and Derivatives trading.
My personal allocation is 51% stocks, 36% options, 11% RE, 2% cash. That worked really well for me since retiring. I recommend the 2 exotic asset classes to everyone who’s listening. But put shorting is only appropriate if you’re math-savvy and you practiced it a little bit. 🙂
Do you recommend or use the glidepath with treasuries or any bond component?
I simulated them with Treasurys. If using corporate bonds, keep in mind that a $100 corporate bond can easily count as a 25-50% stock plus 75-50% Treasury, form a risk perspective!
From what I read in your SWR series, it seems like a glidepath is a good thing to do. Is this something you would recommend?
I don’t see it in your own asset allocation. I hope you don’t take it the wrong way. I’m just trying to inform my own asset allocation decisions and I find you the be the best public writer on this topic.
For retirees it’s best to start with a higher bond share and then slowly shift back, yes.
I have a different asset allocation from most people. I would argue that with 10+% real estate and 36% put writing with relatively stable income and with less exposure to sequence risk, I can get away with my allocation.
If people are completely passive investors, Jim Collins/Jack Bogle disciples, then the glidepath would be best.
I see! That makes sense.
Not a US senator but personally I fell this will get a lot worse including we might encounter some level of depression.
Love the other withdrawal methods but not a fan of the CAPE ratio. It is hard to calculate CAPE when E is unknown and has fallen off a cliff.
Personally while everyone is focused on the stock market; the craziness in the bond market was worrying. I remember when we broke the buck during the financial crisis. But watching a large fund like BND trade at a discount to the underlying was worrying. Imagine if the Fed had not stepped in….Phew
Good point. I doubt the depression will happen just because there’s likely a time constraint when this will be over, while in the Great Depression there was a sense of helplessness from not knowing how long this will last.
Yeah, crazy bond market. Very illiquid market for physical bonds and that spilled over in to the ETF market.
I think that’s less of a problem and more of a “functioning as designed” issue. If earnings fall off a cliff, the very high resulting CAPE10 would predict low expected yield, and the corresponding yield-derived withdrawal rate would drop, pretty much as one would hope.
Problems if E goes to zero, of course. Probably it would be sensible to nominate a maximum value for E if that happens… 40? Something like that.
EPS will go lower. That’s why the CAPE uses a 10-year rolling average. It’s not even clear that 10-year rolling real EPS will drop now beacuse we’re still replacing the very low 2010 figures.
Big ERN, you’re a really smart guy. You know that, right?
Just a thought about “when to buy in”. I’ve established a personal guideline of buying stocks equal to 1-2% of my Net Worth (selling bonds/cash) with every 5% downward hurdle in the market. I was at 50% Equity on 12/31 with plenty of dry powder (<2 years into retirement, conservative portfolio to mitigate Sequence of Return Risk, and now glad I took that approach). Also, I got cut trying to catch the falling knife too early in 2008. This "new" approach seems to be working well with this downturn, curious what you think about the approach?
Hi Fritz: Excellent question for ERN. My situation is pretty similar to yours, and my own enhancement to your personal guideline for buying stocks is to sell smaller parts of my net worth at lower downward drops (e.g. at 5% and 10%) and gradually ramp up size of purchase as the downward hurdles are more extreme (25%, 30%) and especially ramp up size of purchase if we get to 40%, 45%, 50% downward drops. The overall effect of buying is similar to yours with about a 15% total of my portfolio rebalanced from 10 Y US treasury bonds to broad stock indexes if there is a total drop of 50%. (This approach will be more conservative (lower purchase levels for lower equity reduction levels) than yours Fritz, but would solve your 2008 “too early” move (I did not make this error in 2008, I made a worse one of being frozen in place. 😊 ) ).
ERN: what do you think/calculate?
Mex-Tex, I’ve been doing larger buys the deeper it goes, starting at 1% and upping it to 2% on my last two tranches. I didn’t want to wait too long in the event it ended up being a quick bounce like most viruses have been. I’m happy with the approach, may increase to 3% if I hit the next 5% tranche.
Well, again, most retirees have no futher money to buy except through rebalancing and glidepaths. I generally support the idea of some light “market timing” a la Fritz when there’s blood in the street. But cautious: the initial drop is rarely the bottom. But at -33% from the peak as on Monday this week it looked like a good opportunity to dip your toes. 🙂
Also drained all my dry powder too quickly in 2008. Drained all my spare cash by around the 20-25% drop back then. This time around, I have more dry powder and am taking a similar approach.
But I am spooked that I kept that dry powder “cash” in an ultra-short term bond ETF that also dropped (but only 5%). Was that a mistake? Any thoughts from anyone on the best place to keep dry powder cash that is ready to buy more equities if the knife falls further?
Wow, what ETF is that? I presume corporate bonds. Yeah, it shows that everything is hurting if it’s not U.S. Treausry Bonds/Bills. In hindsight a mistake. But it was hard to know that in advance.
Well, 5% down and then shift to stocks at 20% down is still almost as good as 0% and shifting to 20% down.
Thanks Fritz! Glad to hear to fraom you! 🙂
What you’re doing is probably observationally equivlant to an “active grlidepath” (parts 19, 20), i.e., shifting over to stocks when stocks drop.
Also notice that even with a fixed asset allocation, just the rebalancing will already move the AA. Example:
Start with 50/50.
Equities down 10%, bonds up 2%.
New allocation $45/$51.
By simply rebalancing to a 50%/50% this would mean $48/$48, so a $3 shift from bonds to stocks, simply due to the rebalance. Then maybe a little bit more from the active GP and you’re at 4% shift. 4% shift after a 10% = 2% shift after a 5% drop like the upper end of your ratio. 🙂
Big ERN, I’m curious what you now think of future returns. For back of the envelope calculations, I’ve always used 4% real returns, based on all the warnings that returns will be lower with such high valuations. Is now the time to start assuming 5%?
My rule of thumb: 1/CAPE is the real return. Currently about 23, so you’re right between 4 and 5%.
Thanks for another great post. I’m thinking about my parents and in-laws who are unsophisticated investors on the door step of retirement with 401(k)s that are 100% in target date funds. Vanguard 2020 is 50/50 stocks/bonds and Vanguard 2025 is 60/40 stock/bonds.
Are broad bond market index funds even a good idea any more? Given such low interest rates and the risk of the 40-year tail-wind on bond prices potentially coming to an end, bonds seem to have little upside going forward and risk of prolonged downside. Should cash (even at a lower interest rate) be a better option? Like 60% stocks and 40% cash?
Your historical simulations will show bonds to have been beneficial. Would be interested in discussion on whether owning bonds or some alternative (cash or other) to be more beneficial going forward.
ERN another insightful analysis!
At first I was confused about the calculation of a provisional withdraw rate based on CAPE.
The equation 1.5% + 0.5/30.85=3.12% is confusing in that it mixes percentages and real numbers.
I would propose that it would be more clear to write the equation with only real numbers. ie convert the percentages to decimal fractions.
0.015 + (0.5 / 30.85) = .0312
with simplified yields..
0.015 + 0.0162 = .0312
Then convert the result .0312 to percentages (.0312 x 100%) = 3.12%.
As an retired engineer I actually “do the math” as I read your posts.
Thanks again for the service you provide to the FI community.
It is actually easier and clearer if the author always expresses his units. This is something most other engineering disciplines do well.
1.5% + 0.5 * 1%/30.85
This preserves the information that the intercept constant and expected yield are percentages and 0.5 is a unitless constant.
Changed that. Hope this looks more proper now to the engineers! 🙂
Cash/money market is almost the worst of all worlds: lower yields and no correlation with stocks (as opposed to <0 correlation between bonds and stocks).
The GP in TDF is probably OK for people approaching (traditional) retirement. But the problem with TDFs: in retirement they go even further out of stocks. This exacerbates Sequence Risk. Best to shift to a static 50/50 or 60/40 allocation in retirement (if no tax consequences, i.e., easy to do in 401k. Not so easy in taxable)
Never underestimate the value of an investment policy statement to keep emotion and market-timing tendencies out of the equation.
If in the accumulation phase, keep making those bi-weekly purchases (assuming the emergency fund is in place). Similarly, if in decumulation phase, stick with the scheduled rebalance activities if applicable (quarterly, annual, etc.).
ERN, two questions:
-From time to time treasuries correlate with equities and move in tandem. While this may occur during the short term (eg: for a few days) is there any precedence for this happening for an extended time period?
-Many online high-held savings accounts offer interest rates in excess of the 3mo t-bill. In fact, some are even offering more than the 30y bond! At face value the practice seems unsustainable. However, after talking to some of them they flat out said they have no intention of lowering the rate anytime soon. What tools are the banks using that enable them to continue paying these rates on FDIC-insured cash deposits?
Of course waiting for ERN for the expert response. But in the case of my credit union (s) I assume it is because they are lending the money out for mortgages, car loans, and home equity loans at an even higher rate. Pay 1.75%. Lend at 3.5%. Nice profit!
Pulling on this thread a little more…
For institutions that originate and hold mortgages while earning the spread such as “savings and loan” banks, does this mean they operate similarly to AGNC and NLY (hold massive portfolios of highly leveraged mortgage-backed securities that are federally guaranteed by Freddie / Fannie) but at a smaller scale? I know the banks are federally backed as an institution whereas mREIT companies such as AGNC and NLY are not (but their agency mortgage assets are).
My understanding is that big-box banks such as Chase, Wellsfargo, etc. originate then sell their mortgages, hence why the origination charges are substantially higher at those institutions vs places that don’t sell the note. In other words, big box banks make their money selling “points” to lower the interest rate and from outsized origination charges (2.5k-4k) while S&L banks make their money by holding the note and earning the spread (origination charge of ~$295)
Yeah, that too. Banks are not really in the business of lending anymore, but more in facilitating. There’s still some business line of credit lending there, hence my reference to the prime+x. But a lot of the traditional lending immidiately sold/securitized. 🙂
Yup! That;s what I thought too! 🙂
Yeah, that IPS is essential. Lots of people might have overreacted to this mess.
And, yes, if you’re still accumulating, Sequence Risk might work in your favor (dollar cost averaging), so keep contributing!
Bonds and Stocks had painfully high positive correlations in the 1970s, early 80s. Until a while ago, many people believed that this can happen again. Probably, that scenario is off the table. This shock will likely be deflationary.
Banks can still lend at prime (3.25%) and prime+x. But you’re right, generally banks are hurting from the low rates.
This is an interesting perspective because it is so counterintuitive. Does the “conditional” rate assume that the history we have to work with basically has included the “worst case”? If so, what would be the basis for that assumption?
A typical Monte Carlo simulation (where each return is independent) would suggest that the risk of failure goes up after the market drop (see e.g., recent article by Michael Finke https://www.advisorperspectives.com/articles/2020/03/23/how-financial-plans-must-adapt-to-market-crashes).
A “reversion to the mean” rule (maybe like the CAPE rule) relaxes the independence assumption. But the “conditional” rate seems to go beyond that. Have you discussed the thinking behind this in a prior post? For example, what withdrawal rate would one have used when the portfolio was previously at $1.65MM (maybe sometime in 2017) conditional or non-conditional?
Thanks as always for thought-provoking content.
I find Monte Carlo simulation useless because of exactly that problem. It doesn’t take into account valuation. The stock market is no Random Walk, see this post:
Thanks again for another great post!
You mentioned above that you would never recommend 100% equities, but I thought your post (#19) on equity glidepaths recommended eventually gliding to 100% equities. I’m sure I am just misunderstanding something, but I’d love to clear things up since my plan was to glide from 60% to 100% equities in 0.4% steps.
Perhaps you simply meant you would never recommend a static 100% equity allocation, but a glidepath to 100% is ok and even better than a 75%/25% static allocation according to the table in post 19?
Right. 100% all throughout the 30-year retirement is suboptimal. The 100% on a glidepath is reached after made it through the intial (dangerous) period.
I doubt that most retirees will even go that far. They see after 10 years into retirement that their situation looks OK and they can afford the peace of mind because they have enough.
But some retirees who see a beaten-down portfolio after 10 years and low CAPE ratios might have no choice but to roll the dice and do 100% equities to recover the losses.
I was planning on retiring early this June, and based on your lengthy analyses of sequence of return risk, I had pared down to a 60/40 stock/bond split, with an additional cash account (so maybe more like 55/45 if you count the cash as a low yield bond). Needless to say, I am very glad I did, and I am very grateful for your advice and conservative analyses. Hopefully this means just one extra year of work for me, but we will see. If you ever find yourself coming up to Seattle, I will buy you a beer!
Thanks, Sean. Likewise, stop by if you’re in the Vancouver, WA area!
ERN: another insightful and very timely post. You are not only smart, well trained and experienced, but also very generous of your knowledge and time (I know this must take many hours to create and calculate). For all you will do in the future, “Gracias de antemano” (Thanking you beforehand).
A question: you cover 75%/25% stock/bond mix in depth in the article (and also 90/10 and 100/0 in the last section). In general, does a 60/40 mix strategy and conclusions differ much from the 75/25 mix? Is there a simple rule of thumb we can apply to extrapolate the 75/25 results to the 60/40?
[I ask about 60/40 since this is: 1) close to your personal effective mix per your comment on a very recent post, and 2) because in your glide path article (SWR 28 & 29 if I recall correctly) the optimal approach was a 60/40 stock/bond mix rising to at least 80/20 over about a decade or so into retirement.]
Fixing an error in my comment above, you discuss Glide Paths in SWR 19 (not in SWR 28 & 29) .
And I can’t wait to see your (ERN’s) replies to the great questions in the above comments. The mix of your great posts, plus excellent comments & questions of your readers combined with your (ERN’s) response makes for an optimal reading and learning experience mix (pun intended 🙂 )
What works best depends on what you try to optimize. I tried to balance the risk from a supply side (1970s) vs. demand side recession (Great Depression) and the 75/25 seemed to work well in both. 60/40 works better in Great Depression, but not so well in 1970s.
Hi ERN, thanks so much from an almost retiree (age 64). I note that on http://www.multpl.com that the Jan. 1, 1966 CAPE was ~24, and today’s March 25, 2020 CAPE is also ~24. Now Treasuries yielded more then, but the real yield was i believe low going forward then because of the high inflation rate during the late 1960s and all of the1970s. So if 10-yr treasuries return to their recent nominal yield of ~2.00%, and with today’s inflation ~2.00%, or if real bond yields become similar to late 1960s, 1970s, then today’s treasuries real yield would be similar to Jan. 1, 1966. This data similarity in valuations between Jan. 1, 1966 and March 54, 2020, supports being able to use a 3.50 – 4.00% SWR and still have portfolio survive 30+ years.
1: the CAPE now is a little less scary now due to different accounting rules, higher profit retention, etc., so keep that in mind. A CAPE of 24 today is maybe only a CAPE of 20 historically..
But in general, you should calibrate your SWR to the 1960s worst case, so 3.5-4% is a good starting point. Yes.
And you’d have extra money to spend if things don’t work out as badly as in the 1970s. 🙂
Feb 2020: prior to market drop when the CAPE was 31, using your CAPE formula with .5 and .015 on 2,985,000 I got an annual SWR of ~92,920 (pre-tax).
March 27, 2020: end of today, CAPE 24, same CAPE formula on 2,753,434 I get an SWR of ~98,665.
So…in my situation, using your CAPE formula, and assuming I start the acceIerated rising equity glidepath from my current 25% up to 50%, have I (age 64 retiring soon) actually benefited from this market drop?, which has provided me with a higher SWR dollar amount? hmmm…. that would make me feel somewhat better,though still cryin’ in my beer, or should I be adjusting your formula for lower bond yields? I might have seen that in a past posting on your site?
Probably your portfolio is very low ion equities so it hasn’t even dropped enough. Down less than 8%. So, you could have an increase in the withdrawal amount.
One caveat though: the a=0.015 and b=0.5 was calibrated with a 60/40 to 75/24 allocation.
For much lower equity allocations you might have to lower the a and/or b, to be long-term sustainable.
1.) If the a=0.015 and b=0.5 were also calibrated for 100% capital preservation, and if I were to accept 100% capital depletion, perhaps this would allow for using the a=0.015 and b=0.5 with a lower equity allocation of possibly 25-30%? Or a rising equity glidepath to 50% allocation to equities over the next 10 years?
2.) Using Excel’s PMT function with the parameters, how does it adjust the future withdrawal amounts for COLA?
In this context, all of my calculations are done in real terms. real returns, real withdrawals, so everything is COLA adjusted
Haven’t done any sims with changing allocation and/or glidepaths yet.
As a traditional soon-to-be-retired, soon-to-start-rising-equity-glidepath retiree, my large fixed income allocation is CDs, online savings accounts, bond funds, and STIP (short-term TIPS) and SCHP (longer term TIPS). What are the risks of these TIPS ETFs? If interest rates were to suddenly rise (crazy things can happen unexpectedly) would investors lose money in these ETFs?
Ern, thanks again for the informative post. I currently am upside down 30-70 and have been wondering when to get back into more equities, In the media it has been commented on that the recent 2000 point DOW increase was the largest since 1933. Believe 1933 was the worst year for the US stock market ever. Furthermore, think back a week, 2 weeks, 1 month ago. What was the sentiment on this virus? Not in the US, only in Washington State, last week it was only there and NYC and California. This week it’s all of the above and NYC and NYS are much worse, along with New Orleans, New Jersey Fla,, Illinois and Wisconsin. Question is what part of the country is next? Better to wait it out. Virus likely to get worse and this is not even mentioning the effects on the economy. Good news is a formerly good economies tend to bounce back rapidly. Whereas, long suffering ones such as Spain and Italy likely will not. But they have a new friend in China.
The 2000 point move was the best in points and the 4-th largest %-move:
The virus will reach every corner of the country. Only in a staggered/delayed fashion.
Yeah, Italy has a new best friend in China. How the world changes!
Big ERN, Thanks for the retiree focus of this post for real-time analysis for your readers. Approaching retirees can learn so much as well.
Will be updating my recommendations post. While I point to the fantastic SWR Series in general, I’ll add a link to highlight #37!
Thanks, buddy! 🙂
excellent post ERN. your posts have meant quite a lot to me over time.
A question, though:
>So the CAPE-rule does require a certain degree of flexibility. It’s because the CAPE-based withdrawal rate is calibrated not to the worst-case scenario, but the average-case scenario. So, you can afford a higher initial withdrawal rate than the fail-safe but you also have significant downside risk.<
I don't think the text really covered the downside risk aspect, or at least not clearly. Which downside risk are you getting at here? And is there a way to qualify significant?
The flexibility part is covered here:
Google Sheet: Simulate your own CAPE-based rule and check how flexible you have to be (see tab “CAPE-based Rule”)
Oh, I see. You mean downside risk in terms of reductions in withdrawal rates. Got it, thank you.
Thanks for your great blog.
Would it be a good idea to have a post dedicated to your thoughts about the Fed steps? It is clear and almost a consensus that the intervention and market support is required (and I personally believe that it is), however sometimes it feels like these guys invented a perpetual motion machine – a never stopping printer which keeps on producing those green small rectangles (these days you don’t even need neither paper nor ink for making them, just a few bytes in computers) with which they buy bonds, bailout companies and save the world from collapsing. Isn’t there a price for it? Many people expected inflation after 2008 but it did not come. Do you think it can be differently this time or a few trillions here and there already don’t change anything in this mad world and we are in parallel universe where inflation does not exist? Why wouldn’t Fed simply buy a significant part of the stock market (like BOJ did) and thus we can have the stocks that only climb up. No lost money, no sequence risk anymore.
You thoughts about these topics would be very interesting thing to hear about.
Maybe at a future date. Good idea.
Just a quick one – Firstly, love your website. I am pretty hardcore into the maths like I perceive many of your other readers, and appreciate the work and clarity you provide. Highly recommend the book ‘Living off your money’ which runs many simulations and variations on US/global/SWR/tax/longevity/CAPE etc..
Anyway – onto my comment perhaps I’m simplifying/being naive however I view the SWR as simply moving up/down. E.g. for my modeling I use that the SWR (pre-tax) was 3% (incorporating high valuations etc).
If the market crashes e.g. 25/50% then the SWR simply goes up. That’s it’s whole purpose. i.e. if your asset pool has halved, then your SWR doubles. I.e. you withdraw the same amount of cash. Essentially that’s what your ex-ante calculation was supposed to tell you anyway – I guess it’s good to be confirmed however, so thank you
It is interesting to see that the numbers in your calc above do match this (e.g. 25% drop is 1.33x, 50% drop is 2x SWR)
Yeah, I like the McClung book too. Recommended!
Yeah, if you keep the spending $ the same, then the % will change over time. The only question is: If you keep withdrawing that higher % today, is it still “safe” with today’s market conditions (lower CAPE, large drawdown, etc.)
Avid reader here. I was not aware that “…the CAPE withdrawal rates are calibrated to target capital PRESERVATION”.
I have used the CAPE rule since FIREing a few years ago but I thought the SWR derived from the CAPE rule was to simply not run out of money (>90% chance like with Bengen, Trinity study, etc.).
I have always used 1.5/0.5 in my CAPE formula based on leaving behind 25% of the starting amount after 30 years. This post shows that the SWR could be higher than that because I am targeting to leave behind less than the starting amount. Am I reading this right?
I had the same basic question when I read the part about using the CAPE equation…..and I think Mario was on the same path (see his earlier reply) asking about how “significant” is the downside risk with CAPE.
I went back and read Parts 2 and 11 in Big ERN’s series and it may provide some more background on how to utilize CAPE in setting the SWR.
My perspective is based on Part 11’s REPORT CARD is that the “a” and “b” parameters chosen for CAPE have a significant effect on the ability to maintain purchasing power for 30+ years (the REPORT CARD varied the “a” parameter).
Maintaining that purchasing power is another way of saying a higher final asset value target is the desired outcome.
Of course, the tradeoff is that near-term spending may be lower and the bequest may be quite large after 30+ years.
I am also a supporter of the CAPE equation in that it accounts for market valuations without getting too complicated (i.e. Guyton-Klinger).
Big ERN….I would love to get your perspective on the CAPE parameters’ impact on the final asset target value (and of course in CPI-adjusted terms).
Did all that already!
You can check yourself in the Google Sheet (see part 28), tab “CAPE-based Rule”
Change the a/b parameters and check the chart “30Y Stats for different starting cohorts” to see how the 30Y change, 30Y Drawdown and 30Y mean vs. initial evolve.
I’ve calibrated my CAPE-rules so that a simulated portfolio moves sideways with occasional dips for the ENTIRE 150-year simulation preiod. So, that’s captial preservation.
If you like to walk to down the capital, you can indeed use a higher rate. Similar approach to the VPW calc on Bogleheads. 🙂
I enjoyed reading through this. We’re fine through this as a 2019 retiree, but I’ve certainly learned some lessons through this adventure and will not be repeating the same mistakes. That positive correlation (and even greater than positive correlation) in some of the high yielding assets is brutal. Inevitably people slowly get into those who shouldn’t be, then the panic sell off is brutal. Eventually the market will even out, but people will once again fall asleep at the risk wheel and think they’ve found a way to “earn a little more than treasuries/investment grade corporate” then get hurt when everyone runs to the exits on those products.
Yeah, chasing yield was great as long the economy rolled along. Now it’s a mini-repeat of the GFC. My risky-FI assets have now recovered quite substantially from the bottom. Let’s hope it stays that way! 🙂
I’m new to your website. When I enter the same parameters into the Google sheet online, there are different results than show in your write up. Any explanation why? All links bring you to SWR Toolbox v2.
Did you set the supplemental cash flows to 0?
No. I didn’t realize there had been values entered. Got it now.
With the gov’t committed to massive stimulus and record deficits. What do you think of Treasury Inflation Protected Securities (TIPS) as a portion of a current retirees bond portfolio?
Short Term TIPS ala VTAPX vs longer term TIPS (VIPSX or TIP) ?
By the way I used to live in Vancouver, WA and miss the Gorge, Hood River and my favorite camping spots in Gifford Pinchot NF / Skamania County.
I think more economies will go the route of Japan: massive debt and deficits and low inflation. The big debt load is a wet blanket on the economy and causes stagnation and low inflation.
Hey, cool! We love it here in the PNW! Lots of outdoor activities!
Ern, would you be able to share the spreadsheet calculation for the actual withdrawal amounts (https://i1.wp.com/earlyretirementnow.com/wp-content/uploads/2020/03/SWR-Part37-Table03.png?w=815&ssl=1) ?
Great post, thanks. Do you have any article about how investing with a different currency affects the SWR and the overall investing strategy?
In particular, when one is not young anymore (early 40s) and the available cash is in GBP?
Haven’t considered that yet. Wade Pfau has the international SWR numbers and they look much weaker abroad. But then again, he makes the mistake of assuming people in country X have ONLY country X equities/bonds. People are more likely to have a globally diversified portolio.
Interesting study, thanks for sharing.
I had just experience withmarkets in UK, Spain, Japan and US and I was thinking along those lines as well, that the SWR of investors in their local markets only would need to be much lower than in the US (I was guessing around 2% – which seems to happen in a lot of countries).
Having said that, and trying to minimize that problem, I was then thinking about a global portfolio (or mainly an US portfolio) but not sure how the currency risk will affect all this. I’ve seen the GBP.USD pair changing in value around +40% and -40% or so in the last 2 decades.
What I’ve been doing so far is getting an USD loan from my broker and paying around 4% annually on it to avoid the currency risk, but not sure if this is the best approach long term as the interests paid with larger portfolios starts being higher now (and this is in times where interests rates are at minimums)
If you’ve got any other info/idea about how to learn more about this subject (in the way of articles you know, books, etc) pls do let me know as I’d like to expand my knowledge about this subject of long term risks when investing in overseas markets…
Enjoy the weekend Big Ern!
Hi Big ERN,
Thanks for another great post. For me, a 45-yo who retired last summer, I wish I would have been a bit more conservative as shown by the simulations in your equity glidepath posts. I was at about 82/18 allocation on Feb. 19 and was thinking I should derisk a bit. Well, too late for that! I’m now at about 75/25 due to the bear market. My question is: I need to rollover an old 401k due to plan changes and can’t transfer assets in kind. So I have an opportunity to rebalance a bit. Debating whether to bring my allocation closer to 60/40 now. Any thoughts?
(Love the death zone comparison in your latest post, as a big hiker in Bend, OR. Congrats on St. Helens summit! Once we’re back to normal, let me know if you ever want to hike down here!)
Now the damage is done and it’s hard to tell if a shift into bonds is still worth it, considering the yields. (but then again if the crap hits the fan, bond yields will go the way of Germany/Japan, etc., so there is potential)
Right now you’d probably still do OK with 75/25.
Thanks! Crazy, how we’ve not even explored the aread very much. We’ll definitley check out Bend at some point. Will contact you if we’re in the area! 🙂
Thanks for the feedback! And hopefully all the trails will be open in time for summer!
First, thanks for this blog. I’m working through the safe SWR posts and also the McClung book, so this is my crash course!
Can you say a bit more about “Now the damage is done and it’s hard to tell if a shift into bonds is still worth it”? I’m one of those 100/0 people who wishes I’d read your blog 6 months ago. 🙂 But, as you’ve said, I’ve been 100% equities for several years, so the crash hasn’t destroyed me (yet!) when measured from where I started.
All that said, does a shift to 75/25 right now make sense? I suppose that depends whether you think we’re anywhere near the bottom yet — but that’s “market timing” talk. What does a backtest tell us if someone shifts from 100/0 to 75/25 *after* a drop like this one? Does it offer any comfort against the feeling that you’re selling equities at the bottom and buying bonds at the top?
Actually, let me make this more complicated (maybe beyond scope?), let’s say I’m 100/0, but own a home outright, which actually accounts for 50% of net worth. So really 50/50, equities and real estate. Is it time to fund withdrawals from a home equity loan until equities recover, rather than selling equities now to fund bonds?
You investment portfolio is still 100% stocks.
Your house, unless you can rent out part of it is currently not an investment.
HELOC is an interesting option. If the crisis stretches long enough (I don’t hope but it’s possible), you’ll be left with crushed equity portfolio, a mountain of debt and a home value that will also be down (remember 2008?).
So, I normally advise against debt to smooth out Sequence Risk.
Well, as of today you’re almost back to the high, so, I’d consider shifting some into bonds as a hedge.
Again: if stocks rally and bonds tank, so be it. You still gain, but just a little bit less. But if the economy goes to hell, at least you’re not at 100% stocks.
I found a completely different safe withdrawal methodology that I don’t think you’ve posted about yet. It seems to have merit but I’d be really curious to know your opinion. It would also be interesting to see it modeled in a FIRE framework, since he uses only 30 year time frames:
I’d be cautious about that. It all depends on what kind of interest rate you’d get. They use FFR+1.5%, which sounds a bit too optimistic:
HELOC: it’s often the Prime Rate (normally around FFR+3%). Even a HELOC can be frozen if times get tough.
Margin Loan on IB: it’s indeed ffr+1.5%, but good luck relying on that for extended periods during market stress periods. They would not give you that money during a repeat of 2008/9.
Hi Ern. There are some nuances on your site as to bond allocations and would love your help squaring them.
In Parts 1, 2, 3, of the SWR series modeling a retiree with a 60 yr time frame shows highest success with 100% equities. Throughout your blog you make many comments that a reader would infer bonds are not adding to portfolio success:
“Success probabilities stay very high at all horizons when using 75-100% equity shares and withdrawal rates of 3.5%…”
“…for longer horizons, 100% stocks gives the highest success rate. This goes back to our earlier research that showed that over long horizons bonds can have extended drought periods and only equity-like returns are a guarantee for not running out of money over long horizons.”
“Bonds don’t offer much benefit for the success rates, unless stocks are wildly overvalued, with much higher CAPE ratios than today’s value (>30!). For CAPE ratios below 30, mixing in bonds has either only a marginal benefit or even lowers the success probability.”
“When planning with a 3%, even 4% withdrawal rate, adding an asset with a potentially low or even negative decade-long real return trend, may be riskier than equities, at least in the long-term.”
But then in later posts you say things like: “If you heeded my advice here on the blog and kept some bonds for diversification you should have significantly cushioned the fall.” Is this specifically referring to those with a 30 year retired time horizon?
A person could have conflicting takeaways. Is there one post that clears all this up as to 60 year retirement time horizons, and also if leaving a bequest of 50% or more?
Thanks for all your work.
Very good question! We have to distinguish between 2 objectives:
1: Maximize the probability of the 4% Rule succeeeding
2: Maximze the fail-safe withdrawal rate
If optimizing #1, it’s indeed best to roll the dice and go with the higest-mean-return asset
If optimizing #2, it’s best to keep some diversifying assets
And you’re right: when I initially started writing about this topic I was mostly influenced by the Trinity-Study-style calculations looking mostly at probabilities. though. But I realized that maximizing the probability you also maximize the severity of the failure, conditional on failing.
Hi Big Ern,
Just finished your SWR series. Terrific!!!
I retired this year at 53 and am planning on a 40 year retirement without capital depletion (100%). Fortunately, my portfolio is only down 10% and still living on 2.2% SWR, but embarrassingly, I’ve never invested in Bonds!!!. Portfolio: 45% Equities (VTI), 55%….big gulp…$1M CASH – 25% CDs in taxable (1 yr CD @ 2.15%, 11 month liquid CD ladder @ 1.85%). 30% in VG FED MM (.53%)
Questions: I plan to use your CAPE a:1 b=.5 GP GP to 80% equities. How do you suggest I move the cash to bonds given the low yield environment? 1) For now, do you suggest keeping the CD’s? 2) When does it make sense to move it to a bond fund, and do I lump it or DCA? 3) And what about the MM funds given the measly .5% yield? 4) Lastly, do you have a preference on the ETF/fund to use?
Keep up the great work. Much appreciated!!!!
I think MM or CDs might be a good way to hedge. If you want to move into bonds, I’d DCA because there’s so much uncertainty: do we get a quick snap-back in yields or will we go like Japan, Germany, etc. with negative yields if the economy/market take a deep and long nosedive.
No preference on ETFs. If they are similar, go with the lower ER. iShares seems to be a good option. Fidelity, Vanguard, Schwab also have low-fee mutual funds for bonds.
Thanks Big Ern. That’s very helpful
In terms of DCA, is there a strategy you suggest such as 1 or 2 years,or perhaps even more?
Also, for your simulations you use IEF which is a 7-10 year treasury etf (with .15% ER), maturty 7.55 years, whereas VGIT (.05% ER) and other Intermediate Term etfs/funds are around 5.2 years. Is the that 2 year+ difference in maturity in your view significant enough to pay the extra .1% ER. Sorry, if a dumb question, I am new to bonds and not sure if that 2 years difference really matters for long term performance.
After reading the SWR series, I’ve got the same question! 🙂
Yeah, I’d say 1-2 years would be safe to do the DCA.
Different folks have different definitions. Most people consider 30Y=long-term, 10Y=intermediate-term.
The Vanguard has shorter duration and thus less diversification potential. It might be best to use the EDV or a mix between EDV and VGIT if you don’t like the IEF expense ratio.
I’ve love to hear your thoughts on what I will call an “Ease-in” withdrawal strategy:
Let’s say one is still 5-10+ years from hitting 25x or 30x their expenses, but would like to get out of full-time work soon. Given that a 3% withdrawal is almost always safe indefinitely, what if they switched to part-time work (or a rental property, or some other method to bring in maybe 50% of their expenses) and started pulling 3% from their portfolio. In most cases their portfolio will still grow, and as it does (and the time-horizon shrinks) they could ratchet up withdrawals hopefully to the point of fully-retiring at a traditional age.
Logically, this seems to me to be one way of pulling likely excess future dollars into the present when you’d want them most.
Amazing work on the series!
Hey Ern, continuing to make my way through all the great materials here. I’m starting to get deep into thinking through how to implement your CAPE based withdrawal model. I’m wondering if you have made a mistake in the PMT calculation you’re doing in Excel to calculate the monthly withdrawal rate. Month after month you’re keeping the FV set at a static $500k rather than adjusting it based on inflation.
All figures are in real terms. $ in real, CPI-adjusted $. Returns in real CPI-adjusted returns.
So, you don’t have to adjust the $500k final value.