Welcome back to the Safe Withdrawal Rate series. 13 installments already! As requested by many readers, both in the comments section and via email, I wanted to look into one intriguing method, called “Prime Harvesting” (PH) to dynamically shift the stock vs. bond allocation during retirement. Where does this post fit into the big picture? Recall that parts 1-8 of our series dealt with fixed withdrawals and fixed asset allocation (same % stocks and bonds throughout retirement). Make sure you check out our SSRN working paper, now downloaded over 1,000 times!
Parts 9-11 dealt with how to adjust the withdrawal amounts while keeping the asset allocation fixed (Guyton-Klinger, VPW, CAPE-based rules, etc.). Prime Harvesting does something completely different: Keep the withdrawal amount constant, but use a dynamic stock/bond asset allocation to (hopefully) squeeze out some extra withdrawal wiggle room; the Northwest corner in the diagram below. Almost uncharted territory in our series!
Eventually, of course, we like to move to that Northeast corner: Dynamic withdrawals and Dynamic Asset Allocation. But let’s take it one step at a time! Let’s see what this Prime Harvesting is all about.
We were surprised by how many personal finance bloggers publish their net worth numbers. J. Money over at RockstarFinance maintains the world’s first and only (to our knowledge) blogger directory and out of almost 1,000 bloggers, over 250 publish their net worth. So, should we publish ours? What good is all that stealth wealth business (see the excellent posts from Physician on FIRE and The Retirement Manifesto) if I post our net worth on the blog? Well, if someone were to find out who we actually are then with or without the precise number it would be pretty obvious that we’re well off. Whether our net worth is $500,000 or $5 million, what’s the difference, then? People get mugged on the street every day for much less. So we might as well show our numbers, right?
Last week, I read a nice post on Chief Mom Officer on the challenges of calculating savings rates. Right around that time I was also revisiting our 2017 budget and the projections of how much we are going to save this year. This is the last full calendar year before our planned retirement in early 2018 and it’s imperative that we stay on track and keep a high savings rate on the home stretch. But how high is our savings rate? Is there even a generally accepted way of calculating a savings rate? What are some of the pitfalls? We were surprised about how easy it is to mess up a calculation as seemingly trivial as the savings rate.
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 »
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!
My blogging buddy Ben Davis who runs From Cents to Retirement invited me to participate in his interview series. Ben lives and works in Germany and plans an early retirement at the age of 36 to become a real estate mogul in Portugal. Here’s the link to the interview. Enjoy!
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:
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 »
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!
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.
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 …
We are taking a short break from our Safe Withdrawal Rate Series (see the latest post here) to look into some pretty fascinating data we came across the other day. There’s a small place on earth with rampant wealth inequality. If you had just one single dollar in your name you’d be worth more than the entire bottom 27% of the wealth distribution combined. The bottom half of the population owns only about 8.6% of all wealth, while the richest 10% own 40% of all wealth, and the richest 20% own about 62% of all wealth.
Despite the wealth inequality, there is surprising harmony. There’s no call for building walls. And no call for redistributing the “ill-gotten” profits of “evil capitalists” either. There is no envy! Folks in the lowest wealth bracket would regularly compliment their richer counterparts and say “Geez, you are rich. Good for you!”