Can a Rising Equity Glidepath Save the 4% Safe Withdrawal Rate Over a 60 Year Retirement? (Guest Post by Dr. David Graham)

Welcome back to another guest post. Dr. David Graham, over at FIPhysician has been on a roll. His spike in productivity has been the perfect “hedge” against my drop in productivity while traveling this summer, so when he offered me to write a follow-up on his very well-received guest post a few weeks ago, I was all for it. This current post is about adding a “glidepath” to your retirement portfolio and how and why this would change the success prospects over a 60-year retirement horizon. Over to you, Dr. Graham…

In my last post, I show a 4% Safe Withdrawal Rate (SWR) is actually NOT safe over 60-years (assumptions, assumptions). A more conservative 3.25% SWR does ok. On the other hand, if the asset allocation is increased from 60/40 to 90/10 stock to bond ratio, a 4% SWR thrives again. ERN advises, however, that a 90/10 portfolio sets you up for even more Sequence of Return Risk (SORR). SORR describes the long-term detrimental effects initial negative market returns have on overall portfolio success. Even if the stock market eventually recovers, selling part of your equity portfolio at rock-bottom prices can lead to premature failure of the withdrawal strategy.

What protects from SORR yet permits a higher SWR? A rising equity glidepath is one possibility. Let’s look at the details…

Continue reading “Can a Rising Equity Glidepath Save the 4% Safe Withdrawal Rate Over a 60 Year Retirement? (Guest Post by Dr. David Graham)”

A Different Way to Plan Retirement – Guest Post on “Monte Carlo” Simulations by “Gasem”

Today we have another guest post, this time by our long-time reader “Gasem.” I’m sure most of you who have looked through the comments section here and at a number of other blogs would have noticed his comments. They are always highly insightful. He’s also a prolific writer on his own blog MD on FIRE, which I highly recommend. And if you’re not a Gasem-fan yet, I suggest you check out the What’s Up Next? podcast episode earlier this year where he was featured together with Susan from FIIdeas and VagabondMD

In any case, we had a discussion about using Monte Carlo Simulations to gauge safe withdrawal rates following David Graham’s guest post two weeks ago. And Gasem volunteered to write a guest post here detailing his approach measuring retirement risks. So without further ado, Dr. “Gasem,” please take over…

David Graham recently wrote a great post on this site regarding the 4% rule. What is the 4% rule really? You save 25x your yearly need and put it at some risk in a portfolio and then try to extract 30 years of value from the portfolio by extracting 4%/yr. 25x is the target (initial) principal. You have to inflation-adjust the withdrawal, and then you risk the principal at some interest rate above inflation. Let’s say you have 1M, you pull out 4% above inflation (and SORR doesn’t eat your lunch) you will preserve your capital and thus still have 1M 25 years later. You can re-retire for another 25 years on that 1M (capital preservation!) and still pull out 4%. So if inflation is 2% you need to make 6% on your money to run this money machine. 6% is the leverage on your future, That’s the “math” behind the 4% projection.

What’s the problem you say? The problem is volatility. The problem is the market can not guarantee 6% return and 2% inflation. Return is all over the map as is inflation. One year you may make 12%, the next year lose 20%. One year inflation maybe 2% and 5 years later 13% (1979). If you’re lucky it’ll work out you tell yourself, probably will work out, I read it on the internet! So what’s the probability? That’s where “Monte Carlo Simulations” come in. Let’s take a look… Continue reading “A Different Way to Plan Retirement – Guest Post on “Monte Carlo” Simulations by “Gasem””

Does A 4% Withdrawal Rate Survive a 60-Year Retirement? (Guest Post by Dr. David Graham)

You might have noticed that I haven’t published any guest posts for a while. I even explicitly state on my contact page that I’m no longer interested in publishing any guest posts. But every once in a while you make an exception to the rule. David Graham, actually, Dr. David Graham (FIPhysician), has been on a roll with a bunch of top-notch guest posts on other personal finance blogs; first writing for the White Coat Investor blog on Roth Conversions, then two guest posts on Physician on FIRE, first on Asset Location in Retirement, and then on Buffer Stock and Bucket Strategies to alleviate Sequence Risk in retirement. All really important topics! And after sending a few emails back and forth with the good Dr. Graham we agreed on a topic for him to publish a guest post here on the ERN blog, Instead of using backward-looking historical return windows, as I would normally do in my SWR Series, why not check the sustainability of the 4% Rule with forward-looking return projections? Vanguard and a lot of financial companies publish those every year. Sounds like an interesting exercise! So, without further ado, please take over Dr. Graham…

As we all know, ERN is the man when it comes to Safe Withdrawal Rate (SWR) and FIRE. Reading between the lines, he has a different opinion on SWRs for a 60-year retirement vs. a more traditional 30-year plan. Obviously, using only historical data, it is more difficult to study SWR with rolling 60-year stock and bond returns than 30-year periods. Nevertheless, FIRE often subscribes to the 4% rule despite a prolonged period of income demands on the accumulated nest egg. In order to further understanding of the 4% rule over a longer than usual planned retirement, let’s visualize the 4% rule over a 60-year period and see what we can learn. Continue reading “Does A 4% Withdrawal Rate Survive a 60-Year Retirement? (Guest Post by Dr. David Graham)”

How To “Lie” With Personal Finance

“Lies, damned lies and statistics” (Mark Twain)

“Do not trust any statistic you did not fake yourself” (Winston Churchill)

There is a classic book called “How to lie with Statistics” that I read many, many years ago (actually decades ago!) as a college student. If you’re ever looking for an inexpensive but fun and impactful present for a young student/graduate with the hidden agenda of getting that person interested in math and statistics, this is the one! The book taught me to take with a grain of salt pretty much anything and everything number-related. Anywhere! Whether it’s in the news or in the Personal Finance blogging world and even (particularly?!) in academia. I’m not sure if I was already a severely suspicious (paranoid?) person before reading this or the book turned me into the person I’m today. So, inspired by that book, I thought it would be a nice idea to write a blog post about the different ways numbers are misrepresented in the FIRE/Personal Finance arena. And just to be sure, this post is not to be understood as a manual for fudging numbers, but – in the spirit of the “How to Lie With Statistics” classic – serves as a manual on how to spot the personal finance “lies” out there!

And there’s a lot of material! Probably enough for at least one more followup post, so for today’s post, I look at just four different way of how quantitative financial issues are frequently fudged in the personal finance world. And a side note about the slightly attention-grabbing title I used here: Well, I put the word “Lie” in quotation marks to show to the faint-hearted that this is a bit tongue-in-cheek. I could have written, “fudge the numbers” or “Enron-accounting” or “How we delude ourselves in personal finance,” or something like that. Also, Hanlon’s Razor (“don’t attribute to malice what can be explained by incompetence”) comes to mind here, but I’m not sure if those faint-hearted folks feel that incompetence is a significantly more benign explanation than malice.

So, let’s look at some of my favorite examples of how people lie to themselves (and others) in the realm of personal finance…

Continue reading “How To “Lie” With Personal Finance”

The Yield Illusion (or Delusion?): Another Follow-Up! (SWR Series Part 31)

Welcome to the follow-up to the follow-up post on the “Yield Illusion.” Again, here’s the context: a few weeks ago, I wrote a post (SWR Series Part 29) on why I don’t believe that chasing higher yields is necessarily a good hedge against Sequence of Return Risk. A very well-received post! It was picked up by CanIRetireYet.com as one of their Best of the Web in February, it was featured on RockstarFinance on Monday, and we had a great discussion in the comments section. So I wrote a follow-up post on Monday (SWR Part 30) and since that post was running way too long already, here’s some more material that got cut; some more thoughts on my asset class outlook, international vs. U.S. stocks, dividend vs. value stocks, and more. So let’s get rolling…

Continue reading “The Yield Illusion (or Delusion?): Another Follow-Up! (SWR Series Part 31)”

The Yield Illusion Follow-Up (SWR Series Part 30)

Welcome to a new installment of the Safe Withdrawal Series! The last post on the Yield Illusion (Part 29) was definitely a discussion starter! 140 comments and counting! Just as a quick recap, fellow bloggers at Millenial Revolution claim that the solution to Sequence Risk is to simply invest in a portfolio with a high dividend yield. Use the dividend income to pay for your retirement budget, sit back and relax until the market recovers (it always does, right?!) and, boo-yah, we’ve solved the whole Sequence Risk issue! Right? Wrong! As I showed in my last post, it’s not that simple. The Yield Shield would have been an unmitigated failure if applied during and after the 2008/9 Great Recession. So, not only did the Yield Shield not solve Sequence Risk. The Yield Shield made it worse! And, as promised, here’s a followup post to deal with some of the open issues, including:

  • A more detailed look at the reasons for the Yield Shield Failure over the past 10 years (attribution analysis).
  • Past performance is no guarantee for future returns. How confident am I that the Yield Shield will fail again in the future?
  • Dividend Yield vs. Value
  • Are non-US investors doomed? Probably not!

So, let’s look at the details:

Continue reading “The Yield Illusion Follow-Up (SWR Series Part 30)”

The Yield Illusion: How Can a High-Dividend Portfolio Exacerbate Sequence Risk? (SWR Series Part 29)

Welcome, everyone, to another installment of the Safe Withdrawal Rate Series! See here for Part 1, but make sure you also check out Part 26: Ten things the “Makers” of the 4% Rule don’t want you to know for a more high-level, less technical intro to my views on Safe Withdrawal Strategies! Today’s topic is something that has come up frequently in reader inquiries, whether through email or in the blog post comments. Let me paraphrase what people normally write:

“Here’s how I can guarantee my withdrawal strategy won’t fail: I simply hold a portfolio with a high enough yield! Now the regular cash flow covers my expenses. Or at least enough of my expenses that I never have to worry much about Sequence Risk, i.e., liquidating principal at depressed prices.”

I’ve seen several of those in the last few weeks and it’s a nice “excuse” to write a blog post about this very important topic. So, what do you think I normally reply? Want to take a guess? It’s one of the two below:

A: Oh, my God, you got me there. This is indeed the solution to once and for all, totally and completely eliminate Sequence Risk! I will immediately take down my Safe Withdrawal series and live happily ever after.

B: Your suggestion sounds really good in theory but there are serious flaws with this method in practice. It will likely be no solution to Sequence Risk. And in the worst case, your “solution” may even exacerbate Sequence Risk!

Anyone? Of course, it’s option B. It sounds like a great idea in theory but it has very serious flaws once you look at the numbers in detail. Let’s take a look…

Continue reading “The Yield Illusion: How Can a High-Dividend Portfolio Exacerbate Sequence Risk? (SWR Series Part 29)”

An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28)

Since I first published Part 7 of the SWR Series with the accompanying Google Sheet in early 2017, I’ve made several changes and enhancements. Sometimes without much explanation or documentation. So, it would be nice to do a quick update and itemize the changes since then. Whether this is the first time using the toolbox or you check it out again after more than a year, I hope you all find the new features useful… Continue reading “An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28)”

A Reader Case Study: Whole Life Insurance

Welcome back! I hope everyone had a great 4th of July Holiday (U.S. Independence Day for non-U.S. readers)! Today I have a case study about whole life insurance. Not the most popular investment vehicle among the FIRE enthusiasts, see, for example, an excellent summary of the disadvantages of Whole Life by White Coat Investor (though, for full disclosure, I don’t agree with all of his claims and calculations). But let’s face it: a lot of folks have policies and now wonder what to do about them. Here’s a case study about the tradeoffs when considering either cashing out the policy or keeping it intact. Let’s look at the numbers…

Continue reading “A Reader Case Study: Whole Life Insurance”

Ten things the “Makers” of the 4% Rule don’t want you to know (SWR Series Part 26)

For today’s post, I thought it was time to add another installment to the Safe Withdrawal Rate Series. 25 posts already! What have I learned after so many posts? Well, I started out as a skeptic about the so-called “4% Rule” and I thought it might be the time to poke a little bit of fun at the “makers of the 4% Rule.” Just to be clear, this post and the title are a bit tongue-in-cheek. Obviously, the “makers” of the 4% Rule, the academics, financial planners and bloggers that have popularized the rule aren’t part of any conspiracy to keep us in the dark. Sometimes I have the feeling they are still in the dark themselves! So here are my top ten things the Makers of the 4% Rule don’t want you to know… Continue reading “Ten things the “Makers” of the 4% Rule don’t want you to know (SWR Series Part 26)”