Author Topic: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)  (Read 26868 times)

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #50 on: March 30, 2015, 07:45:43 AM »
I like the idea, but I wonder about the relevance of using a 5% withdrawal rate to look into the success rate of a 4% withdrawal rate.

It wouldn't be relevant for telling us the impact of market performance in the years leading up to retirement on the specific historical success rate of a 4% withdrawal rate, but it would help to answer the question of whether there is correlation between market performance in the years leading up to retirement and historical portfolio success rates in general.  The 4% SWR was intentionally chosen for its status as sustainable in the worst case (or near-worst case) scenario, so by design I think it doesn't produce enough historical failures to properly test the correlation you were testing for.

I was playing around with cFIREsim and I think the "Retire Again & Again Method" is a pretty good simulation.  Set to a 4% withdrawal rate, and increases any time the market goes up 3% (a crude method for inflation), with a floor in constant dollars of 4% of the initial starting value, the success rate falls from 107/115 to 105/115 or, from 93% to 91.3%.

The "Retire Again & Again Method" is probably the cfiresim option that most closely approximates the OP's strategy, but it doesn't reflect it exactly because it's ratcheting up the withdrawals based on crossing a specified threshold for a percentage increase in the real value of the portfolio rather than the amount of the withdrawals as a percentage of the real value of the portfolio.  I didn't follow why you set the spending increase to 3% -- what does inflation have to do with the spending increase threshold?  Inflation is already reflected in both the constant-dollar withdrawal floor and the running portfolio value.  Wouldn't it be a closer approximation of the OP's strategy to use the lowest threshold for spending increases possible, like 0.01%?  (Doing so results in the same 91.3% you reported, but I think that's because this approach still suffers from the problem of insufficient number of failure cases for statistically significant conclusions.)

Either way, we can use this method to try to approximate the OP's strategy over a full period (consisting of successive individual rolling 30-year periods) of a given length.  For a full 60-year retirement, for example, the "Retire Again & Again Method" with the threshold set at 3% reduces the chances of success from 82.35% to 74.12%.  Lowering the threshold down to 0.01% doesn't change this result.

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #51 on: March 31, 2015, 01:15:45 PM »
I didn't follow why you set the spending increase to 3% -- what does inflation have to do with the spending increase threshold?  Inflation is already reflected in both the constant-dollar withdrawal floor and the running portfolio value.  Wouldn't it be a closer approximation of the OP's strategy to use the lowest threshold for spending increases possible, like 0.01%?  (Doing so results in the same 91.3% you reported, but I think that's because this approach still suffers from the problem of insufficient number of failure cases for statistically significant conclusions.)

Yes, I just picked an arbitrary amount greater than 0, figuring that one wouldn't bother adjusting the withdrawal size for tiny amounts (3% is probably still to small for this).

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #52 on: March 31, 2015, 01:31:57 PM »
I like the idea, but I wonder about the relevance of using a 5% withdrawal rate to look into the success rate of a 4% withdrawal rate.

It wouldn't be relevant for telling us the impact of market performance in the years leading up to retirement on the specific historical success rate of a 4% withdrawal rate, but it would help to answer the question of whether there is correlation between market performance in the years leading up to retirement and historical portfolio success rates in general.  The 4% SWR was intentionally chosen for its status as sustainable in the worst case (or near-worst case) scenario, so by design I think it doesn't produce enough historical failures to properly test the correlation you were testing for.

Yeah, this is a good idea.  I initially thought I could simply ramp up the previous 5, 10, or 20 years return and see what retirement success rates were when one retired after great market runs.  Then I realized that would still suffer from the same problem of not enough failures. 

And, honestly, an analysis of the failures that started in the 60s pretty clearly shows that the problem wasn't really low market returns the problem was the crazy high inflation of the 70s.  If you look at 20 year retirement period with a withdrawal rate of 6%, the success rate is about 76%.  And one of the big blocks of failures is starting periods in the 60s.  But periods with not great returns, but low inflation (i.e. periods ending in 2009 or later) work out pretty well.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #53 on: March 31, 2015, 02:00:30 PM »
Yes, I just picked an arbitrary amount greater than 0, figuring that one wouldn't bother adjusting the withdrawal size for tiny amounts (3% is probably still to small for this).

Yeah.  After posting, though, I realized you can set the threshold to exactly 0, which (when combined with the constant-dollar floor set to an amount equal to 4% of the original portfolio) actually replicates the OP's proposed strategy exactly.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #54 on: March 31, 2015, 02:26:13 PM »

And, honestly, an analysis of the failures that started in the 60s pretty clearly shows that the problem wasn't really low market returns the problem was the crazy high inflation of the 70s.  If you look at 20 year retirement period with a withdrawal rate of 6%, the success rate is about 76%.  And one of the big blocks of failures is starting periods in the 60s.  But periods with not great returns, but low inflation (i.e. periods ending in 2009 or later) work out pretty well.

Right, but I don't know if I would state it that way.  All you're really saying is that the problem was really low market returns in real terms.

What your analysis demonstrated is that (historically) retiring after a great market run should not have caused you to fear above-average chances of portfolio failure, which struck me as completely counterintuitive and is probably something most of us (or none of us) ever realized.  However, that is looking at market prices in isolation (and I wonder if the results of the analysis would differ if the 5-year annualized return data you used represented real returns instead of nominal, but my hunch is that wouldn't make a huge difference).  Looking at market prices as they relate to earnings (or another market valuation metric), on the other hand, tells a different story, as most recently discussed in this thread:  http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/

sol

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #55 on: March 31, 2015, 10:53:25 PM »
So my follow up here is: what *is* a viable method to re-evaluate and reset spending?

I see an obvious answer to this question: don't re-evaluate at all until you have a better idea of your time horizon.  If you're 90 and still have a million dollars left, you can probably crank it up.  If you're 30 you probably can't, just because over long time periods your crystal ball is less certain. 

That's the real problem here, as beltim and brook discussed above.  It's not like the 91% success vs the 95% success rates mean anything, when 6 of the 8 failures are caused by the same crazy inflation rates in near-consecutive years.  That was really just one historical event, and none of us have any idea of the real likelihood of that kind of event happening again.  Which is why I think anything over about 80% success is just wishful thinking.

do you think it would be a useful exercise to do the same analysis using a more failure-prone WR (like maybe 5%)?  Perhaps once there are more failure cases in the dataset, the analysis will show that

I don't think it's useful, no.  If the difference in failure rates is only due to how effectively you capture the stagflation of the 1970s, or other similar grouped sequences of bad timing years, then your percentage outcomes don't really tell you anything meaningful about future failure rates.  We could have another bad run like the 70s or the 30s at any moment, and what you really need to know is what the likelihood of that kind of bad run happening again is.  Historical returns don't help you with that estimate, they only provide false precision by turning those two events into a whole bunch of failure years. 

I think cranking the SWR up to 5% is functionally equivalent to doing the same analysis on monthly returns, instead of annual returns.  You've just oversampled the same data to get more data points, but it's only going to give you false precision. 

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #56 on: April 01, 2015, 09:16:29 AM »
I think cranking the SWR up to 5% is functionally equivalent to doing the same analysis on monthly returns, instead of annual returns.  You've just oversampled the same data to get more data points, but it's only going to give you false precision.

I don't think this is quite right, though it may be functionally equivalent (or at least analogous) to doing the same analysis on a dialed-down threshold for market returns in order to get more data points (the opposite of what beltim suggested in post # 52).  I do agree that this entire exercise has limited utility because of the false precision issue, but isn't that equally true of SWR research in general?

(This is related to the recent discussion in this thread (primarily between skyrefuge and me, interspersed between a lot of noise about the broader topic of investing vs. paying off a mortgage in general).)

dandarc

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #57 on: April 01, 2015, 09:37:31 AM »
I'm not entirely sure that retire again and again is implemented correctly on c-firesim - really looks like the spending only ever resets once (not again and again).

Apparently this very idea was discussed here a year and a half ago:

http://forum.mrmoneymustache.com/investor-alley/new-withdrawal-method-retire-again-again/

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #58 on: April 01, 2015, 01:04:38 PM »
I'm not entirely sure that retire again and again is implemented correctly on c-firesim - really looks like the spending only ever resets once (not again and again).

I think you're right.  Based on the "spending level" graph in the cfiresim output (which I hadn't paid attention to before), it looks like there's only one spending reset.  So the 91.3% success rate referenced above is overstating the historical success rate of the OP's proposed strategy (perhaps grossly so?).

Quote
Apparently this very idea was discussed here a year and a half ago:

http://forum.mrmoneymustache.com/investor-alley/new-withdrawal-method-retire-again-again/

This appears to be the very idea (via its expression a few months earlier in a Bogleheads forum thread started by the same poster) that gave rise to the "Retire Again & Again" spending plan option in cfiresim.  So is there just a glitch in cfiresim?  It seems to be implementing a spending plan of "Retire Again (But Not Again)" instead of "Retire Again & Again."

dandarc

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #59 on: April 01, 2015, 01:21:32 PM »
I'm not entirely sure that retire again and again is implemented correctly on c-firesim - really looks like the spending only ever resets once (not again and again).

I think you're right.  Based on the "spending level" graph in the cfiresim output (which I hadn't paid attention to before), it looks like there's only one spending reset.  So the 91.3% success rate referenced above is overstating the historical success rate of the OP's proposed strategy (perhaps grossly so?).

Quote
Apparently this very idea was discussed here a year and a half ago:

http://forum.mrmoneymustache.com/investor-alley/new-withdrawal-method-retire-again-again/

This appears to be the very idea (via its expression a few months earlier in a Bogleheads forum thread started by the same poster) that gave rise to the "Retire Again & Again" spending plan option in cfiresim.  So is there just a glitch in cfiresim?  It seems to be implementing a spending plan of "Retire Again (But Not Again)" instead of "Retire Again & Again."

Could be just the spending graph, I suppose.  But the spending graph has looked right on other options.  I was expecting spending to look more like stair-steps and less like one single jump (often very early in the scenario) followed by a plateau.

dktoller

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #60 on: April 02, 2015, 09:30:50 AM »
I do agree that this entire exercise has limited utility because of the false precision issue, but isn't that equally true of SWR research in general?

The SWR dataset is embarrassingly small, given that we are trying to forecast 30 years based on 80? years of sequentially-correlated data. I wonder whether the difference between 5% and 15% failure rates is even statistically significant.

That said, SWR still provides value in framing a way to think about retirement spending.

As far as RAA, this approach guarantees that you retire into a declining market.  Not good.

sol

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #61 on: April 02, 2015, 10:23:45 AM »
I wonder whether the difference between 5% and 15% failure rates is even statistically significant..

Most sources say no difference.  Anything above about 80% success is just giving you a false sense of security.

The real question here is what the relevant decades of the future world economy look like.  If your early retirement decades look like the 1930s or 70s, your 3% or 5% plan might fail.  If they look like any other decades you'll be fine.  I'm not sure it makes sense to count up the number of failure rate years in those past decades as a proxy for how likely those types of economic conditions are to reoccur.
« Last Edit: April 02, 2015, 10:26:23 AM by sol »

My Own Advisor

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #62 on: April 07, 2015, 07:18:14 PM »
Step 1. Own your home.
Step 2. Have no debt.
Step 3. Have ~ $1 M in investments churning out 3-5% in dividends per year.
Step 4. Spend the dividends ($30k - $50k) per year and keep capital intact until old age, so you can afford home care to pay for expenses.
Step 5. Forget about the SWR.

That should do it :)

arebelspy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #63 on: April 07, 2015, 07:38:53 PM »
Step 1. Own your home.
Step 2. Have no debt.
Step 3. Have ~ $1 M in investments churning out 3-5% in dividends per year.
Step 4. Spend the dividends ($30k - $50k) per year and keep capital intact until old age, so you can afford home care to pay for expenses.
Step 5. Forget about the SWR.

That should do it :)

So your spending could fluctuate by as much as 66% in a given year, based on dividends?

..yeah, I think I'll stick with a more traditional ER plan.
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Shane

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #64 on: April 08, 2015, 05:22:43 PM »
This thread is interesting.

It's made me realize that my understanding of the 4% rule was flawed. It never occurred to me that I could continue withdrawing 4% of the starting value of my portfolio every year, no matter what happened, i.e. retire with $1M, withdraw $40,000 the first year, in year two portfolio value drops 40% to $600,000, still withdraw $40K... My understanding now is that, historically, most times, even if I did that, probably my nest egg would survive for 30 years.

To me, that seems like pretty reckless behavior, and I have no intention of doing that, but it's nice to know that even if I did, probably I wouldn't run out of money.

My wife and I are planning on being flexible and definitely reducing withdrawals, probably down to just dividends, from our stash during serious downturns in the stock market, and getting at least part time jobs doing something low stress and relatively enjoyable (because we know it's just temporary). When stocks go on sale during market crashes, we're planning on making enough money to at least max out our IRAs for a year or two, so that we can buy shares at a discount. Conversely, as our stash grows, I won't have any fear about spending 5% or even more, some years, because I'll know that when the markets head south, I'll be ready and able to reduce expenses accordingly, either by working and/or using geographic arbitrage and moving to a lower COL part of the country/world.


forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #65 on: May 06, 2015, 06:09:43 PM »
Yes, I was assuming that you re-roll the cylinder after each trigger-pull.  Isn't that how Russian roulette is played?  I'm by no means an expert, but it seems like that's got to be the way it works -- I sure as hell wouldn't pull the trigger after 95 trigger pulls with no shot fired if the cylinder doesn't get re-rolled :-)

Also, now I see beltim's point -- the Russian roulette analogy would require consecutive fully-elapsed 30 year periods for the analogy to correctly apply.

Think of each year in the last 100 years as a chamber. In this analogy, the bullets would be distributed throughout the gun in the same places as a retirement start date for a 4% SWR failure scenario. So you would not re-roll the chamber. You would proceed in order year-to-year (chamber-to-chamber) until you hit a bullet or no longer need your portfolio (which sounds like you died either way). Now technically you wouldn't necessarily have portfolio failure if you hit a bullet, say in year 25 and you were only planning to need your money for 40 years, and the sequence of returns you hit at year 25 just happens to allow your portfolio to last for 15 years. So the math gets a little complicated there. You could apply a damping function to each successive year to lower the effect of it on your portfolio success.

forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #66 on: May 06, 2015, 06:22:19 PM »
Alright, so I have a dataset for the S&P 500 that goes back to 1928.  Using cFIREsim for all 30 year periods since 1928 gives a success rate of 51/58 or 88%.  The failure years are:
1929
1965
1966
1967
1968
1969
1973
Let's restrict ourselves to only 30 year periods that start after a 5 year period with annualized returns in excess of 5% (to model cases where the OP might increase spending to a new 4%).  That's 36 out of 53 periods ending in 1984.  By comparing those to the starting failure years, we can get historical information on the success rate of this strategy.  Notably, 1965, 1966, 1967, and 1968 all came after 5-year periods where greater than 5% annual returns.  So, in the historical data set of 36 periods, 4 resulted in failure using the OP's idea (put into practice by 5% annual gains over the preceding 5 years).  Note that the inflation rate in each of the failure times was less than 5%.  So that's a historical success rate of 32/36 or 89%, statistically indistinguishable from the original, full data set.

Ok, I've now focused on this post and taken the time to digest the methodology you used here (which was frankly brilliant).

If we put aside for a moment the fact that there probably just isn't enough data to allow us to draw statistically significant conclusions (which I agree is a real problem), then what your analysis tells us is that retiring after a large market run-up (on an annualized basis) does *not* result in decreased chances of portfolio success.  That is an incredibly counterintuitive result.

I think this is a nice analysis. But I don't draw the same conclusion. I assume Beltim did not adjust for inflation here (no mention of real returns). Given that annualized returns during that 1928+ time period were somewhere around 10% (7% real), 5% returns are not indicative of a bubble, and may not even have kept up with normal historical returns. Beltim doesn't say if each individual year in the 5-year periods had a positive return >= 5%. It could be read that way or just that the 5 year period had a CAGR of 5% or more. So unless I'm not understanding what analysis was done, I'm not sure that we can make the conclusion you state here. And I'm not really sure what it does say. I would be interested in hearing more detail about the methodology and other findings from this analysis. Maybe even posting the spreadsheet used so we can see what happened in the scenarios that were excluded, etc.

forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #67 on: May 06, 2015, 06:25:39 PM »
Beltim, did the data you used for historical S&P 500 returns include reinvestment of dividends?  And was it for returns in nominal terms?

Yes on both - it included dividends, and was in nominal terms.  However, the inflation in each 5 year period below that was less than 5% annualized.

So it would theoretically have been possible for there to be 5 years of 6% returns each year, and inflation to have been 4% each year?

forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #68 on: May 06, 2015, 06:41:53 PM »

And, honestly, an analysis of the failures that started in the 60s pretty clearly shows that the problem wasn't really low market returns the problem was the crazy high inflation of the 70s.  If you look at 20 year retirement period with a withdrawal rate of 6%, the success rate is about 76%.  And one of the big blocks of failures is starting periods in the 60s.  But periods with not great returns, but low inflation (i.e. periods ending in 2009 or later) work out pretty well.

Right, but I don't know if I would state it that way.  All you're really saying is that the problem was really low market returns in real terms.

What your analysis demonstrated is that (historically) retiring after a great market run should not have caused you to fear above-average chances of portfolio failure, which struck me as completely counterintuitive and is probably something most of us (or none of us) ever realized. 

I think the bolded section is the core of what I think is a misunderstanding of the analysis. If I understand what Beltim did, a 5% CAGR in nominal terms is in no way a great market run. It's actually pretty poor historically speaking. So, if I understand correctly, this did not tell us much about retiring when equity prices are substantially overvalued historically. A better analysis would be to look at what the failure rate was for retirements starting in a year when CAPE (or a similar metric) was, say, over 20. There aren't a lot of those years with 30 years following that.

1901
1902
1903
1906
1929
1930
1937
1962
1964
1965
1966
1967
1968
1969

I bet you would find more than 4 failures here.

forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #69 on: May 06, 2015, 06:55:38 PM »

And, honestly, an analysis of the failures that started in the 60s pretty clearly shows that the problem wasn't really low market returns the problem was the crazy high inflation of the 70s.  If you look at 20 year retirement period with a withdrawal rate of 6%, the success rate is about 76%.  And one of the big blocks of failures is starting periods in the 60s.  But periods with not great returns, but low inflation (i.e. periods ending in 2009 or later) work out pretty well.

Right, but I don't know if I would state it that way.  All you're really saying is that the problem was really low market returns in real terms.

What your analysis demonstrated is that (historically) retiring after a great market run should not have caused you to fear above-average chances of portfolio failure, which struck me as completely counterintuitive and is probably something most of us (or none of us) ever realized. 

I think the bolded section is the core of what I think is a misunderstanding of the analysis. If I understand what Beltim did, a 5% CAGR in nominal terms is in no way a great market run. It's actually pretty poor historically speaking. So, if I understand correctly, this did not tell us much about retiring when equity prices are substantially overvalued historically. A better analysis would be to look at what the failure rate was for retirements starting in a year when CAPE (or a similar metric) was, say, over 20. There aren't a lot of those years with 30 years following that.

1901
1902
1903
1906
1929
1930
1937
1962
1964
1965
1966
1967
1968
1969

I bet you would find more than 4 failures here.

It looks like there are 5 failures: 1965-1969 using cFIREsim's default portfolio. So 9/14=64% success rate after CAPE>20 retirements. A bunch of the earliest ones get pretty close to depleting the portfolio, but survive. CAPE is 27 right now. The only time it's been that high with 30 years after that is 1929 (which succeeded, but spent about 20 years hovering around 50% of the initial portfolio value, requiring 8% withdrawals year after year).

I don't think it's correct to say that elevated market values are not associated with higher failure rates.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #70 on: May 06, 2015, 07:00:23 PM »
I think the bolded section is the core of what I think is a misunderstanding of the analysis. If I understand what Beltim did, a 5% CAGR in nominal terms is in no way a great market run. It's actually pretty poor historically speaking. So, if I understand correctly, this did not tell us much about retiring when equity prices are substantially overvalued historically. A better analysis would be to look at what the failure rate was for retirements starting in a year when CAPE (or a similar metric) was, say, over 20.

It wasn't a misunderstanding - that was what was explicitly stated in the second half of the post you quoted from:

Right, but I don't know if I would state it that way.  All you're really saying is that the problem was really low market returns in real terms.

What your analysis demonstrated is that (historically) retiring after a great market run should not have caused you to fear above-average chances of portfolio failure, which struck me as completely counterintuitive and is probably something most of us (or none of us) ever realized.  However, that is looking at market prices in isolation (and I wonder if the results of the analysis would differ if the 5-year annualized return data you used represented real returns instead of nominal, but my hunch is that wouldn't make a huge difference).  Looking at market prices as they relate to earnings (or another market valuation metric), on the other hand, tells a different story, as most recently discussed in this thread:  http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/

The linked thread does almost exactly the analysis you suggested, showing that retirement start years with high CAPEs have historically been much more failure-prone.

forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #71 on: May 06, 2015, 07:05:23 PM »
I think the bolded section is the core of what I think is a misunderstanding of the analysis. If I understand what Beltim did, a 5% CAGR in nominal terms is in no way a great market run. It's actually pretty poor historically speaking. So, if I understand correctly, this did not tell us much about retiring when equity prices are substantially overvalued historically. A better analysis would be to look at what the failure rate was for retirements starting in a year when CAPE (or a similar metric) was, say, over 20.

It wasn't a misunderstanding - that was what was explicitly stated in the second half of the post you quoted from:

Right, but I don't know if I would state it that way.  All you're really saying is that the problem was really low market returns in real terms.

What your analysis demonstrated is that (historically) retiring after a great market run should not have caused you to fear above-average chances of portfolio failure, which struck me as completely counterintuitive and is probably something most of us (or none of us) ever realized.  However, that is looking at market prices in isolation (and I wonder if the results of the analysis would differ if the 5-year annualized return data you used represented real returns instead of nominal, but my hunch is that wouldn't make a huge difference).  Looking at market prices as they relate to earnings (or another market valuation metric), on the other hand, tells a different story, as most recently discussed in this thread:  http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/

The linked thread does almost exactly the analysis you suggested, showing that retirement start years with high CAPEs have historically been much more failure-prone.

That poster used a slightly more aggressive portfolio and found slightly poorer outcomes than I did. So given that you've seen these analyses, do you still think that retiring at the top of overvalued markets is not any more risky than retiring in a more normally valued or undervalued market?

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #72 on: May 06, 2015, 07:06:18 PM »
I don't think it's correct to say that elevated market values are not associated with higher failure rates.

No-one said that elevated market values are not associated with higher failure rates, just that a run-up in market prices was not associated with higher failure rates.

I think your last few posts are all consistent with everything that was said above - a run-up in prices (in nominal terms) in the years leading up to retirement was not indicative of a greater likelihood of portfolio failure.  The answer might be similar for real returns (that analysis hasn't been done), which is not the same thing as valuation (using CAPE or similar measures).

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #73 on: May 06, 2015, 07:10:05 PM »
That poster used a slightly more aggressive portfolio and found slightly poorer outcomes than I did. So given that you've seen these analyses, do you still think that retiring at the top of overvalued markets is not any more risky than retiring in a more normally valued or undervalued market?

Our posts are crossing, but no, I never said that I thought retiring in an overvalued market is not riskier.  You're conflating "run-up in prices" with "overvaluation" -- they're not the same thing (as was explicitly recognized and discussed in the earlier discussion in this thread).

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #74 on: May 06, 2015, 07:17:20 PM »
I don't think it's correct to say that elevated market values are not associated with higher failure rates.

No-one said that elevated market values are not associated with higher failure rates, just that a run-up in market prices was not associated with higher failure rates.

I think your last few posts are all consistent with everything that was said above - a run-up in prices (in nominal terms) in the years leading up to retirement was not indicative of a greater likelihood of portfolio failure.  The answer might be similar for real returns (that analysis hasn't been done), which is not the same thing as valuation (using CAPE or similar measures).

OK, I see the distinction. In that case, I would not equate 5% CAGR (Beltim's analysis) to a "run up" in prices. Especially nominal terms. That's more a sideways market. In fact, a 5% nominal CAGR would make me more comfortable about retiring then, because for the last 5 years, I know the market has been underperforming the historical average (by about 50%) and reversion to the mean will increase my expected long term total returns. So for those years closer to the 5% rate you should see more success. For those years much higher than the 5% rate (15% say) you should see more failures. N gets pretty small for some of those.

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #75 on: May 06, 2015, 07:29:28 PM »
In that case, I would not equate 5% CAGR (Beltim's analysis) to a "run up" in prices. Especially nominal terms. That's more a sideways market. In fact, a 5% nominal CAGR would make me more comfortable about retiring then, because for the last 5 years, I know the market has been underperforming the historical average (by about 50%) and reversion to the mean will increase my expected long term total returns. So for those years closer to the 5% rate you should see more success. For those years much higher than the 5% rate (15% say) you should see more failures. N gets pretty small for some of those.

Yeah, that's a good point.  Beltim mentioned the possibility of doing the same analysis using a higher threshold for the annualized return in the years leading to retirement in post # 52, but the problem we keep coming back to is insufficient number of failure cases.  That's why I had suggested doing the analysis using a higher (more failure-prone) WR, but no consensus was reached on whether that would be a useful exercise.

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #76 on: May 06, 2015, 07:36:38 PM »
In that case, I would not equate 5% CAGR (Beltim's analysis) to a "run up" in prices. Especially nominal terms. That's more a sideways market. In fact, a 5% nominal CAGR would make me more comfortable about retiring then, because for the last 5 years, I know the market has been underperforming the historical average (by about 50%) and reversion to the mean will increase my expected long term total returns. So for those years closer to the 5% rate you should see more success. For those years much higher than the 5% rate (15% say) you should see more failures. N gets pretty small for some of those.

Yeah, that's a good point.  Beltim mentioned the possibility of doing the same analysis using a higher threshold for the annualized return in the years leading to retirement in post # 52, but the problem we keep coming back to is insufficient number of failure cases.  That's why I had suggested doing the analysis using a higher (more failure-prone) WR, but no consensus was reached on whether that would be a useful exercise.

I think doing it for 10% real (which is the important part right) and 12% real would have a small number of years, but would be more illustrative. You would probably have a bunch of failures for the small number of years, which would tell you that it is more risky than you were thinking. Or so I would project. 2010-2014 was 13.5% real. I'd be pretty nervous about retiring with a 4% SWR now.

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #77 on: May 06, 2015, 07:39:28 PM »
My analysis was only to evaluate the success rate of a retirement strategy where you adjust the withdrawal rate - as was discussed in the first post.  I used a period of five years somewhat arbitrarily, and the 5% rate was deliberately relatively low so that I would have more data points.  The data don't indicate anything about the success rate after a huge market runup - because they weren't intended to.  What the data do show is that you could adjust your withdrawal rate after the market goes up, and the new, higher withdrawal rate doesn't seem to make much of a difference in the chance of your money lasting a new 30 year period.

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #78 on: May 07, 2015, 10:46:00 AM »
My analysis was only to evaluate the success rate of a retirement strategy where you adjust the withdrawal rate - as was discussed in the first post.  I used a period of five years somewhat arbitrarily, and the 5% rate was deliberately relatively low so that I would have more data points.  The data don't indicate anything about the success rate after a huge market runup - because they weren't intended to.  What the data do show is that you could adjust your withdrawal rate after the market goes up, and the new, higher withdrawal rate doesn't seem to make much of a difference in the chance of your money lasting a new 30 year period.

That makes sense. BG just interpreted it differently. I think you would want to have longer than a 5 year "run up" period then, since the risk would probably only show up in any meaningful way with more time. 10 or 15 years even.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #79 on: May 07, 2015, 11:38:58 AM »
Well, to be fair, the analysis may have been prompted by the OP's question and intended to evaluate the success rate of the OP's proposed withdrawal strategy, but it was also done knowing that it would have broader application.  As beltim said:

I'm trying to figure out the right stats for what the OP is actually suggesting - basically, how the probability of the 4% WR succeeding varies depending on the previous x years of market returns.  I think it's an interesting question, particularly in that it has applications beyond the OP's question.  The market returns in the few years before retiring certainly affect your probability of success, and it would be interesting to know how.  Unfortunately, I suspect there isn't enough data in the historical record to get a statistically significant answer.

It's the problem of insufficient historical data that we keep bumping into.  Beltim chose a relatively low threshold for returns and a relatively short lead-up period to get more data points; increasing either threshold will give us less data points to work with.  That is why I suggested running the test with a failure-prone WR.

Forummm, with respect to your point about a 5% (or higher) nominal run-up being par for the course, using that threshold did cut out 38% of the 30-year periods from the original data set, so it wasn't that common in the historical record.  But you're right that it isn't very meaningful, given that it's nominal rather than real.  And again, the problem is that correcting for it exaggerates the problem of insufficient number of failure cases.

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #80 on: May 07, 2015, 02:27:07 PM »
Redoing the analysis for a 5-year period with 10% annualized nominal returns, there are just 19 examples to choose from (this seemed low, but the annualized return over that period was 8.2%, so it makes sense that it would be less than half).

Now, here's the truly weird thing.  All 19 of those periods succeeded at using a 4% withdrawal rate for a 30 year period.  I think we're getting into statistical insignificance here, but it's interesting nonetheless.


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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #81 on: May 07, 2015, 02:39:42 PM »
Now, here's the truly weird thing.

We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #82 on: May 07, 2015, 02:43:47 PM »
Now, here's the truly weird thing.



If we hit that bullseye, the rest of the dominoes should fall like a house of cards. Checkmate.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #83 on: May 07, 2015, 02:48:19 PM »
Redoing the analysis for a 5-year period with 10% annualized nominal returns, there are just 19 examples to choose from (this seemed low, but the annualized return over that period was 8.2%, so it makes sense that it would be less than half).

Now, here's the truly weird thing.  All 19 of those periods succeeded at using a 4% withdrawal rate for a 30 year period.  I think we're getting into statistical insignificance here, but it's interesting nonetheless.

But that's not surprising, because we already know that the start years of all the failure cases (of which there are very few to begin with) are clustered around the late 1960's, when nominal returns were not high.  The problem is not enough failure cases in the original data set.  Wouldn't using a more failure-prone WR (and thereby increasing the number of failure cases in the full data set) be a better approach?  Then we can do the analysis using meaningful real returns (and also longer lead-up periods) with statistically more significant (though probably still not actually statistically significant) results.

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #84 on: May 07, 2015, 03:05:31 PM »
Redoing the analysis for a 5-year period with 10% annualized nominal returns, there are just 19 examples to choose from (this seemed low, but the annualized return over that period was 8.2%, so it makes sense that it would be less than half).

Now, here's the truly weird thing.  All 19 of those periods succeeded at using a 4% withdrawal rate for a 30 year period.  I think we're getting into statistical insignificance here, but it's interesting nonetheless.

But that's not surprising, because we already know that the start years of all the failure cases (of which there are very few to begin with) are clustered around the late 1960's, when nominal returns were not high.  The problem is not enough failure cases in the original data set.  Wouldn't using a more failure-prone WR (and thereby increasing the number of failure cases in the full data set) be a better approach?  Then we can do the analysis using meaningful real returns (and also longer lead-up periods) with statistically more significant (though probably still not actually statistically significant) results.

To answer the question of "does a run up in prices negatively correlate to a safe withdrawal rate" maybe.  This shows, though, the danger of using small sample sizes.  19 starting years seems like a reasonable number of data points, but the result suggested - that waiting to retire until a 5 year period of 10% annual returns is SAFER than if you don't - is of course absurd.

So if 19 years isn't enough to give a good answer, would 30?  Doubtful.  So I don't think this analysis will work even at a higher withdrawal rate.

A better analysis setup would be to look at the maximum safe withdrawal rate for each year, and compare that to whatever factor you wanted (CAPE, past 5 year return, past 10 year return, etc.).  Anyone know where I could get that data?

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #85 on: May 07, 2015, 03:17:49 PM »
Someone's done it in a different presentation that I would have but it's pretty cool nonetheless:


brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #86 on: May 07, 2015, 03:31:32 PM »
Someone's done it in a different presentation that I would have but it's pretty cool nonetheless

That is pretty cool.  As discussed in the other active thread on this topic (linked to earlier in this thread), though, CAPE seems to have lost its predictive value in recent decades (whether temporarily or permanently is an open question).

Do you know what parameters were used for the SWR in that chart?

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #87 on: May 07, 2015, 03:48:15 PM »
Someone's done it in a different presentation that I would have but it's pretty cool nonetheless

That is pretty cool.  As discussed in the other active thread on this topic (linked to earlier in this thread), though, CAPE seems to have lost its predictive value in recent decades (whether temporarily or permanently is an open question).

Do you know what parameters were used for the SWR in that chart?

The chart I got from here: https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/
which may have gotten it from here: https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf
Both are good reads.  But it looks like the portfolio they looked at was 60% equities/40% bonds. 

Regarding the bolded part, I think you're misinterpreting the data, or I'm looking at the wrong thread.  The other thread I'm looking at discusses how current measures of the CAPE are directly comparable to previous measures of the CAPE due to accounting changes.  I didn't see anyone argue that CAPE wasn't a good long-term (10 years) predictor of equity returns.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #88 on: May 07, 2015, 03:58:53 PM »
Both are good reads.

Thanks - will take a look.  I usually love Kitces' stuff. 

Quote
Regarding the bolded part, I think you're misinterpreting the data, or I'm looking at the wrong thread.  The other thread I'm looking at discusses how current measures of the CAPE are directly comparable to previous measures of the CAPE due to accounting changes.  I didn't see anyone argue that CAPE wasn't a good long-term (10 years) predictor of equity returns.

This is the thread I was referring to, where skyrefuge pointed out that the past couple of decades are looking kinder to high CAPEs as far as impact on portfolio success:

http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #89 on: May 07, 2015, 04:08:00 PM »

This is the thread I was referring to, where skyrefuge pointed out that the past couple of decades are looking kinder to high CAPEs as far as impact on portfolio success:

http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/

Oh, I see.  Thanks for the clarification.  I thought you were saying CAPE was losing its power to predict returns, not safe withdrawal rate.  Interestingly, in the second link I gave, Kitces makes the point that the correlation between CAPE and SWR is stronger than CAPE and 10-year forward returns.  Interesting stuff!

forummm

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #90 on: May 07, 2015, 05:41:36 PM »
Redoing the analysis for a 5-year period with 10% annualized nominal returns, there are just 19 examples to choose from (this seemed low, but the annualized return over that period was 8.2%, so it makes sense that it would be less than half).

Now, here's the truly weird thing.  All 19 of those periods succeeded at using a 4% withdrawal rate for a 30 year period.  I think we're getting into statistical insignificance here, but it's interesting nonetheless.

So let's say that 1901-1905 has a CAGR of 11% (made up number). Then your analysis would look at whether retiring in 1906 with a 4% withdrawal rate would fail?

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #91 on: May 07, 2015, 05:59:40 PM »
Redoing the analysis for a 5-year period with 10% annualized nominal returns, there are just 19 examples to choose from (this seemed low, but the annualized return over that period was 8.2%, so it makes sense that it would be less than half).

Now, here's the truly weird thing.  All 19 of those periods succeeded at using a 4% withdrawal rate for a 30 year period.  I think we're getting into statistical insignificance here, but it's interesting nonetheless.

So let's say that 1901-1905 has a CAGR of 11% (made up number). Then your analysis would look at whether retiring in 1906 with a 4% withdrawal rate would fail?

Exactly right.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #92 on: May 07, 2015, 09:09:18 PM »
The chart I got from here: https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/
which may have gotten it from here: https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf
Both are good reads.  But it looks like the portfolio they looked at was 60% equities/40% bonds.

Those were both excellent reads.  I'd be curious to see how the chart differs for other allocations, including 100% equities.

I thought you were saying CAPE was losing its power to predict returns, not safe withdrawal rate.  Interestingly, in the second link I gave, Kitces makes the point that the correlation between CAPE and SWR is stronger than CAPE and 10-year forward returns.  Interesting stuff!

But I'm confused about your point here in drawing this distinction.  CAPE has gotten worse at predicting long term stock prices over the past couple of decades, too -- using CAPE's relationship to its historical average as the yardstick, the stock market has been "overvalued" for the past twenty years.  Yes, as the Kitces articles described, CAPE has historically been even more highly correlated with SWRs than with long term equity returns, but it's CAPE's correlation with equity returns that explains its correlation with SWRs (because SWRs are largely determined by equity returns).

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #93 on: May 07, 2015, 11:53:01 PM »
Unless you plan on giving up retirement and picking up work again in 30 years, then 30 years isn't the proper time period for analysis.

If you plan on being retired until you die, then years until death is the appropriate metric to use, and of course it decreases by one each year, so Bayesian statistics are appropriate.

As you near death, the risk goes down somewhat because there are fewer years left for things to go wrong.  On the other hand your withdrawal rate is going to be based on the value at a market peak so your future projections are going to have a greater tendency to the downside and less future growth than the typical year, which increases your risk of failure.

I calculated some numbers from the market peak in December 1999 until December 2014.  Starting with 1,000,000 in the S&P 500 and withdrawing 40,000.  I adjusted spending up each year by the CPI and reinvested all dividends.  At the end you have $551,121 and are spending $57,158.  At that level of spending vs. assets (>10%) there's a very good chance you'll run out of money if you still have 30+ years to go.  With a 3% withdrawal rate you'd still have about $900,000 and spending $42,000.

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #94 on: May 08, 2015, 04:58:50 AM »
Unless you plan on giving up retirement and picking up work again in 30 years, then 30 years isn't the proper time period for analysis.

I doubt there is anyone here who doesn't already recognize this.  But, for the type of historical analysis we've been doing in this thread (and any other history-based, SWR-type research), it makes more sense to use 30-year periods than, say, 60-year periods, because there are a lot more of them in the historical record.  No-one is (or, at least, no-one should be) concluding that any answer applicable to a 30-year retirement is equally applicable to a 60-year retirement.  Instead, we're using the results of 30-year period analyses as useful data points from which to draw informed conclusions.  (For example, if we conclude that a 4% WR is not advisable for a 30-year retirement, then we know it sure as hell isn't advisable for a 60-year retirement.)

Quote
If you plan on being retired until you die, then years until death is the appropriate metric to use, and of course it decreases by one each year, so Bayesian statistics are appropriate

But then there's the "garbage in, garbage out" problem.  A Bayesian statistical analysis would require making assumptions about future returns, right?

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #95 on: May 08, 2015, 01:15:41 PM »
I thought you were saying CAPE was losing its power to predict returns, not safe withdrawal rate.  Interestingly, in the second link I gave, Kitces makes the point that the correlation between CAPE and SWR is stronger than CAPE and 10-year forward returns.  Interesting stuff!

But I'm confused about your point here in drawing this distinction.  CAPE has gotten worse at predicting long term stock prices over the past couple of decades, too -- using CAPE's relationship to its historical average as the yardstick, the stock market has been "overvalued" for the past twenty years.  Yes, as the Kitces articles described, CAPE has historically been even more highly correlated with SWRs than with long term equity returns, but it's CAPE's correlation with equity returns that explains its correlation with SWRs (because SWRs are largely determined by equity returns).

Has it?  CAPE has been off for long periods of time before.  It's possible that it's gotten worse as a predictor, but I haven't seen that data. 

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #96 on: May 08, 2015, 01:43:42 PM »
Has it?  CAPE has been off for long periods of time before.  It's possible that it's gotten worse as a predictor, but I haven't seen that data.

I guess I haven't seen that data either.  It is true that CAPE has historically had a high standard deviation from its mean, spending long periods of time well above or below the mean.  I was using the fact that CAPE seems to have lost some of its power to predict SWRs to conclude that it must have also lost some of its power to predict returns (because how else could the former be explained?), but maybe that reasoning is flawed?  As the Kitces articles pointed out, it's really CAPE's predictive power with respect to the first decade or so of retirement that explains its high predictive power with respect to SWRs (since it's the first decade or so of returns that are the most critical for 30-year portfolio success), so maybe a single anomaly in the early part of the past couple of decades could explain how CAPE has gotten worse than its historical average at predicting SWRs while still allowing it to be as good as (or even better than) it has historically been at predicting long term returns?

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #97 on: May 08, 2015, 01:48:18 PM »
Has it?  CAPE has been off for long periods of time before.  It's possible that it's gotten worse as a predictor, but I haven't seen that data.

I guess I haven't seen that data either.  It is true that CAPE has historically had a high standard deviation from its mean, spending long periods of time well above or below the mean.  I was using the fact that CAPE seems to have lost some of its power to predict SWRs to conclude that it must have also lost some of its power to predict returns (because how else could the former be explained?), but maybe that reasoning is flawed? 

But what's your basis for this?

brooklynguy

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #98 on: May 08, 2015, 02:02:52 PM »
But what's your basis for this?

That retirements commenced in the past 20 years clearly seem to be on track for success to a greater extent than 30-year retirements commenced at all the historical periods in the past with high CAPEs.  (Of course, we won't know for sure until each of the rolling 30-year periods have fully elapsed, but that's why I've been saying "seems to".)  But now that I'm articulating the logical steps I've been taking to draw these conclusions, I'm starting to see that there may be a flaw in the reasoning, but can't pinpoint it.  Perhaps it is possible for CAPE to fail to accurately predict SWRs over the past couple of decades without its predictive performance dropping below the historical average (after all, CAPE hasn't had a perfect correlation with SWRs in the past)?

beltim

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Re: If (SWR+inflation < 4% of stash, reset to 4%, spend SWR+inflation)
« Reply #99 on: May 08, 2015, 02:16:24 PM »
But what's your basis for this?

That retirements commenced in the past 20 years clearly seem to be on track for success to a greater extent than 30-year retirements commenced at all the historical periods in the past with high CAPEs.

But other than the two years reference in skyrefuge's post here http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/msg597846/#msg597846 do you have other data?