Dallas Morning News Columnist Scott Burns reported in a recent column on some of the most important findings of our community’s Great Safe Withdrawal Rate (SWR) Debate.
“A Growing School of Thought”
“The established safe-withdrawal-rate rules of thumb are based on long periods of time in which yields were higher than they are today and stock valuations were lower. A growing school of thought believes future withdrawal rates should be reduced to reflect expected lower future returns. This would knock another 1.5 to 2 percentage points off the safe withdrawal rate.”
Here’s the text of an e-mail I sent to Scott Burns the following day:
“I applaud you for taking the courageous stand you took re the safe withdrawal rate (SWR) topic in your column of June 3, 2005. I am in complete agreement with you that the reason why there have been only a smattering of reports in the general press about what the best-informed experts have long known about safe withdrawal rates is that, as you put it, “it is information most people don’t want to hear.”
“I am writing a book on the Safe Withdrawal Rate Investing Tool that I co-developed with John Russell, and the focus of the book will be the implications of this observation. There are many who have come to believe that investment analysis is primarily a numbers game, that it is all about studying historical stock-return data and summarizing it into impressive-looking tables. My three years of participation in The Great SWR Debate has convinced me that it is the emotional state of the human beings preparing and reading the tables that is of the greatest import.
Bull Market Psychology
“When Bull Market psychology prevails, even very smart people can be taken in by methodologies like those used in the study published at the RetireEarlyHomePage.com site and in the FIREcalc retirement calculator. My guess is that, when stock prices return to moderate levels or drop to even lower levels, there will be all sorts of analysts coming out with “research” that is equally slanted in the opposite direction and that purports to show why stocks are ALWAYS a bad investment choice for the middle-class investor. My take is that an investor who keeps his wits about him can invest successfully with the aid of just a normal endowment of common sense, while the best educated experts in the world will go astray if they permit fear and greed too great an influence in their investment decision-making process.
“If you would at some point like to write a column about the experiences I went through trying to argue for a reasoned approach to safe withdrawal rate analysis at the various Passion Saving/Retire Early discussion boards, please let me know. I think that that there is a lot to be learned from what happened during The Great Safe Withdrawal Rate Debate about how the negative emotions of fear and greed ruin the investing dreams of millions. My hope is that the story of the ordeal I was put through in trying to steer my discussion board community in a positive direction can in coming days be put to use helping middle-class investors come to a better understanding of what it really takes to invest successfully for the long term.
“Since my last e-mail to you, John Russell and I have both put up web sites. Russell’s site reports on his safe withdrawal rate research. It is at Early-Retirement-Planning-Insights.com. My site is focused on the saving side, which is also the focus of my first book, “Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work.” My site only went live on June 1, so there is not much there at the moment. But I will be adding lots of material in the next few months on the new approach to money management that I call “Passion Saving.” The address for my site is PassionSaving.com. If you ever have an interest in writing about this new approach to saving, please be sure to let me know about that as well. It is a subject a lot dearer to my heart than the safe withdrawal rate matter (I am very much a words guy, and very much NOT a numbers guy!).
“Thanks again for your breakthrough column pointing to the “growing school of thought” that a new and more realistic approach to safe withdrawal rate analysis is much needed. There are times when I come close to losing hope that word will get out to middle-class investors re what the true experts already know about the message contained in the historical stock-return data. It seems that every time that I am coming close to giving up, a ray of sunshine arrives to break through the fog and confusion threatening to do so much financial harm to so many. I’ve seen it happen before with words that were put forward by William Bernstein, and with words put forward by Rob Arnott, and with words put forward by Andrew Smithers, and with words put forward by Peter Bernstein, and with words put forward by Robert Shiller. Now I’ve seen it happen with words put forward by Scott Burns, my favorite personal finance columnist on Planet Earth.
“If I weren’t so in love with words, I might have reduced the length of this e-mail to the five of them that I knew on first reading your brave and bold column absolutely needed to be said–Thanks, man, I needed that!”
Scott Burns is a Hero of the First Order in the Passion Saving/Retire Early movement for the words he wrote in the column reported on above. He will probably be taking on a good bit of heat for telling the truth about safe withdrawal rates, but he went ahead and did it anyway. It takes not just brains, but guts too to be one of the best personal finance columnists in the business. Burns has both. He is a columnist with the right stuff.
Still, no one’s perfect, even Scott Burns. You also need to know about an important part of the safe withdrawal rate story that Scott Burns missed in his column of June 3, 2005, reporting that “the established safe-withdrawal-rate rules of thumb are based on long periods of time in which yields were higher than they are today and stock valuations were lower.”
Is the SWR a Rule of Thumb?
That phrase “rules of thumb” should set off warning bells for veterans of the Great Safe Withdrawal Rate Debate that dominated discussions at six Passion Saving/Retire Early boards in the wake of my fateful May 13, 2002, post to the Motley Fool board. A poster going by the screen-name “Ataloss” based much of his defense of the REHP study (the study published by John Greaney at the RetireEarlyHomePage.com site) on the claim that the SWR is nothing more than a rule of thumb, that there is no right or wrong with rules of thumb, and that therefore it is not possible for Greaney to have gotten the number wrong in his study.
I disagree. The safe withdrawal rate is used as a rule of thumb. That much is certainly so. Pessimists adopt as their Personal Withdrawal Rate (PWR) a number a bit lower than the safe withdrawal rate on grounds that we may see a returns sequence in the future worse than any we have seen in the past. Optimists adopt as their Personal Withdrawal Rate (PWR) a number a bit greater than the safe withdrawal rate on grounds that it is not too likely that a worst-case scenario will pop up in their retirement. There is no rule that says that those making use of safe withdrawal rate analysis in putting together their retirement plans must incorporate without adjustment the number identified as the safe withdrawal rate in an analytically valid study. The SWR is not each SWR study user’s PWR.
That said, the SWR is not itself a rule of thumb. The SWR is a mathematical construct. It is the highest withdrawal rate that works in the event that a worst-case returns sequence (the worst that we have seen in history but nothing worse than that) pops up in a particular retirement. There is no one right answer when one is selecting a PWR. There are right and wrong answers when one is calculating the SWR. Greaney got the number wrong in his SWR study and Bill Sholar got it wrong in his FIREcalc retirement calculator, and their failure to correct the errors they made has put thousands of retirements at risk of going bust. So this aspect of the question is a matter of no small consequence.
Scott Burns Corrects Peter Lynch
It is surprising to see Scott Burns make the mistake of speaking of the calculation of the SWR as if it were a matter of subjective guesswork (a mere decision to settle on one “rule of thumb” rather than another). Scott Burns is the one who identified the error made by Peter Lynch when Lynch said that a take-out number of 7 percent is safe because that is the real long-term return for stocks. If the SWR is a mere rule-of-thumb, couldn’t it be said that Lynch was every bit as right in saying that the SWR was 7 percent as Scott Burns was in saying (at the time) that the SWR is 4 percent? I don’t believe that Scott Burns viewed the SWR concept as being so fuzzy a concept then as he appears to view it as being today. I’ve many times posted to the same discussion boards as Greaney and Sholar, and there is a lot of evidence in the Post Archives of those boards showing that those two in earlier days also understood that the SWR is the product of a mathematical calculation.
It is the fact that the SWR is the product of a mathematical calculation that provides SWR analysis its great value as a tool for helping investors plan their retirements. There are all sorts of viewpoints expressed in all sorts of forums that provide investors with guesswork as to what they should do with their money. An analytically valid SWR study provides something unique–solid, hard, objective numbers. Transform SWR calculation into a subjective exercise and you take away from it the very thing that makes SWR analysis an analytical tool of unique power.
The other thing lacking in the recent Scott Burns’ column is a statement of whether he agrees with “the growing school of thought” asserting that the SWR for retirements beginning today is about 1.5 percentage points less than the 4 percent take-out number identified in the REHP study and FIREcalc as “100 percent safe.” Based on things that Scott Burns has said both in earlier columns and in private correspondence with me, I believe that he agrees with the school of thought arguing that a validly calculated SWR must include an adjustment for changes in valuation levels for stocks. It would be a positive step for him to say that in clear and unmistakable terms.
There seems to be no limit to the mental gymnastics that defenders of the REHP study and FIREcalc will go to in an effort to avoid acknowledging their grave flaws. Given the consequences likely to be experienced by aspiring retirees placing their confidence in the analytic validity of these tools, a clear statement by Scott Burns that Greaney and Sholar got the number wrong would do our movement a world of good. It should be remembered here that Scott Burns’ citing of the REHP study in earlier days provided Greaney a good bit of the credibility that he has won (unfortunately so, in my view) for his investing views in recent years.
Scott Burns wrote a great column. He has advanced the ball in a significant way. We all owe him our gratitude for a job well done on our behalf. But I do not believe that it is a good idea for us to declare The Great Safe Withdrawal Rate Debate over at this stage of the proceedings. There have been many twists and turns over the course of the past 37 months of discussions and my guess is that there are many more twists and turns yet to come for at least another 37 months into the future. We’ve got a tiger by the tail with this one. That’s my take.
Thanks, Scott Burns. Next time, though, please be sure to let us know what you personally think of this “growing school of thought” that the true SWR is 1.5 to 2 percentage points lower than the 4 percent number that Greaney and Sholar have been telling us for so long now is “100 percent safe” for aspiring early retirees with high stock allocations planning to hand in their resignations at times of the sorts of high stock valuations that prevail today. Do those in the growing school of thought (hey, that includes me and John Russell!) have it right or do those in the Greaney/Sholar camp have it right?
They can’t possibly both have it right, can they?
Well, can they?