Rise of the New School of Safe Withdrawal Rate Analysis

Rise of the New School of Safe Withdrawal Rate Analysis, Update #1 — Bill Sholar’s Failing Confidence in FIRECalc

The July 15, 2005, issue of Robert Powell’s Retirement Weekly endorses the Early Retirement Forum (Early-Retirement.org), quoting Brent Gindleberg as saying: “It’s my favorite (early) retirement site.” I agree with Gindleberg. The Early Retirement Forum is an awesome resource for those seeking financial freedom early in life. The site is owned by Bill Sholar, who posts in the Financial Freedom Discussion-Board Community as “Dory36.” I know Bill from my Motley Fool days (when our small but quickly growing movement was just getting off the ground). He’s an insightful poster and an all-around good guy. His discussion board is today by far the best financial freedom board on Planet Internet.

What makes the endorsement of the Early Retirement Forum ironic is that the write-up notes that “the site also features a link to the Financial Independence/Retire Early calculator.” The SWR claims put forward in FIRECalc are based on the findings of the safe withdrawal rate (SWR) study authored by John Greaney and published at RetireEarlyHomePage.com (the REHP study). That study was discredited during The Great SWR Debate, which I kicked off with a post to the Motley Fool board in May 2002 and which generated tens of thousands of response posts at half a dozen boards over the following three years. Ultimately, it was determined beyond any reasonable doubt that I was right in what I said in my May 2002 post–changes in valuation levels do indeed affect the SWR for stocks, and, since it includes no adjustment for changes in valuation levels, the REHP study got the SWR number wrong (what Greaney actually calculated was the Historical Surviving Withdrawal Rate, not the Safe Withdrawal Rate).

It pains me to see a connection drawn between Greaney’s study and the Early Retirement Forum in a reference to the latter in a respected retirement publication. Greaney’s abusive posting destroyed the Motley Fool board as a resource for learning about how to retire early. All of our effective on-topic posters left the board during the Campaign of Terror that Greaney and his supporters employed to block reasoned discussion of the flaws in the methodology of his SWR study. I now see the potential for a repeat performance at the Early Retirement Forum.

It is clear from Sholar’s posting that he no longer has confidence that the REHP study reports the SWR accurately. He once did. Back in his Motley Fool days, Sholar was a big advocate of the Greaney study. But in Early Retirement Forum threads in which both Sholar and I participated, he said that be believes that anyone using FIRECalc to plan his or her retirement today needs to include lots of slack to cover the possibility that stocks might perform in the future somewhat in the way in which they have always performed in the past. Sholar is of course correct. The Greaney study is off the mark on its SWR calculation by two full percentage points, according to William Bernstein’s book The Four Pillars of Investing. Anyone using the REHP study to plan a retirement beginning at today’s valuation levels is engaging in high-risk retirement planning.

New School Safe Withdrawal Rate Research Unfortunately, Sholar has not corrected FIRECalc to reflect what we have learned about how to calculate SWRs during the Great Debate. Thus, the errors in the numbers reported as safe by FIRECalc are every bit as serious as the errors in the numbers reported as safe in the REHP study. Sholar made an effort at permitting honest and informed SWR posting at his site. He opened a separate board there just for discussion of the Data-Based Methodology for SWR calculations developed by John Walter Russell (see Early-Retirement-Planning-Insights.com). Greaney supporters threatened to destroy the Forum if Sholar allowed the new board to remain, and a few days after setting it up Sholar capitulated to the Greaney Goon Squad and took the entire board down.

I think it is fair to say that Greaney is bad news for the Financial Freedom movement. There are tens of thousands of middle-class workers who have made use of our various boards to learn what it takes to win financial freedom early in life. We all should be very proud of the work we have done over the course of the past six years. We have done nothing less than revolutionize our community’s understanding of what works in personal financial planning. We owe something to the tens of thousands of middle-class workers who have put their confidence in us. We should always be sure to shoot straight with them.

Sholar is a straight-shooter by nature. That’s clear to me. But I think he is playing a dangerous game indeed in permitting Greaney and his supporters to continue to post at his Forum, and in holding off on correcting the errors he made (unintentionally at the time they were made, to be sure) in FIRECalc. No one knows how long it will be before we see the sorts of adjustments in stock prices that are sure to come if you believe William Bernstein’s statement that the connection between changes in valuation levels and SWRs will always apply as a matter of “mathematical certainty.” But when they do come, I don’t think it takes a genius to see that it will not reflect well on our movement that we permitted the REHP study and FIRECalc to remain uncorrected while they continued to offer discredited SWR findings to tens of thousands of aspiring early retirees.

If you are reading this, Bill, please give what I am saying here your serious consideration. You saw what Greaney’s abusive posting tactics did to the Motley Fool board. Please don’t let the same happen to the wonderful forum you have built at Early-Retirement.org. Make the necessary corrections to FIRECalc or take it down from the site altogether. Stand up to the Greaney supporters. Do what’s right.

Will you lose a few posters in the short-term? For sure. Will you gain ten times that many in the long-run? I’m just as sure of that. You have the power to get our movement back to where it once belonged, Bill. Don’t let us down.

Rise of the New School of Safe Withdrawal Rate Analysis, Update #2 — Bill Sholar Defends the FIRECalc Safe Withdrawal Rate Calculator

Bill Sholar came to the defense of his FIRECalc retirement calculator in a recent thread at the Early Retirement Forum.

The background is that I said in a blog entry from last week that the methodology employed in FIRECalc is analytically invalid for purposes of determining safe withdrawal rates. Sholar says in response that: “If someone were to claim an ability to predict the temperature in St. Louis for August 13, 2007, he would universally be recognized as a charlatan. But if someone were to say that, based on recorded history, you could be safe leaving your heavy winter clothing at home that day–everyone would see that as a blinding flash of the obvious. Could there be a new ice age? Sure. But not too likely.”

The Path to Retirement

Sholar and I are in agreement that it is not possible to predict the exact temperature that will apply on a specified future day, and that it is not possible to predict precisely what withdrawal rate will be the highest that will work for retirements beginning today. Where we part company is on his claim that it is safe for those retiring today with high stock allocations to plan to take a 4 percent inflation-adjusted withdrawal from their portfolios for 30 years. With valuations where they are today, the historical stock-return data reveals this as a risky plan, not a safe one.

Say that someone looked at what the high temperature was on two dates in August in the past–August 10, 1934, and August 22, 1957. Say that on August 10, 1934, the high temperature was 98 degrees and that, on August 22, 1957, the high temperature was 97 degrees. Would it be reasonable to conclude from these two data points that it is 100 percent safe to count on the temperature on August 13, 2007, to be at least 97 degrees?

It would not be reasonable. It would be reasonable to believe that the high temperature might be 97 degrees on August 13, 2007, or perhaps even something higher than that. But it would by no means be safe to stake too much on things turning out that way. Nor is it safe to stake your retirement on a 4 percent withdrawal from a high-stock portfolio at today’s valuation levels. FIRECalc’s conclusions do not follow from its findings regarding the historical data.

There are two cases in the history of the U.S. stock market in which we reached valuation levels somewhat in the neighborhood of those that have applied in recent years–the late 1920s and the mid-1960s. In both of those cases, retirees with high stock allocations who took 4 percent withdrawals were crushed.

Yes, they had more than $1 remaining in their portfolios at the end of 30 years. FIRECalc counts it as a retirement success if the hypothetical retiree started with $2 million in his portfolio and ended up 30 years later with only $1 remaining. I do not. I view a loss of $1,999,999 over a 30-year holding period to be an almost unmitigated disaster. I would not dream of arguing that those sorts of investing results are the sort that people aspiring to financial freedom early in life should be aiming for.

Still, a portfolio of more than $1 at the end of 30 years is a portfolio that did indeed survive the 30-year period. I have no objection if Sholar refers to the 4 percent figure as the Historical Surviving Withdrawal Rate (HSWR). It is indeed that.

But is it safe for a retiree today to stake his retirement on a hope that the third time a 4 percent withdrawal is tried from such high valuation levels the retirement will barely squeak by yet again? It is not. The historical data is screaming out a message to us. The message is: “Taking a 4 percent withdrawal from a high-stock portfolio for a retirement beginning at today’s valuations is a high-risk strategy. Please don’t be fooled by those doing gymnastics with the numbers in support of a claim that this is a safe thing to do!”

We should listen to what the historical data is telling us. We should advise aspiring early retirees to make use of the analytically valid SWR analyses described in William Bernstein’s The Four Pillars of Investing and at John Walter Russell’s Early-Retirement-Planning-Insights.com web site.

Russell’s research shows that the SWR for an 80 percent S&P Index portfolio in January 2000 was 1.6 percent. In more recent times, the SWR for that portfolio has generally been a number between 2.5 percent and 3.0 percent, and the odds of that portfolio surviving 30 years with a 4 percent take-out have been about 50 percent, at times a bit higher. So it’s essentially a coin flip as to whether the portfolio identified in FIRECalc as 100 percent safe will survive 30 years or not, presuming that stocks perform in the future much as they always have in the past.

It won’t take an ice age for retirements constructed pursuant to FIREcalc to fail. All it will take is for stocks to perform much as they always have in the past. Even a small change in the order of returns (not a change in the returns themselves, just a change in the order in which they play out) would have caused the 1929 and 1965 retirements to have gone bust rather than to have left the retiree with something in his portfolio at the end of 30 years.

Sholar has termed an extreme negative event (the loss of up to $1,999,999 in portfolio value over 30 years) a success, and then jumped to the inappropriate conclusion that because the results of using this dangerous withdrawal rate (at today’s valuation levels) was only a 90 percent disaster in the two prior times it was tried and not a 100 percent disaster that it is fair to term this strategy a 100 percent safe one to employ today.

Retirement Planning Secrets It’s not so. Bernstein and Russell got it right. Sholar and John Greaney (author of the SWR study published at RetireEarlyHomePage.com, on which FIRECalc is based) got it wrong. The conventional SWR methodology is the SWR methodology of the past. The data-based SWR methodology is the SWR methodology of the future.

We all should begin making it a practice to shoot straight with fellow aspiring early retirees as to what the historical data really says re SWRs. The possible consequences of playing it any other way are too horrible to contemplate. That’s my take.

Rise of the New School of Safe Withdrawal Rate Analysis, Update #3 — Peter Ponzo (“Gummy”) Rejects the Conventional-Methodology SWR Claims

“I draw a very different conclusion.” So says a poster to the Vanguard Diehards board in a discussion of our community’s exciting safe withdrawal rate (SWR) findings of recent years. The poster is referring to the advice you often hear (rooted in the findings of conventional methodology SWR studies and similar statistical analyses of how stocks have performed in the past) that it is safe to retire with a high-stock-allocation portfolio, even when stocks are at the valuation levels they are at today. Nothing could be further from the truth, according to the historical stock-return data.

As the poster observes: “Since large negative returns early in retirement are so devastating, then a more conservative, less risky asset allocation should be used. More bonds, conservative stocks and maybe even significant cash or cash equivalents.” Precisely so. The findings of conventional methodology SWR studies are nonsense. Highly dangerous nonsense.

The Stocks-for-the-Long-Run Paradigm is dying. Our community’s SWR findings are going to play a big role in killing it, I hope. It very much needs to be killed. The old paradigm has put the financial freedom hopes of millions at great peril. It is time for the development of a new paradigm, a paradigm rooted in an understanding of what the historical stock-return data really says about what works. I will be reporting in days and weeks and months to come on developments in the building of this new investing paradigm, both in this space and at other sections of this web site.

I would need to write a book-length manuscript to explain fully the background and implications of the claims put forward in that last paragraph. So I am writing one. My second book will be entitled I Get a Kick Out of Cash: What You Know About Investing That Just Ain’t So. I expect to publish it in late 2007.

For now, I ask you to focus on one small thing that I hope is clear to most readers of the statement that kicks off this blog entry. The poster quoted above is saying that he has changed his viewpoint on how to invest because of what he learned from The Great SWR Debate. The purpose of our explorations of what the historical data says is to encourage and facilitate such changes. We do not study the historical data because we enjoy studying historical data. We do it because we have learned that we must change how we invest if we hope to win financial freedom early in life, and the record of how stocks have performed in the past provides the best guidance available to us as to the sorts of changes that we need to be making.

You should be changing how you invest too. You too should be drawing a very different conclusion from the one you have held in recent years about how to invest. The conventional way of examining the historical stock-return data has been proven beyond any reasonable doubt to be an analytically invalid approach. When an analytical tool in widespread use (conventional methodology studies have been cited in The New York Times, The Wall Street Journal, and Money, and both the SWR study published at RetireEarlyHomePage.com and the one published at Early-Retirement.org employ the conventional methodology) is found to be invalid, it must be replaced by one that is valid.

We have torn down something big in our past 41 months of SWR discussions. We now must get about the business of replacing what we have torn down with something more useful and valuable and accurate and reliable. We don’t want people to stop making use of the historical stock-return data to craft their investing strategies. We want to change how they do it so that the guidance they obtain from the exercise is helpful rather than dangerous.

There is a saying that it’s not what you don’t know that hurts you, it’s what you know for certain that just ain’t so. That’s a warning that very much applies to the stock investors of today. We know all sorts of things that in fact are simply not so.

Retirement Secrets

We need to get about the business of finding out what really is so. The first step is giving up the dogmatism that causes many discussions of how to invest to become wrapped in endless displays of pointless verbal gymnastics. That stuff is a waste of everyone’s time. Passion Savers are practical people. We need to keep our eye on the ball. Our focus should be the focus evidenced in the words of the poster quoted above–What sorts of changes do we need to make to our investing strategies if we are to hold realistic hopes of attaining our long-term financial goals?

It is bad not to know stuff. But it is often far worse to believe you know stuff that is in fact not so. Middle-class investors have been placed in an extremely dangerous position because they have been misled in very serious ways about what the historical stock-return data says about how stocks perform in the long term. We need to change that. We need to get the word out about what the historical data really says. I view getting the word out on this issue to be one of the most important aims of this blog and this web site.

Peter Ponzo provided us a big assist in that effort in recent days. Ponzo is a retired mathematics professor who publishes a fine web site in which he employs his numbers skills to develop all sorts of investing insights. He is also a regular participant at several Financial Freedom Discussion-Board Community boards (he posts as “gummy”).

Ponzo recently published an article at his site confirming once again our core SWR finding that the SWR is not a constant number but a number that varies with changes in the valuation level that applies at the start-date of a retirement. Ponzo thereby added his name to the ever-growing list of experts acknowledging the critical role of valuations in determining long-term stock performance. There are now ten names on the list: (1) William Bernstein; (2) Scott Burns; (3) John Walter Russell; (4) raddr (the screen-name for an SWR researcher who posts to our boards); (5) Peter Ponzo; (6) BenSolar (another screen-name for a community researcher) (7) Robert Shiller; (8) Rob Arnott; (9) Andrew Smithers; and (10) Peter Bernstein.

Ponzo made an effort to make sure that his article could not possibly be misinterpreted by those even to this day defending the conventional methodology claim that a 4 percent withdrawal is safe for high-stock investors at the valuation levels that now apply. He offered to answer questions about his analysis at one of our boards and admonished defenders of the SWR study published at RetireEarlyHomePage.com (a conventional methodology study) to “forget the 4 percent rule.”

Ponzo quickly lost patience with the nonsense gibberish word games that this plain-speaking comment inspired, stating as clear as can be stated the bottom line for recent retirees with high stock allocations — “Do not expect to withdrawal 4 percent after retirement, except by accident.” Good words.

Rise of the New School of SWR Analysis, Update #4 — William Bernstein Reiterates SWR Concerns

William Bernstein made four important points in his comments on the Vanguard Diehards forum yesterday.

First, he reiterated his belief that an aspiring early retiree going with a high stock allocation needs to go down to a withdrawal rate of somewhere in the neighborhood of 2 percent to have a safe plan for a long-term retirement beginning at today’s valuations (The last time I checked, the 30-year SWR for an 80 percent S&P allocation was somewhere between 2.5 percent and 3 percent);

Two, he said that those who don’t like the idea of going with such low withdrawal rates probably could do better shifting out of stocks a bit when stocks are at high valuations;

Three, he added a wrinkle that I do not recall having been discussed before in our community. Bernstein pointed out that those who leave the workforce altogether will be missing out on productivity gains enjoyed by those who do not. This might be an argument in favor of the new-fangled definition of retirement often discussed at this site and often advocated at our various discussion boards, the kind of retirement in which the worker lets go of those aspects of the work experience that he does not enjoy, but hangs on to those he does enjoy; and

Four, he pointed out that even an analytically valid SWR study is based on historical stock-return data and we have no assurance that U.S. stocks will perform as well in the future as they have in the past. That’s so, but my personal view is that an analytically valid SWR is a conservative enough number to provide a decent bit of cover against the possibility that U.S. stock performance will not be as good in the future as it has been in the past.

Rise of the New School of SWR Analysis, Update #5 — The Wall Street Journal Endorses Valuation-Adjusted SWRs

Retirement Probabilities “Some planners say 3% is a safer figure these days, given that market returns in coming years are expected to hover in the single digit range.”

That’s a quote not from a poster at the Motley Fool board or a poster at the Early Retirement Forum or a poster at the Safe Withdrawal Rate Research Group. It’s a quote from–The Wall Street Journal!

The scores of Financial Freedom Community members who helped us develop our safe withdrawal rate findings of recent years should all take a bow. The investing insights that we have been talking about since May 2002 are going mainstream.

One of the questions that we used to hear from defenders of conventional methodology studies was–How did we get to be so smart, how is it that our community came to know more than such experts as the reporters for the Wall Street Journal and other fine publications that in the past have often endorsed the myth of the always-and-forever 4 percent safe withdrawal rate (the recent article suggests that some investors may want to use 4 percent as their personal withdrawal rate, but makes clear that 4 percent is not the number defined in the literature as the safe withdrawal rate, the number that works for those with high stock allocations if a worst-case returns sequence comes up)? The answer is that those sorts of experts are best at what they specialize in and our community is best at what our community specializes in.

There are lots of things that Wall Street Journal reporters know that our community does not. But the safe withdrawal rate issue is one of critical importance for those seeking financial freedom early in life. We cannot afford to get that one wrong. So we worked hard enough at it to get it right long before many other sorts of experts even knew that there were serious problems with the old way of calculating safe withdrawal rates.

What’s next, a New York Times feature on how middle-class investors can profit from long-term timing?

I don’t know what the future holds, of course. But I feel that I do know one thing for sure after six years of work in this fine community. Don’t ever count us out!

When it comes to questions relating in a core way to the question of how to win financial freedom early in life, we are the true experts. We all need to let that reality in and accept both the exciting challenge that comes with acknowledging the reality and the responsibility to exercise care in doing the important work we do that comes with acceptance of the challenge.

Financial Freedom Community, I think a little self-back-patting is in order for today. We deserve it. We worked hard. We done good.

And there are many signs that I have been seeing in recent days that the best is very much yet to come!

Rise of the New School of Safe WSithdrawal Rate Analysis, Update #6 — Focus Shifting from Accumulation Phase to Distribution Phase of Investing Life Cycle

An article recently published at the BoomerMarketAdvisor.com site argues that the aging of the Baby Boomers is causing a shift in focus from the Accumulation Phase to the Distribution Phase of the Investing Life-Cycle.

Here is the text of the section of the article that quotes me:

” ‘Unfortunately, many of the retirement planning tools now in use suffer from a grave flaw,’ says Rob Bennett, the author of the Financial Freedom Blog, a daily column on PassionSaving.com. ‘They fail to adjust for the valuation level that applies on the start date of retirement. Most existing tools provide one safe withdrawal rate for all possible retirement start-date valuation levels.’

“It’s common knowledge that shifts in valuation level influence long-term returns. As such, Bennett insists that any retirement calculations take this into account.

Retirement Worries ” ‘That means the safe withdrawal rate that applies for a retirement starting at a time of high valuation cannot be the same as the safe withdrawal rate that applies for a retirement starting at a time of low valuation,’ he explains. ‘The number you get for the 30-year safe withdrawal rate for a portfolio of 80 percent S&P stocks for a retirement beginning in January 2000 is 1.6 percent. The conventional tools say a 4 percent withdrawal is safe. For a retiree with a $1 million portfolio, that’s the difference between living on $16,000 of spending per year and living on $40,000 per year.’ ”

Interesting points made in the article include:

1) Investing analysts of the past have rarely provided effective guidance on the Distribution Phase of the Investing Life-Cycle. The article asserts that “financial advisors appropriately (my emphasis) concentrated on asset accumulation….” I question how appropriate the focus on the Accumulation Phase has been. Much of the conventional investing advice virtually ignores the Distribution Phase. This slant is entirely inappropriate and even dangerous, in my view. Still, I am happy to see an article point out this grave flaw in the conventional investing advice (a flaw identified early in Financial Freedom Community discussions because those seeking to rely on income generated by their investments to cover at least some of their daily living costs must give serious thought to the realities of the Distribution Phase);

2) Second-generation distribution planning software is “already hitting the shelves.” It is certainly fair to say both that there is great value in using simulations of possible future investment outcomes to test the real-world viability of an investment strategy, and that the first-generation retirement planning software has failed to do the job that investors need done. So the development of new software is probably a good thing. I hope to provide an analytically valid safe-withdrawal-rate calculator at this site in days to come (my guess is that it will be some time before I am able to find time to arrange for that); and

3) Many boomers are seeking to “Retire Different!” rather than to pursue the old and moldy idea of handing in a resignation at age sixty-five and then leaving the workplace altogether. Many financial advisors are finding that their clients see value in being able to run “What if?” scenarios to guide them in the construction of investing plans to serve this more complex (but perhaps more sensible and more fulfilling too!) approach to the retirement project.

Rise of the New School of SWR Analysis #7 –Disclaimer Language to Fix Retirement Planning Tools

I would not put my name to a retirement planning tool reporting the findings of a conventional-methodology safe withdrawal rate study as if those findings accurately portrayed what the historical stock-return data says about what is needed to make a retirement plan safe. But let’s say that the author of one of today’s retirement planning tools cannot bring himself to acknowledge that he got the number wrong. What should he do?

The best course of action in that circumstance is for the author of the flawed study or calculator to add Disclaimer Language letting his readers know that many smart people have concluded that changes in valuation levels do indeed affect long-term stock returns. The Disclaimer Language should also point users of the study or calculator to materials providing more information about the flaws of the conventional tools and about the findings of analytically valid tools.

Here’s my suggested wording for the Disclaimer Language:

“This study was prepared using the conventional methodology for determining safe withdrawal rates. That means that no adjustment was made for the effects of changes in valuation levels. This study reports the same safe withdrawal rate for retirements beginning at times of low valuation as it does for retirements beginning at times of high valuation.

Retirement Dreams “There are a good number of investing experts who dispute the assumption that changes in valuations have zero effect on safe withdrawal rates. This group includes: (1) William Bernstein; (2) Scott Burns; (3) John Walter Russell; (4) Robert Shiller; (5) Peter Bernstein; (6) Rob Arnott; (7) Ed Easterling; (8) John Mauldin; (9) Peter Ponzo; (10) Andrew Smithers; (11) Ben Stein; and (12) “Raddr” (owner of the Raddr-Pages.com web site). In the event that these experts are right, the portfolio withdrawal percentages identified as safe in this study are at times of high valuation wildly off the mark from the safe withdrawal rates that would be identified by an analytically valid study of the question.

“I encourage you to think hard about the valuations question before using this study to plan your retirement or to decide on your stock allocation in your pre-retirement years. Failure to do so may cause you to suffer the severe life consequences that follow from having your retirement go bust when you are too old to seek reemployment or in the loss of a large percentage of your life savings in your pre-retirement years.

Here are links to materials that you should look at before using this study to plan your retirement:

(1) Link to the Scott Burns column reporting that there is a “growing school of thought” holding that safe withdrawal rates should be adjusted downward at times of high valuation by 1.5 to 2.0 percentage points;

(2) Link to the Amazon.com page at which William Bernstein’s The Four Pillars of Investing is offered for sale; and

3) Link to the Early-Retirement-Planning-Insights.com web site.

Rise of the New School of Safe Withdrawal Rate Analysis, Update #8 — Scott Burns Again Endorses New School Safe Withdrawal Rate Analysis

Bill Bernstein and I went public about the grave flaws in the conventional-methodology safe withdrawal rate (SWR) studies at roughly the same time. I had discovered the flaws back in the mid-1990s (after reading what Jack Bogle said about the effect of valuations on long-term returns in his book Common Sense on Mutual Funds). But I did not go public until my famous May 13, 2002, post to the Motley Fool board (“The Post Heard ‘Round the World”). Bernstein went public in his book The Four Pillars of Investing, which was published a few weeks earlier.

After my tentative SWR findings were confirmed at the various Retire Early boards (lots of people helped, but John Walter Russell’s service to our community on this matter goes beyond anything that anyone else has ever done for any discussion-board community–I intend to dedicate my investing book to him in an attempt at a small community payback), I initiated an effort to publicize our findings. That led to correspondence with Dallas Morning News Columnist Scott Burns asking him to publish a column announcing the New School approach to determining SWRs and warning aspiring retirees of the dangers of putting their confidence in the findings of the conventional studies.

Online Retirement Planning Tools

Burns published his column in July 2005. He explained that the New School (that’s Rob Bennett [me!], John Walter Russell, Bill Bernstein, Peter Ponzo [“Gummy”], Rob Arnott, and so on) argues that, at times of high valuations, 1.5 to 2.0 percentage points need to be subtracted from the 4 percent number put forward as the SWR in the old studies to get the “safe withdrawal rate” as that term is defined in the literature. He also explained why many media accounts continue to report the results of the old studies even after they have been discredited — “It is information most people don’t want to hear.”

Since that time, Burns has made reference to the discredited studies in a number of columns. This has led some to believe that he has reversed his position and once again has confidence in the conventional-methodology studies.

Burns has now published a column reiterating his support of the New School studies (he only reported on the New School of SWR Analysis in his old column, without offering his personal view as to which analytical school is right, but he did tell me in an e-mail that he agrees with my views).

Scott Burns: “Let’s review the latest thinking on safe withdrawal rates.

“While most of the research says any retiree can safely start with a withdrawal rate of 4 percent to 5 percent a year, a newer school of thought believes the safe withdrawal rate depends on how stocks are priced at the time you start making withdrawals.

“If stocks were cheap and selling around eight times trailing earnings and offering high dividend yields, for instance, history shows that you could easily withdraw more than 5 percent a year. That would have made 1980 or 1981 good years to retire.

“But if stocks were expensive and selling at a high multiple of earnings and offering low dividend yields, history shows that a higher withdrawal rate can be fatal to your nest egg. That would have made 2000 or 2001 bad years to retire.”

Retirement Planning Research The old SWR methodology is dead, as dead as the Bull Market Illusions that some of us capitulated to during the Summer of 1999. The Summer of 1999 ain’t coming back, and the discredited SWR methodology that became popular during the longest and strongest bull market in U.S. history ain’t coming back either.

That’s not to say that Scott Burns and a whole big bunch of others will never again make reference to the discredited studies. As the man said in his column from July 2005: “It is information a lot of people don’t want to hear.”

Rational? By no means.

All Too Human? You betcha.


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