Gentlemen, Good News

[Owen` 2]

Heads up, guys. The following link is an earthquake of sorts in the world of money for retirees who are not funding their retirement purely with pensions. It's a new study out by a guy(s) with solid credentials. Both have written on the subject before and their work has been peer reviewed. Guyton is not a crackpot.

 

It is hard reading and will require a lot of time from you, so don't start on it until you have that time to sit, read, and think very hard about what is here. It's a new approach to determining your SWR, safe withdrawl rate, from your assets and be assured they will not run out before you die.

 

http://www.fpanet.org/journal/articles/200...enderforprint=1

 

It requires some mental translation for the UK guys, but the approach is mostly stochastic so it should be applicable for you Brits.

 

I am loathe to summarize, but here are some of the conclusions that hopefully will entice you to get into the study and understand why it seems to work.

 

Past estimates of safe withdraw rate from a portfolio were (absent any pension or Soc Sec input) about 4% for perfect safety for 30 years and a 50/50 equity/bond portfolio mix. Using the rather easy management rules Guyton presents, you can jack that number up to 5.8% for a 50/50 mix. People, a delta of 1.8% on say a 500K portfolio is $9,000 extra per year that you can safely extract and spend.

 

The rules are:

 

The portfolio management rule (PMR) determines the source(s) of each year's withdrawal.

 

* Following years where an asset class has a positive return that produced a weighting exceeding its target allocation, the excess allocation is sold and the proceeds invested in cash to meet future withdrawal requirements.

* Portfolio withdrawals are funded in the following order: (1) overweighting in equity asset classes from the prior year-end, (2) overweighting in fixed income from the prior year-end, (3) cash, (4) withdrawals from remaining fixed-income assets, (5) withdrawals from remaining equity assets in order of the prior year's performance.

* No withdrawals are taken from any equity following a year with a negative return if cash or fixed-income assets are sufficient to fund the required withdrawal.

 

The inflation rule (IR) determines the size of the yearly withdrawal increase.

 

* Yearly withdrawals increase by the annual rate of inflation as measured by the Consumer Price Index (CPI) except when the withdrawal rule freezes the withdrawals.

* The maximum annual inflationary increase is 6 percent.

* There is no "make-up" for a "capped" inflation adjustment.

 

The withdrawal rule (WR) determines the conditions when portfolio withdrawals are frozen from one year to the next.

 

* Withdrawals increase from year to year in accordance with the inflation rule, except that there is no increase following a year where the portfolio's total return is negative.

* There is no "make-up" for a missed increase.

 

 

Not that anyone cares (or should care) but this is so new that I have no opinion on it yet. It is exciting in the context that it's such a major shift in thinking in this field and it is supported by rational analysis. It would be a huge increase in lifestyle for guys worldwide. You just have to know what you're doing and you can yank out an extra 1.8%/yr pretty safely. But note carefully that to implement these rules you must not find yourself with spending on necessities at 5.8%. A substantial chunk of your spending needs to be discretionary so that you can implement the rules that call for a freeze in certain market environments.

 

I am a little worried about Heisenberg-like issues. If this approach sweeps the world of retirees, their actions may change the behavior of the markets themselves . . . somehow. No idea how, but something this powerful could affect something. Dunno.

 

Enjoy.

Edited January 16, 2007 by Owen`

[Eneukman 1]

Thanks, Owen.

 

I've saved the page and will print it off and read it later at my leisure.

 

Alan

[sabang 0]

Thanks owen, I will read it with interest.

Having skimmed your summary, I can say it is a methodology based on existing investment science rather than anything new as such.

It is actually quite similar to the approach used by myself when I was an offshore investment adviser, and is still used by my company.

In practise, one's clients and their somewhat random consumption and investment patterns provide the main uncertainty, or Beta, to a model retirement portfolio.

[scorpions 6]

Very interesting read! Some simple rules which will help to increase my comfort level over the time.

My conservative calculated initial withdraw level is 50% below (2.9% vs. 5.8%).

[Owen` 2]

The one thing the 4.5% (with Soc Sec) rule of thumb did was simply, for about 8 years now, get cognizant people thinking in terms of 4.5%. It became instinct for those who understood the inevitability of bad years. To have a strategy now introduced that allows you to nudge that up 0.5-1.0% is a big increase in lifestyle.

 

Note how the currency hit that has happened this past 12 mos would have needed that cushion, at least for a while. When it moderates, there will be years of extra money.

 

All in all, it's a great study. If people understand it well and apply it to their own circumstances, frankly, they can safely spend more money than they had planned to. How can that be a bad thing?