BH/Siamond Withdrawal Rate Worries

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ochotona
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Re: BH/Siamond Withdrawal Rate Worries

Post by ochotona » Mon Mar 12, 2018 11:21 am

Tyler's withdrawal rate calculator https://portfoliocharts.com/portfolio/withdrawal-rates/
shows that for a 60/40 portfolio, the worst-case gets pretty darn close to 4%. The perpetual withdrawal rate for a 60/40 is 3.5%. It all depends on the allocation. The HBPP is significantly better as a retirement portfolio than a 60/40.
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Tyler
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Re: BH/Siamond Withdrawal Rate Worries

Post by Tyler » Mon Mar 12, 2018 4:59 pm

For reference, Siamond is the guy who currently maintains the Simba Spreadsheet. I've met him IRL and also trade emails with him pretty often on various data/analysis issues. He's a really smart guy and I have a lot of respect for his perspective.

One thing I particularly like about Siamond is how he's completely above board with the limitations involved with his analysis. Read his long explanation, and he's good about pointing out how CAPE really only applies to stocks, how some of the correlations are decent but not great, and how even his best use of CAPE as a SWR predictor is not perfect. He values data in its own right and works hard to have a balanced interpretation even if people would love an easy answer. I'm not sure the linked blog post fully appreciates the detailed nuance of Siamond's full writeup.

Personally, I think a CAPE fixation misses the forest for the trees. Fussing about stock valuations really only makes sense if you invest in a portfolio of mostly stocks. For example, here's a SWR chart that shows the evolving SWRs over ever-growing retirement periods for retirees in every start year since 1970 using a 100% stock portfolio. Every start year has its own blue line, and clearly one's withdrawal rate is highly dependent on the economic conditions of the year you're lucky enough to retire in. SWRs simply track the lowest line marked in orange.

Image

Even assuming CAPE is a decent predictor of SWRs for stock-heavy portfolios (something I'm highly skeptical of based on my own data), picture the analysis as simply trying to 1) identify which blue line most applies to you ahead of time, and 2) make sure your own blue line won't set a new all-time low (just like the year 2000 line is doing in this chart creating the dotted projection). With a very wide spread of SWR outcomes like you see in an all-stock portfolio, I can see why people might be concerned about valuations or whatever other metric might help them judge their own personal trajectory.

Now compare that to the same chart for the PP.

Image

See the difference? SWRs for the PP are a LOT more consistent, and the likelihood of the next path completely shooting off the rails is extremely low. Note that this covers all the same start years as the stock chart with the same stock CAPE issues, but that metric is basically irrelevant for a portfolio with only 25% stocks.

No portfolio is perfectly predictable, but not every portfolio is equally unpredictable. Personally, rather than worry about stock valuations to compensate for a volatile and uncertain asset allocation I prefer to address the root cause and pick a more dependable portfolio less tied to a single economic condition for success.
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eufo
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Re: BH/Siamond Withdrawal Rate Worries

Post by eufo » Mon Mar 12, 2018 6:06 pm

This is one of my favorite calculators on your site, Tyler. It really puts withdrawals into perspective. I'm not anywhere close to retirement, but I feel much better equipped than before I found this forum and your site.
Don't agree with me too strongly or I'm going to change my mind
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