May 2007 Highlights

A. Recent Success

1. We continue to make outstanding progress. In Building on Success, we reached a continuing withdrawal rate of 6.1% (plus inflation). It is hard to see how we can lift the bar much higher.

Building on Success

2. In spite of this, I recommend limiting withdrawals to 5.0% (plus inflation) for up to five years, until valuations improve significantly. There is always a risk, albeit small, that any analysis will fail, no matter how well done. I estimate that this risk is 10%.

3. I do not expect my analysis to fail. Even if it were to fail, an early retiree need not despair. After all, I have identified several ways to reach a continuing withdrawal rate in excess of 5.0% (plus inflation).

4. Last year, I had combined intermediate term timing with a dividend strategy to lift the continuing withdrawal rate to 5.4% (plus inflation) under realistic assumptions or 4.8% (plus inflation) using highly conservative assumptions.

5. This year, I have looked at managing cash flows. I transfer excessive income from a very high yield investment for use during the middle years. I rely on dividend growth from a second investment in the later years. I use an account with 2% TIPS to maintain steady withdrawals. Such a combination, or blend, works exceptionally well. Used on its own, the continuing withdrawal rate rises to 5.5% (plus inflation). Combined with intermediate timing (or delayed purchases), it lifts the continuing withdrawal rate to 6.1% (plus inflation).

B. Online Calculators

6. Rob Bennett of PassionSaving and I have introduced three new calculators. The Stock Return Predictor estimates stock returns at Years 10, 20, 30, 40, 50 and 60. The Year 30 SWR and Year 15 SWR buttons take you to Retirement Risk Evaluators, where you can read Safe Withdrawal Rates as a function of valuations, TIPS allocations, TIPS interest rates and the balance at the end of the 15 or 30 years. That is right. You can enter a final balance other than zero. You can link retirement segments together. You can plan on leaving an inheritance.

PassionSaving

7. I have built a TIPS Table as well. It fills a void. It tells you how much the Government guarantees if you use a TIPS ladder by itself.

C. Scenario Surfer

8. For those looking into the future, Rob Bennett and I plan to build an interactive Scenario Surfer. I already have working prototypes. You can download them from my Yahoo Briefcase. I call them Retirement Trainers. I recommend the Simplified Retirement Trainer A with Dividends.

9. I have built a wide variety of other prototypes. They include my Latch and Hold calculators. They show other ways to improve withdrawal rates. Yet, I believe that, with training, individuals can do even better. Simple rules for humans can be bulky and complex when converted to programming steps. A little practice on the Scenario Surfer will teach you how to succeed much better than endless analyses of mechanically implemented algorithms.

D. Theory

10. We continue to advance the theory. I have found two attractive alternatives to P/E10: the dividend yield (using smoothed dividends) and Tobin’s q. I have found that the Gordon Model works well from 5 to 15 years, but only inside that range.

11. I have located the flaw in Dollar Cost Averaging at today’s valuations: human frustration. At today’s valuations, an investor is likely to give up because it takes decades to be sure of an advantage.

Have fun.

John Walter Russell
May 1, 2007