The SWR Translator

Updated: May 18, 2006.

With the SWR Translator, you specify how well you expect your portfolio to do in the absence of any deposits or withdrawals. The SWR Translator converts this into Safe, Calculated and High Risk Withdrawal Rates.

This is the kind of thing that a Monte Carlo model is used for. What is different is that the SWR Translator is based entirely upon historical sequences, not assumptions about market statistics.

Here are a couple of equations that you will need:

1) Average returns, annualized returns and market volatility (i.e., the variance or the square of the standard deviation) are approximated by using this equation:annualized return = average return – 0.5*(the standard deviation)^2

2) John Bogle’s version of the Gordon equation is:
the total return = dividend yield + earnings growth rate + speculative return.

Historically, after smoothing, the earnings growth has been fairly steady at 1.5% to 2.0% per year after adjusting for inflation.The speculative return is an annualized adjustment caused by changes in the markets price to earnings ratio. The original form of the Gordon equation uses dividend growth instead of earnings growth.

I invite those who want to see various mathematical derivations including these to visit Professor Peter Ponzo’s web site. He has tutorials on just about everything related to investing.

Gummy's (Peter Ponzo's) web site

Valuations and the SWR Translator

The SWR Translator does not use valuations directly. They enter indirectly when you estimate the real, annualized, total return of your portfolio (not just stocks).

The SWR Translator strips away regression to the mean unless you make a special adjustment to your input, the estimated return of your portfolio. In essence, it tells you what will happen if valuations have reached a new, permanent, higher plateau.

Historically, valuations have been constrained (loosely).

An Overview of the SWR Translator

Here is a description of the SWR Translator.

An Overview of the SWR Translator

Typical uses of the SWR Translator

Wouldn’t it be nice to have a rule of thumb about market returns and Safe Withdrawal Rates? For example, you might want to say that you can safely withdraw 2.5% less than an investment’s long-term return. I tried to do this. It didn’t work out.

Typical uses of the SWR Translator

Advanced uses of the SWR Translator

Here are examples of advanced uses of the SWR Translator. Starting from an estimate of a portfolio’s annualized return over the next decade, I show how much of the original balance will remain when the decade ends and how it varies with your withdrawal rate.

Advanced uses of the SWR Translator

Valuation-Informed Indexing (Lucky 7) SWR Translators

I am placing SWR Translators into my Yahoo Briefcase. I call them Valuation-Informed Indexing (Lucky 7) SWR Translators or Lucky 7 Translators for short. They are easy to use.

SWR Translators are an alternative to Monte Carlo models. You supply an estimate of the real, annualized, total return of your portfolio (not just your stocks).

I have put the following capabilities into my Lucky 7 Translators folder:

1) SWR Translator. It calculates 30-Year Safe Withdrawal Rates and 30-Year Coin Toss Rates (50%-50% Odds) for portfolios HSWR50 and HSWR80.

2) HSWR50T2 SWR Translator. It calculates 30-Year Safe Withdrawal Rates and 30-Year Coin Toss Rates (50%-50% Odds) for portfolio HSWR50T2.

3) Year 10 SWR Translator. This calculates 10-Year Safe Withdrawal Rates and Year 10 Percentage Balances for portfolio HSWR50.

These SWR Translators are small, typically using 20 to 25 KBytes.

Yahoo Briefcase

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Problem Downloading Calculators? NOTE

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