Letters to the editor

May 2005 Highlights Summary

I received this email from Rob Bennett about my May 2005 Highlights Summary. Rob is the author of Passion Saving, which he will make available from his web site soon.
http://www.passionsaving.com/

John:

Your article summarizing recent findings is of great value. It is very easy for people to lose sight of the forest for the trees. This piece does a fine job of putting things in perspective.

There is one word in Item 11 that I consider an unfortunate choice. You say:"In terms of numbers, varying allocations according to P/E10 historically would have allowed us to increase the amount that we could withdraw SAFELY from 4.0% to 5.0%+ (of the portfolio's initial value plus inflation), when compared to a fixed allocation of stocks and bonds." I do not believe this is so.

It appears to me that what you mean to say here is "to increase the amount that we could withdraw SUCCESSFULLY..." I presume that your finding is that there were no failures at a withdrawal of up to 5 percent, looking backward today at what we know happened in those returns sequences. Looking backward does not tell us what is safe, but only what happened to survive.

It does not appear to me (it is possible that I do not understand precisely what sort of analysis you were doing here) that you have determined that a withdrawal of up to 5 percent was safe with switching, but only that it survived. It's fair to say that it proved successful. It does not appear to me (again, based on my possibly incorrect understanding of what you looked at here) that you have determined that a withdrawal of up to 5 percent was historically safe with switching. To determine what was safe would require a different sort of analysis, one that focused on what was known at the time the hypothetical retirements began, not on the returns sequences that played out in the real world but which we learned of only after the retirements commenced.

Even if I am wrong in my understanding of what you were looking at here, my sense is that this aspect of things continues to be a source of confusion for many and that it would be a good idea to clarify whether your analysis was a survival analysis or a safety analysis. I think it is important for people to understand that the root flaw of the conventional methodology is not that we entered a bubble in the late 1990s, but that the methodology always examined not safety but survival. The bubble greatly exacerbated the problem that existed from the day the conventional methodology was created.

Rob

This is the article.
May 2005 Highlights

HERE IS MY REPLY:

Rob, you are absolutely right.

There is a lot of confusion about Safe Withdrawal Rates and Historical Surviving Withdrawal Rates. Just because a portfolio would have survived does not mean that it was safe. It could have been lucky.

We require that a portfolio have about a 95% chance of success (one-sided probability about a calculated rate) before we declare it SAFE. Only when the withdrawal rate exceeds the High Risk Rate do we declare it to be UNSAFE. (The High Risk Rate has a 95% chance of failure. It is the other confidence limit about the calculated rate.)

I have calculated the Safe Withdrawal Rates with optimized switching using stocks and 2% TIPS. Here is the link.
Safe Withdrawal Rates with Switching

Here is a link to the data.
Safe Withdrawal Rates with Switching Data

Thanks again. Have fun.

John Walter Russell
I wrote this on May 22, 2005.