Letters to the editor

May 2005 Highlights Summary

I received some emails from Rob Bennett about my May 2005 Highlights Summary.
Letters about my May 2005 Highlights Summary

Safe and Hazardous Regions

Rob Bennett continues the discussions that arose out of my May 2005 Highlights Summary.

John:

I appreciated your response to my "Letter to the Editor" expressing terminology concerns.

You said: "How about this? Let me refer to the withdrawal rates above the Calculated Rate as being in the HAZARDOUS REGION. The High Risk Rate corresponds to almost certain failure. Withdrawals below the Calculated Rate are in the PLANNING REGION. The Safe Withdrawal Rate identifies almost certain success."

I think you probably meant to suggest that withdrawal rates for which the historical data shows odds of success of LESS than 50 percent be termed "hazardous" and that withdrawal rates for which the historical data shows odds of success of greater than 50 percent be termed to be rates to be considered in "planning."

My view is that this terminology does not do the job that needs to be done.

We experienced the greatest bull market in U.S. history from the early 80s through the late 90s. As the bull market stretched on, more and more dubious claims about the long-term safety of stock purchases made at times of high valuation were put forward. Many middle-class investors have as a result take on a great deal more risk than they intended to take on when they explored what the "experts" were saying re the historical stock-return data.

The value of the SWR Investing Tool is that it breaks through the fog and confusion of subjective investing advice and reports the hard and cold facts--your SWR methodology reports what the historical data says, nothing more and nothing less.

It is important to get this message out to as many middle-class investors as possible as soon as possible. In the event that stock valuations return to normal levels in days to come (a likely event, according to the historical data), many people are going to be hurt by the "highly misleading" (William Bernstein's words) SWR claims that have been put forward by proponents of conventional methodology SWR studies. I favor communicating the essential message as clearly as it can be communicated without compromising accuracy.

Some people will be alarmed if you report all withdrawal rates with less than a 75 percent or 80 percent chance of working out as "unsafe." So be it. Those who are considering retiring with portfolios that have more than a one in four chance of failing (according to the historical data) very much NEED to be alarmed. These people are taking on a significant risk of doing something that may cause them to experience severe life setbacks in days to come. I think we do a service to them by trying to report accurately what the historical data says in time to save them from taking on unnecessary risks to their retirements.

An argument can be made that a retirement with an 80 percent chance of not going bust is reasonably "safe." Perhaps even a 75 percent safe retirement can fairly be termed "safe." I have a hard time accepting that a retirement with only odds of two in three of not going bust in 30 years can fairly be termed "safe." We need to call a spade a spade. Retirements that have more than a one in four chance of going bust are not properly termed "safe," in my view. I would like to think that few are "planning" such retirements.

I like to think that most are planning only to avoid them.

I don't have a problem with using "Calculated Rate" to describe a retirement that is 50 percent safe. That's a neutral term. However, an argument can be made that a more descriptive term would make the point in a stronger way. Perhaps this take-out number should be referred to as "The Coin Flip Rate" since it is the withdrawal rate that makes your chance of having a successful retirement as likely as your chance of guessing the outcome of a single flip of a coin.

The withdrawal rate that possesses only a 5 percent chance of working out needs to be renamed, in my view. The chances of success here are so low that we need language that communicates the danger in stark and uncompromising terms. I think that something like "The Extreme High-Risk Rate" does the trick here.

My guess is that terminology of the type I have described above will become more "acceptable" in the minds of many only AFTER many middle-class investors have lost large amounts of capital due to the misplaced confidence that they have placed in conventional methodology SWR research. It may be that there is little or nothing that we can do about that. However, for those open to hearing what an analytically valid analysis reveals on the question of what withdrawal rate is safe, I think we have a responsibility to speak with as much clarity as possible.

I love your site. I expect that I will be making frequent references to it in the material that I put to my site after I take it "live" on June 1.

Thanks again for all the help you provide aspiring early retirees with the work you do here.

Rob

Rob is the author of Passion Saving, which he will make available from his web site in the very near future. It is a blockbuster.
http://www.passionsaving.com/

HERE IS MY REPLY.

I have added a new section called Guidelines. I address some of these issues in my article about Understanding Risk.

I will stick with the old names for the moment.

BTW, Rob is right about safety. Setting your primary safety requirements at less than 75% or 80% is reckless.

Have fun.

John Walter Russell
I wrote this on May 30, 2005.