Notes starting from April 18, 2007

Updated: May 18, 2007.

What about inflation?

Many readers are aware of the controversy that surrounds the CPI. I do not wish to enter into the argument.

I have just responded to a Letter to the Editor regarding inflation. I show you how to make adjustments.

Understand that I use a single standard throughout. All inflation adjustments depend upon the CPI. They are not limited to TIPS.

April 17, 2007 Letters to the Editor

Building on Success

Combining intermediate term timing based on valuations (i.e., delayed purchases) with an income blend approach lifts the continuing withdrawal rate to 6.1% (plus inflation).

Building on Success

Expanded Allocator Insights D

This time, I examined inflation. It doesn’t cause nearly so much damage as I had expected.

Expanded Allocator Insights D

Expanded Allocator Insights E

I continue to investigate the effect of inflation when managing income streams. It is not nearly as bad as one might fear.

Expanded Allocator Insights E

Today’s Alternatives

In February, I spoke of the Many Alternatives available to a retiree. Now he has even more.

Today’s Alternatives

Taken At Face Value: Upside

Once again, I have taken the Morningstar Dividend Investor newsletter at face value. Last time, I was conservative. This time, I assume that they meet the upside of their growth levels.

Taken At Face Value: Upside
Edited: Taken At Face Value: Upside

Double Counting by John P. Hussman, Ph.D.

This is an article well worth reading.

“Notice that the calculation of the S&P 500 already fully reflects the impact of the repurchase on both the level and the growth of per-share earnings and dividends.”

There is no need whatsoever to adjust our Stock Returns Predictor for share buybacks.

Double Counting by John P. Hussman, Ph.D.

May 2007 Highlights

We continue to make outstanding progress. It is hard to see how we can lift the bar much higher.

May 2007 Highlights

Y2K Retirees

Those who retired at the Year 2000 market peak should count their blessings. The stock market has behaved as it typically does. It has lost very little in terms of buying power over the last seven years.

The S&P500 price has returned to its Year 2000 peak. Its meager dividends (currently less than 2%) have come close to matching inflation. Its real return has been just under zero percent.

If you check the Stock Returns Predictor, you will find that the Most Likely return at Year 10 is close to minus (1%) when starting from P/E10=44, the value in January 2000.

If the market continues to behave in a typical manner, Year 2000 retirees will reach Year 30 at withdrawal rates above 3% even if they follow traditional advice. Our readers should do much better.

Scenario Surfer Developments

I am continuing to build spreadsheets associated with the future Scenario Surfer. Refer to “May 2007 Highlights” for details. It will be an advanced Retirement Trainer.

We are considering placing rebalancing results side by side with those achieved by the user. You can download the latest version from my Yahoo Briefcase, Retirement Trainers folder, “Simp Ret Tr w Rebalancing D” file. It is an Excel spreadsheet.

It has a sample of how training improves results. With 20%, 50% and 80% stocks, the Year 30 balances were $117K, $210K and $33K, respectively, with rebalancing. With user inputs, the Year 30 balance was $1.58 million.

Yahoo Briefcase

Automatic Rebalancing Examples

If you have ever doubted the folly of automatic rebalancing, look at these retirement portfolio examples.

Automatic Rebalancing Examples

Early Retirement with a Delayed Pension

This shows what happens if you have a pension (or Social Security) ten years after you retire. Your continuing withdrawal rate will be around 6.6% to 7.4% of your original balance (plus inflation).

Early Retirement with a Delayed Pension

Price Drops

Today’s holder of the S&P500 index can expect his balance to fall to 60.5% of its current purchasing power within the next decade even with dividends reinvested. The likely range of outcomes is between 45.5% and 75.5%.

Price Drops

Is 10% by Year 10 enough?

Bring up the Risk Evaluator (Year 30 SWR button). Enter P/E10=8 and Year 30 balance = 100%. Allocate 100% to stocks. The Safe Withdrawal Rate is 9.76%. The Reasonably Safe Rate is 10.36%. At P/E10=7, the rates are 11.42% and 12.02%, respectively.

P/E10 is likely to fall to 7 or 8 within the next decade.

The low may be no more than a momentary blip.

Is a Year 30 (continuing) Safe Withdrawal Rate of 10% of your original balance (plus inflation) enough? Would it get you to save diligently? Will you exploit the opportunity? I hope so.

These numbers are my contribution.

But for the best in motivational material, visit Rob Bennett’s PassionSaving site.

Rob Bennett’s PassionSaving site