Short Posts starting from May 8, 2008

Updated: October 21, 2008.

5% the Hard Way

Reaching a 5% withdrawal rate with a dividend strategy is easy. Reaching 5% with a liquidation strategy, where you sell shares, is difficult. This is how you do it.

5% the Hard Way

5.5% with Corporate Bonds?

If you use corporate bonds instead of TIPS, you can withdraw 5.5% of your original balance (plus inflation) for 30 years most of the time, but not always, provided that you vary allocations according to market valuations. If you rebalance instead, you are assured of bankruptcy.

5.5% with Corporate Bonds?

Back of the Envelope 6%

Here is a simple way for traditional retirees to withdraw 6% (plus inflation) while leaving an inheritance. You can adjust it for any level of risk.

Back of the Envelope 6%

Matching 3% TIPS

If you can find the equivalent of TIPS at a 3% real interest rate over a decade, you can lift your withdrawal rate to 6% of your original balance (plus inflation) indefinitely. This shows what it involved.

Matching 3% TIPS

Reacting to Price Drops during DCA: 50%

I examined what happens to a 100% stock investor after a 50% loss over two years. I assumed that he dollar cost averages. I assumed that he would cut his holdings to 50% stocks after such a blow.

A dollar cost averaging investor is likely to stick with a 100% stock allocation in today’s market because the bad years are likely to occur early.

Reacting to Price Drops during DCA: 50%

Reacting to Price Drops: Middle Years

I examined what happens to a 100% stock investor after a 50% loss spread over two years. I assumed that starts out with $100000. I assumed that he would cut his stock allocation to 20% after such a blow.

Reacting to Price Drops: Middle Years

Locking In Failure

I examined what happens to a 100% stock investor after a severe loss. I assumed that starts out with $100000. I assumed that he would cut his stock allocation to 20% if his balance fell below $80000.

A stock-only investor is in danger. He is likely to see his balance decline far enough for him to cut his stock holdings sharply. If so, he is likely to lock in failure.

Locking In Failure

Today’s Safe Withdrawal Rates

Today, P/E10=24. Here are the 30-year Safe Withdrawal Rates using a variety of strategies.

Today’s Safe Withdrawal Rates

Dividend Strategies versus Valuation Informed Indexing

I list the 30-Year Safe Withdrawal Rate for dividend strategies as 6.0%. I list the 30-Year Safe Withdrawal Rate of Valuation Informed Indexing as just under 5.5%.

The differences are smaller than indicated.

Dividend Strategies versus Valuation Informed Indexing

Now that P/E10=23

Stocks are in bear territory. It seems that bargains abound. Should you buy now?

Now that P/E10=23

Why Use P/E10?

Professor Robert Shiller came up with P/E10 as his measure of valuation. It is spectacularly successful.

Why Use P/E10?

With P/E10 Close to 20

Today, P/E10 is below 23. Stock prices have fallen sharply. What should we expect when P/E10 falls to 20?

With P/E10 Close to 20

Failure Mechanism

Stock prices are falling. Do not be surprised. Expect further drops over the next 5 to 10 years. The Failure Mechanism is easy to understand.

Failure Mechanism

Year 30 Balance

Your original balance has two parts: that which you consume at Year 30 through withdrawals and that which is untouched. The untouched portion grows by a factor equal to the total return.

Year 30 Balance

S&P500 Dividend Design Baseline

Here are some baseline numbers for use in designing dividend strategies.

S&P500 Dividend Design Baseline

Something Simple

Here is a simple way to reach a continuing withdrawal rate of 6% (plus inflation).

Something Simple

Practicing for Retirement

Why not practice before retirement? Here are my suggestions.

Practicing for Retirement

Price Drops When P/E10=20

P/E10 has fallen below 22. Soon it will be 20. The Scenario Surfer tells us what to expect.

Price Drops When P/E10=20

Switching Graphs

Here are graphs of Switching A and Switching B 30-Year Historical Surviving Withdrawal Rates HSWR versus the percentage earnings yield 100E10/P.

Switching Graphs

HSWR50T2 Graph

Here is a graph of HSWR50T2 30-Year Historical Surviving Withdrawal Rates HSWR versus the percentage earnings yield 100E10/P.

HSWR50T2 Graph

HSWR80T2 Graph

Here is a graph of HSWR80T2 30-Year Historical Surviving Withdrawal Rates HSWR versus the percentage earnings yield 100E10/P.

HSWR80T2 Graph

The Extrapolation Issue

Traditional Safe Withdrawal Rate studies select the lowest surviving rate among 30-Year historical sequences. They identify this as being a SAFE withdrawal rate.

This overlooks the extrapolation issue.

The Extrapolation Issue