Data Based Safe Withdrawal Rates

Rob Bennett is the writer of Passion Saving, which contains many wonderful insights for those who wish to retire early.

There are three or four different things that people call Safe Withdrawal Rates. We distinguish Rob Bennett’s innovation by calling it the Data Based SWR Tool. Rob’s idea dates back to 1996. He introduced it back then as part of his own planning.

In its most primitive form, Rob’s Safe Withdrawal Rate tool featured these critical attributes:
1) He normalized all investments to a very high level of safety.
2) He determined the Safe Withdrawal Rate of each in as objective a manner as possible, preferring mathematical calculations.
3) He estimated the upward potential of each investment (even if only a crude approximation).
4) He identified the degree of safety of each investment (even if only a crude approximation).
5) He kept judgments, rules of thumb and guesses external to Safe Withdrawal Rates.
6) He kept individual preferences and personalities external to Safe Withdrawal Rates.

Rob has used his Safe Withdrawal Rate numbers to determine his own investment allocations. He introduces these criteria:
1) He wants his nest egg to remain the same or to increase gradually with time. It is OK to have occasional losses so long as they are only temporary.
2) He plans to maintain his portfolio indefinitely (as opposed to a fixed number of years).
3) He does not want to abandon long-term growth entirely just to reach the highest levels of safety.
4) He addresses the growth potential of his investments from a long-term perspective. He views a portion of his holdings in his bonds and certificates of deposit as only a means of preserving capital. He plans to invest those funds later in long-term, growth-oriented investment classes when conditions became favorable.
5) He examines the health of his portfolio and its allocations in detail at the start of each year.

The essential elements of the Data Based SWR tool are 1) normalizing comparisons by requiring a high level of safety and 2) making objective calculations.

The Data Based Safe Withdrawal Rate tool is not a calculator. It is an analysis procedure. We supplement it with information from our calculators. We introduce confidence limits. We try to extract as much information from the historical data as possible. We look at data from many different vantagepoints.

There is a wealth of information available in the historical record. We expect the future to be similar to the past in many respects, but not all. Our investigations into the SWR Investment Tool will lead us to many exciting, new discoveries.

Have fun.

John Walter Russell