Letters to the Editor

Updated April 14, 2006.

4% and hot selling books...

I received this letter from Dave.

I believe you've already routed some of your materials to Scott Burns. Have you also done so to the author Lee Eisenberg (just published the book “The Number”)? As you probably know, it's a wandering account about the “nut” needed to retire--as viewed by the 1% crowd (Wall Street Masters of the Universe) as well as other more regular Joes.

He does go on at great length about how 4% is a safe withdrawal rate using a 60/40% stock/bond portfolio--without any mention, I believe, of how valuations matter. And basically dismisses other portfolio blends. There's a short chapter on Monte Carlo stuff.

It's a very entertaining book and appears to be a big seller--so I sadly assume he will start a web site and use it to sell sweatshirts with the words: "what's your number?" on the back.

Anyway, he should know more about your work, if he doesn't already. (And apologies if this is old news.)

HERE IS MY RESPONSE

First, to answer your questions: Yes, you are right about Scott Burns. No, I have not contacted Lee Eisenberg.

I have discussed your remarks with Rob Bennett of PassionSaving.com .

Rob sent me the following in an email:

"I haven't yet read "The Number." I intend to. I intend to write an article on it at my web site when I do.

"My guess is that I will end up agreeing with what Dave is saying here. He is saying that the author of the book "The Number" should be informed of our findings. I have intended to make the author of the book aware of our findings after I get around to reading the book and writing a review of it.

"I'm fine with your saying all this. If you care to, feel free to say that I intend to read the book, write a review of it, and contact the author re our findings after doing so.

"I view the publication and success of the book as significant in that it shows that there is a growing concern over the sorts of issues that you are addressing with your research. Regardless of whether the book gets everything right or not, it is drawing attention to an important issue. By doing that, it is advancing the ball.

"It is unfortunate if the book takes the conventional view re SWRs or long-term stock returns. But anything that educates large numbers of people re the background issues is a plus, in my view."

I think that Rob has a healthy attitude. We really are doing cutting edge research. It takes time for our message to get out.

Even then, we are making tremendous progress. A year ago, just mentioning that a 100%-TIPS portfolio makes an excellent baseline was enough to set off a flame war. Today, this message is generally accepted.

BACKGROUND information: If you can maintain a TIPS ladder with a 2.0% interest rate, you can withdraw 4.0% of your initial balance (plus inflation) for 35 years before running out of money. This comes with a Government guarantee. The earlier claims for an optimized, fixed allocation of stocks and commercial paper (i.e., the main component of money market funds) were that you could withdraw 4.0% safely for 30 years (but not 31 years) and that your portfolio was likely to grow. Even if you accept the earlier claims, which we do not, a 100%-TIPS portfolio makes a lot of sense for many investors.

There has been a similar reaction to dividend-based strategies, but not as intense.

TIPS

I received this letter from Evelyn.

Hi, I found out about your web site from The California Merchant, a publication we receive periodically. In this issue, February 2006, the topic is Retirement Planning Tools May Give Dangerous Advise, and your web site is mentioned.

I am reading it now and do not know what TIPS stands for.

Kindly explain. Thank you for providing information that is needed for those who don't believe in traditional approaches to preparing for retirement.

HERE IS MY RESPONSE

TIPS are special treasury bonds. The acronym stands for Treasury Inflation Protected Security. The original Government wording was Treasury Inflation Indexed Security.

Here is a link to Treasury Direct. It is an official US Government web site. It has everything that you need.

Treasury Direct for Individuals

I have received and responded to many outstanding letters about TIPS and I-Bonds. You can find a wealth of information if you click on the Letters 2005 button (at the left side of this page). I think that you will be very well pleased.

Thank you very much for your kind words.

TIPS yields moving higher

I received this letter from Dan.

With TIPS yields moving back towards 2.5%, I'd be interested in your thoughts on the TIPS strategy, or TIPS/Dividends strategy now.

I have a 40 year time horizon, and want to be sure before I FIRE!

Thanks!

HERE IS MY RESPONSE.

Look into worst case outcomes. Understand the failure mechanisms. Make adjustments for your own situation. Be absolutely certain.

Go for it.

Here are withdrawal rates that last the full 40 years:

With 2.1% TIPS, you can withdraw 3.72% (plus inflation) for 40 years.
With 2.2% TIPS, you can withdraw 3.79% (plus inflation) for 40 years.
With 2.3% TIPS, you can withdraw 3.85% (plus inflation) for 40 years.
With 2.4% TIPS, you can withdraw 3.92% (plus inflation) for 40 years.
With 2.5% TIPS, you can withdraw 3.98% (plus inflation) for 40 years.
With 2.6% TIPS, you can withdraw 4.05% (plus inflation) for 40 years.

These are “bird-in-the-hand” numbers. With 2.5% TIPS, you can withdraw 3.98% (plus inflation) for forty years, regardless.

Here is a practical detail that you need to know. You adjust for inflation by following the variation of interest payments that you receive. This is similar to a cost of living adjustment at a job or from Social Security.

You also need to know about the tax treatment of TIPS. All adjustments to principal to match inflation are taxable. This is a problem for TIPS inside of a taxable account.

The biggest issue with TIPS is whether you will be able to reinvest at favorable rates in the future. I believe that rates will soon be high enough at all maturities so that you can construct a strong, long-lasting TIPS ladder. This will reduce any negative effects from future interest rate fluctuations.

If you are happy with these numbers, you have already met your goal.

You should run some other numbers as well.

Here is an example of a what-if exercise.

With a TIPS/Dividends strategy, I believe that you will be able to withdraw 5.4% (plus inflation) safely, long into the future. There is risk. With more conservative assumptions, this rate falls to 4.8%.

I would be reluctant to start at a withdrawal rate higher than 5.4% (plus inflation). If you are amenable to working part-time within the first ten years, it might make sense to start with a 5.4% (plus inflation) withdrawal rate. You could cover any shortfall even if I have made serious errors in my analysis. You might consider starting out at 4.8% (plus inflation) as an alternative for your peace of mind.

The failure mechanism is that you never find stock dividends attractive. At these withdrawal rates, a TIPS-only portfolio would only last 25 to 30 years.

Suppose that you treat 25% of your portfolio differently from the rest. Suppose that you apply the dividend strategy to this portion immediately. You withdraw 5.4% (plus inflation) from this part of your portfolio and 3.98% from the rest. This would allow you to withdraw a total of 4.3% immediately. The absolute worst case is that this portion would run out of money at year 25. You would still be able to withdraw 2.99% of your portfolio’s initial balance (plus inflation) during the final decade.

I cannot fathom an absolute worst case as extreme as this. I can easily understand that knowing about it will allow you to sleep very well at night.

You don’t have to withdraw 5.4% or 4.8% (plus inflation) from the start. You can start at a lower rate and increase withdrawals later. If so, expect to end up with a higher rate. That is, higher than 5.4% or 4.8% (plus inflation).

You may prefer to stick with 3.98% (plus inflation) withdrawals until after purchasing high quality companies with high dividend payouts. You should be able to increase your withdrawal rate dramatically in only a few years.


HERE IS MORE FOR DAN.

What if you couldn't buy suitable stocks for 20 years?

What If There Is A Bubble?

Are you the psychic?

I received this letter from Mascha.

Are you the same John Russell who is also a psychic on the internet?

HERE IS MY RESPONSE.

No. I am a retired Electronics Engineer (USAF Civil Service). I recommend that people listen to the Thru The Bible Radio program. It is beginning another 5-year study today.

Thru The Bible Radio

Rob Bennett (Hocus)

I received this letter from Jeff.

An interesting web site, although I'm a little surprised to find you espousing Rob Bennett. This is the guy..He's been debunked/blacklisted on numerous web sites..

HERE IS MY RESPONSE.

I am familiar with the details. Rob Bennett is the one telling the truth.

Earlier Letters to the Editor

Mike asked about High Dividends: Half DVY, Half RWR. Don asked: Do visual aids or other simple tools exist? From Bud: Very cool stuff here followed by remarks about Exponential Weighting.
February 20, 2006 Letters to the Editor


Retirement Planning Tools Offer Dangerous Advice
February 14, 2006 Letters to the Editor


More Comments: This Time Inspired by "Dollar-Cost Averaging Today" and Comments Inspired by "Year 10 Choices."
February 5, 2006 Letters to the Editor


Comments Inspired by Reading "The Story Behind the Numbers" by Rob Bennett. My response, including Risky Alternatives, Dollar Cost Averaging Today and DCA Today: The Point of Frustration.
January 29, 2006 Letters to the Editor


Unclemick about the Dow Jones Utilities. BillW (with Thanks!) about getting started. Rob Bennett about Dividend Theory versus Dividend Reality. This led to a breakthrough.
January 11, 2006 Letters to the Editor