More Than a Number

Safe Withdrawal Rate research is about more than a single number. It is central to many early retirement planning insights.

1) SWR Research has led us to come up with some tough-to-beat baseline portfolios. They all beat the 4% (plus inflation) for 30 years that was claimed (incorrectly) to be safe with optimized high stock allocations. [We even have a low risk approach that provides 4% (plus inflation) for 40 years starting at today’s valuations.]
2) SWR Research has led us to vary allocations with valuations. This boosts the 30-year Safe Withdrawal Rate of a portfolio (with the S&P500 index and TIPS at 2% interest) from 3.0%-3.6% to 4.4% at today’s valuations. [The Calculated Rates (which have 50%-50% odds) increase from 4.1%-4.4% to 5.1% at today’s valuations.]
3) SWR Research showed us that P/E10 is an excellent measure of valuation.
4) Because SWR Research focuses on cause-and-effect, we know why P/E10 is an excellent measure of valuation. Our findings make sense.
5) SWR Research led us to discover that P/E10 is an excellent indicator for changing allocations with segments of the stock market (Large Capitalization Growth, Small Capitalization Growth, Large Capitalization Value and Small Capitalization Value) as well as the stock market as a whole (S&P500).
6) SWR Research has led us to make sensitivity studies. History does not have to repeat itself exactly.
7) SWR Research has revealed the danger of high stock allocations when valuations are high (such as they are today). Back in the 1960s, they sometimes brought the surviving withdrawal rates below that of 100% commercial paper (i.e., money market funds).
8 ) SWR Research exposed the fallacy behind rebalancing. Rebalancing helps only if you are unable to determine, even coarsely, whether prices are high or low. Rebalancing helps only a little when prices are high. It hurts a lot when prices are low.
9) SWR Research has told us about the timing of withdrawals. Always seek to get a fair price for the securities that you sell. Allow yourself two to three years to get prices that are at least as good as average. Avoid selling at lows.
10) SWR Research led us to take advantage of TIPS ladders. They allow us to adjust allocations without selling bonds into the secondary market.
11) SWR Research led us to dividend-based strategies as an alternative or a supplement to our basic approaches.

Have fun.

John Walter Russell
July 22, 2005