Notes starting from February 9, 2009

Updated: March 7, 2009.

The Annuity Mindset

Traditional retirees often choose a Single Premium Immediate Annuity. This makes a lot of sense for a lot of people. Their income is guaranteed to last throughout their entire life. Their income is higher than for others because of the nature of an annuity. Those who die earlier finance higher payments to those who live longer. There is no need to worry about the day to day price fluctuations of the underlying investments.

Their final balance is zero (unless they select special provisions). They may or may not include an inflation matching clause.

A younger retiree can do better with a fully invested dividend and/or income strategy. He should focus on the income stream as opposed to his portfolio’s current balance. He should adjust withdrawals and reinvest his income well enough to keep up with inflation.

His income stream can last indefinitely, possibly increasing faster than inflation. He will have a final estate to pass on to his heirs. In today’s market, he can do as well as a traditional retiree. But he must monitor his portfolio. He must understand his risks.

Long Retirements and the Scenario Surfer

You can use the Scenario Surfer to prepare for long retirements. Here is how.

Long Retirements and the Scenario Surfer

6% for 60 Years

I used the Scenario Surfer to see if I could withdraw 6% for 60 years.

I came close.

6% for 60 Years

After the Turning Point

I used the Scenario Surfer. I looked at withdrawing 6% for 60 years in a Normal Market. We will see this after the next turning point.

You still need to be careful.

After the Turning Point

Hocus was Right

Rob Bennett was right. The conventional studies got the safe withdrawal rate number wrong. Millions are facing busted retirements. They trusted the experts. The experts were wrong.

Rob Bennett has faced ruthless attack after attack because of his insights. He has been banned from discussion board after discussion board because of abusive posters who have followed his every move in order to shut him up. Rob Bennett’s sin is that he insists on honest postings about safe withdrawal rates. It began when he asked a simple question that I was able to answer later: “What is the price adjusted safe withdrawal rate?”

Rob Bennett’s investment advice is much more accurate than that of John Bogle and William Bernstein. Rob Bennett varies allocations with risk levels. He invests rationally. He does not invest passively.

Reasonably Safe, Not Safe

I have repeated attempted to withdraw 6% (plus inflation) for 60 years using a traditional liquidation strategy in today’s market. All of my attempts have failed. They have been Reasonably Safe.

Reasonably Safe, Not Safe

Continuing Withdrawal Rates

You can determine a continuing Safe Withdrawal Rate for a liquidation strategy by using the Year 30 SWR Retirement Risk Evaluator. Enter P/E10=14 and a 100% Year 30 balance. The best Safe Withdrawal Rate is 4.8% (plus inflation) with a 100% stock allocation. It has a Reasonably Safe Rate of 5.4%.

The 60-year Safe Withdrawal Rate will be slightly higher than the continuing rate.

Valuation Informed Indexing will have higher withdrawal rates.

6% and Safety

A 60-year Safe Withdrawal Rate of 6% (plus inflation) using a liquidation strategy is too much to ask for at today’s prices.

6% and Safety

Turning Points E

I looked at a P/E10=26 Bear Market. I collected more turning point statistics. I focused on when we will hit bottom.

Turning Points E

Turning Points F

I looked at a P/E10=8 Normal Market. I collected more turning point statistics. I focused on how long it takes to reach a top.

Turning Points F

Equations of Psychology

Science fiction fans have toyed with the idea of human psychology wrapped up in mathematical equations. This has already happened.

As Rob Bennett points out, Professor Robert Shiller’s P/E10 is a measure of the emotional content of the stock market. When you use our calculators, you are using early equations of psychology. Wow!

RobCast #69 (75 minutes) -- February 25, 2009 -- Beyond Valuations

Rob Bennett does an outstanding job once again. It is a great overview.

Rob Bennett’s RobCast Page Nine

The Investment Strategy Tester

The Investment Strategy Tester is up and running. Use the "Strategy Tester" button on the left. It automates the Scenario Surfer.

The Investment Strategy Tester is the new name for what was the Reality Checker. Rob Bennett and I developed it together.

The Investment Strategy Tester

The Investment Strategy Tester is working on some, but not all computers at this time (February 26, 2009). We are working to fix this problem.

If the Strategy Tester starts out with an error, try clicking on the Back to "Choose Function" Page and make your entries. Sometimes, but not always, this will do the job.

Turning Points G

I combined my Turning Points E and F data. I calculated the likely range of stock market cycle periods. It comes close to what we have seen in the past.

Turning Points G

Researchers: Include Valuations

I was reading EF Moody’s Daily Commentary [dated 2/29/2009]. He referenced a study about stock volatility in the long run. The article has a lot going for it. But it also has a critical oversight. It failed to separate the effect of valuations.

The best measure of valuations is Professor Robert Shiller’s P/E10 (actually, the reciprocal 100E10/P, the percentage earnings yield of the S&P500 index).

Valuations vary wildly with time. A study that fails to include valuations confounds its results with the primary cause of return variation.

You can see the effect of valuations for yourself. Look at the Stock Returns Predictor [Stock Returns button on left]. P/E10 has varied between 5 and 44 in the past.

EF Moody’s Daily Commentary

Should We Buy Yet?

The S&P500 index has fallen to 701. P/E10 has fallen below 12. The Stock Return Predictor tells us to expect a Year 10 real return of 8%. The inner confidence limits are 5% to 11% (60% probable).

Is now a good time to buy? Or is there a hidden flaw?

The actual return at Year 10 is likely to fall short by about 1.5% per year (real, annualized, total return) because of the long lasting (secular) Bear Market. This would still leave us with a likely return of 6.5%, which matches the historical norm.

Many will want to wait for the S&P500 index to fall to 600 and a P/E10 level of 10. They could miss out, but I don’t think so. Their odds of success are at least 50%-50%. If they are right, their most likely Year 10 real, annualized, total return of the market would be 10.7%. This is why you might want to wait a few months before making your heaviest purchases.

Historically, the lows have ranged between P/E10=5 and 8. But there have been only a very few complete cycles.

Yes. This is an excellent time to be buying. But the market is in free fall. Wait on the sidelines for a few months until the market settles down. A good stock allocation for today [March 2, 2009] is 50% with plans to invest up to 80% or 100% over the next two or three years.

Better Than TIPS

Use the Stock Returns Predictor. Look at stock returns at today's prices. Even worst case, stocks will do better than TIPS at all decades shown.

Wait for stocks to stop falling and then buy heavily. This is a great buying opportunity. I expect it to last for several years.

For Today’s Accumulators

I looked at dollar cost averaging for today’s accumulators.

For Today’s Accumulators

Notes Index starting from November 23, 2007