Notes starting from May 8, 2008

Updated: May 26, 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

They Got It Wrong

The original Safe Withdrawal Rate studies broke new ground. They advanced our knowledge of retirement finances tremendously. Yet, it is amazing how many things they got wrong.

They Got It Wrong

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?

Is 6% Normal After All?

There are times when you can withdraw 6% of your original balance (plus adjustments to match inflation) safely using a traditional approach. Such times are unusual for those who invest in stocks and TIPS. But what about those who invest in stocks and corporate bonds?

Is 6% Normal After All?

When Price Drops Occur (Dollar Cost Averaging)

I looked at dollar cost averaging with fixed allocations. The sooner P/E10 falls below 20, the better. The sooner that P/E10 falls below 10, if it happens, the better.

When Price Drops Occur (Dollar Cost Averaging)

When Price Drops Occur (Single Investment)

I looked at investing $10000 for 30 years while maintaining a fixed stock allocation. There were no deposits. There were no withdrawals.

When Price Drops Occur (Single Investment)

Taxable Accounts

My studies do not include the effect of taxes. Doing so is impossible, at least if you want something meaningful.

Recently, a question came up as to Valuation Informed Indexing and taxes. Is it a problem? If so, it is no worse a problem than using a fixed allocation and rebalancing. After all, rebalancing creates a taxable event every year. Valuation Informed Indexing trades less frequently and more deliberately.

Intentional long term timing (as with Valuation Informed Indexing) is less of a hassle regarding taxes than rebalancing, which (when you think about it) is a mechanical form of short term timing.

When Price Drops Occur (Valuation Informed Indexing)

I looked at investing $10000 for 30 years while maintaining varying stock allocations with valuations (Valuation Informed Indexing). There were no deposits. There were no withdrawals.

Varying allocations introduces a weak sensitivity as to when prices fall. The sooner, the better.

When Price Drops Occur (Valuation Informed Indexing)

When Price Drops Occur (DCA and VII)

I looked at dollar cost averaging (DCA) and varying allocations in accordance with valuations (Valuation Informed Indexing VII). Varying allocations produces consistently high final balances. It removes the sensitivity of dollar cost averaging as to when price drops occur.

When Price Drops Occur (DCA and VII)

When Price Drops Occur (2 Stage DCA and VII)

I looked at dollar cost averaging (DCA) and varying allocations in accordance with valuations (Valuation Informed Indexing VII). I used different algorithms for the first and second fifteen years.

This version was decidedly inferior to using Valuation Informed Indexing throughout.

When Price Drops Occur (2 Stage DCA and VII)

Current Research L: When Price Drops Occur

I have opened up Current Research L to address when price drops occur. So far, I have learned that dollar cost averaging with 100% stocks or with Valuation Informed Indexing produces similar median returns. Valuation Informed Indexing produces consistently high returns. Investing entirely in stocks sometimes produces spectacular returns. At other times, it produces disappointing returns. Most often, however, the two approaches have similar final balances.

Current Research L: When Price Drops Occur

When Price Drops Occur (Retirement)

I varied allocations according to valuations in a retirement portfolio for 30 years. I determined when price drops occurred.

I found that varying allocations is vastly superior to maintaining fixed allocations (i.e., rebalancing). I found that it removes the sensitivity as to when price drops occur and how deep they are.

When Price Drops Occur (Retirement)

When Price Drops Occur (DCA and VII variant)

I dollar cost averaged (DCA) while varying my stock allocation. I invested entirely in TIPS until P/E10 fell below 15. Then I applied Valuation Informed Indexing.

This version is almost as good as using Valuation Informed Indexing throughout.

When Price Drops Occur (DCA and VII variant)

When Price Drops Occur (DCA and VII variant 2)

I dollar cost averaged (DCA) while varying my stock allocation. I invested 80% in TIPS and 20% in stocks until P/E10 fell below 15. Then I applied Valuation Informed Indexing.

This version produces results similar to using Valuation Informed Indexing throughout.

When Price Drops Occur (DCA and VII variant 2)
When Price Drops Occur (DCA and VII variant 2A)

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

Thread on matching 3% TIPS

Here is a Morningstar thread on corporate bonds, preferred stocks and other investments that can meet the requirements to match the effect of 3% TIPS. It is highly encouraging.

Thread on matching 3% TIPS

Notes Index Starting from November 23, 2007