Sunday, June 17, 2012

Updated Situation for 2000 Retirees


Now that 12 years have passed since the retirement date for 2000 retirees, we can obtain a progress report about how they fare relative to other historical retirees. This entry builds on my article, "Will 2000-Era Retirees Experience the Worst Retirement Outcomes in U.S. History? A Progress Report after 10 Years," from The Journal of Investing, as well as William Bengen's article "How Much is Enough" in the May 2012 issue of Financial Advisor linked to and described here

The numbers are shown in Table 3.3. Ranked in terms of real remaining wealth 12 years after retirement, the 2000 retiree comes in 15th place with 67.6% of their retirement date wealth remaining after 12 years. This is for a 4% withdrawal rate, 50/50 asset allocation, and all of the other assumptions described in my entry on William Bengen’s SAFEMAX.

On the surface, the situation does not look dire for 2000 retirees. The 14 retirees with less remaining real wealth after 12 years all subsequently experienced success over 30 years with the 4% rule. The current withdrawal rate (which is the real withdrawal amount of 4 divided by the remaining real wealth of 67.6) for the 2000 retiree is 5.92%, whereas with the 1937 retiree the current withdrawal rate was already 8.51%.
Table 3.3
Retirements Ranked By Lowest Remaining Real Wealth 12 Years After Retirement
For 4% Withdrawal Rate, 50/50 Asset Allocation, Inflation-Adjusted Withdrawals, No Fees
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds


12 Years Later
(For example, for the 2000 retiree these are the numbers at the start of 2012)

30 Years Later
Rank
Ret. Year
Remain. Real Wealth (%)
Current Withdrawal Rate
Remain. Nominal Wealth (%)
Cyclically-Adjusted Price Earnings Ratio (PE10)
Dividend Yield
10-Year Gov't Bond Yield

Remain. Real Wealth (%)
Maximum Sustainable Withdrawal Rate
1
1937
47.0
8.51
78.8
10.25
6.18
2.31

26.7
4.36
2
1973
48.1
8.31
114.7
10.00
4.41
11.38

42.9
4.45
3
1969
48.4
8.26
104.6
9.26
4.66
12.57

23.4
4.20
4
1968
49.8
8.03
99.5
8.85
5.14
10.80

19.0
4.19
5
1966
52.7
7.59
96.3
9.24
5.22
7.96

3.3
4.04
6
1972
53.8
7.44
127.8
9.89
4.28
11.67

68.2
4.64
7
1970
54.0
7.41
123.5
7.39
5.68
14.59

102.8
4.84
8
1971
56.5
7.08
133.5
8.76
4.77
10.46

95.0
4.81
9
1967
57.9
6.91
109.2
9.26
5.12
9.10

38.3
4.42
10
1965
61.7
6.49
109.5
11.44
3.95
7.21

8.3
4.12
11
1939
62.6
6.39
105.6
11.90
7.02
2.57

60.5
4.76
12
1940
63.9
6.26
114.6
12.53
5.83
2.68

56.6
4.81
13
1964
64.8
6.17
108.9
11.19
3.80
7.74

27.0
4.35
14
1936
66.2
6.04
103.0
10.42
5.66
2.44

75.0
4.91
15
2000
67.6
5.92
88.0
21.21
2.06
1.97

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Note: Data for PE10, Dividend Yield, and 10-Year Government Bond Yield are the values for the January occurring 12 years later. This data is from Robert Shiller's homepage.

Did the 2000 retiree already past the test to be well on the way to success with the 4% rule as well? Perhaps, but I do not think that great confidence is called for yet. I checked the historical maximum sustainable withdrawal rates over 18-year periods, and there were 8 retirements with withdrawal rates below the 5.92% needed by the 2000 retiree. These include 5.35% for 1969 retirees, 5.41% for 1968 retirees, 5.42% for 1973 retirees, 5.42% for 1966 retirees, 5.59% for 1937 retirees, 5.65% for 1965 retirees, 5.7% for 1972 retirees, and 5.82% for 1967 retirees.

While a lot of those retirees also appear in the above table as well for 12 year retirements, it is also worthwhile to note the current market conditions 12 years after retirement. For the 14 retirees ranked in worst-shape than the 2000 retiree after 12 years, harsh market conditions had already tended to bring market valuations to rather low levels. The highest PE10 after 12 years was the 12.53 value experienced by the 1940 retiree. Compared to a PE10 of 21.21 at the start of 2012, 2000 retirees may not be able to expect higher forward looking stock market returns. As well, dividend yields are lower than experienced in the past. Bond yields are also at the lowest levels in U.S. history, and this is the best predictor of future bond returns. 

The 4% rule may work for 2000 retirees. Then again, it may not. Certainly the next few years will be critical and those retirees should remain cautious and monitor their current withdrawal rate.

Update: Welcome Readers from the Oblivious Investor blog. Shortly after writing this, an astute reader at the Early Retirement Forum wondered whether these results are too favorable for 2000 retirees because I use bonds. He thought retirees in 2000 might have been looking at an allocation such as 75% stocks and 25% cash. He also wanted to see fees included. I considered a few more scenarios like this at "Grim News: Another Look at the 2000 Retiree"

Leaving an Inheritance / Safety Margin and Safe Withdrawal Rates


One of the classical assumptions in the safe withdrawal rate literature is that retirees choose a withdrawal rate based on what would have left precisely no wealth after the withdrawal in the 30th year of retirement. Retirees do not deviate from the inflation-adjusted withdrawal amounts, which leaves them playing a game of chicken as their wealth may be plummeting toward zero. As well, retirees do not make any adjustments for the fact that as their 30th year of retirement approaches, they are increasingly likely to live longer than 30 years. As well, the classical assumptions are such that retirees do not have any particular desire to leave a bequest, an estate, an inheritance, or whatever you may like to call it. The objective of the classical studies is to get a handle on what is the maximum sustainable withdrawal rate from a portfolio of volatile assets over a 30 year retirement period.
That being said, as Michael Kitces notes on his blog, when we talk about using a safe withdrawal rate, we are really talking about a case in which no wealth will be left in the worst-case scenario. More often than not, wealth may continue to grow when using a 4% withdrawal rate rule.
Nonetheless, what I aim to investigate here is how withdrawal rate decisions may change when retirees specifically incorporate a desire to leave a bequest, which I will summarize here as either maintaining the nominal value of retirement date wealth at the end of the 30th year, or maintaining the real value of retirement date wealth at the end of the 30th year. The value of wealth may decline in the interim and then make a comeback, as I am only checking the value of wealth after the 30th year.
I am using the same assumptions as described in my entry on William Bengen’s SAFEMAX. These assumptions include withdrawals at the start of the year, annual rebalancing from a 50/50 portfolio of stocks and bonds, a 30-year retirement, inflation-adjusted withdrawal amounts, and no fees. Data is from the SBBI Yearbook.
As an aside, this is the first time I’ve shown results with data through the end of 2011. Now we know the outcome for the 1982 retiree, a new record setter! While that was a terrible year to retire in terms of pre-retirement bear markets, the 1982 retiree could have used a whopping 9.78% withdrawal rate with whatever wealth they had.
Table 4.2 shows the maximum sustainable withdrawal rates by retirement year for three scenarios: the classic case in which wealth is depleted after 30 years, the case in which the nominal value of retirement date wealth is preserved after 30 years, and the case in which the real inflation-adjusted value of retirement date wealth is preserved after 30 years.
With the classical wealth depletion assumption and a 50/50 asset allocation, the 1966 retiree experienced the worst-case scenario withdrawal rate (SAFEMAX), which was 4.04%. As Michael Kitces and Bill Bengen both emphasize, 4% also does pretty well with preserving the nominal value of retirement date wealth (though after 30 years of inflation that wealth may not have a whole lot of purchasing power left). There were only 4 cases when 4% did not preserve nominal wealth, and the SAFEMAX for this case was 3.78% for the 1937 retiree.
I think that when someone says they want to preserve the value of their wealth, they probably are implicitly thinking in terms of preserving the real purchasing power of their wealth, even if they do not fully articulate this. The next column shows the maximum sustainable withdrawal rates than will preserve the real value of wealth after the 30th year. The 4% withdrawal rate accomplishes this in 54% of the historical simulations (31 out of 57 rolling periods). The SAFEMAX for this case happened for a 1965 retiree who could only use 2.73% to preserve the real value of their retirement date wealth.
Table 4.2
Maximum Sustainable Withdrawal Rates (MWRs)
Cases: (1) Wealth Depletion,  (2) Preserve Nominal Value of Retirement Date Wealth,
and (3) Preserve Real Value of Retirement Date Wealth
For 50/50 Asset Allocation, 30-Year Retirement Duration, Inflation Adjustments, No Fees
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds
Year

MWR
(Wealth Depletion)
MWR
(Preserve Nominal Wealth)
MWR
(Preserve Real Wealth)
Year
(1)
MWR
(Wealth Depletion)
MWR
(Preserve Nominal Wealth)
MWR
(Preserve Real Wealth)
1926
7.29
6.42
6
1955
5.6
5.03
3.45
1927
7.04
6.16
5.7
1956
5.04
4.57
3.21
1928
6.04
5.11
4.56
1957
5.19
4.77
3.51
1929
5.12
4.33
3.81
1958
5.62
5.19
3.93
1930
5.4
4.62
4.08
1959
4.92
4.5
3.27
1931
5.82
5.1
4.5
1960
4.87
4.52
3.42
1932
7.14
6.54
5.92
1961
4.82
4.46
3.3
1933
6.78
6.21
5.46
1962
4.39
4.08
3.03
1934
5.64
5.09
4.38
1963
4.65
4.35
3.31
1935
5.8
5.27
4.58
1964
4.35
4.07
3.06
1936
4.91
4.38
3.7
1965
4.12
3.82
2.73
1937
4.36
3.78
3.04
1966
4.04
3.8
2.89
1938
5.56
5.01
4.31
1967
4.42
4.19
3.34
1939
4.76
4.24
3.51
1968
4.19
3.98
3.23
1940
4.81
4.25
3.39
1969
4.2
4.02
3.36
1941
5.19
4.67
3.79
1970
4.84
4.65
4.03
1942
6.26
5.73
4.88
1971
4.81
4.61
3.96
1943
6.47
5.92
5.13
1972
4.64
4.42
3.71
1944
6.15
5.52
4.62
1973
4.45
4.2
3.42
1945
5.94
5.19
3.99
1974
5.27
5.03
4.33
1946
5.29
4.63
3.43
1975
6.9
6.63
5.95
1947
6.69
6.02
4.96
1976
6.4
6.11
5.4
1948
7.42
6.63
5.45
1977
5.99
5.7
4.99
1949
7.77
6.95
5.65
1978
6.93
6.62
5.93
1950
7.3
6.53
5.11
1979
7.65
7.24
6.38
1951
6.98
6.26
4.77
1980
8.32
7.88
7.11
1952
6.9
6.12
4.36
1981
8.51
8.03
7.31
1953
6.6
5.94
4.29
1982
9.78
9.25
8.54
1954
6.85
6.25
4.68
1983 +
30 Years of Data Not Yet Available
Note: SAFEMAXs are boxed. All MWRs below 4% are bold-faced.

Finally, to provide more detail, Table 4.3 identifies the amount of wealth remaining after 30 years in both nominal and real terms (retirement date wealth = 100) when using a 4% withdrawal rate with a 50/50 asset allocation and all of the other standard assumptions. The SAFEMAX of 4.04% happened with a 1966 retiree, and we can see that the real value of their wealth after 30 years is 3.3. Since a withdrawal of 4 will be taken in year 31, the 4% rule would fail over a 31 year horizon for the 1966 retiree. On the other end of the spectrum, as we can now calculate outcomes for the 1982 retiree as well, we can see the growth of their wealth had they used 4% withdrawals. In nominal terms, their wealth would have grown to more than 10 times its retirement date value, and even in real terms the value of their wealth grew by more than 4 times.

Table 4.3
Remaining Wealth After 30 Years (Measured in Nominal and Real  Terms)
Using a 4% Withdrawal Rate and Retirement Date Wealth=100
50/50 Asset Allocation, Inflation Adjustments for Withdrawals, No Fees
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds
Year
Nominal
Wealth
Real
Wealth
Year
Nominal
Wealth
Real
Wealth
1926
380.2
254.9
1955
281.3
74.3
1927
345.6
227.4
1956
221.5
56.4
1928
219.9
137.7
1957
279.6
70.6
1929
141.1
85.0
1958
372.1
95.7
1930
178.8
106.0
1959
220.9
55.4
1931
251.6
138.1
1960
245.6
59.9
1932
525.5
257.1
1961
227.3
53.7
1933
481.2
209.8
1962
125.2
28.1
1934
298.6
129.3
1963
218.2
48.1
1935
338.4
147.0
1964
124.3
27.0
1936
169.5
75.0
1965
38.6
8.3
1937
60.8
26.7
1966
15.5
3.3
1938
284.7
124.7
1967
178.6
38.3
1939
146.4
60.5
1968
88.7
19.0
1940
144.1
56.6
1969
106.2
23.4
1941
226.3
84.6
1970
447.0
102.8
1942
420.9
163.6
1971
402.0
95.0
1943
448.6
184.4
1972
288.9
68.2
1944
341.1
139.9
1973
178.5
42.9
1945
257.3
99.0
1974
524.2
134.0
1946
196.7
69.0
1975
1086.8
305.9
1947
400.0
154.9
1976
817.3
238.4
1948
431.1
173.6
1977
669.3
197.9
1949
459.3
177.9
1978
945.4
291.1
1950
430.6
150.2
1979
893.8
288.2
1951
413.5
134.7
1980
979.7
357.6
1952
370.9
113.8
1981
940.7
375.8
1953
395.8
112.5
1982
1085.0
465.2
1954
475.8
131.0
1983 +
30 Years of Data Not Yet Available
Note: All wealth values below 100 are bold-faced.