Michael Shedlock had a scary nugget in a recent post, quite eye opening actually.In the 20th century the Dow Jones Industrial Average went from 66 to 11, 497. Michael says that compounds to 5.3% annually.
If that 5.3% were to repeat in this century the Dow would be at about 2,000,000 on December 31, 2099. He goes on to note we are 8 years into the century and we have only added 1300 points out of the roughly 1.99 million Dow points we need this century just to get 5.3%.
That doesn't have to be scary. Anyone starting a clock from 1968 forward for ten years comes up with a volatile round trip to nowhere yet the market skyrocketed in the 1980s and 1990s. The Great Depression was another volatile round trip to nowhere. Even if the century comes up short there will be boom periods for the market along with one or two more decade long round trips to nowhere.
Worrying about this sort of thing is counter productive because it is beyond our control. There are two action points from this which, as is usually the case, are save more than you currently do and live below your means.
19 comments:
Fine I save more and I live below my means, but if the market is only returning 5.3% wouldn't I want to leave say 2.3% in there and only plan on extracting 3% per year in retirement.
I know others would argue for higher or lower inflation on average, but my point is I think we can not plan on extracting 4 to 5% per year just because that number has worked well from 1982
nothing wrong with your logic. of course.
the longer answer might be let's say you retire today with $600,000. 4% would be $24,000.
let's say one year from now the portfolio is worth $594,000. 4% of that would be $23760. the year after it is worth $568,000. 4% of that is $22720. the year after that it goes up to $604,000. 4% of that is $24160. let's say the next year it is worth $671,000. 4% of that is $26840.
my idea of whatever you got, 4% makes the income stream less predictable to be sure but it seems reasonable unless you have so many unpredictable events that no plan can be reliable.
No plan can work for everyone and there are so many variables (some pertain to the individual and some pertain to circumstance) that it gets progressively more complicated.
What is in our control for now can be save more and live below your means. It improves the odds for success while guaranteeing nothing.
I normally have a lot of respects for your comments, but your rationale is idiotic to say the least.
Why not say you take out 25% a year. Lets say you start with $600,000. The first year you take $150,000. The second year you have $450,000 so you take $112,500 a few lines down my excel spread sheet in year 7 you take $26696.77 and are left with $80,090.33 Even with no earning as in my example you will still have money left in year 50. If you make any money things will be better and you are assured to never run out of money as long as you follow the 25% rule.
It is just a simplistic as Rogers rule just easier to realize simply stating a flat percentage is ridiculously simplistic and idiotic advice. It is just more obvious with my 25% example
ok, i'm an idiot.
the diff is that at 4% you have a likelihood of surviving unexpected expenses and 4% is well below average returns for the market. further your example (i realize it's hyperbolic) gives no shot of surviving inflation.
next time you feel the need to come on so strong feel free to actually sign your comment.
The idea of withdrawing 4% isn't just to have money to withdraw. It's to have a somewhat predictable stream of income and make that somewhat predictable stream last 25 or 30 years.
If you can afford to withdraw 25%, fine, go ahead. Just don't make that decision in year 1 without thinking "if I need a big expense in year 20, can I handle it?"
The point of 25% is obviously wrong to everyone, but fits in Rogers flat percentage draw range as well.
The original post referenced 5.3% market return over a century. My point is 4% is way to close to the 5.3% when I try to account for inflation. While not as obvious as 25% the 4% with drawl is much to large as well.
I am not saying I know 2.5% or 3.5% or some other number are correct, but 4% seems obviously wrong to me if 5.3% is correct for a century.
I actually think it gets more complex than that. 4% would have been disastrous in 1968 or quite likely 2000. But 5% might have been just fine in 1982.
BTW, I did not call Roger an idiot. Yes I was hyperbolic and yes I strongly criticized his rationale. I also acknowledged I normally respect his comments. Nobody is perfect. Apparently one of my flaws is I come on to strong.
one other thing from me on this is that 4% of whatever you have is at most a tweak on a standard notion and actually the way i interpret the 4% rule it would not even be a tweak...again the way i interpret.
my notion is potentially flawed of course but i do not think it is idiotic
I don't see a big impact from inflation on my retirement years, am I missing something?
if you retire at 99 and die at 101 then inflation will not matter.
"Speak sense to a fool and he calls you foolish."
- Euripedes
Just sayin'
is that a quote from my friend
Euripedes Upman?
If it hits at all it will be very subtle.
Euripedes Upman
modest chuckle.
i do not know who this Shedlock is but that math was discussed by Warren Buffett in his most recent letter to shareholders couple of months back.
His point was not to expect the returns of this coming century to match those of the past century.
i've made the same argument a gazzillion times. our returns over the last century were a function of events and natural resources that are clearly behind us in the US.
If such returns were to repeat i would presume they will happen in a country rich with resources that has a positive account balance.
Canada, Australia, Singapore, Brazil, Chile, have a lot better chance to achieve that goal going forward than we do.
The 5.3% does not include dividends but it is about the right number. Just plug historical values into a spreadsheet and you can calculate it yourself (not you roger, i am talking to the anon dude).
That reminds me.....
Buffet's letter seems to make the same point several other writers have made lately (perhaps simply copying Buffet's point). Maybe I'm getting a bit sarcastic, but the point seems to be "if the returns in this century are the same, the Dow would be at 24 million and OMFG that can't happen' cause that number is huge!"
Now, do I think we'll be at 24m? Well, probably not. But does it make sense to essentially say "we won't be there 'cause that's a really big number?"
*Sigh* Sad to say, I'll never know, nor will my childern.
If you relocate them to the Bay Area, they'll have a fighting chance!
http://www.mercurynews.com/healthandscience/ci_9011215
Of course, a good chunk of their potential retirement funds will have to go to the cost of living - sigh.
To me the 4% figure is something to aim for if your portfolio fits other criteria, plus it's a standard yardstick for Roger to talk to all of us efficiently. Maybe 25% would be suitable in an uncommon situation and 1% in another. 4% is just a guideline to aim for. If your child has their own kid you might be drawing 6% that year, if you get a part-time job it might be only 3% the next.
Regarding returns this century so far we'd just come off of the biggest bubble which had been growing for 5 years, so I don't think we can use the 21st century so far as a yardstick for anything. We might still be in that bull market that started in 1978.
Incidentally has that bull market everything to do with the computer age?
Yes, Buffett is correct in that the market will be at 24 million by the end of the century. I'm surprised he would even bring it up. Of course a car will cost a few million and minimum wage will be pushing a million but then that's how our system works. My grandfather made $5 a month and my Dad worked for a dollar a day. I made a couple of hundred grand by the time I turned senior and I expect my kids, to make a million a year and the grandkids making several million a year. All this represents middle income and all will have just gotten by in the end. And yes I think 4% is a good number. Once again, "it's bad enough to be old but to be old and poor is horrible".
It should also be pointed out that when Roger talks about withdrawing 4% yearly, he's only pointing out half of the equation. The 4% is usually based on the fact that you've saved some amount of money - for instance 12x your pre-retirement salary, as described here and that you're planning on, sayin living on 80% of your pre-retirement salary, etc.
In other words, this isn't some simplistic idea. It's math.
Is it me or is the FT providing better information and point of view than the Journal?
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