Related to my article on "safe savings rates," I discussed how valuations were linked both to how much wealth could be accumulated with a given savings rate (or what savings rate is needed to achieve a wealth target), and what withdrawal rate would be sustainable over 30 years. High valuations tend to mean that someone could reach a wealth goal with a low savings rate, but would then also experience a low withdrawal rate. Meanwhile, low valuations tend force retirees to use a higher savings rate to meet a target, but could then get away with using a higher withdrawal rate anyway.
Individuals from Virginia to Texas, and perhaps somewhere in between, have suggested making an adjustment to the wealth accumulation for valuations. Something like a normalized wealth accumulation. I finally just now checked this. Using a 10% savings rates, I checked how much wealth could be accumulated after 30 years of savings in real inflation-adjusted terms.
Then I multiplied this amount by the median value of PE10 over the historical period (1881-2010 for PE10 values) and then divided it by PE10 for that year. This would adjust wealth downward when PE10 is high, because the fraction is less than 1, but would adjust wealth upward when PE10 is low, because the fraction is greater than 1.
I think the idea was that this adjusted curve should be rather flat.
But it is not really all that flat after all.
In looking at this following figure, I can't come up with any story to explain it, and I'm open to suggestions.
The valuations-adjusted wealth accumulations were quite high in the 1960s. But surprisingly/interestingly, the accumulations are low around 2000 when valuations were at an all time high. I can't really come up with any clear explanation for the movements in the red curve. Perhaps there is no deeper meaning to this figure. What do you think?
Saturday, December 10, 2011
I wrote a short article for Wealth Strategies Journal called, "When Can I Retire? Answers from the Historical Record."
The last paragraph of the introduction effectively summarizes the issues explored in this article:
The purpose of this article is to explore some loose ends from the "Getting on Track" article. That article provides a framework for mid-career individuals to develop a progress report about their retirement plans by showing which savings rate they may still need to use and how much longer they may still need to work. How would the results change for a younger, mid-career individual who wishes to plan for retirement sustainability without relying on Social Security income? What impacts do annual percentage of portfolio fees have on sustainable savings rates and retirement ages? And how different are the results for a retiree making plans to enjoy a sustainable retirement through age 90, rather than through age 100?
If you are interested in those issues, particularly the impact of a 1% fee and the impact of planning up to age 90 instead of age 100, then please have a look. Also, this article is written from the perspective of a 40 year old.
Regarding the specific issues addressed in the article, I'd really like to thank Ricky Hutchins, CFP, and Jean Lesperance for their suggestions.