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"

5 comments:

  1. Hello Wade, how can you ignore the very high standard deviation of the current E10 (10 year earnings in Shiller's PE10)? Doesn't that make the current PE10 suspect as a forward equity returns projection tool?

    Lsbcal

    ReplyDelete
  2. Hi,

    Certainly earnings nosedived in 2008 and 2009. That could mean that average earnings over the past 10 years are "too low" and so PE10 is "too high". But with PE10 still around 20 or 21, it is probably still going to be overvalued a bit even after some adjustments.

    I've seen some articles about this. But at the same time, to the extent that basing asset allocation on PE10 is a formula plan to help guide investments in a mechanical way, one should probably be cautious about looking for reasons why "this time might be different." It could lead to behavioral mistakes and defeat the purpose of trying to use mechanical rules. Then again, perhaps rules based on PE10 won't work any longer anyway. As no matter what, PE10 isn't extremely far out of line with historical norms, I haven't been worrying too much about this lately.

    ReplyDelete
  3. I see so often on forums that some use PE10 to suggest the market is overvalued. So just thought I'd mention the counter argument. Sounds like you are taking a nuanced approach to this. Much appreciated.

    Lsbcal

    ReplyDelete
  4. Wade--over on bogleheads there's a discussion about how the 2000 retiree is doing now (March 2014). Given the run up in equities since you made this post, I think it would be interesting to do another update. I'm guessing the 2000 retiree, now in March 2014, probably has closer to 70-70% of the retirement portfolio and with two more years of retirement accounted for is probably O.K., right?

    ReplyDelete
    Replies
    1. Thanks for alerting me to the discussion at Bogleheads. I don't have the 2013 data at this point, but certainly after a great 2013 the situation will be looking better for 2000 retirees.

      Delete