You must be very rich or very frugal (or very daring) to retire today if you depend on your portfolio (rather than a pension). This is especially true if you retire early.
Bond yields are historically low. The Shiller PE (a measure of stock market valuation) is at the third highest peak in history. This means that future returns will be low and the sequence-of-returns-risk is high.
This paper from authors including Wade Pfau provides sobering results: http://corporate.morningstar.com/us/documents/targetmaturity/LowBondYieldsWithdrawalRates.pdf. For example, the safe withdrawal rate from a 60:40 stock:bond portfolio for a 30-year horizon is 2.4% (5% failure rate), and for a 40-year horizon it's 1.8% (5% failure rate).
Your outcomes might be better because the authors impose a 1% fee on returns, but that is perhaps 90 basis points more than a DIY investor will pay.
On the other hand, the paper was written in January 2013 and valuations are worse today. The Shiller PE was about 21.9 then, but it is about 29.1 now. The authors used Ibbotson’s 2012 long-term capital market forecasts for stock returns and projected an arithmetic mean return 2% lower than the historical average. I project a geometric mean return of 3.27% now versus a long-term average of 6.8%, 3.53% lower than the historical average. (This projection is based on the current 2.02% dividend and the 1.25% long-term real growth rate of earnings with no fall in valuation, ever. For slightly more detail, see my comment at 4:26 pm on 11/6/16 to "25 Pearls About the Financial Life of Physicians," https://www.whitecoatinvestor.com/25-pearls-about-the-financial-life-of-physicians/.)
Further, the authors assume that bond yields will drift upward toward the long-term average over time, providing a 2% real return rather than the negative real return we have today. They use the Ibbotson Intermediate-Term Government Bond Index as a proxy for bonds and use a starting yield of 2.5%, but Vanguard's intermediate-term government bond index (VSIGX, Admiral Shares) has an SEC yield of 1.93% today.
I'll consider retirement in 3-6 years if we have a significant bear market in stocks by then, but if valuations remain high I'll look hard for some type of part-time arrangement.
Bond yields are historically low. The Shiller PE (a measure of stock market valuation) is at the third highest peak in history. This means that future returns will be low and the sequence-of-returns-risk is high.
This paper from authors including Wade Pfau provides sobering results: http://corporate.morningstar.com/us/documents/targetmaturity/LowBondYieldsWithdrawalRates.pdf. For example, the safe withdrawal rate from a 60:40 stock:bond portfolio for a 30-year horizon is 2.4% (5% failure rate), and for a 40-year horizon it's 1.8% (5% failure rate).
Your outcomes might be better because the authors impose a 1% fee on returns, but that is perhaps 90 basis points more than a DIY investor will pay.
On the other hand, the paper was written in January 2013 and valuations are worse today. The Shiller PE was about 21.9 then, but it is about 29.1 now. The authors used Ibbotson’s 2012 long-term capital market forecasts for stock returns and projected an arithmetic mean return 2% lower than the historical average. I project a geometric mean return of 3.27% now versus a long-term average of 6.8%, 3.53% lower than the historical average. (This projection is based on the current 2.02% dividend and the 1.25% long-term real growth rate of earnings with no fall in valuation, ever. For slightly more detail, see my comment at 4:26 pm on 11/6/16 to "25 Pearls About the Financial Life of Physicians," https://www.whitecoatinvestor.com/25-pearls-about-the-financial-life-of-physicians/.)
Further, the authors assume that bond yields will drift upward toward the long-term average over time, providing a 2% real return rather than the negative real return we have today. They use the Ibbotson Intermediate-Term Government Bond Index as a proxy for bonds and use a starting yield of 2.5%, but Vanguard's intermediate-term government bond index (VSIGX, Admiral Shares) has an SEC yield of 1.93% today.
I'll consider retirement in 3-6 years if we have a significant bear market in stocks by then, but if valuations remain high I'll look hard for some type of part-time arrangement.
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