PSA: 2.7% is the new 4%

Ask your investment, budget, and other money related questions here
Crusader
Posts: 342
Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: PSA: 2.7% is the new 4%

Post by Crusader »

basuragomi wrote:
Fri Dec 30, 2022 11:47 am
Would you rather: buy a jar of jam (or socks or fertilizer or pre-paid services or whatever) for $2 now that you know you will eat two years from now,
or: invest the $2, have it turn into $3, and buy the same jar of jam in two years for $4?

What course of action delivers more value to you? What leaves you with more money in the future?
I would, of course, buy a jar of jam. But, I don't know what this metaphorical jar of jam would be in practice, nor would I know that it would cost $4 in two years (i.e. what the inflation will be in the future). And, if you are literally talking about a jar of jam (i.e. food), than I would say that this is too much of a short term to think about.
basuragomi wrote:
Fri Dec 30, 2022 11:47 am
If you are saying that you expect the market to yield more than inflation so it's worth the risk, then your SWR is by definition above 2.7% in this scenario. If that's the case, then how is 2.7% relevant?
No, no it isn't by definition that. Expectation and SWR are not the same. SWR is more conservative than the expectation. You can model it as a statistical random variable. Its expected value can be something like 5% (the historic S&P 500* annualized return adjusted for inflation), but that doesn't mean that you won't catch a bad stretch of years where you need enough net worth that will only support an initial withdrawal of 2.7%.

* - I am aware the the Trinity study had something like a 50/50 stocks/bonds portfolio, but my overall point remains

Humanofearth
Posts: 188
Joined: Sun Mar 28, 2021 3:32 am

Re: PSA: 2.7% is the new 4%

Post by Humanofearth »

To be completely honest, the set and forget it swr hasn't been 4% if we account for money supply dillution as m2 rather than CPI. The trinity study didn't account for m2 growth. The best solution is equity in a business you create, lowering expenses through resilience/skills-ie-renting out 3 units in a 4-plex among other examples.

Bitcoin is one solution for increasing purchasing power long term as it's the only property one can truly own without counterparty risk but then we get risk of extreme financial volatility, improperly storing your keys, technical risk due to the difficulty of properly setting up your private keys in a secure manner that can be passed in your estate, a quantum computer attack and other network attacks are unlikely as that type of technology could seize nuclear codes and control any computer in the world so it's comical to think BTC would be the primary target over the current major nation states that command for more economic capital at present. Also, direct equity has many other benefits that simply holding an asset doesn't so retirement isn't really an option for a multi-decade time frame for any capable individual not willing to spend down their capital. Work and resilience or atrophy and shrivel away. ERE is useful for a break from work but for the long term, we see how the posters tire of retirement and produce some value. Those who have the capacity to achieve ERE don't want to do nothing economically productive for life, that's hell.
--------
The S&P 500 index has lost value over the past 22 year period if we use M2 growth rather than CPI. Considering that CPI is calculated with substitution, a rib eye steak going up in price will get substituted for a beef burger for a chicken steak to eventually a can of worm meal spam so it's a joke.

Using *, M2 from Dec 1999 to Dec 2022 went from 4683 to 21351 so a 4.56x.
This is similar to house price increases in quality areas, much more than deteriorating areas like Detroit.
Using **, 100 in the S&P 500 with dividends reinvested went to 397.76 so a nearly 4x. This is during the closest time frame went off by a few months to the benefit of the S&P 500 (Jan 2000 to September 2022).
*** Had a 4.2x in the same time frame from S&P 500 with dividends reinvested.

*https://www.longtermtrends.net/m2-money ... inflation/
**https://dqydj.com/sp-500-return-calculator/
***https://www.officialdata.org/us/stocks/ ... dYear=2022

Crusader
Posts: 342
Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: PSA: 2.7% is the new 4%

Post by Crusader »

Humanofearth wrote:
Thu Jan 19, 2023 5:19 am
The S&P 500 index has lost value over the past 22 year period if we use M2 growth rather than CPI.
M2 is the money supply? I don't think you can just take that, even if you thought that CPI methodology was stupid (and I am not convinced that it is). You have to account for how many goods there are (supply), relative to the demand (which can be tied to the number of people... population, which has been going up). In fact, the more I think about it, the more I feel CPI (that changes) is the only way that one can attempt to measure inflation.

Humanofearth
Posts: 188
Joined: Sun Mar 28, 2021 3:32 am

Re: PSA: 2.7% is the new 4%

Post by Humanofearth »

M2 & M1 are different ways to measure the money supply.

CPI is meant to be consumer inflation but the basket underweights goods of high quality that are hard to produce and overweights low quality goods that are easy to produce when it accounts for substitution after the fact. I don’t want to go from Wagyu to crickets and soybean oil and say that the calorie composition is the same so spending only increased 5.3% because one is better than organic, pasture raised while the other is industrial sludge that harms the body. While cpi will adjust for change in spending when one sees Wagyu increase too much in price, I won’t substitute wagyu to crickets and soy oil.

I count inflation as monetary dilution, which means expansion of money supply as that is my share of the financial pie. I want to increase my percent of the assets available worldwide over time. If I take on counterparty and volatility risk, I at least want to beat the rate of money supply growth over a decades time frame as assets that fail to match that aren’t even getting their share of growth relative to the broad base of the human pie.

In the spending sense, inflation is ultimately a unique vector for each human that changes across their life. CPI got a recent adjustment that’ll lower the numbers yet again by overweighting spending style during the lockdown even after lockdowns have eased and S&P has had many adjustments that’ll lower future returns, such as float adjustment. This means the future numbers will be relatively worse and lag further behind monetary supply dilution than they already have. There are incentives to lowering the numbers for cpi that I do not believe are aligned with my best interest.

PhoneticNachos
Posts: 43
Joined: Thu Jan 26, 2023 9:17 pm
Location: Jacksonville, FL

Re: PSA: 2.7% is the new 4%

Post by PhoneticNachos »

My plan for retirement has evolved to include more real estate then I thought I would get before.

I am saving for my first house, intend to get a duplex in about a year, with a 5% conventional first time home buyer type loan.

I too am going to plan for a smaller withdrawal rate to boost the funds I will have at retirement. I will always be 100% stocks/index funds. No bonds ever.

If I get say $1,500 in social security each month adjusted for inflation in equivalency for today, it would probably equal $3k+ past the year 2053.

Then if I get at a minimum of $1k a month in cashflow to my hopefully fully paid off real estate, for each duplex, I want to get at least 4.

And may down the road do a 1031 exchange and scale up to a apartment building of at least 50 units, enough to support a full time maintenance live-in worker, and a full time live-in office worker.

So that is roughly $4k-5k a month before my investments even come into the picture.

Post Reply