Investment income returns.

[HanoiRocks]

Thanks for the replies, TokyoWort and retirejapan.

TokyoWort, you think 3% is a conservative return rate even above inflation, is that right? And maybe especially easy to achieve in Japan?

retirejapan, could you explain a bit more why a 4-5% withdrawal rate would by definition mean you wouldn't run out of funds. Are you assuming natural fund inflation would be around that much, and inflation in Japan being negligible?

Just to clarify, I think 3% is a conservative withdrawal rate for a US-dominated portoflio that has at least 50% stocks. In Japan it is less conservative because the long-term market returns here have not been as good as for the US and because the bond portion would return so poorly at today's interest rates. However, "less conservative" is relative. Sustainable portfolio withdrawal calculations are usually done for 30 years. Put your money in a shoebox and you can take 3% of the original out for over 30 years.

Right. Thanks for the reply.
Back to the original question though, say you had ￥50 million invested in the stock market, do you think you could reasonably easily take out 3% a year on top of inflation and be reasonably confident it would stay at ￥50 million (adjusted for inflation) pretty much for ever?

[TokyoWart]

Back to the original question though, say you had ￥50 million invested in the stock market, do you think you could reasonably easily take out 3% a year on top of inflation and be reasonably confident it would stay at ￥50 million (adjusted for inflation) pretty much for ever?

Forever is a long time but I am basically saying "yes" with these caveats:

1) These are initial withdrawal rates. No one should completely ignore what is happening with their portfolio value because in the real world it is both practical and wise to adjust withdrawal rates (usually adjusting them up if you start this low).

2) I would not have a portfolio only based in Japan and be confident of any specific withdrawal rate. I would say the same for any single EU or developing market country. I would say that a solely-domestic US 50/50 stock/bond portfolio has been shown to sustain withdrawal rates of 3% forever based on returns from nearly the last 100 years.

Like may RetireJapan readers I have a significant fraction of my portfolio in Japan because I live here and my employer stock position cannot be sold while I am employed, but I don't think Japan has had great longterm returns for equities and I would not even consider holding Japanese bonds.

[RetireJapan]

Thanks for the reply. Sorry, I'm still confused as to why continually taking 5% out of your portfolio would not deplete the investment, continually shrinking as it would be?

It's not intuitive because most withdrawal rates are based on setting the dollar amount at the start, then adjusting for inflation going forward.

This is a much simpler idea, which is just to calculate 5% of the portfolio each year, then take that out. If the value of the portfolio drops, the 5% would get smaller and smaller in real terms, but could not seriously deplete the portfolio. The main downside is that this will result in huge variations in annual income (which could be smoothed somewhat by having, say, 5 years of spending in cash at the beginning).

The best way to approach spending your investments is going to depend very much on your circumstances at the time. I'm still 20-30 years away, so I haven't thought about it as much as I might have

[HanoiRocks]

Back to the original question though, say you had ￥50 million invested in the stock market, do you think you could reasonably easily take out 3% a year on top of inflation and be reasonably confident it would stay at ￥50 million (adjusted for inflation) pretty much for ever?

Forever is a long time but I am basically saying "yes" with these caveats:

1) These are initial withdrawal rates. No one should completely ignore what is happening with their portfolio value because in the real world it is both practical and wise to adjust withdrawal rates (usually adjusting them up if you start this low).

2) I would not have a portfolio only based in Japan and be confident of any specific withdrawal rate. I would say the same for any single EU or developing market country. I would say that a solely-domestic US 50/50 stock/bond portfolio has been shown to sustain withdrawal rates of 3% forever based on returns from nearly the last 100 years.

Like may RetireJapan readers I have a significant fraction of my portfolio in Japan because I live here and my employer stock position cannot be sold while I am employed, but I don't think Japan has had great longterm returns for equities and I would not even consider holding Japanese bonds.

Interesting points. Thank you

[HanoiRocks]

Thanks for the reply. Sorry, I'm still confused as to why continually taking 5% out of your portfolio would not deplete the investment, continually shrinking as it would be?

It's not intuitive because most withdrawal rates are based on setting the dollar amount at the start, then adjusting for inflation going forward.

This is a much simpler idea, which is just to calculate 5% of the portfolio each year, then take that out. If the value of the portfolio drops, the 5% would get smaller and smaller in real terms, but could not seriously deplete the portfolio. The main downside is that this will result in huge variations in annual income (which could be smoothed somewhat by having, say, 5 years of spending in cash at the beginning).

The best way to approach spending your investments is going to depend very much on your circumstances at the time. I'm still 20-30 years away, so I haven't thought about it as much as I might have

Ah, I think I see what you mean now, cheers.

[mighty58]

For what it's worth, Wade Pfau, the guru of safe withdrawal rate research, did conduct a study back in 2010 on safe withdrawal rates in various international (ie. non-US) markets. He found that Japan had the worst safe withdrawal rate... but there are a lot of caveats that need to be taken into consideration for devising your own safe withdrawal rate. I think very few of us would be looking to go 100% all-in on the Japanese market. Japan has also been very volatile over the course of the last century, what with the wars and the bubble era and whatnot, so what the historical data means for the future is questionable.

In any case, predicting future market movements is a fickle endeavour, frought with potential pitfalls everywhere you look.

Here's the link to the research paper:
https://papers.ssrn.com/sol3/papers.cfm ... id=1699526

[nosake]

Replying to the OP, we invest in individual stocks in the US. Last year I saw a 12% rate of return. The rule of thumb I use is to carefully watch the stock, don't get too greedy before taking it off the table, and always invest in dividend paying stocks. Also, the stocks must be near a PE of 20.

I already filed my 2018 taxes and owe nothing.

[captainspoke]

...
The main downside is that this will result in huge variations in annual income (which could be smoothed somewhat by having, say, 5 years of spending in cash at the beginning).
...

Ben doesn't point it out here, but there are some variations on the 5% rule (e.g., 4%, or 3%). Depending on your age/health, one way to "ballpark" your portfolio is to divide by the probable number or years you'll likely live--so someone who is 65 might divide by 30 (planning to live to 95), someone who is 70 by 25, and so on.

As for the part I've bolded, above, there is a well-known "bucket system". Divide your portfolio into three buckets. Bucket #1, which you'll use first, should be 5-8 years of money in safe investments--cash, short term bonds, CDs, etc. these are not volatile (good), but won't earn you much (2%?). The idea is that regardless of shorter term mkt moves, you have your first years covered.

Bucket #2 is intermediate term, let's say 6-7 to 15 years out. (and you'll read that the # of years for these buckets can vary) Obviously, a little more risk--throw a dart and say 50-50 stocks and bonds for this chunk of your portfolio.

Bucket #3 is long term, let's say 12-30 years out. Here, at least up to when you get close to using it, you'd take on more risk--maybe 80-100% stocks, as an example. (There are studies that show that over rolling 10-year periods, you almost never lose. Go longer, 15+ and your chances will likely be better.)

[captainspoke]

...
I already filed my 2018 taxes and owe nothing.

That has to be on the US side, eh?


(Also, why a P/E of 20?)

[nosake]

Yes, the US side.

A PE of 20 or thereabouts demonstrates confidence in the stock without over extension.

t