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I remember Jim posting about a safe withdrawal rate based on book value. All those links are now dead, which is a real shame. The Fool lost something quite valuable there.

If I remember correctly, and I'm sure Jim will chime in, the idea was book value tends to grow at x% above inflation, and one could withdraw the growth % less a safety factor.

The numbers I had written down were:
Nominal Growth 8.5%
Inflation 2.5%
Safety 1%
Withdrawal Rate 5%

Currently, that would be 324 * 5% = $16.20 per share
500/16.20 = 3.2% withdrawal rate on current share price

Probably a bit conservative. I get 10-year nominal growth of 12%, 15-year of 11%, 20-year of 11%.

Thoughts? Jim?

And to remind myself:
Rich, Broke or Dead? Post-Retirement FIRE Calculator: Visualizing Early Retirement Success and Longevity Risk
https://engaging-data.com/will-money-last-retire-e...

The best example is the one in Berkshire's chairman's letter where he discusses how, despite having given away 5% of his [then current] number of shares each year for many years, the market value of his shareholding had gone up, not down. He doesn't do an inflation adjustment in that example, but the numbers weren't even close, so it didn't matter.

I've written a bunch of things on that general subject.

One of my favourite approaches is to smooth the real book value per share (I've advocated a 16-quarter WMA), and based your liquidation amount on how much that smoothed value has risen since your last withdrawal. This in effect keeps the real (smoothed) value of your portfolio constant in real terms, so it lasts forever. I also put in a tweak so that there is a floor on any rolling year's withdrawals, 4% of the original real portfolio value, just so you don't have dry spells.

The nice thing about this is that it adapts, gently, to any change in the rate of change of Berkshire's growth in value per share. If Berkshire stops growing quickly the withdrawals shrink commensurably, the portfolio doesn't go broke. At least so long as trend real value rises 4%/year, which isn't much of a hurdle rate.

This is particularly appropriate as I think it would be quite nice to live forever. With good health of course, nobody wants to be Tithonus.

Jim

If I remember correctly, and I'm sure Jim will chime in, the idea was book value tends to grow at x% above inflation, and one could withdraw the growth % less a safety factor.

The numbers I had written down were:
Nominal Growth 8.5%
Inflation 2.5%
Safety 1%
Withdrawal Rate 5%


Here's a great backtest.

BRK-A since 3/17/1980, 5% annual withdrawal.
https://testfol.io/?s=c6cZviUhnZ2 (click the Logarithmic scale box)

Zoom up from 1980 to 1999.
Price essentially flat from 1999 to 2015.
Very slow climb up from 2015 to 2026.

Initial $10,000, ending value on 2/3/2026 $2,400,000
Total withdrawals $2,000,000

Thanks, Jim.

The best example is the one in Berkshire's chairman's letter where he discusses how, despite having given away 5% of his [then current] number of shares each year for many years, the market value of his shareholding had gone up, not down. He doesn't do an inflation adjustment in that example, but the numbers weren't even close, so it didn't matter.

Yes. Maybe we're just getting too complicated. I get into the weeds on this stuff, then realize that a 4% withdrawal rate from Berkshire at the current price is more than we spend. And in any case, we spend what we spend. We don't have or need a budget.

This is particularly appropriate as I think it would be quite nice to live forever.

Not happening, though I'd like to leave some for the kiddos.

I too was struck by those posts...so I saved them. Here they are!



From time to time I ponder the interesting statistico-arithmetic problem of funding a retirement of unknown length with a stock portfolio.

A while back, about 5.5 years ago, I mooted a method for someone who found themselves holding nothing but Berkshire stock.
https://boards.fool.com/sorta-ot-swr-on-brk-319408...

The question it addressed:
If one is willing to put up with some variability of income, what's the most you could cash in per year or per quarter, with zero risk of ever running down your portfolio?

It starts with the observation that ultimately it's the increase in value of your portfolio over time that determines how much you can spend in retirement.
So, just estimate the value of your portfolio periodically, and liquidate only the amount that leaves its real inflation-adjusted value constant.
If you get that right, then by definition your stream of liquidations will last forever, or at least as long as the value of the shares is rising.

The specific proposal was to value Berkshire shares regularly, smooth that with a four year average,
and sell only the amount that leaves the value of your portfolio (using that smoothed valuation number) unchanged.

I like to use a weighted moving average for such calculations (WMA) rather than a simple average, as it considers more recent information to be more important.
A weight of 4 on the most recent year, 3 for a year ago, 2 for two years ago, 1 for three years ago, and divide the sum by 10.
You can do the same ramping thing with quarterly figures by using weights 1-16 and dividing the sum by 136, which is what I did here.

For the valuation metric I used the average of 1.5 times book per share and my "two and a half column" metric, both done quarterly.
[I did add one quirk: I assume that any drop in a valuation metric larger than 2% will be transient and can be ignored.
So each quarter, I use the higher of "current value measure" and "98% of peak to date".]
All figures adjusted for inflation. So, all of the following figures are inflation adjusted into today's dollars.

So, imagine one had taken this suggestion to heart when the post was made, and you owned a million bucks worth of Berkshire stock (in today's dollars), and retired that day.
Not a million at market price, but a million in intrinsic value based on the smoothed valuation metric.

Today, by construction, your shares are still worth the same million bucks. The market price is not quite that figure, but that's what they're still worth based on this quarter's estimate.

Of course, each liquidation leaves the value unchanged, but is of varying size for multiple reasons.
Partly because the growth in value per share is irregular, and partly because you have to sell at market prices which are themselves irregular.

Anyway, here are the figures since the post, in today's money:

Price Value
2015 liquidations: 98071 11.0% 9.8%
2016 liquidations: 76205 8.6% 7.6%
2017 liquidations: 79813 8.0% 8.0%
2018 liquidations: 91997 8.9% 9.2%
2019 liquidations: 94093 9.5% 9.4%
2020 liquidations: 78705 9.2% 7.9%


i.e., you could have sold stock quarterly adding up to that much (in today's dollars--inflation protected) and still have a portfolio worth as much as it was in 2015.

The first percentage is the real value of the liquidated shares as a percentage of the average portfolio market value in the prior year.
The second percentage is the real value of the liquidated shares as a percentage of the constant $1m intrinsic value of the portfolio.

Of course, we started out with the requirement that you live with variability of the amount of cash raised.
Some years are not so kind, notably around a big recession when not much value progress is visible.
Note the dip 2009-2010:


2004 liquidations: 90410 10.4% 9.0%
2005 liquidations: 81310 10.6% 8.1%
2006 liquidations: 79693 9.9% 8.0%
2007 liquidations: 97157 10.6% 9.7%
2008 liquidations: 74746 8.7% 7.5%
2009 liquidations: 32368 5.2% 3.2%
2010 liquidations: 35341 4.5% 3.5%
2011 liquidations: 41021 5.8% 4.1%
2012 liquidations: 57879 7.8% 5.8%
2013 liquidations: 91798 10.2% 9.2%
2014 liquidations: 113278 11.5% 11.3%

Without a doubt, that's a big cut in your income around the credit crunch.
But, to keep it in perspective, it only dipped down to the sort of SWR that would be considered aggressive using SPY these days.
Most of the time the cash generated has been very impressive, to say the least.
In the last 58 quarters it has paid out a million bucks (in real terms) starting with a million bucks (in real terms) and no compounding was allowed.
That's almost twice the total real income you'd have received from one "standard" SWR strategy--4% of initial portfolio value per year, adjusted for inflation.
And with vastly lower risk of outliving the nest egg.

As always, the sustainable rate comes down to the rate of rise in observable value of the asset you've chosen, plus or minus a one-time adjustment for its valuation level when you start.
So long as a share of Berkshire keeps rising in value at over (say) inflation+6%/year, then one can cash cash out that much on average without ever reducing the value of the portfolio.
The method proposed automatically cuts the payouts if/when business results falter, though with a
slight lag, so any slowdown in the business becomes a slowdown in withdrawals, not a risk of eating into the capital.

Jim


For anybody interested in playing with it, these are the quarterly valuation metric numbers I used, from end 1989 to end 2020.
All in today's dollars with CPI at 260.23
Early years are a little more rough and ready, take them with a grain of salt.
For one thing they use only book value, not the average of book and my two-and-a-half-column metric.

13393 (end 1989)
13125
14145
13863
13863
15412
15788
17030
18362
17994
18975
20536
21451
22207
22588
23567
23880
23402
24279
26792
26490
29079
31618
34143
35918
38551
41517
43764
47153
48384
55854
55517
62081
68083
71868
70430
90670
91101
90389
89279
89279
88581
87494
88632
91377
89550
89550
89550
87759
87759
88356
87463
88241
92715
99914
101204
114447
114284
113897
113940
117626
117574
118167
118842
120406
124363
124867
129868
138954
139478
142811
148530
147950
145717
145559
144991
142803
142648
142091
145121
147518
154027
150947
155376
165652
169289
168560
165903
172935
184249
183918
190855
196100
205443
209172
214026
228295
230255
235023
242052
245433
250783
253003
253663
259508
258542
259019
261674
273284
283963
289706
294525
315042
314335
323680
341445
336573
344452
354710
369120
386097
378375
378375
382341
409719 (end 2020)

If a person retiring today had nothing but a big block of Berkshire shares,
what's a safe withdrawal rate for income to last through retirement?
I don't particularly recommend starting from this scenario, but it's an interesting problem.
Here's yet one more possible solution.

Both higher income and more guaranteed sustainability, at the expense of some variability:
Each year, estimate the value of a Berkshire share.
Maybe classic two column, or something like my 2.5 column model, or just 1.5 times book/share.
Each year, sell enough shares so that your remaining shareholding is
worth (after inflation) the same amount as its peak to date.
Not market price "worth", but intrinsic value "worth".
(peak will be almost, but not always, equal to the same value every year: there will be the occasional down year in valuation).
In effect you will liquidate the amount of all your after-inflation gains, but only that amount.
By construction, the real value of your shareholding will never change over time, and you can't ever run out of money.
Your income from year to year will vary with the firm's fortunes, but not really all *that* much.
Keep a cash cushion, as there will be the occasional down year in
apparent value so this approach will recommend no sales some years.

Now, holding a year or two of cash is the easiest fix to deal with variability, but a fancier
fix for that is to replace each year's share valuation with the four year average.
Sell whatever amount leaves the value of your shareholding (based on four year
average of valuations) at the historical peak of that four year average in the past.
For a sense of the smoothing effect, the four-year-average inflation-adjusted 2.5 column
method valuation has not risen less than +2.3% in any of the last 20 years,
even though without averaging it dropped by -10.7% in the credit crunch.
Four-year-average inflation adjusted valuation has risen 10.5% to 12.3% in the last three years.
Sure, it'll vary, but something like "2% to 12%" is an attractive SWR given that you're guaranteed not to go broke.

Other than the disadvantage of variability--
- Any retirement approach designed to last forever is definitely going
to last longer than you do; you never get to spend the capital.
- By extension, it requires that you have a large portfolio.
It has to be big enough that you can live on just the income.

Obviously this approach works for any type of portfolio which lends
itself to a simple numerical valuation method that's "good enough".
It emphasizes the point that it's the increase in value of your
portfolio over time that determines how much you can spend in retirement.

Jim

Here's a great backtest.

BRK-A since 3/17/1980, 5% annual withdrawal.

Zoom up from 1980 to 1999.
Price essentially flat from 1999 to 2015.
Very slow climb up from 2015 to 2026.

Initial $10,000, ending value on 2/3/2026 $2,400,000
Total withdrawals $2,000,000

Sure, but 15% CAGR real will do that. We can't expect that performance for the 2025 retiree (ahem...).

Still, probably 4-5% withdrawal will keep us in the style to which we are accustomed and might leave a bauble or two for the kiddos.

Last 18 years, 5% WR:
https://testfol.io/?s=g015xHlrdM8

" Here's a great backtest.

BRK-A since 3/17/1980, 5% annual withdrawal."


Oh my, level with us partner, were you a history professor? ::))

So that we are very clear, your position is that IF Munger could text me from brkville heaven today his message would be, stay the coarse, keep hoarding cash until it tops 400 BILLION, and wait for brk to trade below 1.4 XS BV, no other moves are necessary, is that what you believe?

Thank you and AAAAAAAmen.

“The specific proposal was to value Berkshire shares regularly, smooth that with a four year average,
and sell only the amount that leaves the value of your portfolio (using that smoothed valuation number) unchanged.”

Many Thanks sherwoodsri & Jim! Berkshire continues to be the majority of our investment assets, so we use and reflect upon Jim’s data and commentary often. We continue to undersell, by need and nature, at present, but Jim’s framework & idea is reassuring and keeps it simple!

Oh my, level with us partner, were you a history professor? ::))

So that we are very clear, your position is that IF Munger could text me from brkville heaven today his message would be, stay the coarse, keep hoarding cash until it tops 400 BILLION, and wait for brk to trade below 1.4 XS BV, no other moves are necessary, is that what you believe?

Thank you and AAAAAAAmen.

You quoted Ray, but replied to me, so I'll reply back: What are you smoking?
Just sell some stock when you need the money. Send me your login details and I'll do it for you...for a small fee.
Maybe you'll pay some cap-gains tax. Boo-hoo. Where did I put that tiny violin?

" Just sell some stock when you need the money. Send me your login details and I'll do it for you...for a small fee.
Maybe you'll pay some cap-gains tax. Boo-hoo. Where did I put that tiny violin?"

Thank you for your concern. Just so you know I paid cash for our Clayton double wide, it's furnished, and it houses all 6 of us with room to share. IM, livin large my brother!

With the stock at 503 based on what I see it looks like the 505 and 510 calls expiring tomorrow have a good chance to get into the money.

That's called, looking forward, professor.

Thank you for your attention to this matter.

Thank you for your concern. Just so you know I paid cash for our Clayton double wide, it's furnished, and it houses all 6 of us with room to share. IM, livin large my brother!

That's a relief. Clayton makes some nice homes. I was at the 2009 Berkshire annual meeting where Clayton had an eco-home on display. Interesting, but corrugated iron maybe not the best material for a Las Vegas summer. Nice out there this time of year though, if I remember correctly.

With the stock at 503 based on what I see it looks like the 505 and 510 calls expiring tomorrow have a good chance to get into the money.

That's called, looking forward, professor.

Are you sure that isn't speculation? You'll be thrown out of the BRK club for that. Well, hope it works out. Wouldn't want you to have to start playing the slots.

" Are you sure that isn't speculation? You'll be thrown out of the BRK club for that. Well, hope it works out. Wouldn't want you to have to start playing the slots."


Where ya been bro, I was excommunicated from the church of brkville in Foolsville decades ago. I was a bad boy back then, I'm much tolerant of those with questionable opinions these days. I do appreciate the laughs tho.

How about this as a fairly simple method. I already have a running 5-groves IV calculation (similar to Jim's 2 and a half column, I think).

5 Groves IV/share 2020 $280, inflated to 2026 $332
5 Groves IV/share 2025 $446
Real IV Growth CAGR =((446/332)^(1/5)-1) = 6.1%
Safety Margin 1%
IV % to withdraw 5.1%
Withdrawal Amount $22.66/share owned
Withdrawal Rate of 4.5% at $505/share

" That's a relief. Clayton makes some nice homes. I was at the 2009 Berkshire annual meeting where Clayton had an eco-home on display. Interesting, but corrugated iron maybe not the best material for a Las Vegas summer. Nice out there this time of year though, if I remember correctly."


Good morning AdrianC, before Charley starts bashing Gates I would like to inform you that I have never been inside a Clayton home. :)

Now to be serious, meta, googl, nvda, etc all initiated a small, NOT meaningful, a SMALL dividend, be the brkb board hero, explain WHY you think those BODS made that decision?

Thank you, while I'm at the park you can use three lifelines, Jim, the unstable genius, and another partner to explain why those poor capital allocators made that idiotic decision. I can't wait.

Now to be serious, meta, googl, nvda, etc all initiated a small, NOT meaningful, a SMALL dividend, be the brkb board hero, explain WHY you think those BODS made that decision?

Ooh, ooh! I know this one...I'll make it a true daily double, Ken.
Clap, clap, clap.
What is...to increase demand for the common?



Hang on, if it's "NOT meaningful" why would it make a difference? Rhetorical question.

Now to be serious, meta, googl, nvda, etc all initiated a small, NOT meaningful, a SMALL dividend, be the brkb board hero, explain WHY you think those BODS made that decision?

Man, now we are expected to be mindreaders????
Dang.


Just after reading Jim's last comment about buying BRK in two chunks, this came across the yahoo feed:
"Amazon sinks after vow to spend $200 billion on AI this year.
AMZN 203.19 -19.50 (-8.76%)"


Maybe it's time to grab a 1/2 or 1/4 position of AMZN?
In addition to my lousy skill at mindreading, my crystal ball is acting up just now.
Double dang.

First let me remind you what I responded and predicted to you, yesterday.


" Just sell some stock when you need the money. Send me your login details and I'll do it for you...for a small fee.
Maybe you'll pay some cap-gains tax. Boo-hoo. Where did I put that tiny violin?"

Thank you for your concern. Just so you know I paid cash for our Clayton double wide, it's furnished, and it houses all 6 of us with room to share. IM, livin large my brother!

With the stock at 503 based on what I see it looks like the 505 and 510 calls expiring tomorrow have a good chance to get into the money.

That's called, looking forward, professor.

Thank you for your attention to this matter."



Second, your reply,

" Hang on, if it's "NOT meaningful" why would it make a difference? Rhetorical question."

I haven't had this much fun nice I went to the Chicken Ranch with the guys, many years ago. NO< they didn't take IV net worth checks. Perfect response pal, if you keep this up this may develop into a bromance! it's 55 degrees, I'm outta here but I seriously doubt anyone can top you!

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