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Dr. Pfau looks at the 4% rule in an interview
Old 02-06-2013, 02:59 AM   #1
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Dr. Pfau looks at the 4% rule in an interview

interesting interview with researcher dr wade pfau.

he is concerned the 4% rule may be a little to optomistic going forward.

Interview with Dr. Wade Pfau 01.26.2013 | financialsafari
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Old 02-06-2013, 04:27 AM   #2
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I think many of us here share the same view. I am looking at 3.5% WR without the use of annuities in my model, and about 2% with deferred annuities bought in my mid 40s + SPIAs at a much later stage in life.

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Originally Posted by mathjak107 View Post

he is concerned the 4% rule may be a little to optomistic going forward.

Interview with Dr. Wade Pfau 01.26.2013 | financialsafari
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Old 02-06-2013, 08:58 AM   #3
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He and others have been examining/challenging the classic 4% SWR notion for several years. Food for thought...

2012: Wade Pfau looks at 4% WR, finds it unsafe

2011: New Research Challenges 4% Withdrawal Rule

Remember:
a) the 4% rule provided a 95% chance of success over 30 yrs with a typical AA, so 4% is/was "worst case" in a sense (IOW you could withdraw more than 4% without depleting the portfolio 95% of the time), and
b) I don't know anyone who would blindly follow the 4% for 30 years regardless of sequence of returns during retirement.
c) most people have at least some floor income (Soc Sec), some have lots (Soc Sec, pensions, annuities, retiree HC).
Not advocating for or against anything, we all have our own plan A, B, C, D, etc.
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Old 02-06-2013, 09:18 AM   #4
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What happened to the recently posted Retirement investing requires optimism - MarketWatch?

(Yes, I realize the OP is referring to SWR while the above is referring to investing, but I don't think there is any denying that they are interrelated.)
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Old 02-06-2013, 09:22 AM   #5
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Quote:
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I think many of us here share the same view. I am looking at 3.5% WR without the use of annuities in my model, and about 2% with deferred annuities bought in my mid 40s + SPIAs at a much later stage in life.
Dr. Pfau's analysis is worthwhile, but he comes to conclusions that seem pretty obvious to me. As a long time TIAA-CREF investor I've always held that SPIAs have a place in a retirement portfolio. As I've said before I'm planning for 0% withdrawal from my stocks and bonds portfolio. My post 66 retirement expenses will be covered by various SS, rental income and TIAA-Traditional Annuity. The idea of having your basic income requirements covered by "guaranteed" income sources does not get nearly enough attention in the financial press/advisor world.
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Old 02-06-2013, 09:48 AM   #6
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I'm too conservative to use 4% SWR. My comfort level starts at 3% and I become confident at 2.5%.
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Old 02-06-2013, 09:52 AM   #7
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Originally Posted by obgyn65 View Post
I think many of us here share the same view. I am looking at 3.5% WR without the use of annuities in my model, and about 2% with deferred annuities bought in my mid 40s + SPIAs at a much later stage in life.
I'm curious about the reduction from 3.5% WR to 2% with those changes.

With annuities, you are getting some of your principal back, effectively trading off some of your 'end-of-life' nest egg for current income (and I think that concept makes tons of sense for many/most of us). I will look into that when I'm older, IMO too many variables and too long a time frame for me to want to commit now, in my late 50's.

But I'm a little surprised it would drop the WR to 2%, and is that many years out, or near in? Also, (looking at your sig), I wouldn't call a 3.5%% WR on on all fixed portfolio 'low' (2%, yes). So I'm a little confused by this. Maybe a generic example with round numbers would be illustrative, if that isn't too much work?


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Old 02-06-2013, 09:55 AM   #8
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I think 4% is too high. That is if you view your swr from a financial indpendance standpoint (aka living off interest/dividends and preserving principal adjustin for inflation. I think a good real return after inflation would be 3%. If you want to safe, use 2%.
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Old 02-06-2013, 09:56 AM   #9
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I'm too conservative to use 4% SWR. My comfort level starts at 3% and I become confident at 2.5%.
What's the highest SWR you're comfortable with?
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Old 02-06-2013, 10:03 AM   #10
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With annuities, you are getting some of your principal back, effectively trading off some of your 'end-of-life' nest egg for current income (and I think that concept makes tons of sense for many/most of us). I will look into that when I'm older, IMO too many variables and too long a time frame for me to want to commit now, in my late 50's.
Yes, the annuity pays you principal as well as some return that will give the annuity company a nice profit according to life expectancy tables. What you get is the guaranteed income for life. the danger with SPIAs is that few have a COLA so the buying power of that income is eroded by inflation, so it's good to keep some money in investments that you hope will outpace inflation.
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Old 02-06-2013, 10:09 AM   #11
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I think 4% is too high. That is if you view your swr from a financial indpendance standpoint (aka living off interest/dividends and preserving principal adjustin for inflation. I think a good real return after inflation would be 3%. If you want to safe, use 2%.
The 4% "rule" has never been based upon the idea of living of interest and dividends and preserving principal. The 4% rule has always been based the idea of being willing to deplete principal.

I'm not saying you can't set it up the way you talk about it -- just that doing that way isn't what the researchers mean when they talk about a 4% rule.
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Old 02-06-2013, 11:21 AM   #12
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I'm too conservative to use 4% SWR. My comfort level starts at 3% and I become confident at 2.5%.
I am even more conservative/frightened: A quick back of the envelope calculation tells me that my SWR would be 2.5% with no change in my current lifestyle: Simple tastes, low cost of living state, etc.

However, I still suffer from one more year syndrome for the same reasons that drive most financial activity: Fear and greed.
  • Fear that I have missed something in my planning, the future will not look like the past, I will never be able to pull a similar salary again, etc.
  • Greed: Wanting a better lifestyle than I current have with more travel, better wine, etc.
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Old 02-06-2013, 11:30 AM   #13
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  • Greed: Wanting a better lifestyle than I current have with more wine, better travel, etc.
FIFY...

Since my FIRE date is still somewhere in the future, though hopefully not too far, and I'm 58.5yo, I'm pretty much sticking with 4%, but not without an eye on the markets. I'm hopeful I'll have some left for my son to inherit, but I'm not going to eat Little Friskies so my son can have an inheritance...
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Old 02-06-2013, 11:33 AM   #14
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I plan to use 4%, maybe even 5 or 6% now and then. I will have both SS and a Navy Pension that will cover the basics for life, so why not enjoy life now? I plan to do this from present (60yo) to late 70's. By then I won't be doing much travel, dining out etc.

I feel this way because my 90 year old parents never spent much of anything (didn't travel, eat out, go to shows, etc) and now bitch because they don't know what to do with all the cash coming in from annuities, dividends, pensions, SS and so on. But they always make a point about how much I'm going to inherit. That's nice but I've achieved FI with it. Will just be a bonus for me, but makes me angry that they didn't enjoy themselves a bit more when they could have.

I feel bad for them, and am not about to follow in their path.
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Old 02-06-2013, 11:51 AM   #15
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I'm looking at 3.5% withdrawals after pulling the plug at age 58 (this summer or later). The small pensions and social security kicking in at 65 or 70 will be icing on the cake. Any inheritance is icing too.

There's are few carrots dangling out there each year we wait - $8,000 in company stock vesting each year, and another $2,400 a year in pension. They might pay for some extra trips and hobbies.

My biggest comfort is that we can be flexible. We can sell the house and move into a mobile home. We can watch the portfolio and adjust each year. I can take a few contracts. All worth it to have a worth it life.
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Old 02-06-2013, 12:04 PM   #16
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... but makes me angry that they didn't enjoy themselves a bit more when they could have.
Yeah, I am slowly beginning to wake up to the wisdom behind the Cajun expression "Laissez les bons temps rouler."

(And it will more difficult to ignore next week.)
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Old 02-06-2013, 01:00 PM   #17
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I'm curious about the reduction from 3.5% WR to 2% with those changes.

With annuities, you are getting some of your principal back, effectively trading off some of your 'end-of-life' nest egg for current income (and I think that concept makes tons of sense for many/most of us). I will look into that when I'm older, IMO too many variables and too long a time frame for me to want to commit now, in my late 50's.

But I'm a little surprised it would drop the WR to 2%, and is that many years out, or near in? Also, (looking at your sig), I wouldn't call a 3.5%% WR on on all fixed portfolio 'low' (2%, yes). So I'm a little confused by this. Maybe a generic example with round numbers would be illustrative, if that isn't too much work?


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I SAW THIS , THEY DISCUSS LOWER WITHDRAWALS

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Old 02-06-2013, 01:05 PM   #18
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Will just be a bonus for me, but makes me angry that they didn't enjoy themselves a bit more when they could have.
Children of LBYM parents commonly say this. Not the parents though, they are not angry. They are living life as they wish.

Perhaps these older people are not very much attracted to consumerism? It's the religion of our age, and even on these LBYM boards, certain categories of consumerism are very popular (cruises, home remodeling, motorhomes, etc.)

Some people would pay money just to never have to think about any of these things, so why would they pay money to participate in these activities?

Ha
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Old 02-06-2013, 01:10 PM   #19
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What happened to the recently posted Retirement investing requires optimism - MarketWatch?
That is so yesterday!
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Old 02-06-2013, 02:06 PM   #20
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I SAW THIS , THEY DISCUSS LOWER WITHDRAWALS

Trinity study update - Bogleheads
Yes, thanks. Not much detail there. The lack of COLA on most of these makes the calculations a bit trickier.

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Children of LBYM parents commonly say this. Not the parents though, they are not angry. They are living life as they wish.

Perhaps these older people are not very much attracted to consumerism?

Ha
Very true. My Mom is set well financially, but really has little interest in anything fancy. That's fine, she's not depriving herself, she just doesn't feel the need.

I push in little ways when I think she really would benefit. When I helped her shop for a TV, I nudged her to the next largest size as I thought she would appreciate it over the long run. When it comes to safety, I push pretty hard. Really no reason to skimp on things like keeping the car safe and well maintained, or replacing a rug that she almost trips/slips over.

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