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Equity Glide Paths - some new thoughts.
03-03-2015, 09:13 AM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,265
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Equity Glide Paths - some new thoughts.
It looks like new assumptions are changing the recent view on equity glide paths.
Quote:
With a 4% withdrawal rate, he finds that declining equity glidepaths in retirement support higher probabilities of success than fixed equity glidepaths, which in turn supports higher probabilities of success than rising equity glidepaths. This finding contrasts with an earlier 2007 article he wrote
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To Rise or Not To Rise: Stock Allocation During Retirement
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Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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03-03-2015, 09:21 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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The more things change...
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Numbers is hard
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03-03-2015, 09:27 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Apr 2012
Location: Nashville
Posts: 2,506
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I am a big fan of Wade Pfau's research reports--as well as his openness when dealing with new information that may undercut his conclusions. Thanks for posting this (I was actually on my way to do so!).
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OMY * 3 2ish Done 7.28.17
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03-03-2015, 09:42 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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Yes, it's great that he modifies his position when new information arrives.
The whole thing seems like drawing conclusions on far-from-solid underlying data (MC or historical). It's probably not appropriate to try to refine AAs down to 2 decimal places based on how we are doing this. Micrometer > grease pencil > axe.
I do find myself drawn to modifying allocations slightly as valuations change. I'd never hop out of equities entirely, but lightening up as they get to stratospheric PE10s seems logical and prudent. I'll have to look into that. And, he likes shorter-term bonds.
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03-03-2015, 10:00 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Apr 2012
Location: Nashville
Posts: 2,506
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Quote:
Originally Posted by samclem
I do find myself drawn to modifying allocations slightly as valuations change. I'd never hop out of equities entirely, but lightening up as they get to stratospheric PE10s seems logical and prudent. I'll have to look into that. And, he likes shorter-term bonds.
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It has been a long time since I've read his publications, but I recall Benjamin Graham's thoughts on this: a 50/50 stock bond portfolio, but flex to 25/75 or 75/25 in light of market valuation. PE10 would seem to be a good ruler.
Going back to Pfau (and ignoring for now the ongoing rising glidepath research), his finds are generally consistent with the large number of posters here who are leery of a 4% withdrawal rate--and with the attractiveness of being flexible on spending to avoid the potential drain of true "SWR." My biggest take from him to date resulted in postponing ER to ensure that we can handle extremely bad times in the first 10 years. Sequence of returns plus current market valuation of both debt and equity....
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OMY * 3 2ish Done 7.28.17
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03-03-2015, 10:12 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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Why would anyone think that his new idea is any better, or better grounded in data, than his old idea? It's like hem lengths or lapel and tie widths in fashion. Pure manipulation, to sell something that appears new.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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03-03-2015, 12:49 PM
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#7
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Recycles dryer sheets
Join Date: Nov 2002
Location: Alajuela, Costa Rica
Posts: 222
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Our annual spending is 2.9% of port. Add in our TER = 0.9% and we're up to 3.8% of port.
If our 60/40 port declines by 30%, our gross AWR goes to 5.0% which, IMHO, is sustainable.
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KISS & STC.
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03-03-2015, 02:52 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2006
Posts: 7,733
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Quote:
Originally Posted by samclem
Yes, it's great that he modifies his position when new information arrives.
The whole thing seems like drawing conclusions on far-from-solid underlying data (MC or historical). It's probably not appropriate to try to refine AAs down to 2 decimal places based on how we are doing this. Micrometer > grease pencil > axe.
I do find myself drawn to modifying allocations slightly as valuations change. I'd never hop out of equities entirely, but lightening up as they get to stratospheric PE10s seems logical and prudent. I'll have to look into that. And, he likes shorter-term bonds.
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I like Wade, but was not a fan of his use of MC in his early paper. Nice to see he is giving historical simulations a try also. As he says historically low interest rates, and high stock valuations are pretty unprecedented in American history.
The problem that I and many other face, is that as much as stock valuations scare me, bonds offer return free risk which terrify me. I can comfortable survive at withdrawal rates above 2%, but bonds don't even offer real rates above that.
So for me personally, I am looking at other asset classes. Angel investing is interesting but very high risk, Real Estate and especially for me Real Estate lending seems promising. I am even keeping an eye on things like Peer2Peer lending, but having been an early adopter, I'm cautious.
Anybody know what the ticker symbol is for beaver cheese futures?
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03-03-2015, 05:52 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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I kept waiting for the specifics!
If I had started the rising glide path in 2000, that would have been great.
But now I'm stuck with a straight allocation, and there doesn't seem to be much benefit to gliding one way or the other.
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Retired since summer 1999.
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03-03-2015, 08:50 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Jun 2007
Posts: 2,657
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Either these new breakthroughs come from mining the data deeply and therefor are dependent on the future economic activity strongly resembling the past economic activity, or else someone makes a lot of assumptions about the ranges and correlations of various factors and anything predicted is highly dependent on the assumptions they made. It's like arguing how many angels fit on the head of a pin.
There's very little reason that economic futures will correspond to either of these scenarios so closely that they can be fine tuned. At best these yield general rules. At worst no one does any sensitivity analysis to see what if the future doesn't resemble the assumptions how far off does one set of actions go vs another set.
I'm not at all impressed that a declining glide path (or a fixed glide path) will give a few percentage points better results. I would be very concerned that one or the other of these might yield much worse results in some future circumstances not considered. Overly optimizing the general likely cases is not much of a gain, but becoming vulnerable to outliers might be a big deal.
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03-03-2015, 09:22 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Sorry, someone's modeling retirement portfolio's and not including the possibility that bond yields might go up........how long do we think interest rates can stay this low. Surely everyone now holding bond funds is expecting interest rates to go up at some point and for those funds to claw their way back into positive territory on then back of increased yields.
Also I wonder what this means for Wade's paper that predicted greater success by replacing bonds with SPIAs? I speak as someone who just bought an annuity. There are just too many assumptions to take any of these models as anything other than indicators and interesting thought experiments. I think they can give insights into strategies, but must not be though of as roadmaps to success. Personally, I've been on a rising glide path for a while as I realize that most of my retirement income will come from rent, SS and a pension/annuity. My logic is that if I have income needs covered from guaranteed sources I can take more risk.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-03-2015, 10:57 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by nun
. My logic is that if I have income needs covered from guaranteed sources I can take more risk.
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Sorry, that's not sophisticated enough. You need to run it through a bevy of calculators using statistical regression analysis along with future assumptions based on historical Monte Carlo algorithms modified by analytic recursive analysis of the mean differentiation integral of the standard deviation mode based on the last 78 years of market backward trailing averages.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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03-04-2015, 01:56 AM
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#13
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Recycles dryer sheets
Join Date: Apr 2005
Posts: 114
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Why am I not surprised that the article ends like this:
Quote:
But, David has produced an interesting article which suggests more research is needed on this topic.
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Following Mr. Pfau's career path seems like a full time job.
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03-04-2015, 03:03 AM
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#14
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Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,985
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This thread points out our desire to cover all possibilities regarding the future. However it's the next factor which has been overlooked that will get ya.
No wonder I'm in OMY mode, this will never end. However I'm starting to see the light and will take the plunge regardless.
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Took SS at 62 and hope I live long enough to regret the decision.
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03-04-2015, 03:17 AM
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#15
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Join Date: Dec 2014
Posts: 2,511
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Quote:
Originally Posted by nun
Sorry, someone's modeling retirement portfolio's and not including the possibility that bond yields might go up........how long do we think interest rates can stay this low. Surely everyone now holding bond funds is expecting interest rates to go up at some point and for those funds to claw their way back into positive territory on then back of increased yields.
Also I wonder what this means for Wade's paper that predicted greater success by replacing bonds with SPIAs? I speak as someone who just bought an annuity. There are just too many assumptions to take any of these models as anything other than indicators and interesting thought experiments. I think they can give insights into strategies, but must not be though of as roadmaps to success. Personally, I've been on a rising glide path for a while as I realize that most of my retirement income will come from rent, SS and a pension/annuity. My logic is that if I have income needs covered from guaranteed sources I can take more risk.
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I'm new to this game and FIRE.. just RE's this week. I first had to figure out what this term "glide path" meant... easy once defined... but had to look it up online.
Nun, it seems like you bought a SPIA, but think rates will go up. I would think one would wait to get a SPIA if one expected rates to rise based on my very limited knowledge.
I saw one of Wade's papers referenced that really concluded a FPIA was better (inflation indexed ... think it was assumed at 4%). But I really did not catch where he considered the added cost by reducing other parts of the portfolio. Getting a 4% inflation adjustment will cost a lot for the same initial payout.
I think one of the real questions with interest rates rising are how fast they will rise... slowly as happened after the great depression or quickly from more recent history.
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03-04-2015, 06:33 AM
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#16
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by Chuckanut
Sorry, that's not sophisticated enough. You need to run it through a bevy of calculators using statistical regression analysis along with future assumptions based on historical Monte Carlo algorithms modified by analytic recursive analysis of the mean differentiation integral of the standard deviation mode based on the last 78 years of market backward trailing averages.
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Unfortunately any level of sophistication in the modeling is hostage to the assumptions made. Change an assumption and you get a different answer. So my modeling assumes conservative return. I don't have the data to set up Monte Carlo simulations so I just go with a pessimistic average annual return. If my numbers work with that I am good to go.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-04-2015, 06:52 AM
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#17
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by bingybear
I'm new to this game and FIRE.. just RE's this week. I first had to figure out what this term "glide path" meant... easy once defined... but had to look it up online.
Nun, it seems like you bought a SPIA, but think rates will go up. I would think one would wait to get a SPIA if one expected rates to rise based on my very limited knowledge.
I saw one of Wade's papers referenced that really concluded a FPIA was better (inflation indexed ... think it was assumed at 4%). But I really did not catch where he considered the added cost by reducing other parts of the portfolio. Getting a 4% inflation adjustment will cost a lot for the same initial payout.
I think one of the real questions with interest rates rising are how fast they will rise... slowly as happened after the great depression or quickly from more recent history.
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I think the 4% you are referring to is the "Safe Withdrawal Rate". Pfau's paper actually concluded that non-COLA'd SPIAs won out over bonds and even COLAed annuities because the COLAed annuities were over priced. I now wonder if Pfau included rising bond yields in his simulations.....I sort of assume that he had as who would think that bond yields will stay low for the next 30 years. That argues for reading the papers in detail rather than skipping to the graphs and tables.
My recent annuity buy is a little special. It's not a commercial annuity it's buying into a state, COLAed, DB pension plan. It gives me a 7% withdrawal at age 55 which is a full 3% more than the 4% I'd be advised to take from the money if I was managing it myself. Also to match the pension income here are the rates of return I'd have to get on the money if I kept it outside the pension plan from 55 to various ages.
Age Interest rate%
60 -20 (although the balance of the account goes to my heirs)
65 -2.5
70 +3.7
75 +6.4
80 +7.7
84 +8.3 (this is my actuarial life span)
I am not a fan of giving up control, but the longevity insurance and the basic numbers looked too good to pass up. If you think an SPIA is appropriate for you in retirement you should not market time interest rates. If you are worried about interest rates they buy a fixed term SPIA for say 5 years.
The choice of your asset allocation going into retirement is going to be mostly governed by your feelings about risk and how to generate income. I expect most people will set a middle course and end up with something close to 50/50 after reading a few articles and inspecting their gut. At the extremes will be the 100% equity folks and the Zvi Bodie folks that have mostly TIPS ladders. Right now, if we ignore the money I just put into the pension I'm at 80/20 AA and I can see me staying there for the foreseeable future, so probably constant glide path rather than rising.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-04-2015, 07:52 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,265
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Quote:
Originally Posted by nun
Unfortunately any level of sophistication in the modeling is hostage to the assumptions made. Change an assumption and you get a different answer. So my modeling assumes conservative return. I don't have the data to set up Monte Carlo simulations so I just go with a pessimistic average annual return. If my numbers work with that I am good to go.
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Thanks. I agree. You made the point much better than my attempt at humour did.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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03-04-2015, 08:09 AM
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#19
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Modeling has a place, but it must be kept in perspective and understood that it is not a recipe for success. It might give you an indication of the ingredients, but there's still a million ways to combine and cook them. Experts, and informed amateurs, can take things way too seriously and forget the stupidity of what they do.
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“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-04-2015, 08:10 AM
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#20
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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Quote:
Originally Posted by bingybear
Nun, it seems like you bought a SPIA, but think rates will go up. I would think one would wait to get a SPIA if one expected rates to rise based on my very limited knowledge.
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I'd say it depends on what I'm selling to buy the SPIA. Suppose I intend to sell long term bonds. In that case, if interest rates go up, the premium for the SPIA should go down, but the market value of my LT bonds should also go down.
If the SPIA and my LT bond portfolio are identically sensitive to interest rates, then the possibility of interest rate changes shouldn't be an issue.
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