New Wade Pfau article of great interest

[bmcgonig]

Quote:

Originally Posted by Texas Proud I just do not see how they can say that the new normal is so low.... Say you get zero real return... and we are talking about their time frame which is 30 years.... then a SWR is 3.33%..... 100/30.... sure, you will have zero when you are done, but that is not a failure in their terms.... Even they say that there should be a positive real return... so it should be higher than that... Now, you do have the sequence or return problem to deal with... but I do not see them saying that is the problem they are trying to solve with the new rate...

I think that Pfau IS saying that. His simulations are using a lower future bond rate, taking a while to normalize, and thus getting a lower SWR if I read it correctly.

The low predictions are due to the combination of the lousy interest rate in the bond market, and the high PE in the stock market. Bernanke is said to have said that interest rates won't normalize in his lifetime. That's ammunition for Pfau's prediction. Others, like Meb Faber point to high CAPEs at present as indicative of low future stock returns. I.e., when CAPE is in the top decile, stock returns will be in the lowest decile, or something to that effect. Probably similar thinking to Bogle etc. They may be just predictions but they seem to have some foundation.


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[Options]

Quote:

Originally Posted by Texas Proud I just do not see how they can say that the new normal is so low.... Say you get zero real return... and we are talking about their time frame which is 30 years.... then a SWR is 3.33%..... 100/30.... sure, you will have zero when you are done, but that is not a failure in their terms.... Even they say that there should be a positive real return... so it should be higher than that... Now, you do have the sequence or return problem to deal with... but I do not see them saying that is the problem they are trying to solve with the new rate...

Again, Bernstein has said that 2% is "bulletproof" and 3% is "probably ok". As I said, I have seen no one as conservative as Pfau (if anyone has, please chime in).

It's also worth noting the 2.5% inflation adjusted (with reduced fees considered) WR example I gave above from Pfau's work is for a 25% equities PF. His table shows that higher equity allocations create a higher WR rate (2.78% for a 50/50 PF, throw in .25% for those with much lower fees, and you're at 3%). Also observe the higher WR rates using the Guyten decision rules. Point is, it's not all that dire.

Something else he shows is that one can have higher WR rates with bonds and annuities--a case for annuities as a plan B or C, perhaps. Then again, his work is sponsored by the insurance industry so make your own assumptions (personally that doesn't bother me as I've seen good arguments discussed elsewhere for delayed (vs. deferred) SPIA's as an alternative to the cat food/cardboard box scenario in later years).

IMO, it's worth remembering the upside to participation in the bond/equity markets, which Pfau aknowledges and specifically notes that his WR's do not show that upside. In my experience, ESPlanner does a brilliant job of showing what that upside could be, as well as the the % of possible time each scenario could occur (using MC simulations). It's for this reason I'm not too worried about low starting WR rates. Probabilities are they could be adjusted upwards if one manages to avoid the most worst case PF scenarios).

Finally, I agree with the above that noone, but noone, can predict the future (as beautifully pointed out by either Charlie Munger or Buffet in Berkshire's most recent annual letter). Pfua's numbers are based on expected returns, and it's good to remember that. In the markets, anything can happen, has happened, and will happen. Only on that much we can count on. The variation I've seen on Sir John Templeton's quote comes to mind: "“The four most expensive (he uses dangerous") words in investing are 'This time it's different.'”

[kevink]

Quote:

Originally Posted by bmcgonig I think that Pfau IS saying that. His simulations are using a lower future bond rate, taking a while to normalize, and thus getting a lower SWR if I read it correctly. The low predictions are due to the combination of the lousy interest rate in the bond market, and the high PE in the stock market. Bernanke is said to have said that interest rates won't normalize in his lifetime. That's ammunition for Pfau's prediction. Others, like Meb Faber point to high CAPEs at present as indicative of low future stock returns. I.e., when CAPE is in the top decile, stock returns will be in the lowest decile, or something to that effect. Probably similar thinking to Bogle etc. They may be just predictions but they seem to have some foundation. Sent from my iPad using Early Retirement Forum

Thanks for the great summary bmcgonig. Your point about CAPE is echoed in Bill Bernstein's most recent writing as well as that of Rick Ferri, Larry Swedroe, Jack Bogle and Paul Meriman, among others.

Bernstein's recommendations in particular ring true to me (for those in or near retirement, of course, since his advice to millenials is very different): high quality bonds, signficant international equity exposure with a value tilt, perhaps a smattering of natural resources and commodity stocks.

Pfau certainly is a proponent of annuitizing at least part of one's porfolio at the right time, but I haven't read anything by him yet that has made me think he's so biased in that regard that it skews his recommendations. I may well be wrong.

[audreyh1]

Quote:

Originally Posted by Texas Proud I just do not see how they can say that the new normal is so low.... Say you get zero real return... and we are talking about their time frame which is 30 years.... then a SWR is 3.33%..... 100/30.... sure, you will have zero when you are done, but that is not a failure in their terms.... Even they say that there should be a positive real return... so it should be higher than that... Now, you do have the sequence or return problem to deal with... but I do not see them saying that is the problem they are trying to solve with the new rate...

Me too - 2.3% as an SWR strikes me as absurd.

Oh, I see that's for a 25% equities portfolio - never mind then.....

[Spanky]

Quote:

Originally Posted by photoguy This is basically untestable within our lifespan. They are generally making a forecast about the "expected return" which is a probability weighted average. So if Pfau says the expected return was 5% and the actual return was 7%, it doesn't mean he was necessarily wrong (or right).

Here's an answer:

[Mulligan]

Quote:

Originally Posted by Spanky Here's an answer:

I love the high tech graphics Spanky. Gives me hope I am not the last Luddite roaming planet Earth.


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[gcgang]

Quote:

Originally Posted by Cut-Throat The problem is not "What is the SWR today"....The problem is using an SWR as a withdrawal method. (Which no one ever has anyway, so I fail to see the interest in this topic) The SWR was a 'Rule of Thumb'. If you use a Withdrawal Method that is Variable based on Portfolio Balance, you really don't have to care. Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

If your portfolio dropped by half, wouldn't you be taking 10%, not 2.5%?

Only a robot would automatically adjust their subsequent withdrawals upward when their portfolio tanks. I think SWR is just something to do to see if it is reasonable to retire and live off investments. Once you do that, you still need to stay "reasonable", and make appropriate adjustments in your AA and spending as the future unfolds.


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[ERD50]

Quote:

Originally Posted by gcgang ... Only a robot would automatically adjust their subsequent withdrawals upward when their portfolio tanks. ...

TAKE .... ME .... TO .... YOUR .... LEADER

I think there were a number of us 'robots' who did not curtail spending during the last meltdown. You can't get those years back, you maybe can't get the activities back. Some opportunities only knock once.

For me, this is the advantage of starting with a conservative plan. You can (and I did) ride out some bad times. I remember looking at those charts back then, and recognizing I was looking at some historic drops in the market. But that's what I saved for, so I carried on and enjoyed life and slept well.

-ERD50

[Meadbh]

Quote:

Originally Posted by Cut-Throat Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

I do not understand this math.

[REWahoo]

Quote:

Originally Posted by Meadbh I do not understand this math.

I suspect it's either the fuzzy or new variety, but I have enough trouble with regular math, so I'm not going to bother to try to figure it out...

[daylatedollarshort]

I do not understand the ultra low safe withdrawal rates predicted for age 62+ age retirees. Even a zero real return over 30 years would provide a 3.33% SWR and one can do better than zero real with individual TIPS held to maturity, no volatility and government backed.

[FUEGO]

Quote:

Originally Posted by clifp Based on this article it appears to be nominal return. I think Bogle is more likely to be right than wrong. Current yield is excellent predictor of the 5-10 year yield of bonds. When the next correction will be and how deep it will be is pretty much anybody guess, but I think Jack is far from predicting doom or gloom.

Yeah, I would buy 2.5-3% for 20 year yield on treasuries, maybe expect a little more for corporates.

As for stock yields, Bogle's method is as good as any I guess. Div yield + earnings growth gives about 7% per year. Worst case, throw in a speculative 20-33% contraction in PE ratios and that only knocks down the annualized yield to 5-6% over 20 years. As a 100% equities guy pulling 2.5% from my portfolio, a 5-6% yield in equities sounds pretty okay to me.

[Independent]

Quote:

Originally Posted by Options So we're back to 2.5% is roughly the new 4% for a conservative couple over 30 years.

These very low numbers get weird. Even at today's yields Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com
it seems that a conservative couple could construct a TIPS ladder that would pay 3.8%.

[mickeyd]

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Originally Posted by utrecht I don't believe that Bogle, Pfau, or anyone else can predict stock market returns for the next 20 years.

Anyone can predict anything. It's accurately predicting that is the difficult part of the process.

[MichaelB]

Quote:

Originally Posted by mickeyd Anyone can predict anything. It's accurately predicting that is the difficult part of the process.

I predict that 10 years from now Mr. Pfau's research will be showing different numbers, but his recommended approach will still involve annuities.

[Independent]

Quote:

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

Quote:

Originally Posted by Meadbh I do not understand this math.

I think he meant to write:

Quote:

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your original Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

[Chuckanut]

A variable withdrawal plan that allows gradually stepping down during bad years and gradually stepping up during good years would solve a lot of problems on how to handle normal ups and downs of the market. And problems caused by making assumptions/ predictions that end up being to far from reality.

Don't most of us do this anyway?

Then there is always plan B. Take SS earlier than planned. Sell the big house in the city and buy a small place in Obscureville, Arkansas. Ect......

[daylatedollarshort]

Quote:

Originally Posted by Chuckanut A variable withdrawal plan that allows gradually stepping down during bad years and gradually stepping up during good years would solve a lot of problems on how to handle normal ups and downs of the market. And problems caused by making assumptions/ predictions that end up being to far from reality. Don't most of us do this anyway? Then there is always plan B. Take SS earlier than planned. Sell the big house in the city and buy a small place in Obscureville, Arkansas. Ect......

No, we don't. We have constant spending projected, which is probably worst case, because we will likely downsize at some point. I have a spreadsheet with 0% real return for the next few years, and 1% real return after that. If rates do not rise I can change it to 0% real return until the "end of plan" date and it just impacts our estate, not annual spending.

We chip away at our fixed expenses each month, like the energy, grocery and water bills, so our spending has continued to decline over time without changing our basic lifestyle. I've been able to up my fun money category as groceries and utilities go down but I haven't changed the overall spending plan.

[DEC-1982]

This is about the article by Wade Pfau

Is now a good time to retire? Retirement Researcher

I am trying to apply this to my situation and would like to get some feedback.

I have a 62% stock allocation (between moderate and aggressive couple).

I am comfortable with 85% success (between 90% success for the moderate couple and 80% success for the aggressive couple).

That puts me about half-way between the moderate and aggressive couple.

My fees are 0.10% not 0.50%.

Could I (with a reasonable degree of confidence) read the article to mean I can use 3.14% (between 2.78 and 3.50%) plus 0.4% (savings in investment fees) to arrive at a possible SWR of 3.54%?

In reality, of course, I would make adjustments to withdrawals if needed.

MOD NOTE: Merged this thread into existing thread on the same article

[Cut-Throat]

Quote:

Originally Posted by Meadbh I do not understand this math.

$1 Million Portfolio.

1.) You decide to take 5% of Portfolio Balance.
2.) First year you take $50 Grand.
3.) Portfolio tanks in a Bad Market Drop. it's now down to around $500K
4.) Next year you also take 5% of Portfolio Balance or about $25 Grand.

$25 Grand is 2.5% of the Starting $1 Million Portfolio.

So, your withdrawal amount is always against your Portfolio Balance, not the Starting Portfolio. Forces you to Sell high and not sell low.