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New Wade Pfau article of great interest
Old 06-20-2015, 04:47 PM   #1
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New Wade Pfau article of great interest

In the article linked to below, Pfau makes what seems to me to be a very important point about the difference between the allocation in Bengen's pioneering work that led to the 4% SWR idea and that used in the subsequent Trinity study.

Historial SWR's increase considerably when IT Treasuries are used, rather than corporate bonds, due to the flight to safety effect. We saw this writ large in 2008 of course, but the article makes it clear it's a general principle worth knowing about.

Safe Withdrawal Rates for Retirement and the Trinity Study
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Old 06-20-2015, 05:31 PM   #2
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Yes. Saw it this morning and took another look at his much touted "dashboard".

Is now a good time to retire? Retirement Researcher

As of 4/1/15, he advises that 2.29% would be the new 4% for a conservative couple. Note his assumptions use a .5% adminitrative fees. He recently stated for those with lower fees (such as my .09% fees at VG), one could add as much as .25% back into that 2.29% figure. So we're back to 2.5% is roughly the new 4% for a conservative couple over 30 years.

I've yet to see anyone other than Bernstein as conservative as Pfau. His caution is well taken, but his assumptions still amount to predictions IMO. Not that I don't highly respect his work, just keeping an open mind on these things.
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Old 06-20-2015, 09:50 PM   #3
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Options you're onto something of vital importance, it seems to me, in this ultra low-return environment: cutting investing costs to the bone. Mr. Bogle is calling for 2% from bonds and 5% from stocks for the next 20 years, so Pfau and Bernsteing are in good company in calling for dialed-down expectations.

Worth reminding ourselves of is that all of the number Pfau and his predecessors talk about are adjusted for inflation. Personally I work on living on 4% of actual (no adjustment) at all times, and have found that as an ER inflation need not affect me as thoroughly as it does someone working full time.
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Old 06-20-2015, 10:46 PM   #4
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Options you're onto something of vital importance, it seems to me, in this ultra low-return environment: cutting investing costs to the bone. Mr. Bogle is calling for 2% from bonds and 5% from stocks for the next 20 years, so Pfau and Bernsteing are in good company in calling for dialed-down expectations.
Was that real or nominal returns? I think I've seen similar real returns from a recent Vanguard forecast.
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Old 06-21-2015, 02:39 AM   #5
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Was that real or nominal returns? I think I've seen similar real returns from a recent Vanguard forecast.
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.
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Old 06-21-2015, 07:03 AM   #6
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Options you're onto something of vital importance, it seems to me, in this ultra low-return environment: cutting investing costs to the bone. Mr. Bogle is calling for 2% from bonds and 5% from stocks for the next 20 years, so Pfau and Bernsteing are in good company in calling for dialed-down expectations.

Worth reminding ourselves of is that all of the number Pfau and his predecessors talk about are adjusted for inflation. Personally I work on living on 4% of actual (no adjustment) at all times, and have found that as an ER inflation need not affect me as thoroughly as it does someone working full time.
Nicely said. This summarizes my current thinking as well. Given the fact that I don't intend to adjust for inflation, I may start closer to 5%. Will see what the environment is like in a year or two when we pull the plug.
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Old 06-21-2015, 07:28 AM   #7
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I don't believe that Bogle, Pfau, or anyone else can predict stock market returns for the next 20 years.
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Old 06-21-2015, 08:16 AM   #8
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It's really LT treasuries that are pretty good at having negative correlation with stocks. LT corporate bonds pay a higher dividend, but have a significant default rate during serious market downturns causing them to potentially have a positive correlation with stocks. However, if the Fed needs to raise interest rates to fight inflation, the LT treasuries become positively correlated with stocks also. This means both will go down simultaneously when interest rates are pulled up to fight inflation.

My strategy is to use a portion of long term treasury bonds to take advantage of the fact that usually they are negatively correlated with stocks.

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Old 06-21-2015, 08:28 AM   #9
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My family's goal is to have enough return with a minimum of volatility. We're at 45 %stock index ETFs and 55% bonds. We hope for about a 6% return overall and plan on a 3.5% safe withdrawal before SS, then 2.5% thereafter. We'll retire in 2 years at 59.

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Old 06-21-2015, 08:46 AM   #10
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I don't believe that Bogle, Pfau, or anyone else can predict stock market returns for the next 20 years.

Actually they all can and all have....


The question is if their prediction is accurate or not....
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Old 06-21-2015, 09:06 AM   #11
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"4% rule is not safe… 1.8% is the new SWR .... " so what's next based on the assumption/prediction of significantly lower returns of stock and bonds?
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Old 06-21-2015, 09:08 AM   #12
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Actually they all can and all have....


The question is if their prediction is accurate or not....
agreed - Anyone can! It's only a question of accuracy or certainty.
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Old 06-21-2015, 09:18 AM   #13
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True enough Texas Proud, but I appreciate Bogle and Pfau's pessimism-cum-realism and would rather be pleasantly surprised using their numbers as a basis for my expectations.

OrcasIslandBound (great name by the way - Orcas Island is one of my favorite places on earth!) you sound like a kindred spirit in terms of risk/return appetite. According to Paul Merriman's risk tables a 40:60 bond:stock allocation has a worst one year return of .23%, so you'd be taking on a bit more than that with your "conservative" 55:45 (I'm in the same boat), unless, as you say, you do a bond "barbell" of half 30 year Treasuries and the rest short term, a la Harry Browne's Permanent Portfolio.

I'll post a link to the historical risk:return matrix of the PP to a plain vanilla stock:bond portfolio below, but as with all of the other approaches based on backtesting (which is to say all approaches!) it seems to me several things that have given the PP such a great run are unlikely to be repeated (e.g. the one-time event of opening up the gold market in the 1970's). William Bernstein, in his recent book "Deep Risk: How History Informs Portfolio Design" does a great job of showing the limitations of the PP and other defensive "bunker" approaches, but (getting back to the Pfau article) I don't think he'd have any problem with having most if not all of one's bond allocation in IT Treasuries.

Worst 3 year PP performance ever? - Page 2
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Old 06-21-2015, 09:44 AM   #14
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"4% rule is not safe… 1.8% is the new SWR .... " so what's next based on the assumption/prediction of significantly lower returns of stock and bonds?
So if you've been using 4% for the past 5-10 years...should you now switch to 2% or so?

Might some folks have to go back to w*rk after being led astray by the same 'experts'?!

2% is the new 4%? In 5 years will it be 1%?

Are all these dire predictions based on foreseeable market performance or only based upon the current environment?

I'd hate to die really rich if these guys are wrong.
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Old 06-21-2015, 10:00 AM   #15
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So if you've been using 4% for the past 5-10 years...should you now switch to 2% or so?

Might some folks have to go back to w*rk after being led astray by the same 'experts'?!

2% is the new 4%? In 5 years will it be 1%?

Are all these dire predictions based on foreseeable market performance or only based upon the current environment?

I'd hate to die really rich if these guys are wrong.
There are no guarantees in life, as I'm sure you know. We can read what all the so-called experts think, and then make our own decisions. That's really all we can do.

Personally I think I am very conservative financially, but 1% seems ridiculous even to me. I could be wrong! But right now I see nothing wrong with 3% or more.

When reading various predictions, it helps to check into the business interests of those doing the predicting. For example, I am sure the annuity pushers would tend to recommend a lower withdrawal rate from investments, and assert that an annuity is the only sure way to secure an income stream in retirement.
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Old 06-21-2015, 10:03 AM   #16
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I don't believe that Bogle, Pfau, or anyone else can correctly predict stock market returns for the next 20 years.
Fixed my own post
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Old 06-21-2015, 10:11 AM   #17
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The question is if their prediction is accurate or not....
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).
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Old 06-21-2015, 10:22 AM   #18
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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...
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Old 06-21-2015, 10:34 AM   #19
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However, if the Fed needs to raise interest rates to fight inflation, the LT treasuries become positively correlated with stocks also. This means both will go down simultaneously when interest rates are pulled up to fight inflation.
Historically this has been true only when the 10 year rate is over 5%. The reverse has been true under 5%.
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Old 06-21-2015, 10:43 AM   #20
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"4% rule is not safe… 1.8% is the new SWR .... " so what's next based on the assumption/prediction of significantly lower returns of stock and bonds?
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?
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