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Old 10-06-2015, 03:45 PM   #41
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Originally Posted by DEC-1982 View Post
In all fairness to Pfau, I need to find the article where Pfau says SWR needs to be around 2%. Just because a Money article says Pfau said that doesn't mean Pfau actually said that. What got me riled up is this mention of 2% SWR in the same article as annuities. The S&P500 Index ETF delivers about 2% (slightly higher today). There is no guarantee that it will stay at 2% for the next 30-45 years; it might go lower and it might go higher; and it probably will vary. But if you use the approx 2% dividend for your SWR, you could fund your retirement to perpetuity.
Lots of retirement professionals will be using TIPS in the fixed income allocation and probably have lower stock percentages that many people on here. I think there's a tendency for the folks on here to take on quite a bit more risk that the average retiree. Whether this comes from investing expertise or hubris really depends of future stock market returns. Anyway Pfau's low withdrawal rate probably derives from a fixed income heavy portfolio and a pessimistic view of bond returns.
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Old 10-06-2015, 04:03 PM   #42
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I think there's a tendency for the folks on here to take on quite a bit more risk that the average retiree.
Most early retirees have to finance 40+ years of retirement and need stocks in their portfolio to do that. Their biggest risk is inflation. The majority of retirees on this board have an AA between 40% and 60% in stocks. In my opinion that's not too risky since Vanguard 2015 target retirement fund has 50% stocks allocation.
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Old 10-06-2015, 05:30 PM   #43
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Most early retirees have to finance 40+ years of retirement and need stocks in their portfolio to do that. Their biggest risk is inflation. The majority of retirees on this board have an AA between 40% and 60% in stocks. In my opinion that's not too risky since Vanguard 2015 target retirement fund has 50% stocks allocation.
Sequence of return risk is very important too. Pfau is pessimistic about bond returns because of the low return of the 10 year T-bill and for stocks because of today's P/E ratios.....so he predicts lower returns that with historical data. He uses a 50/50 asset allocation. Maybe a 50% allocation to an intermediate bond index is pretty risky right now.
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Old 10-07-2015, 07:36 AM   #44
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Possibly the Pfau article from May 2012 discussed in this thread?

Wade Pfau looks at 4% WR, finds it unsafe
Thank you for sharing this. I reviewed the 2012 article. I also reviewed the 88 posts in that thread started by MichaelB. Comments about Dr Pfau's annuity push and his pessimism were discussed there. The one comment worth repeating is that FireCalc does not show the same failure rate. I find similarly that my chances of success from FireCalc and Fidelity RIP are different from what I would assume from Dr Pfau's article.

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Sequence of return risk is very important too. Pfau is pessimistic about bond returns because of the low return of the 10 year T-bill and for stocks because of today's P/E ratios.....so he predicts lower returns that with historical data. He uses a 50/50 asset allocation.
Maybe a 50% allocation to an intermediate bond index is pretty risky right now.
Bond rates - I guess Dr Pfau looks at it with a certain lens. For the last few years we have been waiting for bond prices to drop so theory and real world results are different.

If you look at Dr Pfau's April 2015 post (and I haven't rechecked the July 2015 update), for the old 4% rule he shows 2.29%, 2.78% and 3.50% as the SWR for conservative, moderate and aggresive portfolios. The moderate portfolio (50% stock) shows a 90% chance of success. Somewhere in there, he also shows an expense ratio of 0.50%. But if one puts money into Vanguard S&P500 ETF (0.05%) and Vanguard Total Bond Market ETF (0.07%), a 50/50 split has an expense ratio of 0.06%. Add that 0.44% (0.50-0.06) to 2.78 and you get 3.22%, a 15% increase in return. And I think many people would be quite OK with a 3.22% SWR, as compared to the 2% SWR mentioned in the article.

I am not against all annuities. Social Security is a type of annuity that society is happy with. But when I look at the annuities marketed out there, the cost and complexity outweigh the advantages. This is a personal opinion, and opinions vary between people.
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Old 10-07-2015, 07:58 AM   #45
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Bond rates - I guess Dr Pfau looks at it with a certain lens. For the last few years we have been waiting for bond prices to drop so theory and real world results are different.
I think the current low 10 year T-bill return is the reason for the pessimism about bond returns in the next decade. If rates do go up then prices will come down......you simply won't make much money in a bond index fund for a while.
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Old 10-07-2015, 08:25 AM   #46
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I am not against all annuities. Social Security is a type of annuity that society is happy with. But when I look at the annuities marketed out there, the cost and complexity outweigh the advantages. This is a personal opinion, and opinions vary between people.
Yes people love SS but hate annuities.......I don't get the logic of that really.
I hate annuities when they combine investing with insurance because no one every knows exactly what they are buying and they are expensive. To assure a floor of lifetime income or to insure against longevity risk I see a use for fixed annuities.
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Old 10-07-2015, 09:10 AM   #47
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To assure a floor of lifetime income or to insure against longevity risk I see a use for fixed annuities.
And to truly provide a real floor of lifetime income, they need to have an adjustment for inflation (as SS does, one reason people favor it). And when we see what those cost, esp in today's low-interest rate environment, we see one big reason people don't like annuities.
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Old 10-07-2015, 10:08 AM   #48
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And to truly provide a real floor of lifetime income, they need to have an adjustment for inflation (as SS does, one reason people favor it). And when we see what those cost, esp in today's low-interest rate environment, we see one big reason people don't like annuities.
I think the new QLAC DAs will be attractive to some people and an SPIA for income would allow a higher percentage of equities in the rest of the portfolio to deal with inflation......there's a lot of ways to skin a cat. The returns on annuities definitely suck today so no matter how long you live if you don't get one with inflation adjustment it will always suck as an investment no matter how long you live, but then again my home insurance and auto insurance are also terrible investments.
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Old 10-07-2015, 11:05 AM   #49
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And to truly provide a real floor of lifetime income, they need to have an adjustment for inflation (as SS does, one reason people favor it). And when we see what those cost, esp in today's low-interest rate environment, we see one big reason people don't like annuities.
I think it might be worth it to consider SPIA for fixed expenses such as mortgage. Particularly so if all your funds are in tax deferred accounts and you'll be faced with a hefty tax liability if you pay it off from traditional 401k/IRA distributions.
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Old 10-07-2015, 11:05 AM   #50
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I think the new QLAC DAs will be attractive to some people and an SPIA for income would allow a higher percentage of equities in the rest of the portfolio to deal with inflation...
If the purpose of the annuity is truly to provide a "floor of income" (to meet crucial requirements--"I need all of this, no kidding") for a lifetime, then I don't think it is consistent to say inflation protection doesn't need to be part of it. The loss of real spending power due to inflation is real. If we are happy to just say that we'll handle >that part< with equities (or real estate, or bonds--whatever), then why is it incorrect to do the whole thing that way (and be about 90+% assured that we, or our heirs, will come out way ahead)? If "assured floor" means what I think it does, and we're saying it's worth insuring, then it all has to be insured--against inflation as well as market forces.
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Old 10-07-2015, 11:11 AM   #51
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I think the current low 10 year T-bill return is the reason for the pessimism about bond returns in the next decade. If rates do go up then prices will come down......you simply won't make much money in a bond index fund for a while.
Rates now are not very different from 1954 and the Fed gives Treasury data for that period. I looked at that data and the 5 year Treasury returned a real 0.9% per year (nominal was 2.4%) for about 10 years. During that time the 5 year Treasury went from 1.9% up to 4.9%. Currently the 5 yr is at 1.3% so not that different from 1954.

If you hold bonds for safety of principle and a bit more income, that data should be comforting.
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Old 10-07-2015, 12:45 PM   #52
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If "assured floor" means what I think it does, and we're saying it's worth insuring, then it all has to be insured--against inflation as well as market forces.
I don't accept that its an all or nothing proposition. The percentage of your income that is produced from volatile sources does not have to be 0% or 100%. or even a constant percentage. I remember reading another Pfau analysis that found that an SPIA and stock portfolio was more efficient than one with bonds or inflation linked annuities. The high cost if the inflation linked annuities was their downfall.
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Old 10-07-2015, 12:56 PM   #53
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Rates now are not very different from 1954 and the Fed gives Treasury data for that period. I looked at that data and the 5 year Treasury returned a real 0.9% per year (nominal was 2.4%) for about 10 years. During that time the 5 year Treasury went from 1.9% up to 4.9%. Currently the 5 yr is at 1.3% so not that different from 1954.

If you hold bonds for safety of principle and a bit more income, that data should be comforting.
Well it looks like owning a bond fund today and using it for income for the next decade might well be worse that the worst historical decade. So that's going to drag down the chances of a 50/50 portfolio being successful with a 4% withdrawal rate. I can't hope to do the Monte Carlo runs, maybe I could do the 30 year rolling periods, but I'll leave that up to the folks like Pfau.
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Old 10-07-2015, 03:09 PM   #54
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Well it looks like owning a bond fund today and using it for income for the next decade might well be worse that the worst historical decade. So that's going to drag down the chances of a 50/50 portfolio being successful with a 4% withdrawal rate. I can't hope to do the Monte Carlo runs, maybe I could do the 30 year rolling periods, but I'll leave that up to the folks like Pfau.
There are a few mitigating factors. First, if the bonds don't do so well over the next decade it is not necessarily failure. One's portfolio will just go down somewhat on the bond component. Stocks could do better with a blend of US/international. There are still reasons to be optimistic.
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Old 10-07-2015, 03:49 PM   #55
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There are a few mitigating factors. First, if the bonds don't do so well over the next decade it is not necessarily failure. One's portfolio will just go down somewhat on the bond component. Stocks could do better with a blend of US/international. There are still reasons to be optimistic.
Yes but having those poor bond results at the start of retirement would not be good. Here is one of Pfau's blog posts where he shows his results for the likely out comes of various asset allocations in retirement when you need an annual income of 4% of your portfolio, if you only needed 1% a 100% stock portfolio would be the "best". He uses today's bond rates which is probably why the bond asset allocations perform poorly.

An Efficient Frontier for Retirement Income
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Old 10-07-2015, 04:24 PM   #56
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Yes but having those poor bond results at the start of retirement would not be good. Here is one of Pfau's blog posts where he shows his results for the likely out comes of various asset allocations in retirement when you need an annual income of 4% of your portfolio, if you only needed 1% a 100% stock portfolio would be the "best". He uses today's bond rates which is probably why the bond asset allocations perform poorly.

An Efficient Frontier for Retirement Income
I took a look at that article, comments:
1) It's an interesting choice of cases because it's not that far from our situation
2) He didn't discuss how he dealt with the bond or stock returns going forward into the future. Or did I miss something there? Was this just the executive summary?
3) If things start going down a lot, most people would reduce spending a little. So one might spend 3% instead of 4%. In our own case things are going fine although it's a weak returns year so far. But we will be underspending this year even with a lot of goodies so won't get to even 4%.
4) He says the couple will be sad if they can't meet their spending goals. Probably they could cope with a domestic instead of an international vacation. Lots of ways to substitute.
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Old 10-07-2015, 04:39 PM   #57
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Yes people love SS but hate annuities.......I don't get the logic of that really. ...
You really don't? With SS, we had no choice but to contribute, so now we all want to maximize our benefits. And SS is COLA'd, hard to find in an annuity, and we would be paying for it with discretionary dollars.

The logic is simple - they are two very different things.

Plus, is it a straw-man to say people 'love' SS? I've always heard from people who say they wish they had their deductions, and their companies deductions, to invest for themselves. I don't know if that's a majority or not. It would be an interesting experiment to allow people to increase their FICA deduction, and 'buy' the added (diminishing return) benefits at retirement. I doubt many people would 'love' that idea enough to put the money up front.

And I don't 'hate' annuities (a two-step straw-man?). I just don't think they sound very promising at this stage of my life.

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Old 10-07-2015, 06:17 PM   #58
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I took a look at that article, comments:
1) It's an interesting choice of cases because it's not that far from our situation
2) He didn't discuss how he dealt with the bond or stock returns going forward into the future. Or did I miss something there? Was this just the executive summary?
3) If things start going down a lot, most people would reduce spending a little. So one might spend 3% instead of 4%. In our own case things are going fine although it's a weak returns year so far. But we will be underspending this year even with a lot of goodies so won't get to even 4%.
4) He says the couple will be sad if they can't meet their spending goals. Probably they could cope with a domestic instead of an international vacation. Lots of ways to substitute.
Here is some more detail

An Efficient Frontier for Retirement Income by Wade D. Pfau :: SSRN

Obviously asset returns are vital to these models. Pfau uses the current intermediate Government bond market rates, then derives stock market returns
from the historical average premium of stock returns over bond returns and uses historical standard deviation data to produce a possible spread in returns. Of course you might criticize this as being overly pessimistic or you might say it's more realistic than using historical averages.

One of the criteria is also that the portfolio must support an 4% inflation adjusted spending rate......so no reduction of spending in down years.....that's probably not realistic.

I'm lucky enough to have a small pension which along with rent just covers my income needs so that's my annuity. Prior to SS starting the rest of my portfolio will be 70% stocks and 30% TIAA-Traditional which pays 4% interest. When SS starts I will go 100% stocks. I still have to sell some Wellesley to implement this AA.
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Old 10-07-2015, 06:21 PM   #59
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You really don't? With SS, we had no choice but to contribute, so now we all want to maximize our benefits. And SS is COLA'd, hard to find in an annuity, and we would be paying for it with discretionary dollars.

The logic is simple - they are two very different things.

Plus, is it a straw-man to say people 'love' SS? I've always heard from people who say they wish they had their deductions, and their companies deductions, to invest for themselves. I don't know if that's a majority or not. It would be an interesting experiment to allow people to increase their FICA deduction, and 'buy' the added (diminishing return) benefits at retirement. I doubt many people would 'love' that idea enough to put the money up front.

And I don't 'hate' annuities (a two-step straw-man?). I just don't think they sound very promising at this stage of my life.

-ERD50

I did a poll recently and asked if people would swap their SS for an equivalent lump sum......the vast majority voted to keep the SS. Maybe "love" is a bit hyperbolic, but they preferred it to a lump sum.
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Old 10-07-2015, 06:37 PM   #60
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I did a poll recently and asked if people would swap their SS for an equivalent lump sum......the vast majority voted to keep the SS. Maybe "love" is a bit hyperbolic, but they preferred it to a lump sum.
I guess it depends on how you define 'equivalent'? Technically, if it was truly an equivalent lump sum, no one would care, right? Coin flip.

I suppose what you saw was people had more faith in the Fed govt's ability to make COLA payments for their life, than they had faith in an ins company to do that (and COLAd annuities are not so easy to find from what I understand), or in their ability to invest some lump sum 'equivalent' for life. Again, depending on the 'equivalency' that makes sense from a 3 -legged stool aspect. So I'm not surprised. Offset by the fact that many fear their SS may be cut in value in some way (maybe through taxes rather than a straight cut).

Another way to say that is - the backing of the Fed Govt (and the 'third-rail' effect - but don't mean to get political) adds a lot of certainty (and hence value) to that future income stream from SS. So the 'equivalent' would need to be higher than some calculation based on what an ins co would offer. I think?

It's a far different question from would you voluntarily add money to either SS or an annuity. That's more apples-apples, and still needs adjustment for the certainty factor.

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