Pfau: https://www.onefpa.org/journal/Pages/OCT15-Making-Sense-Out-of-Variable-Spendin

[Lsbcal]

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.

 

[nun]

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.

 

[nun]

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.

 

[Lsbcal]

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.

 

[nun]

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

 

[Lsbcal]

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.

 

[ERD50]

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.

-ERD50

 

[nun]

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.

 

[nun]

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.

 

[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.

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.

-ERD50

 

[Huston55]

The result that caught my attention was the relatively high level of spending possible using the "Annuitize Floor & Aggressive Discretionary" approach. Its spending rates are within 5% of the highest (Guyton-Klinger) decision rules approach, even though it's more closely related to the "safety first" camp.



The 'take away' for me is that, if one has (SS, pension, etc) or purchases (annuity) income sources to cover their floor expenses, that retiree can spend a relatively high percentage of initial wealth with what I'd describe as a relatively high level of confidence. This is because: (1) floor expenses are covered, (2) sequence of returns risk is highly mitigated, and (3) having a covered floor would likely help to preclude poor investment behavior [buy high/sell low].

Of course, there's a price for this (primarily loss of liquidity) if one uses as much of NW (40%) to purchase an annuity as in Pfau's example. But, if part/much of the floor expenses are already covered by SS and/or pension, then annuitizing a smaller percentage might be attractive to more retirees.

 

[nun]

The result that caught my attention was the relatively high level of spending possible using the "Annuitize Floor & Aggressive Discretionary" approach. Its spending rates are within 5% of the highest (Guyton-Klinger) decision rules approach, even though it's more closely related to the "safety first" camp.

I've always planned to generate most of my retirement income from SS, pensions, TIAA-Traditional interest, and rent and invest my remaining money aggressively, so I was happy to see that result. Of course I think part of the reason for the Annuity success is the low bond rates assumed. Also these models assume you want to spend the max amount and if you only need 1% withdrawals a 100% equity portfolio will probably be best as the chance of running out of money is basically zero and you just go for the AA that maximizes the potential size of the portfolio.

 

[Koolau]

This is the first year we've hit the magic 4% WDR. There were special circumstances. So, after 10 years, I don't usually think too much about WDRs any more. SS will soon kick in, so there's that as well. At 68, I'm beginning to think a 30 year time frame is overly optimistic. Hope I'm wrong!

Actually, my biggest concerns now are the "black swans" or whatever folks call the potential for when TSHTF. World instability, incredible national debt, terror attacks, run away inflation, etc. etc. seem much more likely to derail my "plan" than any "normal" mistake I might make at this time (over spending, improper AA, coming RMDs, current taxes, etc. etc.) Most issues are out of my control, so I attempt to make back-up plans for the general unknown "what-ifs" of our current world. At this point in my journey, I'd rather see a "paper" on such planning than one more WDR strategy paper - but that's just me, so YMMV.