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

[nun]

I think for someone planning to ER, having a nest egg of 30-35x of essential expenditures might be prudent. Granted, that doesn't take SS or pensions into account.

Maybe subtract SS and pensions etc from your income requirements and then times by 30.....although that seems very conservative to me

 

[audreyh1]

That seems a great idea. Curious, where do you keep the extra withdrawals? Just cash or cash equivalent?

Short-term CDs, high yield savings. Nothing volatile as these are funds we could tap into within a few years.

 

[audreyh1]

I think for someone planning to ER, having a nest egg of 30-35x of essential expenditures might be prudent. Granted, that doesn't take SS or pensions into account.

One of our long time posters, cut-throat, thought that essential expenses minus pensions/SS should only be half of expected income from the portfolio for an ER. This implies a 50x essential expenses (minus pension/SS) for the 4% rule.

In other words, an ER should have the flexibility to cut their (non pension/SS) spending in half if they really, really had to. Otherwise they might have to face returning to work if they hit a bad stretch right after retiring.

I don't know if we have that much slack, as we have no pensions and are still many years from drawing SS. But we do have a lot of discretionary spending, plus extra funds accumulated to help weather years when our withdrawals fall short.

 

[nun]

One of our long time posters, cut-throat, thought that essential expenses minus pensions/SS should only be half of expected income from the portfolio for an ER. This implies a 50x essential expenses (minus pension/SS) for the 4% rule.

In other words, an ER should have the flexibility to cut their (non pension/SS) spending in half if they really, really had to. Otherwise they might have to face returning to work if they hit a bad stretch right after retiring.

I don't know if we have that much slack, as we have no pensions and are still many years from drawing SS. But we do have a lot of discretionary spending, plus extra funds accumulated to help weather years when our withdrawals fall short.

The size of the non-ss/pensions spending requirement should factor in.

 

[2017ish]

...

I think for someone planning to ER, having a nest egg of 30-35x of essential expenditures might be prudent. Granted, that doesn't take SS or pensions into account.

Much like everything else, "it depends." We are planning for 4% fixed percentage withdrawals. 1% would cover our "essential" expenses, even more so by the longitudinal standards. But, our purpose/plan for retiring early will be 1) to see each other more, at last; 2) to dive, travel, dive, and travel for about a decade, then buy an RV and along with the outdoors, hit the best restaurant(s) in every city we pass..... If we went with 30-35 times essential expenditures, life would not be as much fun. (although we'd be retired already!)

 

[audreyh1]

The size of the non-ss/pensions spending requirement should factor in.

Isn't that what I was talking about?

 

[audreyh1]

Much like everything else, "it depends." We are planning for 4% fixed percentage withdrawals. 1% would cover our "essential" expenses, even more so by the longitudinal standards. But, our purpose/plan for retiring early will be 1) to see each other more, at last; 2) to dive, travel, dive, and travel for about a decade, then buy an RV and along with the outdoors, hit the best restaurant(s) in every city we pass..... If we went with 30-35 times essential expenditures, life would not be as much fun. (although we'd be retired already!)

I think it's pretty clear that "essential" covers the bare bones basic fixed costs of living - no travel, extra vehicles, eating out, etc. Just basics - housing, essential utilities, taxes, minimal food budget, etc.

 

[hnzw_rui]

One of our long time posters, cut-throat, thought that essential expenses minus pensions/SS should only be half of expected income from the portfolio for an ER. This implies a 50x essential expenses (minus pension/SS) for the 4% rule.

In other words, an ER should have the flexibility to cut their (non pension/SS) spending in half if they really, really had to. Otherwise they might have to face returning to work if they hit a bad stretch right after retiring.

I agree. Lol, cut-throat's even more conservative than I am. Then again, after factoring in SS and pension, maybe the numbers even out. Besides, returning to work might not be an option for some (e.g. bad health, caring for a sick parent, etc) so I personally wouldn't consider that as one of my contingency plans.

Much like everything else, "it depends." We are planning for 4% fixed percentage withdrawals. 1% would cover our "essential" expenses, even more so by the longitudinal standards. But, our purpose/plan for retiring early will be 1) to see each other more, at last; 2) to dive, travel, dive, and travel for about a decade, then buy an RV and along with the outdoors, hit the best restaurant(s) in every city we pass..... If we went with 30-35 times essential expenditures, life would not be as much fun. (although we'd be retired already!)

The 30-35x I'm thinking is the minimum you'd have to accumulate. Obviously, you'd need a bigger nest egg if you have big plans.

 

[Lsbcal]

Also

I think it's pretty clear that "essential" covers the bare bones basic fixed costs of living - no travel, extra vehicles, eating out, etc. Just basics - housing, essential utilities, taxes, minimal food budget, etc.

I track our fun + discretionary items carefully. But not weekly eating out or fairly minor $100 purchases. So a new refrigerator would be in the discretionary category but not a hedge trimmer. I suppose if we were in a catastrophic economic situation I'd change that definiton but not for a bad sequence like the one that started in 1968 (to about 1982).

 

[Big_Hitter]

thought of this thread when I was reading this article that mentioned Pfau is now recommending a 2% SWR? Warning: contains a recommendation to buy SPIAs


http://finance.yahoo.com/news/2-ways-boost-income-retirement-110041158.html

 

[DEC-1982]

thought of this thread when I was reading this article that mentioned Pfau is now recommending a 2% SWR? Warning: contains a recommendation to buy SPIAs


http://finance.yahoo.com/news/2-ways-boost-income-retirement-110041158.html

I just saw that from the referenced article

"What is that SWR these days? Well, it’s probably less than the historical 4%. In fact, Wade Pfau recently argued that it’s more like 2% . "

I guess the promotion and selling of annuities is so important that they have to make all alternatives look terrible. It shows the flaw in research papers in any field, not just Wade's papers - who is paying the researcher to research the topic and write about it? Doctors push drugs when the pharma company pays the doctor; tobacco companies pay researchers to write good things about them; the list can go on.

 

[nun]

I just saw that from the referenced article

"What is that SWR these days? Well, it’s probably less than the historical 4%. In fact, Wade Pfau recently argued that it’s more like 2% . "

I guess the promotion and selling of annuities is so important that they have to make all alternatives look terrible. It shows the flaw in research papers in any field, not just Wade's papers - who is paying the researcher to research the topic and write about it? Doctors push drugs when the pharma company pays the doctor; tobacco companies pay researchers to write good things about them; the list can go on.

When research commissioned by a company produces a result favorable to that company questions must be asked. So has anyone shown Pfau's methods or assumptions to be flawed? Is he being honest in his research? or are you really accusing him of publishing incorrect results just because of his funding source.

People immediately shrink from annuities, but is there any technical reason to dismiss his results, or is it just an aversion to annuities and an assumption that he is being dishonest for a pay check?

 

[W2R]

I just saw that from the referenced article

"What is that SWR these days? Well, it’s probably less than the historical 4%. In fact, Wade Pfau recently argued that it’s more like 2% . "

I guess the promotion and selling of annuities is so important that they have to make all alternatives look terrible. It shows the flaw in research papers in any field, not just Wade's papers - who is paying the researcher to research the topic and write about it? Doctors push drugs when the pharma company pays the doctor; tobacco companies pay researchers to write good things about them; the list can go on.

+1 Personally I would advocate caution and abundant application of critical thinking skills before swallowing what Pfau (or anyone else) has to say about investing.

There's a lot of money in retirement nesteggs, and everyone and his brother wants to get his/her hands on yours. Spammers included, for example.

 

[DEC-1982]

When research commissioned by a company produces a result favorable to that company questions must be asked. So has anyone shown Pfau's methods or assumptions to be flawed? Is he being honest in his research? or are you really accusing him of publishing incorrect results just because of his funding source.

People immediately shrink from annuities, but is there any technical reason to dismiss his results, or is it just an aversion to annuities and an assumption that he is being dishonest for a pay check?

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.

 

[REWahoo]

In all fairness to Pfau, I need to find the article where Pfau says SWR needs to be around 2%.

Possibly the Pfau article from May 2012 discussed in this thread?

http://www.early-retirement.org/forums/f28/wade-pfau-looks-at-4-wr-finds-it-unsafe-61573.html

 

[nun]

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.

 

[Corporateburnout]

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.

 

[nun]

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.

 

[DEC-1982]

Possibly the Pfau article from May 2012 discussed in this thread?

http://www.early-retirement.org/forums/f28/wade-pfau-looks-at-4-wr-finds-it-unsafe-61573.html

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.

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.

 

[nun]

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.

 

[nun]

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.

 

[samclem]

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.

 

[nun]

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.

 

[hnzw_rui]

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.

 

[samclem]

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.