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Pfau on Bengen's SAFEMAX
Old 02-20-2012, 12:10 AM   #1
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Pfau on Bengen's SAFEMAX

Interesting overview of some of the concepts in the paper that gave us the "4% rule."

Pensions, Retirement Planning, and Economics Blog: William Bengen's SAFEMAX
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Old 02-20-2012, 05:25 AM   #2
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Dang - This guy just seems to avoid the fluff and sticks to the facts in the few posts that I've read. I'm gonna need to spend more time reading his stuff.


Interesting that if I read this correctly, you can move your AA from 40% stocks to 75% with little change to the safe withdrawl rate. Of course this post is to explain how the 4% came about, not a direct comment on the validity, but if I can do 70% stocks, and get the same historically safe 4% they why not move from 40% to 70%?
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Old 02-20-2012, 09:06 AM   #3
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Thanks for the link, another great article from Dr. Pfau. I love the graphs, they speak to my engineer brain better than text alone. I have been reading articles of his on fpanet and elsewhere, but was not aware of his blog until recently (thanks Nords). I have begun to read that too...
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Old 02-20-2012, 09:15 AM   #4
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Something else similar which also references Dr. Phau's research. Keep reading through the comments to see what "he who cannot be named" has to say about it (still).

are-safe-withdrawal-rates-really-safe
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Old 02-20-2012, 09:35 AM   #5
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Quote:
Originally Posted by RetireBy90 View Post
...if I can do 70% stocks, and get the same historically safe 4% they why not move from 40% to 70%?
Because you may not be able to afford the laundry bills caused by the much higher volatility of a 70% stock portfolio. Of course some people may have a high tolerance for soiled underwear...
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Old 02-20-2012, 10:08 AM   #6
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Quote:
Originally Posted by ronin View Post
Something else similar which also references Dr. Phau's research. Keep reading through the comments to see what "he who cannot be named" has to say about it (still).

are-safe-withdrawal-rates-really-safe
If you read all this, you have to conclude you can't figure it out yourself and you'll have to buy the guys ebook - only $37...
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Old 02-20-2012, 10:18 AM   #7
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... only $37...
I think I see how the author is planning to make sure he doesn't run out of money in retirement...

I also think anyone who develops a retirement strategy (or writes a book!) based on anything 'he who shall not be named' has written should be viewed with all the pity suspicion you can muster.
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Old 02-20-2012, 10:26 AM   #8
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I get these great ideas from an author, but I don't often see where they get the equity portion of the portfolio.

DW/me are in our mid-60's, with no substantial income beyond our combined retirement investments.

In our case, we have more than a few years worth of gross income in cash accounts. While most folks will discount cash in an AA, we are folks that do include them within the same bucket as bonds (at a 0% return).

Reading the article, you would think that we need to increase our equity target/actual holding beyond our current 50%. However if you want to only look at the actual equity/bond portion of our portfolio (e.g. not considering cash), we have what would be suggested by the author - some 70% (or more) in equity.

Articles like these are interesting, but they don't do well in basic assumption of the actual makeup of a retirement portfolio.

Just my thoughts...
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Old 02-20-2012, 10:28 AM   #9
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Quote:
Originally Posted by RetireBy90 View Post
Interesting that if I read this correctly, you can move your AA from 40% stocks to 75% with little change to the safe withdrawl rate. Of course this post is to explain how the 4% came about, not a direct comment on the validity, but if I can do 70% stocks, and get the same historically safe 4% they why not move from 40% to 70%?
That's why I ended up at 100% equities. I can handle the volatility, and it gives me a shot at growing the portfolio much faster, without lowering SWR a whole lot.
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Old 02-20-2012, 10:30 AM   #10
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That's why I ended up at 100% equities. I can handle the volatility, and it gives me a shot at growing the portfolio much faster, without lowering SWR a whole lot.
It's bizzare, but Fig 2.2 & 2.3 in the Pfau blog seem to suggest that's almost as "safe" - looks like about 3.75% for 100% equity vs 4% for 35-80% equity. Plus a far higher residual wealth end of plan. All comes back to 'past performance is no guarantee of future performance...'
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Old 02-20-2012, 11:21 AM   #11
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All comes back to 'past performance is no guarantee of future performance...'
After what we experienced in 2008-2009, and in 2002-2003, I really question the assumption that we can base our retirements on past performance of the stock market in past historical eras. Economic realities seem to have shifted, and at any rate our historical record is way too short and volatile for this type of assumption IMO.

On the other hand, we have to use something as a guideline. Still, reading this article felt like reading a fairy tale to me. Even 4% seems awfully high to me, much less 5% or 8%.

Quote:
Originally Posted by ronin View Post
Something else similar which also references Dr. Phau's research. Keep reading through the comments to see what "he who cannot be named" has to say about it (still).

are-safe-withdrawal-rates-really-safe
From the article that Ronin cites,
Quote:
For example, our theoretical retiree in 1921 enjoyed an astounding 10.42% safe withdrawal rate largely because of historically low market valuations when he retired. Our 1966 retiree faced a difficult future with high valuations and rising inflation causing a 3.53% safe withdrawal rate. This is a difference of 3 times the spending capacity from the same nest egg simply because of the date you retired!

And if that isn’t shocking enough, the 2010 retiree is looking at a 1.8% safe withdrawal rate according to Pfau’s research. No, that is not a misprint – 1.8% – far below the conventional wisdom of 4% based on historical research. It is caused by persistently overvalued markets and razor thin interest rates that simply don’t exist in the historical data.

Maybe I am overly cautious, but I think 1.8% sounds pretty rational.
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Old 02-20-2012, 11:34 AM   #12
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Quote:
Originally Posted by Midpack View Post
Thanks for the link, another great article from Dr. Pfau. I love the graphs, they speak to my engineer brain better than text alone. I have been reading articles of his on fpanet and elsewhere, but was not aware of his blog until recently (thanks Nords). I have begun to read that too...
I've been doing a lot of financial reading lately, but he made himself pretty easy to find. Pfau seems to be one of a new breed of economists who are reaching out to their audiences through blogging & other social media. I like the idea of peer review through crowdsourcing-- it's why I read this board.

Imagine what Bernstein & Lynch would have been like with Twitter accounts.

Speaking of great articles, take a look at these charts in Pfau's latest blog post comparing retirement duration and failure rates:
Pensions, Retirement Planning, and Economics Blog: Retirement Planning Guidelines: An Alternative to the Trinity Study

I like the way it allows people to choose a retirement longevity, a failure rate, and a withdrawal percentage. Now all we have to do is add a SPIA to put a safety net on the minimum standard of living.

I think Monte Carlo has its own drawbacks, like not properly incorporating the persistence of a trend from one year to the next, but that's a programming problem and not a "we need more history" problem. I remember Raddr was tweaking his own MC simulator to force a degree of persistence from one year's returns data to the next, and it seemed to move the resulting SWR a few tenths of a percent in the right direction.

Quote:
Originally Posted by ronin View Post
Something else similar which also references Dr. Pfau's research. Keep reading through the comments to see what "he who cannot be named" has to say about it (still).
are-safe-withdrawal-rates-really-safe
Note that Pfau went the full 10 rounds with that guy and managed to disengage, dignity intact, without being subject to the usual stalkings or death threats. Winner by judge's unanimous decision.
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Old 02-20-2012, 11:44 AM   #13
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Originally Posted by rescueme View Post
I get these great ideas from an author, but I don't often see where they get the equity portion of the portfolio.

DW/me are in our mid-60's, with no substantial income beyond our combined retirement investments.

In our case, we have more than a few years worth of gross income in cash accounts. While most folks will discount cash in an AA, we are folks that do include them within the same bucket as bonds (at a 0% return).

Reading the article, you would think that we need to increase our equity target/actual holding beyond our current 50%. However if you want to only look at the actual equity/bond portion of our portfolio (e.g. not considering cash), we have what would be suggested by the author - some 70% (or more) in equity.

Articles like these are interesting, but they don't do well in basic assumption of the actual makeup of a retirement portfolio.

Just my thoughts...
Good points. I'd add that Pfau's blog is all about an SP500 & 5yr Treasury mix. In this day and age one could (1) have more small/mid caps, (2) tilt towards value a bit, (3) have some international exposure, (4) diversify the FI to cover rising rate periods, (5) hold high real rate Ibonds or TIPS (when they are available), ... etc.

Since the SP500 and Treasury data is the most available, most of the studies seem to use this. Even FIRECalc is a bit lacking in data, I think.

Here is some data from my home brew retirement calculator for a 65% equity portfolio, 35% 5yr Treasury with 4% spending over the period 1969 to present, and varying the equity part:

all equity = SP500
0.1% real return, 43% max drawdown over 2 year periods

80% Large value, 20% Small Value
1.5% real return, 37% max drawdown

64% Large value, 16% Small value, 20% International
1.3% real return, 37% max drawdown

Conclusion: just using SP500 for equity part of the portfolio seriously underestimates returns for the 1969 to present period.
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Old 02-20-2012, 02:03 PM   #14
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Thanks for all of these interesting posts, the only problem is I am now even further behind on my reading!
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Old 02-20-2012, 06:29 PM   #15
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This was an interesting article and another good one from Dr. Pfau. Figure 4 comparing the ratio of remaining-wealth/original-retirement-date-wealth for various stock allocations is enlightening to say the least. It affirms my belief that the legendary John Templeton was right when asked about investing for a regular income (bonds, preferred stocks, etc.) or growth (common stocks). As I recall he advised investing for growth and selling some growth as needed.
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Old 02-20-2012, 10:00 PM   #16
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A great thread. Renewed my interest in reading about SWR.
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