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SWR paper
Old 07-24-2010, 01:30 PM   #1
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SWR paper

If you missed this good discussion over at the bogleheads board.

There is a new paper out on SWR using data that includes the last decade. I haven't read the whole paper yet, but like what I've read so far. The discussion on the bogleheads board, as usual, is also very educational.

Bogleheads :: View topic - New Paper on Not So Safe Withdrawals
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Old 07-24-2010, 03:56 PM   #2
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Well that's good and bad news for me. The good news is I only have 25 yrs to be concerned with and the bad news is that I only have 25 yrs to be concerned with.
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Old 07-24-2010, 08:54 PM   #3
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Thanks for the link.

The paper seems to confirm what many of us had already suspected, that inflation is at least as much of a problem, if not more so, than stock market volatility.

Given this known issue, it would be nice to see some attempt to incorporate an estimate of the impact a TIPS allocation would have on survivability. I imagine it would be meaningful.
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Old 07-25-2010, 06:39 AM   #4
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The 100% Success WR from this study are on pg 27.

Looks like:

  • 75/25 over 30 Yr is 3.7%
  • 75/25 over 35 Yr is 3.6%

IMO - What this study shows is the warning that has been stated many times... rules of thumb are not to be followed blindly. It seems to me that the data is not much different from previous studies of this sort. Depending on the time period used in the study... the SWR varies a little. The real outcome for many of us will almost certainly be different from this study. If one is going to use stock to fund retirement, this points out the possible need to make prudent and reasonable adjustments along the way.
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Old 07-25-2010, 11:10 AM   #5
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If one is going to use stock to fund retirement, this points out the possible need to make prudent and reasonable adjustments along the way.
Is that any different from someone who uses bonds to fund retirement? Won't they need to make adjustments if inflation eats up the value of their portfolio?

What I saw in post #6 in that thread, the chart from the Trinity study, was that a stock allocation of 50% and higher was more successful than a stock allocation of 25% and lower. At any Withdraw rate. That seems to roughly match the runs I've done with FIRECALC (easy to see with the 'Investigate' tab).

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Old 07-25-2010, 12:01 PM   #6
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Is that any different from someone who uses bonds to fund retirement? Won't they need to make adjustments if inflation eats up the value of their portfolio?

What I saw in post #6 in that thread, the chart from the Trinity study, was that a stock allocation of 50% and higher was more successful than a stock allocation of 25% and lower. At any Withdraw rate. That seems to roughly match the runs I've done with FIRECALC (easy to see with the 'Investigate' tab).

-ERD50
Of course. There could be a number a reason to make adjustments.
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Old 07-25-2010, 12:07 PM   #7
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They did point out that (although too new to include in the study) TIPS and CPI adjusted annuities looked promising:

New Investment Alternatives for Retirees
Two investment options available today, TIPS and CPI-adjusted income annuities, are too new to include in an historical test because they have insufficient historical data. But their existence is relevant to the study’s conclusion that a portfolio with returns that closely track inflation is a key to a successful withdrawal plan. While others have commented on the usefulness of TIPS in this regard (Bodie, 2003), we observe the potential usefulness of CPI-adjusted income annuities. At certain price levels, these insurance contracts can be combined with portfolios of stocks and bonds to produce more income than the historical “no failure” withdrawal rates, while also adding an insurance company guarantee.


Looks like you have a couple of choices here. Either "go it alone" and reduce your withdrawal rate (according to their study), which might possibly cut back on your quality of life in retirement (and possibly run out of funds), or consider TIPS and CPI adjusted annuities. They state you could obtain a "higher" retirement income stream with those annuities in your portfolios. They also appear to like the annuities' insurance company guarantee. I guess you could possibly buy them from either person. It looks like (according to their affiliations) they both sell them.
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Old 07-25-2010, 05:13 PM   #8
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They did point out that (although too new to include in the study) TIPS and CPI adjusted annuities looked promising:
I saw that and kind of thought it was a cop-out, or at least an avenue ripe for further analysis. Sure, you don't have actual historical information, but that doesn't mean calculations developed with some simplifying assumptions wouldn't be tremendously useful. It seems simple enough to assume a certain portion of the portfolio is invested in a TIPS ladder and those bonds are held to maturity. The only other assumption you need are current real-yields and those can be extrapolated from market data.
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Old 07-25-2010, 06:58 PM   #9
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The study by Christopher O'Flinn, and Felix Schirripa has links that show both of them co-founded/work(ed) for ELM Income Grp. Felix shows Financial Designs LLC on the article, but his (out of date) Linkedin page has him as Executive Vice President of ELM. His new company supports ELM Income Group. ELM Income Grp is an independent insurance agency and not currently showing registered as either brokers or investment advisors.

Don't know, but thought there might be possible "annuity" bias.

ELM Income Group
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File Type: pdf ELM Income Group website.pdf (58.6 KB, 2 views)
File Type: pdf Chris and Felix profiles.pdf (91.1 KB, 1 views)
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Old 07-26-2010, 12:21 AM   #10
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Don't know, but thought there might be possible "annuity" bias.
Wouldn't it be more to the point to decide whether this sounds helpful to you or not, rather than try to do a background analysis on the authors? It seems blindlingly obvious that if a fully COLA'd annutity or a skillfully constructed TIPS ladder could support you, and you are not a speculator at heart (this knocks me out) then the annuities or TIPS ladder is much safer than the usual asset allocation liquidating portfolio.

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Old 07-26-2010, 07:46 AM   #11
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It seems blindlingly obvious that if a fully COLA'd annutity or a skillfully constructed TIPS ladder could support you, and you are not a speculator at heart (this knocks me out) then the annuities or TIPS ladder is much safer than the usual asset allocation liquidating portfolio.
Agree.

If real yields ever get north of 3% again across much of the curve, I could very easily move to a 100% bond allocation, or nearly so.
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Old 07-26-2010, 07:55 AM   #12
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Agree.

If real yields ever get north of 3% again across much of the curve, I could very easily move to a 100% bond allocation, or nearly so.
I'm curious about this - I agree that 3% real on bonds would be attractive, but wouldn't you be risking that the future real returns could be much less (inflation increases from that point)? Not that stocks aren't w/o that same risk, but would you also risk 'buying high' into those bonds?

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Old 07-26-2010, 08:19 AM   #13
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I'm curious about this - I agree that 3% real on bonds would be attractive, but wouldn't you be risking that the future real returns could be much less (inflation increases from that point)? Not that stocks aren't w/o that same risk, but would you also risk 'buying high' into those bonds?

-ERD50
I'm not sure I understand. 3% is the real yield. The nominal return would increase if inflation increases, so I'd be indifferent to it (some tax leakage aside).

Also, relative to where yields are today (sub 2%) a 3% yield would mean bond prices are lower, not higher. And besides, with a ladder I wouldn't much care about buying high because I'd hold to maturity. Sure I give up all that great upside that comes with riding the market, but the chances my plan would bust are about as low as is achievable.

edit: I think I understand now. In the post you replied to I said I'd switch to a 100% bond allocation. Although it was implied, I didn't specifically say that I would move to a 100% TIPS ladder. But that is what I meant.
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Old 07-26-2010, 08:30 AM   #14
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Finally read the paper in full. The analysis of nominal and real IRR for success is interesting. I also liked charts 18-25 that show how much of a portfolio needs to be annuitized to get to 100% historical success rates for different payout percentages.

I think I've had my fill of these SWR papers. Like many have said or implied, a real plan has to take a more holistic view that includes financial & non-financial aspects like the ability to decouple happiness from material goods.
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Old 07-26-2010, 09:40 AM   #15
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edit: I think I understand now. In the post you replied to I said I'd switch to a 100% bond allocation. Although it was implied, I didn't specifically say that I would move to a 100% TIPS ladder. But that is what I meant.
Yes, that was it (TIPS vs 'regular' bonds) - thanks for the clarification. Gotcha now.

At 3% real I also would be take a serious look at making TIPS a big chunk of my portfolio. I probably just could not force myself to do 100% anything, though this would seem to be a reasonable exception to that guideline.

-ERD50
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Old 07-26-2010, 10:04 AM   #16
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I think I've had my fill of these SWR papers. Like many have said or implied, a real plan has to take a more holistic view that includes financial & non-financial aspects like the ability to decouple happiness from material goods.
And how long someone is willing to work for those goods...
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Old 07-26-2010, 10:11 AM   #17
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I plan on a SWR being any %age that doesn't eat into my principal
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Old 07-26-2010, 12:49 PM   #18
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Wouldn't it be more to the point to decide whether this sounds helpful to you or not, rather than try to do a background analysis on the authors? It seems blindlingly obvious that if a fully COLA'd annutity or a skillfully constructed TIPS ladder could support you, and you are not a speculator at heart (this knocks me out) then the annuities or TIPS ladder is much safer than the usual asset allocation liquidating portfolio.

Ha

No, I believe it's more to the point to have full disclosure. As for annuities, not a big fan for a lot of reasons. Apologize if I struck a nerve with you (if you have a few annuities). Thought you'd like to read the following article.
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Old 07-26-2010, 01:47 PM   #19
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No, I believe it's more to the point to have full disclosure.
Disclosure is good, but I think it is important essential to assume there is bias in everything we read, regardless of the source or any disclosure. But once you do that, disclosure isn't so important anymore since you are evaluating the info on content anyway.

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I plan on a SWR being any %age that doesn't eat into my principal
I hope you have good pensions. There are years that both stocks and bonds were negative. You could get very hungry. Or, you need enough cash to provide risk-free income, but at the current rates, that would be so much cash that pulling some from principal wouldn't be a big deal.

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Old 07-26-2010, 05:33 PM   #20
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I hope you have good pensions. There are years that both stocks and bonds were negative. You could get very hungry. Or, you need enough cash to provide risk-free income, but at the current rates, that would be so much cash that pulling some from principal wouldn't be a big deal.

-ERD50
I don't recall any recent years of negative interest & dividends from my portfolio.
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