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07-03-2013, 04:55 PM
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#1
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Full time employment: Posting here.
Join Date: Oct 2009
Posts: 640
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SWR race to the bottom
Here are the latest and most depressing findings from Wade Pfau and friends, just out:
Asset Valuations and Safe Portfolio Withdrawal Rates
In a nutshell, they propose that from here on it's going to be different (and worse than you ever imagined). Accordingly, they write:
Quote:
The issue is that bond yields today are well below and stock market valuations are well above their historical average. Importantly, there are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously.
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The fun really starts on page 11 of the linked paper (most of which is over my head), with a table showing the probability of success for a 4% initial withdrawal rate over 30 years for different equity allocations, initial bond yields, and initial cyclically adjusted price-earnings ratio (CAPE) values. And it gets even more interesting on page 13, with a table estimating the safe initial withdrawal rates for various equity allocations and retirement periods.
Brace yourself, because the SWR numbers shown are very low (e.g., 1.4% SWR for 30 years, 99% probability of success with 60% equity allocation). Ouch.
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07-03-2013, 05:02 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
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This will give those with OMY syndrome comfort.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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07-03-2013, 06:22 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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So the evil Dr. Pfau is at it again, eh?
If we really believed this, we would all be piling into annuities or perhaps 30 year TIPS. Anyone ready to do so? Bueller?
Didn't think so (aside from obgyn who would do so even if Dr. Pfau predicted a 10% SWR from an all equity portfolio). We are clearly in unusual times, but the US population has never been so old, so wealthy, or so open to international investment.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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07-03-2013, 07:02 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Mar 2013
Location: Western US
Posts: 1,205
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Well, 15 pages is a lot to wade phrou, but I don't mind a little drama. Thanks for the link, I'll give it a look.
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07-03-2013, 07:04 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Posts: 11,401
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We are all doomed!
The most remarkable thing about the video was Wade Pfau's boyish appearance and squeaky voice. I'm sure he is highly intelligent......
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07-03-2013, 07:11 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Aug 2004
Location: St. Louis
Posts: 2,179
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Quote:
Originally Posted by wishin&hopin
Brace yourself, because the SWR numbers shown are very low (e.g., 1.4% SWR for 30 years, 99% probability of success with 60% equity allocation). Ouch.
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Hmm....current dividend yield on the S&P 500 ETF SPY (according to Yahoo!) is 2.03%.
Using his assumptions, I wonder if he would suggest an 80%-100% equity portion and living off of just the dividends to increase your projected SWR?
__________________
Dryer sheets Schmyer sheets
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07-03-2013, 07:21 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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Quote:
Originally Posted by MooreBonds
Hmm....current dividend yield on the S&P 500 ETF SPY (according to Yahoo!) is 2.03%.
Using his assumptions, I wonder if he would suggest an 80%-100% equity portion and living off of just the dividends to increase your projected SWR?
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Offer him some grant money and he will look into it for you.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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07-03-2013, 08:59 PM
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#8
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Moderator Emeritus
Join Date: May 2007
Posts: 12,894
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I didn't read the whole paper, but scanning through it, my thoughts are:
1) 1.4% SWR for 30 years would require some seriously negative average real returns over that time span.
2) In Table 3, lower equity allocations yield higher withdrawal rates than higher equity allocations. For example, for a 30 year retirement and 95% success, a 20% equity allocation allows for a 2.8% WR while a 80% equity allocation allows for only a 2% WR. Seems counter-intuitive.
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07-03-2013, 09:12 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 1,183
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I didn't browse the paper yet, but I just bought a nice block of 30 Years TIPs at the last auction a couple of weeks ago and they went for 1.42% real. Theoretically, that gives you a 1.42% SWR for 30 years without touching inflation-adjusted principal.
The theoretical 30 year SWR for this bond, which would be quite difficult to do in practice for logistical reasons like reinvestment risk etc, would be 4.06%.
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07-03-2013, 09:20 PM
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#10
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Recycles dryer sheets
Join Date: Dec 2006
Posts: 81
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It seems to me that there's really a diminishing return to all this model input refinement that Wade and others are going through.
It's just my opinion, but I believe that the "success percentage" quantification makes it too easy to draw the wrong conclusions from these kinds of analyses. This problem is closely coupled to the oversimplified spending models that most simulations provide.
As an alternative (or complement, perhaps) to speculating further about modeling the earning side, I think a more meaningful step forward would be to build a new tool that
(a) allows for parameterization of spending in a variety of more realistic ways,
(b) produces a broader set of outcome data, in both numeric and visual form, that are more tractable and intuitive, and
(c) automatically simulates a nice variety of A's and provides interesting ways to explore the differences in the results.
Maybe when I retire I'll get to work on this.
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07-03-2013, 09:41 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Feb 2007
Posts: 2,525
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Let's face it. The end conclusion from all this tweaking will be that the only safe SWR is 0%. And then there is Rewahoo's asteroid.
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07-04-2013, 01:01 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
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Quote:
Originally Posted by wishin&hopin
Here are the latest and most depressing findings from Wade Pfau and friends, just out:
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I only skimmed through this paper but my first impression is that it is telling us a whole lot about what the author's think is a good "forecasting" model and maybe not so much about SWR rates.
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07-04-2013, 01:36 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2013
Posts: 9,358
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The thing is all these SWR forecasts from various "experts" change year to year based on the state of the current economy, when they are supposed to be predicting 30 years in advance.
If they had any degree of accuracy, a 30 year forecast for a SWR rate wouldn't change year to year based on one additional year's worth of economic data. How many financial experts predicted current interest rates of today 30 years ago accurately? I'm guessing close to zero or at most no more than would occur from random chance guessing.
As other have said anyone could just buy 30 year TIPS this week and lock in ~1.20% real, which would provide a 1.2% SWR without even dipping into any principal.
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07-04-2013, 03:40 AM
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#14
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Full time employment: Posting here.
Join Date: Jan 2006
Posts: 956
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Thanks for posting. I will take a better look. Sure glad I did not read this before I turned in my notice yesterday, and waivered on the decision. Whatever % I withdraw, I am looking forward to it.
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07-04-2013, 05:02 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2006
Posts: 7,733
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Well if you decrease the expected returns of the US stock market by 2% to make it more in line with rest of the world and then further use CAPE to make the results even more dire you can end up with really low withdrawal rates.
If you have a 50/50 portfolio and Firecalc uses historical equity returns of X% and Dr. Pfau uses returns of X-2% logically you'll end up with a withdrawal rate roughly 1% lower than FIRECalc. I posted comment on his blog explaining my objection to his arbitrary decreasing of US equities returns.
But I think much of the results defy common sense. If you simply buy a 30 year ladder of TIPs bonds you'll get a real yield of ~.4% This means you have 100% SWR rate of 3.3% (spending principal)+.4%= 3.7%. The bad news is you have a 100% chance of being broke in year 31. But if you spend less than than 3.7% say 3.0% you can stretch your retirement.
When I look at my own portfolio its current yield was 2.7% at the beginning of the year, which is as low it has ever been. This is also the same as 90% SWR rate. However, my portfolio is designed to be an evergreen portfolio meaning I'll die with my principal intact. However for the typical retiree it is perfectly ok to spend a portion of their principal. Meaning for an ~80% equity portfolio 2.7% is darn near the floor of a SWR not the ceiling.
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07-04-2013, 05:05 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2011
Posts: 8,363
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So, for years and years this guy was talking about 3.5-4% SWR. "Don't worry, be happy...years-of-analysis, 100 years of historical data, yada yada yada".
Now, "ooops!"?
__________________
Living well is the best revenge!
Retired @ 52 in 2005
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07-04-2013, 07:27 AM
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#17
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Thinks s/he gets paid by the post
Join Date: May 2011
Location: South Eastern USA
Posts: 1,068
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So, they performed Monte Carlo simulations using current bond yields and projected equity yields derived from CAPE correlation. I am not surprised at the results.
Their ability to predict the future is not enhanced by this method.
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All that glitters is not gold. -G. Chaucer, W. Shakespeare
All that is gold does not glitter. -J.R.R. Tolkien
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07-04-2013, 07:29 AM
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#18
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,587
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Quote:
Originally Posted by Brett_Cameron
So, they performed Monte Carlo simulations using current bond yields and projected equity yields derived from CAPE correlation. I am not surprised at the results.
Their ability to predict the future is not enhanced by this method.
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+1
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07-04-2013, 08:00 AM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,004
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Quote:
Originally Posted by Brett_Cameron
Their ability to predict the future is not enhanced by this method.
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But their ability to gain media attention and sell books certainly is. You can be the judge on which is the primary motivating factor.
__________________
Numbers is hard
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07-04-2013, 08:06 AM
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#20
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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I tend to be very cautious by nature. But a 1.4% SWR does sound very low indeed. If these predictions come true, I guess some here may need to reconsider the use of SPIAs :-)
Quote:
Originally Posted by wishin&hopin
Brace yourself, because the SWR numbers shown are very low (e.g., 1.4% SWR for 30 years, 99% probability of success with 60% equity allocation). Ouch.
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__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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