4% rule for 2018 - Pfau updates the charts

[Dd852]

FYI Pfau has updated the charts supporting the 4% rule for 2018 here:

https://www.forbes.com/sites/wadepf...bengens-safemax-updated-to-2018/#68f3b9746be4

The summary - keep a solid chunk in stocks and the 4% rule still holds for a 30-year retirement with the potential for a good upside surprise for your heirs or for the managed-care facility owners.

It is always useful and reassuring to see that the basic research holds up. Unlike that on coffee, fats, wine, salt and whatever else that seems to zoom from being bad for you to being good for you!

In all things, moderation and flexibility!

 

[Rdub]

Thanks for sharing!

 

[ejman]

Reassuring to see Pfau's results holding at 4%. Yet the new normal frequently mentioned seems to be in the 2.5% -3.5% range and many retirees seem to strive for that range as a goal. I guess there will be many happy heirs.

 

[MichaelB]

Thanks for the link and article. I don't see Mr. Pfau actually embracing the 4% as safe. It appears to me he is just explaining Berger's work and how the methodology determined that 4% was a safe withdrawal rate.

He references a 1/15 webinar titled "How Much Can I Spend in Retirement?" We will probably see there if he agrees with the 4% or continues to advocate a lower rate.

 

[Huston55]

Thanks for the link and article. I don't see Mr. Pfau actually embracing the 4% as safe. It appears to me he is just explaining Berger's work and how the methodology determined that 4% was a safe withdrawal rate.

He references a 1/15 webinar titled "How Much Can I Spend in Retirement?" We will probably see there if he agrees with the 4% or continues to advocate a lower rate.

That’s my take as well.

Below is a link to another recent Pfau article on today’s SWR, with an excerpt (my bolding), which clearly states that 4% is not safe for today’s retirees.

https://retirementresearcher.com/sustainable-spending-rate-retirees-2016/

“To be conservative, a lower withdrawal rate is required to account for the additional random fluctuations from outside the model. This analysis further confirms the idea that the 4% withdrawal rate cannot be treated as safe for retirees in today’s market environment.”

 

[ejman]

That’s my take as well.

Below is a link to another recent Pfau article on today’s SWR, with an excerpt (my bolding), which clearly states that 4% is not safe for today’s retirees.

https://retirementresearcher.com/sustainable-spending-rate-retirees-2016/

“To be conservative, a lower withdrawal rate is required to account for the additional random fluctuations from outside the model. This analysis further confirms the idea that the 4% withdrawal rate cannot be treated as safe for retirees in today’s market environment.”

Yes, he does state in that article that the 4% WR is not safe for today's environment yet the equation he developed in that article predicts a 4.16% SWR for a 2016 retiree.

I guess we always get back to the general understanding that yes 4% was safe in the past but who knows what kind of crappy environment we may encounter in the future so might as well drop that WR as low as we possibly can just in case.

 

[Lsbcal]

I would expect that 1966 will be the worst year for SAFEMAX for many years to come. It would take many years of bad returns to see any change in this conclusion. So good years like 2017 will not change any conclusions in the Bengen study. But this was a nice review article.

I have not read the other Pfau papers. My thought is that we will at some point have a nasty bear market and all the forward estimates will shift. Then maybe the forward SAFEMAX will shift too and the sun will come out?

 

[ejman]

Ah!, with all the exuberance of recent times I had forgotten but now I remember Bernstein's wonderful retirement calculator from hell series to put things in perspective.

 

[Huston55]

Ah!, with all the exuberance of recent times I had forgotten but now I remember Bernstein's wonderful retirement calculator from hell series to put things in perspective.

Yep, if TS really does HTF, that’s my back-up back-up plan...move to Hell.

I figure the COL is low, especially real estate (compared to where I am now). But, utilities might be a little pricey.

 

[Lawrence of Suburbia]

Annuitize some. Solves a lot of problems.

 

[REWahoo]

Annuitize some. Solves a lot of problems.

Especially for your heirs. They won't have to figure out what to do with all that inheritance money.

 

[ejman]

Annuitize some. Solves a lot of problems.

Maybe so but my understanding is that insurance companies invest in pretty much the same vehicles that are available to us little investors and my question then becomes if there is really a systemic SHTF situation a la Bernstein series where are the insurance companies going to get the money to pay out? I know there are small State funds designed to cover some limits but I suspect those are designed for individual companies failing, not systemic events.

And if the above holds, then my investments ( assuming a nice diversified portfolio) will do as well or better than the annuity in the regular order of events (after all, I don't need to pay for that wonderful insurance building, and jets and all that) and if the SHTF I suspect the insurance company will say sayonara.

 

[brewer12345]

Isn't Pfau the one that hawks annuities? Of course he is going to say that doing without one is dangerous.

 

[Onward]

Especially for your heirs. They won't have to figure out what to do with all that inheritance money.

 

[CRLLS]

Annuitize some. Solves a lot of problems.

If my recent experience with trying to get an answer from a large insurance co is any indication, in a word, no. I have been trying to initiate a simple surrender process under the terms stated in a small MetLife policy for well over 2 months now. I'm not a happy camper. Blatantly wrong answers from their direct customer support line. I contacted one of their sales agents (Mass Mutual) for help. She contacted one of the MetLife spin offs. They gave her bad advice. She then called another spin off from MetLife and they said they would have an answer in 10 business days. That was on Dec 8th. Since I didn't get a reply, I called my agent earlier in the week to find out what the current status was. She said she'd look into it. I got no reply. So yesterday I called back, left a voicemail and, my agent didn't return my call. I may have to contact my State's Insurance dept for assistance.

No way would I give them a goodly amount of my hard earned cash.

 

[LOL!]

Perhaps a good rule-of-thumb is to retire when you reach your number despite two years in a row of bad stock market performance.

Conversely, do not retire just because you reach your number after two years in a row of great stock market performance.

 

[USGrant1962]

Perhaps a good rule-of-thumb is to retire when you reach your number despite two years in a row of bad stock market performance.

Conversely, do not retire just because you reach your number after two years in a row of great stock market performance.

Hmm, a rule of thumb for a rule of thumb? But why not use a 3-year look back, or 4 years, or one?

Your first example isn't really a stress test, rather it is setting up one of those excess wealth scenarios where you could have drawn 6% or 7%. Your heirs will love it.

The 4% SWR already includes cases like the second. The market ran up smartly for about 7 years leading to 1929 and for three years leading to 1966, yet 4% SAFEMAX worked for 30 years with reasonable AAs. We'll see how 2000 works out, but analyses I've seen recently say it will be OK.

Anyway, 4% SWR is just a rule of thumb for planning, and is derived from an inflexible model, so take it as input and do what makes you feel comfortable.

 

[pb4uski]

Maybe so but my understanding is that insurance companies invest in pretty much the same vehicles that are available to us little investors .....

I guess it depends on what you have in mind, but the vast majority of assets backing annuities are invested in bonds.... probably close to 100%.

 

[alaska55]

If my recent experience with trying to get an answer from a large insurance co is any indication, in a word, no. I have been trying to initiate a simple surrender process under the terms stated in a small MetLife policy for well over 2 months now. I'm not a happy camper. Blatantly wrong answers from their direct customer support line. I contacted one of their sales agents (Mass Mutual) for help. She contacted one of the MetLife spin offs. They gave her bad advice. She then called another spin off from MetLife and they said they would have an answer in 10 business days. That was on Dec 8th. Since I didn't get a reply, I called my agent earlier in the week to find out what the current status was. She said she'd look into it. I got no reply. So yesterday I called back, left a voicemail and, my agent didn't return my call. I may have to contact my State's Insurance dept for assistance.

No way would I give them a goodly amount of my hard earned cash.

If your talking surrender fees then your not talking about a SPIA. Pfau only recommends SPIA type annuities.

 

[alaska55]

That’s my take as well.

Below is a link to another recent Pfau article on today’s SWR, with an excerpt (my bolding), which clearly states that 4% is not safe for today’s retirees.

https://retirementresearcher.com/sustainable-spending-rate-retirees-2016/

“To be conservative, a lower withdrawal rate is required to account for the additional random fluctuations from outside the model. This analysis further confirms the idea that the 4% withdrawal rate cannot be treated as safe for retirees in today’s market environment.”

Well since we have had 11.96 (2016) and 21.83(2017)S&P returns, I wonder if he will change it to 2017 retirees. The first 5 years are the most critical years. I refer you to his last statement. Flexible is the key word. Of course watch out the sky might hit you.

Unfortunately, we do not know what the future will bring, and, ultimately, retirees should remain cautious and flexible.

 

[davebarnes]

I despise Forbes and their anti-adblocker software.

 

[DrBrisket]

Well since we have had 11.96 (2016) and 21.83(2017)S&P returns, I wonder if he will change it to 2017 retirees. The first 5 years are the most critical years. I refer you to his last statement. Flexible is the key word. Of course watch out the sky might hit you.

Unfortunately, we do not know what the future will bring, and, ultimately, retirees should remain cautious and flexible.

Dr. Pfau also states in the same article that SWR is net of advisory and mutual fund fees. Fair enough. However, given his role at an investment advisory firm, he clearly wants to be paid for his efforts...How much one might ask? 1.0% for “unavoidable fees” is quoted on page 9 in http://corporate.morningstar.com/us/documents/targetmaturity/LowBondYieldsWithdrawalRates.pdf. Another article Dr. Pfau co-authored assumes 1.6%+ management fees (1% advisory + 0.6%+ mutual fund fees). See Study from 'Professor of Retirement Income' Dr. Wade Pfau shows you can double your income by dumping your financial advisor..

Doesn’t take a CFA or PhD to use a 60/40 AA with Vanguard or Fidelity funds and keep almost all of those “unavoidable fees” for yourself.

 

[Huston55]

That’s my take as well.

Below is a link to another recent Pfau article on today’s SWR, with an excerpt (my bolding), which clearly states that 4% is not safe for today’s retirees.

https://retirementresearcher.com/sustainable-spending-rate-retirees-2016/

“To be conservative, a lower withdrawal rate is required to account for the additional random fluctuations from outside the model. This analysis further confirms the idea that the 4% withdrawal rate cannot be treated as safe for retirees in today’s market environment.”

Well since we have had 11.96 (2016) and 21.83(2017)S&P returns, I wonder if he will change it to 2017 retirees. The first 5 years are the most critical years. I refer you to his last statement. Flexible is the key word. Of course watch out the sky might hit you.

Unfortunately, we do not know what the future will bring, and, ultimately, retirees should remain cautious and flexible.

Hopefully, you realize you’ve made [-]my[/-] Pfau’s point.

 

[alaska55]

Hopefully, you realize you’ve made [-]my[/-] Pfau’s point.

No I made my point. The more things change the more they remain the same or this time its different. We don't know what's going to happen and neither does Pfu. So i say go with 4% WD until the SHTF, because guess what it might never happen. Then your going to say coulda/shoulda. I saved money so I could spend in retirement damm if I'm going take it to the grave with me.

 

[Lawrence of Suburbia]

I am a little surprised by some reactions to my "annuitize some" post...

I'm going to be able to retire this year because of being able to buy a SPIA with about 1/4 of my savings. Doing so will allow me to reduce my withdrawal rate of my portfolio from over 4% to more like 3%. There's no mutual fund that will pay me 6.2% annually, guaranteed, for the rest of my life.

I will take this opportunity to solicit ideas for how to achieve my aim, without buying an immediate annuity.