New Wade Pfau article of great interest

[Mulligan]

Here's an answer:

I love the high tech graphics Spanky. Gives me hope I am not the last Luddite roaming planet Earth.


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[gcgang]

The problem is not "What is the SWR today"....The problem is using an SWR as a withdrawal method. (Which no one ever has anyway, so I fail to see the interest in this topic) The SWR was a 'Rule of Thumb'. If you use a Withdrawal Method that is Variable based on Portfolio Balance, you really don't have to care.

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

If your portfolio dropped by half, wouldn't you be taking 10%, not 2.5%?

Only a robot would automatically adjust their subsequent withdrawals upward when their portfolio tanks. I think SWR is just something to do to see if it is reasonable to retire and live off investments. Once you do that, you still need to stay "reasonable", and make appropriate adjustments in your AA and spending as the future unfolds.


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[ERD50]

...

Only a robot would automatically adjust their subsequent withdrawals upward when their portfolio tanks. ...

TAKE .... ME .... TO .... YOUR .... LEADER

I think there were a number of us 'robots' who did not curtail spending during the last meltdown. You can't get those years back, you maybe can't get the activities back. Some opportunities only knock once.

For me, this is the advantage of starting with a conservative plan. You can (and I did) ride out some bad times. I remember looking at those charts back then, and recognizing I was looking at some historic drops in the market. But that's what I saved for, so I carried on and enjoyed life and slept well.

-ERD50

 

[Meadbh]

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

I do not understand this math.

 

[REWahoo]

I do not understand this math.

I suspect it's either the fuzzy or new variety, but I have enough trouble with regular math, so I'm not going to bother to try to figure it out...

 

[daylatedollarshort]

I do not understand the ultra low safe withdrawal rates predicted for age 62+ age retirees. Even a zero real return over 30 years would provide a 3.33% SWR and one can do better than zero real with individual TIPS held to maturity, no volatility and government backed.

 

[FUEGO]

Based on this article it appears to be nominal return.

I think Bogle is more likely to be right than wrong.

Current yield is excellent predictor of the 5-10 year yield of bonds.

When the next correction will be and how deep it will be is pretty much anybody guess, but I think Jack is far from predicting doom or gloom.

Yeah, I would buy 2.5-3% for 20 year yield on treasuries, maybe expect a little more for corporates.

As for stock yields, Bogle's method is as good as any I guess. Div yield + earnings growth gives about 7% per year. Worst case, throw in a speculative 20-33% contraction in PE ratios and that only knocks down the annualized yield to 5-6% over 20 years. As a 100% equities guy pulling 2.5% from my portfolio, a 5-6% yield in equities sounds pretty okay to me.

 

[Independent]

So we're back to 2.5% is roughly the new 4% for a conservative couple over 30 years.

These very low numbers get weird. Even at today's yields Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com
it seems that a conservative couple could construct a TIPS ladder that would pay 3.8%.

 

[mickeyd]

I don't believe that Bogle, Pfau, or anyone else can predict stock market returns for the next 20 years.

Anyone can predict anything. It's accurately predicting that is the difficult part of the process.

 

[MichaelB]

Anyone can predict anything. It's accurately predicting that is the difficult part of the process.

I predict that 10 years from now Mr. Pfau's research will be showing different numbers, but his recommended approach will still involve annuities.

 

[Independent]

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

I do not understand this math.

I think he meant to write:

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your original Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

 

[Chuckanut]

A variable withdrawal plan that allows gradually stepping down during bad years and gradually stepping up during good years would solve a lot of problems on how to handle normal ups and downs of the market. And problems caused by making assumptions/ predictions that end up being to far from reality.

Don't most of us do this anyway?

Then there is always plan B. Take SS earlier than planned. Sell the big house in the city and buy a small place in Obscureville, Arkansas. Ect......

 

[daylatedollarshort]

A variable withdrawal plan that allows gradually stepping down during bad years and gradually stepping up during good years would solve a lot of problems on how to handle normal ups and downs of the market. And problems caused by making assumptions/ predictions that end up being to far from reality.

Don't most of us do this anyway?

Then there is always plan B. Take SS earlier than planned. Sell the big house in the city and buy a small place in Obscureville, Arkansas. Ect......

No, we don't. We have constant spending projected, which is probably worst case, because we will likely downsize at some point. I have a spreadsheet with 0% real return for the next few years, and 1% real return after that. If rates do not rise I can change it to 0% real return until the "end of plan" date and it just impacts our estate, not annual spending.

We chip away at our fixed expenses each month, like the energy, grocery and water bills, so our spending has continued to decline over time without changing our basic lifestyle. I've been able to up my fun money category as groceries and utilities go down but I haven't changed the overall spending plan.

 

[DEC-1982]

A question about one Wade Pfau article

This is about the article by Wade Pfau

Is now a good time to retire? Retirement Researcher

I am trying to apply this to my situation and would like to get some feedback.

I have a 62% stock allocation (between moderate and aggressive couple).

I am comfortable with 85% success (between 90% success for the moderate couple and 80% success for the aggressive couple).

That puts me about half-way between the moderate and aggressive couple.

My fees are 0.10% not 0.50%.

Could I (with a reasonable degree of confidence) read the article to mean I can use 3.14% (between 2.78 and 3.50%) plus 0.4% (savings in investment fees) to arrive at a possible SWR of 3.54%?

In reality, of course, I would make adjustments to withdrawals if needed.

MOD NOTE: Merged this thread into existing thread on the same article

 

[Cut-Throat]

I do not understand this math.

$1 Million Portfolio.

1.) You decide to take 5% of Portfolio Balance.
2.) First year you take $50 Grand.
3.) Portfolio tanks in a Bad Market Drop. it's now down to around $500K
4.) Next year you also take 5% of Portfolio Balance or about $25 Grand.

$25 Grand is 2.5% of the Starting $1 Million Portfolio.

So, your withdrawal amount is always against your Portfolio Balance, not the Starting Portfolio. Forces you to Sell high and not sell low.

 

[gcgang]

$1 Million Portfolio.

1.) You decide to take 5% of Portfolio Balance.
2.) First year you take $50 Grand.
3.) Portfolio tanks in a Bad Market Drop. it's now down to around $500K
4.) Next year you also take 5% of Portfolio Balance or about $25 Grand.

$25 Grand is 2.5% of the Starting $1 Million Portfolio.

So, your withdrawal amount is always against your Portfolio Balance, not the Starting Portfolio. Forces you to Sell high and not sell low.

Oh just cut your standard of living in half. Easy peezy.


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[bmcgonig]

I do not understand the ultra low safe withdrawal rates predicted for age 62+ age retirees. Even a zero real return over 30 years would provide a 3.33% SWR and one can do better than zero real with individual TIPS held to maturity, no volatility and government backed.

Because you are accepting volatility in your investments you need to accept the existence of the bad years. Those are the years with bad sequence of returns etc. that bring it down to sub 3.33.

Remember all this SWR is to allow you to be the person who retires with a crappy sequence of returns and survives. You can do this with 3.33 as above, but you forfeit the possibility of the 10-20% up years.

Annuities can raise the SWR because like bonds, they curb volatility, so make it less likely to have a bad sequence of returns affect you.


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[Cut-Throat]

Oh just cut your standard of living in half. Easy peezy.

Well, If you believe Ole Wade 2.5% is the new SWR..... So you can either start with 2.5% and 'cut your standard of living in half' from the 'get-go' or take 5% of Portfolio Balance and see if you really need to down the road. Your Choice!

Maybe the worst case won't happen !

 

[REWahoo]

Well, If you believe Ole Wade 2.5% is the new SWR..... So you can either start with 2.5% and 'cut your standard of living in half' from the 'get-go' or take 5% of Portfolio Balance and see if you really need to down the road. Your Choice!

While waiting until 70 to take SS...

 

[OrcasIslandBound]

Kevink wrote:"True enough Texas Proud, but I appreciate Bogle and Pfau's pessimism-cum-realism and would rather be pleasantly surprised using their numbers as a basis for my expectations.

OrcasIslandBound (great name by the way - Orcas Island is one of my favorite places on earth!) you sound like a kindred spirit in terms of risk/return appetite. According to Paul Merriman's risk tables a 40:60 bondtock allocation has a worst one year return of .23%, so you'd be taking on a bit more than that with your "conservative" 55:45 (I'm in the same boat), unless, as you say, you do a bond "barbell" of half 30 year Treasuries and the rest short term, a la Harry Browne's Permanent Portfolio.

I'll... " Thank you Kevink,

I find that I don't really have time to do a huge amount of simulation regarding optimizing the portfolio return, so have to exercise judgment on how to best invest given the near peaking of the Schiller 10 year price to earnings ratio and the prolonged low interest rates. I was thinking 3% for bonds and 9-10% stocks, thus the weighted sum average would be about 6 %. The lousy climate in bonds would have me increase my stock holdings. But the exceptionally high PE ratios in stocks would have me increasing my bond holdings. What am I supposed to do with these choices?

We have a house in Orcas island that we bought nearly 3 years ago and haven't spent a single night in it yet as it has been rented this entire time. Well, the tenants are nearly finished building a house and we'll be "camping out" in our own house finally for the whole month of August. Can't wait!


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[Meadbh]

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?

How I interpreted this paragraph:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw $50,000, or 10.53% of remaining portfolio.
Portfolio now valued at $425,000.
Buy more new underwear.

What I believe CT was trying to say:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw 2.5% of original portfolio, or $25,000.
Remaining portfolio = $450,000.
Patch old underwear and move to a van down by the river.

 

[daylatedollarshort]

Because you are accepting volatility in your investments you need to accept the existence of the bad years. Those are the years with bad sequence of returns etc. that bring it down to sub 3.33.

Remember all this SWR is to allow you to be the person who retires with a crappy sequence of returns and survives. You can do this with 3.33 as above, but you forfeit the possibility of the 10-20% up years.

Annuities can raise the SWR because like bonds, they curb volatility, so make it less likely to have a bad sequence of returns affect you.

I am not sure who the "you" refers to in your post. If the you means me specifically, I'm looking at matching strategies with low volatility, not looking for any 10 - 20% up years or much sequence of return risk. If the financial pundits really believe going forward for 10+ years real returns will be super low, why not recommend (or at least mention) a known strategy (TIPS ladders, I-bonds, liability matching, etc.) with a higher SWR than their forecasts and no sequence of returns risk?

Matching strategy - Bogleheads

 

[Options]

I predict that 10 years from now Mr. Pfau's research will be showing different numbers, but his recommended approach will still involve annuities.

To his credit, Pfau presents a balanced discussion of the annuity/no annuity debate (although he does personally views SPIA and deferred annuitization as viable PF components).

See this: Your Clients' Toughest Retirement Decision

 

[OrcasIslandBound]

Annuities seem really disturbing to me. Today's rates for a 59 year old are barely above a long term bond index fund rate. Seems like a shame to pay a bunch of fees for so little return.

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[OrcasIslandBound]

And BTW you have to trust the insurance company that provides the annuity not to go bankrupt

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