SWR paper

[walkinwood]

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

 

[Bikerdude]

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.

 

[Gone4Good]

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.

 

[chinaco]

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.

 

[ERD50]

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).

-ERD50

 

[chinaco]

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.

 

[fritz]

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.

 

[Gone4Good]

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.

 

[fritz]

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

 

[haha]

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.

Ha

 

[Gone4Good]

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.

 

[ERD50]

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?

-ERD50

 

[Gone4Good]

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.

 

[walkinwood]

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.

 

[ERD50]

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

 

[Nords]

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...

 

[nun]

I plan on a SWR being any %age that doesn't eat into my principal

 

[fritz]

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.

 

[ERD50]

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.

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.

-ERD50

 

[Bikerdude]

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.

 

[fritz]

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.




I found it questioning that they would include a discussion at the end of the study regarding annuities and TIPS (copied in my original post). They were excluded from the study, but looked upon favorably by the authors. Annuities were also given the nod for increasing retirement income stream in a portfolio - with a favorable insurance company guarantee. After their revisiting the 4% rule with a less than favorable outcome - found it suspect to give the nod to another product not included in the study.

I included the authors' insurance agency only backgrounds in my second post to give everyone reading it my reasoning for making the comment of possible bias.

I also posted an attached article on annuities in my third post with advice on annuities (and what to look out for when considering them). Kind of gives no-no's like: holding too many in your portfolio, buying them when you have less than $75k remaining, or annual retirement income under $20K. Thought this might be enlightening for some..

Hoped the info might be appreciated by those following this thread, and having read the article.

 

[haha]

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.

I have no annuities, it just struck me how odd it seemed to try to reason based on what you think of a paper's authors. I usually pay more attention to what I think of the ideas, unless of course the authors claim to have some research that is not easily checked by reference to public documants.

Actually, I pay very little attention to what anyone says, other than to note some asset or other than I had not previously considered.

"Believe half of what you see, and none of what you hear"

Ha

 

[ERD50]

I found it questioning that they would include a discussion at the end of the study regarding annuities and TIPS (copied in my original post).
...

I included the authors' insurance agency only backgrounds in my second post to give everyone reading it my reasoning for making the comment of possible bias.

Hoped the info might be appreciated by those following this thread, and having read the article.

OK, I think we are in agreement then - it's good to be skeptical, and I think you raise some good points. I guess I'm saying I wouldn't be skeptical only because the source has some interest in the matter (few bother to publish something they have no interest in), I'm just always skeptical, and need to see that the content passes the 'smell test', regardless the source (sometimes in spite of the source).

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

True, the interest & divs keep coming in. My point was that conservative investments aren't paying much now, so if one was being conservative, you need a big stash (maybe I wrongly assumed that poster was conservative, but the 'not touching principal' approach gave me that impression). With a big stash, tapping the principal isn't much of an issue anyway.

Maybe it's semantics, but I don't see too much difference between pulling 1% out of your principal, and seeing the NAV of a basket of bonds & div paying stocks loosing 1%. That's not apples-apples either, equities are just different from bonds, but 'not touching your principal' isn't some sort of holy grail either - it will come at a cost. And I'm not saying either is right/wrong, just need to look at the whole picture, is all.

-ERD50

 

[haha]

Maybe it's semantics, but I don't see too much difference between pulling 1% out of your principal, and seeing the NAV of a basket of bonds & div paying stocks loosing 1%.
-ERD50

This is what cognitive scientists call mental accounting. It has no meaning in the external world, it is just something people often do to make them feel more comfortable.

Ha