Poll:Are You "Probabilistic" School or "Safety First" School?

[Midpack]

Anyone who has Soc Sec or the like (most here?) isn’t completely probabilistic?

 

[donheff]

I didn't see an answer that fit so I chose #5. We have our essentials fully covered by pensions and SS so that would put us in safety first by OP's reckoning, but I see that as a circumstance, not a school. Our portfolio is 75% equities on the theory that will insure a larger estate. That thinking puts us in the probabilistic school but that is easy to choose when your essentials are covered. If I allocating our thinking I would put us around 60/40 - P/S. Maybe 50/50.

 

[mitchjav]

Hope I'm understanding the poll correctly... I picked "Probabilistic School but, would be Safety First School if financially possible", because the only guaranteed income stream we have today is DW's small pension which covers
< 20% of our yearly expenses. That said, we're a few years off from taking Social Security which, together with the pension, would cover 75% of yearly expenses as they exist today. Considering inflation, I would expect that we'd be relying about equally on the Pension/Social Security income streams and using the funds from our portfolio. If we didn't have to deplete the portfolio, that would be preferable - so I think we can say we'd prefer to be in the Safety School if it were possible.

 

[Huston55]

For this poll, we will consider a retiree “safety first” if s/he uses guaranteed income streams for at least essential expenses.

I cannot choose any of your choices.

I would say "Safety first" to cover essential spending, and then probabilistic for anything above that.

For this poll, you'd be considered "safety first" if you cover essential expenses with guaranteed income streams.

 

[audreyh1]

I found the link racy provided above to help with the terminology used here:
https://www.kitces.com/blog/even-sa...stinction-is-risk-transfer-vs-risk-retention/

Another great food-for-thought Kitces article.

And this one has a long argument with Pfau in the comments!

 

[MarieIG]

I found the link racy provided above to help with the terminology used here:
https://www.kitces.com/blog/even-sa...stinction-is-risk-transfer-vs-risk-retention/

Another great food-for-thought Kitces article.

And this one has a long argument with Pfau in the comments!

Worth reading - From the article: The bottom line, though, is simply this – the real distinction in retirement income philosophies and strategies is not really about which is “safe” and which is not, as any of the strategies can be managed in a manner that is safe or in a manner that is more risky (and at least has “a probability of failure”). The real distinction is whether (market and longevity) risk is transferred or retained, and if retained how those risks are managed or avoided. For which, given a world of uncertainty, there are no absolute “correct” answers about what the future may hold… which is what makes them a matter of retirement income philosophy in the first place!

I believe that Robbie B said something of the sort.

P.S. Did listen to a podcast of Wade Phau (throught the Booglehead website, where he dicussed this.)

 

[pacergal]

I guess #3, safety first, as we have pensions and SS. But it doesn't completely match as
also have investments available to draw from, if needed.

 

[Huston55]

I found the link racy provided above to help with the terminology used here:
https://www.kitces.com/blog/even-sa...stinction-is-risk-transfer-vs-risk-retention/

Another great food-for-thought Kitces article.

And this one has a long argument with Pfau in the comments!

Exactly. The most illuminating part of this blog post is in the debate between Pfau & Kitces in the comments. I follow them both but, in this instance, I believe Pfau makes the stronger argument. Two comments capture that well:

Pfau states that Kitces is "reaching for a counter-example to demonstrate that probabilty vs. safety is artificial", and I agree with that point, given the somewhat ridiculous example that Kitces uses.

But, more precisely, when it comes to comparing potential "failure" rates of the Probabilistic versus Safety First approaches, Pfau quantifies potential "failure" of the Probability Based approach in the current (2015) environment as follows:

"Michael,

Yes, if the withdrawal rate from a volatile portfolio is low enough, then it can certainly become very safe. Your 0.000001% withdrawal rate example should work out fine.

But what about a 4% withdrawal rate? That's about what you could get now with contractual guarantees using a 20-year TIPS ladder and a DIA. You lose upside potential though. Of course this is not 100% safe, as nothing is. But it's close.

With a 4% withdrawal rate from a volatile portfolio, you might maximize the probability for success at about 70-80% with today's low interest rates. With fees (as it is important to remember that the original 4% rule assumes no AUM fee or fund expense ratios), this might be down to more like 60-70%."


Although there is certainly variability in forecasts like Pfau's in this example, even with the current status of pension funding shortfalls, I still cannot envision an environment where the "failure" rate of pensions and SS comes anywhere close to 20%-40%.

 

[MarieIG]

Probabilistic at this point. I would have like to have gotten a government job with a pension, but was not hired for those for which I applied, and the private sector where I worked (small businesses) did not even provide a 401(k) match.

I have thought about an annuity, but the payouts are awful. I will look again after I am 65. I do have some $ sitting in a Vanguard variable annunity (recently transferred as Vanguard got out of the Annunity business) I purchased a while back - after maxing out tax deferred. Anything I would purchase would be 100% joint & survivor.

As we age, with Social Security, it will probably skew more towards safety. I am aware that there is a risk of people's ability to handle finances as they age.

DH's second (company) 401k as something called a lifetime income fund; it is basically a very cheap variable annuity, and it can be turned into a lifetime income stream with a minimum guaranteed income; so if I am still around - I will look at converting this when he hits RMD age. (He does not like fussing with the investments and tends to panic and wants to sell everything - so I want as much headache free income for him as possible.) So DH would have his base pension and SS (which we are targeting for 70); and most likely a least one (possibly two) annunity streams. He also has something which is called an annuity through his Union which is not really an Annuity, just really a pot of funds which they manage for the Union members and send out monthly stipends although it is possible to roll out this money. I (we) thought about rolling it out, but they have access to income funds, etc. that we can't get, and also at least attempt to factor in some risk management. We'll see.

 

[Huston55]

Just as a reminder, for this poll, one is considered "Safety First" if "essential" expenses are covered (or will be covered) by guaranteed income streams. I know that some would define it as "all" expenses but, that's now how I structured the poll.

 

[Huston55]

DH's second (company) 401k as something called a lifetime income fund; it is basically a very cheap variable annuity, and it can be turned into a lifetime income stream with a minimum guaranteed income; so if I am still around - I will look at converting this when he hits RMD age.

This sounds similar to the product "nun" purchased, and which he frequently discusses.

The value of an annuity depends on the numbers and your circumstances. They have been very poor value for a long time because pf low interest rates.

Just before I retired I got the chance to use DC pension money to buy into my employer's DB pension plan. I looked at the numbers and I found I could get a $20k index linked annual pension starting at age 55 by transferring $280k from my DC plan to the DB plan at age 52. So the payout rate was 7% and I estimated that if I lived to 83 I'd have to get an 7% annual return on the money to match the pension. As I had plenty of other DC and investment money I bought into the pension. I'm now 57 and collecting the pension each month and can be pretty sanguine about the stock market.

 

[Exchme]

There is no safety and there never was. Safety is an illusion, a mirage.

The rock is ground to sand by the action of waves and wind.

+1
The future is always unknown. Some of the risk factors - like unfavorable government policies, interest rate shocks, overdone market movement could apply to bonds, stocks and the solvency of pensions. So be prepared to be flexible and have a cushion.

 

[NW-Bound]

Most people don't fall clearly into one camp or the other. I suspect that most like myself evolve from one to the other as we age and pick up pension and/or SS.

I started out my ER with an WR closer to the 4% WR, but then my children got through college and became independent, and my stash grew due to the recent boom market. With my wife drawing SS now, my WR has been way below 4%.

When I decide to draw my SS, our WR will be even lower. Several posters here live on 0% WR. We most likely will have a non-zero WR while we still can travel.

 

[Cobra9777]

...We have our essentials fully covered by pensions and SS so that would put us in safety first by OP's reckoning, but I see that as a circumstance, not a school...

That was my reaction to this thread as well. I guess they are opposing "schools of thought." But I didn't pick a side and then arrange my affairs accordingly. We both just happened to stay at employers that offered pensions as part of the total compensation package.

Mine had a lump sum option. So I suppose when I elected the annuity option instead, that was a chosen step toward "safety-first". But I wasn't trying to cover some base level of expenses. I just thought it was the better option, financially. And of course, there is no lump sum option for SS. So most early retirees eventually evolve into "safety-first" to some degree.

Anyway, our two small pensions currently cover 75% of non-discretionary and 50% of total spend. Pensions + SS (several years away) will easily cover all non-discretionary and close to 100% of total spend. So I guess that makes us "safety-first." But I would have been just as happy in the probabilistic camp. I'm just going with the cards I was dealt. I marked #5.

 

[GravitySucks]

Good article.
The comments though... Glad I never heard of Pfau before I retired , 60-80% shot a 4% WR will succeed. I would have waited till I was 70 to retired.
Does anyone think we're in the most dire straights since 1920?

 

[Montecfo]

Good article.
The comments though... Glad I never heard of Pfau before I retired , 60-80% shot a 4% WR will succeed. I would have waited till I was 70 to retired.
Does anyone think we're in the most dire straights since 1920?

From his comment, the low probability of success would appear to be because the 4% withdrawal rate he uses as example is actually understated at somewhere around four and a half to five and a quarter or so, due to failure to include investment expenses within it.

So not sure there is anything new there.

 

[GravitySucks]

From his comment, the low probability of success would appear to be because the 4% withdrawal rate he uses as example is actually understated at somewhere around four and a half to five and a quarter or so, due to failure to include investment expenses within it.

So not sure there is anything new there.

Fair enough. But most of my funds fees are less than 0.15% and the ones most of my money is invested in are less than 0.1%. I bet the fees on my small annuity dwarf those.
Pfau certainly is a worthwile read, but I find Bengen and Kitce more in line with my thinking.

 

[big-papa]

Both: Part of my portfolio is a 60/40
US/International for stock
Intermediate Treasuries for bonds

And part of my portfolio is a TIPs/Ibonds ladder which I'll tap at age 70 when I start SS. The ladder + SS will just about cover the most minimal living expenses for 15 years, after which I'll consider a SPIA.

 

[DrRoy]

I would say that we are about half and half, which was not an option, unless I say "other". My modest pension and passive income from my taxable investments covers about 55% of our typical spending. That spending includes a lot of travel, and a bunch of remodeling projects over the last few years. After next year, the remodeling will run out. We could manage on just the 55% if we had to, if we have no projects or travel. As it is now, I do sell investments annually for spending purposes. I am 61 so no SS (probably not till 70) or RMD's. Which camp do you all think that puts us in?

 

[audreyh1]

Good article.
The comments though... Glad I never heard of Pfau before I retired , 60-80% shot a 4% WR will succeed. I would have waited till I was 70 to retired.
Does anyone think we're in the most dire straights since 1920?

Pfau has always come off as a doom-and-gloomer, promoting the safety of annuities*, and using high investment fees to push down future projections of safe withdrawal rates (this time it's different - we could be like Japan/Germany). Kitces has often challenged him. One challenge resulted in a great joint paper about using a rising equity glide-path to reduce SORR.

*Pfau has some professional connection to annuity companies.

 

[Onward]

“probabilistic” school versus the “safety first” school of thought

False dichotomy. There is no true safety.

 

[Huston55]

False dichotomy. There is no true safety.

All of life is on a spectrum.

 

[Montecfo]

I do not love the terms as they are misleading in my view.

But setting that aside I am 100 percent probabilistic since I designed retirement to rely solely on my investment portfolio.

Yes we will have SS when we get there and my wife will get a latte pension. But my plan for those is as longevity insurance.

It seems exceedingly safe but my mileage may vary.

 

[Major Tom]

I do not love the terms as they are misleading in my view.

I thought the same, and found the word "probabilistic" to be a bit odd. I think it's because there is a risk associated with every single form of holding money. However, like you, I went with it, and answered accordingly.

 

[Time2]

I have no idea what to put. We over saved, but, this year we spent 6.8% of our nest egg, that will happen one more year, and the kids expensive tuition is done. Then we will drop to about 3%. Then in 4 years, at 70, I will get SS, and 4 yrs after that she gets SS. Our SS combined will cover 60% of our spending, putting us at a 1.2% WR. Although if, we can get 1/2 the growth rate of the last 10 years on out assets going forward it may be lower than 1.2%, or if we have a big downturn it could be much higher. I have no concerns about not having enough, but I do have concerns about seeing my nest egg become smaller, even though it wouldn't affect our lifestyle. We would like to pass on an inheritance to the kids, even though I don't expect them to get it until their 50s and I expect they won't need it. Both college educate, one should make a lot of income in the medical field, but is not as frugal as I'd like, the other will have a lower income, but is much more frugal and if he doesn't marry a spender will do great.