A Low-Return Future? Are We Prepared?

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HomerJ
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Re: A Low-Return Future? Are We Prepared?

Post by HomerJ »

Clearly_Irrational wrote:By the way, that number assumes that returns are as good as they were in the past and that you don't live more than 30 years in retirement, both assumptions are looking less certain nowadays.
Most of the time in the past, you could take 5% or 6% and do just fine...

Going with 4% is already the conservative number... That's already assuming that returns won't be as good as they were in the past... That's the number you need if the Great Depression happens again...

Going even lower is getting to the point of silliness... I'm not working 5 extra years to protect myself from 0.01% chance that something twice as bad as the Great Depression happens
Last edited by HomerJ on Fri Aug 29, 2014 10:26 am, edited 1 time in total.
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Clearly_Irrational
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years
Wow, I think that's WAY too pessimistic. 2% real returns for US Large Cap? Sorry, I'm not buying that without one heck of a lot of evidence.
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HomerJ
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Re: A Low-Return Future? Are We Prepared?

Post by HomerJ »

EmergDoc wrote:I blogged about this a year and a half ago. Then I enjoyed my 2013 returns of 19.7% and my YTD returns of 7.17%. Maybe those guys are right and just early. Maybe it's cool to be a pessimist. I don't know.
Yeah I almost feel bad for Pfau... The guy has been predicting low returns since 2011 and in the last 3 years, the market has done just a little bit better than that...
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Clearly_Irrational
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Ged wrote:I am really unconvinced that increased rates of technical progress will lead to lower returns on capital.
Just to be clear that was not what I was arguing. Population growth is one variable that effects returns and I was just pointing out that it's expected to be lower in the 21st century than it was in the 20th. Productivity growth tends to be a separate variable (though it can be influenced by population growth in some scenarios).
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HomerJ
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Re: A Low-Return Future? Are We Prepared?

Post by HomerJ »

EmergDoc wrote:I mean, think about this. Typical retirement is probably 20 years. Yes, we prepare for 30. We hypothesize that we'll possibly live 40. But we probably won't. We'll probably keel over at 80 or 85 like most people.
This.
The problem with the kind of pessimism exhibited on threads like this one is it leads people to do ridiculous things, like 1% withdrawal rates and saving 50% of their income and working until they're 75 because they're afraid they'll run out of money.
And this.
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Clearly_Irrational
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Valuethinker wrote:If you look at the cost of putting a pound in orbit, the sheer energy cost, this doesn't seem that likely.
Here is some food for thought. Platinum is $22,704 a pound. The cost of getting to orbit is currently about $10,000 a pound. SpaceX feels they can get that cost down by a factor of 10. If they can manage that it starts to look possible that asteroid mining might be feasible.
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SimpleGift
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Re: A Low-Return Future? Are We Prepared?

Post by SimpleGift »

Clearly_Irrational wrote:Wow, I think that's WAY too pessimistic. 2% real returns for US Large Cap? Sorry, I'm not buying that without one heck of a lot of evidence.
I understand your skepticism. But realize that Mr. Bernstein's real return forecasts are pretty much middle of the road when it come to a lower-return future. If you want to see actual pessimism, check out Jeremy Grantham's forecasted 7-year returns — how about -1.7% real for US large cap stocks?

Image
Source: Mutual Fund Observer
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Clearly_Irrational
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

HomerJ wrote:5% chance of a 6.5% loss in spending power is irrelevant to me...
You're mixing up two different numbers. It's a 5% chance of going completely broke before you die. It would take a 6.5% reduction in yearly spending to reduce that chance to zero based on historical data.
HomerJ wrote:Pretty much zero risk at 4% SWR... as long as you have SOME buffer, and adjust your spending if needed like any normal human can.
If your minimum spending level is below your withdrawal rate, then of course that adds additional safety. In that case, SWR is not the right way to model the problem. Check out this work by Gummy for a better way to model that situation: http://www.gummy-stuff.org/sensible_withdrawals.htm
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Re: A Low-Return Future? Are We Prepared?

Post by Ldevelopment »

Clearly_Irrational wrote:
Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years
Wow, I think that's WAY too pessimistic. 2% real returns for US Large Cap? Sorry, I'm not buying that without one heck of a lot of evidence.
Wow is right. I just read that table for the first time. If returns are this low going forward, I would think real estate would be a more attractive investment option. This is sort of depressing.
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Re: A Low-Return Future? Are We Prepared?

Post by Tigermoose »

Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years (from his book, Rational Expectations, published May 2014). These estimates are mostly in line with those of other prominent forecasters of a low-return world.

Image

My Stable Value Funds are looking pretty attractive in this environment :sharebeer
Institutions matter
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

HomerJ wrote:Going with 4% is already the conservative number...
Yes, it's fairly conservative with only a 5% failure rate. If that's within your risk tolerance then go with it.

For me, I find the world pretty unpredictable and my personal experience has been that things often work out not nearly as well your would expect from the numbers. Due to that I would never create a plan that had a baked in 5% failure rate at the planning stage. Of course the SWR model is pretty simplistic and assumes you can't lower spending or have any other sources of income. As a rule of thumb it's not bad, but for real retirement planning I'd want something much more sophisticated.
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Re: A Low-Return Future? Are We Prepared?

Post by anil686 »

Tigermoose wrote:
Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years (from his book, Rational Expectations, published May 2014). These estimates are mostly in line with those of other prominent forecasters of a low-return world.

Image

My Stable Value Funds are looking pretty attractive in this environment :sharebeer

I don't understand. If a SV fund is at - lets say - 2.5% - and inflation is 2.3% - then would it not be just 0.2% real return (granted only insurance company risk). I think they table is real returns - not nominal - but maybe I am missing something. I have a SV fund available in my 401K but it is only at 1.5% - I follow a simple 3 fund portfolio - can you explain why you use the SV fund so I can understand?

Thanks so much
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Re: A Low-Return Future? Are We Prepared?

Post by Tigermoose »

anil686 wrote:
Tigermoose wrote:
Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years (from his book, Rational Expectations, published May 2014). These estimates are mostly in line with those of other prominent forecasters of a low-return world.

Image

My Stable Value Funds are looking pretty attractive in this environment :sharebeer

I don't understand. If a SV fund is at - lets say - 2.5% - and inflation is 2.3% - then would it not be just 0.2% real return (granted only insurance company risk). I think they table is real returns - not nominal - but maybe I am missing something. I have a SV fund available in my 401K but it is only at 1.5% - I follow a simple 3 fund portfolio - can you explain why you use the SV fund so I can understand?

Thanks so much
Yes, you are right. But compared to -1% for other fixed income and bond options, SVF is superior (assuming the predictions of real return are true)
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HomerJ
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Re: A Low-Return Future? Are We Prepared?

Post by HomerJ »

Ldevelopment wrote:Wow is right. I just read that table for the first time. If returns are this low going forward, I would think real estate would be a more attractive investment option. This is sort of depressing.
(1) No one can predict anything.
(2) Even if they're right, the FOLLOWING ten years will probably give higher returns than normal.

It's certainly possible that the market can go nowhere for an extended period of time... The DOW was around 1000 in 1966, and still around 1000 in 1982... That's 16 years of nothing (lots of ups and down during those years of course).

Anyone who was still accumulating during those years did just fine though... They got 16 years of buying the DOW around 1000... And then watched all that saved money double, triple in less than a decade, finally growing 10x by 2000...

10x!

Now if you're retiring TODAY, you might be worried... People who RETIRED in 1966 did the worse of anyone who retired in the past century.. They are ones where 4% SWR failed (barely)... But anyone who was still SAVING in 1966 did very well...
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Re: A Low-Return Future? Are We Prepared?

Post by Ldevelopment »

Clearly_Irrational wrote:
HomerJ wrote:Going with 4% is already the conservative number...
Yes, it's fairly conservative with only a 5% failure rate. If that's within your risk tolerance then go with it.

For me, I find the world pretty unpredictable and my personal experience has been that things often work out not nearly as well your would expect from the numbers. Due to that I would never create a plan that had a baked in 5% failure rate at the planning stage. Of course the SWR model is pretty simplistic and assumes you can't lower spending or have any other sources of income. As a rule of thumb it's not bad, but for real retirement planning I'd want something much more sophisticated.
It also assumes inflation adjustments annually. For some people, especially early on in retirement might try to live on their investments and turn off the inflation feature that's built into the SWR model. Inflation can bite you, but if a retiree has her home paid for, adequate health insurance, and kids through college, you can somewhat limit your exposure to the risks of inflation during retirement years.
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Re: A Low-Return Future? Are We Prepared?

Post by HomerJ »

Clearly_Irrational wrote:
HomerJ wrote:Going with 4% is already the conservative number...
Yes, it's fairly conservative with only a 5% failure rate. If that's within your risk tolerance then go with it.
Ugh...

(1) You might not even live the full 30 years.
(2) You can adjust your spending downward if needed... Going from 3 vacations a year to 2 vacations for a couple of years isn't a horrible hardship.
(3) If the market tanks hard the first 2 years of your retirement (the real danger - market tanking 10 or 20 years into your retirement isn't as bad), you can go back to work part-time since you're still relatively young
(4) You can buy a SPIA which pays far more than 4% partway through your retirement to make up any shortfall.

For me, I find the world pretty unpredictable and my personal experience has been that things often work out not nearly as well your would expect from the numbers.
This is why I don't try to achieve 100% numbers... There is no such thing... 4% is very conservative.
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Re: A Low-Return Future? Are We Prepared?

Post by Ldevelopment »

HomerJ wrote:
Ldevelopment wrote:Wow is right. I just read that table for the first time. If returns are this low going forward, I would think real estate would be a more attractive investment option. This is sort of depressing.
(1) No one can predict anything.
(2) Even if they're right, the FOLLOWING ten years will probably give higher returns than normal.

It's certainly possible that the market can go nowhere for an extended period of time... The DOW was around 1000 in 1966, and still around 1000 in 1982... That's 16 years of nothing (lots of ups and down during those years of course).

Anyone who was still accumulating during those years did just fine though... They got 16 years of buying the DOW around 1000... And then watched all that saved money double, triple in less than a decade, finally growing 10x by 2000...

10x!

Now if you're retiring TODAY, you might be worried... People who RETIRED in 1966 did the worse of anyone who retired in the past century.. They are ones where 4% SWR failed (barely)... But anyone who was still SAVING in 1966 did very well...

True. Thanks for this data. I personally would have a hard time continuing to save aggressively during those 16 years of nothingness (1966 to 1982). I plan on using the 4% rule in my retirement planning, but will not take out an even amount every year, and probably turn off the inflation feature built into the rule for some time.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Simplegift wrote:I understand your skepticism. But realize that Mr. Bernstein's real return forecasts are pretty much middle of the road when it come to a lower-return future. If you want to see actual pessimism, check out Jeremy Grantham's forecasted 7-year returns — how about -1.7% real for US large cap stocks?
Seven years is starting to get pretty short, so it's harder to say. My modeling suggests we have a 95% chance of having a recession by May 2017, but at the moment all indicators are pointing towards an improving economy.

Possible returns if the future sequence looks like past pre/post recession periods (expressed as CAGR from present to 2021):

Housing Collapse 4.17%
Tech Bubble 4.75%
Savings & Loan Crisis 11.96%
Oil Shock 16.18%
Stagflation 4.22%
Vietnam 3.91%
Great Depression 3.34%

I didn't cover every recession available but you can see from this selection that 2% returns are very unlikely. Given current conditions I'd say a worst case for that time period is closer to 4%. PE10 is currently predicting 5.9% (mean, which probably translates to 4.98% CAGR), given that the long term CAGR is 9.07% I'd still call that "low returns" but it's way more than 2%.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

HomerJ wrote:(1) You might not even live the full 30 years.
True, or you might live for 40 years. The chances are lower for that occurrence of course but it is possible. Any sensible plan should include that contingency.
HomerJ wrote:(2) You can adjust your spending downward if needed... Going from 3 vacations a year to 2 vacations for a couple of years isn't a horrible hardship.
As I mentioned previously, if your minimum spending requirements are lower than your withdrawal rate then the SWR is not the correct model to use for projections.
HomerJ wrote:(3) If the market tanks hard the first 2 years of your retirement (the real danger - market tanking 10 or 20 years into your retirement isn't as bad), you can go back to work part-time since you're still relatively young
Maybe, agism is pretty rampant and it's often hard for older people to get jobs commensurate with their talents.
HomerJ wrote:(4) You can buy a SPIA which pays far more than 4% partway through your retirement to make up any shortfall.
If you're in the correct net worth "zone" where that makes sense then it could be a good option.
HomerJ wrote:This is why I don't try to achieve 100% numbers... There is no such thing... 4% is very conservative.
If a KNOWN 5% failure rate is conservative for you then great, you're done.
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Re: A Low-Return Future? Are We Prepared?

Post by leonard »

My main rebuttal is that - as of yet - no one is able to see the future.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

HomerJ wrote:(1) No one can predict anything.
I don't agree but ok.
HomerJ wrote:(2) Even if they're right, the FOLLOWING ten years will probably give higher returns than normal.
Isn't that a prediction?
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Re: A Low-Return Future? Are We Prepared?

Post by Valuethinker »

Tigermoose wrote:Innovation? We have only seen the beginning. We have just put through the largest group of young people in the history of the world through college. We have people like Elon Musk developing ideas like the "Hyperloop" http://en.wikipedia.org/wiki/Hyperloop If you read this, you will notice how engineers can effectively work together on an open source project. The Internet is bringing together ideas and people from around the world. We have just begun the internet revolution -- a technology just as, or even more, disruptive as Gutenberg's printing press.
There is a big academic literature around the argument that fundamental rates of innovation have declined. If I find the cites, I shall post them. I do not have a strong view.

I take the view that the real measure of innovation is *adoption*. There, I believe that since only 1 billion or so are on the internet now, when it gets to be 3-4 billion (via the phone, not the PC) then it will be a different world.

Similarly things like solar cells and electric cars are only in their infancy. Explaining to our grandchildren or great grandchildren what a filling station was, or what a payphone was, will be amusing.

What you do see is that sometimes in emerging markets, like China and India, the rate of innovation adoption seems faster than here (UK and USA). South Korea is way ahead in ultra fast broadband, for example.

If I look at the real 'biggies' of the last 50 years, they are all about massive invested capital. Shipping containers (needed new ports, totally different ways of working), computers (needed 500m+ computers and phones), interstate highway system (largest public works project in American history), air travel (hundreds of billions in planes and airport infrastructure), municipal sewage (*the* great innovation of the last 150 years was municipal sewage collection and disposal and water supply-- ironically one the Romans (and the Moors in Granada in Spain) had 2000 years ago). Antibiotics you needed mass production and distribution of pharmaceuticals-- ditto mass vaccination, the other great innovation of the last 100 years).
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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat »

Clearly_Irrational wrote:
HomerJ wrote:(1) You might not even live the full 30 years.
True, or you might live for 40 years. The chances are lower for that occurrence of course but it is possible. Any sensible plan should include that contingency.
HomerJ wrote:(2) You can adjust your spending downward if needed... Going from 3 vacations a year to 2 vacations for a couple of years isn't a horrible hardship.
As I mentioned previously, if your minimum spending requirements are lower than your withdrawal rate then the SWR is not the correct model to use for projections.
HomerJ wrote:(3) If the market tanks hard the first 2 years of your retirement (the real danger - market tanking 10 or 20 years into your retirement isn't as bad), you can go back to work part-time since you're still relatively young
Maybe, agism is pretty rampant and it's often hard for older people to get jobs commensurate with their talents.
HomerJ wrote:(4) You can buy a SPIA which pays far more than 4% partway through your retirement to make up any shortfall.
If you're in the correct net worth "zone" where that makes sense then it could be a good option.
HomerJ wrote:This is why I don't try to achieve 100% numbers... There is no such thing... 4% is very conservative.
If a KNOWN 5% failure rate is conservative for you then great, you're done.
Why even worry about failure rate, when you can employ VPW that cannot fail. You'll probably start out with a WR of over 4%.
VPW has a 0% chance of Failure.

If times get tough, VPW will employ a 2% WR, but only IF it needs to. And it will do it at the Proper time!
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HomerJ
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Re: A Low-Return Future? Are We Prepared?

Post by HomerJ »

Clearly_Irrational wrote:If a KNOWN 5% failure rate is conservative for you then great, you're done.
You make good points, and I'll stop our discussion with this last word (feel free to respond one more time, if you want the "last word") :)

That 5% "failure" means I take 3 vacations a year instead of 4...

It's NOT 95% you do fine, 5% you're in the street...

It's 80% you do great and become richer than ever, 15% you do fine, and 5% you cut back on a few luxuries (or get a SPIA, keep your lifestyle intact, and leave nothing for the kids)

Yeah, I'm happy with those odds, AND the consequences of "failure".
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Re: A Low-Return Future? Are We Prepared?

Post by garlandwhizzer »

Simplegift wrote:
Bottom line: Any investor who expects and plans for future stock market returns (and bond returns!) like were seen in the last half of the twentieth-century is in for a rude shock and disappointment. We can reasonably predict those returns certainly won't be repeated. Better to make prudent plans for a lower-return future.
1+

The future is of course unknown and unknowable. On the other hand isn't it better to try to prepare for what looks from here to be a likely but pessimistic outcome. If you're wrong and future returns are better, you have choices. It's not so bad having too much money. You can always take your foot off the gas petal a few years early. A mistake in the other direction however may have severe consequences and you may not have choices available to deal with it.

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Re: A Low-Return Future? Are We Prepared?

Post by Ged »

Valuethinker wrote:
Rapid technological change tends to be [bad] for corporate profits.

Think of DEC. A company which caused a computer revolution, briefly was the world's largest tech company and then was eaten by it. Osborne Computers?
DEC was bought by COMPAQ which was then bought by HP.

The companies made obsolete by technological change, say DEC generally end up being replaced by whatever company created that change. In this case DEC was replaced by Microsoft and Intel which are far larger and more profitable than DEC ever was.

BTW, the first computer I wrote a program for was a DEC PDP-8. 4K Core Memory and the size of two large refrigerators.

Personally I don't think we have seen anything yet. We still don't understand the limits of self-interpretation possible by computer software. And biotech? The potential for change arising from that field is orders of magnitude greater than the computer revolution. How many orders nobody knows.

In my opinion this change is one of the best fundamental reasons for buying the entire market. It's impossible to predict where it will come from.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Cut-Throat wrote:Why even worry about failure rate, when you can employ VPW that cannot fail. You'll probably start out with a WR of over 4%.
VPW has a 0% chance of Failure.

If times get tough, VPW will employ a 2% WR, but only IF it needs to. And it will do it at the Proper time!
Unless you can pick the exact date of your death it's a bit problematic since it guarantees you'll run out of money. One option would be to combine VPW with an deferred inflation indexed SPIA though the cost of that will cut into your spending considerably.

*shrug* There is no perfect solution. Any rate greater than Dividends + Coupons has the chance of being depleting and the rate you choose is going to be based on your risk tolerance, spending needs and desire or lack thereof to leave an estate.

For me, I intend to have rental income, a SPIA the size of the state guarantee limit, Social Security and a portfolio. Each of those has different risk tradoffs but together it should work fairly well in the vast majority of plausible scenarios.
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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat »

Clearly_Irrational wrote: Unless you can pick the exact date of your death it's a bit problematic since it guarantees you'll run out of money.
Then you don't understand VPW! .... Why would you think you have to predict the 'exact date of your death'?

I use age 100... If I die at 87, VPW worked just fine and I was off by 13 years. Hardly the exact date!

If you're really paranoid pick an age of the oldest person in the U.S. - Not me, I'm retired!

And who says if you're using VPW, you can't have a Pension, S.S. and an SPIA.

You infer too much and make wrong assumptions.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

HomerJ wrote:You make good points, and I'll stop our discussion with this last word (feel free to respond one more time, if you want the "last word") :)
I haven't had all my coffee yet, perhaps I'm coming across a bit too strongly.
HomerJ wrote:That 5% "failure" means I take 3 vacations a year instead of 4...

It's NOT 95% you do fine, 5% you're in the street...

It's 80% you do great and become richer than ever, 15% you do fine, and 5% you cut back on a few luxuries (or get a SPIA, keep your lifestyle intact, and leave nothing for the kids)

Yeah, I'm happy with those odds, AND the consequences of "failure".
As long as your minimum spending level is significantly less than your starting withdrawal rate then I agree with you. (That's a pretty big caveat though)

You make a very good point about the fact that in many cases a conservative withdrawal rate will result in your portfolio growing significantly instead of shrinking. That's one of the reasons why I don't think the SWR model is a very good one for anything other than quick rule of thumb calculations.
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Clearly_Irrational
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Cut-Throat wrote:
Clearly_Irrational wrote: Unless you can pick the exact date of your death it's a bit problematic since it guarantees you'll run out of money.
Then you don't understand VPW! .... Why would you think you have to predict the 'exact date of your death'?
Looking at the description one of the requirements is to choose a duration and the plan guarantees you will spend all of your money by that date.
Cut-Throat wrote:You infer too much and make wrong assumptions.
I'm sorry but you'll have to be more explicit about what I'm missing.
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siamond
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Re: A Low-Return Future? Are We Prepared?

Post by siamond »

anil686 wrote:
Tigermoose wrote:
Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years (from his book, Rational Expectations, published May 2014). These estimates are mostly in line with those of other prominent forecasters of a low-return world.

Image

My Stable Value Funds are looking pretty attractive in this environment :sharebeer
I don't understand. If a SV fund is at - lets say - 2.5% - and inflation is 2.3% - then would it not be just 0.2% real return (granted only insurance company risk). I think they table is real returns - not nominal - but maybe I am missing something.
Yes, this table from W. Bernstein describes REAL expected returns. Definitely not nominal.

Also, be careful, this table provides expected returns for the coming decade, with a speculative factor dragging down fundamental returns due to the currently high PE10 valuation. If you eliminate the speculative factor (to think long term), then we're back to ~ 3.5% for US large-caps, if you follow W.Bernstein's logic. Which is certainly pretty sobering.

Are we prepared? Personally, as a not overly wealthy early retiree, I decided that doing some part-time work for a few more years was in order, hoping to improve my PE10-adjusted portfolio balance...
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Re: A Low-Return Future? Are We Prepared?

Post by TareNeko »

Ged wrote:
Valuethinker wrote:
Rapid technological change tends to be [bad] for corporate profits.

Think of DEC. A company which caused a computer revolution, briefly was the world's largest tech company and then was eaten by it. Osborne Computers?
DEC was bought by COMPAQ which was then bought by HP.

The companies made obsolete by technological change, say DEC generally end up being replaced by whatever company created that change. In this case DEC was replaced by Microsoft and Intel which are far larger and more profitable than DEC ever was.
I suggest reading Innovator's Dilemma on this subject (technology change, ie disruptive technology).

http://www.amazon.com/Innovators-Dilemm ... rs+dilemma
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Re: A Low-Return Future? Are We Prepared?

Post by TareNeko »

Clearly_Irrational wrote:
HomerJ wrote:(2) You can adjust your spending downward if needed... Going from 3 vacations a year to 2 vacations for a couple of years isn't a horrible hardship.
As I mentioned previously, if your minimum spending requirements are lower than your withdrawal rate then the SWR is not the correct model to use for projections.
I'm with HomerJ.

1- You cannot predict your minimum spending requirements, therefore you'd add margin.
2- As a result of 1 (margin) you can always cut back, unless your minimum spending requirements were based on unrealistic assumptions.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

Erhan wrote:1- You cannot predict your minimum spending requirements, therefore you'd add margin.
2- As a result of 1 (margin) you can always cut back, unless your minimum spending requirements were based on unrealistic assumptions.
Well, in order to "add margin" you have to have some kind of estimate of what your minimum is or you're adding to an undefined term. I'm well aware the estimate is only going to be best guess but it shouldn't be too terribly hard to come up with something reasonable. Most of us already have this sort of number figured out in case we experience a job loss or other financial hardship. For example, if really pressed my wife and I could probably cut about 28% of our current budget. It would be massively painful, eliminating pretty much all discretionary spending like Christmas gifts, television or buying healthy food, but it would still cover the basics. So if you're using your "comfortable but not bare bones" number then you've got some built in safety margin. My recommendation, if you're going to use the SWR model then pick an intended withdrawal amount that covers your desired lifestyle not your bare minimum requirement. In that case, sure you can cut those trips to Europe, hobby spending or other "lifestyle" expenses in order to compensate for market fluctuations if necessary. Of course, given that information, I think you'd be better off using a different model to do your projections.
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Re: A Low-Return Future? Are We Prepared?

Post by rustymutt »

Nobody knows what the markets will do. They could go even higher.
Inflation is more a concern to me, than reduced long term real returns.
Even educators need education. And some can be hard headed to the point of needing time out.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

rustymutt wrote:Inflation is more a concern to me, than reduced long term real returns.
I'm actually not very worried about that. All the information I've seen points to a very low inflation environment.
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Re: A Low-Return Future? Are We Prepared?

Post by Clive »

Tigermoose wrote:
anil686 wrote:
Tigermoose wrote:
Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years (from his book, Rational Expectations, published May 2014). These estimates are mostly in line with those of other prominent forecasters of a low-return world.

Image
My Stable Value Funds are looking pretty attractive in this environment :sharebeer
I don't understand. If a SV fund is at - lets say - 2.5% - and inflation is 2.3% - then would it not be just 0.2% real return (granted only insurance company risk). I think they table is real returns - not nominal - but maybe I am missing something. I have a SV fund available in my 401K but it is only at 1.5% - I follow a simple 3 fund portfolio - can you explain why you use the SV fund so I can understand?

Thanks so much
Yes, you are right. But compared to -1% for other fixed income and bond options, SVF is superior (assuming the predictions of real return are true)
WOW! That sure is pessimistic. The only time a decade long -1%/year real has occurred in the last half century+ was for the ten years to the 1982 14%+ high yields.

On the plus side is that the subsequent rewards can be great if you move out to long dated at/near/during the high yields period.
Last edited by Clive on Fri Aug 29, 2014 1:14 pm, edited 1 time in total.
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Re: A Low-Return Future? Are We Prepared?

Post by siamond »

Clearly_Irrational wrote:Using an attribution model stocks should return (dividend yield + productivity growth rate + population growth rate + inflation) which is (1.85% + 2.2% + 1% + 2.25%) = 7.30% nominal or 5.05% real.
Huh? What does population growth have to do with anything? I don't see the relation with expected returns... More workers and more consumers, sure, but this comes with a heap of other problems... Please explain?
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Re: A Low-Return Future? Are We Prepared?

Post by Valuethinker »

Ged wrote:
Valuethinker wrote:
Rapid technological change tends to be [bad] for corporate profits.

Think of DEC. A company which caused a computer revolution, briefly was the world's largest tech company and then was eaten by it. Osborne Computers?
DEC was bought by COMPAQ which was then bought by HP.

The companies made obsolete by technological change, say DEC generally end up being replaced by whatever company created that change. In this case DEC was replaced by Microsoft and Intel which are far larger and more profitable than DEC ever was.

BTW, the first computer I wrote a program for was a DEC PDP-8. 4K Core Memory and the size of two large refrigerators.

Personally I don't think we have seen anything yet. We still don't understand the limits of self-interpretation possible by computer software. And biotech? The potential for change arising from that field is orders of magnitude greater than the computer revolution. How many orders nobody knows.

In my opinion this change is one of the best fundamental reasons for buying the entire market. It's impossible to predict where it will come from.
All of this is not necessarily good for corporate profits.

In industries with fast product cycles, the rise and fall leads to a lot of writeoffs. I don't think it is obvious (or inevitable) that you will make superior returns.

If we look at industries like motor cars, aviation, which have been the incredible successes of the 20th century in terms of *adoption* it's been very hard to make money in those industries. Airlines are pretty much a constant basket case. Car companies don't make a lot of money-- not even Toyota. BMW does, but even Mercedes has lost a lot.

Take a look at industries with strong defencible market positions though. Like tobacco. Generated huge wealth for shareholders over the last 30 years. Take a look at what Buffett invests in (and his comments about say the changes in the newspaper industry-- a classic case of technology destroying shareholder value).

Similarly there is no correlation between economic growth in a country and equity market returns. Dimson and Marsh have shown that.

What you want is nice tough to break into market niches.

Rapid technological change and its adoption benefits *society* but I don't think it necessarily benefits corporate profits.
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Re: A Low-Return Future? Are We Prepared?

Post by technovelist »

Clearly_Irrational wrote:
Cut-Throat wrote:Why even worry about failure rate, when you can employ VPW that cannot fail. You'll probably start out with a WR of over 4%.
VPW has a 0% chance of Failure.

If times get tough, VPW will employ a 2% WR, but only IF it needs to. And it will do it at the Proper time!
Unless you can pick the exact date of your death it's a bit problematic since it guarantees you'll run out of money. One option would be to combine VPW with an deferred inflation indexed SPIA though the cost of that will cut into your spending considerably.

*shrug* There is no perfect solution. Any rate greater than Dividends + Coupons has the chance of being depleting and the rate you choose is going to be based on your risk tolerance, spending needs and desire or lack thereof to leave an estate.

For me, I intend to have rental income, a SPIA the size of the state guarantee limit, Social Security and a portfolio. Each of those has different risk tradoffs but together it should work fairly well in the vast majority of plausible scenarios.
Even that rate leads to depletion due to inflation.
There is no such thing as absolute safety. All you can do is try to insure yourself as much as possible against risks foreseen and unforeseen.
In theory, theory and practice are identical. In practice, they often differ.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

siamond wrote:Huh? What does population growth have to do with anything? I don't see the relation with expected returns... More workers and more consumers, sure, but this comes with a heap of other problems... Please explain?
Here's a picture that probably explains it better than I can just using words:

Image
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

technovelist wrote:Even that rate leads to depletion due to inflation.
For a 50/50 portfolio, using the current dividend + coupon rate of 2.21% there are no historical failures at the 10, 20, 30, 40 or 50 year time frames. Lowest balance during the retirement period by timeframe (starting with $1 Million):

10 $532,920
20 $645,561
30 $1,000,000
40 $1,000,000
50 $1,000,000

So, while it's possible for short periods of time to be pretty terrible, there are no examples of a 30 year retirement that would show depletion at this withdrawal rate.
technovelist wrote:There is no such thing as absolute safety. All you can do is try to insure yourself as much as possible against risks foreseen and unforeseen.
I agree. My normal assumption is that the future will be at least as bad as the past and may not be as good.
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Re: A Low-Return Future? Are We Prepared?

Post by technovelist »

Clearly_Irrational wrote:
technovelist wrote:Even that rate leads to depletion due to inflation.
For a 50/50 portfolio, using the current dividend + coupon rate of 2.21% there are no historical failures at the 10, 20, 30, 40 or 50 year time frames. Lowest balance during the retirement period by timeframe (starting with $1 Million):

10 $532,920
20 $645,561
30 $1,000,000
40 $1,000,000
50 $1,000,000

So, while it's possible for short periods of time to be pretty terrible, there are no examples of a 30 year retirement that would show depletion at this withdrawal rate.
technovelist wrote:There is no such thing as absolute safety. All you can do is try to insure yourself as much as possible against risks foreseen and unforeseen.
I agree. My normal assumption is that the future will be at least as bad as the past and may not be as good.
Yes, but what was the value of that $1 million in constant dollars after 50 years? Certainly far less than $1 million.
In other words, it was depleted by inflation even though not nominally.
In theory, theory and practice are identical. In practice, they often differ.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

technovelist wrote:Yes, but what was the value of that $1 million in constant dollars after 50 years? Certainly far less than $1 million.
In other words, it was depleted by inflation even though not nominally.
You know, I hadn't actually looked into that portion of the FireCalc site before. Here is what it says "Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle." That sounds inflation adjusted but I'm open if someone else has a different interpretation.
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Re: A Low-Return Future? Are We Prepared?

Post by technovelist »

Clearly_Irrational wrote:
technovelist wrote:Yes, but what was the value of that $1 million in constant dollars after 50 years? Certainly far less than $1 million.
In other words, it was depleted by inflation even though not nominally.
You know, I hadn't actually looked into that portion of the FireCalc site before. Here is what it says "Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle." That sounds inflation adjusted but I'm open if someone else has a different interpretation.
Where do you see the lowest balance results? I went to the firecalc page but didn't see where they display that data.
Edit: I see that now but I also get this warning for the 30 year run with 2.1%:

"(Caution: The portfolio failed, or went negative, during some of the years in your scenario, but scheduled adjustments brought it back above zero before the end of the 30 years.)"

I find it hard to believe that it went negative and then came back up! What kind of rate of return would that require?
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

technovelist wrote:Where do you see the lowest balance results? I went to the firecalc page but didn't see where they display that data.
Edit: I see that now but I also get this warning for the 30 year run with 2.1%:

"(Caution: The portfolio failed, or went negative, during some of the years in your scenario, but scheduled adjustments brought it back above zero before the end of the 30 years.)"

I find it hard to believe that it went negative and then came back up! What kind of rate of return would that require?
Ok, so here's what I did exactly:

1) Go to http://www.firecalc.com
2) Change portfolio starting value to 1,000,000
3) Change spending to 22,100 (This is 2.21% of $1 Million)
4) Click on "Your Portfolio" tab
5) Set equity percentage to 50%
6) Click submit
7) Select results tab

I'm guessing you did something slightly different, perhaps not changing the portfolio starting value?
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Re: A Low-Return Future? Are We Prepared?

Post by technovelist »

Clearly_Irrational wrote:
technovelist wrote:Where do you see the lowest balance results? I went to the firecalc page but didn't see where they display that data.
Edit: I see that now but I also get this warning for the 30 year run with 2.1%:

"(Caution: The portfolio failed, or went negative, during some of the years in your scenario, but scheduled adjustments brought it back above zero before the end of the 30 years.)"

I find it hard to believe that it went negative and then came back up! What kind of rate of return would that require?
Ok, so here's what I did exactly:

1) Go to http://www.firecalc.com
2) Change portfolio starting value to 1,000,000
3) Change spending to 22,100 (This is 2.21% of $1 Million)
4) Click on "Your Portfolio" tab
5) Set equity percentage to 50%
6) Click submit
7) Select results tab

I'm guessing you did something slightly different, perhaps not changing the portfolio starting value?
Ah, I see. I didn't change the equity percentage to 50%.
I agree that it is pretty unlikely that one would run out of money with such a low withdrawal rate, but I don't think that is because it is "dividends + interest"; it's just low enough that you almost certainly won't run out.
In any case, it's pretty safe. :beer
In theory, theory and practice are identical. In practice, they often differ.
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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational »

technovelist wrote:I agree that it is pretty unlikely that one would run out of money with such a low withdrawal rate, but I don't think that is because it is "dividends + interest"; it's just low enough that you almost certainly won't run out.
I'm not sure if this is supported by academic research or not, but here is my theory:

A) In order to pay dividends or coupon payments over the long term a business has to generate sufficient profits, which means in the vast majority of cases companies pay an amount that is less than their rate of profit. (obviously there are individual exceptions, but we're talking about the aggregate for the market as a whole).

B) Corporate earnings tend to go up over time as they find ways to increase productivity (As a group, single companies can have all kinds of issues) Asset prices, over the long term, tend to be a stable multiple of the company's discounted earnings. (There are lots of things that create volatility, but this is the mean to which they generally revert)

C) The economy normally has a positive growth rate (once in a while things go backwards but it's very rare and unlikely to be sustained)

Since payment rate A is going to be lower than growth rate B during any time period with economy C it's exceedingly unlikely that a portfolio could be depleted by using rate A. In order for that to happen you would need a negative economic growth rate, a failure of companies to improve their productivity or a long term decline in price to earnings multiples. All of those things are so unlikely as to be nearly impossible while still having a functioning technological civilization based on capitalism. So essentially, in the only conditions where it won't be true, I won't be worrying about the value of my portfolio anyways.
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Re: A Low-Return Future? Are We Prepared?

Post by TareNeko »

I agree. You'd have your estimated spending at 100%. You'd put margin, make that 110%. And you'd know, during tough times you can reduce it to 70%... Both the spending and withdrawal during retirement will be and should be based on conditions. Rebalancing the AA helps. In good return years, one should take more than, say, 4% etc. This is pretty obvious.

Discussing a fixed 4% withdrawal every year is only good for projections. I don't think anyone during retirement mechanically follows the 4% withdrawal rule.
Clearly_Irrational wrote:
Erhan wrote:1- You cannot predict your minimum spending requirements, therefore you'd add margin.
2- As a result of 1 (margin) you can always cut back, unless your minimum spending requirements were based on unrealistic assumptions.
Well, in order to "add margin" you have to have some kind of estimate of what your minimum is or you're adding to an undefined term. I'm well aware the estimate is only going to be best guess but it shouldn't be too terribly hard to come up with something reasonable. Most of us already have this sort of number figured out in case we experience a job loss or other financial hardship. For example, if really pressed my wife and I could probably cut about 28% of our current budget. It would be massively painful, eliminating pretty much all discretionary spending like Christmas gifts, television or buying healthy food, but it would still cover the basics. So if you're using your "comfortable but not bare bones" number then you've got some built in safety margin. My recommendation, if you're going to use the SWR model then pick an intended withdrawal amount that covers your desired lifestyle not your bare minimum requirement. In that case, sure you can cut those trips to Europe, hobby spending or other "lifestyle" expenses in order to compensate for market fluctuations if necessary. Of course, given that information, I think you'd be better off using a different model to do your projections.
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Re: A Low-Return Future? Are We Prepared?

Post by sciencenerd »

Valuethinker wrote:
sciencenerd wrote: However, as the eternal pessimist, I also fear lower investment returns in the future, for two reasons. 1) Limits to growth and 2) the end of cheap energy. We are already seeing that the US, at least, is awash in capital that is somehow not in great demand. Why? I don't have a good answer but the two points above may have something to do with it.
.
re limits to growth. There are effluent limits to growth, that is clear. However cleaning up those effluents is possible-- a North American car now produces c. 10% of the pollutants that one in the 1970s did.

On resource limits to growth that is much less clear. Because the price of a resource rises as it gets scarce, alternative materials are found. That has been the history throughout the period since about 1750.

If you look at economic growth, then a lot of the world's most advanced economies appear to be reaching 'peak materials'-- ie they are not consuming more raw materials. Partly that's simply because we import more manufactured goods from China, but even stripping that out there seems to be a real effect. We consume more services like healthcare, dining out etc. But not more things.

On cheap energy again the problem is an effluent one. There is loads of cheap energy around (coal) and virtually infinite energy (sunlight). The problem is the one is not something we can keep on burning, and there's a cost to switch to the other. Peak anything discussions are forbidden here but I encourage you to have optimism: look at the fall in cost curves for solar cells over the last 30 years.

I think the answer re cheap capital has a lot more to do with what Keynes talked about. ie a deficiency in aggregate demand.
Thanks for the encouragement, Valuethinker. I actually lurked here for several years before recently starting to post. Reading about your's and other poster's seasoned and level headed approach has actually made me sleep better at night since I started following the Boglehead philosophy (thanks for that).

- As to your point about the deficiency in aggregate demand leading to cheap capital, I fully agree and probably should have included that point in the above analysis (it is interesting to read Stiglitz on this issue).

- Regarding the energy issue (bolded above): It is surprising how the suns's energy supply is actually far from infinite. If one extrapolates the last 100 year world exponential growth in energy consumption, then we would use all of the solar radiant energy incident on the earth surface in about 500-600 years. I find that thought pretty staggering, since it clearly demonstrates that growth WILL have limits. The good thing is that GDP growth has decoupled recently somewhat from growth in energy consumption, which might give us another few hundred years before limits are reached :).

- As for other posters reiterating the inability to predict the future: There are some things we can predict. For example, we can predict that the sun eventually stops shining (not in our lifetime, of course). We also can predict that the stock market will eventually collapse without bouncing back. What we cannot predict is exactly WHEN this happens, thus limiting our ability to act on these predictions.
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