Backpedaling: Rising Equity Allocation During Retirement

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Leeraar
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Backpedaling: Rising Equity Allocation During Retirement

Post by Leeraar »

There has been some controversy over the idea that equity allocations should rise during retirement. Dr. Wade Pfau now takes a step back from that idea:

http://retirementresearcher.com/rise-no ... etirement/
It does indeed seem that retiring at times with particularly low bond yields, which can be expected to increase over time, may not favor rising equity glidepaths during retirement. It essentially causes the retiree to lock in low bond returns and even capital losses on a bond fund as bond yields gradually increase (on average) over time.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by RadAudit »

Thanks for the post.

As we get further in to financial research, the more similarities I see between that and modern science and diets. Use to be that you shouldn't drink coffee; now coffee is OK. Now we have it use to be a rising equity AA in retirement was the thing to do; now, maybe not in some circumstances.

I appreciate the Dr's. revisit of his prior work. But, the older I get the more I appreciate Mr. Bogle's advice to stay the course.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nisiprius »

Good for Dr. Pfau.

The previous paper, by Kitces and Pfau, was properly stated. In my opinion, they made it clear that this was a fairly weak effect, based on various carefully assumptions. One of the big ones is only mentioned in an aside: "the clear caveat and concern of this approach is that it may also create concerns for seniors in their later years, who may not be comfortable from a risk tolerance perspective."

Unfortunately, in my opinion, the previous paper was wildly overpublicized and overhyped by people who like high stock allocations.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nedsaid »

Dr. Pfau is intellectually honest. I like that. Too many people, when confronted with contrary evidence just do the old double down and lash out at their critics. I also like that he is taking market valuations into account. He is also doing a lot of thinking aloud and thinking aloud in his articles and publications. This stimulates valuable discussion. It is too bad that many people are only concerned about being right.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by The Wizard »

I mentioned to Wade at BH13 last October that I wasn't too keen on the rising equity concept.
I'm sure that probably wasn't the main reason for this modification...
:)
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by itstoomuch »

He's only stating today's obvious observation.
Tomorrow's observation may be different.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Levett »

"Dr. Pfau is intellectually honest. I like that."

Me, too.

It's called integrity.

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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Rodc »

nisiprius wrote:Good for Dr. Pfau.

The previous paper, by Kitces and Pfau, was properly stated. In my opinion, they made it clear that this was a fairly weak effect, based on various carefully assumptions. One of the big ones is only mentioned in an aside: "the clear caveat and concern of this approach is that it may also create concerns for seniors in their later years, who may not be comfortable from a risk tolerance perspective."

Unfortunately, in my opinion, the previous paper was wildly overpublicized and overhyped by people who like high stock allocations.
Yes, good for Dr. Pfau to take another look and not get locked into a not very well thought out idea.

I'm surprised it was published in the first place. Not because it was a bad idea per se, but because the case they built was so horrendously weak.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Garco »

I am a big fan of Pfau. But while he is reviewing the "rising equity allocation" idea, he ought to look at the levels recommended at various ages, whether or not they rise.

So what's the "best" AA at age 50, 55, 60, 65, 70, 75 etc.?

What implication does Pfau's recent recanting have for the standard 60/40 calculations?
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nun »

Interestingly I'm 54 and retired and just took a step up in my equity allocation because I bought a SPIA with some stable value and Total Bond Index money.
Pre annuity my AA was 50/50, after, the remaining portfolio is 70/30. If I can get an average of 1% greater return with the higher equity portfolio the portfolio
value with be greater than with 50/50 by the time I'm 64 and I actually feel that I've reduced my risk......of course I don't consider the possibility that I'll die before 64..
and if I do I'll be dead and won't care.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by knpstr »

The best asset allocation is one with the most in stocks that you can "tolerate". What you can tolerate is based on a variety of individual factors two of which are the ratio of living expenses to nest egg size, and temperament to market swings. Once you mitigate your liquidity risk (need for short term cash, which again is a different number for everyone) the game is still invest for the long haul, even for retirees.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Garco »

knpstr wrote:The best asset allocation is one with the most in stocks that you can "tolerate". What you can tolerate is based on a variety of individual factors two of which are the ratio of living expenses to nest egg size, and temperament to market swings. Once you mitigate your liquidity risk (need for short term cash, which again is a different number for everyone) the game is still invest for the long haul, even for retirees.
Yes. But both in the comments of Pfau's that are linked, plus his response to a question, he seems unwilling to offer any default recommendation for those who are not able to carefully design a plan that incorporates their own risk acceptance/aversion or initial conditions (interest rate environment). Given this kind of uncertainty, my own approach at retirement (age 70) is to be rather more aggressive with equities than the "age in bonds" notion. Sometime in the future I will find out if I was wrong. (Of course, I will respond to changing economic and financial conditions. It's not set-and-forget.)
Last edited by Garco on Wed Mar 04, 2015 12:26 pm, edited 1 time in total.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by 555 »

The whole idea was nonsense to start with. It's not appropriate to think in terms of glidepaths at all in retirement. It's better to make sure you have your basic needs covered, then you have more freedom to invest the excess. What can happen is that if someone has a comfortable excess they may choose to put it in stocks, and over time the stock percentage may grow with market movement. But that's not a pre-set glidepath, but instead is just what is seen to happen in hindsight for this group of retirees.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by knpstr »

Garco wrote: Yes. But both in the comments of Pfau's that are linked, plus his response to a question, he seems unwilling to offer any default recommendation for those who are not able to carefully design a plan that incorporates their own risk acceptance/aversion or initial conditions (interest rate environment).
Perhaps it is because a default recommendation is not meaningful in such a individualistic topic.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Garco »

knpstr wrote:
Garco wrote: Yes. But both in the comments of Pfau's that are linked, plus his response to a question, he seems unwilling to offer any default recommendation for those who are not able to carefully design a plan that incorporates their own risk acceptance/aversion or initial conditions (interest rate environment).
Perhaps it is because a default recommendation is not meaningful in such a individualistic topic.
Maybe. But this affects the utility of every online retirement income calculator as well. And I would assume a whole lot of people rely on those for at least basic retirement planning.

My own approach is to pick an AA at retirement (this year) that I can live with, which is more risky than "age in bonds" but not as risky as the 60/40 "standard" assumption. But I have a "secret sauce," which is simply that I have set aside a very large part of my money (about 30%) that I do not ever expect to need to draw on. This is my "insurance policy" (along with LTCI) if all hell breaks loose. Of course that money needs to be invested somehow, but I'm not evaluating it for total return or yield nearly as closely as the money that I intend to live on (and which comes mainly from my dedicated retirement funds -- IRA, 401k etc.).
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by knpstr »

Garco wrote: Maybe. But this affects the utility of every online retirement income calculator as well. And I would assume a whole lot of people rely on those for at least basic retirement planning.

My own approach is to pick an AA at retirement (this year) that I can live with, which is more risky than "age in bonds" but not as risky as the 60/40 "standard" assumption. But I have a "secret sauce," which is simply that I have set aside a very large part of my money (about 30%) that I do not ever expect to need to draw on. That is my "insurance policy" (along with LTCI) if all hell breaks loose. Of course that money needs to be invested somehow, but I'm not evaluating it for total return or yield nearly as closely as the money that I intend to live on (and which comes mainly from my dedicated retirement funds -- IRA, 401k etc.).
So to simplify, I'll count your "stash" as the same as bonds: you're 42/58; stocks/bonds.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Garco »

It's more complex than that, but basically that's fair.

My "stash" is actually invested in two ways, some just for inflation protection, some for total return. It also "insures itself" in that I draw the LTCI premiums from it, as a form of wealth insurance.

My "retirement fund" (which I'm drawing on via MRD's, basically) could at some point be partly annuitized, but I have no current plan to do that. But the investments in that plan aren't just stocks vs. bonds. By some reckonings I'm 50% equities, by others (depending on how the alternative investment is interpreted), I'm about 62% equities.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by VPP »

It's fascinating to here everyones reasoning and situations. I am nearly 54 years old and 70/30, 1/2 in Wellesley and 1/2 split equally between S&P, mid blend and small value. I have been considering if I would be willing to increase my equity allocation further as the market declines, say an additional 3-5% for every 10-15% market decline, just thinking but have not convinced myself yet. My current thought is that Wellesley is my conservative portion but still getting better than just bond return.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nun »

My approach is to get my basic expenses from "guaranteed" sources. I'm only 54 so SS a while away. I cover my expenses from rent on an apartment I own and a pension/annuity. Hopefully i won't need to draw anything from my portfolio so I've increased from 50/50 to 70/30 and might consider a higher equity allocation once SS starts.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Leeraar »

The flip side of this is the idea that equity allocations should drop around retirement. That is because of sequence of returns risk.*

Put that together with the Kitces and Pfau paper, and you have this shiny new thing. I agree with nisiprius, the whole thing was (is) poorly understood and oversold.

* Sequence of returns: If you are accumulating, poor returns in the latter part of your accumulation period are much more important than if they occur early. If you are withdrawing, poor returns in the early part of your withdrawal period are much more important than if they occur later.

L.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nun »

Leeraar wrote:The flip side of this is the idea that equity allocations should drop around retirement. That is because of sequence of returns risk.*

Put that together with the Kitces and Pfau paper, and you have this shiny new thing. I agree with nisiprius, the whole thing was (is) poorly understood and oversold.

* Sequence of returns: If you are accumulating, poor returns in the latter part of your accumulation period are much more important than if they occur early. If you are withdrawing, poor returns in the early part of your withdrawal period are much more important than if they occur later.

L.
Surely the "sequence of returns risk" assumes that you are taking your income from sources that go up and down with the equity and bond markets. What if income is mostly taken from sources like SS, rent or annuities? If you aren't spending from your market assets what is the best AA....in fact what is your goal? surely just to maximize your return as risk has been removed from the income equation.
Last edited by nun on Wed Mar 04, 2015 4:53 pm, edited 1 time in total.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Leeraar »

nun wrote:
Leeraar wrote:The flip side of this is the idea that equity allocations should drop around retirement. That is because of sequence of returns risk.*

Put that together with the Kitces and Pfau paper, and you have this shiny new thing. I agree with nisiprius, the whole thing was (is) poorly understood and oversold.

* Sequence of returns: If you are accumulating, poor returns in the latter part of your accumulation period are much more important than if they occur early. If you are withdrawing, poor returns in the early part of your withdrawal period are much more important than if they occur later.

L.
Surely the "sequence of returns risk" assumes that you are taking your income from sources that go up and down with the equity and bond markets. What if income is mostly taken from sources like SS, rent or annuities? If you aren't spending from your market assets what is the best AA....in fact what is your goal?
nun,

Yes, this whole conversation assumes you are invested in volatile assets and withdrawing according to some formula, and damn the torpedoes.

The far better strategy is to assure your base cash flow needs, at a much lower risk than equity investments.

L.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Dale_G »

My SS, tiny pension and annuity more than cover my ordinary expenses (including taxes that amount to 1/3rd of expenditures). But more importantly, as I continue to mature my likely dependence on the investment portfolio decreases year by year.

Since the portfolio is intended primarily as a legacy, I am letting the equity portion increase with time. I am presently 69% equities on a tax adjusted basis. As equities go up, I do take a little off the top, but then I adjust the equity bands upwards. I have no idea when I will stop. Just maybe a bear market of 50% or more may make me rethink the position.

Everyone has different needs and goals. The equity allocation should be adjusted to what the objectives are - and whether they can be reasonably met.

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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by john94549 »

The "reverse glide path" has merit for a retiree, if, and only if, the retiree's expected retirement can be funded from a rock-solid, no-risk, ain't-nobody-gonna-touch-me-now, portfolio large enough to last the first fifteen years or so of retirement, starting at age 70 or so. We have this. It's called an IRA CD ladder.

The problem being, I suspect most folks don't have this cushion, and they will (perforce) be required to take their withdrawals from a mixture of equities and bond funds. To nip at bond funds to the exclusion of equities might cause some consternation should bond funds swoon.

That said, if one has the aforementioned IRA CD ladder, and does not even need to tap one's "equity/bond" funds for quite a number of years, an increasing allocation to equities is just the result of math. If, at age 85, you wind up with a remaining portfolio allocated 60/40*, but started out at age 70 with 30/70 (the "70" being mostly those IRA CDs), is that so bad?

*VBIAX and the equivalent, your core retirement funds.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nun »

A pension, rent, SS or a stable value fund would alternatives to a CD ladder. If you do get all your income from "rock solid sources" do you go on a reverse glide path with anything else you have and just let your equity percentage grow or would you rebalance. I rebalanced in the past and I think I'd probably continue to do that after resetting my AA to a higher equity percentage than in the accumulation phase. I stuck to 50/50 in accumulation maybe I'll stick at 70/30 or 80/20 in retirement. Is there a good argument against 100/0?
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Leeraar »

john94549 wrote:The "reverse glide path" has merit for a retiree, if, and only if, the retiree's expected retirement can be funded from a rock-solid, no-risk, ain't-nobody-gonna-touch-me-now, portfolio large enough to last the first fifteen years or so of retirement, starting at age 70 or so. We have this. It's called an IRA CD ladder.

The problem being, I suspect most folks don't have this cushion, and they will (perforce) be required to take their withdrawals from a mixture of equities and bond funds. To nip at bond funds to the exclusion of equities might cause some consternation should bond funds swoon.

That said, if one has the aforementioned IRA CD ladder, and does not even need to tap one's "equity/bond" funds for quite a number of years, an increasing allocation to equities is just the result of math. If, at age 85, you wind up with a remaining portfolio allocated 60/40*, but started out at age 70 with 30/70 (the "70" being mostly those IRA CDs), is that so bad?

*VBIAX and the equivalent, your core retirement funds.
Look,

The whole conversation could be moot, because anyone can buy an SPIA that pays 7% for life, rather than agonize about the potential failure of a 4% withdrawal strategy. (Yes, I know this is not quite a fair comparison.)

If you want guaranteed income for life with no possibility of failure, buy an SPIA. Done. (Yes, I know SPIAs have some improbable failure modes.)

That's if your concern is running out of money. If your concern is leaving a legacy or getting all "your money" back, those are different issues.

L.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by carolinaman »

Leeraar wrote:
nun wrote:
Leeraar wrote:The flip side of this is the idea that equity allocations should drop around retirement. That is because of sequence of returns risk.*

Put that together with the Kitces and Pfau paper, and you have this shiny new thing. I agree with nisiprius, the whole thing was (is) poorly understood and oversold.

* Sequence of returns: If you are accumulating, poor returns in the latter part of your accumulation period are much more important than if they occur early. If you are withdrawing, poor returns in the early part of your withdrawal period are much more important than if they occur later.

L.
Surely the "sequence of returns risk" assumes that you are taking your income from sources that go up and down with the equity and bond markets. What if income is mostly taken from sources like SS, rent or annuities? If you aren't spending from your market assets what is the best AA....in fact what is your goal?
nun,

Yes, this whole conversation assumes you are invested in volatile assets and withdrawing according to some formula, and damn the torpedoes.

The far better strategy is to assure your base cash flow needs, at a much lower risk than equity investments.

L.
+1. I believe the excellent point you are making has gotten lost in the sequence of return discussion. If a retiree has allocated funds to low risk assets like short term bonds, CDs, etc. that will cover expenses for at least 5 to 7 years, they have greatly reduced the sequence of return risk.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nun »

johnep wrote:
+1. I believe the excellent point you are making has gotten lost in the sequence of return discussion. If a retiree has allocated funds to low risk assets like short term bonds, CDs, etc. that will cover expenses for at least 5 to 7 years, they have greatly reduced the sequence of return risk.
There is an interesting discussion to be had as to whether a CD ladder, short term bonds or SPIA is the best way to reduce risk and provide income and a buffer against market down turns. I suspect the result will be so dependent of assumptions about the future as to make it meaningless. So it comes down to personal circumstances and preferences.

Something I wonder is whether the higher initial withdrawal possible from an SPIA is a big advantage, particularly for early retirees looking for income prior to SS starting.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Leeraar »

nun wrote:
johnep wrote:
+1. I believe the excellent point you are making has gotten lost in the sequence of return discussion. If a retiree has allocated funds to low risk assets like short term bonds, CDs, etc. that will cover expenses for at least 5 to 7 years, they have greatly reduced the sequence of return risk.
There is an interesting discussion to be had as to whether a CD ladder, short term bonds or SPIA is the best way to reduce risk and provide income and a buffer against market down turns. I suspect the result will be so dependent of assumptions about the future as to make it meaningless. So it comes down to personal circumstances and preferences.

Something I wonder is whether the higher initial withdrawal possible from an SPIA is a big advantage, particularly for early retirees looking for income prior to SS starting.
Yes, it depends.

There are only two ways I know to get mortality credits: An annuity, or an extended family that will let you move in with them when you run out of money. With both of these, the benefit dies when you do.

Bond and CD ladders have the advantage that the remaining assets do not disappear when you die. But, you need enough assets to set them up for a long enough period of time. And, you do not know how long that is.

L.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by ourbrooks »

Well, if Pfau and Kitches have backpedaled, it's not by much. Here's what they say in their March, 2015 JFP article:
•When retirements begin in overvalued market environments (which reflected the situation for new retirees in 2015), an accelerated rising equity glide path shows potential to provide downside risk protection for retirees. In other valuation environments, historical worst-case scenario sustainable withdrawal rates are highest with valuation-based asset allocation strategies.
The only caveat Dr. Pfau has added is that he's unsure what happens in overvalued equity environments that are also low interest rate environments, because such periods are too rare historically. He speculates that under these conditions, a rising equity glidepath MIGHT not work well if interest rates rise rapidly. (Everyone who thinks interest rates will rise rapidly, please post your reasons.)

Nisiprius' claim that the rising glidepath strategies are just an excuse to buy more stocks means that he hasn't done a careful job of reading about rising glidepath strategies. In fact, they presume a more conservative than usual equity allocation at retirement time so someone planning using a rising glidepath strategy and retiring in the next few years would have already begun reducing their stock holdings. The way the rising equity glidepath is achieved during retirement is mostly by withdrawing from bonds, not by increasing stock investments.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by 555 »

If they are talking about glidepaths during retirement, then they are wrong.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by Leeraar »

ourbrooks wrote:Well, if Pfau and Kitches have backpedaled, it's not by much. Here's what they say in their March, 2015 JFP article:
•When retirements begin in overvalued market environments (which reflected the situation for new retirees in 2015), an accelerated rising equity glide path shows potential to provide downside risk protection for retirees. In other valuation environments, historical worst-case scenario sustainable withdrawal rates are highest with valuation-based asset allocation strategies.
The only caveat Dr. Pfau has added is that he's unsure what happens in overvalued equity environments that are also low interest rate environments, because such periods are too rare historically. He speculates that under these conditions, a rising equity glidepath MIGHT not work well if interest rates rise rapidly. (Everyone who thinks interest rates will rise rapidly, please post your reasons.)

Nisiprius' claim that the rising glidepath strategies are just an excuse to buy more stocks means that he hasn't done a careful job of reading about rising glidepath strategies. In fact, they presume a more conservative than usual equity allocation at retirement time so someone planning using a rising glidepath strategy and retiring in the next few years would have already begun reducing their stock holdings. The way the rising equity glidepath is achieved during retirement is mostly by withdrawing from bonds, not by increasing stock investments.
I think it would be fair to say that the March, 2015 JFP article was written and complete (committed for publication) long before the blog I quoted in the OP. I think this is a work in process.

L.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by ourbrooks »

Leeraar wrote:
ourbrooks wrote:Well, if Pfau and Kitches have backpedaled, it's not by much. Here's what they say in their March, 2015 JFP article:
•When retirements begin in overvalued market environments (which reflected the situation for new retirees in 2015), an accelerated rising equity glide path shows potential to provide downside risk protection for retirees. In other valuation environments, historical worst-case scenario sustainable withdrawal rates are highest with valuation-based asset allocation strategies.
The only caveat Dr. Pfau has added is that he's unsure what happens in overvalued equity environments that are also low interest rate environments, because such periods are too rare historically. He speculates that under these conditions, a rising equity glidepath MIGHT not work well if interest rates rise rapidly. (Everyone who thinks interest rates will rise rapidly, please post your reasons.)

Nisiprius' claim that the rising glidepath strategies are just an excuse to buy more stocks means that he hasn't done a careful job of reading about rising glidepath strategies. In fact, they presume a more conservative than usual equity allocation at retirement time so someone planning using a rising glidepath strategy and retiring in the next few years would have already begun reducing their stock holdings. The way the rising equity glidepath is achieved during retirement is mostly by withdrawing from bonds, not by increasing stock investments.
I think it would be fair to say that the March, 2015 JFP article was written and complete (committed for publication) long before the blog I quoted in the OP. I think this is a work in process.

L.
The caveat I mention above is from the blog, not from the article. I hardly think that's "backpedaling" from his position in the article. Perhaps, a better title for the the post would have been something along the lines of "Further information about rising equity allocation."

I'd agree that all of this is a work in progress. I look forward to the work differentiating withdrawal strategies based on valuations. It might be the case that "age in bonds" works best under some valuations and rising equity withdrawals works better under others. Admittedly, rising equity allocations are counter-intuitive - how can increasing risk as measured by year to year volatility reduce risk as measured by the chance of running out of money? Nevertheless, the evidence so far that favors rising equity strategies is strong enough to suggest that dismissing them under all circumstances would be a mistake.
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nisiprius
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nisiprius »

Studies like this seem to fall into two categories:

a) those that don't really discuss risk tolerance or risk aversion at all, but simply take it for granted that everyone in the world is happier with a 50% chance of $2 million/50% chance of $0.5 million, than with a 100% sure-thing of $1 million. Why? because rationally they ought to be happier.

b) those that incorporate a metric and model of risk aversion, and conclude that retirees with a risk aversion of 3.14 should do one thing and those with risk aversion of 2.72 should do another--but give no clue as to how to measure risk aversion in the real world, or validate any measurements that are made. Those stupid questionnaires that everyone, including Vanguard, uses, are about as reliable as asking someone one of those horns-of-the-dilemma party game questions--like whether you would be willing to lose their left pinky finger in return for $100,000.

What there seems to be darn little of is studies like Hannes Schwandt, 2014, Wealth Shocks and Health Outcomes: Evidence from Stock Market Fluctuations. Despite the scorn sometimes expressed for "volatility as risk," this paper suggests that volatility might literally be hazardous to health.

We ought to know a lot more about the effect of financial volatility on elders before we casually recommend high stock allocations to octogenarians. (Surely a high annual rate of return becomes less and less important as a person has fewer and fewer years in which to earn it?)
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by pascalwager »

Pfau writes:
Do remember that ultimately, this whole discussion is about appropriate default glidepaths for those who have very little interest in investments… what should target date funds do post-retirement? Those with greater sophistication should be determining asset allocation based on their funded ratio, and should also be thinking more broadly about the role of income annuities and other strategies.
Also, he concludes that short-term bonds (6 months to 1 year) give better results than longer term bonds, at least in the present valuation/rate environment.
VT 60% / VFSUX 20% / TIPS 20%
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by nun »

pascalwager wrote:Pfau writes:
Do remember that ultimately, this whole discussion is about appropriate default glidepaths for those who have very little interest in investments… what should target date funds do post-retirement? Those with greater sophistication should be determining asset allocation based on their funded ratio, and should also be thinking more broadly about the role of income annuities and other strategies.
Also, he concludes that short-term bonds (6 months to 1 year) give better results than longer term bonds, at least in the present valuation/rate environment.
Before I retired and before I read a few of Wade Pfau's papers I didn't ever consider income annuities. However, given the chance to buy into a COLA'ed public pension (which is basically an very good value annuity) the logic of using 20% of my money to buy guaranteed income overcame 30 years of DIY investing habits and dogma that all annuities are always bad.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by ourbrooks »

nisiprius wrote:
What there seems to be darn little of is studies like Hannes Schwandt, 2014, Wealth Shocks and Health Outcomes: Evidence from Stock Market Fluctuations. Despite the scorn sometimes expressed for "volatility as risk," this paper suggests that volatility might literally be hazardous to health.
Um, here's the abstract from the paper:
Wealth Shocks and Health Outcomes:
Evidence from Stock Market Fluctuations*
Do wealth shocks affect the health of the elderly in developed countries? The economic
literature is skeptical about such effects which have so far only been found for poor retirees in
poor countries. In this paper I show that wealth shocks also matter for the health of wealthy
retirees in the US. I exploit the booms and busts in the US stock market as a natural
experiment that generated considerable gains and losses in the wealth of stock-holding
retirees. Using data from the Health and Retirement Study I construct wealth shocks as the
interaction of stock holdings with stock market changes. These constructed wealth shocks
are highly predictive of changes in reported wealth. And they strongly affect health outcomes.
A 10% wealth shock leads to an improvement of 2-3% of a standard deviation in physical
health, mental health and survival rates. Effects are heterogeneous across physical health
conditions, with most pronounced effects for the incidence of high blood pressure, smaller
effects for heart problems and no effects for arthritis, diabetes, lung diseases and cancer.
The comparison with the cross-sectional relationship of wealth and health suggests that the
estimated effects of wealth shocks are larger than the long-run wealth elasticity of health.
Note the use of the word, improvement. I thought it might have been a typo but here's the conclusion:
This paper provides evidence that wealth shocks have strongly positive effects on health
outcomes of stock holding retirees in the US. A 10% wealth shock is associated with an improvement
of 2-3% of a standard deviation in physical health, self-reported health, mental
health and survival rates. Analyzing individual health conditions I find a strong effect on
high blood pressure, smaller effects on heart diseases and no effect on arthritis, diabetes,
lung disease and cancer. The analysis of interaction terms reveals that effects on physical
health and mortality increase with age. The comparison with the cross-sectional relationship
of wealth and health indicates that the estimated causal effects of wealth shocks are
larger than the long-run wealth elasticity of health.

So far positive effects of wealth shocks on elderly health have been found only for poor
retirees in Russia and South Africa. This paper is the first to document such effects for
wealthy retirees in a wealthy country.
Could be a copy and paste error, but if it isn't, the paper says that wealth shocks lead to improved health.
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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by pkcrafter »

The lesson, once again, is don't use backtesting to tell you much about future returns and circumstances involving those returns. Be wary of any study that produces certain results. Pfau, Bengen, Trinity study, hmm?

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Re: Backpedaling: Rising Equity Allocation During Retiremen

Post by stlutz »

...the paper says that wealth shocks lead to improved health.
I think what the paper is saying is that your wealth going up by 10% improves your health and vice versa. For example, from the paper:
This means that among 100 retirees losing 10% of their remaining
life-time wealth 2.5 will develop an additional health condition and one additional retiree
will not survive the next two years (given a baseline 2-year mortality rate of 12%). The
analysis of individual health conditions reveals a plausible pattern underlying the eect on
physical health. Eects are strongest for hypertension, which we would expect to be most
responsive in the short run. Smaller eects I nd for heart diseases which are typically
caused by high blood pressure. And there are no eects on arthritis, diabetes, lung disease
and cancer which in general take more than two years to be aected by external factors.
Compared to the cross-sectional relationship of wealth and health the estimated eects
are large in magnitude.
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