Dr. Wade Pfau on the 4% Rule

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Dr. Wade Pfau on the 4% Rule

Post by Mel Lindauer » Mon Aug 12, 2013 8:24 pm

Here's an interview Wade did on a San Diego radio station on 8/3 (hour 2).

http://www.760kfmb.com/story/12637763/y ... our-wealth
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Re: Dr. Wade Pfau on the 4% Rule

Post by LadyGeek » Mon Aug 12, 2013 8:28 pm

The link in human readable format: Your Money, Your Wealth Scroll down until you see:

Your Money, Your Wealth Hr. 2 (direct link to podcast)
Aired: 8/3/2013 11 AM: Joe and Big Al talk about the 4 percent rule.

The wiki has some background info: Wade Pfau
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Re: Dr. Wade Pfau on the 4% Rule

Post by baw703916 » Mon Aug 12, 2013 9:00 pm

For those of us who just want to see the bottom line, is 4% still a realistic number in Mr. Pfau's view?

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Re: Dr. Wade Pfau on the 4% Rule

Post by JoMoney » Tue Aug 13, 2013 2:28 am

baw703916 wrote:For those of us who just want to see the bottom line, is 4% still a realistic number in Mr. Pfau's view?

Brad
The podcast is an hour, but the interview portion is at the beginning and fairly short, Dr.Pfau's view is stated early on:
"It's going to vary by circumstances."

Here's what I think I heard:
Based on a 30 year retirement period
Assumption of 30-80% stocks; lower stocks, lower chances
2.8-3% for a diversified portfolio is safer than something higher
What happens early on in retirement has a disproportionate impact to later in retirement
Even if things normalize in bonds, this is a period of time not earning interest rates
Anyone who retired in the early 1990s might be alright
Worried about people who retired in the year 2000
Possible high rate of failure for people who sell stocks at worst possible time (i.e. panic instead of maintaining allocation)
Historically the 4% rule only worked in U.S., Australia, Canada over past century
Consider SPIA
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Re: Dr. Wade Pfau on the 4% Rule

Post by Call_Me_Op » Tue Aug 13, 2013 5:32 am

4% has only worked with a fairly risky portfolio. I think 4% is too high today and has always been too high. I'd keep it at 3% or below.
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Re: Dr. Wade Pfau on the 4% Rule

Post by nisiprius » Tue Aug 13, 2013 6:13 am

I wish some academic type would do a fairly wide-ranging literature search on articles relating to withdrawals and safe withdrawal rates, from the 1990s through today and plot a chart with dots on it for each study.

I think it would turn out that despite these studies being supposedly based on long-term data and/or Monte Carlo simulations, there's been an unmistakable tendency toward continual downward revision.

If so, I charge the advice-givers with ignorance; with arrogance in failing to allow for their ignorance; and with irresponsibility. Because the whole point of a safe withdrawal rate number, even one that is merely "a matter of planning, not of contract," is that you need to decide at the start of a thirty-year period what you are going to tentatively commit to for thirty years. Absolutely anyone can take a seat-of-the-pants guess, and human nature being what it is we are likely to overspend at the beginning. The point of the studies is to give us some prudent restraint on what we would do left to our own devices.

If the advice given around the year 2000 tells us that 4% is prudent, and then ten years later the number is revised to 3%, then shame on "them," because that 4% number was supposed to be taking into account the full range of likely future market behavior.

There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
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Re: Dr. Wade Pfau on the 4% Rule

Post by Dandy » Tue Aug 13, 2013 6:35 am

There is really no safe withdrawal rate to have and hold through sickness and health for 30 years till death. There might be a reasonable starting withdrawal rate say 4% or a little less. I believe the allocation that the 4% rule is based on was 60% equities. Hard for advanced seniors to hold that aggressive allocation when the market takes a big dive and their nest egg impact is alarming and health issues and expenses present themselves.

Mr. Pfau is trying to lift the veil on the 4% rule. Given the historic low interest rates 4% looks less safe. The advice to plan on less than 4% and consider an immediate annuity makes sense. Whatever the initial approach we decide we can't take our eye off the ball -- need to periodically revisit the withdrawal rate, the size of our portfolio and our health/expenses.

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Re: Dr. Wade Pfau on the 4% Rule

Post by 1210sda » Tue Aug 13, 2013 7:13 am

nisiprius wrote: If the advice given around the year 2000 tells us that 4% is prudent, and then ten years later the number is revised to 3%, then shame on "them," because that 4% number was supposed to be taking into account the full range of likely future market behavior.

There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
Totally agree !.

If 4% was supposed to cover these "worse case" periods (at least to a high probability) , are "they" saying that the future 30 yrs will be even worse......therefore the lower SWR. This is really getting annoying.
1210

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Re: Dr. Wade Pfau on the 4% Rule

Post by Cut-Throat » Tue Aug 13, 2013 7:24 am

Call_Me_Op wrote:4% has only worked with a fairly risky portfolio. I think 4% is too high today and has always been too high. I'd keep it at 3% or below.
Historically 3.7% has Worked.....Use 3.5% of remaining portfolio Balance, and then up the percentage as you age. It's pretty much guaranteed to work!

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Re: Dr. Wade Pfau on the 4% Rule

Post by Cut-Throat » Tue Aug 13, 2013 7:34 am

nisiprius wrote: There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
Yup, totally agree! This is recency at it's worst!

If stocks rally over the next 10 years, because earnings rally....then we may see a whole other series of articles of why 5% should should be the 'number'

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Re: Dr. Wade Pfau on the 4% Rule

Post by tadamsmar » Tue Aug 13, 2013 7:46 am

nisiprius wrote:I wish some academic type would do a fairly wide-ranging literature search on articles relating to withdrawals and safe withdrawal rates, from the 1990s through today and plot a chart with dots on it for each study.

I think it would turn out that despite these studies being supposedly based on long-term data and/or Monte Carlo simulations, there's been an unmistakable tendency toward continual downward revision.

If so, I charge the advice-givers with ignorance; with arrogance in failing to allow for their ignorance; and with irresponsibility. Because the whole point of a safe withdrawal rate number, even one that is merely "a matter of planning, not of contract," is that you need to decide at the start of a thirty-year period what you are going to tentatively commit to for thirty years. Absolutely anyone can take a seat-of-the-pants guess, and human nature being what it is we are likely to overspend at the beginning. The point of the studies is to give us some prudent restraint on what we would do left to our own devices.

If the advice given around the year 2000 tells us that 4% is prudent, and then ten years later the number is revised to 3%, then shame on "them," because that 4% number was supposed to be taking into account the full range of likely future market behavior.

There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
Why earth would you predict that the results of a study like the Trinity Study (a study that just happened to be based solely on the single most successful national stock market in the 20th Century, a study that ignored the performance of the the typical stock market for that period) would need downward revision based on future out-of-sample data?
Last edited by tadamsmar on Tue Aug 13, 2013 7:51 am, edited 1 time in total.

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Re: Dr. Wade Pfau on the 4% Rule

Post by baw703916 » Tue Aug 13, 2013 7:50 am

JoMoney wrote:
The podcast is an hour, but the interview portion is at the beginning and fairly short, Dr.Pfau's view is stated early on:
"It's going to vary by circumstances."
In one of the Dilbert books, Scott Adams stated that you can get partial credit by answering any technical question "it depends".
Consider SPIA
Currently the quoted SPIA rate for the TSP (assuming this is a reasonable number) is about 2.6%--not even close to 4% even with the "death premium".
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Re: Dr. Wade Pfau on the 4% Rule

Post by lwfitzge » Tue Aug 13, 2013 8:06 am

1210sda wrote:
nisiprius wrote: If the advice given around the year 2000 tells us that 4% is prudent, and then ten years later the number is revised to 3%, then shame on "them," because that 4% number was supposed to be taking into account the full range of likely future market behavior.

There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
Totally agree !.

If 4% was supposed to cover these "worse case" periods (at least to a high probability) , are "they" saying that the future 30 yrs will be even worse......therefore the lower SWR. This is really getting annoying.
1210

+1 Indeed, I'm a optimist brimming w even newer recency bias.... and my 1,3 ,5 yr annualized return according to Vanguard is 8.3%, 11%, 13% respectively..... whoo hoo..... My new SWR is 7% so there.... this is all getting silly. Until another Trinity study comes out that refreshes the former study (w rigor not opinion/guesses) I'll keep to the 4% and adjust as necessary my expenses or revenue (as the original trinity study recommended).

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Re: Dr. Wade Pfau on the 4% Rule

Post by IlliniDave » Tue Aug 13, 2013 8:07 am

I don't think there's anyway to get around the fact that for most people (SPIAs aside) there isn't going to be a way to do this on autopilot. For the segment who can get by drawing down only 1-2% per year, maybe it can be close to an autopilot setting. My intention is to plan for something under 3%, but retain awareness during retirement and accept the fact that my retirement income may be somewhat variable, and to live my life accordingly. I plan to semi-retire early (~55) so I will have some initial flexibility through considering part-time employment and a willingness to dial the frugality knob up or down as a function of conditions. Through my home-spun Monte Carlo analysis I quickly concluded that even modest changes in assumptions can have dramatic affects on success probabilities. So intuitively it's no surprise to me that as prevailing opinions about the future change (and increased historical data becomes available) that the SWDs thrown out there will meander around.
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Re: Dr. Wade Pfau on the 4% Rule

Post by dbr » Tue Aug 13, 2013 8:12 am

A noteworthy experience is that of all the retired people I have met, there has been no one, not one, who has ever told me that they retired too soon and regretted that they could have worked longer and had more money.

That should tell you something.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Bill M » Tue Aug 13, 2013 8:46 am

baw703916 wrote: Currently the quoted SPIA rate for the TSP (assuming this is a reasonable number) is about 2.6%--not even close to 4% even with the "death premium".
Today's quote for an inflation adjusted SPIA at Income Solutions (through Vanguard), for a 65-year-old male, is 5.07%. Far above the so-called safe withdrawal rate.

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Re: Dr. Wade Pfau on the 4% Rule

Post by dbr » Tue Aug 13, 2013 9:00 am

Bill M wrote:
baw703916 wrote: Currently the quoted SPIA rate for the TSP (assuming this is a reasonable number) is about 2.6%--not even close to 4% even with the "death premium".
Today's quote for an inflation adjusted SPIA at Income Solutions (through Vanguard), for a 65-year-old male, is 5.07%. Far above the so-called safe withdrawal rate.
There is probably some confusion about what it is that is being quoted. I bet that 2.6% is what an investment of $100,000 would have to yield if it were amortized at constant rate for the expected lifetime of the annuitant at a yearly payout of $5600, or 5.6%. The inflation factor would adjust that somewhat.

The correct point by Bill M is that you look at the payout compared to 4%, inflation adjusted, and you recognize that the payout is insured against longevity risk and you see why an SPIA is an efficient way to provide retirement income compared to 4% rule withdrawal from a portfolio. To ensure success from a portfolio you have to drop the withdrawal rate so low that most of the time the investor dies with unspent money.

What the SPIA does not provide is investment of assets for legacy purposes or as a lump sum for some contingency. There is also a tendency to worry about insurance company default, probably far in excess of actual historical risk. It should be noted that when purchased at a reasonable age an SPIA can provide all the planned income will leaving aside a fraction of the assets that would then not be needed at all to support income. Combining the SPIA and residual investment seems like a very practical plan.

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Re: Dr. Wade Pfau on the 4% Rule

Post by TheTimeLord » Tue Aug 13, 2013 9:10 am

Call_Me_Op wrote:4% has only worked with a fairly risky portfolio. I think 4% is too high today and has always been too high. I'd keep it at 3% or below.
This is always interesting to me. Recently I took a early retirement package which paid a lump sum. If I left the lump sum in my retirement plan it would convert to an annuity type product that paid 5.6% of the principle with a COLA but of course I would never see the principle again. So why do these type products work at well over 5% while many are now considering 4% unsafe. Is it because they are sold to large groups so the average lifespan is easier to calculate while individual savers have to assume they will need funds well beyond normal life expectancy. If that is it, which I suspect, then it seems buying into these products sold to groups would make sense. Just trying to understand.
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Re: Dr. Wade Pfau on the 4% Rule

Post by YDNAL » Tue Aug 13, 2013 9:16 am

Mel Lindauer wrote:Here's an interview Wade did on a San Diego radio station on 8/3 (hour 2).

http://www.760kfmb.com/story/12637763/y ... our-wealth
Thank you Mel.

It is worthwhile that people as Wade Pfau continue to review these guidelines.
  • However, absent a crystal ball, neither Pfau nor I nor ANYONE knows what total returns will look like over a specific retirement period (until death).
  • A 4% withdrawal, just like 3% or 5% or __%, may be successful in the future.
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Re: Dr. Wade Pfau on the 4% Rule

Post by HomerJ » Tue Aug 13, 2013 2:12 pm

nisiprius wrote:There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
This.

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Re: Dr. Wade Pfau on the 4% Rule

Post by technovelist » Tue Aug 13, 2013 2:24 pm

4% is perfectly safe... If it is 4% of the remaining balance. :oops:
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Re: Dr. Wade Pfau on the 4% Rule

Post by Cut-Throat » Tue Aug 13, 2013 3:10 pm

technovelist wrote:4% is perfectly safe... If it is 4% of the remaining balance. :oops:
And that is Exactly the Strategy that you should use. Ramping up the percentage as you age.

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Re: Dr. Wade Pfau on the 4% Rule

Post by SeattleCPA » Tue Aug 13, 2013 9:27 pm

dbr wrote:A noteworthy experience is that of all the retired people I have met, there has been no one, not one, who has ever told me that they retired too soon and regretted that they could have worked longer and had more money.

That should tell you something.
I feel like I'm going through these posts tonight and rudely disagreeing with everybody... :( Yikes. I don't want to be rude...

But just for the record (and I talk with lots of people about their finances as part of being a CPA) I regularly run into people who years into retirement tell me they wish they'd continued working. I also regularly run into multimillionaires who retired way early and then say it was a bad idea for just "staying emotionally healthy."

BTW, the reason usually isn't solely to make more money but because people find they actually enjoyed the part that work played in their life, their socialization, their self-worth, etc. People usually don't want to work fifty hours a week or whatever... but wish they'd stayed economically and socially engaged.

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Re: Dr. Wade Pfau on the 4% Rule

Post by LadyGeek » Tue Aug 13, 2013 9:38 pm

^^^ My Dad retired at 87 - he loved his job.

Whenever I hear that the 4% rule is now the 3% rule (approximately), I'm concerned about what I don't hear. That you need to save more for retirement. The math is the same, but many people just don't get what changing this magic number means.

Instead, say that you now need to save more (work harder) in order to reach the same goal. That brings the point home to a lot more people than a mathematical 1 % change in a withdrawal rate.
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Re: Dr. Wade Pfau on the 4% Rule

Post by Devil's Advocate » Tue Aug 13, 2013 10:16 pm

Whenever I hear that the 4% rule is now the 3% rule (approximately), I'm concerned about what I don't hear. That you need to save more for retirement. The math is the same, but many people just don't get what changing this magic number means.

Instead, say that you now need to save more (work harder) in order to reach the same goal. That brings the point home to a lot more people than a mathematical 1 % change in a withdrawal rate.
Not to pick on you but I don't think working harder is really the issue. Save more, spend less, delay retirement are also ways to get to the same goal.

DA

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Re: Dr. Wade Pfau on the 4% Rule

Post by dbr » Tue Aug 13, 2013 10:42 pm

SeattleCPA wrote:
dbr wrote:A noteworthy experience is that of all the retired people I have met, there has been no one, not one, who has ever told me that they retired too soon and regretted that they could have worked longer and had more money.

That should tell you something.
I feel like I'm going through these posts tonight and rudely disagreeing with everybody... :( Yikes. I don't want to be rude...

But just for the record (and I talk with lots of people about their finances as part of being a CPA) I regularly run into people who years into retirement tell me they wish they'd continued working. I also regularly run into multimillionaires who retired way early and then say it was a bad idea for just "staying emotionally healthy."

BTW, the reason usually isn't solely to make more money but because people find they actually enjoyed the part that work played in their life, their socialization, their self-worth, etc. People usually don't want to work fifty hours a week or whatever... but wish they'd stayed economically and socially engaged.
Well, the people I know are economically, politically, and socially engaged. Some of them are so in amazing ways that would not have been possible if they had continued to work.

But, your point is well taken. I know people who are still working after nominal retirement age who do so because there is nothing else they would rather do. That set seems to hold a preponderance of academics, however.

I really do not know anyone that comes to mind that regretted retiring and admits to it.

The real point is to contemplate the broader dimensions of what it means to retire.

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Re: Dr. Wade Pfau on the 4% Rule

Post by HomerJ » Tue Aug 13, 2013 10:44 pm

Here's a compromise...

Retire when 3% can cover your basic necessities, and 4% gives you 3 nice vacations and some spending money a year.

Then spend the 4% and enjoy your life... If you end up retiring into a 30-year period WORSE than the Great Depression, then you don't go on vacation and thank your lucky stars that you're not begging for food and unemployed like 35% of the working-age population (I did say WORSE than the Great Depression).

If you wait until 3% withdrawal can cover your vacations as well, there's a decent chance you'll have worked 5-10 extra years for nothing. That's time you can't get back on the 99% chance that you don't end up retiring into a 30-year period worse than the Great Depression.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Dick Purcell » Wed Aug 14, 2013 7:14 am

Nisiprius and other critics –

If you are criticizing Wade Pfau regarding SWR, your criticism is unjustified.

You should repent.

Years ago he launched and hosted one of the longest/best threads I have seen on Bogleheads, about SWR. Number of pages in double digits.

In that thread, back then, Wade (and others, ahem) provided essentially the same warning that he offers now: 4% is not so safe, 3% is much safer, consider SPIA. As one major basis for that advice Wade provided data for other nations showing 4% not so safe. The original 4%, which was not from Wade, was based on “historical simulation.” Wade and I both showed that Monte Carlo shows 4% less safe. We also showed that historical is biased against bonds and that safest allocation is not mostly stocks, as had been recommended in the pre-Wade 4% era, but only 30% to 40% stocks. Another reason offered for preferring 3% is that you may outlive those 25 or 30 years.

Critics, repent.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Dandy » Wed Aug 14, 2013 9:09 am

If you are angry or annoyed that the 4% rule is in question then you may have missed the point. The point is that the future is unknown so the best study of the past can't give you a set it and forget it guide to the future as far as withdrawal rate safety. Too many unknowns and too important to think you have the answer that will hold true for decades.

The lower the withdrawal rate the safer it is. The more you supplement your retirement with an immediate annuity the less risk you take of running out of money during your life. Why would you trust your financial life "blindly" following a rule of thumb? No matter how respected the study? It provides a great starting point and gives you some comfort that you can sustain your withdrawal through some tough times. Sometimes I think the needle gets stuck on "stay the course". It may apply to maintaining your investment allocation but I think not to withdrawal rates.

In fact it probably makes sense to build into your Investment Plan a periodic revisit to your withdrawal rate given your portfolio, your expenses and your health. Say every 3 to 5 years so that you won't over react to short term fluctuations. Wouldn't that make more sense than saying 4% and set it and forget it?

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Re: Dr. Wade Pfau on the 4% Rule

Post by Valuethinker » Wed Aug 14, 2013 9:46 am

nisiprius wrote:I wish some academic type would do a fairly wide-ranging literature search on articles relating to withdrawals and safe withdrawal rates, from the 1990s through today and plot a chart with dots on it for each study.

I think it would turn out that despite these studies being supposedly based on long-term data and/or Monte Carlo simulations, there's been an unmistakable tendency toward continual downward revision.

If so, I charge the advice-givers with ignorance; with arrogance in failing to allow for their ignorance; and with irresponsibility. Because the whole point of a safe withdrawal rate number, even one that is merely "a matter of planning, not of contract," is that you need to decide at the start of a thirty-year period what you are going to tentatively commit to for thirty years. Absolutely anyone can take a seat-of-the-pants guess, and human nature being what it is we are likely to overspend at the beginning. The point of the studies is to give us some prudent restraint on what we would do left to our own devices.

If the advice given around the year 2000 tells us that 4% is prudent, and then ten years later the number is revised to 3%, then shame on "them," because that 4% number was supposed to be taking into account the full range of likely future market behavior.

There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
'When faced with new information I change my positions. What do you *do* sir?

JM Keynes

The sin was to not imagine different states of the world were possible. Now that we know they are possible, it is necessary to change what we say about SWR.

The whole debate becomes sterile, because eventually you realize you have to annuitize at least part of your wealth-- which is what the old DB/ Final Salary pension schemes did.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Valuethinker » Wed Aug 14, 2013 9:56 am

SeattleCPA wrote:
dbr wrote:A noteworthy experience is that of all the retired people I have met, there has been no one, not one, who has ever told me that they retired too soon and regretted that they could have worked longer and had more money.

That should tell you something.
I feel like I'm going through these posts tonight and rudely disagreeing with everybody... :( Yikes. I don't want to be rude...

But just for the record (and I talk with lots of people about their finances as part of being a CPA) I regularly run into people who years into retirement tell me they wish they'd continued working. I also regularly run into multimillionaires who retired way early and then say it was a bad idea for just "staying emotionally healthy."

BTW, the reason usually isn't solely to make more money but because people find they actually enjoyed the part that work played in their life, their socialization, their self-worth, etc. People usually don't want to work fifty hours a week or whatever... but wish they'd stayed economically and socially engaged.
It is a rare corporate job that offers you the choice. 55 seems to be a sort of upper limit at least in the UK== maybe 60.

The government moves the state retirement age up, but I don't know anyone who has that option of delaying their retirement. Most of work for companies (that we don't own) and once you have some grey hair, you are living on marked time. Your boses are 10-20 years younger and they want a younger, more malleable team underneath them.

Greeters in WalMart I guess. We can always look forward to that. But remember, at 65 I won't be able to stack shelves like I did when I was 18.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Grasshopper » Wed Aug 14, 2013 10:03 am

HomerJ wrote:Here's a compromise...

Retire when 3% can cover your basic necessities, and 4% gives you 3 nice vacations and some spending money a year.

Then spend the 4% and enjoy your life... If you end up retiring into a 30-year period WORSE than the Great Depression, then you don't go on vacation and thank your lucky stars that you're not begging for food and unemployed like 35% of the working-age population (I did say WORSE than the Great Depression).

If you wait until 3% withdrawal can cover your vacations as well, there's a decent chance you'll have worked 5-10 extra years for nothing. That's time you can't get back on the 99% chance that you don't end up retiring into a 30-year period worse than the Great Depression.
This is us, we can stay under 3% for 2 years and use leftovers for travel or good life stuff. Since we retired in 2006 we have had 5 years under 3, one year over 3.5 but less than 4% and we did some travel every year, and major travel 3 of those years.

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Re: Dr. Wade Pfau on the 4% Rule

Post by RNJ » Wed Aug 14, 2013 10:10 am

For those who need a clear discussion with a visual, here is a YouTube link to an interview with Pfau & Finke discussing their "research regarding safe withdrawal rates in today's environment". Very clear explication of their thinking, imho.

Part 1
http://www.youtube.com/watch?v=LXgfIwkfS0M

Part 2

http://www.youtube.com/watch?v=sa6oxUaLtys


Defining "safe" as allowing for a 10% failure rate, according to their research, a 50/50 Stock/bond portfolio would allow for a 2.8% SWR over a thirty year retirement.
Last edited by RNJ on Wed Aug 14, 2013 10:15 am, edited 1 time in total.

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Re: Dr. Wade Pfau on the 4% Rule

Post by HomerJ » Wed Aug 14, 2013 10:14 am

Dick Purcell wrote:Nisiprius and other critics –

If you are criticizing Wade Pfau regarding SWR, your criticism is unjustified.

You should repent.

Years ago he launched and hosted one of the longest/best threads I have seen on Bogleheads, about SWR. Number of pages in double digits.

In that thread, back then, Wade (and others, ahem) provided essentially the same warning that he offers now: 4% is not so safe, 3% is much safer, consider SPIA. As one major basis for that advice Wade provided data for other nations showing 4% not so safe. The original 4%, which was not from Wade, was based on “historical simulation.” Wade and I both showed that Monte Carlo shows 4% less safe. We also showed that historical is biased against bonds and that safest allocation is not mostly stocks, as had been recommended in the pre-Wade 4% era, but only 30% to 40% stocks. Another reason offered for preferring 3% is that you may outlive those 25 or 30 years.

Critics, repent.

Dick Purcell
Why should any of us recant? Pfau hasn't been proven correct yet. Anyone who retired a few years ago who ignored your and Wade's warning has done just fine withdrawing 4%.

That's not to say you and Wade are 100% wrong. If we have a long prolonged crash starting in the next 5 years, or if bonds really do take 30 years to return to 5% (which one of Pfau's assumptions), you may still be proven right...

But there's certainly no reason for us to recant yet. So far 4% has worked fine for any recent retirees.

Question: If Pfau keeps changing his numbers every couple of years by issuing new reports, how good can his 30-year forecasts really be?
Last edited by HomerJ on Wed Aug 14, 2013 10:33 am, edited 1 time in total.

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Re: Dr. Wade Pfau on the 4% Rule

Post by YDNAL » Wed Aug 14, 2013 10:14 am

LadyGeek wrote:Whenever I hear that the 4% rule is now the 3% rule (approximately), I'm concerned about what I don't hear. That you need to save more for retirement. The math is the same, but many people just don't get what changing this magic number means.
Good point, one I've made previously. If you (or I) need $40,000 from savings to cover residual expenses - those NOT covered by other income - then:
  • A 4% withdrawal means you (or I) should save $1 million.
  • Reduce withdrawal to 3% and the number jumps to $1.333 million in savings.
  • The math is crystal clear, you want a lower withdrawal %, then save more (no magic wand here).
Now, the issue that I have is folks that come to the conclusion that $1 million is insufficient to withdraw $40,000 (4%) annually for 20, 30 years. These folks should seriously consider that they do NOT have a clue what 20, 30 years in the future hold !!!

Flexibility, folks.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Dr. Wade Pfau on the 4% Rule

Post by HomerJ » Wed Aug 14, 2013 10:17 am

Dandy wrote:If you are angry or annoyed that the 4% rule is in question then you may have missed the point. The point is that the future is unknown so the best study of the past can't give you a set it and forget it guide to the future as far as withdrawal rate safety. Too many unknowns and too important to think you have the answer that will hold true for decades.

The lower the withdrawal rate the safer it is. The more you supplement your retirement with an immediate annuity the less risk you take of running out of money during your life. Why would you trust your financial life "blindly" following a rule of thumb? No matter how respected the study? It provides a great starting point and gives you some comfort that you can sustain your withdrawal through some tough times. Sometimes I think the needle gets stuck on "stay the course". It may apply to maintaining your investment allocation but I think not to withdrawal rates.

In fact it probably makes sense to build into your Investment Plan a periodic revisit to your withdrawal rate given your portfolio, your expenses and your health. Say every 3 to 5 years so that you won't over react to short term fluctuations. Wouldn't that make more sense than saying 4% and set it and forget it?
I don't think ANYONE on these boards has promoted a 4%, set it and forget it method.

Most of us are arguing that since 4% worked during World Wars, the Great Depression, high inflation periods, and decades of bond bear market and stock bear markets, it's probably still a pretty good starting point.

I'm pretty sure all of us agree that watching your portfolio balance and making adjustments if needed is prudent.

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Re: Dr. Wade Pfau on the 4% Rule

Post by RNJ » Wed Aug 14, 2013 10:18 am

YDNAL wrote:
Flexibility, folks.
Yes. And flexibility has a price.
Last edited by RNJ on Wed Aug 14, 2013 10:21 am, edited 1 time in total.

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Re: Dr. Wade Pfau on the 4% Rule

Post by HomerJ » Wed Aug 14, 2013 10:20 am

RNJ wrote:Defining "safe" as allowing for a 10% failure rate, according to their research, a 50/50 Stock/bond portfolio would allow for a 2.8% SWR over a thirty year retirement.
Note that includes a .50% management fee, so even Pfau thinks that 3.2% would work for us 0.1% fee Bogleheads.

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Re: Dr. Wade Pfau on the 4% Rule

Post by lwfitzge » Wed Aug 14, 2013 10:22 am

RNJ wrote:
YDNAL wrote:
Flexibility, folks.
Yes. And flexibility has a price.
No such thing as free lunch, in life or life planning. Since we are throwing around Pfau a lot today. I found this paper to be a bit more thoughtful as it captures some of the themes in the thread... flexibility in spending habits and general risk tolerance of the investor need to be considered.

http://www.fpanet.org/journal/SpendingF ... awalRates/

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Re: Dr. Wade Pfau on the 4% Rule

Post by 1210sda » Wed Aug 14, 2013 10:29 am

HomerJ wrote: I don't think ANYONE on these boards has promoted a 4%, set it and forget it method.

Most of us are arguing that since 4% worked during World Wars, the Great Depression, high inflation periods, and decades of bond bear market and stock bear markets, it's probably still a pretty good starting point.

I'm pretty sure all of us agree that watching your portfolio balance and making adjustments if needed is prudent.
Well said Homer. I've been retired for 12 years and this approach has served me well, including going through two fairly rough patches during this time.
1210

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Re: Dr. Wade Pfau on the 4% Rule

Post by dbr » Wed Aug 14, 2013 10:33 am

1210sda wrote:
HomerJ wrote: I don't think ANYONE on these boards has promoted a 4%, set it and forget it method.

Most of us are arguing that since 4% worked during World Wars, the Great Depression, high inflation periods, and decades of bond bear market and stock bear markets, it's probably still a pretty good starting point.

I'm pretty sure all of us agree that watching your portfolio balance and making adjustments if needed is prudent.
Well said Homer. I've been retired for 12 years and this approach has served me well, including going through two fairly rough patches during this time.
1210
Yes, no real retirement can use a withdrawal study algorithm as an actual plan. What can be done is to manage as necessary and monitor the situation by comparison to something that comes from a study.

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Re: Dr. Wade Pfau on the 4% Rule

Post by hicabob » Wed Aug 14, 2013 11:10 am

HomerJ wrote:
Question: If Pfau keeps changing his numbers every couple of years by issuing new reports, how good can his 30-year forecasts really be?
With the greatest respect for Dr Pfau and his work - Homer has an interesting point. :?

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Re: Dr. Wade Pfau on the 4% Rule

Post by Mel Lindauer » Wed Aug 14, 2013 11:50 am

HomerJ wrote:
Dandy wrote:If you are angry or annoyed that the 4% rule is in question then you may have missed the point. The point is that the future is unknown so the best study of the past can't give you a set it and forget it guide to the future as far as withdrawal rate safety. Too many unknowns and too important to think you have the answer that will hold true for decades.

The lower the withdrawal rate the safer it is. The more you supplement your retirement with an immediate annuity the less risk you take of running out of money during your life. Why would you trust your financial life "blindly" following a rule of thumb? No matter how respected the study? It provides a great starting point and gives you some comfort that you can sustain your withdrawal through some tough times. Sometimes I think the needle gets stuck on "stay the course". It may apply to maintaining your investment allocation but I think not to withdrawal rates.

In fact it probably makes sense to build into your Investment Plan a periodic revisit to your withdrawal rate given your portfolio, your expenses and your health. Say every 3 to 5 years so that you won't over react to short term fluctuations. Wouldn't that make more sense than saying 4% and set it and forget it?
I don't think ANYONE on these boards has promoted a 4%, set it and forget it method.

Most of us are arguing that since 4% worked during World Wars, the Great Depression, high inflation periods, and decades of bond bear market and stock bear markets, it's probably still a pretty good starting point.

I'm pretty sure all of us agree that watching your portfolio balance and making adjustments if needed is prudent.
BINGO! That's what I've always recommended. We frequently make/made adjustments during our pre-retirement lives when necessary because of increased expenses, reduced income, etc., and retirement withdrawls should be no different. Flexibility is paramount.
Best Regards - Mel | | Semper Fi

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Re: Dr. Wade Pfau on the 4% Rule

Post by Dandy » Wed Aug 14, 2013 4:27 pm

people are upset that the "rules" are changing after 10 years so now safe is 3% - 4% was supposed to be safe through times like now.
That sounded to me that people weren't just using 4% as a starting point. If they were then I stand corrected.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Garco » Wed Aug 14, 2013 5:08 pm

Cut-Throat wrote:
nisiprius wrote: There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
Yup, totally agree! This is recency at it's worst!

If stocks rally over the next 10 years, because earnings rally....then we may see a whole other series of articles of why 5% should should be the 'number'
I think Pfau deserves a lot of credit for something that has been largely overlooked here. Whether one uses historical U.S. data or a Monte Carlo simulation, the "4%" recommendations assumed a range of annual variation in returns that was tied to U.S. history. In a paper that Pfau published a couple of years ago, he broadened the consideration to include historical data from a wide range of countries. Based on that study (well before the recent concerns about dwindling returns from bonds), he inferred that SWR's closer to 2-3% were warranted. He didn't discover the problem in 2013, when it's suddenly been brought into broader discussion in financial media. He discovered it in 2010 because he was concerned by the constrained variance in returns reflected in the historical experience of a single country (ours).

Here's the first of his articles on that theme that I am aware of, from 2010: “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?” Journal of Financial Planning (December 2010) [P] [WP].

This and later ones are also linked on his blog here: http://www.retirementresearcher.com/articles-by-wade/

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Re: Dr. Wade Pfau on the 4% Rule

Post by RNJ » Wed Aug 14, 2013 7:17 pm

hicabob wrote:
HomerJ wrote:
Question: If Pfau keeps changing his numbers every couple of years by issuing new reports, how good can his 30-year forecasts really be?
With the greatest respect for Dr Pfau and his work - Homer has an interesting point. :?
He lives his creed - flexibility!

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Re: Dr. Wade Pfau on the 4% Rule

Post by HomerJ » Wed Aug 14, 2013 8:53 pm

Garco wrote:
Cut-Throat wrote:
nisiprius wrote: There is nothing about known market conditions in 2013 that is outside the range of what has been seen before; not only the 1929 crash but also the 1937 stock market crashes were worse that 2008-2009; the 1966-1982 "death of equities" era was worse than the 2000-2009 "lost decade;" and there's no reason to expect that "rising interest rate environment" to be any worse than 1940-1980.
Yup, totally agree! This is recency at it's worst!

If stocks rally over the next 10 years, because earnings rally....then we may see a whole other series of articles of why 5% should should be the 'number'
I think Pfau deserves a lot of credit for something that has been largely overlooked here. Whether one uses historical U.S. data or a Monte Carlo simulation, the "4%" recommendations assumed a range of annual variation in returns that was tied to U.S. history. In a paper that Pfau published a couple of years ago, he broadened the consideration to include historical data from a wide range of countries. Based on that study (well before the recent concerns about dwindling returns from bonds), he inferred that SWR's closer to 2-3% were warranted. He didn't discover the problem in 2013, when it's suddenly been brought into broader discussion in financial media. He discovered it in 2010 because he was concerned by the constrained variance in returns reflected in the historical experience of a single country (ours).

Here's the first of his articles on that theme that I am aware of, from 2010: “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?” Journal of Financial Planning (December 2010) [P] [WP].

This and later ones are also linked on his blog here: http://www.retirementresearcher.com/articles-by-wade/
(1) Did he correct for other countries being destroyed by war during the last century? Because if they're not destroyed by war in the next 30 years, maybe they all will increase their historical returns to match ours instead of ours dropping to their historical level. He assumes that we're going to see 2%-3% less returns from the stock market going forward. That's a pretty big assumption. He assumed that 3 years ago right before the market went up 60-80%.

(2) Another one of his assumptions is that bonds rates will slowly rise to their historical mean but will take 20-30 years to get there... What if they rise steadily to 5.5% in 10 years instead? Or (gasp) even past that! Talk about recency basis... It wasn't that long ago that CDs returned 5%. It's a pretty big assumption that it will take 30 years before we get back to 5% again.

(3) Bringing up that he inferred 2%-3% SWRs were warranted 3 years ago doesn't make his case stronger... He was wrong 3 years ago. He probably was deep in recency basis over the stock market crash. He sure didn't predict the 80% gains over the last 3 years. Anyone who retired 3 years ago has been taking the full 4% and her portfolio is probably up like 30%. That's plenty of buffer space even if returns are terrible going forward. At what point is he proven wrong? If we get to 2020 and 4% is still doing well, will you guys then finally stop talking about Wade Pfau's safe SWR prediction he made in 2010?

I think his assumptions are very pessimistic. If you postulate a SWR less than 3.33% then you are saying that both the stock and bond markets are going to return LESS THAN ZERO percent real over the next 30 years. That's a pretty huge statement. I cannot believe that he can say that with such certainty and that so many of you believe it so strongly. None of us know what's going to happen. No one can predict the next 30 years. But I find it rather unlikely that we're about to experience the worst 30 years on record.

It's certainly possible, but is it really likely?
Last edited by HomerJ on Thu Aug 15, 2013 8:56 am, edited 1 time in total.

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Re: Dr. Wade Pfau on the 4% Rule

Post by heyyou » Wed Aug 14, 2013 10:30 pm

Seems to me that most are looking for certainty from now through the distant future. Good luck to you on that. So far, that has not ever been achieved.

Some will die sooner, so SWR to 30 years won't matter. Some will be unlucky, but adapt to their reduced incomes. If that happens to you, but you feel grateful for what you do have, you will still have a good retirement. Is there anyone here who will spend 4%+inflation for 30+ years, REGARDLESS OF THEIR PORTFOLIO BALANCE, because the Trinity Study said that was safe? If you live your life to that detail, I hope that you are not my neighbor.

Annuitizing does not have to be a one time event. A retiree could annuitize periodically to spread the rate risk.

If you are so afraid of equity risks, that you have to have a low equity allocation, some of that is greed.
If you are so afraid of annuity risks, that you don't want to let go of your savings, some of that is greed.
Being too safe now feeds a distant risk.
It might be wise to expect to need to adapt to whatever the markets deliver to your accounts.

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Re: Dr. Wade Pfau on the 4% Rule

Post by Ozonewanderer » Wed Aug 14, 2013 11:05 pm

To add more confusion to the rule, here is another one from Blackrock, CORI:
http://www.blackrock.com/cori-retiremen ... CoRI_Brand

ps.
In my case it suggests a pretty generous income stream: 5.3%!

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Re: Dr. Wade Pfau on the 4% Rule

Post by AndroAsc » Thu Aug 15, 2013 8:40 am

Although it may look like a recency issue, I don't think it is. The problem with the 4% rule is that it was derived using data from a time where there was "anomalously" high returns of US stocks relative to the rest of the world.

A few years back, there was a study published on the safe withdrawal rate for a number (>10) developed nations, and the average safe withdrawal rate was 2-3%. Only US, Switzerland(?) and Canada(?) survived the 4% withdrawal rate in that study.

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