qwertyjazz wrote:What is your take on using utility maximization and constant relative risk aversion framework such as Sun and Webb use versus a strictly maximum spending or lack of failure (running out of money) which seems to be more discussed on this board?
It is my impression that utility maximization frameworks have largely displaced "probability of failures" in much (but far from all) of the writing that isn't targeted at a popular audience. (For instance, look over recent papers in the Journal of Financial Planning to see what they use.)
Lack of failure is known to be useless for any kind of variable spending scheme. Say your withdrawal strategy is to spend 50% of your portfolio every year. You are never going to "fail", though in 30 years you may only be withdrawing 12 cents. The 0% probability of failure isn't very meaningful, right?
The kind of framework Sun & Webb use is increasingly common but that doesn't mean it is perfect and without flaws. It assumes constant risk aversion across your life, which is probably not true. It requires you to make guesses about what your risk aversion level is. (Most papers will test various levels to see how it affects the results.) There are some criticisms that the research on risk aversion levels has flaws that result in overestimating people's actual level of risk aversion. (The argument is: most of the research is based on low-stakes games with university students.)
Despite the flaws, the framework is, I think, the best lens to look at different realistic withdrawal schemes. For instance, a onetime Boglehead named gummi proposed a withdrawal scheme he called "Sensible Withdrawals" where each year you might get a "bonus", where can withdraw some portion of the portfolio gains. That is, if the market is flat or down, you are only allowed to withdraw, say $30,000. But if the market was up 7% -- and your portfolio was up $52,000 -- then you could withdraw 25% of that gain -- an extra $13,000 on top of that. So let's compare that to the constant 4% withdrawal scheme.
(I have no idea why my screenshots are coming out fuzzy but hopefully you can still make them out well enough to see what's going on.)
Which of those two is "better"? To make things even less straightforward, say you wanted to compare VPW to "just withdraw 5% of the portfolio balance"