Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

[Rick Ferri]

I am pleased to bring you an enlightening and perhaps controversial interview with Wade D. Pfau, Ph.D., CFA, RICP.

Episode 024: Dr. Wade Pfau, host Rick Ferri

Dr. Pfau Wade is the program director of the Retirement Income Certified Professional designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA, and is a partner with a financial advisory firm in PA. He holds a doctorate in economics from Princeton University and has published more than sixty peer-reviewed research articles in a wide variety of academic and practitioner journals. 

Dr. Pfau hosts the Retirement Researcher website and is a contributor to Forbes, Advisor Perspectives, Journal of Financial Planning, and an Expert Panelist for the Wall Street Journal.  He is the author of the books:

Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement, How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Income Strategies, and Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.

This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012.

Rick Ferri
Your Host

[marcopolo]

Thanks for doing the interview. I have to say it was a bit disappointing that it sounded like a softball commercial from an insurance company.
No questions about who is funding his research and what influence that might have on his studies. No questions when he mentioned his simulations about why he assumes very high fees for investments but relatively low fees for annuities. Making light-hearted fun of the "chicken dinner" circuit does not seem like a serious critical look at insurance as a possible retirement solution.

The funniest part was when he stated that he was not in the business of selling insurance.

[tomd37]

Rick - Before you get lambasted with comments, can you correct the spelling of Wade's last name throughout the post?

[Uncorrelated]

I facepalmed around 20 times during the postcast over statements that where obviously suboptimal and borderline market timing.

He failed to mention a few things I thought where important. Such as the negative expected return on insurance products, no mention of risk aversion, that life insurance products are inefficient ways of managing a bequest motive for risk averse individuals (i.e. everyone).

Sorry for the harsh words. I read multiple of his research papers and they all look like bad science. Now I know why, his interview gives off the impression that he doesn't know better. He's stuck in the world where excel is the only available tool and failure probabilities the only yardstick. A colossal waste of time.

[Big Dog]

Thanks Rick. While I'm not a fan of annuities or whole life, I still learned quite a bit (which reinforced my skepticism for those products), I still found the interview to be a worthwhile listen.

[Rick Ferri]

My view of Dr. Pfau is that he is honest, ethical, detailed, inquisitive, and reports what he sees. While his findings do run counter to the beliefs of some Bogleheads, the accusation that he “sells insurance” is unfounded and undeserved. Dr. Pfau is an academic, dedicated to finding and publishing ALL useful income solutions for retirees, despite the controversy some of those ideas may create.

Rick Ferri

[tealeaves]

My view of Dr. Pfau is that he is honest, ethical, detailed, inquisitive, and reports what he sees. While his findings do run counter to the beliefs of some Bogleheads, the accusation that he “sells insurance” is unfounded and undeserved. Dr. Pfau is an academic, dedicated to finding and publishing ALL useful income solutions for retirees, despite the controversy some of those ideas may create.

Rick Ferri

I did think he came across as sincere; certainly no less than others who make and try to defend proclamations that many here may or may not agree with. Thanks for the podcast.

[Nate79]

I facepalmed around 20 times during the postcast over statements that where obviously suboptimal and borderline market timing.

He failed to mention a few things I thought where important. Such as the negative expected return on insurance products, no mention of risk aversion, that life insurance products are inefficient ways of managing a bequest motive for risk averse individuals (i.e. everyone).

Sorry for the harsh words. I read multiple of his research papers and they all look like bad science. Now I know why, his interview gives off the impression that he doesn't know better. He's stuck in the world where excel is the only available tool and failure probabilities the only yardstick. A colossal waste of time.

It's not surprising considering his research is funded by the insurance industry and his university was founded to train insurance salesman, err I mean financial advisors.

I'll just leave this right here: viewtopic.php?f=2&t=57154

There are good insurance products/annuities (SPIAs) but sadly he pushes more towards the trash (whole life and its ugly cousins).

[Nate79]

Thanks for doing the interview. I have to say it was a bit disappointing that it sounded like a softball commercial from an insurance company.
No questions about who is funding his research and what influence that might have on his studies. No questions when he mentioned his simulations about why he assumes very high fees for investments but relatively low fees for annuities. Making light-hearted fun of the "chicken dinner" circuit does not seem like a serious critical look at insurance as a possible retirement solution.

The funniest part was when he stated that he was not in the business of selling insurance.

He may not be an insurance salesman but he sure does sound like one. Sadly a Bogleheads podcast sounded like an insurance commercial which is pretty much anti-Bogleheads.

[000]

I listened in the background. I may have missed something.

Inflation and default risk of annuities weren't addressed. These seem like pretty big issues if one is thinking about replacing bonds with annuities. TIPS and I Bonds were mentioned in passing, but not how they could be used with an annuity if inflation happens (note: they really can't because they won't appreciate enough to make up for the real losses in the nominal annuity).

Also, whole life and variable annuities are mentioned, but not how to find the "good" ones.

[petulant]

Thank you for the interview. It was a good interview to get his position explained, which I frankly do find compelling. I understand the podcast is not a forum for airing boglehead criticism--it would fail if it became that. There does need to be a balance though. I think the tone was just right on challenging him toward the end, but I was disappointed it focused on the salesmen instead of some technical questions, like the 1% AUM fees he always includes in his models. Overall, this is shaping up to be my favorite finance-focused podcast. Thanks.

[Rick Ferri]

To a someone with a hammer, the solution to every problem is a nail.

To index fund providers, the answer to retirement is stock and bond index funds. To insurance agents, the answer is annuities and insurance. To mortgage companies, the answer is a reverse mortgage.

If you REALLY listen to what Dr. Pfau said, it’s to be agnostic. Don’t have biases. Be open to new ideas.

Rick Ferri

[JBTX]

Given given all the hyperbolic comments, I was forced to listen. I'm the one who always goes straight to the locked threads.

I must have listened to a different podcast. I found nothing particularly controversial. If you go beyond Bogleheadlandia, it isn't a stretch that some combination of unpredictable volatile stocks and fixed income earning nothing isn't the best approach for everybody. It is entirely plausible that there is a way to better structure the risk / return relationship so that people can take advantage of an income stream and not worry the rest of their lives about the fluctuating size of their honey pot, and whether they will outlive it.

The point he made repeatedly is using these products as a bond substitute, not so much as stock/bond portfolio substitute.

Rick did try his best to flesh out the practical problem of securing these products in a way such that the sales and administrative expense "leak" is minimized. Unfortunately Pfau mostly punted on that, apart from a mention of buying from fee only advisors, which doesnt necessarily directly answer the question. I'm curious, can you get these with modest fees and minimal surrender values, or is such a thing a unicorn?

Also, in discussing SPIAs, or other products for that matter, there was no discussion of inflation. It seems the default assumption these days is that inflation is dead forever, so just don't worry about it.

Also agree that some discussion of solvency risk would be useful. These products aren't exactly bond substitutes. Even with corporate bonds there is a diversification of solvency risk. Having a big chunk of your future tied up in one company does prevent a theoretical risk, that is difficult to quantify. It wasn't long ago that AIG was taken out by a small division of theirs that decided writing credit default swaps on investment banks was a great idea.

Nonetheless, there is theoretical merit to the discussion, and I appreciate the diversity of subject matter.

[afan]

I was really hoping to hear him asked why he assumes lowest cost annuities but high costs for DIY investing, including 1% AUM fees and astronomical expense ratios on top.
I had been looking forward to an answer. Absent one, I cannot agree with the characterization that he is

honest, ethical,

Presenting these products in a way slanted to improve their performance versus index funds appears intentionally deceptive. This would have been a chance to explain. Better still, it would have been a chance to report simulations with average TOTAL fees of 0.05%, rather than 1.7%

Did you ask and he refused to answer?
Did he refuse to do the podcast if he were expected to respond?
Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I am left with the same impression as I had before this opportunity was wasted: He needs to make annuities look good to support his funding, so he puts a few dozen bowling balls on the scale. Enough to make the annuity come out ahead.

Duplicitous. As far from honest and ethical as one could get.

If there is a justification for his behavior, we lost a chance to hear it.

[afan]

One good reason for buying an annuity would be to get total assets below estate tax levels. The income stream would be subject to income taxes but not to estate taxes. Reducing assets by paying an insurance company to pay you back is generally a bad idea (unless you are paid to sell annuities) but in this circumstance one could do better by getting some assets out of the taxable estate. One could use the income stream to pay for Roth conversions. That empties out retirement accounts, which would be subject to estate and income taxes, and permit one to preserve the non-annuitized assets.

I have not run the real numbers- using 0.05% expense ratios and no AUM fees- to determine whether the estate and income tax gains are worth the fees to annuity companies. But hypothetically it might work.

[Rick Ferri]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of cost or mental anguish.

Rick Ferri

[Grt2bOutdoors]

.....

[Rick Ferri]

Please listen to the podcast before providing an opinion about it.

Rick Ferri

[JBTX]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of costs or mental anguish.

Rick Ferri

It seems you are guilty of not being Mike Wallace. Shame on you.

I am perplexed by some of the responses in this thread.

[marcopolo]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of costs or mental anguish.

Rick Ferri

It seems you are guilty of not being Mike Wallace. Shame on you.

I am perplexed by some of the responses in this thread.

Perhaps some of us mistook the following exchange to mean that Rick would would actually ask some of the questions people posed in the thread where he solicited them:

geerhardusvos wrote: ↑
Sun Jul 19, 2020 11:56 pm
My one request is that you actually ask him some of these good and tough questions! Call him out in a nice BH way! Will be an interesting episode

In other words, interview Wade the same way I interviewed every other guest.

Rick Ferri

There were two main points of concern expressed by several people in that thread:

1) Potential conflict of interest due to research funding coming from insurance industry
2) Assumptions in his studies that appear to put a thumb on the scale in favor of that same insurance industry

It seems this would have been a great opportunity to clear that up, instead we got what felt like a puff piece in support of various insurance products.

I am in early retirement and would consider doing a SPIA at some point later in life. It would have been great to get some unbiased analysis of the options from knowledgeable people in the industry. This did not feel like that, at all.

[JBTX]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of costs or mental anguish.

Rick Ferri

It seems you are guilty of not being Mike Wallace. Shame on you.

I am perplexed by some of the responses in this thread.

Perhaps some of us mistook the following exchange to mean that Rick would would actually ask some of the questions people posed in the thread where he solicited them:

geerhardusvos wrote: ↑
Sun Jul 19, 2020 11:56 pm
My one request is that you actually ask him some of these good and tough questions! Call him out in a nice BH way! Will be an interesting episode

In other words, interview Wade the same way I interviewed every other guest.

Rick Ferri

There were two main points of concern expressed by several people in that thread:

1) Potential conflict of interest due to research funding coming from insurance industry
2) Assumptions in his studies that appear to put a thumb on the scale in favor of that same insurance industry

It seems this would have been a great opportunity to clear that up, instead we got what felt like a puff piece in support of various insurance products.

I am in early retirement and would consider doing a SPIA at some point later in life. It would have been great to get some unbiased analysis of the options from knowledgeable people in the industry. This did not feel like that, at all.

It seems as if some believe the intent of the podcast is to aggressively tear down anyone who appears to advance an idea that could be perceived as antithetical to Boglehead dogma. In my mind Mr Ferri addressed the potential issues. I don't think the purpose of a podcast is to do a hit piece. His ties are what they are. I've also seen Pfau quoted quite a bit in SWR threads.

Would you want to see John Bogle badgered to the point of annoyance about his views on international, or why he recommended gold in the portfolio of a private school he advised? You can find fault with anybody if the benchmark is 3 fund or die. Makiel has recently had some views that stray from the BH good book, but I found that podcast very good. Merriman should have been excoriated because he *gasp* TILTS!!

Seems to me you try to extract useful knowledge from a variety of guests. Questioning assumptions in a professional way is appropriate, but I tend to think assassinating guests personally isn't professional and won't lend itself to attract future guests.

If the idea is to only advance Boglehead core preferred views, then I'm not sure there is any need for a podcast.

[marcopolo]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of costs or mental anguish.

Rick Ferri

It seems you are guilty of not being Mike Wallace. Shame on you.

I am perplexed by some of the responses in this thread.

Perhaps some of us mistook the following exchange to mean that Rick would would actually ask some of the questions people posed in the thread where he solicited them:

geerhardusvos wrote: ↑
Sun Jul 19, 2020 11:56 pm
My one request is that you actually ask him some of these good and tough questions! Call him out in a nice BH way! Will be an interesting episode

In other words, interview Wade the same way I interviewed every other guest.

Rick Ferri

There were two main points of concern expressed by several people in that thread:

1) Potential conflict of interest due to research funding coming from insurance industry
2) Assumptions in his studies that appear to put a thumb on the scale in favor of that same insurance industry

It seems this would have been a great opportunity to clear that up, instead we got what felt like a puff piece in support of various insurance products.

I am in early retirement and would consider doing a SPIA at some point later in life. It would have been great to get some unbiased analysis of the options from knowledgeable people in the industry. This did not feel like that, at all.

It seems as if some believe the intent of the podcast is to aggressively tear down anyone who appears to advance an idea that could be perceived as antithetical to Boglehead dogma. In my mind Mr Ferri addressed the potential issues. I don't think the purpose of a podcast is to do a hit piece. His ties are what they are. I've also seen Pfau quoted quite a bit in SWR threads.

Would you want to see John Bogle badgered to the point of annoyance about his views on international, or why he recommended gold in the portfolio of a private school he advised? You can find fault with anybody if the benchmark is 3 fund or die. Makiel has recently had some views that stray from the BH good book, but I found that podcast very good. Merriman should have been excoriated because he *gasp* TILTS!!

Seems to me you try to extract useful knowledge from a variety of guests. Questioning assumptions in a professional way is appropriate, but I tend to think assassinating guests personally isn't professional and won't lend itself to attract future guests.

If the idea is to only advance Boglehead core preferred views, then I'm not sure there is any need for a podcast.

I agree there is no reason to be aggressive, make it a hit piece, or badger, anyone.
Surely, there is a middle ground between that and a puff piece, where someone can ask some critical questions in the course of an interview?

Anyway, it is Rick's Podcast, and he can ask whatever questions he wants. I will refrain from any further criticism.

[JBTX]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of costs or mental anguish.

Rick Ferri

It seems you are guilty of not being Mike Wallace. Shame on you.

I am perplexed by some of the responses in this thread.

Perhaps some of us mistook the following exchange to mean that Rick would would actually ask some of the questions people posed in the thread where he solicited them:

geerhardusvos wrote: ↑
Sun Jul 19, 2020 11:56 pm
My one request is that you actually ask him some of these good and tough questions! Call him out in a nice BH way! Will be an interesting episode

In other words, interview Wade the same way I interviewed every other guest.

Rick Ferri

There were two main points of concern expressed by several people in that thread:

1) Potential conflict of interest due to research funding coming from insurance industry
2) Assumptions in his studies that appear to put a thumb on the scale in favor of that same insurance industry

It seems this would have been a great opportunity to clear that up, instead we got what felt like a puff piece in support of various insurance products.

I am in early retirement and would consider doing a SPIA at some point later in life. It would have been great to get some unbiased analysis of the options from knowledgeable people in the industry. This did not feel like that, at all.

It seems as if some believe the intent of the podcast is to aggressively tear down anyone who appears to advance an idea that could be perceived as antithetical to Boglehead dogma. In my mind Mr Ferri addressed the potential issues. I don't think the purpose of a podcast is to do a hit piece. His ties are what they are. I've also seen Pfau quoted quite a bit in SWR threads.

Would you want to see John Bogle badgered to the point of annoyance about his views on international, or why he recommended gold in the portfolio of a private school he advised? You can find fault with anybody if the benchmark is 3 fund or die. Makiel has recently had some views that stray from the BH good book, but I found that podcast very good. Merriman should have been excoriated because he *gasp* TILTS!!

Seems to me you try to extract useful knowledge from a variety of guests. Questioning assumptions in a professional way is appropriate, but I tend to think assassinating guests personally isn't professional and won't lend itself to attract future guests.

If the idea is to only advance Boglehead core preferred views, then I'm not sure there is any need for a podcast.

I agree there is no reason to be aggressive, make it a hit piece, or badger, anyone.
Surely, there is a middle ground between that and a puff piece, where someone can ask some critical questions in the course of an interview?

Anyway, it is Rick's Podcast, and he can ask whatever questions he wants. I will refrain from any further criticism.

It by no means was a "puff piece". Use of words like that tend to imply non tolerance for straying from dogma.

[000]

The funniest part was when he stated that he was not in the business of selling insurance.

Here's what my research found on this subject.

The retirementresearcher.com site provides a referral to McLean Asset Management, whose website I believe is mcleanam.com. The two sites are hosted on the same IP address. The ADV Part 3 posted on retirementresearcher.com indicates they may receive compensation from referrals.

Wade Pfau is listed as "Principal, Director of Retirement Research" at McLean Asset Management. Their ADV Part 2A (linked in their ADV Part 3) indicates they are an AUM advisor with a standard fee of 1.25% on the first million under management.

The McLean Asset Management ADV Part 2A indicates they are not an insurance agency and do not "sell insurance products".

[Uncorrelated]

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

After a night of sleep I realized what the problem is: Wade is an economist. But "what should my retirement portfolio be" is not an economics question, it's an optimization question. Wade has not demonstrated any knowledge on that subject.

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.

[Derpalator]

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

After a night of sleep I realized what the problem is: Wade is an economist. But "what should my retirement portfolio be" is not an economics question, it's an optimization question. Wade has not demonstrated any knowledge on that subject.

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.

Isn't liability matching "taking care of your needs first"? And if it is how is it suboptimal? Needs met. Again, suboptimal?

If optimality if defined as maximized returns/income/legacy, then liability matching MAY NOT be optimal. All Pfau does is bring up the possibility that it MAY BE optimal from his own modeling by replacing the fixed income portion of one's portfolio with an insurance product. His modeling possibly being weighted in favor of insurance products is another subject on its own.

I have seriously considered such a move, even prior to reading two of his books including the "safety first" one. And in this zero interest rate climate, SPIAs have better utility as the mortality credits themselves become more of a factor in "return" rates rates to the client. But I remain to date one still influenced by the Scrooge McDuck syndrome Pfau mentioned. Alas I am still in the annuity conundrum faction that economists simply cannot explain. Being 60 myself and headed into retirement in 1-2 years, I may change my mind if I make it to later years like Taylor.

[Uncorrelated]

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

After a night of sleep I realized what the problem is: Wade is an economist. But "what should my retirement portfolio be" is not an economics question, it's an optimization question. Wade has not demonstrated any knowledge on that subject.

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.

Isn't liability matching "taking care of your needs first"? And if it is how is it suboptimal? Needs met. Again, suboptimal?

Suppose that you have $1m and an expected lifespan of 20 years. Your needs are $20k / year (I intentionally choose a low amount in order to make the calculations trivial). After your needs are taken care of, you would like to give a bequest motive that maximizes the utility your offspring, which currently are in the leverage constrained part of the accumulation phase.

Using liability matching, we find that one solution is to use $400k to purchase an annuity awarding 20k/year. Your needs are now being taken care of, you place the remaining $600k in an equity fund. You decide not to spend anything extra, when you die, your offspring receives the entire equity fund.

Can we do better? It turns out we can. We can invest 100% of the equity in the market. Since spending is low compared to your net worth, it's unlikely that you will run out of money. If you have bad luck on the markets (for example, your net worth is reduced to $600k after the first year), then it would be unwise to keep 100% in the market, and you should purchase an annuity. This approach results in the same certainty equivalent spending for your utility and a higher expected utility for the bequest motive.

For more information see https://www.aacalc.com/about. Specifically, this figure should make it immediately obvious that liability matching is not an optimal solution for anything.

source: https://papers.ssrn.com/sol3/papers.cfm ... id=2531779

If optimality if defined as maximized returns/income/legacy, then liability matching MAY NOT be optimal. All Pfau does is bring up the possibility that it MAY BE optimal from his own modeling by replacing the fixed income portion of one's portfolio with an insurance product. His modeling possibly being weighted in favor of insurance products is another subject on its own.

Liability matching is not an optimal solution to any known portfolio problem unless you are infinitely risk averse and only have nominal liabilities. I don't think these are fair assumptions.

[goodenyou]

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

After a night of sleep I realized what the problem is: Wade is an economist. But "what should my retirement portfolio be" is not an economics question, it's an optimization question. Wade has not demonstrated any knowledge on that subject.

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.

Isn't liability matching "taking care of your needs first"? And if it is how is it suboptimal? Needs met. Again, suboptimal?

Suppose that you have $1m and an expected lifespan of 20 years. Your needs are $20k / year (I intentionally choose a low amount in order to make the calculations trivial). After your needs are taken care of, you would like to give a bequest motive that maximizes the utility your offspring, which currently are in the leverage constrained part of the accumulation phase.

Using liability matching, we find that one solution is to use $400k to purchase an annuity awarding 20k/year. Your needs are now being taken care of, you place the remaining $600k in an equity fund. You decide not to spend anything extra, when you die, your offspring receives the entire equity fund.

Can we do better? It turns out we can. We can invest 100% of the equity in the market. Since spending is low compared to your net worth, it's unlikely that you will run out of money. If you have bad luck on the markets (for example, your net worth is reduced to $600k after the first year), then it would be unwise to keep 100% in the market, and you should purchase an annuity. This approach results in the same certainty equivalent spending for your utility and a higher expected utility for the bequest motive.

For more information see https://www.aacalc.com/about. Specifically, this figure should make it immediately obvious that liability matching is not an optimal solution for anything.

source: https://papers.ssrn.com/sol3/papers.cfm ... id=2531779

If optimality if defined as maximized returns/income/legacy, then liability matching MAY NOT be optimal. All Pfau does is bring up the possibility that it MAY BE optimal from his own modeling by replacing the fixed income portion of one's portfolio with an insurance product. His modeling possibly being weighted in favor of insurance products is another subject on its own.

Liability matching is not an optimal solution to any known portfolio problem unless you are infinitely risk averse and only have nominal liabilities. I don't think these are fair assumptions.

I think you underestimate the desire for some investors to sleep well at night. You don’t have to be infinitely risk adverse to desire an income floor that meets your essential needs. For some, the mental energy needed to meet these requirements with a probability-based investment plan is just not worth it. The lost opportunity cost of a larger legacy by staying fully invested is not a priority. Volatility is perceived very differently as we age.

[Nahtanoj]

With a 2% withdrawal rate and a potential 30 - 40 year retirement period that needs to be financed, you can invest in pretty much anything you want and have a vanishingly low failure rate - even 100% equities. (In fact, 100% equities may be best if you have a bequest motive.) Annuities will be more useful for people who don’t have the luxury of such a low withdrawal rate - which is a lot of us.

[Uncorrelated]

I think you underestimate the desire for some investors to sleep well at night. You don’t have to be infinitely risk adverse to desire an income floor that meets your essential needs. For some, the mental energy needed to meet these requirements with a probability-based investment plan is just not worth it. The lost opportunity cost of a larger legacy by staying fully invested is not a priority. Volatility is perceived very differently as we age.

Merely having an income floor is not a sufficient condition to be an infinitely risk averse investor. In order to be an infinitely risk averse investor, you must have both an income floor and no desire for additional spending. If you are such an investor, you should have had a very specific asset allocation during the accumulation phase.

I think the average investor is more likely to behave as a floor plus upside investor. The investor wants to spend at least X annually, but would also like to have discretionary spending. For example, the investor needs $20k/year to survive, but would also like to have one vacation per year. This investor does not have infinite risk aversion, liability matching will not be the optimal solution. The research I linked presents some solution.



It's fine if you want to use liability matching. Finding a better solution is complicated and probably well out of your reach, especially given the low quality of retirement research in general. But I expect better from someone who calls himself a retirement researcher. I wouldn't expect a good researcher to spend 5 minutes talking about SWR's. I would expect a good researcher to say: Don't use SWR's, they don't map well to actual investor preferences.

[GoneOnTilt]

.....

[vineviz]

With a 2% withdrawal rate and a potential 30 - 40 year retirement period that needs to be financed, you can invest in pretty much anything you want and have a vanishingly low failure rate - even 100% equities. (In fact, 100% equities may be best if you have a bequest motive.) Annuities will be more useful for people who don’t have the luxury of such a low withdrawal rate - which is a lot of us.

Indeed, Pfau even said is much during the podcast IIRC. If your withdrawal rate is low enough, just about any strategy will work.

[petulant]

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

After a night of sleep I realized what the problem is: Wade is an economist. But "what should my retirement portfolio be" is not an economics question, it's an optimization question. Wade has not demonstrated any knowledge on that subject.

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.

Isn't liability matching "taking care of your needs first"? And if it is how is it suboptimal? Needs met. Again, suboptimal?

Suppose that you have $1m and an expected lifespan of 20 years. Your needs are $20k / year (I intentionally choose a low amount in order to make the calculations trivial). After your needs are taken care of, you would like to give a bequest motive that maximizes the utility your offspring, which currently are in the leverage constrained part of the accumulation phase.

Using liability matching, we find that one solution is to use $400k to purchase an annuity awarding 20k/year. Your needs are now being taken care of, you place the remaining $600k in an equity fund. You decide not to spend anything extra, when you die, your offspring receives the entire equity fund.

Can we do better? It turns out we can. We can invest 100% of the equity in the market. Since spending is low compared to your net worth, it's unlikely that you will run out of money. If you have bad luck on the markets (for example, your net worth is reduced to $600k after the first year), then it would be unwise to keep 100% in the market, and you should purchase an annuity. This approach results in the same certainty equivalent spending for your utility and a higher expected utility for the bequest motive.

For more information see https://www.aacalc.com/about. Specifically, this figure should make it immediately obvious that liability matching is not an optimal solution for anything.

source: https://papers.ssrn.com/sol3/papers.cfm ... id=2531779

If optimality if defined as maximized returns/income/legacy, then liability matching MAY NOT be optimal. All Pfau does is bring up the possibility that it MAY BE optimal from his own modeling by replacing the fixed income portion of one's portfolio with an insurance product. His modeling possibly being weighted in favor of insurance products is another subject on its own.

Liability matching is not an optimal solution to any known portfolio problem unless you are infinitely risk averse and only have nominal liabilities. I don't think these are fair assumptions.

Most people do not have $1M with a $20K spending need. Most people are more akin to only having $600K with a $20K spending need. Am I correct in interpreting the graph you posted as showing that if the starting wealth vs. needs are high enough, 0% to annuities is better until age raises the mortality credits significantly (blue in upper left area), while if starting wealth vs. needs are moderate, an allocation to annuities makes sense (red in mid-left area)? If so, that is exactly what Wade Pfau is saying.

[Rick Ferri]

Dr. Pfau is not advocating market timing, he is not advocating active management, he is not anti-Bogleheads. He is guilty only of researching and reporting alternative ways for retirees of modest means to fund their liabilities, maintaining real liquidity for spending shocks, and leave a legacy.

If you think his ideas might work for you, then research them further. If not, then don’t. It’s that simple.

Rick Ferri

[Stinky]

I think that Rick Ferri does an absolutely wonderful job of interviewing a diverse group of financial folks for the podcast. He is not Mike Wallace; this is not 60 Minutes; and Rick is a genuinely nice guy.

Dr. Pfau said (I think) during the podcast that sometime in his 30s he bought a whole life policy, so he has "drunk the Kool Aid" himself. That's a personal choice, and if he's OK with the purchase, so am I.

My issue with what Dr. Pfau presented concerns the real-world practicality of substituting whole life for a bond allocation. I have two primary issues:

---- Early year returns on WL. I've seen many posts on the Forum where folks that have had a whole life policy for 15 or more years are seeing 3% or 4% returns on the "investment" component of the WL policy. I believe that those returns are possible on a go-forward basis when the WL policy has been in force for a decade or more. However, that ignores the absolutely HORRIBLE returns in the first decade of almost all WL policies, when the return is often negative. High upfront costs, especially commissions, are recouped by the insurance companies early in the policy lifetime. It would be hard for me to say that whole life would be a suitable replacement for a bond allocation for the first 10 or so policy years.

---- Affordability of WL. Many folks who are in their 30s are in the thick of their child-rearing years, and their need for "pure life insurance" protection is at a peak. Level term life insurance is very affordable for these folks. However, whole life is multiples of the cost of term life. If folks in their 30s were to provide for their insurance needs through whole life only, I'm afraid that the cost of the whole life policy would crowd out other savings types.

Rick, please keep your chin up as you face incoming fire from some on the Board. You do a great job, and thanks for your service to the Boglehead community.

[GoneOnTilt]

.....

[Peanutsandme]

Rick, that was very interesting.

I thought it was fair and balanced.

And I agree, Dr. Pfau is honest. He is just presenting a different point of view than this forum.

[GoneOnTilt]

.....

[vineviz]

Dr. Pfau is not advocating market timing, he is not advocating active management, he is not anti-Bogleheads. He is guilty only of researching and reporting alternative ways for retirees of modest means to fund their liabilities, maintaining real liquidity for spending shocks, and leave a legacy.

If you think his ideas might work for you, then research them further. If not, then don’t. It’s that simple.

Rick Ferri

I wonder if there is a guest you could invite who might discuss the dangers of confirmation bias, authority bias, etc. to investors?

I’d love to hear Carl Richards or Daniel Crosby discuss what’s going on in this thread in particular.

[Rick Ferri]

I’d love to hear Carl Richards or Daniel Crosby discuss what’s going on in this thread in particular.

Advisers who charge based on assets under management (AUM) are generally not going to support annuities or whole life because those products take billable assets away from them.

Rick Ferri

[Rick Ferri]

It's not surprising considering his research is funded by the insurance industry and his university was founded to train insurance salesman, err I mean financial advisors.

What's also egregious is that this insurance infomercial - which did not disclosed conflicts of interest - was funded by the John C. Bogle Center for Financial Literacy.

Jack Bogle must be rolling over in his grave.

Vanguard offers annuity products and has done so for decades.

Rick Ferri

[GoneOnTilt]

.....

[vineviz]

Advisers who charge based on assets under management (AUM) are generally not going to support annuities or whole life because those products take billable assets away from them.

I was referring to the irrationality and close-mindedness I'm seeing, not the use of annuities per se. I know Crosby and Richards mostly as authors on the topics of behavioral finance and investor psychology, which I why they came to mind.

[Nate79]

As was discussed in the other thread on this topic people should not be surprised that a "professor" who works for a university founded to train the insurance industry, funded why the insurance industry and then also works for an AUM advisory firm found that their strategy of high cost and complicated products sold by salesman was the "best."

Not that any of this was disclosed on the show or anything.

[vineviz]

I wasn't criticizing annuities or suggesting Jack Bogle was against them. I was pointing out that Jack Bogle was of the highest ethics and would not like his Center being used to pitch products without full disclosure.

I'm sure Rick agrees with you, so I'm glad that neither this podcast nor any other that I've heard include any "product pitching".

Pfau is a professor, not an insurance salesman. Full stop.

[Nate79]

Did you ask and he refused to answer?

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

Did he refuse to do the podcast if he were expected to respond?

No. Of course not.

Several people brought this up when you asked for questions before the podcast. Did you just decide not to ask?

I asked about the insurance company sponsoring his white paper, and he told me the research was already done and published before the company approached him to sponsor it. It was all after-the-fact.

--------------------------------

In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.

His simplest strategy, replace bonds in a portfolio with an immediate fixed annuity to reduce longevity risk, can be implemented by anyone. He said this several times. This is a practical solution that's also easily implemented by a DIY investor without a lot of cost or mental anguish.

Rick Ferri

Since you are a financial advisor that is a fiduciary and you believe the approach of Pfau is sound do you plan to recommend this strategy to your clients?

[afan]

I did not ask him why he makes an assumption that the average adviser fee is 1%, which it is BTW.

The question is not whether 1% is a typical fee.

The question is why include an "average" AUM fee (and a high expense ratio) to a comparison with the best annuity rates? Why not "average" to "average" or "best" to "best?"

Why include an AUM fee at all?

Since he uses the best annuity rates he can find, a fair comparison would be those rates to a portfolio with zero AUM fee and 5 basis points for expense ratio.

If there is a good reason for the asymmetrical assumptions, this was our chance to hear it.

Given how greatly his assumptions distort his comparisons of annuities to low cost portfolios, nothing else he has to say is interesting. Absent a good explanation for these assumptions, everything else appears to be part of the same sales pitch.

With this opportunity gone and Pfau never addressing these questions in his writing or including fair comparisons, one should ignore what he has to say.

A shame. This could have been useful.

Any chance of sending him a follow up question about this and seeing whether he will answer?

[GoneOnTilt]

.....

[Rick Ferri]

No specific companies or products were mentioned in this podcast with Dr. Pfau. In contrast, Burton Malkiel routinely touted Wealthfront where he is their Chief Investment Officer, and an emerging market ETF managed by a company he is tied in with during his podcast last month without disclosing either affiliation, and no one had an issue.

So, let's be fair.

Rick Ferri

[vineviz]

Are you kidding? Pfau financially benefits from the annuity industry. He is "Co-President" of a "Center" that is a front for New York Life and its insurance products, including annuities.

I'm not kidding, and I no amount of nostril flaring is going to turn Pfau from a professor into an insurance agent.

The American College of Financial Services, where Pfau teaches, is an accredited university. Accredited by the same group that accredits Vassar, Barnard, Sarah Lawrence, Swarthmore, Bucknell, the United States Naval Academy, etc.

It's not a "front" for anything.