Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

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Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Stinky » Wed Apr 29, 2020 8:11 am

Here’s a new podcast from the Morningstar series “The Long View”. Christine Benz and Jeff Ptak interview Wade Pfau about a variety of retirement income topics.

Pfau gives comments about the “4% rule” not being safe today, primarily because bond yields are so low. That discussion starts at about 15:40 into the podcast.

In addition to other retirement income topics, Pfau also talked positively about the use of whole life as a potential “buffer asset”, which allows folks to borrow on the cash value rather than liquidate retirement assets when times are stressed. (Perish the thought of using whole life, Bogleheads!)

https://the-long-view.simplecast.com/ep ... fau-9Z7_8m
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by deltaneutral83 » Wed Apr 29, 2020 8:18 am

Stinky wrote:
Wed Apr 29, 2020 8:11 am

In addition to other retirement income topics, Pfau also talked positively about the use of whole life as a potential “buffer asset”, which allows folks to borrow on the cash value rather than liquidate retirement assets when times are stressed. (Perish the thought of using whole life, Bogleheads!)

https://the-long-view.simplecast.com/ep ... fau-9Z7_8m
I'm going to guess Pfau is suggesting this as a hedge against emotional selling? We talk a lot about mathematics around here but emotional decisions in bear markets are far and away the second biggest driver of long term success for investing with the first obviously being saving and investing in the first place. Same concept with why people get an adviser, if it helps them stay the course then it's worth it. I am genuinely curious as to the Whole life suggestion by Pfau, I will have to give that a listen but I guess it relates around emotional decisions in volatile times.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by White Coat Investor » Wed Apr 29, 2020 8:59 am

I don't think Pfau ever believed the 4% rule was safe did he?
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Stinky » Wed Apr 29, 2020 9:07 am

White Coat Investor wrote:
Wed Apr 29, 2020 8:59 am
I don't think Pfau ever believed the 4% rule was safe did he?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.

Now he thinks a 4% rule might work 60-70% of the time with current interest rates.

He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by nisiprius » Wed Apr 29, 2020 9:21 am

I hate this kind of statement because it violates the whole premise of what safe withdrawal rules were supposed to be and were said to be. They are not supposed to be based on the current situation. They are supposed to be based on time periods that include the full credible range of situations, often back to 1871, sometimes based on statistically modeling that isn't restricted to history. I'm not saying he's wrong, I'm saying that the 4% "safe rates" were supposed to have allowed for virtually everything.

There have been plenty of times when interest rates were much lower than 5-6%, and they were supposed to have been accounted for in those "safe" withdrawal rates. If they weren't, then the studies behind them have some 'splainin' to do.

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To quote some rhetoric from a different situation, you really shouldn't say something will work "in any market environment, as long as we live" and then just a year or two later say "of course I didn't mean a market environment like this one."
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by randomguy » Wed Apr 29, 2020 9:27 am

Stinky wrote:
Wed Apr 29, 2020 9:07 am
White Coat Investor wrote:
Wed Apr 29, 2020 8:59 am
I don't think Pfau ever believed the 4% rule was safe did he?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.

Now he thinks a 4% rule might work 60-70% of the time with current interest rates.

He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
Historical data says that 5%+ interest rates are abnormally high. The more normal rates are 2-4% (i.e. basically what we had from 1900-1960 and from 2007-2019). The 4% rule worked fine during pretty much all of those periods. A lot of us though grew up in the bubble of 1970-2000 and have this unrealistic expectation that bonds routinely yield 6%+.

Now our .2% is abnormal. These are also abnormal times. I would wait 6 months before reading too much into them. They might be the future, Or they might be a blip.

And the last part is that it isn't low bonds that is causing Pfau to driving the SWR reduction. It is the assumptions he is making about stock returns. It is up to you to decide if he is right or not.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by midareff » Wed Apr 29, 2020 9:57 am

I'm not sure the inflationary indexed 4% rule does a good job of matching a retirees spending needs. I suspect VPW based on prior three year portfolio average might be more effective.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by vitaflo » Wed Apr 29, 2020 10:09 am

Stinky wrote:
Wed Apr 29, 2020 9:07 am
He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
This seems a little silly when a TIPS ladder should get you 3.3%.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Watty » Wed Apr 29, 2020 10:13 am

Stinky wrote:
Wed Apr 29, 2020 9:07 am
He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
For a 30 year retirement you could put it all your money into a TIPS ladder where 3.33% mature each year and you would also get a bit of interest each year so you would actually get around 3.5%

That would work best in a retirement account where the way TIPS are taxed is not an issue but when people start talking about lower SWR rates I get real skeptical.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by HomerJ » Wed Apr 29, 2020 10:17 am

Stinky wrote:
Wed Apr 29, 2020 8:11 am
Pfau gives comments about the “4% rule” not being safe today, primarily because bond yields are so low. That discussion starts at about 15:40 into the podcast.
He said this in 2010 and every year since then.
In addition to other retirement income topics, Pfau also talked positively about the use of whole life as a potential “buffer asset”, which allows folks to borrow on the cash value rather than liquidate retirement assets when times are stressed. (Perish the thought of using whole life, Bogleheads!)
He's pushing whole life now? He always talked about using SPIAs, which wasn't too bad, but now he's pushing whole life?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.
If he actually said this, he should lose his PhD... Pfau has turned into a quack, and that's sad.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by galeno » Wed Apr 29, 2020 10:24 am

We are 62 yr old. Looking forward and backward.

Expected real CAGR of our 50/50 port = 2%. AWR = 4%. Our port lasts 50 yr.

Using firecalc.com. 4% is 95% SWR for 30 yr. 3.8% for 33 yr.

AWR = 4.0% = very conservative. At 3.5% your port should last forever.
Last edited by galeno on Wed Apr 29, 2020 10:27 am, edited 1 time in total.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Will do good » Wed Apr 29, 2020 10:26 am

I remember him say something similar for the past 5+ years. Didn't he also included 1% advisory fees?
He sounds more and more like a salesman.
Last edited by Will do good on Wed Apr 29, 2020 10:32 am, edited 1 time in total.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by bradshaw1965 » Wed Apr 29, 2020 10:30 am

Mentioned above, but why the jump to 3% when 3.3-3.5% seem more realistic. It's a pretty decent amount of spending in an upper-middle class retirement portfolio.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by azanon » Wed Apr 29, 2020 10:31 am

More generally stated, the constant dollar method of retirement income is not safe, and never has been. Following "the 4% rule" and "constant dollar method" are essentially discussing the same thing.

The reason why it's not safe has always had far less to do with the percentage chosen, as it does with making a decision about how much to withdraw in year one, and then crossing your fingers for the next 20-40 years or more hoping you don't run out of money. One could be completely ignorant (not knowledgeable) about other income methods and, with any reasoning skills at all, would almost be able to immediately deduce that there must be a better way.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by galeno » Wed Apr 29, 2020 10:40 am

Correct. He does. 4% + 1% = 5%.

Our port's ER = 0.29%. If we were Americans our port ER = 0.03%.

Play with www.firecalc.com to see how the ER impacts the SWR.
Will do good wrote:
Wed Apr 29, 2020 10:26 am
I remember him say something similar for the past 5+ years. Didn't he also included 1% advisory fees?
Last edited by galeno on Wed Apr 29, 2020 10:46 am, edited 1 time in total.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by White Coat Investor » Wed Apr 29, 2020 10:42 am

Stinky wrote:
Wed Apr 29, 2020 9:07 am
White Coat Investor wrote:
Wed Apr 29, 2020 8:59 am
I don't think Pfau ever believed the 4% rule was safe did he?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.

Now he thinks a 4% rule might work 60-70% of the time with current interest rates.

He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
Anyone that thinks they should use a fixed rule (whether 3% or 4% or whatever) is not super bright on this subject IMHO. The smart folks use a variable withdrawal system, even if it is just a simple eyeballing of the account when you decide what you'll spend. Spend less in bad times and more in good times and you can spend a lot more money. It's amazing how few people on this site are comfortable dealing with the uncertainty inherent in surviving retirement without running out of money after an entire career of even less certainty as far as your earning and spending.

The right answer is not 3% or 4%. It's "adjust as you go so you can spend as much as possible without running out."
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by MikeWillRetire » Wed Apr 29, 2020 10:43 am

nisiprius wrote:
Wed Apr 29, 2020 9:21 am
I hate this kind of statement because it violates the whole premise of what safe withdrawal rules were supposed to be and were said to be. They are not supposed to be based on the current situation. They are supposed to be based on time periods that include the full credible range of situations, often back to 1871, sometimes based on statistically modeling that isn't restricted to history.
This

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by willthrill81 » Wed Apr 29, 2020 10:48 am

HomerJ wrote:
Wed Apr 29, 2020 10:17 am
Stinky wrote:
Wed Apr 29, 2020 8:11 am
Pfau gives comments about the “4% rule” not being safe today, primarily because bond yields are so low. That discussion starts at about 15:40 into the podcast.
He said this in 2010 and every year since then.
In addition to other retirement income topics, Pfau also talked positively about the use of whole life as a potential “buffer asset”, which allows folks to borrow on the cash value rather than liquidate retirement assets when times are stressed. (Perish the thought of using whole life, Bogleheads!)
He's pushing whole life now? He always talked about using SPIAs, which wasn't too bad, but now he's pushing whole life?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.
If he actually said this, he should lose his PhD... Pfau has turned into a quack, and that's sad.
I agree on all points. He's been off the tracks for years with his uber-pessimism, but he's now gone completely whacko with recommending whole life.
White Coat Investor wrote:
Wed Apr 29, 2020 10:42 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
White Coat Investor wrote:
Wed Apr 29, 2020 8:59 am
I don't think Pfau ever believed the 4% rule was safe did he?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.

Now he thinks a 4% rule might work 60-70% of the time with current interest rates.

He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
Anyone that thinks they should use a fixed rule (whether 3% or 4% or whatever) is not super bright on this subject IMHO. The smart folks use a variable withdrawal system, even if it is just a simple eyeballing of the account when you decide what you'll spend. Spend less in bad times and more in good times and you can spend a lot more money. It's amazing how few people on this site are comfortable dealing with the uncertainty inherent in surviving retirement without running out of money after an entire career of even less certainty as far as your earning and spending.

The right answer is not 3% or 4%. It's "adjust as you go so you can spend as much as possible without running out."
Agreed. We only use the '4% rule' as a talking point and as a rough guide for how much a retiree needs to kick off a 30 year retirement. The idea of retirees deciding on day 1 of retirement how much they will withdraw in inflation-adjusted dollars every year for the next 30 years is literally insane. And thankfully, I've never seen a single poster here actually claim that they had done so or had plans to. We intuitively (and correctly) understand that adjustments on some level are needed based on the performance of our portfolios.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by nisiprius » Wed Apr 29, 2020 10:51 am

Transcript
So, there's three buffer assets that exist. And one of them I don't think is really a very good one, but the original sort of buffer asset is cash. ...The two buffer assets that have more ability to actually improve your retirement outcome--if you do have already the cash value in your whole life insurance policy; or if you don't have that, but you own a home and you plan on living in the home, a growing line of credit on the reverse mortgage Home Equity Conversion Mortgage program. Those are the two realistic buffer assets we have.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by nisiprius » Wed Apr 29, 2020 10:53 am

willthrill81 wrote:
Wed Apr 29, 2020 10:48 am
The right answer is not 3% or 4%. It's "adjust as you go so you can spend as much as possible without running out."
Agreed. We only use the '4% rule' as a talking point and as a rough guide for how much a retiree needs to kick off a 30 year retirement. The idea of retirees deciding on day 1 of retirement how much they will withdraw in inflation-adjusted dollars every year for the next 30 years is literally insane. And thankfully, I've never seen a single poster here actually claim that they had done so or had plans to. We intuitively (and correctly) understand that adjustments on some level are needed based on the performance of our portfolios.
And, of course, the authors of the Trinity Study, one of the influential sources of the "4% rule," also agreed:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by 2pedals » Wed Apr 29, 2020 10:55 am

I don't like the term safe withdrawal rate (SWR), it over simplifies a complex concern for a rule thumb methods used for retirement planning. Nothing is truly safe with a fixed blind withdrawal when you are in retirement. I wish the financial experts never called it (SWR). Maybe it should be called the "doubtful blind traditional withdrawal rate (DBTWR)".
Last edited by 2pedals on Wed Apr 29, 2020 11:48 am, edited 1 time in total.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Nate79 » Wed Apr 29, 2020 10:59 am

Whole life? Uh huh. I recall it was mentioned in a recent thread that he got caught promoting some other high expense products and it turned out he was being sponsored by the insurance industry.

Pfau lost credibility years ago and should be ignored. I agree with the sentiment above. He's been a quack for years now.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by galeno » Wed Apr 29, 2020 11:07 am

Lots of rookies and newbies on this thread. Complicating a very simple concept such as the SWR. It is SIMPLE guys. Don't complicate it.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by randomguy » Wed Apr 29, 2020 11:08 am

vitaflo wrote:
Wed Apr 29, 2020 10:09 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
This seems a little silly when a TIPS ladder should get you 3.3%.
Yes but the problems is that you have now given up all the upside (i.e. 4% SWR or having money in year 31). That might not be a trade off you want to make. So you take the risk of a 3% SWR instead of going with the sure things of a 3.5% one from TIPS. You got to balance out greed and fear.

And in Wade's defense he doesn't use 1% in all his studies. He tends to do it in the instituational ones (perpetual withdrawal rates and the like) and is like 50/50 in the rest. As always when looking at a study, make sure to look at the assumptions that are used to generate the data and decide if you agree with them and if they apply to you.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Silence Dogood » Wed Apr 29, 2020 11:21 am

I like the idea of calling it "the 4% observation" instead.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by cherijoh » Wed Apr 29, 2020 11:23 am

azanon wrote:
Wed Apr 29, 2020 10:31 am
More generally stated, the constant dollar method of retirement income is not safe, and never has been. Following "the 4% rule" and "constant dollar method" are essentially discussing the same thing.

The reason why it's not safe has always had far less to do with the percentage chosen, as it does with making a decision about how much to withdraw in year one, and then crossing your fingers for the next 20-40 years or more hoping you don't run out of money. One could be completely ignorant (not knowledgeable) about other income methods and, with any reasoning skills at all, would almost be able to immediately deduce that there must be a better way.
Personally, I think it is only useful for bookending purposes. If you are 30 years from retirement and trying to figure out how much to save for retirement, take a swag at retirement expenses, and then use SWR to forecast whether you are in the ballpark at various saving rates. At the other end, it can be useful for reassuring someone suffering One More Year (OMY) syndrome - if your back-of-the-envelope SWR comes in below 2.5% then, for goodness sake, retire already! :oops:

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by azanon » Wed Apr 29, 2020 11:38 am

cherijoh wrote:
Wed Apr 29, 2020 11:23 am
azanon wrote:
Wed Apr 29, 2020 10:31 am
More generally stated, the constant dollar method of retirement income is not safe, and never has been. Following "the 4% rule" and "constant dollar method" are essentially discussing the same thing.

The reason why it's not safe has always had far less to do with the percentage chosen, as it does with making a decision about how much to withdraw in year one, and then crossing your fingers for the next 20-40 years or more hoping you don't run out of money. One could be completely ignorant (not knowledgeable) about other income methods and, with any reasoning skills at all, would almost be able to immediately deduce that there must be a better way.
Personally, I think it is only useful for bookending purposes. If you are 30 years from retirement and trying to figure out how much to save for retirement, take a swag at retirement expenses, and then use SWR to forecast whether you are in the ballpark at various saving rates. At the other end, it can be useful for reassuring someone suffering One More Year (OMY) syndrome - if your back-of-the-envelope SWR comes in below 2.5% then, for goodness sake, retire already! :oops:
I (generally) agree with that, but I usually like to make one post every time this comes up, because Wade (and so many others) talk about this rule from the perspective of a retirement income strategy.

If i were going to use a constant percentage method (MUCH better than constant dollar IMO), I'd probably still use 4%, a 50/50 portfolio, and probably borrow the 3-year smoothed model that the Managed payout fund uses (soon to be "used").

But my personal preference is VPW (variable percentage withdrawal), and looking at its chart, if I pick a 50/50 and age 62, the starting percentage is ~ 4.6%. So even higher than 4%. But of course that's because the method gradually spends into principle.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Artsdoctor » Wed Apr 29, 2020 11:49 am

White Coat Investor wrote:
Wed Apr 29, 2020 10:42 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
White Coat Investor wrote:
Wed Apr 29, 2020 8:59 am
I don't think Pfau ever believed the 4% rule was safe did he?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.

Now he thinks a 4% rule might work 60-70% of the time with current interest rates.

He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
Anyone that thinks they should use a fixed rule (whether 3% or 4% or whatever) is not super bright on this subject IMHO. The smart folks use a variable withdrawal system, even if it is just a simple eyeballing of the account when you decide what you'll spend. Spend less in bad times and more in good times and you can spend a lot more money. It's amazing how few people on this site are comfortable dealing with the uncertainty inherent in surviving retirement without running out of money after an entire career of even less certainty as far as your earning and spending.

The right answer is not 3% or 4%. It's "adjust as you go so you can spend as much as possible without running out."
Couldn't agree with this more. I think that it's a behavioral finance question for many. If you're really, really tight and have no room to maneuver whatsoever, it's going to be very stressful. But one of the most valuable levers a retiree can use is flexibility which is almost certainly what most people would do if at all possible.

I don't think I've ever heard of a retiree starting with a 4% withdrawal rate and then increasing it every year according to inflation regardless of market performance.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by MiddleOfTheRoad » Wed Apr 29, 2020 11:52 am

White Coat Investor wrote:
Wed Apr 29, 2020 10:42 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
White Coat Investor wrote:
Wed Apr 29, 2020 8:59 am
I don't think Pfau ever believed the 4% rule was safe did he?
He said that the Rule might have worked 90% to 95% of the time when interest rates were in the 5-6% range - that is, historical data.

Now he thinks a 4% rule might work 60-70% of the time with current interest rates.

He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
Anyone that thinks they should use a fixed rule (whether 3% or 4% or whatever) is not super bright on this subject IMHO. The smart folks use a variable withdrawal system, even if it is just a simple eyeballing of the account when you decide what you'll spend. Spend less in bad times and more in good times and you can spend a lot more money. It's amazing how few people on this site are comfortable dealing with the uncertainty inherent in surviving retirement without running out of money after an entire career of even less certainty as far as your earning and spending.

The right answer is not 3% or 4%. It's "adjust as you go so you can spend as much as possible without running out."
And like the current crisis, we are forced to reduce spending because of shelter-in-place. :P

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Dottie57 » Wed Apr 29, 2020 11:52 am

vitaflo wrote:
Wed Apr 29, 2020 10:09 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
This seems a little silly when a TIPS ladder should get you 3.3%.
+1. - caveat - but not everyone buys TIPS.

Edited to correct mangling
Last edited by Dottie57 on Wed Apr 29, 2020 12:39 pm, edited 4 times in total.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by randomguy » Wed Apr 29, 2020 11:54 am

azanon wrote:
Wed Apr 29, 2020 11:38 am

But my personal preference is VPW (variable percentage withdrawal), and looking at its chart, if I pick a 50/50 and age 62, the starting percentage is ~ 4.6%. So even higher than 4%. But of course that's because the method gradually spends into principle.
Spending principle isn't the reason VPW starts higher. That is a fundamental misunderstanding of how variable withdrawal schemes work. VPW starts with a higher number because it is willing to dramatically cut spending during poor times. The 1966 retiree would have gone from 4.6% in year 1 to about 2.8% in year 15. The more aggressive you are willing to cut spending, the more aggressive you can be with starting SWR. If you can handle a 30% cut in spending from the portfolio, VPW works fine. If you can only handle a 15%, you would have to look at one of the alternatives. If you can handle 0%, you should think about a 3.8% SWR.

The other thing to think about is how much do you want to panic when bad times happen. The quicker you panic, the less cuts you have to make. But you will also end up cutting a lot when you don't need to. The 2008 retiree didn't need to make any cuts and they would have been fine despite a ~50% drop in year stocks over the first 18 months. Same thing for 2000. Or the 1973 retiree. And so on for every single 10-20% drops that are too numerable to mention. But you didn't know that at the time. It is easy to say 2000 worked out fine(well so far). Waking up in March 2009 though was a different story. Depending on your personal preferences you can debate if cutting in 2001,2002,2003, 2008, or 2009 or not cutting at all mades sense and by how much and for how long.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by HomerJ » Wed Apr 29, 2020 12:35 pm

randomguy wrote:
Wed Apr 29, 2020 11:54 am
The other thing to think about is how much do you want to panic when bad times happen. The quicker you panic, the less cuts you have to make. But you will also end up cutting a lot when you don't need to. The 2008 retiree didn't need to make any cuts and they would have been fine despite a ~50% drop in year stocks over the first 18 months. Same thing for 2000. Or the 1973 retiree. And so on for every single 10-20% drops that are too numerable to mention. But you didn't know that at the time. It is easy to say 2000 worked out fine(well so far). Waking up in March 2009 though was a different story. Depending on your personal preferences you can debate if cutting in 2001,2002,2003, 2008, or 2009 or not cutting at all mades sense and by how much and for how long.
The way I imagine all of those would have worked out for me...

Late 2008 crash... We would have gone on the big January 2009 trip we had already booked in mid 2008, but we would skip booking a trip in 2009 for 2010.

By mid 2010, things would be looking good, and we'd be booking a trip for 2011.

And by 2013-2014 at the latest, with all the extra money we'd have, we'd probably be booking 2 trips to make up for the one we missed.

And then probably even 2 a year after that for the next few years, as the market doubled again.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by galeno » Wed Apr 29, 2020 12:41 pm

"I don't think I've ever heard of a retiree starting with a 4% withdrawal rate and then increasing it every year according to inflation regardless of market performance."

We try to spend as much as we can while staying 95% safe. We let www.firecalc.com set our AWR every January. Essentially we retire anew every year.

To keep it simple. When the stock market goes down the CPI is usually flat or decreases (deflation). So an easy move is to NOT increase your AWR when stocks go down. Only when they go up.

If you do that simple move you just increased the safety of your AWR.
USA-NRA. TER = 0.28%. Expected real CAGR = 2.00%. AWR = 4.00%.: Port: 50% World Stocks + 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by arcticpineapplecorp. » Wed Apr 29, 2020 12:45 pm

I like Wade and I know he spoke at past bogleheads conferences, but I found a new piece of info on Don MacDonald's podcast last week in which he questioned any possible relationship between Wade promoting annuities to ensure a truly safe withdrawal rate and the financial institution who sponsored some of Wade's research...Lincoln Financial (life insurance company, provider of annuity products).

https://www.google.com/search?client=fi ... ncoln+life

Is there a conflict of interest?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by azanon » Wed Apr 29, 2020 12:49 pm

randomguy wrote:
Wed Apr 29, 2020 11:54 am
azanon wrote:
Wed Apr 29, 2020 11:38 am

But my personal preference is VPW (variable percentage withdrawal), and looking at its chart, if I pick a 50/50 and age 62, the starting percentage is ~ 4.6%. So even higher than 4%. But of course that's because the method gradually spends into principle.
Spending principle isn't the reason VPW starts higher. That is a fundamental misunderstanding of how variable withdrawal schemes work. VPW starts with a higher number because it is willing to dramatically cut spending during poor times. The 1966 retiree would have gone from 4.6% in year 1 to about 2.8% in year 15. The more aggressive you are willing to cut spending, the more aggressive you can be with starting SWR. If you can handle a 30% cut in spending from the portfolio, VPW works fine. If you can only handle a 15%, you would have to look at one of the alternatives. If you can handle 0%, you should think about a 3.8% SWR.

The other thing to think about is how much do you want to panic when bad times happen. The quicker you panic, the less cuts you have to make. But you will also end up cutting a lot when you don't need to. The 2008 retiree didn't need to make any cuts and they would have been fine despite a ~50% drop in year stocks over the first 18 months. Same thing for 2000. Or the 1973 retiree. And so on for every single 10-20% drops that are too numerable to mention. But you didn't know that at the time. It is easy to say 2000 worked out fine(well so far). Waking up in March 2009 though was a different story. Depending on your personal preferences you can debate if cutting in 2001,2002,2003, 2008, or 2009 or not cutting at all mades sense and by how much and for how long.
It has to be at least part of the reason why it starts higher, because of simple math. It WILL gradually spend down principle from starting age until age 100, and pay 100% of that back to the individual as part of the retirement payment. In comparison, a constant percentage method will maintain the inflation-adjusted principle from start to finish and only provide a payment/income using a total return + NO principle approach.

Now I haven't actually done the math, but I would imagine the inflation adjusted growth of that principle, gradually paid in full to the retiree using the method, explains the entirety of the 0.6% delta between VPW and constant percentage using the same parameters.

I think you're overthinking it. I am entirely familiar with how VPW works, btw.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by vitaflo » Wed Apr 29, 2020 1:08 pm

randomguy wrote:
Wed Apr 29, 2020 11:08 am
vitaflo wrote:
Wed Apr 29, 2020 10:09 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
This seems a little silly when a TIPS ladder should get you 3.3%.
Yes but the problems is that you have now given up all the upside (i.e. 4% SWR or having money in year 31). That might not be a trade off you want to make. So you take the risk of a 3% SWR instead of going with the sure things of a 3.5% one from TIPS. You got to balance out greed and fear.
Sure, but we're talking about safe withdrawal rates, IE the lowest percentage you can take and still have money at the end. And it's obvious that 3% is too low in this instance. The safest is still 3.3%. SWR doesn't consider upside.

You give up the upside if you add bonds to your portfolio too but we don't recommend that for retirees. If someone is so scared of the market that they're willing to do a 3% SWR (or even 2% as I've seen some post here), maybe giving up the upside (IE risk) is what will help them sleep at night while allowing them to spend more of their money.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by randomguy » Wed Apr 29, 2020 1:13 pm

azanon wrote:
Wed Apr 29, 2020 12:49 pm


It has to be at least part of the reason why it starts higher, because of simple math. It WILL gradually spend down principle from starting age until age 100, and pay 100% of that back to the individual as part of the retirement payment. In comparison, a constant percentage method will maintain the inflation-adjusted principle from start to finish.

Now I haven't actually done the math, but I would imagine the inflation adjusted growth of that principle explains the entirety of the 0.6% delta between VPW and constant percentage using the same parameters.

I think you're overthinking it. I am entirely familiar with how VPW works, btw.
You might want to look into how the 4% rule works.:) Depletion of capital isn't the reason for the difference because both approaches do that. The 4% rule doesn't trying to " maintain the inflation-adjusted principle from start to finish. ". With the 4% rule, you are spending 100% of your principle in the rate limiting cases. You are hitting year 28-30 broke. The difference between the 2 approaches comes from VPW cuts spending by 20%+ for 10 years in the early on before ramping it back. That maximizes portfolio survivability and spending ability at an old age at the cost of being able to spend money when you are sort of young.

As soon as you are willing to dramatically change expenses all types of options open up. Maybe 5% for the first 15 years and 2.5% for the last 15 (only if things go bad) matches how you want to spend money. Maybe going above 4% has no value but going below 3.5% is painful. You need to figure out your needs and desires and find a scheme that fits it. You can't really create returns but you do have flexibility to shift things around a bit.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by azanon » Wed Apr 29, 2020 1:20 pm

randomguy wrote:
Wed Apr 29, 2020 1:13 pm
azanon wrote:
Wed Apr 29, 2020 12:49 pm


It has to be at least part of the reason why it starts higher, because of simple math. It WILL gradually spend down principle from starting age until age 100, and pay 100% of that back to the individual as part of the retirement payment. In comparison, a constant percentage method will maintain the inflation-adjusted principle from start to finish.

Now I haven't actually done the math, but I would imagine the inflation adjusted growth of that principle explains the entirety of the 0.6% delta between VPW and constant percentage using the same parameters.

I think you're overthinking it. I am entirely familiar with how VPW works, btw.
You might want to look into how the 4% rule works.:) Depletion of capital isn't the reason for the difference because both approaches do that. The 4% rule doesn't trying to " maintain the inflation-adjusted principle from start to finish. ". With the 4% rule, you are spending 100% of your principle in the rate limiting cases. You are hitting year 28-30 broke. The difference between the 2 approaches comes from VPW cuts spending by 20%+ for 10 years in the early on before ramping it back. That maximizes portfolio survivability and spending ability at an old age at the cost of being able to spend money when you are sort of young.

As soon as you are willing to dramatically change expenses all types of options open up. Maybe 5% for the first 15 years and 2.5% for the last 15 (only if things go bad) matches how you want to spend money. Maybe going above 4% has no value but going below 3.5% is painful. You need to figure out your needs and desires and find a scheme that fits it. You can't really create returns but you do have flexibility to shift things around a bit.
Now you're confusing 4% rule (aka constant dollar method) with constant percentage. The point you objected to was my point that VPW will start at a higher rate than the constant PERCENTAGE method because VPW will eat into principle and constant PERCENTAGE method, by design, maintains the inflation-adjusted principle. So you're losing track of what I was comparing.

I'm going to pull the ripcord on this exchange though because it's deviating from the OP. You can have the last say if you want.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by randomguy » Wed Apr 29, 2020 1:26 pm

vitaflo wrote:
Wed Apr 29, 2020 1:08 pm
randomguy wrote:
Wed Apr 29, 2020 11:08 am
vitaflo wrote:
Wed Apr 29, 2020 10:09 am
Stinky wrote:
Wed Apr 29, 2020 9:07 am
He thinks that a “3% rule” is more realistic than a 4% rule in today’s environment.
This seems a little silly when a TIPS ladder should get you 3.3%.
Yes but the problems is that you have now given up all the upside (i.e. 4% SWR or having money in year 31). That might not be a trade off you want to make. So you take the risk of a 3% SWR instead of going with the sure things of a 3.5% one from TIPS. You got to balance out greed and fear.
Sure, but we're talking about safe withdrawal rates, IE the lowest percentage you can take and still have money at the end. And it's obvious that 3% is too low in this instance. The safest is still 3.3%. SWR doesn't consider upside.

You give up the upside if you add bonds to your portfolio too but we don't recommend that for retirees. If someone is so scared of the market that they're willing to do a 3% SWR (or even 2% as I've seen some post here), maybe giving up the upside (IE risk) is what will help them sleep at night while allowing them to spend more of their money.
People do worry about upside. It is one thing to plan for a 5% case (i.e. SWR is turns out to be 3%). It is another to lock it in (i.e. I give up the 75% chance that I will leave my kids more money than I started with if I go with a 3.3% SWR). You can look at annuities for how hard of pitch it is for people to give up the upside for protection against the downside.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Nate79 » Wed Apr 29, 2020 1:29 pm

arcticpineapplecorp. wrote:
Wed Apr 29, 2020 12:45 pm
I like Wade and I know he spoke at past bogleheads conferences, but I found a new piece of info on Don MacDonald's podcast last week in which he questioned any possible relationship between Wade promoting annuities to ensure a truly safe withdrawal rate and the financial institution who sponsored some of Wade's research...Lincoln Financial (life insurance company, provider of annuity products).

https://www.google.com/search?client=fi ... ncoln+life

Is there a conflict of interest?
Yes, he got caught doing this in the past and seems obvious he is at it again.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by willthrill81 » Wed Apr 29, 2020 3:43 pm

Nate79 wrote:
Wed Apr 29, 2020 1:29 pm
arcticpineapplecorp. wrote:
Wed Apr 29, 2020 12:45 pm
I like Wade and I know he spoke at past bogleheads conferences, but I found a new piece of info on Don MacDonald's podcast last week in which he questioned any possible relationship between Wade promoting annuities to ensure a truly safe withdrawal rate and the financial institution who sponsored some of Wade's research...Lincoln Financial (life insurance company, provider of annuity products).

https://www.google.com/search?client=fi ... ncoln+life

Is there a conflict of interest?
Yes, he got caught doing this in the past and seems obvious he is at it again.
I didn't have a problem with him recommending SPIAs. Several other researchers and many well respected posters here have made good arguments that annuitizing at least part of your nominal bond holdings in retirement is an efficient means of generating spending. But whole life insurance is a completely different animal that 99% (or more) of retail investors should steer clear of completely.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by michaeljc70 » Wed Apr 29, 2020 4:33 pm

If you have a higher percent of equities, you may be less impacted by lower interest rates. Also, does he think rates will be low for decades? It is possible, but certainly not guaranteed. Rates are historically low, but we've never increased our debt level by 10%+ in a few weeks either.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Dinosaur Dad » Wed Apr 29, 2020 4:59 pm

willthrill81 wrote:
Wed Apr 29, 2020 3:43 pm
Nate79 wrote:
Wed Apr 29, 2020 1:29 pm
arcticpineapplecorp. wrote:
Wed Apr 29, 2020 12:45 pm
I like Wade and I know he spoke at past bogleheads conferences, but I found a new piece of info on Don MacDonald's podcast last week in which he questioned any possible relationship between Wade promoting annuities to ensure a truly safe withdrawal rate and the financial institution who sponsored some of Wade's research...Lincoln Financial (life insurance company, provider of annuity products).

https://www.google.com/search?client=fi ... ncoln+life

Is there a conflict of interest?
Yes, he got caught doing this in the past and seems obvious he is at it again.
I didn't have a problem with him recommending SPIAs. Several other researchers and many well respected posters here have made good arguments that annuitizing at least part of your nominal bond holdings in retirement is an efficient means of generating spending. But whole life insurance is a completely different animal that 99% (or more) of retail investors should steer clear of completely.

I just read Wade's book on "safety first retirement planning" where he makes his case. I haven't run all of the numbers to see what this looks like for me, (and I'm not going anywhere near anything but SPIA's) but this seems correct: annuitizing at least part of your bond holdings can increase efficiency. It's not the only road, but one road. It does take out some of the risk. The part I'm having trouble with is the impact of inflation over time, although one way around that is to potentially space out your SPIA purchases over time.

As to conflict of interest, my personal impression of him from his many writings and interviews is that he's a straight shooter. In any event it's incumbent upon each of us to vet out the potential strategy and run your own numbers.

Wade recently posted an article about the potential value of annuity even in a low interest rate environment ... see link below.

https://www.forbes.com/sites/wadepfau/2 ... 5dc44d6f85
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by willthrill81 » Wed Apr 29, 2020 5:07 pm

Dinosaur Dad wrote:
Wed Apr 29, 2020 4:59 pm
willthrill81 wrote:
Wed Apr 29, 2020 3:43 pm
Nate79 wrote:
Wed Apr 29, 2020 1:29 pm
arcticpineapplecorp. wrote:
Wed Apr 29, 2020 12:45 pm
I like Wade and I know he spoke at past bogleheads conferences, but I found a new piece of info on Don MacDonald's podcast last week in which he questioned any possible relationship between Wade promoting annuities to ensure a truly safe withdrawal rate and the financial institution who sponsored some of Wade's research...Lincoln Financial (life insurance company, provider of annuity products).

https://www.google.com/search?client=fi ... ncoln+life

Is there a conflict of interest?
Yes, he got caught doing this in the past and seems obvious he is at it again.
I didn't have a problem with him recommending SPIAs. Several other researchers and many well respected posters here have made good arguments that annuitizing at least part of your nominal bond holdings in retirement is an efficient means of generating spending. But whole life insurance is a completely different animal that 99% (or more) of retail investors should steer clear of completely.

I just read Wade's book on "safety first retirement planning" where he makes his case. I haven't run all of the numbers to see what this looks like for me, (and I'm not going anywhere near anything but SPIA's) but this seems correct: annuitizing at least part of your bond holdings can increase efficiency. It's not the only road, but one road. It does take out some of the risk. The part I'm having trouble with is the impact of inflation over time, although one way around that is to potentially space out your SPIA purchases over time.
Although SPIAs with a COLA linked to CPI are unfortunately no longer offered (probably because they were flippin' expensive, though I don't know why since TIPS would seemingly allow insurers to offset inflation risk easily), annuities that offer a fixed COLA (e.g. 2% or 3%) are still very common and seem very likely to be adequate when combined with SS benefits, which are linked to CPI.
Dinosaur Dad wrote:
Wed Apr 29, 2020 4:59 pm
As to conflict of interest, my personal impression of him from his many writings and interviews is that he's a straight shooter. In any event it's incumbent upon each of us to vet out the potential strategy and run your own numbers.
I agree that we should evaluate our own circumstances, mindset, risk tolerance, goals, etc. instead of relying on an 'expert's' take on things.

That said, I'm highly suspect of anyone who recommends whole life insurance in this context, especially if that person's work has been funded, even in part, by an insurer selling that product.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Nate79 » Wed Apr 29, 2020 5:18 pm

He was not peddling SPIAs in the past. He was promoting other high fee annuities and his work was used by the insurance industry as selling material. I cant find the thread right now but he took a lot of heat over it. It's not surprising given his past that he is now peddling Whole Life. He has zero credibility.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by sixtyforty » Wed Apr 29, 2020 5:18 pm

A couple of points regarding the 4% by Bengen / Trinity Study;

(1) The 4% as Bengen defined it, is impractical to use in real life. No one in their right mind is going to year in and year out adjust previous year's withdrawal for inflation when the market is heading through the floor. Retirees will ultimately be using some sort of variable withdrawal.
(2) SS is never included in these studies. SS is essentially a deferred annuity indexed to inflation that last the rest of your life. It's a big deal and many retirees are doing just fine with SS and way, way less than < $1 Mill. My MIL is one of them.

Both components above should have a more favorable impact on one's portfolio compared to the strict definition of the 4% Bengen/ Trinity Study.
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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by willthrill81 » Wed Apr 29, 2020 6:32 pm

Nate79 wrote:
Wed Apr 29, 2020 5:18 pm
He was not peddling SPIAs in the past. He was promoting other high fee annuities and his work was used by the insurance industry as selling material. I cant find the thread right now but he took a lot of heat over it. It's not surprising given his past that he is now peddling Whole Life. He has zero credibility.
I thought that he specifically mentioned SPIAs, but now I'm not sure that he did. He definitely mentioned annuities, but that's not much more specific than just advocating insurance in general.

Combined with his 2% SWR recommendation years ago, I agree that he's completely lost any credibility he ever had.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by tvubpwcisla » Wed Apr 29, 2020 6:46 pm

2% WR along with an allocation of 100% equities is probably the only way to go!

:moneybag
Stay invested my friends.

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by willthrill81 » Wed Apr 29, 2020 6:49 pm

tvubpwcisla wrote:
Wed Apr 29, 2020 6:46 pm
2% WR along with an allocation of 100% equities is probably the only way to go!

:moneybag
I'm sure that financial advisors salespeople getting a 1% AUM fee would advocate that. But 2% could still be a little high... :twisted:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Podcast - Wade Pfau: The 4% Rule Is No Longer Safe

Post by Horton » Wed Apr 29, 2020 7:33 pm

I like to always assume good intent - he has done a lot of analysis and concluded that the products that he recommends are appropriate. He is a very sharp, knowledgeable guy who can figure out which types of life insurance and annuity products are good and which are bad. I think his error is in assuming that the average person can figure this out for themselves (or with an advisor), which is highly unlikely. The chapters on variable annuities and fixed index annuities in "Safety-First Retirement Planning" contain an upfront caveat (literally, a big box labeled caveat) that says that he is "making an implicit assumption that the annuity is competitively priced." Perhaps he should have said "the casual reader can skip this chapter."

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