LadyGeek and bob90245:
The characteristics Bob is describing about long-term corporate bonds is important. I'm not exactly sure how much to include about it, but for now I added "more volatile long-term" in front corporate bonds for this paragraph:
The difference in data choice for the fixed income component between William Bengen's work and the Trinity study deserves mention. William Bengen used intermediate-term government bonds, which allows for a 100% success rate for the inflation-adjusted 4% withdrawal rate rule. Meanwhile, the Trinity study uses more volatile long-term corporate bonds, which caused the maximum inflation-adjusted withdrawal rate for new retirees in 1965 and 1966 to dip below 4%.
I'd say Dick's most recent post is also very important and deserves a spot in the Wiki, though probably in the main article rather than the asset allocation article.
Perhaps over the next month or so, we could develop some sort of point/counterpoint article about why "Trinity is too optimistic" and "Trinity is too pessimistic".
Dick's analysis definitely shows the pessimistic side. But even this may be optimistic, because it is still based on the rather optimistic historical data parameters. I kind of view the world as one big Monte Carlo simulation, and the parameters we've gotten from our historical run may not be the correct parameters. Dick, I wonder if you can see how much difference there is among each of the 10 or however many simulations in regard to their means, standard deviations, and correlations, despite the fact that each simulation was based on the same underlying parameters?
I think Dick already made a very useful point about this by increasing historical standard deviations by 30% in order to account more for the uncertainty. But perhaps the assumption about means is actually more important than the assumption about standard deviations. I'm not sure though.
More generally about why Trinity may be pessimistic:
From reading Enough
, I think it is fair to say that Jack Bogle would reject the Trinity study because he believes it is foolish to define future parameters as the historical averages, which is implicitly what Trinity is doing by presenting these probabilities as representative of future events. This would apply both for historical simulations and Monte Carlo. Instead, he, as has Rob Arnott and many others, prefers to look at the building blocks of returns: their income component, underlying earnings growth, and changes in valuation levels. So, just as a hypothetical example that I think is not too far off base, if the historical real stock return is 7% but the results from combining the building blocks of returns is 5%, I think
he would say that he would prefer basing Monte Carlo on the 5% instead of 7%. Dividends yields are at historic lows, bond yields are leaning to the low side, earnings growth may not be able to reach the high bar set in the past, and though I think Jack Bogle would always choose a best forecast for valuation levels as no further change from their present levels, valuations are currently on the high side as well.
I posted my figure earlier in this thread showing safe withdrawal rates for 17 countries, and I used that to point out that for the US the results were about the same for stock allocations between 30% and 80%, but now I refer to it again to ask: what if the 21st century U.S. experiences patterns closer to 20th century Denmark or Switzerland, or any of the other countries except Canada?
Also, I already showed tables about what happens in the Trinity study when one has to pay a 1% or 2% account administrative fee. This is something very real that people need to account for.
Also, the whole analysis of every withdrawal rate study I am aware of makes the implicit assumption that people can match the precise returns of the historical index. People make behavioral mistakes. But even if they don't make any mistakes, it may still just generally be difficult to match the historical returns precisely.
On the optimistic side: maybe people just need to go out and enjoy life and be prepared to cut expenses dramatically later should the need arise. Also, TIPS, international diversification, and annuities may help.
Leesbro63 and others about annuities: I mostly understand the theoretical aspect of annuities, and I've written a program to calcuate nominal/real and fixed/variable annuities that I hope to use some more one of these days. I don't know about the real world practical issues like taxes and fees. But I think the way you just wrote about it is as an "all or nothing" proposition. Annuities could be treated as a type of asset class with particular risk and return properties, and then as you develop your strategic asset allocation for retirement, you can decide what percentage of your portfolio should be allocated to annuities. It could be 0, 20, 40, 100,... It doesn't have to be all or nothing. But this is really about all I can say on the topic of annuities.