What a Low Return Outlook Means for Your Retirement?

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matjen
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What a Low Return Outlook Means for Your Retirement?

Post by matjen » Mon Aug 14, 2017 9:47 am

I thought this was quite a nice article on retirement success. Optimists will likely not like it. For me a flaw is that it is only taking into account US equities.
High valuations of core assets in the U.S. suggest that retirement withdrawal rates that were once safe may now deliver success rates that are no better - or even worse - than a coin flip. Unfortunately, we cannot control the returns of U.S. stocks or bonds (or any asset class returns for that matter).
What a Low Return Outlook Means for Your Retirement?
https://blog.thinknewfound.com/2017/08/ ... -387553953
A man is rich in proportion to the number of things he can afford to let alone.

Engineer250
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Re: What a Low Return Outlook Means for Your Retirement?

Post by Engineer250 » Mon Aug 14, 2017 10:05 am

I thought it was very well written and willing to dig into a bit of nuance instead of just tropes and cliches. I suspect a lot of pro-bond Bogleheads will like it since he discussed not just safe withdrawal rates but also the emotional component of holding bonds.

Also, learned something new:
The Ulcer Index is a measure that summarizes the severity and duration of wealth drawdowns. We like this metric as it provides us some idea of how emotionally stressful a given market path is for investors. In our view, high investing stress not only is unenjoyable, but also raises the likelihood of making poor, emotionally-charged decisions.
Even though I am 100/0 I love the term!
Where the tides of fortune take us, no man can know.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Mon Aug 14, 2017 10:10 am

For those truly worried about this issue, there seem to me to be a few plausible recommendations in the current environment.

1. Begin your retirement at a withdrawal rate no more than 3%.
2. Adopt a flexible withdrawal rate.
3. Overweight your equities toward international, where valuations are more favorable for long-term returns than in the U.S.

That being said, I'm not entirely convinced of the methods they used to model future returns or examine sequence of returns. They also assume that valuations remain at their current levels, which is not an appropriate assumption IMHO. They could come down if earnings go up and prices do not, which would presumably 'help' current retirees.
“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

lazyday
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Re: What a Low Return Outlook Means for Your Retirement?

Post by lazyday » Mon Aug 14, 2017 10:23 am

To see the effect of muted returns more clearly, we are going to recreate the retirement visualizations from earlier, but with one key modification: we adjust historical stock and bond returns downward so that the long-term averages are in line with realistic future return expectations given current valuation levels. We do this by subtracting the difference between the actual average log return and the forward-looking log return from each year’s return. By doing this, we reflect subdued average returns while retaining the peaks and valleys that we would expect in actual rolling 30-year periods.
Does this seem like a reasonable method?

Is is reasonable to use nominal instead of real returns?

I assume that "the forward-looking log return" is the expected future return from today, not from each year?

Why use log?

For equities, is this just Actual return - ( ln(9%) - ln(5.3%) ) for each year?

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iceport
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Re: What a Low Return Outlook Means for Your Retirement?

Post by iceport » Mon Aug 14, 2017 10:55 am

willthrill81 wrote:
Mon Aug 14, 2017 10:10 am
[...]I'm not entirely convinced of the methods they used to model future returns or examine sequence of returns. They also assume that valuations remain at their current levels, which is not an appropriate assumption IMHO. They could come down if earnings go up and prices do not, which would presumably 'help' current retirees.
I am also not convinced of the validity of the analysis:
To see the effect of muted returns more clearly, we are going to recreate the retirement visualizations from earlier, but
with one key modification: we adjust historical stock and bond returns downward so that the long-term averages are in
line with realistic future return expectations given current valuation levels. We do this by subtracting the difference
between the actual average log return and the forward-looking log return from each year’s return. By doing this, we
reflect subdued average returns while retaining the peaks and valleys that we would expect in actual rolling 30-year
periods.
My doubt about a flawed analysis notwithstanding, I emphatically support the general line of inquiry.

There are numerous arguments out there, based on statistical analyses, that the 4% rule is too conservative, weights the absolute worst cases too heavily and leaves too much spending on the table in the vast majority of cases. While that may be true, I find the argument somewhat ironic. The primary value of the Trinity Study and all its successors is to account for sequence of return risk: the risk encountered in real life by individual investors that is not captured by simplistically applying long term averages. But when research attempts to find a way to capture more of the spending theoretically available, based on statistical analyses of dozens of actual retirement periods, might there not be a similar flaw: failing to account for the specific conditions encountered in real life by individual investors that is not completely captured, even with more sophisticated analyses? In other words, I do think valuations at the time of retirement need to be better accounted for as this type of research continues.

In fairness, there are numerous counter-arguments that the 4% rule is outdated. I don't buy that argument completely, either. Again, it just seems to be missing something (valuations).
"Discipline matters more than allocation.” ─William Bernstein

Random Walker
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Re: What a Low Return Outlook Means for Your Retirement?

Post by Random Walker » Mon Aug 14, 2017 10:58 am

I think this is a very important subject. Recent generous returns result in higher valuations, which means lower future expected returns. I recently started a thread on Murphy's Law Of Retirement. People see their portfolios swell as a result of a bull market. They decide they have enough to retire and do so. But with generous valuations and lower expected future returns they are at risk for both low future returns and perhaps more significantly, sequence of returns risk early in retirement. Generous valuations don't only decrease the future expected mean return; they shift the whole potential dispersion of returns leftward. This makes good outcomes pretty modest and bad outcomes really bad.
I think Monte Carlo Simulation is a great tool. My own simulations have (surprising to me) taught me the relative insensitivity of achieving goals to asset allocation. I think anyone in those critical peri-retirement years should consider cooling off those 80/20 portfolios towards 50/50. The upside of being aggressive is not that high and the downside pretty far down there.

Dave

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willthrill81
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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Mon Aug 14, 2017 11:20 am

iceport wrote:
Mon Aug 14, 2017 10:55 am
There are numerous arguments out there, based on statistical analyses, that the 4% rule is too conservative, weights the absolute worst cases too heavily and leaves too much spending on the table in the vast majority of cases. While that may be true, I find the argument somewhat ironic. The primary value of the Trinity Study and all its successors is to account for sequence of return risk: the risk encountered in real life by individual investors that is not captured by simplistically applying long term averages. But when research attempts to find a way to capture more of the spending theoretically available, based on statistical analyses of dozens of actual retirement periods, might there not be a similar flaw: failing to account for the specific conditions encountered in real life by individual investors that is not completely captured, even with more sophisticated analyses? In other words, I do think valuations at the time of retirement need to be better accounted for as this type of research continues.

In fairness, there are numerous counter-arguments that the 4% rule is outdated. I don't buy that argument completely, either. Again, it just seems to be missing something (valuations).
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates. He found that the historic highest valuations (highest quintile) would still support a 4.0% withdrawal rate if with a 60/40 portfolio. That being said, the valuations we're currently in are nearly outside the historic record (for the U.S. at least), so making predictions based on past history is even more problematic than normal.

In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
“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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iceport
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Re: What a Low Return Outlook Means for Your Retirement?

Post by iceport » Mon Aug 14, 2017 11:51 am

willthrill81 wrote:
Mon Aug 14, 2017 11:20 am
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates.
Thank you for that, willthrill81! I hadn't seen it before, though I've read many of Kitces' later articles. Michael Kitces is really adding enormous value to this area of research.

More importantly ( :wink: ), the May 2008 analysis firmly backs up my own intuition. 8-)

(And it certainly undermines the study linked in the OP that finds a SWR of 4% only succeeding 58% of the time, for a 60/40 AA.)
"Discipline matters more than allocation.” ─William Bernstein

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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Mon Aug 14, 2017 12:10 pm

iceport wrote:
Mon Aug 14, 2017 11:51 am
willthrill81 wrote:
Mon Aug 14, 2017 11:20 am
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates.
Thank you for that, willthrill81!
You're most welcome. :beer
iceport wrote:
Mon Aug 14, 2017 11:51 am
I hadn't seen it before, though I've read many of Kitces' later articles. Michael Kitces is really adding enormous value to this area of research.
I think that Kitces is one of the most 'sane', logical, data-driven financial planners out there.
“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

garlandwhizzer
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Re: What a Low Return Outlook Means for Your Retirement?

Post by garlandwhizzer » Mon Aug 14, 2017 1:04 pm

Excellent post, matjen, thanks for sharing it. I believe it raises issues that all of us should be aware of, like not counting on historical US stock and bond returns going forward in our retirement planning. The biggest missing point is, as matjen pointed out, omitting consideration of international equity in the portfolio. Most analysts believe that based on current valuations by a number of measures, INTL equity has higher expected future returns than US only equity, although likely with greater volatility/risk. Still a significant allocation to INTL might make the expected retirement picture less grim going forward.

At the end of the article a number of strategies are suggested to mitigate the risks and low expected returns going forward. I would be interested in the comments of Bogleheads on them. Interestingly international diversification is not one of them. Also one of the strategies is to look beyond fixed income for risk management given low interest rates. Maybe I'm just old fashioned, but bonds, even with low interest rates, still seems to me the best strategy for risk management in the event of a severe bear market. Also interestingly, these approaches leave ample room to generate a robust fee structure.
Being strategic, not static: Have a thoughtful, forward-looking outlook when developing a strategic asset allocation. This means having a willingness to diversify U.S. stocks and bonds with the ever-expanding palette of complementary asset classes and strategies.

Directly address the role of behavioral finance by recognizing that an investor must have the willingness to stick with a plan in order to succeed (e.g. the journey is just as important as the destination).

Utilize a hybrid active/passive approach for core exposures given the increasing availability of evidence-based, factor-driven investment strategies.

Be fee-conscious, not fee-centric. For many exposures (e.g. passive and long-only core stock and bond exposure), minimizing cost is certainly appropriate. However, do not let cost considerations preclude the consideration of strategies or asset classes that can bring unique return generating or risk mitigating characteristics to the portfolio.

Look beyond fixed income for risk management given low interest rates.

Recognize that the whole can be more than the sum of its parts by embracing not only asset class diversification, but also strategy/process diversification.
Garland Whizzer

DC3509
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Re: What a Low Return Outlook Means for Your Retirement?

Post by DC3509 » Mon Aug 14, 2017 1:18 pm

Doesn't it seem like many of his suggestions are designed to generate fees through active management and the opposite of the Boglehead approach?

sambb
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Re: What a Low Return Outlook Means for Your Retirement?

Post by sambb » Mon Aug 14, 2017 1:24 pm

The risk is more significant in this way: if markets are weak, and the economy is weak, one may be downsized out of their job. This will have far more impact in many cases.
My advice is to work hard and be a cooperative employee who takes on extra tasks if the outlook is weak.

bigred77
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Re: What a Low Return Outlook Means for Your Retirement?

Post by bigred77 » Mon Aug 14, 2017 1:34 pm

Frankly, I didn't find the article all that compelling.

If I hold volatility (measured by standard deviation) constant to historical values for both US equities and fixed income, but then reduce the mean nominal return for those distributions by 40% or so, yeah, I expect the numbers to look gruesome. That's all they did here. It's a theoretical exercise put forth by an active manager who already knew what the results would be. Color me shocked.

If you want to guarantee yourself 30 years of real income you can do that right now with an initial withdrawal rate of 3.4% or so with no equity risk. You can go build a TIPS ladder today. That should be a floor while using "current valuations". It's always regurgitated on here but I think it bears repeating yet again, the 4% rule was "rule of thumb" advice to get one by during very periods of very poor returns. Not for regular or "normal" times, but for very bad times. You don't have to keep revising it down over and over again. That's incredibly counter productive.

Do valuations suggest future returns to US equities might be lower than historical averages? Yes they do. Does that mean I should take drastic action if I was already considering a very conservative withdrawal plan like the 4% rule? No. It means that maybe I won't die with a real portfolio over double or triple my starting balance when I retired, which would be about the median actual results when using the 4% rule. Perhaps my portfolio can only provide me with inflation adjusted income for 30 years and keep track with inflation. Is that a devastating result?

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Re: What a Low Return Outlook Means for Your Retirement?

Post by RadAudit » Mon Aug 14, 2017 1:54 pm

bigred77 wrote:
Mon Aug 14, 2017 1:34 pm
Perhaps my portfolio can only provide me with inflation adjusted income for 30 years and keep track with inflation. Is that a devastating result?
Devastating? I hope not. It's a result I'm hoping to achieve. I even hope there's enough left over for the DW - as long as she needs it - and may be something for the kids after that - which will probably be the case if history is any guide. And, by the way, a 3% or 4% + inflation SWR to start may also allow you a little wiggle room for unexpected expenses and a splurge or two - if the charts are right.
FI is the best revenge. LBYM. Invest the rest. Stay the course.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by Blueskies123 » Mon Aug 14, 2017 2:06 pm

willthrill81 wrote:
Mon Aug 14, 2017 11:20 am


In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
I so disagree that most people will not be flexible.
To cope; I WILL reduce my spending.

1) my budget includes getting a new car every 4 years - I will put it off
2) my budget has $10K a year for home remodeling - I will put if off
3) my budget has $20K a year for travel - I can reduce this depending on the situation
4) I will take SS earlier than planned.

For me the key to a successful budget is have some options and trade offs.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by indexonlyplease » Mon Aug 14, 2017 2:22 pm

willthrill81 wrote:
Mon Aug 14, 2017 11:20 am
iceport wrote:
Mon Aug 14, 2017 10:55 am
There are numerous arguments out there, based on statistical analyses, that the 4% rule is too conservative, weights the absolute worst cases too heavily and leaves too much spending on the table in the vast majority of cases. While that may be true, I find the argument somewhat ironic. The primary value of the Trinity Study and all its successors is to account for sequence of return risk: the risk encountered in real life by individual investors that is not captured by simplistically applying long term averages. But when research attempts to find a way to capture more of the spending theoretically available, based on statistical analyses of dozens of actual retirement periods, might there not be a similar flaw: failing to account for the specific conditions encountered in real life by individual investors that is not completely captured, even with more sophisticated analyses? In other words, I do think valuations at the time of retirement need to be better accounted for as this type of research continues.

In fairness, there are numerous counter-arguments that the 4% rule is outdated. I don't buy that argument completely, either. Again, it just seems to be missing something (valuations).
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates. He found that the historic highest valuations (highest quintile) would still support a 4.0% withdrawal rate if with a 60/40 portfolio. That being said, the valuations we're currently in are nearly outside the historic record (for the U.S. at least), so making predictions based on past history is even more problematic than normal.

In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
Question: what does overweight in international funds mean? I have seen this a couple of times.

Also, I read on some post that someone was trying to retire enough with such a large portfolio that they would live of the dividends their funds return. Something like 2%. I think that may be a great idea if you can save enough. Not sure what stock fund give that percent. Just looked Vanguard Total Stock Fund yield 1.85%.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Mon Aug 14, 2017 2:37 pm

Blueskies123 wrote:
Mon Aug 14, 2017 2:06 pm
willthrill81 wrote:
Mon Aug 14, 2017 11:20 am


In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
I so disagree that most people will not be flexible.
To cope; I WILL reduce my spending.

1) my budget includes getting a new car every 4 years - I will put it off
2) my budget has $10K a year for home remodeling - I will put if off
3) my budget has $20K a year for travel - I can reduce this depending on the situation
4) I will take SS earlier than planned.

For me the key to a successful budget is have some options and trade offs.
I entirely agree with you. Most of us have had to be flexible with our spending for most of our working careers, so why should we suddenly expect a perfectly stable income in retirement? And as you note, this flexibility need not be overly burdensome.
“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: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Mon Aug 14, 2017 2:39 pm

indexonlyplease wrote:
Mon Aug 14, 2017 2:22 pm
willthrill81 wrote:
Mon Aug 14, 2017 11:20 am
iceport wrote:
Mon Aug 14, 2017 10:55 am
There are numerous arguments out there, based on statistical analyses, that the 4% rule is too conservative, weights the absolute worst cases too heavily and leaves too much spending on the table in the vast majority of cases. While that may be true, I find the argument somewhat ironic. The primary value of the Trinity Study and all its successors is to account for sequence of return risk: the risk encountered in real life by individual investors that is not captured by simplistically applying long term averages. But when research attempts to find a way to capture more of the spending theoretically available, based on statistical analyses of dozens of actual retirement periods, might there not be a similar flaw: failing to account for the specific conditions encountered in real life by individual investors that is not completely captured, even with more sophisticated analyses? In other words, I do think valuations at the time of retirement need to be better accounted for as this type of research continues.

In fairness, there are numerous counter-arguments that the 4% rule is outdated. I don't buy that argument completely, either. Again, it just seems to be missing something (valuations).
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates. He found that the historic highest valuations (highest quintile) would still support a 4.0% withdrawal rate if with a 60/40 portfolio. That being said, the valuations we're currently in are nearly outside the historic record (for the U.S. at least), so making predictions based on past history is even more problematic than normal.

In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
Question: what does overweight in international funds mean? I have seen this a couple of times.

Also, I read on some post that someone was trying to retire enough with such a large portfolio that they would live of the dividends their funds return. Something like 2%. I think that may be a great idea if you can save enough. Not sure what stock fund give that percent. Just looked Vanguard Total Stock Fund yield 1.85%.
Overweight, in this context, simply means that your portfolio has a greater allocation in international than a global cap-weighted portfolio, which is currently approximately 50% U.S. and 50% for the rest of the world.

And you can live off dividends if you want, but many of those who choose to do so have a flawed understanding of what dividends and total returns are. But that is a topic for another thread.
“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: What a Low Return Outlook Means for Your Retirement?

Post by IlliniDave » Mon Aug 14, 2017 3:11 pm

There are all sorts of things that might be true in the future. I'm not overly obsessed with valuations at this moment. For other reasons my plan all along is to save a little more now and plan to spend a little less later, meaning I have a range of options for average withdrawals as a % of starting retirement assets.
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Re: What a Low Return Outlook Means for Your Retirement?

Post by mac808 » Mon Aug 14, 2017 3:48 pm

All of these discussions seem to lead to the same idea, that we should be thinking about SWR as the sum of two components: spending required to maintain absolute minimum desired standard of living, and then additional spending to cover luxuries and other non-necessities. Perhaps it's 3% + 1% = 4%. The second bucket can be pulled back in the event of market declines to lessen sequence of returns risk. I don't think the #s are as important as people understanding what they are signing up for when they retire on a nest egg of a certain amount. Such a structure could be more valuable guidance than the current advice which is often along the lines of 4% is fine but just "cut back a bit" if a recession hits.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by BigJohn » Mon Aug 14, 2017 5:48 pm

mac808 wrote:
Mon Aug 14, 2017 3:48 pm
All of these discussions seem to lead to the same idea, that we should be thinking about SWR as the sum of two components: spending required to maintain absolute minimum desired standard of living, and then additional spending to cover luxuries and other non-necessities. Perhaps it's 3% + 1% = 4%. The second bucket can be pulled back in the event of market declines to lessen sequence of returns risk. I don't think the #s are as important as people understanding what they are signing up for when they retire on a nest egg of a certain amount. Such a structure could be more valuable guidance than the current advice which is often along the lines of 4% is fine but just "cut back a bit" if a recession hits.
Well said and consistent with the plan I am using in retirement. :beer

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Re: What a Low Return Outlook Means for Your Retirement?

Post by AlohaJoe » Mon Aug 14, 2017 6:36 pm

I like the chart which is a good way of showing just how conservative the 4% rule has been historically

Image

The orange-ish dots show years when the portfolio fell between 50% and 75% of the starting value. For the first 20 years of retirement, it looks like there have only been 4 orange dots since 1940.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by North Texas Cajun » Mon Aug 14, 2017 7:16 pm

willthrill81 wrote:
Mon Aug 14, 2017 11:20 am
In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
I agree that a flexible withdrawal rate can work for most retirees. It is especially easy for retirees who can fund all or most of their non-discretionary funding needs with SS and/or a private pension. And, of course, for retirees with large nest eggs.

What surprised me is how little one need flex spending in order to overcome a bad period at the start of retirement. In many cases all that is required is: a)not adjusting spending for inflation in the year after a market downturn; and b) not making a recovery of that lost adjustment in subsequent years.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Mon Aug 14, 2017 9:19 pm

North Texas Cajun wrote:
Mon Aug 14, 2017 7:16 pm
willthrill81 wrote:
Mon Aug 14, 2017 11:20 am
In my view, the simplest and potentially most appropriate way to avoid sequence of returns risk and 'not leave too much money on the table' is to use a flexible withdrawal rate. The only real downsides I've heard anyone bring against it are that it retirees don't like variable income and may not be able to adjust their spending accordingly. I have no doubt that that's true, but I don't think many retirees will have a greater appetite for the alternatives either.
I agree that a flexible withdrawal rate can work for most retirees. It is especially easy for retirees who can fund all or most of their non-discretionary funding needs with SS and/or a private pension. And, of course, for retirees with large nest eggs.
That's partly why I'm planning for a portfolio large enough that a 2% withdrawal would be sufficient to cover our necessary expenses, until we start receiving SS benefits, which should easily cover them.
North Texas Cajun wrote:
Mon Aug 14, 2017 7:16 pm
What surprised me is how little one need flex spending in order to overcome a bad period at the start of retirement. In many cases all that is required is: a)not adjusting spending for inflation in the year after a market downturn; and b) not making a recovery of that lost adjustment in subsequent years.
Another strategy is to use something like Robert Clyatt's "95% rule," where you spend the greater of either a fixed withdrawal rate (i.e. 4%) or 95% of last year's spending. This is a middle ground between a strict fixed withdrawal rate and a purely flexible withdrawal rate (i.e. 4% of your portfolio balance each year). If I were to use something like this, I would start with a higher WR than 4% in order to avoid the historic probability of leaving a lot of money on the table.

But when it's all said and done, I'll probably use Taylor Larimore's approach and just evaluate on a year-by-year basis how our portfolio has done and what our spending needs and desires are. Someone well versed in safe withdrawal rate and flexible spending research should be able to navigate this just fine.
“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: What a Low Return Outlook Means for Your Retirement?

Post by chinto » Tue Aug 15, 2017 1:00 am

matjen wrote:
Mon Aug 14, 2017 9:47 am
I thought this was quite a nice article on retirement success. Optimists will likely not like it. For me a flaw is that it is only taking into account US equities.
High valuations of core assets in the U.S. suggest that retirement withdrawal rates that were once safe may now deliver success rates that are no better - or even worse - than a coin flip. Unfortunately, we cannot control the returns of U.S. stocks or bonds (or any asset class returns for that matter).
What a Low Return Outlook Means for Your Retirement?
https://blog.thinknewfound.com/2017/08/ ... -387553953
Thank you for this. A few on this board have taken jabs at me for my 62.5 times expenses model which worked out to 1.6% withdraw rate to last 50 years. To me that is my sleep well at night position. As long as we are living the life we want I see no reason to go higher thought I would not have an issue with 1.8% or even a variable withdraw that fluctuates between 1.6% and 2.0% based on wants.
Last edited by chinto on Tue Aug 15, 2017 1:17 am, edited 2 times in total.

chinto
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Re: What a Low Return Outlook Means for Your Retirement?

Post by chinto » Tue Aug 15, 2017 1:14 am

mac808 wrote:
Mon Aug 14, 2017 3:48 pm
All of these discussions seem to lead to the same idea, that we should be thinking about SWR as the sum of two components: spending required to maintain absolute minimum desired standard of living, and then additional spending to cover luxuries and other non-necessities. Perhaps it's 3% + 1% = 4%. The second bucket can be pulled back in the event of market declines to lessen sequence of returns risk. I don't think the #s are as important as people understanding what they are signing up for when they retire on a nest egg of a certain amount. Such a structure could be more valuable guidance than the current advice which is often along the lines of 4% is fine but just "cut back a bit" if a recession hits.
+1

TxInjun
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Re: What a Low Return Outlook Means for Your Retirement?

Post by TxInjun » Tue Aug 15, 2017 3:45 am

That's partly why I'm planning for a portfolio large enough that a 2% withdrawal would be sufficient to cover our necessary expenses, until we start receiving SS benefits, which should easily cover them.
Thank you for this. A few on this board have taken jabs at me for my 62.5 times expenses model which worked out to 1.6% withdraw rate to last 50 years. To me that is my sleep well at night position. As long as we are living the life we want I see no reason to go higher thought I would not have an issue with 1.8% or even a variable withdraw that fluctuates between 1.6% and 2.0% based on wants.
To each his own - so my post is NOT a criticism of the above 2 quotes. Having said that - what's the over-under on when Bogleheads will see 1% as the vox populi SWR? How about 0.5%?

My guess - another 6 months of the bull market and we will see talk start about 1% being the new 3% (or is it already at 2.5%?)

I'm sure someone will do a better search than I did and already find such mention! :oops:

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Re: What a Low Return Outlook Means for Your Retirement?

Post by bigred77 » Tue Aug 15, 2017 9:03 am

chinto wrote:
Tue Aug 15, 2017 1:00 am

Thank you for this. A few on this board have taken jabs at me for my 62.5 times expenses model which worked out to 1.6% withdraw rate to last 50 years. To me that is my sleep well at night position. As long as we are living the life we want I see no reason to go higher thought I would not have an issue with 1.8% or even a variable withdraw that fluctuates between 1.6% and 2.0% based on wants.
Chinto,

You have the right to make your own decisions but the plan you are describing can actually be harmful to new posters who see that suggested here and think they might need to do something similar. For you personally, if you are fine with the trade offs, I suppose it's no big deal. Your heirs will love you when your gone. Your will pass away quite rich. Unless you are making a massive income and/or saving some incredible percentage of that income your plan means you will need to work about another decade longer and/or spend 50% less than what you could have prudently based on actual academic research. If you love your job irrespective of money or don't want for anything then by all means. But if you have anything else you'd prefer to do with your time other than work or lets say really wanted to spend a week in Italy but instead spent a week at the nearest lake just to keep within your withdrawal rate than I think that's not a good outcome. I point it out just so others who read and post here don't think your plan is commonly accepted advice.

Just as a thought experiment, think about the ramifications of the plan your proposed:
- A family of 4 would need over $1.5M just to live at the federal poverty line. Literal millionaire households would be living in poverty per US federal income guidelines.

- A 1.6% withdrawal rate is so low you would need negative real returns for 5+ decades for it to fail (and even then if the negative returns were low enough it still would survive). Negative real returns for 5+ decades means nobody would save or invest anything. Why would I save a dollar today if that meant I could only buy 96 cents worth of something a decade from now? Nobody would be able to retire, ever. The only way we could plausibly see something like that from a globally diversified portfolio of stocks and bonds is essentially WWIII. And if that happens, frankly I'd be happy I spent a little more before that happened and maximized the good times.

- The median US household makes roughly 50k a year give or take. How can you tell them they need to save over $3M in 2017 dollars to retire at the same income level? They would just give up. It's not a notion backed by any evidence and it could easily discourage people from even trying.
TxInjun wrote:
Tue Aug 15, 2017 3:45 am

To each his own - so my post is NOT a criticism of the above 2 quotes. Having said that - what's the over-under on when Bogleheads will see 1% as the vox populi SWR? How about 0.5%?

My guess - another 6 months of the bull market and we will see talk start about 1% being the new 3% (or is it already at 2.5%?)

I'm sure someone will do a better search than I did and already find such mention! :oops:
+1... Pretty much my thoughts exactly.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Tue Aug 15, 2017 10:23 am

bigred77 wrote:
Tue Aug 15, 2017 9:03 am
The median US household makes roughly 50k a year give or take. How can you tell them they need to save over $3M in 2017 dollars to retire at the same income level? They would just give up.
It would be hard to blame them for giving up. To reach that level, you would need to save $3,800 a month ($45,600 a year) for 30 years at a 5% real return. That's over 80% of the median U.S. household income before taxes; it's just impossible unless you can live with zero expenses.
bigred77 wrote:
Tue Aug 15, 2017 9:03 am
It's not a notion backed by any evidence and it could easily discourage people from even trying.
This may not be the case with Chinto, but most people that talk about withdrawal rates betwen 1.5-2.0% are basing it on two things: current interest rates and dividend yields, both of which are not surprisingly around close to those levels. Many, likely most, of these people are planning on living off interest and dividends only because they don't want to sell shares at any cost. They incorrectly view their capital in terms of shares rather than as dollars, so they view the sale of shares as a loss of capital, regardless as to how much those shares have appreciated since purchased.
“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: What a Low Return Outlook Means for Your Retirement?

Post by rxtra8 » Tue Aug 15, 2017 10:40 am

Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates. He found that the historic highest valuations (highest quintile) would still support a 4.0% withdrawal rate if with a 60/40 portfolio. That being said, the valuations we're currently in are nearly outside the historic record (for the U.S. at least), so making predictions based on past history is even more problematic than normal.

The Kitces report was very interesting. Forgive my simple reaction but there was a statement in the report that seems to throw some water on "stay the course" :
(Beyond merely the impact on projections, though, accounting for valuation may also suggest that it is proper to alter equity exposure, at least temporarily, to account for the reduction in anticipated intermediate- term equity returns. )

It would appear that Kitces is showing justification for altering allocation ratios based on the economic environment at the time; at least "temporarily". Any comments?
“The eye sees only what the mind is prepared to comprehend.” | — Robertson Davies

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Re: What a Low Return Outlook Means for Your Retirement?

Post by willthrill81 » Tue Aug 15, 2017 10:44 am

rxtra8 wrote:
Tue Aug 15, 2017 10:40 am
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates. He found that the historic highest valuations (highest quintile) would still support a 4.0% withdrawal rate if with a 60/40 portfolio. That being said, the valuations we're currently in are nearly outside the historic record (for the U.S. at least), so making predictions based on past history is even more problematic than normal.

The Kitces report was very interesting. Forgive my simple reaction but there was a statement in the report that seems to throw some water on "stay the course" :
(Beyond merely the impact on projections, though, accounting for valuation may also suggest that it is proper to alter equity exposure, at least temporarily, to account for the reduction in anticipated intermediate- term equity returns. )

It would appear that Kitces is showing justification for altering allocation ratios based on the economic environment at the time; at least "temporarily". Any comments?
Larry Swedroe has recommended the same thing. Essentially, the argument is that higher valuations lead to lower stock returns, so you should actually increase your stock exposure in such an instance in order to make up for the lower returns. It's been discussed here before, and most Bogleheads don't seem to care for it. I don't put much stock in valuations (pun intended), and I'm 100% stocks anyway until 10 years before retirement.
“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: What a Low Return Outlook Means for Your Retirement?

Post by North Texas Cajun » Tue Aug 15, 2017 10:45 am

willthrill81 wrote:
Tue Aug 15, 2017 10:23 am
Many, likely most, of these people are planning on living off interest and dividends only because they don't want to sell shares at any cost. They incorrectly view their capital in terms of shares rather than as dollars, so they view the sale of shares as a loss of capital, regardless as to how much those shares have appreciated since purchased.
Perhaps there was a time when living off interest and dividends made sense. I don't think so, but when dividend yields were much higher it wasn't so austere. Today, though, many corporations are attempting to distribute earnings to shareholders via share buybacks. And some investors still refuse to sell shares despite the favorable tax treatment corporations are attempting to provide them.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by saveinvestbecomefree » Tue Aug 15, 2017 11:15 am

I agree with being conservative with expectations for the next several years of US stock (and bond) returns. However, in these low-return future articles, an important detail is missing......that the current low-return forecasts are for the next decade, not the next 5 decades. And yet the analysis is done out to 50 years. Certainly if typical investments return significantly less for the next 50 years than they did in the last 100, much of our models (since they are based on history) will be overly optimistic. But I don't expect the next 50 years to be significantly worse than the last 100 years, which certainly contained many challenges.

So I expect lower returns for US stocks for the next several years but over a multi-decade timeframe, we should average out to similar long-term real returns compared to history. If you factor this in, the models shown in this study would look more like the past ones where the 4% rule came from. And remember that the 4% rule was a worst-case scenario. The average withdrawal rate that worked was closer to 6.5% but you had to get a bit lucky with timing to use high withdrawal rates like that.

Personally I recommend a 3% withdrawal rate in today's environment plus a larger international stock allocation. Plus a larger amount of cash or short term bonds if you are retiring soon, or are recently retired, to help manage sequence of return risk. But I think 3% is plenty conservative based on all the factors and I highly suspect the 4% "rule" will still end up working nicely in the end.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by chinto » Tue Aug 15, 2017 12:05 pm

bigred77 wrote:
Tue Aug 15, 2017 9:03 am

Chinto,

You have the right to make your own decisions but the plan you are describing can actually be harmful to new posters who see that suggested here and think they might need to do something similar. For you personally, if you are fine with the trade offs, I suppose it's no big deal. Your heirs will love you when your gone. Your will pass away quite rich. Unless you are making a massive income and/or saving some incredible percentage of that income your plan means you will need to work about another decade longer and/or spend 50% less than what you could have prudently based on actual academic research. If you love your job irrespective of money or don't want for anything then by all means. But if you have anything else you'd prefer to do with your time other than work or lets say really wanted to spend a week in Italy but instead spent a week at the nearest lake just to keep within your withdrawal rate than I think that's not a good outcome. I point it out just so others who read and post here don't think your plan is commonly accepted advice.

Just as a thought experiment, think about the ramifications of the plan your proposed:
- A family of 4 would need over $1.5M just to live at the federal poverty line. Literal millionaire households would be living in poverty per US federal income guidelines.

- A 1.6% withdrawal rate is so low you would need negative real returns for 5+ decades for it to fail (and even then if the negative returns were low enough it still would survive). Negative real returns for 5+ decades means nobody would save or invest anything. Why would I save a dollar today if that meant I could only buy 96 cents worth of something a decade from now? Nobody would be able to retire, ever. The only way we could plausibly see something like that from a globally diversified portfolio of stocks and bonds is essentially WWIII. And if that happens, frankly I'd be happy I spent a little more before that happened and maximized the good times.

- The median US household makes roughly 50k a year give or take. How can you tell them they need to save over $3M in 2017 dollars to retire at the same income level? They would just give up. It's not a notion backed by any evidence and it could easily discourage people from even trying.

Well, I'll dispute some of what you wrote. I started down this route in 1994...I hit the 62.5 times not too long ago 2015-2106...my income has been 2x the median for a college graduate, but given my woman does not work outside the home, that makes us just average. The only reason I am still working is because health care is so precarious right now. It put my expense numbers in question but I also think the current required premiums are not sustainable.

I think I am decisively average and the results can be average also. It is a matter of spending discipline relative to yearly investment.

I do think you need to be a multi millionaire to retire and your 3 millions and 50k figures are spot on and readily achievable. Heck I pulled it off in 21 years.

For years I have told people having a million dollars mean you can afford to spend 16-18K a year into perpetuity. So being a millionaire is not all people think it is. It really is a low target.

I think your average person can save 2.5 - 3 million through spending discipline and investment methodology. From what I have seen I think anything over 5 million means extreme austerity or a need for a relatively high income.

I am not sure if you caught I am planning for a 50 year time horizon.

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zaboomafoozarg
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Re: What a Low Return Outlook Means for Your Retirement?

Post by zaboomafoozarg » Tue Aug 15, 2017 12:15 pm

So based on the last chart in that article, I should be planning for a 2% safe withdrawal rate instead of a 3%. :shock:

Awesome :oops:

Still, I think I could get there by 55 if I continue to save 50-60% of income and do work on the side.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by bigred77 » Tue Aug 15, 2017 12:31 pm

chinto wrote:
Tue Aug 15, 2017 12:05 pm

Well, I'll dispute some of what you wrote. I started down this route in 1994...I hit the 62.5 times not too long ago 2015-2106...my income has been 2x the median for a college graduate, but given my woman does not work outside the home, that makes us just average. The only reason I am still working is because health care is so precarious right now. It put my expense numbers in question but I also think the current required premiums are not sustainable.

I think I am decisively average and the results can be average also. It is a matter of spending discipline relative to yearly investment.

I do think you need to be a multi millionaire to retire and your 3 millions and 50k figures are spot on and readily achievable. Heck I pulled it off in 21 years.

For years I have told people having a million dollars mean you can afford to spend 16-18K a year into perpetuity. So being a millionaire is not all people think it is. It really is a low target.

I think your average person can save 2.5 - 3 million through spending discipline and investment methodology. From what I have seen I think anything over 5 million means extreme austerity or a need for a relatively high income.

I am not sure if you caught I am planning for a 50 year time horizon.
I just think your perspective does not accurately reflect reality. You don't have to be a multi-millionaire to retire. $3M is overkill for 50k in annual spending, even over 50 years. The vast majority of people currently living in the richest, developed countries on earth will never be millionaires. The vast majority of people currently living in the richest, developed countries on earth will however eventually find a way to retire. You have been wildly successful. That doesn't not mean the average person can duplicate your success in building wealth. Only a small subset of the population is capable of that.

I also feel compelled to say I think it's a very bad idea for you tell people:

"For years I have told people having a million dollars mean you can afford to spend 16-18K a year into perpetuity. So being a millionaire is not all people think it is. It really is a low target.

I think your average person can save 2.5 - 3 million through spending discipline and investment methodology."

That information is entirely your opinion and not supported by any objective facts or academic research. If you have anything to support that, please share it. People should save diligently, invest prudently, and adjust their expectations to reality after they see how their results played out. That's the whole point of bogleheads, to teach and discuss the most prudent ways to invest based on facts and research (at least that's how I view it). You never know how much a portfolio can support in terms of withdrawals going forward in perpetuity because we don't know the future. But for a reasonable, low cost, global portfolio of stocks and bonds to support only a 1.6% withdrawal rate in perpetuity the future would have to be SIGNIFICANTLY worse than anything we've observed in modern financial history. Like SIGNIFICANTLY worse than the great depression, WWI, WWII, the tech bust, the financial crisis, etc. That is limiting your spending to roughly half and/or working for an extra decade in order to reduce the chances of portfolio failure a few basis points. And even then, you haven't moved the chances to 0. That is some awfully expensive insurance.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by petulant » Tue Aug 15, 2017 12:53 pm

rxtra8 wrote:
Tue Aug 15, 2017 10:40 am
Kitces has completed analyses which incorporate valuations into appropriate historic safe withdrawal rates. He found that the historic highest valuations (highest quintile) would still support a 4.0% withdrawal rate if with a 60/40 portfolio. That being said, the valuations we're currently in are nearly outside the historic record (for the U.S. at least), so making predictions based on past history is even more problematic than normal.

The Kitces report was very interesting. Forgive my simple reaction but there was a statement in the report that seems to throw some water on "stay the course" :
(Beyond merely the impact on projections, though, accounting for valuation may also suggest that it is proper to alter equity exposure, at least temporarily, to account for the reduction in anticipated intermediate- term equity returns. )

It would appear that Kitces is showing justification for altering allocation ratios based on the economic environment at the time; at least "temporarily". Any comments?
Yes, Kitces supports tactical asset allocation; that is, he would recommend shifting allocation between asset classes based on current macro trends. The BH philosophy typically does not support that approach.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by james22 » Wed Aug 16, 2017 5:24 am

Another way:

Who Ate Joe’s Retirement Money? Sequence Risk and its Insidious Drag on Retirement Wealth

With the observations that starting valuation can be a useful tool in forecasting future returns and that owning stocks when they are cheaper tends to win in the long term with the additional benefit of suffering less damaging drawdowns, let’s conduct a simple experiment.

Suppose we use starting CAPEs as our simple and sole indicator of future stock market returns. Let’s go back in history as far as we can and pretend that we are managing the glidepath, but this time, we will manage it dynamically – that is, underweighting or overweighting equities and fixed income around the predetermined path, based on one simple valuation metric, which changes through time. Basically, if we believed stocks were expensive, we would underweight them, and if stocks appeared cheap, we would overweight them.

Can we do better than the static (predetermined) glidepath in terms of drawdowns and final wealth?

The answer is apparently yes.


https://www.gmo.com/docs/default-source ... ?sfvrsn=20

Investing for Retirement: The Defined Contribution Challenge

Let us assume we have a worker who turned 55 in 1965, and to that point was on target for retirement savings. The worker, however, had the misfortune of being in peak savings years during a period in which equity valuations were high and real bond yields were low. The period from the mid-1960s through the 1970s represents some of the worst real returns for both stocks and bonds on record.

A static, or inflexible, glide path would ignore these lofty valuations, and ensure the investor had a higher weighting in equities in 1965, when valuations were very high, than in 1974, when valuations were much lower. The fully dynamic stock weight is based on minimizing expected shortfall incorporating time-varying expected returns.

At first glance, the dynamic flight path looks nonsensical. It shows no weight in stocks in 1965, when the participant is 55 years old and has another 10 years until retirement, but by 1974 the stock weight rises to 90%, staying at a very high level until the early 1980s despite the fact that the participant is approaching 70 years old, and losses can be devastating.

But if the goal is minimizing expected shortfall of wealth in retirement, it can make sense to run an aggressive portfolio in retirement if the increase in expected returns is high enough. Furthermore, if the expected return to stocks is actually lower than bonds due to high valuations, such as was the case in 1965, it is hard to see why owning stocks would help at all.

The static strategy leaves the participant out of money by 1992, the cost of not taking into account the changing valuations of the stock and bond markets over time, and consuming a constant real dollar amount equal to 5% of target wealth. The dynamic strategy, by contrast, allows the participant to make up for earlier inadequate returns, and the money lasts for a full 30-year retirement even though consumption is high.


https://www.gmo.com/docs/default-source ... f?sfvrsn=0
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: What a Low Return Outlook Means for Your Retirement?

Post by iceport » Wed Aug 16, 2017 10:08 pm

Thanks, looking forward to reading those papers.
"Discipline matters more than allocation.” ─William Bernstein

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Re: What a Low Return Outlook Means for Your Retirement?

Post by jbolden1517 » Thu Aug 17, 2017 4:49 pm

willthrill81 wrote:
Mon Aug 14, 2017 10:10 am
That being said, I'm not entirely convinced of the methods they used to model future returns or examine sequence of returns. They also assume that valuations remain at their current levels, which is not an appropriate assumption IMHO. They could come down if earnings go up and prices do not, which would presumably 'help' current retirees.
I tend to agree that's a possibility. Margins are at 7% of sales which is rather high by historic standards I don't see that likely to go up. Corporate share of GDP is high. For earnings to increase we'd have to see overall strong gdp growth. Given that working population is only growing 1.2% that would need to be a productivity surge or inflation. Strong growth hurts bonds likely since it creates demand for capital. Inflation mauls bonds. Hard to see how a typical retirement portfolio does well given the low valuation in bonds. Bonds are priced for a low growth or deflation.

Stocks by themselves could do quite well. Something like 60/40...

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Re: What a Low Return Outlook Means for Your Retirement?

Post by jbolden1517 » Thu Aug 17, 2017 4:53 pm

james22 wrote:
Wed Aug 16, 2017 5:24 am
Investing for Retirement: The Defined Contribution Challenge
What GMO is proposing and TAA in general makes a lot of sense. I did like a lot of their other commentary as well. Vanguard used to include TAA in their Life Strategy funds. Bonds right now are dangerous.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by jbolden1517 » Thu Aug 17, 2017 5:19 pm

saveinvestbecomefree wrote:
Tue Aug 15, 2017 11:15 am
I agree with being conservative with expectations for the next several years of US stock (and bond) returns. However, in these low-return future articles, an important detail is missing......that the current low-return forecasts are for the next decade, not the next 5 decades. And yet the analysis is done out to 50 years. Certainly if typical investments return significantly less for the next 50 years than they did in the last 100, much of our models (since they are based on history) will be overly optimistic. But I don't expect the next 50 years to be significantly worse than the last 100 years, which certainly contained many challenges.
Actually GMO has 3 scenarios:

Heaven -- we get a surge of productivity growth
Purgatory -- we have a nasty bear in both stock and bonds and then sequence of returns get better.
Hell -- we live in a low return world. The political, cultural and economic forces pushing us towards a slowly growing world economy remain in place. Stocks are fairly priced for this new world, and that means the returns just aren't available.
saveinvestbecomefree wrote:
Tue Aug 15, 2017 11:15 am
Personally I recommend a 3% withdrawal rate in today's environment plus a larger international stock allocation. Plus a larger amount of cash or short term bonds if you are retiring soon, or are recently retired, to help manage sequence of return risk. But I think 3% is plenty conservative based on all the factors and I highly suspect the 4% "rule" will still end up working nicely in the end.
I tend to think this may be avoidable though the heavy foreign. International and especially EM are not overvalued. The dollar fundamentals aren't great so there it isn't too scary to hold lots of currency risk. I also think that the valuation problem is concentrated and the aggregate statistics somewhat misleading, I'm seeing too many USA stocks that look attractive to just declare this a bubble. There aren't screaming buys but there risky stocks you are getting compensated for holding. I also think bonds are dangerously low, but those low bond rates and high leverage have created lots of room for stocks.

FWIW there are very few scenarios where cash outperforms short term bonds. You simply get paid too much for that first little bit of duration risk.

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Re: What a Low Return Outlook Means for Your Retirement?

Post by SimpleGift » Thu Aug 17, 2017 5:44 pm

saveinvestbecomefree wrote:
Tue Aug 15, 2017 11:15 am
I agree with being conservative with expectations for the next several years of US stock (and bond) returns. However, in these low-return future articles, an important detail is missing......that the current low-return forecasts are for the next decade, not the next 5 decades. And yet the analysis is done out to 50 years. Certainly if typical investments return significantly less for the next 50 years than they did in the last 100, much of our models (since they are based on history) will be overly optimistic. But I don't expect the next 50 years to be significantly worse than the last 100 years, which certainly contained many challenges.
Many investors don’t realize quite how advantageous the last 100 years have been for the two main drivers of global economic growth and asset returns — namely high population growth rates and high productivity growth rates.

But today, the global population growth rate is steadily decreasing, an inexorable demographic reality at this point (chart below)…
  • Annual Growth Rate of World Population (% Change), 1800-2025
    Image
    Source: Wikipedia
So to drive future increases in global GDP growth, the entire onus is upon ever expanding productivity growth. But global productivity growth rates have also been falling for decades, with no significant signs of increase in sight (chart below)…
  • Annual Growth Rate of Labor Productivity (% Change), 1890-2012
    Image
    Source: OECD Observer
Bottom line: Slower global economic growth in the years ahead, low interest rates and a more challenging environment for equities. It’s unrealistic to expect the next 50 years to look like past 100 years, in my view — the advantageous demographic and productivity fundamentals of the last century are just not going to be repeated.
Cordially, Todd

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