Wade Pfau: Does The 4% Rule Work In Today’s Markets?

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Sun Sep 08, 2019 9:08 pm

vitaflo wrote:
Sun Sep 08, 2019 7:40 pm
Seasonal wrote:
Sun Sep 08, 2019 3:08 pm
Will do good wrote:
Sun Sep 08, 2019 2:37 pm
Not sure I buy into "This time is different".
The SWR will likely be the same as every other time the 10 year treasury was yielding 1.5% and the S&P 500 had a p/e of 20x. How have things usually worked out with that sort of starting point?
The closest comparable would be June of 1946. PE was 22 and 10yr yield was 2.2%. Using a 4% SWR and starting at $1m you would have ended with $1.6m. Inflation was 3.3% that month and skyrocketed to almost 20% a year later, and it still worked out just fine.

We haven't had a time where the 10yr yield was 1.5%, so in that sense, we are in uncharted waters.
Note that the definition of E has changed over the years. That 22 in 1946 was probably about 27 in todays terms after accounting rule changes. And as you point out that was a time of high inflation. Express it in real terms and that 10 year is probably worse than todays. Of course we had also just finished winning a war and all sorts of disruption was happening. Of course you can always come up with reasons why the past was different and doesn't apply.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by vineviz » Sun Sep 08, 2019 9:42 pm

HomerJ wrote:
Sun Sep 08, 2019 9:05 pm
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
4% withdrawal rate ALREADY accounts for the current reality of high equity valuations combined with low bond yields.
Does it? How can you be sure?
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by David Jay » Sun Sep 08, 2019 9:52 pm

HomerJ wrote:
Sun Sep 08, 2019 9:07 pm
(He also assumed 1% expenses in that prediction, which doesn't apply to Bogleheads. Is he still assuming 1% fees?)
Dunno, that was the point of my post above. The linked to, self-described “Newsletter” does not detail his assumptions.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Sun Sep 08, 2019 9:52 pm

vineviz wrote:
Sun Sep 08, 2019 9:42 pm
HomerJ wrote:
Sun Sep 08, 2019 9:05 pm
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
4% withdrawal rate ALREADY accounts for the current reality of high equity valuations combined with low bond yields.
Does it? How can you be sure?
Surety is hard thing to get the investing world, aside from government bonds, and they aren't always a sure thing either. HomerJ knows that the '4% rule' isn't a guarantee.

Kitces said the worst safe withdrawal rate periods in history for a 60/40 portfolio had a real annualized return of .86% over the first 15 years of a 30 year withdrawal period (because the first 15 years were very strongly correlated [r = .91] with the subsequent 30 year SWR). 30 year TIPS are currently yielding .41% real, so that means that you would only need stocks to return .7% real over the next 15 years to at least match the worst historic periods. I'm not aware of anyone who is claiming that the current valuations are predicting returns that low over the next 10-15 years. CAPE currently implies forward real returns of about 3.3% over the next decade.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by countmein » Sun Sep 08, 2019 11:46 pm

vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
Monte Carlo analyses such as this are totally reasonable/standard and can be constructed to account for all the nitpicks and complaints.

What's funny is the misguided fetishizing of our historical record which contains all of 5 independent retirement periods. You see the cognitive error play out every time in these threads. 1871 seems like a long time ago to a human in 2019. "What's this? The model predicts a few instances where returns are WORSE than anything we've seen? (clutch pearls)...That's impossible because the worst period we've ever seen is the all-time worst period by definition!"

Imagine it...we have all of 5 data points and people freak out when a model uses history + current conditions to generate 10,000 synthetic/"future" data points and lo and behold 5% of them show lower lows than the past. Why should it be otherwise? Insisting that the model never generate a lower low than the past is missing the point that the past is not the model. Our history is one outcome that came from the model. It could've been different and just might be different in the future. Folks like Pfau who are doing this work are giving you the opportunity to take this into account in your planning.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by HomerJ » Mon Sep 09, 2019 12:08 am

countmein wrote:
Sun Sep 08, 2019 11:46 pm
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
Monte Carlo analyses such as this are totally reasonable/standard and can be constructed to account for all the nitpicks and complaints.

What's funny is the misguided fetishizing of our historical record which contains all of 5 independent retirement periods. You see the cognitive error play out every time in these threads. 1871 seems like a long time ago to a human in 2019. "What's this? The model predicts a few instances where returns are WORSE than anything we've seen? (clutch pearls)...That's impossible because the worst period we've ever seen is the all-time worst period by definition!"

Imagine it...we have all of 5 data points and people freak out when a model uses history + current conditions to generate 10,000 synthetic/"future" data points and lo and behold 5% of them show lower lows than the past. Why should it be otherwise? Insisting that the model never generate a lower low than the past is missing the point that the past is not the model. Our history is one outcome that came from the model. It could've been different and just might be different in the future. Folks like Pfau who are doing this work are giving you the opportunity to take this into account in your planning.
One can just as easily say we only have five data points, so there's no way to accurately generate 10,000 synthetic/future data points. There's not enough data to predict the future based on "current conditions" and 5 previous data points.
Last edited by HomerJ on Mon Sep 09, 2019 12:15 am, edited 1 time in total.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Mon Sep 09, 2019 12:14 am

countmein wrote:
Sun Sep 08, 2019 11:46 pm
Monte Carlo analyses such as this are totally reasonable...
How do you know this? Why should anyone believe that such analyses can accurately forecast the probabilities of events decades into the future, especially with very limited inputs, and we don't know whether these inputs themselves are accurate either?
Last edited by willthrill81 on Mon Sep 09, 2019 12:25 am, edited 1 time in total.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by CurlyDave » Mon Sep 09, 2019 12:17 am

Stinky wrote:
Sun Sep 08, 2019 2:11 pm

...It confirms what I felt in my gut - 3% (or something close to it) should probably replace 4% as a rough guideline in the plans of near- and recently-retired folks.
The other big thing it shows is that the optimum stock allocation is much higher than most are comfortable having.

It is intuitive that decreasing bond returns relative to stocks will push the best AA toward more stock and fewer bonds.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by countmein » Mon Sep 09, 2019 12:39 am

vineviz wrote:
Sun Sep 08, 2019 2:07 pm
I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
The aversion to doing this is incredibly strong. Nobody wants to be told 3% is the new 4%. It will be fought at all costs, with or without logic, and understandably so because the stakes are so high.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by mrspock » Mon Sep 09, 2019 12:44 am

Why not just bias to more equity allocation, say 60/40, be flexible with your spending in retirement and go with a lower SWR of say 3.5%. Maybe save a little extra... probably things everyone is doing already? Is this not common sense?

I don’t see anything new here. How the tunes have changed, just 18 months ago interest rates could go “no where but up”, yet... here we are. 7/1 ARM FTW .

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by countmein » Mon Sep 09, 2019 12:45 am

HomerJ wrote:
Mon Sep 09, 2019 12:08 am
One can just as easily say we only have five data points, so there's no way to accurately generate 10,000 synthetic/future data points. There's not enough data to predict the future based on "current conditions" and 5 previous data points.
Totally. The nice thing about probabilities is that you can say the whole enterprise is stupid when it doesn't give you the answer you wanted.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stocknoob4111 » Mon Sep 09, 2019 1:31 am

Bond yields are low but we also have extremely low inflation as well.. I don't see that adjustment in this article. Inflation in the 70s, 80s was triple or more what it is today and the 4% rule has been back tested against that so this study is flawed.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by YRT70 » Mon Sep 09, 2019 2:13 am

willthrill81 wrote:
Sun Sep 08, 2019 3:33 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm
Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
I'm curious as to why you find a tool with serious limitations to be interesting.
Using backtesting to predict the probability of future scenarios has serious limitations too yet I find the results interesting.

Just because a tool has serious limitations doesn't mean I completely disregard the results. I just take them for what they are.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by YRT70 » Mon Sep 09, 2019 6:12 am

willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
Do you have a link to that thread?

Does that mean you don't believe in Kitces' ideas about having higher bond allocation during the early years of retirement to safeguard against SoRR?

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by nisiprius » Mon Sep 09, 2019 7:17 am

If the 4% rule is just a rough rule of thumb, it's fine. As the authors of the Trinity Study said explicitly, it is "a matter of planning, not of contract."

But if it is to be taken seriously--as it often seems to be, two-figure precision, is it 3.7% or is it 3.9%--then articles like this don't mean "we need a different number," they simply blow up the whole idea behind the methodology.

Because the claim was never "based on current market conditions, I forecast that X% will work in future." The claim was always said to be that 93 years (1926) or 148 years (1871) included a wide enough sample of market conditions that for all intents and purposes they already included anything that was a credible possibility in the future.

The 4% rule, developed in mid-1990s, wasn't supposed to be based on "the conditions we see today in the mid-1990s." Those numbers were being presented by others, e.g. Peter Lynch, who said 7% was safe. The 4% rule was supposed to be based on "worst that has ever happened, therefore a reasonable planning number for the worst that could happen."

People don't go to a "safe withdrawal rule" in order to be risky, they go to one in order to be pretty safe. If we believe that the next few decades are going to be so far outside the range of what has already happened, that "survived the worst that has ever happened to date" is unlikely to survive what is coming, then that just means the whole approach needs to be tossed. Because if 148 years of data is not enough to insure reasonable safety, then 178 years isn't going to be, either. Tacking on another few decades, whether from Monte Carlo simulations of the future, or by waiting a few decades to get more data, isn't going to improve things materially.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Mon Sep 09, 2019 8:05 am

countmein wrote:
Sun Sep 08, 2019 11:46 pm


Imagine it...we have all of 5 data points and people freak out when a model uses history + current conditions to generate 10,000 synthetic/"future" data points and lo and behold 5% of them show lower lows than the past. Why should it be otherwise? Insisting that the model never generate a lower low than the past is missing the point that the past is not the model. Our history is one outcome that came from the model. It could've been different and just might be different in the future. Folks like Pfau who are doing this work are giving you the opportunity to take this into account in your planning.
The thing is that Pfau and the rests who are getting low numbers aren't based off historical numbers. They are based off historical numbers with a fudge factor applied. Now there is a lot of thought in those fudge factors but they are still guesses.

The debate about historical versus monte carlo has gone on forever. Both have pluses and minuses.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by vineviz » Mon Sep 09, 2019 8:27 am

willthrill81 wrote:
Sun Sep 08, 2019 9:52 pm
Kitces said the worst safe withdrawal rate periods in history for a 60/40 portfolio had a real annualized return of .86% over the first 15 years of a 30 year withdrawal period (because the first 15 years were very strongly correlated [r = .91] with the subsequent 30 year SWR). 30 year TIPS are currently yielding .41% real, so that means that you would only need stocks to return .7% real over the next 15 years to at least match the worst historic periods. I'm not aware of anyone who is claiming that the current valuations are predicting returns that low over the next 10-15 years. CAPE currently implies forward real returns of about 3.3% over the next decade.
I'm not suggesting that anyone is predicting a real return of less than 1% over the next 15 years, merely suggesting it is not outside the range of likely outcomes. Put a 90% or 95% confidence interval around that 3.3% expected real return and I think you'll see what I mean.

Looking only at year-on-year returns, since 1930 there have been 8 times when the 15-year real return of US stocks was less than 1% and the average CAPE at the beginning of those periods was just 20.8.

I don't want anyone to think I'm suggesting that we plan on a doomsday scenario, but imagine the counterfactual case of a 1965 retiree facing the combination of today's bond yields (assume the 0.4% real return available from TIPS) with the realized historical 15-year real return on stocks of -0.7%. I won't suggest that this is highly likely to occur, but surely we should assign a non-zero probability to it.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by MikeG62 » Mon Sep 09, 2019 9:08 am

countmein wrote:
Sun Sep 08, 2019 11:46 pm
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
Monte Carlo analyses such as this are totally reasonable/standard and can be constructed to account for all the nitpicks and complaints.

What's funny is the misguided fetishizing of our historical record which contains all of 5 independent retirement periods. You see the cognitive error play out every time in these threads. 1871 seems like a long time ago to a human in 2019. "What's this? The model predicts a few instances where returns are WORSE than anything we've seen? (clutch pearls)...That's impossible because the worst period we've ever seen is the all-time worst period by definition!"

Imagine it...we have all of 5 data points and people freak out when a model uses history + current conditions to generate 10,000 synthetic/"future" data points and lo and behold 5% of them show lower lows than the past. Why should it be otherwise? Insisting that the model never generate a lower low than the past is missing the point that the past is not the model. Our history is one outcome that came from the model. It could've been different and just might be different in the future. Folks like Pfau who are doing this work are giving you the opportunity to take this into account in your planning.
Can you point to a model which addresses this critically important shortcoming discussed by Derek Tharp here?

https://www.kitces.com/blog/monte-carlo ... l-returns/

Returns are simply not independent from one period to the other (be those periods one, or two or five or ten years or longer). This flaw causes the extreme outcomes from MC simulations to be meaningless. IMHO, the outlier 5%-7% worst or best case outcomes should be tossed as useless.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by TN_Boy » Mon Sep 09, 2019 9:25 am

countmein wrote:
Sun Sep 08, 2019 11:46 pm
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
YRT70 wrote:
Sun Sep 08, 2019 1:48 pm

Wade writes: "The 4% rule may work for today’s retirees, but it is far from a sure bet or a “safe” spending strategy."

Curious to hear what other people think about this article. I'm aware that MC simulations have serious limitations but I think they can be interesting nonetheless.
It seems like a sensible analysis to me. I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
Monte Carlo analyses such as this are totally reasonable/standard and can be constructed to account for all the nitpicks and complaints.

What's funny is the misguided fetishizing of our historical record which contains all of 5 independent retirement periods. You see the cognitive error play out every time in these threads. 1871 seems like a long time ago to a human in 2019. "What's this? The model predicts a few instances where returns are WORSE than anything we've seen? (clutch pearls)...That's impossible because the worst period we've ever seen is the all-time worst period by definition!"

Imagine it...we have all of 5 data points and people freak out when a model uses history + current conditions to generate 10,000 synthetic/"future" data points and lo and behold 5% of them show lower lows than the past. Why should it be otherwise? Insisting that the model never generate a lower low than the past is missing the point that the past is not the model. Our history is one outcome that came from the model. It could've been different and just might be different in the future. Folks like Pfau who are doing this work are giving you the opportunity to take this into account in your planning.
With regard to this statement:

"Monte Carlo analyses such as this are totally reasonable/standard and can be constructed to account for all the nitpicks and complaints."

Could you elaborate on how your analysis accounts for the nitpicks and complaints? Does Pfau's account for them? (Actually the linked article doesn't include much information on methodology, so hard to assess).

And while I have sympathy for both sides of this debate:

Use monte carlo: "the future could be worse than any of the historical sequences" or

Use history: "you really think the future will be worse than the great depression, WW II, etc"

I find the argument that a simplistic monte carlo simulation will have a misleading number of worst and best cases very compelling. I assume that stock prices are, more or less, tied to how the economy is doing. Not in a given year .... the market might have a good year while the country is in a recession, and the vice versa. But over a longer period of time, I believe that if the economy does X, the stock market will roughly, do X. (Caveat, free market economy, reasonable political system, etc. If your country becomes Venezuela, you are toast).

A simplistic monte carlo simulation can come up with sequences where the market just ..... keeps going down. But unless the economy tanks and never comes back, I think this is unrealistic. I have a globally diversified portfolio, so unless the world economy goes down and never comes back, I think I will have some real returns. I will grant you the US had a very fortunate 20th century.

There are certainly things I worry about. The real return of bonds is quite low. Though that has happened before. The world economy might blow up. Political risks in the US, Europe and Asia. An asteroid might strike us, leaving pockets of civilization surviving. Though if I start worrying about all those things, pretty soon a 1% withdrawal rate looks pretty good, along with a stocked cave in the mountains somewhere.

I'd like to see the results with a "smarter" monte carlo simulation. Those as always, simulations are only as good as your simulation engine. If your assumptions about how markets "mean revert" are wrong, that simulation isn't much good.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Mon Sep 09, 2019 9:44 am

vineviz wrote:
Mon Sep 09, 2019 8:27 am
willthrill81 wrote:
Sun Sep 08, 2019 9:52 pm
Kitces said the worst safe withdrawal rate periods in history for a 60/40 portfolio had a real annualized return of .86% over the first 15 years of a 30 year withdrawal period (because the first 15 years were very strongly correlated [r = .91] with the subsequent 30 year SWR). 30 year TIPS are currently yielding .41% real, so that means that you would only need stocks to return .7% real over the next 15 years to at least match the worst historic periods. I'm not aware of anyone who is claiming that the current valuations are predicting returns that low over the next 10-15 years. CAPE currently implies forward real returns of about 3.3% over the next decade.
I'm not suggesting that anyone is predicting a real return of less than 1% over the next 15 years, merely suggesting it is not outside the range of likely outcomes. Put a 90% or 95% confidence interval around that 3.3% expected real return and I think you'll see what I mean.

Looking only at year-on-year returns, since 1930 there have been 8 times when the 15-year real return of US stocks was less than 1% and the average CAPE at the beginning of those periods was just 20.8.

I don't want anyone to think I'm suggesting that we plan on a doomsday scenario, but imagine the counterfactual case of a 1965 retiree facing the combination of today's bond yields (assume the 0.4% real return available from TIPS) with the realized historical 15-year real return on stocks of -0.7%. I won't suggest that this is highly likely to occur, but surely we should assign a non-zero probability to it.
I agree that it's certainly possible for stocks to have real returns below 1% for the next 15 years.

Thankfully, retirees have more choices than just U.S. stocks and nominal bonds. Ex-U.S. has more attractive valuations, 30 year TIPS are still yielding .4%, and you can get 5 year CDs yielding 3% or slightly higher. And all that's aside from any kind of factor tilt.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Forester » Mon Sep 09, 2019 11:19 am

Foreign stocks can't have been this cheap relative to US stocks, since the late 1990s.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by visualguy » Mon Sep 09, 2019 12:42 pm

Forester wrote:
Mon Sep 09, 2019 11:19 am
Foreign stocks can't have been this cheap relative to US stocks, since the late 1990s.
They are not cheap relative to their own historical valuations, unfortunately.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Northern Flicker » Mon Sep 09, 2019 1:05 pm

4% withdrawal rate ALREADY accounts for the current reality of high equity valuations combined with low bond yields.
Does it? How can you be sure?
In the sense that the model is purported to work in all conditions, current conditions are accounted for in the model.

But consider the folks who retired 1-6 months before people started suggesting the model should be change to lower the initial withdrawal rate. Either the model failed for them or the people saying the rate needs to be lowered are incorrect.

In other words, the idea that the withdrawal rate would need to be changed would mean that the original model is wrong. If you use 3% today, how can you know that people won’t be recommending 2.5% in 6 months if the model is now subject to change with changing conditions.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by LilyFleur » Mon Sep 09, 2019 1:40 pm

stlutz wrote:
Sun Sep 08, 2019 4:45 pm
visualguy wrote:
Sun Sep 08, 2019 4:22 pm
willthrill81 wrote:
Sun Sep 08, 2019 3:26 pm
But at the end of the day, all of this SWR discussion is moot because virtually no one is using a SWR approach to determine their withdrawals. Everyone makes adjustments.
I keep hearing this, but this is just another way to say lower your withdrawal rate when times are bad. Not really something I want to do because I want to enjoy my retirement years (and particularly the first decade) even if the stock market stagnates. Once those years are gone, there isn't a second chance. Also, I'm not planning on having a large amount of expenses that can be cut without a meaningful impact.

Maybe the answer is to allocate a bucket in TIPS, CDs, or some such thing for the first decade, and spend from that regardless of what happens in the markets.
I think the obsession with SWR on this forum (and elsewhere) does show that a lot of people want annuity-type income. All of the SWR talk is just asking how I can make a portfolio of risk assets act like an annuity. The answer is that you can't.

The problem people have with annuities is that nobody want to turn over their nest egg to an insurance company. I know I don't. There are options you can add to annuity purchase to mitigate this (e.g. a cash refund option), but of course that reduces your annuity payout.

For my own retirement, my current plan will be to purchase a deferred annuity that starts paying at age 80 or 85. They are pretty cheap and basically take care of the longevity risk as well as making-poor-decisions-as-one-ages risk. Then I can use my balanced portfolio to take care of the earlier years, which is a more manageable prospect.
Are people who want annuities feeling pressure to buy an annuity because they do not have work pensions? I went to a Social Security seminar, and the speaker said that the best retirement is based on three "legs": savings, pension, and SS.

It seems like an annuity at some point would be a good idea if a person did not have a pension.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by HomerJ » Mon Sep 09, 2019 1:44 pm

Northern Flicker wrote:
Mon Sep 09, 2019 1:05 pm
In other words, the idea that the withdrawal rate would need to be changed would mean that the original model is wrong. If you use 3% today, how can you know that people won’t be recommending 2.5% in 6 months if the model is now subject to change with changing conditions.
Heh, good point.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Mon Sep 09, 2019 1:45 pm

YRT70 wrote:
Mon Sep 09, 2019 6:12 am
willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
Do you have a link to that thread?

Does that mean you don't believe in Kitces' ideas about having higher bond allocation during the early years of retirement to safeguard against SoRR?
here is a chart from
https://www.kitces.com/blog/should-equi ... ly-better/
Image


For a 4% SWR
40/60 constant = 94.6%, 29.6 years to failure
50/50 constant = 94.1% success rate,28.8 years to failure
60/40 constant = 93.2%, 27.7 years to failure
30/70 rising to 70/30 = 95.1% success rate, 30.0

The rising glide path might be better but I would argue that we are looking at difference with in the margin of error of the tool. You see similar things when looking at any of the various bucket schemes. The benefits of these schemes tends to be more lower volatility early on than better success rates or higher SWR. There is a plus investing so you only ever see a 100k loss instead of a 200k one even if the total success rate stays the same. On the other hand being 70/30 at 80 might cause sleeping problems...

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by MikeG62 » Mon Sep 09, 2019 2:50 pm

vineviz wrote:
Sun Sep 08, 2019 2:07 pm
I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
Warren Buffett suggested that equities were ridiculously cheap given current interest rates (well the rates that existed when he made these comments in May 2019). His comment was made in the context of “if rates remain this low going forward”. Well we know rates are in fact lower now than in May and yet we have people all over this thread (and the other similar ones running now) talking about needing unprecedentedly low SWR’s (history’s worst case scenario turning out to be better than the next 30-40 years) due in part to low bond yields being a permanent fixture going forward.

https://www.google.com/amp/s/www.cnbc.c ... evels.html.

I am inclined to side with Buffett.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by deikel » Mon Sep 09, 2019 2:54 pm

countmein wrote:
Mon Sep 09, 2019 12:39 am
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
The aversion to doing this is incredibly strong. Nobody wants to be told 3% is the new 4%. It will be fought at all costs, with or without logic, and understandably so because the stakes are so high.
You can argue this the other way round too: There are plenty of folks out there who's job depends on the perception that this time is really (somehow) different and more money should be saved and invested.....fear marketing is a real thing...

I have not seen any mention here yet that the success outcome vastly depends on the first 10 year period of your actual retirement - and those years should be the ones where you are still in full capacity to make adjustments (albeit also the years you probably want to have the most fun).

The 4% 'rule' was a handy 'rule of thumb' that finally allowed people to have a simple gauge to see how much retirement was possible (or not, or not yet), was reasonably back tested at that time and has since then reasonably be tested for the following time periods.

I don't think anything has changed or is new at his point
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by EnjoyIt » Mon Sep 09, 2019 3:02 pm

deikel wrote:
Mon Sep 09, 2019 2:54 pm
countmein wrote:
Mon Sep 09, 2019 12:39 am
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
The aversion to doing this is incredibly strong. Nobody wants to be told 3% is the new 4%. It will be fought at all costs, with or without logic, and understandably so because the stakes are so high.
You can argue this the other way round too: There are plenty of folks out there who's job depends on the perception that this time is really (somehow) different and more money should be saved and invested.....fear marketing is a real thing...
...
A finance firm would love for a wealthy family to only use 3%. Thats a whole lot of AUM fees and expense ratios for them to keep.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Northern Flicker » Mon Sep 09, 2019 3:08 pm

And a higher balance needed to meet expenses.
Risk is not a guarantor of return.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Mon Sep 09, 2019 3:41 pm

deikel wrote:
Mon Sep 09, 2019 2:54 pm
The 4% 'rule' was a handy 'rule of thumb' that finally allowed people to have a simple gauge to see how much retirement was possible (or not, or not yet), was reasonably back tested at that time and has since then reasonably be tested for the following time periods.
Correct. The '4% rule' is not a withdrawal strategy. Virtually no one is actually using it or any other fixed real dollar withdrawal strategy. But as an approximation of how much could be safely withdrawn from a portfolio for 30 years, it's been useful and seems likely to continue to be.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by 2pedals » Mon Sep 09, 2019 3:47 pm

Since nobody knows what rule with work in tomorrows market and the sacrifices you're making to save for later might be making you miserable, whatever SWR you use could be unrealistic and possibly savagely cruel (ruin your dreams in retirement).

What I want is a realistic withdrawal rate in retirement based on somewhere into between the following two questions.

How much money is more than enough to live an fun and exciting retirement (excluding money for legacy reasons)?
How much money is needed for basic necessities?

This is a very very big range for me. Somewhere in between 50k to 150k+.

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
Last edited by 2pedals on Mon Sep 09, 2019 3:49 pm, edited 1 time in total.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by deikel » Mon Sep 09, 2019 3:49 pm

EnjoyIt wrote:
Mon Sep 09, 2019 3:02 pm
deikel wrote:
Mon Sep 09, 2019 2:54 pm
countmein wrote:
Mon Sep 09, 2019 12:39 am
vineviz wrote:
Sun Sep 08, 2019 2:07 pm
I think anyone planning an imminent retirement must somehow account for the current reality of high equity valuations combined with low bond yields.
The aversion to doing this is incredibly strong. Nobody wants to be told 3% is the new 4%. It will be fought at all costs, with or without logic, and understandably so because the stakes are so high.
You can argue this the other way round too: There are plenty of folks out there who's job depends on the perception that this time is really (somehow) different and more money should be saved and invested.....fear marketing is a real thing...
...
A finance firm would love for a wealthy family to only use 3%. Thats a whole lot of AUM fees and expense ratios for them to keep.
yes and funny enough, after their fee of 1 % and the underlying fee for the managed funds they sell....one could be right back at 4.5% and Bengen would be happy...
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Mon Sep 09, 2019 3:52 pm

2pedals wrote:
Mon Sep 09, 2019 3:47 pm
Since nobody knows what rule with work in tomorrows market and the sacrifices you're making to save for later might be making you miserable, whatever SWR you use could be unrealistic and possibly savagely cruel (ruin your dreams in retirement).

What I want is a realistic withdrawal rate in retirement based on somewhere into between the following two questions.

How much money is more than enough to live an fun and exciting retirement (excluding money for legacy reasons)?
How much money is needed for basic necessities?

This is a very very big range for me. Somewhere in between 50k to 150k+.

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
If the lower bound of that range is $50k, SS benefits alone might provide most or even all of it, leaving your portfolio mainly for the 'fun and exciting' things.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by abuss368 » Mon Sep 09, 2019 4:17 pm

The truth is no one knows in advance if that is an acceptable withdrawal rate.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Mon Sep 09, 2019 4:20 pm

2pedals wrote:
Mon Sep 09, 2019 3:47 pm

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
When you use those tools do you also use the same assumptions that people are using to generate 2 or 3% SWR? I am wondering if you get sub 1.5% rates in those bad cases for the half dozen years at the bottom. If we get the returns that will cause the 4% rule to fail, you are going to be dealing with crappy spending no matter what scheme you use. Where the rules are good is that you can ignore that reality (at the expense of having to make deeper cuts IF it shows up) unless it actually shows up. Even the pessimistic models have most people spending 4% most of the time. They are just saying there is going to be some poor sod in the next 20 years who retires in the year where something like the markets drop 50% over the next 3 years and give you negative returns for 15 and interest rates/infaltion rise giving bonds negative yields for 15 happens.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by zengolf2011 » Mon Sep 09, 2019 5:44 pm

Will do good wrote:
Sun Sep 08, 2019 2:37 pm
Not sure I buy into "This time is different". I wonder how many experts would have predicted this years bond index would pass 8-9%?
I use 4%as a guide and adjust as needed, as long as you are not super tight with 4% SWR most would be fine.
I'm not ready to spend this year's to-date bond index return yet. If and when interest rates increase, bond prices will probably drop. I hold bonds for their typically lower volatility and higher internal rate of return than stocks. I'm concerned that bonds are becoming more of a speculation now that their internal rate of return is so low. This would be a cause for caution for those who follow a safe withdrawal rate strategy (though I personally rely on VPW).

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by stlutz » Mon Sep 09, 2019 6:37 pm

nisiprius wrote:
Mon Sep 09, 2019 7:17 am
If the 4% rule is just a rough rule of thumb, it's fine. As the authors of the Trinity Study said explicitly, it is "a matter of planning, not of contract."

But if it is to be taken seriously--as it often seems to be, two-figure precision, is it 3.7% or is it 3.9%--then articles like this don't mean "we need a different number," they simply blow up the whole idea behind the methodology.

Because the claim was never "based on current market conditions, I forecast that X% will work in future." The claim was always said to be that 93 years (1926) or 148 years (1871) included a wide enough sample of market conditions that for all intents and purposes they already included anything that was a credible possibility in the future.

The 4% rule, developed in mid-1990s, wasn't supposed to be based on "the conditions we see today in the mid-1990s." Those numbers were being presented by others, e.g. Peter Lynch, who said 7% was safe. The 4% rule was supposed to be based on "worst that has ever happened, therefore a reasonable planning number for the worst that could happen."

People don't go to a "safe withdrawal rule" in order to be risky, they go to one in order to be pretty safe. If we believe that the next few decades are going to be so far outside the range of what has already happened, that "survived the worst that has ever happened to date" is unlikely to survive what is coming, then that just means the whole approach needs to be tossed. Because if 148 years of data is not enough to insure reasonable safety, then 178 years isn't going to be, either. Tacking on another few decades, whether from Monte Carlo simulations of the future, or by waiting a few decades to get more data, isn't going to improve things materially.
Nisi: Nice post. I've been thinking about it over the course of the day. My thoughts which may or may not be useful:

I agree that 4% is a good rough planning number and really not much more.

The historical-based numbers actually provide a range of results. The 4% number comes from looking at US markets only. Pfau came up with different numbers when looking at domestic securities in international markets around the world, which I think was <2%. He also looked at investing globally but taking returns in native currency--as I recall that result was around 3.5%, but somebody will need to correct me if my recollection is wrong. So, the "historical SWR" is actually a multiple different numbers.

4% was based on the winning country. Might be sort of like a New England Patriots fan buying Super Bowl tickets in advance for the next 10 years--history says it's a good idea.

There are a couple of ways to go about handling this--the annuity approach (which includes things like TIPS ladders) and the balanced portfolio of risk assets approach. Obviously these can be combined.

For the annuity approach, the withdrawal rate is always changing because interest rates are always changing. On can price an annuity any time they way to or calculate what payout they could get from a 30 year TIPS ladder. The result today is different than 6 months ago and 5 years ago. If I was 65 now and a single male (one of those is true), I can buy a CPI adjusted annuity with a payout rate of 4.25%. Which makes me wonder what all of the panic is about. But payout rates are different if you are married, shopping at a different age etc.

For the balanced portfolio of risk assets approach, people simply have to be able to deal with the distinction of possibility and probability.

A few understandings that undergird my thinking here:

a) stocks are riskier than bonds. As such, there is a reasonable possibility in any scenario that a portfolio with stocks will produce a lower withdrawal rate than the annuity approach. Because the long-term risks of equity investing haven't really "shown up" in the US doesn't mean they never were and aren't there.

b) Stocks usually return more than bonds. With the balanced portfolio approach there is a probability that I will be able to ultimately withdraw more than I had hoped and that I will in fact die with a pretty big pot of money.

c) As willthrill notes repeatedly, nobody actually calculates an inflation adjusted 4% from the initial year of retirement and then withdraws that. So the "running out of money" scenario isn't so much the threat as is the income-shrinking-because-the market-performed-poorly threat. Variable withdrawal strategies don't really solve the problem as much as they highlight that the income you can reasonably take from your portfolio can and will vary a lot from year to year.

The possibilities what reasonably can happen are broader than what did happen in one country over 3 or 4 independent periods of time. So, I would say that 4% as a "rule" was never correct. Risky assets don't provide the type of near guarantee that the word "rule" implies And it's focusing on the wrong thing.

When taking your income from a regular portfolio, you have to understand the probabilities, the possibilities, and that fact that you aren't in control of whether good things happen or bad. If you need certainty, buy an annuity. If you want the upside offered by a regular investment portfolio, then be prepared to deal with the fact that it might not work out as you expected, although it probably will.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by 2pedals » Mon Sep 09, 2019 7:04 pm

willthrill81 wrote:
Mon Sep 09, 2019 3:52 pm
2pedals wrote:
Mon Sep 09, 2019 3:47 pm
Since nobody knows what rule with work in tomorrows market and the sacrifices you're making to save for later might be making you miserable, whatever SWR you use could be unrealistic and possibly savagely cruel (ruin your dreams in retirement).

What I want is a realistic withdrawal rate in retirement based on somewhere into between the following two questions.

How much money is more than enough to live an fun and exciting retirement (excluding money for legacy reasons)?
How much money is needed for basic necessities?

This is a very very big range for me. Somewhere in between 50k to 150k+.

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
If the lower bound of that range is $50k, SS benefits alone might provide most or even all of it, leaving your portfolio mainly for the 'fun and exciting' things.
In addition, I have fixed pension and retiree medical that will cover most it not all of my non-discretionary expenses (depends on inflation). After 70 we will have more than enough. I don't see how a SWR applies to our situation. For the most part, we have expenses covered and should spend more on discretionary spending items. If we uncharacteristically overspend in our early retirement (retired now at 60), I get to enjoy the fruits of my labor at a younger age. Not really a bad trade off if I do things that "make my day". Realistically I could not see myself or DW overspend. I find hard to do with our conservative spending mindset. I just would like to know how much is a reasonable and use VPM and ECM as a target.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by 2pedals » Mon Sep 09, 2019 7:31 pm

randomguy wrote:
Mon Sep 09, 2019 4:20 pm
2pedals wrote:
Mon Sep 09, 2019 3:47 pm

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
When you use those tools do you also use the same assumptions that people are using to generate 2 or 3% SWR? I am wondering if you get sub 1.5% rates in those bad cases for the half dozen years at the bottom. If we get the returns that will cause the 4% rule to fail, you are going to be dealing with crappy spending no matter what scheme you use. Where the rules are good is that you can ignore that reality (at the expense of having to make deeper cuts IF it shows up) unless it actually shows up. Even the pessimistic models have most people spending 4% most of the time. They are just saying there is going to be some poor sod in the next 20 years who retires in the year where something like the markets drop 50% over the next 3 years and give you negative returns for 15 and interest rates/infaltion rise giving bonds negative yields for 15 happens.
VPM and ECM does not use the same assumptions that are used to generate 2%, 3% or 4% SWR. SWR numbers are based on a very low probability of out living your money at a planned death date. Dynamic withdrawal rate methods does not.

I don't want to plan to be that poor sod unless I have to, do you? If you force a plan that you are that poor sod and you unrealistically under spend, you missed the boat.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Mon Sep 09, 2019 9:00 pm

2pedals wrote:
Mon Sep 09, 2019 7:04 pm
willthrill81 wrote:
Mon Sep 09, 2019 3:52 pm
2pedals wrote:
Mon Sep 09, 2019 3:47 pm
Since nobody knows what rule with work in tomorrows market and the sacrifices you're making to save for later might be making you miserable, whatever SWR you use could be unrealistic and possibly savagely cruel (ruin your dreams in retirement).

What I want is a realistic withdrawal rate in retirement based on somewhere into between the following two questions.

How much money is more than enough to live an fun and exciting retirement (excluding money for legacy reasons)?
How much money is needed for basic necessities?

This is a very very big range for me. Somewhere in between 50k to 150k+.

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
If the lower bound of that range is $50k, SS benefits alone might provide most or even all of it, leaving your portfolio mainly for the 'fun and exciting' things.
In addition, I have fixed pension and retiree medical that will cover most it not all of my non-discretionary expenses (depends on inflation). After 70 we will have more than enough. I don't see how a SWR applies to our situation. For the most part, we have expenses covered and should spend more on discretionary spending items. If we uncharacteristically overspend in our early retirement (retired now at 60), I get to enjoy the fruits of my labor at a younger age. Not really a bad trade off if I do things that "make my day". Realistically I could not see myself or DW overspend. I find hard to do with our conservative spending mindset. I just would like to know how much is a reasonable and use VPM and ECM as a target.
VPW would be fine, although you might want to take the withdrawals associated with an older age than your actual age (e.g. take the VPW for age 70 at age 65), which would have the effect of front-loading your withdrawals. This would result in you depleting your portfolio prior to age 100, but it sounds like you might be fine with that. And of course, you can always withdraw less down the road.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by randomguy » Mon Sep 09, 2019 10:00 pm

2pedals wrote:
Mon Sep 09, 2019 7:31 pm

VPM and ECM does not use the same assumptions that are used to generate 2%, 3% or 4% SWR. SWR numbers are based on a very low probability of out living your money at a planned death date. Dynamic withdrawal rate methods does not.

I don't want to plan to be that poor sod unless I have to, do you? If you force a plan that you are that poor sod and you unrealistically under spend, you missed the boat.
VPW and ECM will live in the same return world that generates a 2 or 3% SWR. We know historically VPW has had lower bottom (2.8%) than the standard SWR (3.8%). Do you have any reason to believe in a world where the SWR is say 3%, that the VPW bottoming number will not be like 2%?

Unfortunately you can't choose if you are the poor sod or not no matter what scheme you choose. And yes not wanting to underspend is why I don't plan on using VPW. Look at those poor 1966 retireees spending numbers were you were spending 20%+ less than you could have for your prime retirement years is sickening. I will take my chances living on SS, annuities, and floor income if I am 93:) Or more realistically cut spending at 75-80 to stretch out another couple years. The death rate for everyone after 95 is pretty darn high. But that is really a whole different topic.:)

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Mon Sep 09, 2019 10:37 pm

HomerJ wrote:
Sun Sep 08, 2019 9:07 pm
And Wade Pfau posted that 2.5% was the new 4% back in 2011.
And if a year 2012 retiree with a 60/40 AA had strictly followed the '4% rule', they would now have 40.53% more in their portfolio than when they started. At this point, they could make it to 30 years with annualized real returns of -3.27%.
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by bertilak » Tue Sep 10, 2019 6:53 am

LilyFleur wrote:
Mon Sep 09, 2019 1:40 pm
Are people who want annuities feeling pressure to buy an annuity because they do not have work pensions? I went to a Social Security seminar, and the speaker said that the best retirement is based on three "legs": savings, pension, and SS.

It seems like an annuity at some point would be a good idea if a person did not have a pension.
I agree that if one of those three legs has come off one's stool then replacing it is a good idea. Annuities can do that. A pension IS an annuity that has been funded by an employer. If that practice has gone by the wayside a reasonable plan is to fund it yourself.

The lack of a pension is nothing new for many. Not everyone had a pension even when they were fairly common. When job hunting the presence or lack thereof should be one of the considerations.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by YRT70 » Tue Sep 10, 2019 8:01 am

randomguy wrote:
Mon Sep 09, 2019 1:45 pm
YRT70 wrote:
Mon Sep 09, 2019 6:12 am
willthrill81 wrote:
Sun Sep 08, 2019 4:35 pm
goodenyou wrote:
Sun Sep 08, 2019 4:33 pm
A rising equity glide path
Yes, but subsequent analysis done by many here has shown that that doesn't really work any better (and maybe worse) than maintaining a steady AA throughout retirement.
Do you have a link to that thread?

Does that mean you don't believe in Kitces' ideas about having higher bond allocation during the early years of retirement to safeguard against SoRR?
here is a chart from
https://www.kitces.com/blog/should-equi ... ly-better/
Image


For a 4% SWR
40/60 constant = 94.6%, 29.6 years to failure
50/50 constant = 94.1% success rate,28.8 years to failure
60/40 constant = 93.2%, 27.7 years to failure
30/70 rising to 70/30 = 95.1% success rate, 30.0

The rising glide path might be better but I would argue that we are looking at difference with in the margin of error of the tool. You see similar things when looking at any of the various bucket schemes. The benefits of these schemes tends to be more lower volatility early on than better success rates or higher SWR. There is a plus investing so you only ever see a 100k loss instead of a 200k one even if the total success rate stays the same. On the other hand being 70/30 at 80 might cause sleeping problems...
Thanks. I read that one and one of ERN's articles for longer retirements. Iirc it also showed a minor benefit to a rising equity glidepath.

MathIsMyWayr
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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by MathIsMyWayr » Tue Sep 10, 2019 8:05 am

willthrill81 wrote:
Mon Sep 09, 2019 3:52 pm
2pedals wrote:
Mon Sep 09, 2019 3:47 pm
Since nobody knows what rule with work in tomorrows market and the sacrifices you're making to save for later might be making you miserable, whatever SWR you use could be unrealistic and possibly savagely cruel (ruin your dreams in retirement).

What I want is a realistic withdrawal rate in retirement based on somewhere into between the following two questions.

How much money is more than enough to live an fun and exciting retirement (excluding money for legacy reasons)?
How much money is needed for basic necessities?

This is a very very big range for me. Somewhere in between 50k to 150k+.

SWR does very little in helping decide how much money I should be spending. Annual review of various dynamic withdrawal rate methods such as longinvest's VPM and McClung's Extended Conservative Mortality (ECM) can help me decide how "safe" my discretionary spending and withdrawals are.
If the lower bound of that range is $50k, SS benefits alone might provide most or even all of it, leaving your portfolio mainly for the 'fun and exciting' things.
If your savings is only for the fun and exciting things, we should change SafeWR to SensibleWR. It is like agonizing over a football strategy when your team is winning the game 63:0 going into the 4th quarter.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by Random Walker » Tue Sep 10, 2019 10:39 pm

Larry has an essay on the challenges of retirement in today’s low interest rate and high equity valuation environment over at Advisor Perspectives.

Dave

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by EddyB » Tue Sep 10, 2019 11:04 pm

stlutz wrote:
Mon Sep 09, 2019 6:37 pm
nisiprius wrote:
Mon Sep 09, 2019 7:17 am
If the 4% rule is just a rough rule of thumb, it's fine. As the authors of the Trinity Study said explicitly, it is "a matter of planning, not of contract."

But if it is to be taken seriously--as it often seems to be, two-figure precision, is it 3.7% or is it 3.9%--then articles like this don't mean "we need a different number," they simply blow up the whole idea behind the methodology.

Because the claim was never "based on current market conditions, I forecast that X% will work in future." The claim was always said to be that 93 years (1926) or 148 years (1871) included a wide enough sample of market conditions that for all intents and purposes they already included anything that was a credible possibility in the future.

The 4% rule, developed in mid-1990s, wasn't supposed to be based on "the conditions we see today in the mid-1990s." Those numbers were being presented by others, e.g. Peter Lynch, who said 7% was safe. The 4% rule was supposed to be based on "worst that has ever happened, therefore a reasonable planning number for the worst that could happen."

People don't go to a "safe withdrawal rule" in order to be risky, they go to one in order to be pretty safe. If we believe that the next few decades are going to be so far outside the range of what has already happened, that "survived the worst that has ever happened to date" is unlikely to survive what is coming, then that just means the whole approach needs to be tossed. Because if 148 years of data is not enough to insure reasonable safety, then 178 years isn't going to be, either. Tacking on another few decades, whether from Monte Carlo simulations of the future, or by waiting a few decades to get more data, isn't going to improve things materially.
Nisi: Nice post. I've been thinking about it over the course of the day. My thoughts which may or may not be useful:

I agree that 4% is a good rough planning number and really not much more.

The historical-based numbers actually provide a range of results. The 4% number comes from looking at US markets only. Pfau came up with different numbers when looking at domestic securities in international markets around the world, which I think was <2%. He also looked at investing globally but taking returns in native currency--as I recall that result was around 3.5%, but somebody will need to correct me if my recollection is wrong. So, the "historical SWR" is actually a multiple different numbers.

4% was based on the winning country. Might be sort of like a New England Patriots fan buying Super Bowl tickets in advance for the next 10 years--history says it's a good idea.

There are a couple of ways to go about handling this--the annuity approach (which includes things like TIPS ladders) and the balanced portfolio of risk assets approach. Obviously these can be combined.

For the annuity approach, the withdrawal rate is always changing because interest rates are always changing. On can price an annuity any time they way to or calculate what payout they could get from a 30 year TIPS ladder. The result today is different than 6 months ago and 5 years ago. If I was 65 now and a single male (one of those is true), I can buy a CPI adjusted annuity with a payout rate of 4.25%. Which makes me wonder what all of the panic is about. But payout rates are different if you are married, shopping at a different age etc.

For the balanced portfolio of risk assets approach, people simply have to be able to deal with the distinction of possibility and probability.

A few understandings that undergird my thinking here:

a) stocks are riskier than bonds. As such, there is a reasonable possibility in any scenario that a portfolio with stocks will produce a lower withdrawal rate than the annuity approach. Because the long-term risks of equity investing haven't really "shown up" in the US doesn't mean they never were and aren't there.

b) Stocks usually return more than bonds. With the balanced portfolio approach there is a probability that I will be able to ultimately withdraw more than I had hoped and that I will in fact die with a pretty big pot of money.

c) As willthrill notes repeatedly, nobody actually calculates an inflation adjusted 4% from the initial year of retirement and then withdraws that. So the "running out of money" scenario isn't so much the threat as is the income-shrinking-because-the market-performed-poorly threat. Variable withdrawal strategies don't really solve the problem as much as they highlight that the income you can reasonably take from your portfolio can and will vary a lot from year to year.

The possibilities what reasonably can happen are broader than what did happen in one country over 3 or 4 independent periods of time. So, I would say that 4% as a "rule" was never correct. Risky assets don't provide the type of near guarantee that the word "rule" implies And it's focusing on the wrong thing.

When taking your income from a regular portfolio, you have to understand the probabilities, the possibilities, and that fact that you aren't in control of whether good things happen or bad. If you need certainty, buy an annuity. If you want the upside offered by a regular investment portfolio, then be prepared to deal with the fact that it might not work out as you expected, although it probably will.
In the conditions that drive the 2% SWR fears, how many annuity companies are going to fail?

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by usagi » Wed Sep 11, 2019 2:19 am

countmein wrote:
Mon Sep 09, 2019 12:39 am
The aversion to doing this is incredibly strong. Nobody wants to be told 3% is the new 4%. It will be fought at all costs, with or without logic, and understandably so because the stakes are so high.
Why? I don't get what is so hard about this. It is the current reality. Reality is often ugly. You adapt and move on. Your dog dies, your wife leaves you, your spouse has a miscarriage: bad things happen to nice people. When you look at the problems people can face, this is fairly benign.

The idea of 2% or 3% simply means you may have to make lifestyle adjustments. In the U.S. you have SS, take 75% of what you are suppose to get as a base, then look at your bare bones expenses. The delta is likely sleight and primarily comprised of lifestyle choices. So at worst instead of golfing everyday you rekindle the romance with your wife and you take long walks together, discuss current events, eat a romantic dinner by the firepit in your back yard as you sip a bottle of two-buck Chuck and watch the sun set together, enjoying the one thing you cannot ever buy, love. More or less that is your worse case scenario and that ain't so bad.

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Re: Wade Pfau: Does The 4% Rule Work In Today’s Markets?

Post by willthrill81 » Thu Sep 12, 2019 9:30 am

usagi wrote:
Wed Sep 11, 2019 2:19 am
The idea of 2% or 3% simply means you may have to make lifestyle adjustments.
If I thought that there was a realistic possibility of SWRs being under 3% going forward, I would definitely use an 'income flooring' approach whereby we had enough guaranteed income sources (e.g. SS benefits, life annuity) to cover at least all of our essential spending, which is what Pfau has recommended for years now.
“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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