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

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

Post by sleepysurf » Sat Aug 01, 2020 9:46 am

I, for one, think Rick did an excellent job with the questioning. Although I, personally, have no need for an annuity (of any flavor), nor a reverse mortgage, I still learned a lot from Wade's presentation, and appreciated the "alternative" perspective.

WRT "conflicts of interest," I suggest Rick add a simple generic disclaimer at the beginning (or, better yet, END) of every podcast, just to keep things "kosher." Our forum members will, no doubt, provide "forensic level" investigation of any podcast guests potential ulterior motives or conflicts. :D
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by bck63 » Sat Aug 01, 2020 9:47 am

.....
Last edited by bck63 on Sat Aug 01, 2020 10:08 am, edited 1 time in total.

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

Post by vineviz » Sat Aug 01, 2020 9:50 am

bck63 wrote:
Sat Aug 01, 2020 9:47 am
vineviz wrote:
Sat Aug 01, 2020 9:37 am
I'm not kidding, and I no amount of nostril flaring is going to turn Pfau from a professor into an insurance agent.
The Center of which he is co-president is bought and paid for by New York Life, a leading peddler of annuity products. Pfau was pushing annuities on the podcast.

Pfau was also pushing the website "Immediate Annuities," another peddler of annuity products. What is his financial interest in this website? What money does he receive from the Hersh Stern, the CEO of the website, who also publishes the "Annuity Shopper Buyers Guide"?

These conflicts of interest should have been disclosed.
You’re just wrong. Nothing more to say than that, I think.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by Rick Ferri » Sat Aug 01, 2020 9:54 am

sleepysurf wrote:
Sat Aug 01, 2020 9:46 am
I, for one, think Rick did an excellent job with the questioning. Although I, personally, have no need for an annuity (of any flavor), nor a reverse mortgage, I still learned a lot from Wade's presentation, and appreciated the "alternative" perspective.

WRT "conflicts of interest," I suggest Rick add a simple generic disclaimer at the beginning (or, better yet, END) of every podcast, just to keep things "kosher." Our forum members will, no doubt, provide "forensic level" investigation of any podcast guests potential ulterior motives or conflicts. :D
That is a good idea. I'll see what other podcasters have on their sites as a general disclaimer.

If there are any attorneys reading this, please PM me with your ideas.

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The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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

Post by White Coat Investor » Sat Aug 01, 2020 10:03 am

Why is every one beating up on Rick? And Pfau too? If you want Pfau's answer to your questions, ask them yourself on your own podcast or just by emailing him. Some of those acting like Monday morning quarterbacks and anonymous critics in this thread might want to think about an apology to Rick for shooting the messenger.
"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."--Teddy Roosevelt
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by bck63 » Sat Aug 01, 2020 10:12 am

White Coat Investor wrote:
Sat Aug 01, 2020 10:03 am
Why is every one beating up on Rick? And Pfau too? If you want Pfau's answer to your questions, ask them yourself on your own podcast or just by emailing him. Some of those acting like Monday morning quarterbacks and anonymous critics in this thread might want to think about an apology to Rick for shooting the messenger.
"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."--Teddy Roosevelt
I will take this to heart. I love Rick's podcasts. And I have read lots of useful information from Dr. Pfau. I just think there should be a disclosure when there are potential conflicts of interest.

I think the idea of a general disclosure is an excellent idea.

Rick, thank you for all you do.

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

Post by afan » Sat Aug 01, 2020 10:15 am

Rick Ferri wrote:
Fri Jul 31, 2020 2:13 pm

Dr. Pfau Wade has published more than sixty peer-reviewed research articles in a wide variety of academic and practitioner journals. 
from this list, the only journal that could could remotely be called "academic" is the Journal of Portfolio Management and that is a stretch.

https://retirementresearcher.com/reading/

A large proportion of these papers are in Advisor Perspectives, hardly peer reviewed, let alone academic.

Where are the papers in leading academic journals? Here is a list of top economics and finance journals by impact factor.

Has this "professor" published in any of them?

https://ideas.repec.org/top/top.journals.all.html

According to the American College
. Wade D. Pfau, PhD, is Professor of Retirement Income in the PhD in Financial and Retirement Planning program, Co-Director of the New York Life Center for Retirement Income, and RICP® program director at The American College of Financial Services.

Pfau is a co-editor of the Journal of Personal Finance. He has spoken at national conferences of organizations for financial professionals such as the CFA Institute, FPA, NAPFA, AICPA-PFP, and AFS. He also publishes frequently in a wide variety of academic and practitioner research journals. He hosts the Retirement Researcher blog, and is a monthly columnist for Advisor Perspectives, a RetireMentor for MarketWatch, a contributor to Forbes, and an Expert Panelist for The Wall Street Journal. His research has been discussed in outlets that include print editions of The Economist, The New York Times, The Wall Street Journal, and Money Magazine
What the College says about itself
. Serving as a valued business partner to banks, brokerage firms, insurance companies and others
The College has 6 "Centers of Excellence". Five of them are named for insurance companies.

https://www.theamericancollege.edu/abou ... excellence
. Since 1927, The American College of Financial Services has helped more than 200,000 financial services professionals accelerate their careers. Our financial planning and insurance courses produce measurable results. Surveys show that our sales training can boost production by up to 40 percent. Holders of our financial planning designations increase their sales by as much as 51 percent.
https://www.theamericancollege.edu/designations-degrees

This organization makes much of its status as an academic institution. Nonsense. In its 93 years of existence, it has awarded 13 doctoral degrees. Not 13 per year, mind you. Thirteen total.

It is funded by the insurance industry, teaches people how to sell insurance, runs so-called centers of excellence created and operated by insurance companies and makes people professors with publication records that would not get one an adjunct position at a legitimate university.

Let's not fool ourselves because he dresses up his marketing pieces to look like research. They do not get published in real journals because their quality, to be generous even using the term, is nowhere close to what real academic journals require.

He could do fair comparisons of annuities to low cost portfolios but chooses not to. He could explain why he does only biased analyses but chooses not to.

He could have been asked about this but he was not.

There are no mysteries. He is a shill for the insurance industry working for a sales and marketing arm of the insurance industry. Legal activity. But call it what it is.

Not bashing Rick. Just profoundly disappointed. He asked for questions. Many responded asking about the slanted analyses and the conflicts of interest. They have been discussed on bogleheads many times. This was a chance to clear them up.

Given his relentless pro insurance company biases, it was the ONLY thing I was hoping to hear from the interview. Instead, we got more of the same from Pfau with no explanations.
Last edited by afan on Sat Aug 01, 2020 10:20 am, edited 1 time in total.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by Tdubs » Sat Aug 01, 2020 10:19 am

vineviz wrote:
Sat Aug 01, 2020 9:50 am
bck63 wrote:
Sat Aug 01, 2020 9:47 am
vineviz wrote:
Sat Aug 01, 2020 9:37 am
I'm not kidding, and I no amount of nostril flaring is going to turn Pfau from a professor into an insurance agent.
The Center of which he is co-president is bought and paid for by New York Life, a leading peddler of annuity products. Pfau was pushing annuities on the podcast.

Pfau was also pushing the website "Immediate Annuities," another peddler of annuity products. What is his financial interest in this website? What money does he receive from the Hersh Stern, the CEO of the website, who also publishes the "Annuity Shopper Buyers Guide"?

These conflicts of interest should have been disclosed.
You’re just wrong. Nothing more to say than that, I think.
This seriously misrepresents the exchange. Rick asked a hypothetical using immediateannuities.com. Pfau wasn't "pushing."

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

Post by willthrill81 » Sat Aug 01, 2020 10:22 am

Rick Ferri wrote:
Sat Aug 01, 2020 9:29 am
No specific companies or products were mentioned in this podcast with Dr. Pfau. In contrast, Burton Malkiel routinely touted Wealthfront where he is their Chief Investment Officer, and an emerging market ETF managed by a company he is tied in with during his podcast last month without disclosing either affiliation, and no one had an issue.

So, let's be fair.

Rick Ferri
That's a fair point.

As time goes on, I'm becoming even more skeptical of so-called experts, not just Dr. Pfau, for this reason (and others). It seems that a great many of them at least potentially have conflicts of interest, some of which could be serious.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by SB1234 » Sat Aug 01, 2020 10:23 am

Rick Ferri wrote:
Fri Jul 31, 2020 7:48 pm
To a someone with a hammer, the solution to every problem is a nail.

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

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

Rick Ferri
Yes, I really liked the simple principles of the 4 liabilities.
Longetivity, Liquidity, Lifestyle, Legacy.

Many thanks for posting this.
anecdotes are not data

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

Post by Toadandfriends » Sat Aug 01, 2020 10:25 am

I thought this was another excellent podcast. Replacing bonds with a SPIA is an interesting option. I always enjoy listening to Bogleheads on Investing and appreciate the diverse guests.

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

Post by L82GAME » Sat Aug 01, 2020 10:28 am

White Coat Investor wrote:
Sat Aug 01, 2020 10:03 am
Why is every one beating up on Rick? And Pfau too? If you want Pfau's answer to your questions, ask them yourself on your own podcast or just by emailing him. Some of those acting like Monday morning quarterbacks and anonymous critics in this thread might want to think about an apology to Rick for shooting the messenger.
"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."--Teddy Roosevelt
+1. The Bogleheads podcast (and White Coat, too) provides an invaluable educational service. The marketplace of ideas may provide opportunities for debate, but the needless slinging of arrows at those who provide these services is unwarranted.

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

Post by afan » Sat Aug 01, 2020 10:35 am

Rick Ferri wrote:
Sat Aug 01, 2020 9:29 am
No specific companies or products were mentioned in this podcast with Dr. Pfau. In contrast, Burton Malkiel routinely touted Wealthfront where he is their Chief Investment Officer, and an emerging market ETF managed by a company he is tied in with during his podcast last month without disclosing either affiliation, and no one had an issue.

So, let's be fair.

Rick Ferri
Agree.
Malkiel used to be a legitimate professor. Then he became a salesperson.
Pfau got to the same place without wasting his time doing academic research or becoming a professor.

Neither of them produce work worth taking seriously. The difference is that Malkiel used to be an academic and Pfau never was.

I should correct a quibble: some object to calling Pfau a salesperson because, as far as I know, one could not buy an insurance policy from him. But the head of marketing for New York Life does not sell policies to individuals either. Both are in the business of convincing people to buy the product but others handle the actual transactions.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by SB1234 » Sat Aug 01, 2020 10:43 am

afan wrote:
Sat Aug 01, 2020 10:35 am
Rick Ferri wrote:
Sat Aug 01, 2020 9:29 am
No specific companies or products were mentioned in this podcast with Dr. Pfau. In contrast, Burton Malkiel routinely touted Wealthfront where he is their Chief Investment Officer, and an emerging market ETF managed by a company he is tied in with during his podcast last month without disclosing either affiliation, and no one had an issue.

So, let's be fair.

Rick Ferri
Agree.
Malkiel used to be a legitimate professor. Then he became a salesperson.
Pfau got to the same place without wasting his time doing academic research or becoming a professor.

Neither of them produce work worth taking seriously. The difference is that Malkiel used to be an academic and Pfau never was.

I should correct a quibble: some object to calling Pfau a salesperson because, as far as I know, one could not buy an insurance policy from him. But the head of marketing for New York Life does not sell policies to individuals either. Both are in the business of convincing people to buy the product but others handle the actual transactions.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by dodecahedron » Sat Aug 01, 2020 10:51 am

vineviz wrote:
Sat Aug 01, 2020 9:37 am
bck63 wrote:
Sat Aug 01, 2020 9:29 am
Are you kidding? Pfau financially benefits from the annuity industry. He is "Co-President" of a "Center" that is a front for New York Life and its insurance products, including annuities.
I'm not kidding, and I no amount of nostril flaring is going to turn Pfau from a professor into an insurance agent.

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

It's not a "front" for anything.
Plenty of embarrassing academic financial conflicts of interest in accredited organizations, including Ivy League schools (big pharma, financial industry.) Columbia University is also accredited by the same accreditation agency, but the documentary Inside Job pulled back some eye-opening revelations about their b-school dean and a professor there.

Greater transparency and disclosure ought to be demanded of all academics who publish their research, regardless of where they work.

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

Post by Big Dog » Sat Aug 01, 2020 10:52 am

Peanutsandme wrote:
Sat Aug 01, 2020 8:25 am
Rick, that was very interesting.

I thought it was fair and balanced.

And I agree, Dr. Pfau is honest. He is just presenting a different point of view than this forum.
That was my take too. Wade was just offering alternate investment strategies/ideas. And while I'm not a fan of SPIA's (or insurance investment products in general), he made clear -- as did Rick a couple of times -- that to win with annuities, you have to outlive the pool. (Somewhat akin to waiting to claim SS until 70 -- you win if you make it to 80+, otherwise, you lose.) And if you outlive the annuity pool, you can make up for the upfront costs & commissions, and earn a nice return. His suggestions on whole life (and reverse mortgages) was not necessarily to just go out and buy them today, but to consider them as an alternate source of cash instead of selling equities in a down market, i.e., if you already have a whole value life policy, you could use that for cash in a pinch.

Again, informative interview, Rick. (Tough crowd.)

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

Post by SB1234 » Sat Aug 01, 2020 11:15 am

Putting aside the marketing of the insurance products. The important thing that I gained from the podcast was the rationale behind the LMP. I had read about it before but didn't quite understand why it was arguably better than the SWR based. The podcast helped me understand this. Some may call it buckets based, but many of us already do it. E.g many of us have HSA, Roth, Pre-tax, taxable etc that can be soft earmarked for different purposes. But you can also say that those buckets are really addressing the 4Ls.
Longetivity - basic needs,
Liquidity - expense shocks - contingency funds
Lifestyle - Discretionary - think luxuries, travel etc
Legacy - for your dependents, charities that you care about.
These are indeed the only goals for saving. It therefore makes sense to tackle these individually.

The cost matters paradigm helps us with How. The 4L will help us with the Why.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by afan » Sat Aug 01, 2020 12:24 pm

L82GAME wrote:
Sat Aug 01, 2020 10:28 am

The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again,
Sorry, I don't see any glory in valiantly marketing life insurance.

Maybe we would be better off if Pfau did NOT keep coming back with the same slanted pitch. Persistence for something noble is admirable. Persistent deception is just deception.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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

Post by LadyGeek » Sat Aug 01, 2020 12:29 pm

The discussion is getting contentious. The points regarding Dr. Pfau's motivations have been made, let's move on.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by Ben Mathew » Sat Aug 01, 2020 12:36 pm

Uncorrelated wrote:
Sat Aug 01, 2020 1:10 am
Rick Ferri wrote:
Fri Jul 31, 2020 9:46 pm
In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.
FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

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

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.
I am puzzled by your claim that economics does not use utility functions and optimization. That's the basic framework they use for almost all of their models. The CARA and CRRA utilities which you discussed in this post are used by economists and is standard fare in economics textbooks. When I look at the Wikipedia article on CRRA utility, the first sentence begins "In economics, the isoelastic function for utility..." The article gives three references. Two are written by economists, and one is written by a mathematician at a business school publishing in an economics journal. In your post, you talked about Merton's portfolio problem. Samuelson and Merton are both economists, and the portfolio problem is set up and solved in the standard economics framework of utility maximization and choice under uncertainty. The lifecycle investing that emerges from that was popularized in a book by Ayres and Nalebuff, both of whom have a PhD in economics. I am surprised that you have been delving into all of this work by economists without recognizing it as economics.

As for liability matching and annuitization, you can get both from utility theory. Risk pooling is a benefit that you can get from almost any reasonable utility specification. The ability to pool longevity risk is a strong argument for annuitization. Liability matching does not naturally come out of CRRA utility, which says you are willing to place a fraction of your total wealth at risk with no assets being fenced off. But you can easily modify the utility function to allow for that. Someone might decide that they need at least $20,000 per year and will not risk that for any reward. Their utility function would be the usual function shifted to the right by $20,000. Yes, that's infinite risk aversion in that region. That may or may not be exactly right. But it might be a better approximation for some people than assuming CRRA throughout. It's better to try to change the utility function to try to approximately people's preferences, than to try to squeeze people into a utility function that does not reflect their preferences.

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

Post by ChrisBenn » Sat Aug 01, 2020 12:41 pm

SB1234 wrote:
Sat Aug 01, 2020 10:43 am

(...)

Oh. They not part of the index fund community. bring out the clubs. Me attack them. < Insert funny neanderthal caveman picture here>
In defense of the community here, I changed my opinions on annuities (spia, and deferred) based mostly on discussion and information here. I was dubious of all of them before I found this forum, but now feel I have a better understanding (and positive connotation) of their utility as part of a portfolio in certain conditions.

I remain dubious about whole life, and nothing in the podcast changed that - but I appreciate both the host and guest for taking the time and effort to make it (the podcast) available.

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

Post by WoodSpinner » Sat Aug 01, 2020 12:51 pm

Rick,

Just finished listening to the Podcast and want to thank you for pulling all of this together.

Personally my key questions were answered by the dialogue. I did appreciate you probing a bit on the complexity of Non-SPIA annuity products and found Dr. Pfau’s responses credible. Unfortunately, that leaves us all with an ongoing conundrum of how to understand the complexities of Nom-SPIA annuities and costs when making a planning decision. For me the answer is still to steer away from them since I don’t have the insight on how to evaluate them.

I urge folks to give the Podcast a full listen — just reading this thread won’t give you the full flavor of the discussions.

That said, I am really glad that I decided to take a pension rather than a LumpSum payout. It aligns well with his overall advice for securing retirement and there were clear trade offs and risks that were understandable.

I do agree with others that It feels like he has a thumb on the scales with how he did some of the modeling. Perhaps that is best discussed in comments on his academic papers.

Do you know if the general public can read and comment on his published academic works?

WoodSpinner

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

Post by vineviz » Sat Aug 01, 2020 12:54 pm

ChrisBenn wrote:
Sat Aug 01, 2020 12:41 pm
I remain dubious about whole life, and nothing in the podcast changed that - but I appreciate both the host and guest for taking the time and effort to make it (the podcast) available.
It’s been many years since I needed any life insurance, and I’ve not researched it much so I’m in no position to opine in whole life.

In the podcast, though, the discussion was prefaced with a disclaimer: IF YOU NEED LIFE INSURANCE, Pfau said, his research found that whole life was often preferable to “buy term and invest the difference”. That may or may not be true. I’ve always assumed that term was universally superior, but perhaps not.

I never heard Pfau suggest considering whole life outside of that hypothetical, though.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by RamblinDoc » Sat Aug 01, 2020 12:57 pm

Rick Ferri wrote:
Fri Jul 31, 2020 7:48 pm
To a someone with a hammer, the solution to every problem is a nail.

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

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

Rick Ferri

Well said, Rick! I thought this was another excellent interview that provided some diverse points for us to consider.

Is Dr. Pfau’s recommendations for everyone? Absolutely not.

Do I plan to do this? Probably not.

However, the idea of replacing only some of the bond portion of a portfolio during the withdrawal phase with certain annuities is interesting.
“It is the mark of an educated mind to entertain a thought without accepting it."
- slight paraphrase of Aristotle
I would hope the Bogleheads are intelligent enough to at least respectfully entertain an idea...some of our comments surprise me.

Thanks again, Rick and the John C. Bogle Center for Financial Literacy for considering this topic and having a discussion with Dr. Pfau. His ideas and conclusions are thoughtful.

-RD

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

Post by JBTX » Sat Aug 01, 2020 1:23 pm

afan wrote:
Sat Aug 01, 2020 9:28 am
Rick Ferri wrote:
Fri Jul 31, 2020 9:46 pm


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

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

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

Why include an AUM fee at all?

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

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

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

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

A shame. This could have been useful.

Any chance of sending him a follow up question about this and seeing whether he will answer?
You are looking at this from the eyes of Bogleheads. Most Bogleheads don't want or need an advisor. But I don't think thatź is true for the broader population. So an AUM fee of 1% isn't necessarily unreasonable given the broader context.

And even if you do away with AUM fees, it is plausible that a structured financial instrument may give a superior risk/reward outcome for certain individuals. Getting a guaranteed income stream may better meet the "sleep at night" test for some.

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

Post by SB1234 » Sat Aug 01, 2020 1:25 pm

Ben Mathew wrote:
Sat Aug 01, 2020 12:36 pm
Uncorrelated wrote:
Sat Aug 01, 2020 1:10 am
Rick Ferri wrote:
Fri Jul 31, 2020 9:46 pm
In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.
FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

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

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.
I am puzzled by your claim that economics does not use utility functions and optimization. That's the basic framework they use for almost all of their models. The CARA and CRRA utilities which you discussed in this post are used by economists and is standard fare in economics textbooks. When I look at the Wikipedia article on CRRA utility, the first sentence begins "In economics, the isoelastic function for utility..." The article gives three references. Two are written by economists, and one is written by a mathematician at a business school publishing in an economics journal. In your post, you talked about Merton's portfolio problem. Samuelson and Merton are both economists, and the portfolio problem is set up and solved in the standard economics framework of utility maximization and choice under uncertainty. The lifecycle investing that emerges from that was popularized in a book by Ayres and Nalebuff, both of whom have a PhD in economics. I am surprised that you have been delving into all of this work by economists without recognizing it as economics.

As for liability matching and annuitization, you can get both from utility theory. Risk pooling is a benefit that you can get from almost any reasonable utility specification. The ability to pool longevity risk is a strong argument for annuitization. Liability matching does not naturally come out of CRRA utility, which says you are willing to place a fraction of your total wealth at risk with no assets being fenced off. But you can easily modify the utility function to allow for that. Someone might decide that they need at least $20,000 per year and will not risk that for any reward. Their utility function would be the usual function shifted to the right by $20,000. Yes, that's infinite risk aversion in that region. That may or may not be exactly right. But it might be a better approximation for some people than assuming CRRA throughout. It's better to try to change the utility function to try to approximately people's preferences, than to try to squeeze people into a utility function that does not reflect their preferences.
Precisely. Any claims about suboptimality or optimality would rest on the optimality criterion. As they say, Personal finance is personal.
E.g I don't know how much I will spend in retirement every year, but I can determine my lower bound for expenses very easily.
Why shouldn't I use that as base case to build my plan.
Also don't really care about getting that last dollar. I just need a good enough solution.
anecdotes are not data

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

Post by afan » Sat Aug 01, 2020 2:29 pm

dodecahedron wrote:
Sat Aug 01, 2020 10:51 am
vineviz wrote:
Sat Aug 01, 2020 9:37 am
bck63 wrote:
Sat Aug 01, 2020 9:29 am
Are you kidding? Pfau financially benefits from the annuity industry. He is "Co-President" of a "Center" that is a front for New York Life and its insurance products, including annuities.
I'm not kidding, and I no amount of nostril flaring is going to turn Pfau from a professor into an insurance agent.

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

It's not a "front" for anything.
Plenty of embarrassing academic financial conflicts of interest in accredited organizations, including Ivy League schools (big pharma, financial industry.) Columbia University is also accredited by the same accreditation agency, but the documentary Inside Job pulled back some eye-opening revelations about their b-school dean and a professor there.

Greater transparency and disclosure ought to be demanded of all academics who publish their research, regardless of where they work.
Right. Plenty of conflicts among the real academics as well.

Better disclosure would do wonders for them. In the articles on Columbia, the business school professors pushed back hard against the idea of disclosing their sources of funding. That disclosure has been routine in the academic sciences and medicine for years. Problems still come up but no one denies the importance of saying where the money comes from.

At least the people at Columbia and the other top universities are legitimate professors. They did not reach that rank by publishing opinion pieces in Advisor Perspectives.

And to get back to the question at hand.

"Why NOT run the simulations at 5 basis points? Why NOT do a sensitivity analysis of the effects of expenses on the comparison between annuities and whole life versus buy term and invest the difference?"

If someone thinks there is a good reason not to do so, please say what it is.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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

Post by afan » Sat Aug 01, 2020 2:33 pm

JBTX wrote:
Sat Aug 01, 2020 1:23 pm

You are looking at this from the eyes of Bogleheads. Most Bogleheads don't want or need an advisor. But I don't think thatź is true for the broader population. So an AUM fee of 1% isn't necessarily unreasonable given the broader context.

And even if you do away with AUM fees, it is plausible that a structured financial instrument may give a superior risk/reward outcome for certain individuals.
So do an analysis that addresses that question. Compare the insurance products to a portfolio with 5 basis point expense ratio and no adviser fee. If the insurance products come out ahead, then it would not be due to comparing to an overpriced alternative.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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

Post by JBTX » Sat Aug 01, 2020 2:34 pm

White Coat Investor wrote:
Sat Aug 01, 2020 10:03 am
Why is every one beating up on Rick? And Pfau too? If you want Pfau's answer to your questions, ask them yourself on your own podcast or just by emailing him. Some of those acting like Monday morning quarterbacks and anonymous critics in this thread might want to think about an apology to Rick for shooting the messenger.
"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."--Teddy Roosevelt
+1000

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

Post by JBTX » Sat Aug 01, 2020 2:41 pm

afan wrote:
Sat Aug 01, 2020 2:33 pm
JBTX wrote:
Sat Aug 01, 2020 1:23 pm

You are looking at this from the eyes of Bogleheads. Most Bogleheads don't want or need an advisor. But I don't think thatź is true for the broader population. So an AUM fee of 1% isn't necessarily unreasonable given the broader context.

And even if you do away with AUM fees, it is plausible that a structured financial instrument may give a superior risk/reward outcome for certain individuals.
So do an analysis that addresses that question. Compare the insurance products to a portfolio with 5 basis point expense ratio and no adviser fee. If the insurance products come out ahead, then it would not be due to comparing to an overpriced alternative.
How do you quantify "ahead"? How do you quantify the sleep at night factor? I will say bonds at 0.6% are not a high bar to exceed.

I doubt I'd be interested in any of these products, but I am not the typical person.

To be clear, the few instances I've seen of these products they stunk. But when you have a zero percent expected rates on fixed income, and people like Bogle expecting 4-5% nominal return on stocks, locking into a relatively safe 2-3% nominal return may be a better choice for somebody, even if that includes some fees.

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

Post by AerialWombat » Sat Aug 01, 2020 2:44 pm

I read this thread first, and then (just now) listened to the podcast episode.

To me, the inflammatory rhetoric on this thread is completely unwarranted. The episode was very informative, like all of them are. I feel that Rick adequately challenged Dr. Pfau without making it a "hit piece", which isn't the purpose of the show.

I commend Rick Ferri for bringing us alternative viewpoints outside the dogma of this board.

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

Post by Uncorrelated » Sat Aug 01, 2020 3:06 pm

Ben Mathew wrote:
Sat Aug 01, 2020 12:36 pm
Uncorrelated wrote:
Sat Aug 01, 2020 1:10 am
Rick Ferri wrote:
Fri Jul 31, 2020 9:46 pm
In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.
FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

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

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.
I am puzzled by your claim that economics does not use utility functions and optimization. That's the basic framework they use for almost all of their models. The CARA and CRRA utilities which you discussed in this post are used by economists and is standard fare in economics textbooks. When I look at the Wikipedia article on CRRA utility, the first sentence begins "In economics, the isoelastic function for utility..." The article gives three references. Two are written by economists, and one is written by a mathematician at a business school publishing in an economics journal. In your post, you talked about Merton's portfolio problem. Samuelson and Merton are both economists, and the portfolio problem is set up and solved in the standard economics framework of utility maximization and choice under uncertainty. The lifecycle investing that emerges from that was popularized in a book by Ayres and Nalebuff, both of whom have a PhD in economics. I am surprised that you have been delving into all of this work by economists without recognizing it as economics.

As for liability matching and annuitization, you can get both from utility theory. Risk pooling is a benefit that you can get from almost any reasonable utility specification. The ability to pool longevity risk is a strong argument for annuitization. Liability matching does not naturally come out of CRRA utility, which says you are willing to place a fraction of your total wealth at risk with no assets being fenced off. But you can easily modify the utility function to allow for that. Someone might decide that they need at least $20,000 per year and will not risk that for any reward. Their utility function would be the usual function shifted to the right by $20,000. Yes, that's infinite risk aversion in that region. That may or may not be exactly right. But it might be a better approximation for some people than assuming CRRA throughout. It's better to try to change the utility function to try to approximately people's preferences, than to try to squeeze people into a utility function that does not reflect their preferences.


I'm sure there are economists with a strong background in mathematics and optimization. I respect the work of Merton.

My approach is to define an utility function and then search the optimal solution. This is the approach used by (for example) Merton, Campbell and Viceira. I think this should be the starting point of retirement research. Of course the resulting solution can be complex, I see it as the task of economists to create strategies and funds that make intelligent trade-offs between expected utility and complexity.

The approach Pfau uses is to define a goal (for example: being able to spend $40k for the next 30 years), and then choose a few random asset allocation strategies to see how they perform. The failure probability metric does not reflect actual investor preferences. The behavior to use a fixed asset allocation or glidepath does not reflect actual or optimal investor behavior. The assumption to use a pre-determined asset allocation for the following 30 years results in asset allocations that are suboptimal except in extremely limited cases. No guarantees are given to how close the solution is to the optimal solution. No guarantees are given that the solution does not depend on market timing (indeed, all Pfau's papers seem to depend on market timing...). I do not approve of that approach.

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

Post by dodecahedron » Sat Aug 01, 2020 3:17 pm

bck63 wrote:
Sat Aug 01, 2020 10:12 am
White Coat Investor wrote:
Sat Aug 01, 2020 10:03 am
Why is every one beating up on Rick? And Pfau too? If you want Pfau's answer to your questions, ask them yourself on your own podcast or just by emailing him. Some of those acting like Monday morning quarterbacks and anonymous critics in this thread might want to think about an apology to Rick for shooting the messenger.
"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."--Teddy Roosevelt
I will take this to heart. I love Rick's podcasts. And I have read lots of useful information from Dr. Pfau. I just think there should be a disclosure when there are potential conflicts of interest.

I think the idea of a general disclosure is an excellent idea.

Rick, thank you for all you do.
I heartily endorse the totality of the message above. I appreciate Rick´s podcasts in general and Dr. Pfau´s contributions to the discussions.

As an academic and policy wonk, transparency and disclosure are important to me when I read or listen to academics speaking.

Also scrutiny and skepticism and piercing questions like Rick´s are valuable.

Advanced degrees and fancy titles from even the snazziest schools clearly do not intimidate him. I am looking forward not only to listening to Rick´s podcast with Wade Pfau but also his podcast earlier this month with Burton Malkiel (a Princeton professor and investing legend, whose recent ideas also appear to me to require scrutiny.) I will be downloading them both.

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

Post by vineviz » Sat Aug 01, 2020 3:21 pm

Uncorrelated wrote:
Sat Aug 01, 2020 3:06 pm

The approach Pfau uses is to define a goal (for example: being able to spend $40k for the next 30 years), and then choose a few random asset allocation strategies to see how they perform. The failure probability metric does not reflect actual investor preferences. The behavior to use a fixed asset allocation or glidepath does not reflect actual or optimal investor behavior. The assumption to use a pre-determined asset allocation for the following 30 years results in asset allocations that are suboptimal except in extremely limited cases. No guarantees are given to how close the solution is to the optimal solution. No guarantees are given that the solution does not depend on market timing (indeed, all Pfau's papers seem to depend on market timing...). I do not approve of that approach.
The thing this overlooks has been pointed out multiple times: the goal is not merely to tell investors what they SHOULD value, but also how to help them achieve what they DO value.

If investors aren’t behaving the way your assumed utility function says is optimal, the problem is probably your assumptions and not the investor’s. That’s why the bet economists are not always the best mathematicians: the mathematics do you know good if you can’t tie it to economic action.

I can assure you that the majority of real people worry about precisely the kind of things that researchers like Pfau and others are exploring: income security in retirement much more than wealth maximization after retirement.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by dodecahedron » Sat Aug 01, 2020 3:37 pm

vineviz wrote:
Sat Aug 01, 2020 3:21 pm
Uncorrelated wrote:
Sat Aug 01, 2020 3:06 pm

The approach Pfau uses is to define a goal (for example: being able to spend $40k for the next 30 years), and then choose a few random asset allocation strategies to see how they perform. The failure probability metric does not reflect actual investor preferences. The behavior to use a fixed asset allocation or glidepath does not reflect actual or optimal investor behavior. The assumption to use a pre-determined asset allocation for the following 30 years results in asset allocations that are suboptimal except in extremely limited cases. No guarantees are given to how close the solution is to the optimal solution. No guarantees are given that the solution does not depend on market timing (indeed, all Pfau's papers seem to depend on market timing...). I do not approve of that approach.
The thing this overlooks has been pointed out multiple times: the goal is not merely to tell investors what they SHOULD value, but also how to help them achieve what they DO value.

If investors aren’t behaving the way your assumed utility function says is optimal, the problem is probably your assumptions and not the investor’s. That’s why the bet economists are not always the best mathematicians: the mathematics do you know good if you can’t tie it to economic action.
The mathematics is not the hard part of the optimization. The hard part is figuring out the right objective function.

I have a lot of training in math and economics. I know a lot of folks who are considered world class in one or the other or both. I do not know anyone who confidently knows their own utility function. I do not know my own.

The current world has upturned many of my previous priorities and assumptions. My priorities in life have changed in ways I could not imagine due to health risks and dangers of consuming certainly goods and services I had expected to consume. And depending on what develops in coming months and years, those priorities could dramatically shift again. The idea of any well-defined mathematical formula adequately describing ¨my true utility function¨ worth basing lifetime plans upon is absurd.

I am content to be a thoughtful and reasonably prudent satisficer rather than an optimizer in a world of constantly shifting utility functions. I am willing to consider alternatives that are clearly ¨suboptimal¨ from some hypothesized utility function, if they simplify my life and fit with my values. I have John Bogle´s book Enough by my bedside as a reminder.
Last edited by dodecahedron on Sat Aug 01, 2020 3:41 pm, edited 2 times in total.

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

Post by xxd091 » Sat Aug 01, 2020 3:37 pm

Thank you Rick for this podcast
I learnt a lot again about the Annuity end of the market
I think most of us here are canny enough to read about a different/new point of view without getting too carried away re the background of the contributor
We need to be constantly challenged on our investing ideas -life moves on and we need to keep reassessing our investing policies
Personally I find a new point of view very stimulating
Keep up the good work
xxd091

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

Post by willthrill81 » Sat Aug 01, 2020 3:43 pm

dodecahedron wrote:
Sat Aug 01, 2020 3:37 pm
I am content to be a thoughtful and reasonably prudent satisficer rather than an optimizer in a world of constantly shifting utility functions. I am willing to consider alternatives that are clearly ¨suboptimal¨ from some hypothesized utility function, if they simplify my life and fit with my values. I have John Bogle´s book Enough by my bedside as a reminder.
In a very real way, all human beings are satisficers in some regard. There is always more than could be done to tweak our financial planning, for instance. The question becomes whether the effort expended is worth the perceived gain from doing so. For some, that threshold is low (i.e. they won't even try unless they believe the gain will be significant), while it's quite high for others. So like many things in life, we're talking about a spectrum of possibilities rather than discrete groups (i.e. 'pure' satisficers and 'pure' optimizers).

We see people from all across the spectrum on the forum, though I'd say that the majority of posters appear to lean more toward the satisficer side.
“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: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by Ben Mathew » Sat Aug 01, 2020 3:46 pm

Uncorrelated wrote:
Sat Aug 01, 2020 3:06 pm
Ben Mathew wrote:
Sat Aug 01, 2020 12:36 pm
Uncorrelated wrote:
Sat Aug 01, 2020 1:10 am
Rick Ferri wrote:
Fri Jul 31, 2020 9:46 pm
In my opinion, Dr. Pfau's approach is theoretically sound, but as I pointed out in the interview, there are practical matters that make doing some of these strategies difficult.
FWIW my problem is exactly that his approach isn't theoretically sound. Taking care of your needs first and liability matching is something that sounds theoretically sound, but is very suboptimal. The right approach is to define an utility function that awards high utility when your needs are taken care of, and then maximize that utility function. This does not result in anything resembling liability matching.

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

I assume good faith, I just think his methods are terrible. Can't get good results with terrible methods. If you have ever wondered why hedge funds don't hire economists, now you know.
I am puzzled by your claim that economics does not use utility functions and optimization. That's the basic framework they use for almost all of their models. The CARA and CRRA utilities which you discussed in this post are used by economists and is standard fare in economics textbooks. When I look at the Wikipedia article on CRRA utility, the first sentence begins "In economics, the isoelastic function for utility..." The article gives three references. Two are written by economists, and one is written by a mathematician at a business school publishing in an economics journal. In your post, you talked about Merton's portfolio problem. Samuelson and Merton are both economists, and the portfolio problem is set up and solved in the standard economics framework of utility maximization and choice under uncertainty. The lifecycle investing that emerges from that was popularized in a book by Ayres and Nalebuff, both of whom have a PhD in economics. I am surprised that you have been delving into all of this work by economists without recognizing it as economics.

As for liability matching and annuitization, you can get both from utility theory. Risk pooling is a benefit that you can get from almost any reasonable utility specification. The ability to pool longevity risk is a strong argument for annuitization. Liability matching does not naturally come out of CRRA utility, which says you are willing to place a fraction of your total wealth at risk with no assets being fenced off. But you can easily modify the utility function to allow for that. Someone might decide that they need at least $20,000 per year and will not risk that for any reward. Their utility function would be the usual function shifted to the right by $20,000. Yes, that's infinite risk aversion in that region. That may or may not be exactly right. But it might be a better approximation for some people than assuming CRRA throughout. It's better to try to change the utility function to try to approximately people's preferences, than to try to squeeze people into a utility function that does not reflect their preferences.


I'm sure there are economists with a strong background in mathematics and optimization. I respect the work of Merton.

My approach is to define an utility function and then search the optimal solution. This is the approach used by (for example) Merton, Campbell and Viceira. I think this should be the starting point of retirement research. Of course the resulting solution can be complex, I see it as the task of economists to create strategies and funds that make intelligent trade-offs between expected utility and complexity.

The approach Pfau uses is to define a goal (for example: being able to spend $40k for the next 30 years), and then choose a few random asset allocation strategies to see how they perform. The failure probability metric does not reflect actual investor preferences. The behavior to use a fixed asset allocation or glidepath does not reflect actual or optimal investor behavior. The assumption to use a pre-determined asset allocation for the following 30 years results in asset allocations that are suboptimal except in extremely limited cases. No guarantees are given to how close the solution is to the optimal solution. No guarantees are given that the solution does not depend on market timing (indeed, all Pfau's papers seem to depend on market timing...). I do not approve of that approach.
I agree with you that SWR approaches have some deep seated problems and don't match up neatly with reasoanable utitlity functions. It is nevertheless a commonly used method in practice. If Pfau is using that metric, it might simply be an attempt to speak the same language as his audience. I am confident that his training in economics is not responsible for this. The models he would have come across while doing a PhD in economics at Princeton would be of the utility function optimization type a la Samuelson and Merton, not SWR studies.
Last edited by Ben Mathew on Sat Aug 01, 2020 3:50 pm, edited 1 time in total.

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

Post by willthrill81 » Sat Aug 01, 2020 3:47 pm

Considering that the forum clearly and, IMNSHO, justly holds whole life insurance, universal life insurance, and variable annuities in disdain for the overwhelming majority of investors, it shouldn't be surprising to anyone to find that someone like Dr. Pfau who unabashedly advocates for these products will be met with great skepticism.
“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: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by whodidntante » Sat Aug 01, 2020 3:54 pm

This thread reminds of me what happens when you post "wearing masks reduces the spread of COVID-19" on social media. :happy

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

Post by Stinky » Sat Aug 01, 2020 3:58 pm

willthrill81 wrote:
Sat Aug 01, 2020 3:47 pm
Considering that the forum clearly and, IMNSHO, justly holds whole life insurance, universal life insurance, and variable annuities in disdain for the overwhelming majority of investors, it shouldn't be surprising to anyone to find that someone like Dr. Pfau who unabashedly advocates for these products will be met with great skepticism.
I agree.

And I appreciate hearing alternate points of view from those that most BHs hold. I probably won’t ultimately agree with the alternate points of view, but the thought process that I go through in considering the other views strengthens my own beliefs.

And occasionally I change my views on things as a result of dialogue here. For example, after years of thinking I would never purchase an annuity of any type, I submitted an application for a MYGA today.

I really value the back and forth on this Forum.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by willthrill81 » Sat Aug 01, 2020 4:03 pm

Stinky wrote:
Sat Aug 01, 2020 3:58 pm
willthrill81 wrote:
Sat Aug 01, 2020 3:47 pm
Considering that the forum clearly and, IMNSHO, justly holds whole life insurance, universal life insurance, and variable annuities in disdain for the overwhelming majority of investors, it shouldn't be surprising to anyone to find that someone like Dr. Pfau who unabashedly advocates for these products will be met with great skepticism.
I agree.

And I appreciate hearing alternate points of view from those that most BHs hold. I probably won’t ultimately agree with the alternate points of view, but the thought process that I go through in considering the other views strengthens my own beliefs.

And occasionally I change my views on things as a result of dialogue here. For example, after years of thinking I would never purchase an annuity of any type, I submitted an application for a MYGA today.

I really value the back and forth on this Forum.
While there are some here who clearly wish that the forum was an echo chamber, it's valuable to everyone that many perspectives, analyses, etc. be brought forth and discussed logically. And yes, this can (and sometimes probably should) result in us changing our own views and actions. If Bogle had just accepted the dogma of his younger years, he would not have become the father of index investing.

At the same time, it's probably wise to not be too open minded since, as the saying goes, 'your brain can fall out'. :wink:

I'm glad that Rick interviewed Dr. Pfau. I also don't think that Rick or anyone else should be too surprised at the reaction of many to what Pfau said.
“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: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by 000 » Sat Aug 01, 2020 4:20 pm

Rick, are the research papers mentioned in the podcast publicly available? I didn't find any public links on Pfau's sites, so I am assuming they are in proprietary journals.

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Nate79
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by Nate79 » Sat Aug 01, 2020 4:31 pm

willthrill81 wrote:
Sat Aug 01, 2020 3:47 pm
Considering that the forum clearly and, IMNSHO, justly holds whole life insurance, universal life insurance, and variable annuities in disdain for the overwhelming majority of investors, it shouldn't be surprising to anyone to find that someone like Dr. Pfau who unabashedly advocates for these products will be met with great skepticism.
Yes, and it is nothing new that certain annuities, those that are simple, easy to understand and low cost have been openly discussed as a viable option for many on here. These are inline with Boglehead principles.

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

Post by Ben Mathew » Sat Aug 01, 2020 4:37 pm

Rick Ferri wrote:
Fri Jul 31, 2020 7:48 pm
If you REALLY listen to what Dr. Pfau said, it’s to be agnostic. Don’t have biases. Be open to new ideas.
I think that variable annuities, whole life insurance, and universal life insurance all have inherent benefits that could have been more widely exploited if only the fees weren't so high. They offer two real advantages over holding the equivalent portfolio in stocks and bonds:

1. Longevity risk pooling. This allows you to draw a much higher income in retirement compared to living off your portfolio till age 100.

2. Tax advantaged investing. Paying insurance premiums now and collecting benefits later is like placing the premiums in a Roth account (if premiums are taxed, but benefits are not) or in a traditional account (if premiums are deductible, but benefits are taxed). This would be compelling for people who are maxed out on their tax advantaged accounts.

Given these real advantages, what prevents these products from becoming compelling is the high costs. Maybe some day there will be a disruption in the business that leads to lower fees just like there was with low cost index funds replacing high cost mutual funds. I don't see why these products have to be inherently expensive. They are at heart sensible products in an unappealing wrapper of high fees and unnecessary complexity.

In the interview (about 45:00 min in), Pfau said that there are lower cost products available to fee only advisors. I'm intrigued. Given that you are a fee only advisor, it would be interesting to hear your thoughts on that.

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

Post by AerialWombat » Sat Aug 01, 2020 4:38 pm

whodidntante wrote:
Sat Aug 01, 2020 3:54 pm
This thread reminds of me what happens when you post "wearing masks reduces the spread of COVID-19" on social media. :happy
But if I wear a mask, bond yields will go negative! Negative, man, negative! :mrgreen:

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

Post by Uncorrelated » Sat Aug 01, 2020 4:49 pm

vineviz wrote:
Sat Aug 01, 2020 3:21 pm
Uncorrelated wrote:
Sat Aug 01, 2020 3:06 pm

The approach Pfau uses is to define a goal (for example: being able to spend $40k for the next 30 years), and then choose a few random asset allocation strategies to see how they perform. The failure probability metric does not reflect actual investor preferences. The behavior to use a fixed asset allocation or glidepath does not reflect actual or optimal investor behavior. The assumption to use a pre-determined asset allocation for the following 30 years results in asset allocations that are suboptimal except in extremely limited cases. No guarantees are given to how close the solution is to the optimal solution. No guarantees are given that the solution does not depend on market timing (indeed, all Pfau's papers seem to depend on market timing...). I do not approve of that approach.
The thing this overlooks has been pointed out multiple times: the goal is not merely to tell investors what they SHOULD value, but also how to help them achieve what they DO value.

If investors aren’t behaving the way your assumed utility function says is optimal, the problem is probably your assumptions and not the investor’s. That’s why the bet economists are not always the best mathematicians: the mathematics do you know good if you can’t tie it to economic action.

I can assure you that the majority of real people worry about precisely the kind of things that researchers like Pfau and others are exploring: income security in retirement much more than wealth maximization after retirement.
I'm well aware of that. An asset allocation should be tailored to maximize the things that the individual investor values. But that is exactly where Pfau's analysis falls flat.

I'm interested in the same kind of problems that Pfau is, but our methodology is different. Pfau's methodology says that a rising equity glidepath obtains 1% higher SWR's than a constant asset allocation, therefore using a rising equity glidepath is a good idea. My methodology says that there is a third asset allocation that performs 20% better (using the same utility function) and is just as complicated to implement, therefore rising equity glidepaths are a bad idea. Based on this true story, would you agree that Pfau's methodology is bad science, or do you have a different opinion?

No matter what methodology is used, you must specify some utility function. I prefer a CRRA-like utility function. Pfau prefers a success probability metric. If you prefer success probability metrics over CRRA, I will deliver you optimal asset allocations that maximizes the probability of success. That doesn't solve the problem that the utility function might not reflect actual investor behavior.

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

Post by Stinky » Sat Aug 01, 2020 4:52 pm

Ben Mathew wrote:
Sat Aug 01, 2020 4:37 pm

Given these real advantages, what prevents these products from becoming compelling is the high costs. Maybe some day there will be a disruption in the business that leads to lower fees just like there was with low cost index funds replacing high cost mutual funds. I don't see why these products have to be inherently expensive. They are at heart sensible products in an unappealing wrapper of high fees and unnecessary complexity.
“Life insurance isn’t bought; it’s sold!” If I heard that once, I heard it 1,000 times. (And the same goes for annuities)

There are relatively few folks, like Bogleheads, who are self-directed enough to purchase appropriate life insurance and annuity products without being “sold”. But we are the minority. The vast majority of folks need to be “sold”.

And a salesman needs to be paid. That’s why the high fees and commissions exist on many life and annuity products.
It's a GREAT day to be alive - Travis Tritt

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

Post by vineviz » Sat Aug 01, 2020 4:55 pm

Uncorrelated wrote:
Sat Aug 01, 2020 4:49 pm
No matter what methodology is used, you must specify some utility function. I prefer a CRRA-like utility function. Pfau prefers a success probability metric.
I find unlikely that you actually know what Pfau prefers or doesn’t prefer.

More importantly what you or he prefers isn’t germane to the point I raised, which is the only utility function that matters is the one the investor actually has.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by Uncorrelated » Sat Aug 01, 2020 5:27 pm

vineviz wrote:
Sat Aug 01, 2020 4:55 pm
Uncorrelated wrote:
Sat Aug 01, 2020 4:49 pm
No matter what methodology is used, you must specify some utility function. I prefer a CRRA-like utility function. Pfau prefers a success probability metric.
More importantly what you or he prefers isn’t germane to the point I raised, which is the only utility function that matters is the one the investor actually has.
I already acknowledged that. The optimal portfolio is the one that maximizes the investors utility function. That's why I wrote a framework that allows the for optimization of arbitrary utility functions. What's the point you're trying to make?

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