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

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SB1234
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by SB1234 » Sat Aug 01, 2020 5:39 pm

Uncorrelated wrote:
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?
In the paper that you quoted https://papers.ssrn.com/sol3/papers.cfm ... id=2531779
here is the quote from the conclusion section
In other words, the optimal strategy is similar to the optimal strategy for stocks and bonds alone, but with annuitization as age increases, and the annuitization of bonds primarily occuring earlier than the annuitization of stocks.
Can you please explain what you mean by "your" methodology? I mean from the conclusion it appears that the paper is infact recommending annuitization.
anecdotes are not data

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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 5:40 pm

000 wrote:
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.
I will ask and post the answer here.

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

Post by 000 » Sat Aug 01, 2020 5:41 pm

Rick Ferri wrote:
Sat Aug 01, 2020 5:40 pm
000 wrote:
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.
I will ask and post the answer here.

Rick
Thanks!

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

Post by WoodSpinner » Sat Aug 01, 2020 5:42 pm

000 wrote:
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.
Check https://papers.ssrn.com/sol3/DisplayAbstractSearch.cfm and search for “Pfau”.

I didn’t find anyplace to provide comments although his phone and email are provided.....

Interesting to browse.

WoodSpinner

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

Post by LadyGeek » Sat Aug 01, 2020 5:50 pm

SSRN is not the only source for publicly published papers.

There's also Economics and Finance Research | IDEAS/RePEc.

An author search produces: Wade Donald Pfau | IDEAS/RePEc.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by goodenyou » Sat Aug 01, 2020 5:50 pm

Reading the back and forth on this Podcast reminds me of a conversation I had with my parents a while ago about their investing goals. I told them their decisions were “leaving money on the table”. They said they didn’t care because they have set their goals and can reach their goals with their plan. That’s all they cared about. They received no more joy in life by getting better returns for increased volatility. They had no embarrassment of not following “experts”.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by stan1 » Sat Aug 01, 2020 6:09 pm

Rick, I thought you both you and Dr. Pfau addressed the topic professionally and objectively. Almost the first statement Dr. Pfau made was that the Bogleheads might not agree with him and he repeated it at least one other time. Rick pressed him to identify the immediateannutities.com site. Rick stated the theory sounded interesting but in practice how does one find an honest salesman who will actually help? Dr. Pfau agreed that's a problem he didn't have an answer to, and both agreed that going with a family friend or someone from church often opens people up to high cost relationships.

My other point: our household has one military and one FERS pension plus eventually two Social Security claims. We will have less than a 2% withdrawal rate, maybe no withdrawals at all. The younger of us also has LTCI. We don't need additional additional insurance products to transfer any type of risk to an institution. Our heirs will be well taken care of.

However, my mom bought an SPIA at age 75 with 50% of her liquid assets before she sold her house. She is a conservative investor. She does not have a pension and took SS at 62 despite my advising her not to do so. She is in good health and I think there's a good chance she will live beyond 95. She does not need to leave money to her heirs. In her situation I think the SPIA was a good choice and in retrospect I wish we'd bought another one when she sold her house and moved into a senior apartment when she was 80.

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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 6:29 pm

Stinky wrote:
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.
I'm sure you're right. Still, I'm hoping there might be enough sophisticated investors seeking low cost versions of these products that there is a niche market that can be served by a company that sells low life insurance and annuity products without heavy marketing costs.

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

Post by petulant » Sat Aug 01, 2020 6:31 pm

Ben Mathew wrote:
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.
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.
I have been interested in this question too. I found an article the other day by Kitces discussing TIAA-CREF's no-load life insurance, but it appears they exited the business in 2019. Today I found a link to a company called Ameritas that has a "no-load VUL." It appears the only charges are a 2% premium tax, an administrative fee of about $15 per month, the cost of insurance, an annual face amount charge that is currently zero, and a mortality/expense charge starting at 0.70% per year for the first 15 years and then going to 0.10%. In addition to a wide variety of mutual fund options including Vanguard and DFA, it has a fixed account option guaranteed to earn at least 3%. Since the cash value can be removed with no taxes through a withdrawal of premium or loan, the 3% is a direct aftertax premium but after the .70% charge would be 2.3%. I am looking into it more just to understand it.

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

Post by vineviz » Sat Aug 01, 2020 8:08 pm

Ben Mathew wrote:
Sat Aug 01, 2020 6:29 pm
Stinky wrote:
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.
I'm sure you're right. Still, I'm hoping there might be enough sophisticated investors seeking low cost versions of these products that there is a niche market that can be served by a company that sells low life insurance and annuity products without heavy marketing costs.
I’m sure it will become more common.

Pretty much every state requires financial advisors to be licensed as insurance agents to sell any form of insurance. And insurance companies have historically ALWAYS paid a commission, so financial advisors who market themselves as “fee-only” haven’t been able to transact insurance purchases for clients At all.

There’s a firm in California that works as a middleman, coordinating with insurance companies to design commissionless insurance so that fee-only advisors can use these products for clients with no conflict of interest. Seems to be a growing movement.
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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 8:34 pm

WoodSpinner wrote:
Sat Aug 01, 2020 5:42 pm
000 wrote:
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.
Check https://papers.ssrn.com/sol3/DisplayAbstractSearch.cfm and search for “Pfau”.

I didn’t find anyplace to provide comments although his phone and email are provided.....

Interesting to browse.

WoodSpinner
Here is a link to the papers:

https://papers.ssrn.com/sol3/cf_dev/Abs ... id=388906

These are working paper versions of articles, but they don't indicate about where the articles were published.
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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 8:40 pm

afan wrote:
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.
The quote was referring to Rick, who actually uses his real name and actually produces real content for you to enjoy, disagree with, and/or criticize from the sidelines.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by 000 » Sat Aug 01, 2020 9:32 pm

Rick Ferri wrote:
Sat Aug 01, 2020 8:34 pm
WoodSpinner wrote:
Sat Aug 01, 2020 5:42 pm
000 wrote:
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.
Check https://papers.ssrn.com/sol3/DisplayAbstractSearch.cfm and search for “Pfau”.

I didn’t find anyplace to provide comments although his phone and email are provided.....

Interesting to browse.

WoodSpinner
Here is a link to the papers:

https://papers.ssrn.com/sol3/cf_dev/Abs ... id=388906

These are working paper versions of articles, but they don't indicate about where the articles were published.
Thanks

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

Post by Ben Mathew » Sun Aug 02, 2020 12:05 am

petulant wrote:
Sat Aug 01, 2020 6:31 pm
Ben Mathew wrote:
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.
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.
I have been interested in this question too. I found an article the other day by Kitces discussing TIAA-CREF's no-load life insurance, but it appears they exited the business in 2019. Today I found a link to a company called Ameritas that has a "no-load VUL." It appears the only charges are a 2% premium tax, an administrative fee of about $15 per month, the cost of insurance, an annual face amount charge that is currently zero, and a mortality/expense charge starting at 0.70% per year for the first 15 years and then going to 0.10%. In addition to a wide variety of mutual fund options including Vanguard and DFA, it has a fixed account option guaranteed to earn at least 3%. Since the cash value can be removed with no taxes through a withdrawal of premium or loan, the 3% is a direct aftertax premium but after the .70% charge would be 2.3%. I am looking into it more just to understand it.
Thanks for the lead.

If somebody who is familiar with this type of insurance product can compare holding VTSAX directly vs through the Ameritas Advisor II Variable Universal Life policy, please do.

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

Post by Ben Mathew » Sun Aug 02, 2020 12:12 am

vineviz wrote:
Sat Aug 01, 2020 8:08 pm
Ben Mathew wrote:
Sat Aug 01, 2020 6:29 pm
Stinky wrote:
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.
I'm sure you're right. Still, I'm hoping there might be enough sophisticated investors seeking low cost versions of these products that there is a niche market that can be served by a company that sells low life insurance and annuity products without heavy marketing costs.
I’m sure it will become more common.

Pretty much every state requires financial advisors to be licensed as insurance agents to sell any form of insurance. And insurance companies have historically ALWAYS paid a commission, so financial advisors who market themselves as “fee-only” haven’t been able to transact insurance purchases for clients At all.

There’s a firm in California that works as a middleman, coordinating with insurance companies to design commissionless insurance so that fee-only advisors can use these products for clients with no conflict of interest. Seems to be a growing movement.
That sounds promising.

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

Post by Munir » Sun Aug 02, 2020 12:36 am

I am a retiree in my eighties who purchased four SPIAs over 10 years from different companies when I was in my seventies. I learned and followed the advice on this forum about SPIAs. I don't remember Wade Pfau's name in those days. I am very happy with my purchases and wish I had bought a couple more of the SPIAs but the consensus of opinion then was that interest rates were too low and I should wait till they go up. It never happened.

I didn't see much mention of having a part of your fixed income allocation in SPIAs and the rest is the usual instruments such as bond funds. I don't remember in the past any one advocating substituting your whole bond allocation for SPIAs but to use them as a complement to the bond allocation.

I appreciate the time and energy that people like Rick and Larry Swedroe put into this forum. I don't always agree with everything they say but mostly I do. They provide us with a significant service. Swedroe experienced a lot of grief from us and I rarely, if ever, do I see him write here anymore. I hope Rick won't follow him.

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

Post by Uncorrelated » Sun Aug 02, 2020 2:23 am

SB1234 wrote:
Sat Aug 01, 2020 5:39 pm
Uncorrelated wrote:
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?
In the paper that you quoted https://papers.ssrn.com/sol3/papers.cfm ... id=2531779
here is the quote from the conclusion section
In other words, the optimal strategy is similar to the optimal strategy for stocks and bonds alone, but with annuitization as age increases, and the annuitization of bonds primarily occuring earlier than the annuitization of stocks.
Can you please explain what you mean by "your" methodology? I mean from the conclusion it appears that the paper is infact recommending annuitization.
My method is the same as Irlam's method, the writer of the paper you quoted. In this method, we define an utility function and then optimize for the best possible asset allocation with that utility function.

In Pfau's method, he chooses some measurement (usually success rate, such as in the case of SWR). Then he chooses two suboptimal asset allocations and compares both on the chosen measurement. He draws conclusions based on the measurement. This approach is used in, for example, Reducing Retirement Risk with a Rising Equity Glide-Path. He concludes that rising equity glidepaths are worth a look because they result in a very small improvement in the chosen metrics.

The problem is that he has not shown that equity glidepaths are a good approach. In fact, if you search for the optimal asset allocation, you'll find that it is possible to substantially outperform a glidepath. Therefore, my conclusion is that glidepaths are not worth a look. I was able to find similar problems in his other papers.

Whether annuities are a good idea or not isn't the point. They result in higher expected utility in some situations, lower expected utility in others. It depends on your personal circumstances.

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

Post by dodecahedron » Sun Aug 02, 2020 5:19 am

000 wrote:
Fri Jul 31, 2020 7:14 pm
I listened in the background. I may have missed something.

Inflation and default risk of annuities weren't addressed. These seem like pretty big issues if one is thinking about replacing bonds with annuities. TIPS and I Bonds were mentioned in passing, but not how they could be used with an annuity if inflation happens (note: they really can't because they won't appreciate enough to make up for the real losses in the nominal annuity).
I listened quite carefully and your observations struck me as well. I agree that he did not address default risk at all, which is a huge concern for me with annuities. I also agree that inflation is a huge concern with annuities and his passing mention of TIPS and I Bonds did not do the topic justice.

People who annuitized 20 years ago are looking very smart, in retrospect, because they did so at a time when interest rates were quite high compared to today and inflation has turned out not to be as high as expected.

It is not at all obvious to me that folks who annuitize today will look very smart 20 years down the road, especially if the insurance industry starts to have systemic solvency issues that state guarantee funds are insufficient to backstop.

The above said, the discussion was wide-ranging and covered a lot of other thought-provoking ground so there was not time to do justice to everything. Conceptually, he is quite right that annuity products could in theory be very useful if their shortcomings could be addressed.
Also, whole life and variable annuities are mentioned, but not how to find the "good" ones.
Again I agree. To his credit, he did at least acknowledge that it is very easy to find bad ones (and that the infamous free chicken dinners pitching insurance should be avoided.)

I was glad I listened and I thank Rick for making this podcast. I think the bottom line is that his conceptual ideas are sound but we need another creative and generous genius analogous to John C Bogle to innovate with promoting well-designed low cost transparent annuity products. With a mutual tontine-type approach, the solvency and cost issues could both be addressed. (TIAA sorta kinda does this, but with much less transparency than I would like to see.)

Along those lines, it is fascinating to note that until 2019, Wade Pfau´s employer was located in Jack Bogle´s hometown. The college moved last year to a new location in King of Prussia, just 10 miles from Vanguard HQ.

The college that employs him is a pretty fascinating and unique institution. I first heard about the college years ago from a very smart and ethical attorney I know who spent most of his career working for the state insurance department. He took a lot of courses there as part of his continuing professional education and was pretty impressed by it. My friend is retired now and never sold life insurance, so the college definitely attracts more than just insurance salesmen. He felt that it gave him a much better understanding of the insurance industry he was regulating.

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

Post by YRT70 » Sun Aug 02, 2020 5:44 am

Uncorrelated wrote:
Sat Aug 01, 2020 4:49 pm
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.
Sounds interesting. Did you explain this somewhere? If not, can you explain what it is?

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

Post by chipperd » Sun Aug 02, 2020 6:20 am

After reading the intro ("Dr. Pfau Wade is the program director of the Retirement Income Certified Professional designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA, and is a partner with a financial advisory firm in PA"), and understanding the glaring conflict of interest in being a published researcher AND a partner in a financial advisory firm, I didn't waste my time listening.
I hope that conflict of interest, how that conflict is managed, and whether or not Dr. Pfau is a fiduciary, were all flushed out in the interview.

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

Post by Rick Ferri » Sun Aug 02, 2020 6:56 am

chipperd wrote:
Sun Aug 02, 2020 6:20 am
After reading the intro ("Dr. Pfau Wade is the program director of the Retirement Income Certified Professional designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA, and is a partner with a financial advisory firm in PA"), and understanding the glaring conflict of interest in being a published researcher AND a partner in a financial advisory firm, I didn't waste my time listening.
I hope that conflict of interest, how that conflict is managed, and whether or not Dr. Pfau is a fiduciary, were all flushed out in the interview.
Almost every guest I have on the program works in the financial services industry in some capacity. So, if working in the industry is your filter for not listening, then your going to miss out on a lot of learning.

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

Post by livesoft » Sun Aug 02, 2020 7:05 am

I listened last night while out walking. Excellent podcast. After reading this thread one might think there was a heavy bias and almost a sales pitch for some products. In my listen, I detected NO SUCH THING and instead a rather cautious presentation of these alternatives.

What I did find missing though is that TIAA-CREF and TIAA were not mentioned at all. This firm may have been one of the biggest retirement annuities providers with low fees through the 1960s, 70s 80s, 90s, .... for many employees of educational institutions that had 403(b) plans. I think quite a number of Bogleheads have followed the advice of Pfau without even knowing it.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by bck63 » Sun Aug 02, 2020 7:21 am

Rick Ferri wrote:
Sun Aug 02, 2020 6:56 am
chipperd wrote:
Sun Aug 02, 2020 6:20 am
After reading the intro ("Dr. Pfau Wade is the program director of the Retirement Income Certified Professional designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA, and is a partner with a financial advisory firm in PA"), and understanding the glaring conflict of interest in being a published researcher AND a partner in a financial advisory firm, I didn't waste my time listening.
I hope that conflict of interest, how that conflict is managed, and whether or not Dr. Pfau is a fiduciary, were all flushed out in the interview.
Almost every guest I have on the program works in the financial services industry in some capacity. So, if working in the industry is your filter for not listening, then your going to miss out on a lot of learning.

Rick Ferri
I think what this may point out is that -- except perhaps for hourly and other fee only advisors -- it is probably impossible to avoid conflicts of interest in the financial world when appearing on a podcast, writing an article, making a speech, or whatever. It will always be too easy to add or subtract advice or comments that will benefit or hurt your bottom line.

The bottom line is this: No one should pay more for financial advice than the $13.00 cost of John Bogle's "The Little Book of Common Sense Investing." Maybe or maybe not add a tax accountant to that and you're all done. Anything else is really a waste.

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

Post by Stinky » Sun Aug 02, 2020 7:35 am

bck63 wrote:
Sun Aug 02, 2020 7:21 am

I think what this may point out is that -- except perhaps for hourly and other fee only advisors -- it is probably impossible to avoid conflicts of interest in the financial world when appearing on a podcast, writing an article, making a speech, or whatever. It will always be too easy to add or subtract advice or comments that will benefit or hurt your bottom line.
This makes a lot of sense.

When I was employed, I was frequently asked to provide technical input, on behalf of my company, to our state regulators. For some of the "technical matters", there were differing points of view within our industry. Occasionally there was active disagreements and controversy within our industry on how to proceed on a certain technical matter.

I always advocated for the "company line" when talking with our state regulators. I did that because the company expected me to do it, but also because it lined up with my personal views on the matter.

It's easy to advocate for a certain position when you believe in the position. Not only that, but I wouldn't feel comfortable working for a company whose political views didn't line up with mine - because I would not be an effective advocate if I didn't believe in something myself.

I expect that it's the same way for folks in any financial services, including Dr. Pfau. He's advocating for what he believes in, which aligns with what his employers believe in.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by dodecahedron » Sun Aug 02, 2020 8:34 am

bck63 wrote:
Sun Aug 02, 2020 7:21 am
The bottom line is this: No one should pay more for financial advice than the $13.00 cost of John Bogle's "The Little Book of Common Sense Investing." Maybe or maybe not add a tax accountant to that and you're all done. Anything else is really a waste.
That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.

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

Post by petulant » Sun Aug 02, 2020 8:36 am

Ben Mathew wrote:
Sun Aug 02, 2020 12:05 am
petulant wrote:
Sat Aug 01, 2020 6:31 pm
Ben Mathew wrote:
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.
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.
I have been interested in this question too. I found an article the other day by Kitces discussing TIAA-CREF's no-load life insurance, but it appears they exited the business in 2019. Today I found a link to a company called Ameritas that has a "no-load VUL." It appears the only charges are a 2% premium tax, an administrative fee of about $15 per month, the cost of insurance, an annual face amount charge that is currently zero, and a mortality/expense charge starting at 0.70% per year for the first 15 years and then going to 0.10%. In addition to a wide variety of mutual fund options including Vanguard and DFA, it has a fixed account option guaranteed to earn at least 3%. Since the cash value can be removed with no taxes through a withdrawal of premium or loan, the 3% is a direct aftertax premium but after the .70% charge would be 2.3%. I am looking into it more just to understand it.
Thanks for the lead.

If somebody who is familiar with this type of insurance product can compare holding VTSAX directly vs through the Ameritas Advisor II Variable Universal Life policy, please do.
I've modeled VUL policies before to figure it out, and it's hard for them to win. Looking at the VUL as a way to hold assets, the vehicle is driven by up-front and ongoing costs compared to tax benefits. For example, holding bonds inside the policy avoids ordinary income tax on the bonds, allowing them to effectively earn a higher return; it also allows all premiums paid to be included in basis, even though some of the premiums were used to cover cost of insurance. The vehicle also has harder-to-model tax benefits like withdrawing through return of premium or policy loan without generating income tax as well as being able to rebalance inside the policy without incurring taxes. Another aspect of the comparison is that VUL policies often include a "fixed account option" or guaranteed option akin to a stable value fund inside a 401(k). These currently have higher returns than bonds--the Ameritas VUL has a minimum 3% fixed option. But from a theoretical perspective, it is much harder for normal stocks to win inside a VUL since it trades QD tax rates and ultimate LTCG on liquidation for possible ordinary income tax on surrender.

This morning I finished a crude model to look at how the Ameritas product performs compared to a taxable brokerage account. I looked at a 35-year-old male who already needs $500,000 life insurance for 30 years and compared buy-term-and-invest-the-rest to VUL. In this example, the 35-year-old male invested $5,000 annually in investments+life insurance until age 65 and then surrendered/liquidated all amounts at age 80. I then studied how outcomes vary based on asset allocation and state (for calculating income tax differences). What I found was that the brokerage account always wins for a 100% stock portfolio, while the VUL always wins for a bond portfolio based on existing interest rates. Whether the brokerage account or VUL option is better for 50-50 depended on the tax rates applicable, with no-income-tax state investors in a low bracket actually coming out ahead with all 50/50 in VUL. I also assumed the investor only pays cost of insurance based on amount at risk with a fixed death benefit (unless increasing is necessary due to corridor using very crude assumptions).

This isn't perfect modeling because there are aspects that are very hard to model well. For example, it may be unrealistic to liquidate the entire policy at age 80; on the other hand, if COI continues to escalate, that might be the best option. But in the event of death, there is no tax. But there's not tax on the stocks at death either. Also, much of the advantage for VUL in lower tax brackets disappeared if I changed the bond return to equal 3%, though at higher tax brackets VUL is a clear winner for bond assets.

Further, many of the numbers were actually close enough that execution mattered more than the asset location. For example, in one scenario I looked at an investor from a state with an average income tax of 4% using a 50/50 asset allocation. By age 70, this investor would have $382K in the VUL with $155K in basis and thus a net value of $323K if the entire VUL was surrendered. By comparison, using a traditional brokerage account, the investor would have a $348K balance, $221K in basis, and $324K in value if all positions were liquidated. Moving past age 70, the tax deferral of the VUL will allow it to grow faster than the taxable brokerage account until COI becomes too large a drag in later years. The close performance near age 70 indicates that execution would probably make a big difference, however: during their 60s, the investor may be able to realize capital gains in the brokerage account more efficiently, increasing the basis; while the VUL investor would need to start winding down the policy to realize gains--taking a withdrawal up to the basis and then even more while reducing the death benefit to minimize COI based on amount at risk. Which way the investor is better off depends entirely on objectives and more particular circumstances.

Due to the complexity involved, I still think these should be reserved for high-tax-bracket investors who would otherwise hold bonds in a taxable account (after using up all tax-advantaged space), who have a need for life insurance anyway, who plan to exit the policy before aging too far along (since cost of insurance will eventually eat or drag on the policy), and especially who might have unique needs for asset protection or to avoid estate tax.

(Note, my model is not an actual illustration and should be taken with a grain of salt. I can share the model over PM by request.)

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

Post by Uncorrelated » Sun Aug 02, 2020 9:08 am

YRT70 wrote:
Sun Aug 02, 2020 5:44 am
Uncorrelated wrote:
Sat Aug 01, 2020 4:49 pm
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.
Sounds interesting. Did you explain this somewhere? If not, can you explain what it is?
It is discussed in Optimal asset allocation strategies for retirement & saving. Specifically, the asset allocation is this asset allocation. The survival chance (trinity study, monte carlo analysis) for a 25 year retirement is shown in this chart. here is a comparison between prime harvesting (the best retirement withdrawal strategy according a book written by mcclung) and my "optimal" asset allocation, using sequentially drawn years from US history. My asset allocation is optimal under the assumption of i.i.d. years Further along the thread, there is an user that has done something similar without the i.i.d. assumption.

I don't suggest you use this asset allocation because it does not reflect actual investor preferences. Gordon Irlam at https://www.aacalc.com/about has done similar work with more realistic utility functions.

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

Post by petulant » Sun Aug 02, 2020 10:17 am

Uncorrelated wrote:
Sun Aug 02, 2020 9:08 am
YRT70 wrote:
Sun Aug 02, 2020 5:44 am
Uncorrelated wrote:
Sat Aug 01, 2020 4:49 pm
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.
Sounds interesting. Did you explain this somewhere? If not, can you explain what it is?
It is discussed in Optimal asset allocation strategies for retirement & saving. Specifically, the asset allocation is this asset allocation. The survival chance (trinity study, monte carlo analysis) for a 25 year retirement is shown in this chart. here is a comparison between prime harvesting (the best retirement withdrawal strategy according a book written by mcclung) and my "optimal" asset allocation, using sequentially drawn years from US history. My asset allocation is optimal under the assumption of i.i.d. years Further along the thread, there is an user that has done something similar without the i.i.d. assumption.

I don't suggest you use this asset allocation because it does not reflect actual investor preferences. Gordon Irlam at https://www.aacalc.com/about has done similar work with more realistic utility functions.
The Irlam presentation explaining the floor-and-upside utility function was fascinating. I don't really see it being in conflict with Wade Pfau's approach--seems like Wade Pfau is showing that SPIAs as the bond portion can work at least as well numerically, which should make them appealing due to the assumed desirability of a safe floor. Irlam shows that, mathematically, SPIAs can serve this purpose. Again, that's similar to my question earlier where one of your posted graphs seemed to show that, for most investors, partial annuitization does make sense.

Another thing I see is that the actual impact of U.S. tax rules torpedos these strategies involving early annuitization. From a tax perspective it is often desirable to keep bonds in tax-deferred while converting heavily to Roth where the account owner holds stocks, but the desire to convert and minimize the traditional balance over time disfavors the investor from purchasing an annuity in the traditional account. Investors who are just "on track" and plan to retire some years before SS are most affected by this problem.

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

Post by dodecahedron » Sun Aug 02, 2020 10:43 am

petulant wrote:
Sun Aug 02, 2020 10:17 am
Another thing I see is that the actual impact of U.S. tax rules torpedos these strategies involving early annuitization.

That depends on where you are currently holding the assets you annuitize. If you are annuitizing fixed income assets held in a taxable account, it can be quite tax-efficient. Payments up to your expected lifespan are treated mostly as return of basis. Payments after that point are entirely taxable, but by then LTC medical costs (including prescribed home renovations for aging in place) may be high enough to provide at least partially offsetting itemized deductions.
From a tax perspective it is often desirable to keep bonds in tax-deferred while converting heavily to Roth where the account owner holds stocks, but the desire to convert and minimize the traditional balance over time disfavors the investor from purchasing an annuity in the traditional account. Investors who are just "on track" and plan to retire some years before SS are most affected by this problem.
One option that Wade did not discuss was the idea of purchasing a QLAC deferred income annuity inside your tax deferred account.

More generally, no matter what type of account they are in, deferred income annuities can be very useful as a pure form of longevity insurance against the tail risk of living a very long time. (Kitces makes a very good case that deferred income annuities are even better held outside a retirement account than inside one.) Unfortunately, they are even more subject to inflation risk than immediate annuities.
Last edited by dodecahedron on Sun Aug 02, 2020 10:47 am, edited 1 time in total.

bck63
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by bck63 » Sun Aug 02, 2020 10:45 am

dodecahedron wrote:
Sun Aug 02, 2020 8:34 am
bck63 wrote:
Sun Aug 02, 2020 7:21 am
The bottom line is this: No one should pay more for financial advice than the $13.00 cost of John Bogle's "The Little Book of Common Sense Investing." Maybe or maybe not add a tax accountant to that and you're all done. Anything else is really a waste.
That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.
What if we add the Boglehead's Guide to Retirement Planning (Larimore, Lindauer, Ferri, Dogu)?

Would that round it out enough? :happy

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

Post by LadyGeek » Sun Aug 02, 2020 10:52 am

The wiki has some background info: Bogleheads' Guide to Retirement Planning
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by oldzey » Sun Aug 02, 2020 10:57 am

Thank you for the podcast with Dr. Pfau. I found the discussion to be informative as I plan to annuitize at least some of my TIAA Traditional when I retire. I did purchase his new book on Kindle and look forward to reading it.
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by dodecahedron » Sun Aug 02, 2020 11:02 am

bck63 wrote:
Sun Aug 02, 2020 10:45 am
dodecahedron wrote:
Sun Aug 02, 2020 8:34 am
bck63 wrote:
Sun Aug 02, 2020 7:21 am
The bottom line is this: No one should pay more for financial advice than the $13.00 cost of John Bogle's "The Little Book of Common Sense Investing." Maybe or maybe not add a tax accountant to that and you're all done. Anything else is really a waste.
That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.
What if we add the Boglehead's Guide to Retirement Planning (Larimore, Lindauer, Ferri, Dogu)?

Would that round it out enough? :happy
Not nearly enough for me. That book is very good but I think a wider variety of perspectives is quite useful. I read dozens of books recommended on this forum and I am still open and intellectual curious about new ideas. I did some deeper dives into studying annuities and the ins and outs of TIAA Trad, in particular, before concluding that for my circumstances and philosophy, annuitizing does not make sense now or in the immediate future.

I think podcasts like Rick Ferri´s are invaluable and fun to listen to with an open but critical mind because he brings so many diverse viewpoints.

And if and when I get to a stage in life where I feel the need for a financial advisor, I might well choose one I heard on his program and/or met at a Bogleheads Conference. (Of course, some of his guests are not taking new clients or specialize in clients with very large portfolios.) It is nice to be able to ¨audition¨ them in advance of possibly needing one.

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

Post by vineviz » Sun Aug 02, 2020 11:11 am

dodecahedron wrote:
Sun Aug 02, 2020 5:19 am
The college that employs him is a pretty fascinating and unique institution. I first heard about the college years ago from a very smart and ethical attorney I know who spent most of his career working for the state insurance department. He took a lot of courses there as part of his continuing professional education and was pretty impressed by it. My friend is retired now and never sold life insurance, so the college definitely attracts more than just insurance salesmen. He felt that it gave him a much better understanding of the insurance industry he was regulating.
Indeed, a substantial portion of financial advisors with the CFP designation (not all of whom are fee-only but who must, nonetheless work under a "fiduciary standard of conduct") study at The American College of Financial Services.
"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 bck63 » Sun Aug 02, 2020 11:20 am

dodecahedron wrote:
Sun Aug 02, 2020 11:02 am
bck63 wrote:
Sun Aug 02, 2020 10:45 am
dodecahedron wrote:
Sun Aug 02, 2020 8:34 am
bck63 wrote:
Sun Aug 02, 2020 7:21 am
The bottom line is this: No one should pay more for financial advice than the $13.00 cost of John Bogle's "The Little Book of Common Sense Investing." Maybe or maybe not add a tax accountant to that and you're all done. Anything else is really a waste.
That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.
What if we add the Boglehead's Guide to Retirement Planning (Larimore, Lindauer, Ferri, Dogu)?

Would that round it out enough? :happy
Not nearly enough for me. That book is very good but I think a wider variety of perspectives is quite useful. I read dozens of books recommended on this forum and I am still open and intellectual curious about new ideas. I did some deeper dives into studying annuities and the ins and outs of TIAA Trad, in particular, before concluding that for my circumstances and philosophy, annuitizing does not make sense now or in the immediate future.

I think podcasts like Rick Ferri´s are invaluable and fun to listen to with an open but critical mind because he brings so many diverse viewpoints.

And if and when I get to a stage in life where I feel the need for a financial advisor, I might well choose one I heard on his program and/or met at a Bogleheads Conference. (Of course, some of his guests are not taking new clients or specialize in clients with very large portfolios.) It is nice to be able to ¨audition¨ them in advance of possibly needing one.
My entire plan is this: I invest 35% of my gross income in stocks and bonds, using broad-based index funds. I invest in stocks at an allocation that lets me sleep well at night. I re-balance within my chosen bands. I am five to eight years from retirement (hopefully five), and will continue to rebalance in retirement while taking my withdrawals from the overweighted asset.

Done. Finished.

Add a dash of Monte Carlo simulation to make sure my plan has a 95% chance of lasting 30 years (noting that nothing is guaranteed), and I think I'm good to go. I don't see why I or anyone else would need a financial advisor for that, or that it has to be any more complicated.

I will have a modest but sufficient nest egg, but I don't see why the above couldn't be done on any scale.

Okay, I'll add the two books I mentioned, plus the Bogleheads forum, as necessary resources. :D

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

Post by afan » Sun Aug 02, 2020 11:23 am

petulant wrote:
Sun Aug 02, 2020 8:36 am


I've modeled VUL policies before to figure it out, and it's hard for them to win. Looking at the VUL as a way to hold assets, the vehicle is driven by up-front and ongoing costs compared to tax benefits. For example, holding bonds inside the policy avoids ordinary income tax on the bonds, allowing them to effectively earn a higher return; it also allows all premiums paid to be included in basis, even though some of the premiums were used to cover cost of insurance. The vehicle also has harder-to-model tax benefits like withdrawing through return of premium or policy loan without generating income tax as well as being able to rebalance inside the policy without incurring taxes. Another aspect of the comparison is that VUL policies often include a "fixed account option" or guaranteed option akin to a stable value fund inside a 401(k). These currently have higher returns than bonds--the Ameritas VUL has a minimum 3% fixed option. But from a theoretical perspective, it is much harder for normal stocks to win inside a VUL since it trades QD tax rates and ultimate LTCG on liquidation for possible ordinary income tax on surrender.

This morning I finished a crude model to look at how the Ameritas product performs compared to a taxable brokerage account. I looked at a 35-year-old male who already needs $500,000 life insurance for 30 years and compared buy-term-and-invest-the-rest to VUL. In this example, the 35-year-old male invested $5,000 annually in investments+life insurance until age 65 and then surrendered/liquidated all amounts at age 80. I then studied how outcomes vary based on asset allocation and state (for calculating income tax differences). What I found was that the brokerage account always wins for a 100% stock portfolio, while the VUL always wins for a bond portfolio based on existing interest rates. Whether the brokerage account or VUL option is better for 50-50 depended on the tax rates applicable, with no-income-tax state investors in a low bracket actually coming out ahead with all 50/50 in VUL. I also assumed the investor only pays cost of insurance based on amount at risk with a fixed death benefit (unless increasing is necessary due to corridor using very crude assumptions).

This isn't perfect modeling because there are aspects that are very hard to model well. For example, it may be unrealistic to liquidate the entire policy at age 80; on the other hand, if COI continues to escalate, that might be the best option. But in the event of death, there is no tax. But there's not tax on the stocks at death either. Also, much of the advantage for VUL in lower tax brackets disappeared if I changed the bond return to equal 3%, though at higher tax brackets VUL is a clear winner for bond assets.

Further, many of the numbers were actually close enough that execution mattered more than the asset location. For example, in one scenario I looked at an investor from a state with an average income tax of 4% using a 50/50 asset allocation. By age 70, this investor would have $382K in the VUL with $155K in basis and thus a net value of $323K if the entire VUL was surrendered. By comparison, using a traditional brokerage account, the investor would have a $348K balance, $221K in basis, and $324K in value if all positions were liquidated. Moving past age 70, the tax deferral of the VUL will allow it to grow faster than the taxable brokerage account until COI becomes too large a drag in later years. The close performance near age 70 indicates that execution would probably make a big difference, however: during their 60s, the investor may be able to realize capital gains in the brokerage account more efficiently, increasing the basis; while the VUL investor would need to start winding down the policy to realize gains--taking a withdrawal up to the basis and then even more while reducing the death benefit to minimize COI based on amount at risk. Which way the investor is better off depends entirely on objectives and more particular circumstances.

Due to the complexity involved, I still think these should be reserved for high-tax-bracket investors who would otherwise hold bonds in a taxable account (after using up all tax-advantaged space), who have a need for life insurance anyway, who plan to exit the policy before aging too far along (since cost of insurance will eventually eat or drag on the policy), and especially who might have unique needs for asset protection or to avoid estate tax.

(Note, my model is not an actual illustration and should be taken with a grain of salt. I can share the model over PM by request.)
Interesting. What did you use for rates of return of stocks and bonds, inflation and costs of the taxable investments?
Did you include NIIT?
What did you use for federal income tax rates? Current, current with the scheduled increase in a few years, or something else?
With the person contemplating liquidation of the taxable account or surrendering the insurance policy late in life, what did you assume about levels of earned income and hence tax brackets when realizing the income?
Did you compare borrowing money from the taxable account, not taxable income, to borrowing money from the insurance insurance policy?

For estate planning, it is simple to gift taxable investments. For a life insurance policy, one could gift partial ownership but with the eventual value depending on how it is accessed, not clear this would be an efficient use of lifetime exclusion.Again, one could borrow from the insurance policy to fund gifts and one could borrow from the taxable account. That would avoid gifting the low cost basis, which would reduce the value of the gifted securities when sold. It would also preserve the stepped up basis at death.
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 dodecahedron » Sun Aug 02, 2020 11:58 am

bck63 wrote:
Sun Aug 02, 2020 11:20 am
dodecahedron wrote:
Sun Aug 02, 2020 11:02 am
bck63 wrote:
Sun Aug 02, 2020 10:45 am
dodecahedron wrote:
Sun Aug 02, 2020 8:34 am
bck63 wrote:
Sun Aug 02, 2020 7:21 am
The bottom line is this: No one should pay more for financial advice than the $13.00 cost of John Bogle's "The Little Book of Common Sense Investing." Maybe or maybe not add a tax accountant to that and you're all done. Anything else is really a waste.
That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.
What if we add the Boglehead's Guide to Retirement Planning (Larimore, Lindauer, Ferri, Dogu)?

Would that round it out enough? :happy
Not nearly enough for me. That book is very good but I think a wider variety of perspectives is quite useful. I read dozens of books recommended on this forum and I am still open and intellectual curious about new ideas. I did some deeper dives into studying annuities and the ins and outs of TIAA Trad, in particular, before concluding that for my circumstances and philosophy, annuitizing does not make sense now or in the immediate future.

I think podcasts like Rick Ferri´s are invaluable and fun to listen to with an open but critical mind because he brings so many diverse viewpoints.

And if and when I get to a stage in life where I feel the need for a financial advisor, I might well choose one I heard on his program and/or met at a Bogleheads Conference. (Of course, some of his guests are not taking new clients or specialize in clients with very large portfolios.) It is nice to be able to ¨audition¨ them in advance of possibly needing one.
My entire plan is this: I invest 35% of my gross income in stocks and bonds, using broad-based index funds. I invest in stocks at an allocation that lets me sleep well at night. I re-balance within my chosen bands. I am five to eight years from retirement (hopefully five), and will continue to rebalance in retirement while taking my withdrawals from the overweighted asset.

Done. Finished.

Add a dash of Monte Carlo simulation to make sure my plan has a 95% chance of lasting 30 years (noting that nothing is guaranteed), and I think I'm good to go. I don't see why I or anyone else would need a financial advisor for that, or that it has to be any more complicated.
Thatś what my late husband and I thought when we were around your stage. Then he died unexpectedly and I discovered there were a lot of questions to consider that I had not previously considered, for example, the various survivor options from his multiple retirement plans (DB and DC) from his employers, and special state tax treatment for some but not all of those accounts, etc. Also the multiple options for sequentially claiming SS based on my record and his (and discovering that waiting until 70 for either would have been a clearly dominated strategy.) And that the option to annuitize was something worth keeping in mind as a possibility down the road. And my options for health insurance since I had been covered under his employer´s plan. And the need to locate assets in different types of accounts in order to manage MAGI for ACA eligibility prior to Medicare eligibility. And figuring out how my asset allocation should change giving that it had suddenly gone from planning for two to planning for one and there was a substantial life insurance benefit (term) that we had not actually ever expected to collect on. And estate tax filing issues. And sequence of returns issues. And thinking through the most tax-efficient strategy for windows for Roth conversions. And figuring out the most tax-efficient ways to donate appreciated securities to charity, which had suddenly become a much larger component of the household budget. And making a decision about downsizing or aging in place.

I have not yet felt the need to pay any advisors, but I will say that I did kick a few tires by interviewing some local candidates, particularly when I was feeling overwhelmed and uncertain in the months right after my husband´s unexpected death. The most valuable piece of free advice I got from one of the candidates I interviewed was, ¨You don´t need to rush into anything right now. It is fine to leave everything where it is for now, catch your breath, get your bearings and take your time to figure out your priorities.¨ I also got some very useful free advice about options I did not know I had on my husband´s TIAA accounts from the Wealth Management Advisor they offered me. (He was of course trying to pitch me on an AUM policy but I was a tire-kicking skeptic who realized the fancy plan he was offering was absurd.) Still there were things I found out from him that would have been hard to learn elsewhere. (Sadly, he has departed and his successor is much less helpful.)
Okay, I'll add the two books I mentioned, plus the Bogleheads forum, as necessary resources. :D
The Bogleheads forum is priceless! And very glad it is freely available to all (though I do send in donations from time to time to the nonprofit set up to support it.)

But one of the reasons I consider it priceless is because of the many excellent book recommendations that helped to educate me. Two is far from enough. Jason Zweig´s Your Money and Your Brain was particularly helpful to me.

Between the forum and the books and website recommended here, I have not felt the need to pay anyone to do any advising. But I also recognize that DIY is not for everyone and glad there are some ethical and transparent advisors like Allan Roth and Rick Ferri around if and when I need them down the road.

bck63
Posts: 1263
Joined: Fri Sep 28, 2018 4:59 pm

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

Post by bck63 » Sun Aug 02, 2020 12:19 pm

dodecahedron wrote:
Sun Aug 02, 2020 11:58 am
bck63 wrote:
Sun Aug 02, 2020 11:20 am
dodecahedron wrote:
Sun Aug 02, 2020 11:02 am
bck63 wrote:
Sun Aug 02, 2020 10:45 am
dodecahedron wrote:
Sun Aug 02, 2020 8:34 am


That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.
What if we add the Boglehead's Guide to Retirement Planning (Larimore, Lindauer, Ferri, Dogu)?

Would that round it out enough? :happy
Not nearly enough for me. That book is very good but I think a wider variety of perspectives is quite useful. I read dozens of books recommended on this forum and I am still open and intellectual curious about new ideas. I did some deeper dives into studying annuities and the ins and outs of TIAA Trad, in particular, before concluding that for my circumstances and philosophy, annuitizing does not make sense now or in the immediate future.

I think podcasts like Rick Ferri´s are invaluable and fun to listen to with an open but critical mind because he brings so many diverse viewpoints.

And if and when I get to a stage in life where I feel the need for a financial advisor, I might well choose one I heard on his program and/or met at a Bogleheads Conference. (Of course, some of his guests are not taking new clients or specialize in clients with very large portfolios.) It is nice to be able to ¨audition¨ them in advance of possibly needing one.
My entire plan is this: I invest 35% of my gross income in stocks and bonds, using broad-based index funds. I invest in stocks at an allocation that lets me sleep well at night. I re-balance within my chosen bands. I am five to eight years from retirement (hopefully five), and will continue to rebalance in retirement while taking my withdrawals from the overweighted asset.

Done. Finished.

Add a dash of Monte Carlo simulation to make sure my plan has a 95% chance of lasting 30 years (noting that nothing is guaranteed), and I think I'm good to go. I don't see why I or anyone else would need a financial advisor for that, or that it has to be any more complicated.
Thatś what my late husband and I thought when we were around your stage. Then he died unexpectedly and I discovered there were a lot of questions to consider that I had not previously considered, for example, the various survivor options from his multiple retirement plans (DB and DC) from his employers, and special state tax treatment for some but not all of those accounts, etc. Also the multiple options for sequentially claiming SS based on my record and his (and discovering that waiting until 70 for either would have been a clearly dominated strategy.) And that the option to annuitize was something worth keeping in mind as a possibility down the road. And my options for health insurance since I had been covered under his employer´s plan. And the need to locate assets in different types of accounts in order to manage MAGI for ACA eligibility prior to Medicare eligibility. And figuring out how my asset allocation should change giving that it had suddenly gone from planning for two to planning for one and there was a substantial life insurance benefit (term) that we had not actually ever expected to collect on. And estate tax filing issues. And sequence of returns issues. And thinking through the most tax-efficient strategy for windows for Roth conversions. And figuring out the most tax-efficient ways to donate appreciated securities to charity, which had suddenly become a much larger component of the household budget. And making a decision about downsizing or aging in place.

I have not yet felt the need to pay any advisors, but I will say that I did kick a few tires by interviewing some local candidates, particularly when I was feeling overwhelmed and uncertain in the months right after my husband´s unexpected death. The most valuable piece of free advice I got from one of the candidates I interviewed was, ¨You don´t need to rush into anything right now. It is fine to leave everything where it is for now, catch your breath, get your bearings and take your time to figure out your priorities.¨ I also got some very useful free advice about options I did not know I had on my husband´s TIAA accounts from the Wealth Management Advisor they offered me. (He was of course trying to pitch me on an AUM policy but I was a tire-kicking skeptic who realized the fancy plan he was offering was absurd.) Still there were things I found out from him that would have been hard to learn elsewhere. (Sadly, he has departed and his successor is much less helpful.)
Okay, I'll add the two books I mentioned, plus the Bogleheads forum, as necessary resources. :D
The Bogleheads forum is priceless! And very glad it is freely available to all (though I do send in donations from time to time to the nonprofit set up to support it.)

But one of the reasons I consider it priceless is because of the many excellent book recommendations that helped to educate me. Two is far from enough. Jason Zweig´s Your Money and Your Brain was particularly helpful to me.

Between the forum and the books and website recommended here, I have not felt the need to pay anyone to do any advising. But I also recognize that DIY is not for everyone and glad there are some ethical and transparent advisors like Allan Roth and Rick Ferri around if and when I need them down the road.
Wow. So sorry for your loss. And all of the above -- very well said. I am reading Your Money and Your Brain now, as well as A Random Walk Down Wall Street. I guess there are many roads to Dublin and there are plenty of people who could use help with the very complicated potential problems you described.

My lesson from this thread: one size does not fit all. Thank you for sharing your thoughts.

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cashboy
Posts: 527
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Location: USA

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

Post by cashboy » Sun Aug 02, 2020 12:29 pm

Rick,

Thanks for these podcasts. Dr Pfau is somewhat famous, so he was a good choice for a guest.

I like that you bring on guests with (sometimes) varied approaches to financial management (whatever their history or motivation). I do not expect all of the guests to have the same opinions on things that I do, nor would I only want to listen to podcasts that do.

I look forward to your next podcast.

:sharebeer
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CDs - CASH - Canned Beans - Rice - Bottled Water)

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

Post by petulant » Sun Aug 02, 2020 12:42 pm

afan wrote:
Sun Aug 02, 2020 11:23 am
petulant wrote:
Sun Aug 02, 2020 8:36 am


I've modeled VUL policies before to figure it out, and it's hard for them to win. Looking at the VUL as a way to hold assets, the vehicle is driven by up-front and ongoing costs compared to tax benefits. For example, holding bonds inside the policy avoids ordinary income tax on the bonds, allowing them to effectively earn a higher return; it also allows all premiums paid to be included in basis, even though some of the premiums were used to cover cost of insurance. The vehicle also has harder-to-model tax benefits like withdrawing through return of premium or policy loan without generating income tax as well as being able to rebalance inside the policy without incurring taxes. Another aspect of the comparison is that VUL policies often include a "fixed account option" or guaranteed option akin to a stable value fund inside a 401(k). These currently have higher returns than bonds--the Ameritas VUL has a minimum 3% fixed option. But from a theoretical perspective, it is much harder for normal stocks to win inside a VUL since it trades QD tax rates and ultimate LTCG on liquidation for possible ordinary income tax on surrender.

This morning I finished a crude model to look at how the Ameritas product performs compared to a taxable brokerage account. I looked at a 35-year-old male who already needs $500,000 life insurance for 30 years and compared buy-term-and-invest-the-rest to VUL. In this example, the 35-year-old male invested $5,000 annually in investments+life insurance until age 65 and then surrendered/liquidated all amounts at age 80. I then studied how outcomes vary based on asset allocation and state (for calculating income tax differences). What I found was that the brokerage account always wins for a 100% stock portfolio, while the VUL always wins for a bond portfolio based on existing interest rates. Whether the brokerage account or VUL option is better for 50-50 depended on the tax rates applicable, with no-income-tax state investors in a low bracket actually coming out ahead with all 50/50 in VUL. I also assumed the investor only pays cost of insurance based on amount at risk with a fixed death benefit (unless increasing is necessary due to corridor using very crude assumptions).

This isn't perfect modeling because there are aspects that are very hard to model well. For example, it may be unrealistic to liquidate the entire policy at age 80; on the other hand, if COI continues to escalate, that might be the best option. But in the event of death, there is no tax. But there's not tax on the stocks at death either. Also, much of the advantage for VUL in lower tax brackets disappeared if I changed the bond return to equal 3%, though at higher tax brackets VUL is a clear winner for bond assets.

Further, many of the numbers were actually close enough that execution mattered more than the asset location. For example, in one scenario I looked at an investor from a state with an average income tax of 4% using a 50/50 asset allocation. By age 70, this investor would have $382K in the VUL with $155K in basis and thus a net value of $323K if the entire VUL was surrendered. By comparison, using a traditional brokerage account, the investor would have a $348K balance, $221K in basis, and $324K in value if all positions were liquidated. Moving past age 70, the tax deferral of the VUL will allow it to grow faster than the taxable brokerage account until COI becomes too large a drag in later years. The close performance near age 70 indicates that execution would probably make a big difference, however: during their 60s, the investor may be able to realize capital gains in the brokerage account more efficiently, increasing the basis; while the VUL investor would need to start winding down the policy to realize gains--taking a withdrawal up to the basis and then even more while reducing the death benefit to minimize COI based on amount at risk. Which way the investor is better off depends entirely on objectives and more particular circumstances.

Due to the complexity involved, I still think these should be reserved for high-tax-bracket investors who would otherwise hold bonds in a taxable account (after using up all tax-advantaged space), who have a need for life insurance anyway, who plan to exit the policy before aging too far along (since cost of insurance will eventually eat or drag on the policy), and especially who might have unique needs for asset protection or to avoid estate tax.

(Note, my model is not an actual illustration and should be taken with a grain of salt. I can share the model over PM by request.)
Interesting. What did you use for rates of return of stocks and bonds, inflation and costs of the taxable investments?
Did you include NIIT?
What did you use for federal income tax rates? Current, current with the scheduled increase in a few years, or something else?
With the person contemplating liquidation of the taxable account or surrendering the insurance policy late in life, what did you assume about levels of earned income and hence tax brackets when realizing the income?
Did you compare borrowing money from the taxable account, not taxable income, to borrowing money from the insurance insurance policy?

For estate planning, it is simple to gift taxable investments. For a life insurance policy, one could gift partial ownership but with the eventual value depending on how it is accessed, not clear this would be an efficient use of lifetime exclusion.Again, one could borrow from the insurance policy to fund gifts and one could borrow from the taxable account. That would avoid gifting the low cost basis, which would reduce the value of the gifted securities when sold. It would also preserve the stepped up basis at death.
I used 7% nominal for stocks, 1.5% nominal for bonds, no inflation assumption in model, no expense ratios or AUM fees included for taxable investments. The only expense drag on the taxable investments was income tax on dividends and bonds and then the capital gains tax tracked as if all assets were liquidated at a particular point. Inflation would tend to impact all assets equally unless you subscribe to a dynamic theory about asset values or interest rates moving in certain directions as a result of inflation. This wasn't a dynamic or stochastic model, though, it was a linear model trying to figure out an outcome if expected returns occur.

For income tax, I modeled various rate scenarios based on filing status and otherwise existing income level to reach a marginal rate applicable to the family. I then carried that forward across three state scenarios, which were Texas (as a stand in for no state income tax), California (as one of the highest income tax states), and an "average" state that applies a 4% tax rate at a flat rate to QD, LTCG, and income as the marginal rate at all studied income levels. Thus, for example, a $75K MFJ couple in Texas had a 12% ordinary income rate and a 0% QD/LTCG rate. NIIT was included, so the total marginal tax for a California single with $500K in income was 46.3% on ordinary income and 35.1% for QD/LTCG. Note that I modeled it with the same marginal rate at all years, which not entirely realistic, but it's hard to model both effective arbitrage/conversion/drawdown strategies AND VUL-taxable at the same time--plus the insurance policy can benefit from arbitrage/conversion/drawdown strategies as well. I did not model with income tax rates increasing in 2025 or for any proposals to increase capital gains tax at any level.

I did not model any withdrawals until the final liquidation of the account. Generally, withdrawal from the taxable account is going to be easier if bonds are involved since theoretically the asset value equals the basis (since I didn't assume any appreciation), but withdrawal from the insurance policy will be easier if stocks are involved. The net borrowing cost according to the Ameritas prospectus starts at 1% to take your money out (3% credit - 4% rate), but after a certain period the net rate drops to 0%, both of which are smaller than prevailing marginal rates.

Generally, estate planning issues complicate the situation because the performance of the life insurance policy depends on the objectives of the investor for their life insurance policy. My analysis focused on a particular VUL policy designed as an account wrapper for assets that would otherwise be saved regularly in a taxable brokerage account during accumulation and early parts of retirement. However, managing a universal life policy after early parts of retirement can be very risky since the death benefit must be a certain amount above the cash value to satisfy the corridor test, but if the death benefit corridor is allowed to persist or is not controlled, the cost of insurance will eat the cash value and lapse the policy. Even if the math is understood and handled well, it is a dangerous thing to have to manage. That's part of why I assume the investor surrenders the policy at age 80--intended to reflect somewhere in retirement before cost of insurance starts to get truly awful. I wouldn't recommend using VUL for estate planning.

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

Post by SteveinVanvcouverWA » Sun Aug 02, 2020 1:53 pm

Thank you, Rick, for this very informative interview. I am very saddened by the harsh criticisms. Please don't let that stop you from doing more interviews of people with different viewpoints.

I am an academic family physician, and it is standard practice before any medical lecture to declare one's potential conflicts of interest. This approach might help.

JBTX
Posts: 6515
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by JBTX » Sun Aug 02, 2020 2:29 pm

dodecahedron wrote:
Sun Aug 02, 2020 11:58 am
bck63 wrote:
Sun Aug 02, 2020 11:20 am
dodecahedron wrote:
Sun Aug 02, 2020 11:02 am
bck63 wrote:
Sun Aug 02, 2020 10:45 am
dodecahedron wrote:
Sun Aug 02, 2020 8:34 am


That is a great book, but it primarily covers investment during the accumulation phase.

It does not cover the decumulation phase. That is a much harder problem.

How do you arrange your finances to draw down your life savings in a reasonable way to provide for your living expenses, contingencies, discretionary spending, and/or legacy? You have a defined benefit pension but your employer is offering you a lump sum: which do you take? Or your employer is offering you multiple options for your pension depending on whether you want to a 50%, 75% or 100% survivor benefit for your spouse? How do you protect against sequence of returns risk? How do you simplify your finances to prepare for years in which your cognitive skills may not be as sharp as currently? Should you tap into your home equity by downsizing (or using a reverse mortgage)? Is long-term-care insurance a good idea for my particular situation?

At the very least, you might need a few more books.
What if we add the Boglehead's Guide to Retirement Planning (Larimore, Lindauer, Ferri, Dogu)?

Would that round it out enough? :happy
Not nearly enough for me. That book is very good but I think a wider variety of perspectives is quite useful. I read dozens of books recommended on this forum and I am still open and intellectual curious about new ideas. I did some deeper dives into studying annuities and the ins and outs of TIAA Trad, in particular, before concluding that for my circumstances and philosophy, annuitizing does not make sense now or in the immediate future.

I think podcasts like Rick Ferri´s are invaluable and fun to listen to with an open but critical mind because he brings so many diverse viewpoints.

And if and when I get to a stage in life where I feel the need for a financial advisor, I might well choose one I heard on his program and/or met at a Bogleheads Conference. (Of course, some of his guests are not taking new clients or specialize in clients with very large portfolios.) It is nice to be able to ¨audition¨ them in advance of possibly needing one.
My entire plan is this: I invest 35% of my gross income in stocks and bonds, using broad-based index funds. I invest in stocks at an allocation that lets me sleep well at night. I re-balance within my chosen bands. I am five to eight years from retirement (hopefully five), and will continue to rebalance in retirement while taking my withdrawals from the overweighted asset.

Done. Finished.

Add a dash of Monte Carlo simulation to make sure my plan has a 95% chance of lasting 30 years (noting that nothing is guaranteed), and I think I'm good to go. I don't see why I or anyone else would need a financial advisor for that, or that it has to be any more complicated.
Thatś what my late husband and I thought when we were around your stage. Then he died unexpectedly and I discovered there were a lot of questions to consider that I had not previously considered, for example, the various survivor options from his multiple retirement plans (DB and DC) from his employers, and special state tax treatment for some but not all of those accounts, etc. Also the multiple options for sequentially claiming SS based on my record and his (and discovering that waiting until 70 for either would have been a clearly dominated strategy.) And that the option to annuitize was something worth keeping in mind as a possibility down the road. And my options for health insurance since I had been covered under his employer´s plan. And the need to locate assets in different types of accounts in order to manage MAGI for ACA eligibility prior to Medicare eligibility. And figuring out how my asset allocation should change giving that it had suddenly gone from planning for two to planning for one and there was a substantial life insurance benefit (term) that we had not actually ever expected to collect on. And estate tax filing issues. And sequence of returns issues. And thinking through the most tax-efficient strategy for windows for Roth conversions. And figuring out the most tax-efficient ways to donate appreciated securities to charity, which had suddenly become a much larger component of the household budget. And making a decision about downsizing or aging in place.

I have not yet felt the need to pay any advisors, but I will say that I did kick a few tires by interviewing some local candidates, particularly when I was feeling overwhelmed and uncertain in the months right after my husband´s unexpected death. The most valuable piece of free advice I got from one of the candidates I interviewed was, ¨You don´t need to rush into anything right now. It is fine to leave everything where it is for now, catch your breath, get your bearings and take your time to figure out your priorities.¨ I also got some very useful free advice about options I did not know I had on my husband´s TIAA accounts from the Wealth Management Advisor they offered me. (He was of course trying to pitch me on an AUM policy but I was a tire-kicking skeptic who realized the fancy plan he was offering was absurd.) Still there were things I found out from him that would have been hard to learn elsewhere. (Sadly, he has departed and his successor is much less helpful.)
Okay, I'll add the two books I mentioned, plus the Bogleheads forum, as necessary resources. :D
The Bogleheads forum is priceless! And very glad it is freely available to all (though I do send in donations from time to time to the nonprofit set up to support it.)

But one of the reasons I consider it priceless is because of the many excellent book recommendations that helped to educate me. Two is far from enough. Jason Zweig´s Your Money and Your Brain was particularly helpful to me.

Between the forum and the books and website recommended here, I have not felt the need to pay anyone to do any advising. But I also recognize that DIY is not for everyone and glad there are some ethical and transparent advisors like Allan Roth and Rick Ferri around if and when I need them down the road.
Thanks for sharing your story.

Reminds of one of my favorite quotes of all time, from Mike Tyson no less:
"Everybody has a plan until they get punched in the mouth."

PowderDay9
Posts: 73
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Re: Dr. Wade Pfau is my guest on the "Bogleheads on Investing" podcast!

Post by PowderDay9 » Sun Aug 02, 2020 2:38 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
Rick and Jim are two of the best financial podcasts available. Thanks for putting in the time to produce very high quality content. You guys do a fantastic job!

Podcasting tends to draw guests who are selling something (books, investments, online courses, financial services, seminars). That's just the nature of the business. I particularly like that Jim's podcast is a balance between the expert interviews and random listener questions off the speakpipe.

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

Post by Ben Mathew » Sun Aug 02, 2020 3:10 pm

petulant wrote:
Sun Aug 02, 2020 8:36 am
This morning I finished a crude model to look at how the Ameritas product performs compared to a taxable brokerage account.
Thanks for sharing the results of your analysis. Sounds like even with the lower costs, it won't work as a vehicle for stocks in taxable. It might work as a substitute for bonds in taxable. But given that stocks would go into taxable before bonds (at least in more normal times when bond returns are not unusually low), that would seem to limit the applicability.

The complexity is also deterring. An investor would have to be an expert in the ins and outs of the product and how it interacts with state and federal tax laws. I would worry about tripping about somewhere, either in the analysis or in the execution.

The other thing I worry about is unintentional lapse. This is an issue with all insurance products, including the term life and LTC policies we currently hold. Setting up automatic payments reduces, but does not eliminate, the probability of a missed payments. The 30 day grace period is short, and the consequences of unintentional lapse can be severe, given that it would not be possible to get the same rates (or even be insurable) later in life. I find our insurance policies mildly stressful for that reason. I worry about us changing bank accounts and forgetting to update the insurance auto withdrawal, and then being on vacation when the missed premium notice comes in. Low probability, but still a concern.

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

Post by willthrill81 » Sun Aug 02, 2020 3:14 pm

petulant wrote:
Sun Aug 02, 2020 12:42 pm
afan wrote:
Sun Aug 02, 2020 11:23 am
petulant wrote:
Sun Aug 02, 2020 8:36 am


I've modeled VUL policies before to figure it out, and it's hard for them to win. Looking at the VUL as a way to hold assets, the vehicle is driven by up-front and ongoing costs compared to tax benefits. For example, holding bonds inside the policy avoids ordinary income tax on the bonds, allowing them to effectively earn a higher return; it also allows all premiums paid to be included in basis, even though some of the premiums were used to cover cost of insurance. The vehicle also has harder-to-model tax benefits like withdrawing through return of premium or policy loan without generating income tax as well as being able to rebalance inside the policy without incurring taxes. Another aspect of the comparison is that VUL policies often include a "fixed account option" or guaranteed option akin to a stable value fund inside a 401(k). These currently have higher returns than bonds--the Ameritas VUL has a minimum 3% fixed option. But from a theoretical perspective, it is much harder for normal stocks to win inside a VUL since it trades QD tax rates and ultimate LTCG on liquidation for possible ordinary income tax on surrender.

This morning I finished a crude model to look at how the Ameritas product performs compared to a taxable brokerage account. I looked at a 35-year-old male who already needs $500,000 life insurance for 30 years and compared buy-term-and-invest-the-rest to VUL. In this example, the 35-year-old male invested $5,000 annually in investments+life insurance until age 65 and then surrendered/liquidated all amounts at age 80. I then studied how outcomes vary based on asset allocation and state (for calculating income tax differences). What I found was that the brokerage account always wins for a 100% stock portfolio, while the VUL always wins for a bond portfolio based on existing interest rates. Whether the brokerage account or VUL option is better for 50-50 depended on the tax rates applicable, with no-income-tax state investors in a low bracket actually coming out ahead with all 50/50 in VUL. I also assumed the investor only pays cost of insurance based on amount at risk with a fixed death benefit (unless increasing is necessary due to corridor using very crude assumptions).

This isn't perfect modeling because there are aspects that are very hard to model well. For example, it may be unrealistic to liquidate the entire policy at age 80; on the other hand, if COI continues to escalate, that might be the best option. But in the event of death, there is no tax. But there's not tax on the stocks at death either. Also, much of the advantage for VUL in lower tax brackets disappeared if I changed the bond return to equal 3%, though at higher tax brackets VUL is a clear winner for bond assets.

Further, many of the numbers were actually close enough that execution mattered more than the asset location. For example, in one scenario I looked at an investor from a state with an average income tax of 4% using a 50/50 asset allocation. By age 70, this investor would have $382K in the VUL with $155K in basis and thus a net value of $323K if the entire VUL was surrendered. By comparison, using a traditional brokerage account, the investor would have a $348K balance, $221K in basis, and $324K in value if all positions were liquidated. Moving past age 70, the tax deferral of the VUL will allow it to grow faster than the taxable brokerage account until COI becomes too large a drag in later years. The close performance near age 70 indicates that execution would probably make a big difference, however: during their 60s, the investor may be able to realize capital gains in the brokerage account more efficiently, increasing the basis; while the VUL investor would need to start winding down the policy to realize gains--taking a withdrawal up to the basis and then even more while reducing the death benefit to minimize COI based on amount at risk. Which way the investor is better off depends entirely on objectives and more particular circumstances.

Due to the complexity involved, I still think these should be reserved for high-tax-bracket investors who would otherwise hold bonds in a taxable account (after using up all tax-advantaged space), who have a need for life insurance anyway, who plan to exit the policy before aging too far along (since cost of insurance will eventually eat or drag on the policy), and especially who might have unique needs for asset protection or to avoid estate tax.

(Note, my model is not an actual illustration and should be taken with a grain of salt. I can share the model over PM by request.)
Interesting. What did you use for rates of return of stocks and bonds, inflation and costs of the taxable investments?
Did you include NIIT?
What did you use for federal income tax rates? Current, current with the scheduled increase in a few years, or something else?
With the person contemplating liquidation of the taxable account or surrendering the insurance policy late in life, what did you assume about levels of earned income and hence tax brackets when realizing the income?
Did you compare borrowing money from the taxable account, not taxable income, to borrowing money from the insurance insurance policy?

For estate planning, it is simple to gift taxable investments. For a life insurance policy, one could gift partial ownership but with the eventual value depending on how it is accessed, not clear this would be an efficient use of lifetime exclusion.Again, one could borrow from the insurance policy to fund gifts and one could borrow from the taxable account. That would avoid gifting the low cost basis, which would reduce the value of the gifted securities when sold. It would also preserve the stepped up basis at death.
I used 7% nominal for stocks, 1.5% nominal for bonds, no inflation assumption in model, no expense ratios or AUM fees included for taxable investments. The only expense drag on the taxable investments was income tax on dividends and bonds and then the capital gains tax tracked as if all assets were liquidated at a particular point. Inflation would tend to impact all assets equally unless you subscribe to a dynamic theory about asset values or interest rates moving in certain directions as a result of inflation. This wasn't a dynamic or stochastic model, though, it was a linear model trying to figure out an outcome if expected returns occur.

For income tax, I modeled various rate scenarios based on filing status and otherwise existing income level to reach a marginal rate applicable to the family. I then carried that forward across three state scenarios, which were Texas (as a stand in for no state income tax), California (as one of the highest income tax states), and an "average" state that applies a 4% tax rate at a flat rate to QD, LTCG, and income as the marginal rate at all studied income levels. Thus, for example, a $75K MFJ couple in Texas had a 12% ordinary income rate and a 0% QD/LTCG rate. NIIT was included, so the total marginal tax for a California single with $500K in income was 46.3% on ordinary income and 35.1% for QD/LTCG. Note that I modeled it with the same marginal rate at all years, which not entirely realistic, but it's hard to model both effective arbitrage/conversion/drawdown strategies AND VUL-taxable at the same time--plus the insurance policy can benefit from arbitrage/conversion/drawdown strategies as well. I did not model with income tax rates increasing in 2025 or for any proposals to increase capital gains tax at any level.

I did not model any withdrawals until the final liquidation of the account. Generally, withdrawal from the taxable account is going to be easier if bonds are involved since theoretically the asset value equals the basis (since I didn't assume any appreciation), but withdrawal from the insurance policy will be easier if stocks are involved. The net borrowing cost according to the Ameritas prospectus starts at 1% to take your money out (3% credit - 4% rate), but after a certain period the net rate drops to 0%, both of which are smaller than prevailing marginal rates.

Generally, estate planning issues complicate the situation because the performance of the life insurance policy depends on the objectives of the investor for their life insurance policy. My analysis focused on a particular VUL policy designed as an account wrapper for assets that would otherwise be saved regularly in a taxable brokerage account during accumulation and early parts of retirement. However, managing a universal life policy after early parts of retirement can be very risky since the death benefit must be a certain amount above the cash value to satisfy the corridor test, but if the death benefit corridor is allowed to persist or is not controlled, the cost of insurance will eat the cash value and lapse the policy. Even if the math is understood and handled well, it is a dangerous thing to have to manage. That's part of why I assume the investor surrenders the policy at age 80--intended to reflect somewhere in retirement before cost of insurance starts to get truly awful. I wouldn't recommend using VUL for estate planning.
My very limited understanding of VUL is that if you don't fund it heavily for a significant period of time, the returns are even worse. If that's true, then there is an added layer of risk to the product in that you might be unable to fund it appropriately at some point in the future.
“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

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

Post by dharrythomas » Sun Aug 02, 2020 4:34 pm

Another great podcast! Thanks Rick

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

Post by gjlynch17 » Sun Aug 02, 2020 5:01 pm

Rick:

Thanks for another great podcast. I disagree with the criticisms of you and Dr. Pfau. I have read both of Dr. Pfau's last two books and found them to be excellent resources. While I disagree on his conclusions with respect to whole life insurance, fixed index annuities and variable annuities for me (and most DIY investors), he provided a lot of information in this books.

One takeaway from Dr. Pfau's books is that many retired investors should at least seriously consider replacing a portion of their bond allocation with a SPIA and DIA. The benefits of the mortality credits and tax deferrals often outweigh the incremental insurance costs. Michael Kitces has a good article on this subject.

https://www.kitces.com/blog/understandi ... nt-income/

Fortunately, SPIAs and DIAs are increasingly accessible for DIY investors through sites such as www.blueprintincome.com, www.stantheannuityman.com and www.immediateannuities.com. Blueprint Income even provides an implied "investment return" of an annuity based on the investors' age. This helps calculate the longevity break-even point compared to bonds, like what Rick did in the podcast.

Thanks again for a great podcast Rick!

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

Post by drk » Sun Aug 02, 2020 5:58 pm

This was an interesting episode. My mom asked me for help with her retirement planning, and I’ve been thinking about a reverse mortgage and immediate annuities as potential options. They may not be optimal but would definitely help on the behavioral side while carrying her to full retirement age for Social Security.

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

Post by dodecahedron » Sun Aug 02, 2020 8:04 pm

So I wound up listening to Rick´s previous podcast with Burton Malkiel (Princeton professor and author of the classic book Random Walk Down Wall Street.) I would highly recommend listening to both.

As I listened to Rick explain that Burton Malkiel´s 1973 book had been a big inspiration and impetus for Jack Bogle starting up the first index fund a few years later, I thought about the times that academic pie-in-the-sky ideas deemed cockamamie crazy at first sometimes become very influential when a pragmatic business person puts them into practice.

And then I thought about all the work that Wade Pfau (and other academics, e.g., Milevsky) have done to promote the idea that the core idea behind annuities is quite a valuable one, even if most of the current implementations are complex and involve high fees.

But with a tontine-style implementation they could actually be implemented in a very cost-effective Bogleheadish style. Now there are a lot of logistical regulatory and marketing barriers to overcome in making it a reality (just as there were for Bogle´s first index fund) but maybe somebody listening to academics talk about this will be inspired to grab the ball and go for it. A low-expense ratio tontine-style mutual annuity with simplicity and transparency would make a lot of sense. (As I said above, TIAA is kinda/sorta tontine-like but could certainly use improvements in simplicity and transparency.)

So even listening to pie-in-the-sky ideas from academics can spur needed innovations.

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

Post by 000 » Sun Aug 02, 2020 8:11 pm

dodecahedron wrote:
Sun Aug 02, 2020 8:04 pm
And then I thought about all the work that Wade Pfau (and other academics, e.g., Milevsky) have done to promote the idea that the core idea behind annuities is quite a valuable one, even if most of the current implementations are complex and involve high fees.

But with a tontine-style implementation they could actually be implemented in a very cost-effective Bogleheadish style. Now there are a lot of logistical regulatory and marketing barriers to overcome in making it a reality (just as there were for Bogle´s first index fund) but maybe somebody listening to academics talk about this will be inspired to grab the ball and go for it. A low-expense ratio tontine-style mutual annuity with simplicity and transparency would make a lot of sense. (As I said above, TIAA is kinda/sorta tontine-like but could certainly use improvements in simplicity and transparency.)

So even listening to pie-in-the-sky ideas from academics can spur needed innovations.
The hyperlongevity risk is still a concern from my perspective no matter how these are packaged.

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