Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

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randomguy
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by randomguy »

nigel_ht wrote: Wed Oct 05, 2022 3:30 pm
petulant wrote: Wed Oct 05, 2022 8:44 am
On the topic of SWR, howabout address the relationship between SWR and valuation. We know that if you cut the expected return values in a parameterized Monte Carlo simulation, the SWR comes down. Are there novel and interesting ways to map the relationship between valuation and SWR using historical data sets, or more particularly the method used by the authors here? Generally, it seems obvious that valuations affected expected return and hence would adjust SWR, but it might not--there could be relatively quick reversions to the mean; the equity risk premium might not be constant; or most of the SWR shocks could be exogenous (even if we expected valuation plays a role by adjusting expected return, it might be that most of the SWR problems come from wild deviations from expected returns).
If valuations was the driving factor for SWR then 1929 would be our worst case but it isn’t.

Valuations were high in 1966 but not close to 1929.

Valuations are a factor they are not everything. Note how both 1929 and 1966 were bad. If you plot up PE10s versus SWR, if your PE10 was over 20, your SWR was always under 6. If your PE10 was <10, your SWR was in the 6-12% range. In 10-20? 4-12%... Now historically we have very little data on PE10s over 20 (most are clustered on the same couple paths. In a couple years when all those late 90s numbers started getting added in the graph will change quite a bit) and PE10s have a lot of issues with things like E not being internally consistant. I haven't done it but I bet plotting SWR as a function of the previous 5-10 years of returns, would give similar charts.

You could try and come up with some multifactor thing (say valuations, interest rates, and inflation) but I don't think you will have remotely enough data.
nigel_ht
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by nigel_ht »

randomguy wrote: Thu Oct 06, 2022 12:23 pm
nigel_ht wrote: Wed Oct 05, 2022 3:30 pm
petulant wrote: Wed Oct 05, 2022 8:44 am
On the topic of SWR, howabout address the relationship between SWR and valuation. We know that if you cut the expected return values in a parameterized Monte Carlo simulation, the SWR comes down. Are there novel and interesting ways to map the relationship between valuation and SWR using historical data sets, or more particularly the method used by the authors here? Generally, it seems obvious that valuations affected expected return and hence would adjust SWR, but it might not--there could be relatively quick reversions to the mean; the equity risk premium might not be constant; or most of the SWR shocks could be exogenous (even if we expected valuation plays a role by adjusting expected return, it might be that most of the SWR problems come from wild deviations from expected returns).
If valuations was the driving factor for SWR then 1929 would be our worst case but it isn’t.

Valuations were high in 1966 but not close to 1929.
Valuations are a factor they are not everything. Note how both 1929 and 1966 were bad. If you plot up PE10s versus SWR, if your PE10 was over 20, your SWR was always under 6. If your PE10 was <10, your SWR was in the 6-12% range. In 10-20? 4-12%... Now historically we have very little data on PE10s over 20 (most are clustered on the same couple paths. In a couple years when all those late 90s numbers started getting added in the graph will change quite a bit) and PE10s have a lot of issues with things like E not being internally consistant. I haven't done it but I bet plotting SWR as a function of the previous 5-10 years of returns, would give similar charts.

You could try and come up with some multifactor thing (say valuations, interest rates, and inflation) but I don't think you will have remotely enough data.
Sure…a multi factor thing would be more accurate and I also don’t think we would have enough data to draw meaningful conclusions.

I guess my issue is with folks saying high valuations will drive SWR way down when 4-12% returns still supports a SWR above 4%.

Even Nikkei only took SWR down to 3.4% so it seems questionable that high valuations is the driving factor for SWR.

It appears to be the driving factor for ending portfolio size. That matters if you want to leave a legacy..,

There is a relationship between inflation and market performance…higher inflation appears to be correlated with low valuations and vice versa.

And we see that after large busts like 1929, 1990 and 2008 we often get deflation…

So I think that’s why valuations aren’t the driving factor for SWR…when you crash from stratospheric valuations then inflation tends to drop because everyone stops spending as much so prices come down and the COLA works in your favor.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by iim7V7IM7 »

The constant dollar withdrawal approach that makes the most sense to me is the one proposed by Jim Otar.

It is a risk based approach that assigns different acceptance criteria for the probability of success based upon use of the income. He also refers to them as a “sustainable withdrawal rate” vs. a “safe withdrawal rate” which I also prefer

Essential Expenses - The things needed for basic long term survival. His acceptance criteria is never losing > 10% of purchasing power for these things while alive. He suggests an initial withdrawal rate of 3.10% for a 30-year time horizon.

Basic Expenses - These are the smaller pleasantries in life, going out to dinner, gifting, hobbies etc. His acceptance criteria is < 10% probability of running out of funds to support this income. He suggests an initial withdrawal rate of 3.83% for a 30-year time horizon.

Discretionary Expenses - These are aspirational expenses for things like major travel, vacation homes, donations or other discretionary big ticket items. His acceptance criteria is the median outcome should last your lifetime. He suggests an initial withdrawal rate of 4.65% for a 30-year time horizon.
marcopolo
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by marcopolo »

iim7V7IM7 wrote: Fri Dec 23, 2022 4:05 pm The constant dollar withdrawal approach that makes the most sense to me is the one proposed by Jim Otar.

It is a risk based approach that assigns different acceptance criteria for the probability of success based upon use of the income. He also refers to them as a “sustainable withdrawal rate” vs. a “safe withdrawal rate” which I also prefer

Essential Expenses - The things needed for basic long term survival. His acceptance criteria is never losing > 10% of purchasing power for these things while alive. He suggests an initial withdrawal rate of 3.10% for a 30-year time horizon.

Basic Expenses - These are the smaller pleasantries in life, going out to dinner, gifting, hobbies etc. His acceptance criteria is < 10% probability of running out of funds to support this income. He suggests an initial withdrawal rate of 3.83% for a 30-year time horizon.

Discretionary Expenses - These are aspirational expenses for things like major travel, vacation homes, donations or other discretionary big ticket items. His acceptance criteria is the median outcome should last your lifetime. He suggests an initial withdrawal rate of 4.65% for a 30-year time horizon.
This sounds like a very reasonable approach.
But, it is not clear to me how it qualifies as a constant dollar withdrawal approach.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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HomerJ
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Re: Maybe Wade Pfau was over-optimistic …

Post by HomerJ »

MarkRoulo wrote: Sun Oct 02, 2022 3:46 pm
McQ wrote: Sat Oct 01, 2022 5:08 pm
petulant wrote: Sat Oct 01, 2022 12:17 pm ... I am disappointed that user McQ is now apparently trying to match marketwatch headlines for clickbait ...
I note for the record that you are the third Boglehead to accuse me of clickbait (I keep a running tally, I doubt you will be the last).

Two inferences occur:
1. Where there’s smoke, there must be fire;
Or
2. Time to dust off my copy of Plato’s Republic and find the passage where he bans poets because of their fatal predilection for clickbait and other violations of logic and probity.

More than a whiff of that Plato here at Bogleheads, in my experience thus far.

Conversely, your point about whether SWR analyses should include wars does raise a key question. I don't see that the answer is a foregone conclusion, and hope we can debate the question here in this thread.
I don't think we will reach a conclusion.

I will ILLUSTRATE (not prove) why with a few examples that begin as questions.

Question #1: What was the homicide rate in New York City from 2000 - 2010?

Homicide rate is commonly reported as homicides per 100,000 and the US as a whole was a bit over 9.0 in 2000. This dropped to about 4.5 in 2014 and has since risen to 6.5. For reference, Baltimore runs over 50. And upper middle class suburbs often see a rate of around 1.0.

So ... New York City saw around 6,000 homicides over those ten year (so 600 per year) and had a population of around 8 million. This works out to about 7.5 per 100,000. Quite good for a large city compared to the US as a whole.

But there is a catch and it is a big one. The 6,000 count does NOT include the 3,000 people killed on 9/11. I would have a difficult time arguing that flying airplanes into a building full of people didn't count as homicide, but the official stats for NYC *exclude* those deaths for 2001 (the official number of homicides as 649).

If one is trying to ascertain the chances of getting killed in NYC over the next 30-50 years should those deaths be excluded from the backward looking sample because this is unlikely to happen again? Or because it is rare? Or should they be included because every so often this sort of thing DOES happen even if we probably won't get an exact repeat?

Rare events are tough to model, partially because they are rare so we don't have a good idea of the true underlying probability.

I'm not going to offer an answer, but I think this question illustrates well the stats problem to solve.

Question #2 (This is a variation on #1): What is the average homicide rate in Europe compared to the US?

If one looks up the basic statistics one finds something like, "European countries tend to have homicide rates 1/3 - 1/4 that of the US."

Which is a pretty reasonable answer and addresses the question most people care about if they are going to Europe on holiday or trying to make some sort of point about gun control.

But it excludes the 12,000,000 people murdered in the Holocaust (1933 - 1945).

Another way to view the homicide rate is that in any given year the European rate has been quite a bit lower than that of the US, but there have been a few years that were INSANELY HIGH compared to the US.

Note that we can play this game even today because when Russian missiles are aimed at Ukrainian hospitals that almost certainly doesn't show up in the basic homicide statistics for Ukraine though the folks are just as dead as if they had been murdered.

So ... retain the data with World Wars and Great Depressions (and Argentina and Japan post-WW2) or remove it because these events are: (a) rare and, (b) unlikely to be repeated?

I don't think "we" are going to converge on an answer.
This is a great post, and the Holocaust example is an excellent one when talking about SWRs. Heck, why just include the Holocaust? Include ALL the deaths from the entire war...

If we should include people retiring in 1939 Germany and Italy, and say "See! Historical SWRs are much lower!", then the same people should be saying "DO NOT travel EVER to Europe! The average annual deaths per 100,000 makes it the most dangerous place on the planet!"

And then people will say "But World War II isn't happening right now..." which is exactly what we say about including World War II SWRs."
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
iim7V7IM7
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by iim7V7IM7 »

The proposed withdrawal rates are initial withdrawal rates (IWR). They are adjusted each year based on the CPI just like Bill Bengen’s approach. That is why they are constant dollar approaches.

marcopolo wrote: Fri Dec 23, 2022 4:18 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 4:05 pm The constant dollar withdrawal approach that makes the most sense to me is the one proposed by Jim Otar.

It is a risk based approach that assigns different acceptance criteria for the probability of success based upon use of the income. He also refers to them as a “sustainable withdrawal rate” vs. a “safe withdrawal rate” which I also prefer

Essential Expenses - The things needed for basic long term survival. His acceptance criteria is never losing > 10% of purchasing power for these things while alive. He suggests an initial withdrawal rate of 3.10% for a 30-year time horizon.

Basic Expenses - These are the smaller pleasantries in life, going out to dinner, gifting, hobbies etc. His acceptance criteria is < 10% probability of running out of funds to support this income. He suggests an initial withdrawal rate of 3.83% for a 30-year time horizon.

Discretionary Expenses - These are aspirational expenses for things like major travel, vacation homes, donations or other discretionary big ticket items. His acceptance criteria is the median outcome should last your lifetime. He suggests an initial withdrawal rate of 4.65% for a 30-year time horizon.
This sounds like a very reasonable approach.
But, it is not clear to me how it qualifies as a constant dollar withdrawal approach.
marcopolo
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by marcopolo »

iim7V7IM7 wrote: Fri Dec 23, 2022 7:38 pm The proposed withdrawal rates are initial withdrawal rates (IWR). They are adjusted each year based on the CPI just like Bill Bengen’s approach. That is why they are constant dollar approaches.

marcopolo wrote: Fri Dec 23, 2022 4:18 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 4:05 pm The constant dollar withdrawal approach that makes the most sense to me is the one proposed by Jim Otar.

It is a risk based approach that assigns different acceptance criteria for the probability of success based upon use of the income. He also refers to them as a “sustainable withdrawal rate” vs. a “safe withdrawal rate” which I also prefer

Essential Expenses - The things needed for basic long term survival. His acceptance criteria is never losing > 10% of purchasing power for these things while alive. He suggests an initial withdrawal rate of 3.10% for a 30-year time horizon.

Basic Expenses - These are the smaller pleasantries in life, going out to dinner, gifting, hobbies etc. His acceptance criteria is < 10% probability of running out of funds to support this income. He suggests an initial withdrawal rate of 3.83% for a 30-year time horizon.

Discretionary Expenses - These are aspirational expenses for things like major travel, vacation homes, donations or other discretionary big ticket items. His acceptance criteria is the median outcome should last your lifetime. He suggests an initial withdrawal rate of 4.65% for a 30-year time horizon.
This sounds like a very reasonable approach.
But, it is not clear to me how it qualifies as a constant dollar withdrawal approach.
But, presumably this only provides any benefit if you are eliminating the Discretionary and then Basic Expenses based on some criteria. Otherwise, how would it differ from a 4.65 SWR?

Once you have done that, you are no longer in the Constant Dollar regime, and have now implemented some rules based variable withdrawal approach. Which is fine, but has different goals than a constant dollar method.
Once in a while you get shown the light, in the strangest of places if you look at it right.
iim7V7IM7
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by iim7V7IM7 »

All three SWRs are adjusted for inflation so they are constant dollar per category of expenses.
marcopolo wrote: Fri Dec 23, 2022 7:50 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 7:38 pm The proposed withdrawal rates are initial withdrawal rates (IWR). They are adjusted each year based on the CPI just like Bill Bengen’s approach. That is why they are constant dollar approaches.

marcopolo wrote: Fri Dec 23, 2022 4:18 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 4:05 pm The constant dollar withdrawal approach that makes the most sense to me is the one proposed by Jim Otar.

It is a risk based approach that assigns different acceptance criteria for the probability of success based upon use of the income. He also refers to them as a “sustainable withdrawal rate” vs. a “safe withdrawal rate” which I also prefer

Essential Expenses - The things needed for basic long term survival. His acceptance criteria is never losing > 10% of purchasing power for these things while alive. He suggests an initial withdrawal rate of 3.10% for a 30-year time horizon.

Basic Expenses - These are the smaller pleasantries in life, going out to dinner, gifting, hobbies etc. His acceptance criteria is < 10% probability of running out of funds to support this income. He suggests an initial withdrawal rate of 3.83% for a 30-year time horizon.

Discretionary Expenses - These are aspirational expenses for things like major travel, vacation homes, donations or other discretionary big ticket items. His acceptance criteria is the median outcome should last your lifetime. He suggests an initial withdrawal rate of 4.65% for a 30-year time horizon.
This sounds like a very reasonable approach.
But, it is not clear to me how it qualifies as a constant dollar withdrawal approach.
But, presumably this only provides any benefit if you are eliminating the Discretionary and then Basic Expenses based on some criteria. Otherwise, how would it differ from a 4.65 SWR?

Once you have done that, you are no longer in the Constant Dollar regime, and have now implemented some rules based variable withdrawal approach. Which is fine, but has different goals than a constant dollar method.
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by marcopolo »

iim7V7IM7 wrote: Fri Dec 23, 2022 9:11 pm All three SWRs are adjusted for inflation so they are constant dollar per category of expenses.
marcopolo wrote: Fri Dec 23, 2022 7:50 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 7:38 pm The proposed withdrawal rates are initial withdrawal rates (IWR). They are adjusted each year based on the CPI just like Bill Bengen’s approach. That is why they are constant dollar approaches.

marcopolo wrote: Fri Dec 23, 2022 4:18 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 4:05 pm The constant dollar withdrawal approach that makes the most sense to me is the one proposed by Jim Otar.

It is a risk based approach that assigns different acceptance criteria for the probability of success based upon use of the income. He also refers to them as a “sustainable withdrawal rate” vs. a “safe withdrawal rate” which I also prefer

Essential Expenses - The things needed for basic long term survival. His acceptance criteria is never losing > 10% of purchasing power for these things while alive. He suggests an initial withdrawal rate of 3.10% for a 30-year time horizon.

Basic Expenses - These are the smaller pleasantries in life, going out to dinner, gifting, hobbies etc. His acceptance criteria is < 10% probability of running out of funds to support this income. He suggests an initial withdrawal rate of 3.83% for a 30-year time horizon.

Discretionary Expenses - These are aspirational expenses for things like major travel, vacation homes, donations or other discretionary big ticket items. His acceptance criteria is the median outcome should last your lifetime. He suggests an initial withdrawal rate of 4.65% for a 30-year time horizon.
This sounds like a very reasonable approach.
But, it is not clear to me how it qualifies as a constant dollar withdrawal approach.
But, presumably this only provides any benefit if you are eliminating the Discretionary and then Basic Expenses based on some criteria. Otherwise, how would it differ from a 4.65 SWR?

Once you have done that, you are no longer in the Constant Dollar regime, and have now implemented some rules based variable withdrawal approach. Which is fine, but has different goals than a constant dollar method.
Perhaps I am missing something.
Can you explain how this differs from a simple 4.65% SWR?
Once in a while you get shown the light, in the strangest of places if you look at it right.
iim7V7IM7
Posts: 466
Joined: Sun Nov 21, 2021 12:26 pm

Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by iim7V7IM7 »

It is simply a risk-based approach taking less risk on essential expenses, a bit more on basic expenses and the most risk on discretionary expenses. For example, you determine that your estimated expenses are:

Essential = $50,000/year
Basic = $30,000/year
Discretionary = $20,000/year

You take into account that your social security provides $30,000/year, so you need another $20,000/year for essential expenses.

Essential = $645,161 in required savings with a 3.10% IWR.
Basic = $783,290 in required savings with a 3.83% IWR
Discretionary = $430,108 in required savings with a 4.65% IWR

So under this approach a retiree would need $1,858,559 in savings to produce the composite of $70,000/year as a IWR (plus the $30,000 year from SS). Using a Bengen straight 4% SWR it would suggest $1,750,000 in savings. The amount needed should be driven by how much of each you need and the willingness to take risk associated with them. These are constant dollar schemes because they index annually with inflation just like Bengen’s approach for income stability.

Hope that helps.
marcopolo wrote: Fri Dec 23, 2022 10:15 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 9:11 pm All three SWRs are adjusted for inflation so they are constant dollar per category of expenses.
marcopolo wrote: Fri Dec 23, 2022 7:50 pm
iim7V7IM7 wrote: Fri Dec 23, 2022 7:38 pm The proposed withdrawal rates are initial withdrawal rates (IWR). They are adjusted each year based on the CPI just like Bill Bengen’s approach. That is why they are constant dollar approaches.

marcopolo wrote: Fri Dec 23, 2022 4:18 pm

This sounds like a very reasonable approach.
But, it is not clear to me how it qualifies as a constant dollar withdrawal approach.
But, presumably this only provides any benefit if you are eliminating the Discretionary and then Basic Expenses based on some criteria. Otherwise, how would it differ from a 4.65 SWR?

Once you have done that, you are no longer in the Constant Dollar regime, and have now implemented some rules based variable withdrawal approach. Which is fine, but has different goals than a constant dollar method.
Perhaps I am missing something.
Can you explain how this differs from a simple 4.65% SWR?
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