What the Trinity Study authors meant

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What the Trinity Study authors meant

Post by nisiprius » Wed Apr 21, 2010 4:23 pm

[Edited 4/22/2010 to include the author's name, as he has given me permission to quote him directly by name]

I emailed Professor Philip L. Cooley, senior author of paper, Cooley, Philip L., Carl M. Hubbard and Daniel T. Walz (1998) "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable," AAII Journal February 1998, Volume XX, No. 2. It's often referred to in this forum as "the Trinity study" and is one of the sources for the "4% rule."

I can't imagine why I never thought of this before. I have to credit Market Timer for his remark in another context, that "We need not debate about what [so-and-so] meant as if this were a freshman poetry class." I emailed him on 4/21/2010 and asked:
I recently posted this remark and I wonder if you'd care to comment on it, or if you have any papers or aticles that explain more about how you expected your study to be used.

If I've completely misinterpreted you, my apologies. Is the following remark more or less right?

-------
The more I read the Trinity study, the more I think people misinterpret it. The most important sentence is:

"The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity.

I think all the authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while. They also meant to warn people against the much higher withdrawal rates that had been formerly recommended by people using simple amortization calculations that didn't take account of the "order-of-returns" effect.
He replied later that day:
Philip L. Cooley wrote:You have hit the nail on the head!

I've tried to explain that thought to journalists but they don't seem to get it. You've got it.

Stay flexible my friend!, which is the advice we should give to retirees.

Philip L. Cooley, Ph.D.
Prassel Distinguished Professor of Business
Trinity University
Last edited by nisiprius on Thu Apr 22, 2010 5:50 pm, edited 2 times in total.
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Post by Rodc » Wed Apr 21, 2010 4:27 pm

You, and the internet, are great resources.

And points go to the authors of the Trinity study for being willing to respond.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Thanks

Post by antiqueman » Wed Apr 21, 2010 4:33 pm

Thanks, Nisiprius for the word from the "Horses Mouth".

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Re: What the Trinity Study authors meant

Post by mickeyd » Wed Apr 21, 2010 4:48 pm

nisiprius wrote:I emailed one of the authors of the paper. I can't imagine why I never thought of that before. I wrote:
I recently posted this remark and I wonder if you'd care to comment on it, or if you have any papers or aticles that explain more about how you expected your study to be used.

If I've completely misinterpreted you, my apologies. Is the following remark more or less right?

-------
The more I read the Trinity study, the more I think people misinterpret it. The most important sentence is:

"The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity.

I think all the authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while. They also meant to warn people against the much higher withdrawal rates that had been formerly recommended by people using simple amortization calculations that didn't take account of the "order-of-returns" effect.
He replied:
You have hit the nail on the head!

I've tried to explain that thought to journalists but they don't seem to get it. You've got it.

Stay flexible my friend!, which is the advice we should give to retirees.
Fantastic. Feather in your cap!!

Thanks much for updating us on the 4%SWR. I keep saying~ "It's not a religious experience, use it as a guide."
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Post by Lbill » Wed Apr 21, 2010 6:22 pm

That is great, Nisiprius! Gee, just think of the hundreds of posts that have been saved by Bogleheads debating what the Trinity authors might be thinking (guess I can go out and take a walk now).
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Post by Levett » Wed Apr 21, 2010 6:29 pm

Hi Nisiprius,

You've performed a valuable service for those who live by what they thought was the Trinity Study.

Your post and the response should become a "sticky," lest anyone try to make something different out of the Trinity study.

Bob U.
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Post by GammaPoint » Wed Apr 21, 2010 6:35 pm

If the issue of whether or not the SWR is the same regardless of whether or not one has experienced a bear market, Jim Otar gives the same answer in his book
Yet many people confuse the two. Here is the give–away question I am asked occasionally during my talks: “If the sustainable withdrawal rate at age 65 is 3.6%, does it mean that each year I can only take out 3.6% of my portfolio?”
At the risk of being repetitive, here is my answer: “No! Don’t confuse percentage with dollars. All it means is this: if you have one million dollars in your portfolio at age 65, you can take out $36,000 annually from your portfolio. You can continue taking out $36,000 –indexed– each and every year until age 95, regardless of what the portfolio value is at any future age and regardless of what the indexation amount is.

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Post by DRiP Guy » Wed Apr 21, 2010 6:59 pm

bob u. wrote:Hi Nisiprius,

You've performed a valuable service for those who live by what they thought was the Trinity Study.

....

Bob U.
Let's just be careful!

I like it that you included the modifier "What they thought was..."

Because, IMHO, "Living by the Trinity Study" accurately would have included reading and heeding exactly what they wrote, and therefore what nisiprius correctly restated.

I think the number of supposed zealots running around out there has long been greatly overstated, esp by a certain tiny contingent (ahem - of one lone nut, mostly!) with their own broken and rusty axe to grind.

8)

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Post by LadyGeek » Wed Apr 21, 2010 7:49 pm

Great info, so how should the wiki page be updated? Would it be appropriate under the "Safe Withdrawal Rate" section with its usage and controversy discussions, or, to add an "April 2010 forum thread" as a reference?

This is a topic that needs guidance by an "expert" (that leaves me out). Please suggest what to write and I'll incorporate it into the wiki.

Please see Safe Withdrawal Rates on the Bogleheads Wiki.

If anything else on this page needs a correction, please post.
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Post by Levett » Thu Apr 22, 2010 6:02 am

Hi DRiP Guy,

As you noted, I did try to be careful.

And, more importantly, so was Nisiprius whose inquiry I very much appreciate.

Cheers. Bob U.
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Post by DRiP Guy » Thu Apr 22, 2010 11:44 am

LadyGeek wrote:Great info, so how should the wiki page be updated?
I don't know of anything there that is in error.

Obviously, anything there that is contradiction to the author's comments should be 'fixed.' I just don't know that there is anything inconsistent with that information.

Others may see something I'm missing.

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Post by Mitchell777 » Thu Apr 22, 2010 11:51 am

I find them to be quite open. I emailed one a number of years ago. He asked for my mailing address and mailed me hard copy information relating to my questions. Very thoughtful

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Post by Random Musings » Thu Apr 22, 2010 11:59 am

So, is the answer 4% unless something goes very wrong and then you should exhibit some flexibility? Of course, most investors may not know when they get to that "tipping point" where the SWR must be cut back.

RM

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Post by DRiP Guy » Thu Apr 22, 2010 12:06 pm

Random Musings wrote:So, is the answer 4% unless something goes very wrong and then you should exhibit some flexibility? Of course, most investors may not know when they get to that "tipping point" where the SWR must be cut back.

RM
The "Answer" is that any method (call it Trinity, call it whatever) that looks back into historical data to answer what *might* occur in future is by it's very nature tentative at best, and ought to clearly and obviously state that fact somewhere in it's treatise, preferably both at the beginning and in it's conclusions. Which, I believe the Trinity study did.

The "Answer" is that no one can predict the future. Therefore, any model one might propose, whether based on heuristics, history, intuition, tea leaf reading, or a combination, will have a non-zero chance of failure.

I think the whole problem comes when readers of these products insist on the unobtainable. or when pitchmen misconstrue results as promising something that the work simply can't support.

There can be no certainty regarding the future. Period.

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Post by conundrum » Thu Apr 22, 2010 12:11 pm

Thanks nisiprius for obtaining the clarification from the authors. Always appreciate and enjoy your posts.

Drum :lol:

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Post by nisiprius » Thu Apr 22, 2010 5:44 pm

I now have permission from the author to quote him by name, and have edited the initial posting accordingly.
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Post by simplesimon » Thu Apr 22, 2010 7:31 pm

GammaPoint wrote:If the issue of whether or not the SWR is the same regardless of whether or not one has experienced a bear market, Jim Otar gives the same answer in his book
Yet many people confuse the two. Here is the give–away question I am asked occasionally during my talks: “If the sustainable withdrawal rate at age 65 is 3.6%, does it mean that each year I can only take out 3.6% of my portfolio?”
At the risk of being repetitive, here is my answer: “No! Don’t confuse percentage with dollars. All it means is this: if you have one million dollars in your portfolio at age 65, you can take out $36,000 annually from your portfolio. You can continue taking out $36,000 –indexed– each and every year until age 95, regardless of what the portfolio value is at any future age and regardless of what the indexation amount is.
I have always thought that what Otar says here and what the Trinity study was supposed to show was one and the same...that historically, you could keep a 4% withdrawal rate with a 60/40 portfolio and not run out of money in 30 years. I'm a little baffled by the confusion people have had about this.

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Post by Lbill » Thu Apr 22, 2010 8:04 pm

Nisiprius brought about an aha moment for me. The Trinity study is one of many classic studies that have tried to reconcile the need for a predictable standard of living in retirement with an investment strategy that generates unpredictable returns. This is essentially a non sequitur. It is impossible to fund specific liabilities except with a liability-matching investment strategy. Anything else is "trial-and-error" or "hunt-and-peck." The Trinity study authors were trying to map the general territory in which trial-and-error lived, at least based on historical performance of a stock-bond portfolio. They weren't trying to to formulate a rule that was designed to magically convert a non-liability matching investment strategy into one that produces liability-matching results. If the bulk of your retirement is being funded from a diversified investment portfolio that includes equities, then you can never escape the need to calibrate and recalibrate your investment and spending strategies. And you will either underspend or overspend your financial resources; i.e., you will have a lower standard of living than you could have had, or your standard of living will cause you to run out of money too soon. Most people are so afraid of the latter that they will err in the direction of the former and leave way too much money on the table. Good for their heirs, but maybe bad for them. Most retirees can benefit by converting more of their financial assets into a liability matching framework; for example, by purchasing a ladder of TIPS, or by annuitizing. My guess is that there is an "optimal" hybrid strategy for most people.
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Post by Levett » Fri Apr 23, 2010 10:26 am

LBill--

If you can wade through some of the formulas (not my forte), here's a recent Milevsky take on a "hybrid" view.

http://www.ifid.ca/pdf_workingpapers/Sp ... AR2010.pdf

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Post by Lbill » Fri Apr 23, 2010 11:31 am

Bob U. - Thanks for the link to Milevsky's paper. I had read it previously, but a re-read was quite helpful. It fits in nicely with the Sharpe paper I recently re-read as well. Milevsky's life-cycle approach is definitely what I'm thinking of. It is much to naive to simply follow the 4% spending rule, or any simple rule of thumb for that matter. Many factors to consider which Milevsky discusses, such as the utility of decreasing spending rate as one ages, the role of "pensionized" income such as social security, longevity risk, investor risk aversion, and so on. The view that I often hear expressed is that, while the 4% rule is just a "guideline" or "suggestion" it's good enough for government work and that "I'll make the necessary adjustments as I go along." That's not much of a travel plan is it? It's kinda like starting an around-the-world journey with a general sense of direction and then the trip quickly becomes a trial-and-error adventure as we lurch along from point-to-point trying to eventually get near the destination we had in mind. It might be interesting to hear some real life stories from people on the forum who have been trying to manage their retirement spending using the 4% rule for several years to learn "how that's been working for them" (as Dr. Phil would say). For the most part, we only hear from people who haven't started on the journey or haven't been on it very long.
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Post by bob90245 » Fri Apr 23, 2010 12:13 pm

Lbill wrote:It might be interesting to hear some real life stories from people on the forum who have been trying to manage their retirement spending using the 4% rule for several years to learn "how that's been working for them" (as Dr. Phil would say).
13 out of 89 people say they follow the 4% + COLA spending guideline.

http://www.bogleheads.org/forum/viewtopic.php?t=42606
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Post by at ease » Fri Apr 23, 2010 4:24 pm

...i think i've got it now.....you can spend the 4% as long as the market returns at least that much.....and if it's less, be flexible the next year and spend less....no-no, it can't be that easy??? can it....i guess i stay a little confused.

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Post by dbr » Fri Apr 23, 2010 4:46 pm

at ease wrote:...i think i've got it now.....you can spend the 4% as long as the market returns at least that much.....and if it's less, be flexible the next year and spend less....no-no, it can't be that easy??? can it....i guess i stay a little confused.
No, that is not it. In fact you can spend 4% + inflation even while markets decline substantially. Cases like that would have been the worst case scenarios in which 4% + inflation barely make it.

If the market returned 4% of initial portfolio plus inflation and you spent that every year, the portfolio would last forever at its initial value.

In most historical periods portfolios have returned enough more than 4% + inflation of initial to have end point wealth come out quite large.

You can see examples of how this plays out by running FireCalc ( www.firecalc.com ) and observing the chart of Year-by-Year Portfolio Balances on the results page.

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Post by Lbill » Fri Apr 23, 2010 8:15 pm

Staring into a 50% market decline and not flinching from your scientifically- based 4% spending religion reminds me of Clint Eastwood's line from Sudden Impact: "Come on punk, make my day." It ain't gonna happen is it? Mike Tyson: "Everybody has a plan, until they get hit." The problem with these investing mottos is that they are misleadingly simplistic. It's a mantra, not a plan.

From Widipedia:
In one scene of the movie, Harry Callahan (played by Clint Eastwood) goes into a diner for a morning cup of coffee. When Callahan discovers a robbery in the diner, he kills the robbers in a shootout. However, a surviving robber holds the fleeing waitress Loretta (Mara Corday) at gunpoint, and holds his gun to her head, threatening to shoot. Instead of backing off, Harry points his .44 Magnum revolver into the man's face at point-blank range and dares him to shoot, saying with clenched teeth and in his characteristic rough grumble, "Go ahead, make my day". At the end of the film, Harry says "Come on, make my day" just before shooting Mick the Rapist, who aims his stolen shotgun at Jennifer Spencer.
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Post by Levett » Sat Apr 24, 2010 8:09 am

Lbill quoted Mike Tyson:

Mike Tyson: "Everybody has a plan, until they get hit."

That made my day! :lol:

Thanks. Bob U.
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Post by ResNullius » Sat Apr 24, 2010 8:20 am

Yada, yada, yada. It seems that folks never get tired of splitting hairs that already have been split dozens of times before. The Trinity report is just a compilation of data, and the data shows what it shows. It's a great rule of thumb to know that you safely can withdraw 4% plus inflation over a long period of time, with a high probability of dying with money in the bank. If you want to improve your chances, then withdraw less. If you want more money, then withdraw more. If you're tired of hearing folks debate a pointless point, then move on.

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Post by conundrum » Sat Apr 24, 2010 9:05 am

On a Saturday morning with a nice cup of coffee it's kind of fun (and frequently informative) to see the debate rage on. :wink:

Drum

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Post by Lbill » Sat Apr 24, 2010 10:31 am

I agree - the 4% rule from the Trinity study is just a look back at the data. The study does not assert that anybody ever did, or even could, implement an effective retirement withdrawal strategy based on these data. And it also does not assert that someone who doesn't have this piece of information can't implement an effective retirement withdrawal strategy.

Their result is analogous to finding out that moss tends to grow on the north side of trees in a particular forest - at least it has in the past. Armed with this "insight," you head for the forest. But what happens, for example, if you come to an area where there are no trees, or where there is moss growing on all sides of the trees, or where the moss actually grows on the south side of the trees? How do you know you're even in the same forest where investigators found moss growing on the north side of the trees? And it is entirely possible that someone who has never heard of this "moss" rule would be equally effective, or more effective, at navigating successfully through this forest. The practical value of the 4% SWR research finding may really have only limited value for retirees, as evidenced by the author's comments as reported by the OP:
Stay flexible my friend!, which is the advice we should give to retirees
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Post by LadyGeek » Sun Apr 25, 2010 3:07 pm

nisiprius has updated the wiki page to reflect this thread. I did some editing to clean-up the format.

Please see Safe Withdrawal Rates on the Bogleheads Wiki. (Limitations of the Trinity study)

Comments, suggestions, corrections are encouraged as the wiki needs to be objective. This recent addition might be a bit biased. I'm not sure, so I'll let the experts decide.

The wiki page is open to all editors. I'll let nisiprius do the editing (I can certainly help if needed).
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Post by mickeyd » Wed Apr 28, 2010 3:33 pm

Quote:
Stay flexible my friend!, which is the advice we should give to retirees
I think that this is something that we have all believed for a long time. It may be the first time that I have ever actually seen it in print.
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Post by Flux Capacitor » Tue May 04, 2010 10:32 pm

I had Dr. Cooley, Dr Walz, and Dr Hubbard for my finance classes. We had a Student Managed Fund in Cooley's class, that is a trust of real assets. It has outperformed the S&P 500 by ~400 basis points during the time I was there. it had 10 year run at the time. I don't know remember what the % of large, mid and small caps where, and I am curious if the S&P 500 was a valid benchmark.

How can a bunch of college students out perform most of these funds? Too bad we did have a higher AUM and expense ratio!

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Post by dbr » Wed May 05, 2010 9:03 am

Flux Capacitor wrote:I had Dr. Cooley, Dr Walz, and Dr Hubbard for my finance classes. We had a Student Managed Fund in Cooley's class, that is a trust of real assets. It has outperformed the S&P 500 by ~400 basis points during the time I was there. it had 10 year run at the time. I don't know remember what the % of large, mid and small caps where, and I am curious if the S&P 500 was a valid benchmark.

How can a bunch of college students out perform most of these funds? Too bad we did have a higher AUM and expense ratio!
If you believe that it is a fundamental of investing in markets that expected return can only be increased by taking more risk, then you have to compare both return and risk when judging different portfolios. If as students you don't/didn't know how much risk you were taking, you automatically flunk the exercise. What was the content you were studying in this class? I would have to imagine that it at least included some content in Modern Portfolio Theory, additions from Fama-French Model, concept of Efficient Frontier, etc.

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Post by tadamsmar » Wed May 05, 2010 9:33 am

Stay flexible my friend!, which is the advice we should give to retirees.
Do Bogleheads do a good job of staying flexible?

I don't think we are doing an optimal job on flexibility.

1. It seems to me that the typical Boglehead has a relatively safe plan, with a small risk of getting into financial trouble due to investment failure. Excessive long-term care costs are probably a bigger risk than investment failure. Have we sorted out the risk properly to maximize our utility?

2. Many Bogleheads are very likely to end up with excess savings, more than they need to fund their planned lifestyle. Have we planned to make optimal use of that likely bonanza? Have we even figured out how to measure the size of that likely bonanza? Many of us may just stay in the same rut and fail to optimize our utility.

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Post by dbr » Wed May 05, 2010 9:51 am

tadamsmar wrote:
Stay flexible my friend!, which is the advice we should give to retirees.
Do Bogleheads do a good job of staying flexible?

I don't think we are doing an optimal job on flexibility.

1. It seems to me that the typical Boglehead has a relatively safe plan, with a small risk of getting into financial trouble due to investment failure. Excessive long-term care costs are probably a bigger risk than investment failure. Have we sorted out the risk properly to maximize our utility?

2. Many Bogleheads are very likely to end up with excess savings, more than they need to fund their planned lifestyle. Have we planned to make optimal use of that likely bonanza? Have we even figured out how to measure the size of that likely bonanza? Many of us may just stay in the same rut and fail to optimize our utility.
I think a board like this does not reveal the actual flexibility that people practice in real life. Here are areas in which anyone, I bet most Bogleheads included, have and do practice flexibility:

1. How much education to obtain and in what fields, including changes of field and returning to school for further education.

2. Navigating the twisty course of career and careers, including diversions and changes such as military careers, social service careers, changes of field, periods of "dropping out," sacrificing careers in favor of spouses and children (men too, not just women), etc.

3. Decisions regarding marriage, child raising, and divorce.

4. Flexibility to relocate all over the country, or the world.

5. Finally, total shifts in the level of lifestyle one might target.

I do agree that some of the discussions here seem almost surreal considering the impact of the above.

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Post by Tyrobi » Wed May 05, 2010 12:26 pm

Thanks for the link.

Also, thanks Nisiprius for the effort!
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