Another 2.8% SWR Article Quoting Wade Pfau

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Thesaints
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

nisiprius wrote: Mon Apr 12, 2021 12:53 pm I don't know that 4% is safe. I think 4% is a reasonable planning number.
And this is a much more reasonable starting point ! One expects to be able to withdraw about 4% from his/hers portfolio, with the knowledge that going forward one has to be flexible enough to be able to lower that figure (raising it is of course much easier!). Now the challenge is defining how low one can, or has to, go.
That also means we need to rename "SWR" into "RWR", or "EWR", lest those young FIRE church faithfuls don't make terrible mistakes in their early 30's.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by jarjarM »

halfnine wrote: Mon Apr 12, 2021 11:37 am This isn't entirely true. Just because Country Y had a catastrophic failure that led to a 2% WR rate on the chart does not indicate that it did not have a 3.X% at other points in its history where a catastrophic failure did not occur. While publicly available data is scarce in this regard as best as I could dig up SWR of 3.X% are not that uncommon. That said, as best as I could tell a 3.5% WR with globally diversified assets did as good as any as mitigating this left tail risk. Of course, this often came at the expense of the right tail.
This is the chart from the Pfau's analysis of international data. Just so everyone is on the same page. A few note:
- Based on 50/50 stock/bond allocation
- Domestic allocation only, no international exposure
- Worse years (SAFEMAX Year) clustered around 1937 - 1940 (WWII) and 1965 - 1970 (stagflation in DM)
- Pfau pointed out that if one focus on 1946 on, so no WWII effect, then 10 out of 17 countries have SWR > 4%. Japan is still dismal with 1.56% starting
1946 (still recovering from complete destruction of its industrial power). Global diversified portfolio would have resulted in SWR ~3.5%.
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Thesaints
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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geerhardusvos wrote: Mon Apr 12, 2021 12:55 pm Frankly, it's harder or completely different than rocket science, because economics is not science. This shows your naivety. You (and everyone who things they can predict the future based on a couple variables) understand a lot less than you think you do. If I had $5 for every person on this forum who says economics "isn't rocket science" and they know the probabilities of future outcomes after quoting a couple of economic variables that they don't fully understand, let alone the countless other variables they have ignored and not accounted for, I would be able to retire already.
HomerJ wrote: Mon Apr 12, 2021 12:56 pm Nothing is ever abundantly clear in economics. That's your giant mistake.
You guys go ahead and base you plan on a 4% SWR. It is not my money and you might get lucky, after all.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

White Coat Investor wrote: Mon Apr 12, 2021 11:12 am
quantAndHold wrote: Sun Apr 11, 2021 6:23 pm Wade Pfau has made a career out of writing articles espousing absurdly low withdrawal rates. Seriously, it's the thing he's known for.

It's like he's encouraging his clients to have larger than necessary portfolios because he makes more money that way.
A little like the perma-bears that way I guess.

Obviously explains his views on annuities and cash value life insurance though as sources of retirement income though. If you really think your investment returns will be so poor that you can only use a 2.8% withdrawal rate, it makes annuities and life insurance look a lot better.Can't say his logic is not internally consistent.
I don't think this is a fair comparison. Pfau isn't a permabear, after all, and he's not predicting that "doom is right around the corner" or anything like that.

I honestly can't figure out why people have this perception about his research, unless it's that it points to a reality which is uncomfortable to confront. Maybe it has something to do with probability distributions being so difficult for many people to work with?

Virtually no one who raises the possibility of the forward SWR being <3% actually EXPECTS the real return on a blended portfolio to be negative. I certainly don't, and I don't think Pfau or Blanchett or whoever thinks so either.

However, it takes a severe lack of imagination to think that the future can't produce a worse sequence of returns for a US investor than we've seen in the past. The march of history is literally defined by things happening that had never happened before. Every record we have now is one that broke some previous record, after all.

Before 1987, stock prices had never dropped more than 15% in a single day. Then they dropped 20% on October 19th, 1987.

Who is more likely to be overconfident: someone who thinks that the SWR can never drop below 3.9% merely because it never has before, or someone who thinks that a lower SWR is possible because the future is unknowable?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by jarjarM »

Thesaints wrote: Mon Apr 12, 2021 1:00 pm
nisiprius wrote: Mon Apr 12, 2021 12:53 pm I don't know that 4% is safe. I think 4% is a reasonable planning number.
And this is a much more reasonable starting point ! One expects to be able to withdraw about 4% from his/hers portfolio, with the knowledge that going forward one has to be flexible enough to be able to lower that figure (raising it is of course much easier!). Now the challenge is defining how low one can, or has to, go.
That also means we need to rename "SWR" into "RWR", or "EWR", lest those young FIRE church faithfuls don't make terrible mistakes in their early 30's.
Genuinely curious, what is your suggested EWR/RWR or SWR for FIRE folks? 3% or 2%? Currently leader is financial samurai at 0.5% but I think that's too conservative, only Japan retirees at1937 (start of WWII for them) have lower SWR.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by TonyDAntonio »

All I know is that 4% when I retired in 2015 yielded less than 2.8 does now. And I've been living off my portfolio. I don't use these percentages by the way. I don't really have a plan other than to be frugal and build cash like reserves as my portfolio goes up. I suppose I'll reinvest if the market ever goes down for a year or two. I don't know. Very similar 'non plan' to what I used building my 'fortune': be frugal and save as much as I could in index funds. Seems to work but I'm only 61 so we'll see.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Why stop at 2.8%, do I hear 2%? The account will be larger for the heirs. All these articles do is twist certain people into pretzels, thinking they can never retire or it will never be enough. Don't take an inflation adjusted amount each year and you'll likely be just fine. Not everyone gets a raise each year.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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jarjarM wrote: Mon Apr 12, 2021 1:05 pm Genuinely curious, what is your suggested EWR/RWR or SWR for FIRE folks? 3% or 2%? Currently leader is financial samurai at 0.5% but I think that's too conservative, only Japan retirees at1937 (start of WWII for them) have lower SWR.
I don't have a number. My advice to them is that most of them seem to be living an extremely frugal life, only to be able to reach an even more frugal, long, retirement.
I'm well aware that in the Middle Ages very religious people would flog themselves and sleep on a bed of nail in order to be certain of their ultimate salvation, but we are in AD 2021.
Living "large" not only is more enjoyable (and why would try to get more money, otherwise ?), but it is also intrinsically safer: downgrading from a Porsche to a BMW is not that terrible, although undesirable, but there is nowhere to downgrade to from biking+public transportation.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by geerhardusvos »

Thesaints wrote: Mon Apr 12, 2021 1:02 pm
geerhardusvos wrote: Mon Apr 12, 2021 12:55 pm Frankly, it's harder or completely different than rocket science, because economics is not science. This shows your naivety. You (and everyone who things they can predict the future based on a couple variables) understand a lot less than you think you do. If I had $5 for every person on this forum who says economics "isn't rocket science" and they know the probabilities of future outcomes after quoting a couple of economic variables that they don't fully understand, let alone the countless other variables they have ignored and not accounted for, I would be able to retire already.
HomerJ wrote: Mon Apr 12, 2021 12:56 pm Nothing is ever abundantly clear in economics. That's your giant mistake.
You guys go ahead and base you plan on a 4% SWR. It is not my money and you might get lucky, after all.
If something has worked 99% of the time for 150 years, how would it be luck if it worked again? Sounds like an excellent planning baseline for traditional retirement windows.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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geerhardusvos wrote: Mon Apr 12, 2021 1:12 pm If something has worked 99% of the time for 150 years, how would it be luck if it worked again? Sounds like an excellent planning baseline for traditional retirement windows.
One thing "rocket scientists" do is trying to understand why something has worked in the past 150 years, instead of taking that record as a guarantee tout court.
You know that we had a deflationary trend for a couple of centuries following the Industrial Revolution. That changed quite suddenly, though.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by jarjarM »

Thesaints wrote: Mon Apr 12, 2021 1:11 pm
jarjarM wrote: Mon Apr 12, 2021 1:05 pm Genuinely curious, what is your suggested EWR/RWR or SWR for FIRE folks? 3% or 2%? Currently leader is financial samurai at 0.5% but I think that's too conservative, only Japan retirees at1937 (start of WWII for them) have lower SWR.
I don't have a number. My advice to them is that most of them seem to be living an extremely frugal life, only to be able to reach an even more frugal, long, retirement.
I'm well aware that in the Middle Ages very religious people would flog themselves and sleep on a bed of nail in order to be certain of their ultimate salvation, but we are in AD 2021.
Living "large" not only is more enjoyable (and why would try to get more money, otherwise ?), but it is also intrinsically safer: downgrading from a Porsche to a BMW is not that terrible, although undesirable, but there is nowhere to downgrade to from biking+public transportation.
Not all FIRE folks are doing leanFIRE. But I get your point :D
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Grt2bOutdoors wrote: Mon Apr 12, 2021 1:08 pm Why stop at 2.8%, do I hear 2%? The account will be larger for the heirs. All these articles do is twist certain people into pretzels, thinking they can never retire or it will never be enough. Don't take an inflation adjusted amount each year and you'll likely be just fine. Not everyone gets a raise each year.
Why not 2%? Because this isn't a competition to see who can be the most pessimistic (except maybe for Financial Samurai).

The SWR has a specific meaning to retirement planning experts. Roughly speaking, it's an outcome that is worse than 90% of all other potential outcomes. A 2% SWR is MUCH less likely to occur at the 10% probability threshold than a 2.8% SWR.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Thesaints wrote: Mon Apr 12, 2021 1:17 pm
geerhardusvos wrote: Mon Apr 12, 2021 1:12 pm If something has worked 99% of the time for 150 years, how would it be luck if it worked again? Sounds like an excellent planning baseline for traditional retirement windows.
One thing "rocket scientists" do is trying to understand why something has worked in the past 150 years, instead of taking that record as a guarantee tout court.
You know that we had a deflationary trend for a couple of centuries following the Industrial Revolution. That changed quite suddenly, though.
We've also had declining interest rates for several centuries.

https://www.visualcapitalist.com/700-ye ... est-rates/
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Scott S wrote: Sun Apr 11, 2021 8:59 pm Hasn't the real yield on bonds been negative before?
With the data that Bengen used, for 1941 as the starting year, the initial nominal yield of bonds was 0.57%, while the inflation rate for 1941 was 9.72%. The initial withdrawal rate, with later withdrawal amounts adjusted for inflation, that resulted in a portfolio of 50% stocks and 50% bonds being depleted at 30 years was 5.3% (rounded down).
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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nisiprius wrote: Sun Apr 11, 2021 3:49 pm I have a huge problem with the fluctuation in SWR percentages since the 4% number was first bruited about, and with the differences from authority to authority.

The problem that the SWR tries to solve is the variability of stock market returns.

SWR is not supposed to be based on prediction of stock market returns for the next thirty years. The idea is supposed to be that we can look at the entire historic range of past performance, over 94 years (CRSP) or 150 (Cowles Commission), and come up with a number that has an adequate safety margin against the whole range of what could occur. That number is supposed to be a stable number that lets us plan without requiring us to predict the next thirty years.

But the SWR numbers are variable themselves. They keep changing. Recognized experts look at the same data getting really different answers. And lately they have all been justifying their answers with appeals to forward-looking forecasts.

But the whole point of the SWR approach was to avoid the need for specific forecasts.

These numbers are supposed to be for planning, but they can't be used for planning, because they change over periods of time shorter than the period being planned for.

I think we would be just as well off using Taylor Larimore's method: Safe Withdrawal Rates? Complexity versus Simplicity. I see no reason to think that withdrawal systems are going to be any more reliable than personal financial intuition.
Couldn't agree more. Taylor's method is what most of us have done throughout our life, so we should just continue doing what worked previously and got us here.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Mel Lindauer wrote: Mon Apr 12, 2021 1:54 pm
nisiprius wrote: Sun Apr 11, 2021 3:49 pm I have a huge problem with the fluctuation in SWR percentages since the 4% number was first bruited about, and with the differences from authority to authority.

The problem that the SWR tries to solve is the variability of stock market returns.

SWR is not supposed to be based on prediction of stock market returns for the next thirty years. The idea is supposed to be that we can look at the entire historic range of past performance, over 94 years (CRSP) or 150 (Cowles Commission), and come up with a number that has an adequate safety margin against the whole range of what could occur. That number is supposed to be a stable number that lets us plan without requiring us to predict the next thirty years.

But the SWR numbers are variable themselves. They keep changing. Recognized experts look at the same data getting really different answers. And lately they have all been justifying their answers with appeals to forward-looking forecasts.

But the whole point of the SWR approach was to avoid the need for specific forecasts.

These numbers are supposed to be for planning, but they can't be used for planning, because they change over periods of time shorter than the period being planned for.

I think we would be just as well off using Taylor Larimore's method: Safe Withdrawal Rates? Complexity versus Simplicity. I see no reason to think that withdrawal systems are going to be any more reliable than personal financial intuition.
Couldn't agree more. Taylor's method is what most of us have done throughout our life, so we should just continue doing what worked previously and got us here.
me too
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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geerhardusvos wrote: Mon Apr 12, 2021 1:34 pm Can you tell us why it has worked and why it would be lucky to work in the future? You are the one making the claim. Are you saying you have a grasp of economic variables to an extent that it allows you to understand the probabilities of future outcomes enough to make claims about the potential success or failure of withdrawal rates moving forward?
That's what I wrote in my previous posts, haven't I ?
If you use a 60/40 portfolio and the "40" part yields nothing, then you are forced to make 4% (ex-inflation) with the remaining "60". That means a 6.67% yield (again, plus inflation), which is around the upper boundary of today's expectations. Chances of failure, i.e. not getting 4% out of such a portfolio, are quite high.
One can overload on stocks: A 80/20 portfolio "only" requires 5% return from stocks, which is certainly more likely than 6.7%. That portfolio is also more volatile, which means you are more likely to hit 5% on average, but larger oscillations around the average will deplete your capital.
nisiprius wrote: Sun Apr 11, 2021 3:49 pm I see no reason to think that withdrawal systems are going to be any more reliable than personal financial intuition.
[edited to properly attribute above quote - moderator prudent]

I read it as in either we are all financial geniuses, or following any system is tantamount to driving blind.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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vineviz wrote: Mon Apr 12, 2021 1:26 pm
Grt2bOutdoors wrote: Mon Apr 12, 2021 1:08 pm Why stop at 2.8%, do I hear 2%? The account will be larger for the heirs. All these articles do is twist certain people into pretzels, thinking they can never retire or it will never be enough. Don't take an inflation adjusted amount each year and you'll likely be just fine. Not everyone gets a raise each year.
Why not 2%? Because this isn't a competition to see who can be the most pessimistic (except maybe for Financial Samurai).

The SWR has a specific meaning to retirement planning experts. Roughly speaking, it's an outcome that is worse than 90% of all other potential outcomes. A 2% SWR is MUCH less likely to occur at the 10% probability threshold than a 2.8% SWR.

The question was not serious, it was made in jest. Your response is my point. A 2.8 percent SWR is going to leave ALOT of money on the table for the heirs to spend.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Thesaints wrote: Mon Apr 12, 2021 2:06 pm
geerhardusvos wrote: Mon Apr 12, 2021 1:34 pm Can you tell us why it has worked and why it would be lucky to work in the future? You are the one making the claim. Are you saying you have a grasp of economic variables to an extent that it allows you to understand the probabilities of future outcomes enough to make claims about the potential success or failure of withdrawal rates moving forward?
That's what I wrote in my previous posts, haven't I ?
If you use a 60/40 portfolio and the "40" part yields nothing, then you are forced to make 4% (ex-inflation) with the remaining "60". That means a 6.67% yield (again, plus inflation), which is around the upper boundary of today's expectations. Chances of failure, i.e. not getting 4% out of such a portfolio, are quite high.
One can overload on stocks: A 80/20 portfolio "only" requires 5% return from stocks, which is certainly more likely than 6.7%. That portfolio is also more volatile, which means you are more likely to hit 5% on average, but larger oscillations around the average will deplete your capital.
You completely misunderstand what SWR represents.

It's the safe withdrawal rate (so far, we're talking about the past only), that let your money last 30 years, even in the worst 30-year periods.

You don't need to make 4% for a 4% SWR to work. You're allowed to spend your principal. You're talking about something else entirely. You're talking about starting with a $1 million, and 30 years later, still having $1 million (in 2021 dollars).

It only takes about 1% real in returns for one to pull 4% a year for 30 years and not go broke.. A 50/50 portfolio, even if bonds remained at 0% real for the full 30 years, would only need stocks to return 2% real, which is BELOW expected 10-year returns.

3.33% SWR only requires 0% real for your money to last 30 years. It doesn't require 3.33% returns.

You're talking about something completely different from the rest of us.

We're not shooting for 7% returns from stocks, we only need 1%-2% over 30 years. The bar is VERY low.
Last edited by HomerJ on Mon Apr 12, 2021 2:58 pm, edited 1 time in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

Grt2bOutdoors wrote: Mon Apr 12, 2021 2:17 pm A 2.8 percent SWR is going to leave ALOT of money on the table for the heirs to spend.
I want to be clear, because it's easy for people to talk past each other in conversations like this.

The SWR isn't a choice that retirees get to make: it's a measure of the retirement income capacity a portfolio is able to provide. It's not a recommended withdrawal rate, in other words.

People can (and probably should) choose to start retirement at a higher withdrawal rate than the 2.8% SWR being estimated by Pfau and others.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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^^^Agreed.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by JackoC »

vineviz wrote: Mon Apr 12, 2021 1:04 pm
White Coat Investor wrote: Mon Apr 12, 2021 11:12 am
quantAndHold wrote: Sun Apr 11, 2021 6:23 pm Wade Pfau has made a career out of writing articles espousing absurdly low withdrawal rates. Seriously, it's the thing he's known for.

It's like he's encouraging his clients to have larger than necessary portfolios because he makes more money that way.
A little like the perma-bears that way I guess.

Obviously explains his views on annuities and cash value life insurance though as sources of retirement income though. If you really think your investment returns will be so poor that you can only use a 2.8% withdrawal rate, it makes annuities and life insurance look a lot better.Can't say his logic is not internally consistent.
I don't think this is a fair comparison. Pfau isn't a permabear, after all, and he's not predicting that "doom is right around the corner" or anything like that.

I honestly can't figure out why people have this perception about his research, unless it's that it points to a reality which is uncomfortable to confront.
Sometimes the reason I think. If you're working hard and scrimping to put together a portfolio that will work at 4% SWR and somebody tells you it's not enough, it's a bummer. People will rationalize why the bearer of unwelcome news must be wrong, Human Nature 101 (the bearer of bad news isn't necessarily right just *because* people don't want to hear the message, but in some cases it's obvious the response is affected by not wanting to hear it).

On starting with 4% and adjusting downward if necessary as things play out, that's at the same time
a) a reasonable real world approach to take if straight 4% SWR would work most of the time, which I believe it would (unless a quite early retiree with good life expectancy prospects). The 'ERN' site whose model was being debated before has a blog article estimating equity expected return at 4% real pre tax (again I'm not familiar with their model, how or if that's incorporated v using past results like FIRECALC, which makes specific 'probability of failure' numbers worthless IMO). That's plausible IMO for global equity (I'd assume less for US only, and some people are fortunate/unfortunate enough for zero taxes on investment returns to be a highly unrealistic assumption). But say stocks 4% pre tax, bonds are 0%, forget tax, 60/40=2.4%, that's 39 yrs expected at 4% SWR, IOW would work a lot of the time as straight SWR for not very early retirees. Cut back consumption in bad times and it would work even more often. Again give or take tax, but people subject to high income tax generally have more scope to cut back their consumption if forced.

b) a significant shifting of the goalposts in context of "Investing Theory". The 'original finding' of 4% was as *SWR*, not 'start at 4% and see what happens'. The past oriented models (FIRECALC etc) give specific supposed very low or zero 0% failure chance at 4% SWR, not 'start at 4% and see what happens.' Pfau is talking about 2.8% SWR, not 'start at 2.8% and see what happens'. The 'investing theory' point is whether it's reasonable to assume past results are relevant to the future or how relevant, or which past facts. It's just confusing that question IMO to compare 'start at 4% and see what happens' to some lesser number that's an actual SWR.
Last edited by JackoC on Mon Apr 12, 2021 3:11 pm, edited 1 time in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

HomerJ wrote: Mon Apr 12, 2021 2:47 pm
Thesaints wrote: Mon Apr 12, 2021 2:06 pm
geerhardusvos wrote: Mon Apr 12, 2021 1:34 pm Can you tell us why it has worked and why it would be lucky to work in the future? You are the one making the claim. Are you saying you have a grasp of economic variables to an extent that it allows you to understand the probabilities of future outcomes enough to make claims about the potential success or failure of withdrawal rates moving forward?
That's what I wrote in my previous posts, haven't I ?
If you use a 60/40 portfolio and the "40" part yields nothing, then you are forced to make 4% (ex-inflation) with the remaining "60". That means a 6.67% yield (again, plus inflation), which is around the upper boundary of today's expectations. Chances of failure, i.e. not getting 4% out of such a portfolio, are quite high.
One can overload on stocks: A 80/20 portfolio "only" requires 5% return from stocks, which is certainly more likely than 6.7%. That portfolio is also more volatile, which means you are more likely to hit 5% on average, but larger oscillations around the average will deplete your capital.
You completely misunderstand what SWR represents.

It's the safe withdrawal rate (so far, we're talking about the past only), that let your money last 30 years, even in the worst 30-year periods.

You don't need to make 4% for a 4% SWR to work. You're allowed to spend your principal. You're talking about something else entirely. You're talking about starting with a $1 million, and 30 years later, still having $1 million (in 2021 dollars).

It only takes about 1% real in returns for one to pull 4% a year for 30 years and not go broke.. A 50/50 portfolio, even if bonds remained at 0% real for the full 30 years, would only need stocks to return 2% real, which is BELOW expected 10-year returns.

3.33% SWR only requires 0% real for your money to last 30 years. It doesn't require 3.33% returns.

You're talking about something completely different from the rest of us.

We're not shooting for 7% returns from stocks, we only need 1%-2% over 30 years. The bar is VERY low.
Then you are already setting yourself for depletion even with favorable market returns. When returns are unfavourable depletion will be so fast that you will panic.
It certainly has not escaped you attention that in all those studies about SWR the backtesting showed a large number of outcomes pointing to capital not being reduced, or even increasing, at the end of the 30 years. The average result was in fact being left with about the same money one started with.
Trying to be left with zero money at the end of 30 years of equal withdrawals, if one had any reason to pursue such an endeavor, is extremely difficult to achieve.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

JackoC wrote: Mon Apr 12, 2021 3:04 pm Sometimes the reason I think. If you're working hard and scrimping to put together a portfolio that will work at 4% SWR and somebody tells you it's not enough, it's a bummer. People will rationalize why the bearer of unwelcome news must be wrong, Human Nature 101 (the bearer of bad news isn't necessarily right just *because* people don't want to hear the message, but in some cases it's obvious the response is affected by not wanting to hear it).
So if I start posting that 0.5% SWR is necessary, and you push back against that, I can just dismiss your arguments as you rationalizing away "bad news"?

Or could it be that I would just be wrong?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

HomerJ wrote: Mon Apr 12, 2021 3:11 pm
JackoC wrote: Mon Apr 12, 2021 3:04 pm Sometimes the reason I think. If you're working hard and scrimping to put together a portfolio that will work at 4% SWR and somebody tells you it's not enough, it's a bummer. People will rationalize why the bearer of unwelcome news must be wrong, Human Nature 101 (the bearer of bad news isn't necessarily right just *because* people don't want to hear the message, but in some cases it's obvious the response is affected by not wanting to hear it).
So if I start posting that 0.5% SWR is necessary, and you push back against that, I can just dismiss your arguments as you rationalizing away "bad news"?

Or could it be that I would just be wrong?
Anyone who says something like " 0.5% SWR is necessary" is wrong, if for no other reason than the SWR isn't a choice. It's an outcome.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

Thesaints wrote: Mon Apr 12, 2021 3:11 pm
HomerJ wrote: Mon Apr 12, 2021 2:47 pm
Thesaints wrote: Mon Apr 12, 2021 2:06 pm
geerhardusvos wrote: Mon Apr 12, 2021 1:34 pm Can you tell us why it has worked and why it would be lucky to work in the future? You are the one making the claim. Are you saying you have a grasp of economic variables to an extent that it allows you to understand the probabilities of future outcomes enough to make claims about the potential success or failure of withdrawal rates moving forward?
That's what I wrote in my previous posts, haven't I ?
If you use a 60/40 portfolio and the "40" part yields nothing, then you are forced to make 4% (ex-inflation) with the remaining "60". That means a 6.67% yield (again, plus inflation), which is around the upper boundary of today's expectations. Chances of failure, i.e. not getting 4% out of such a portfolio, are quite high.
One can overload on stocks: A 80/20 portfolio "only" requires 5% return from stocks, which is certainly more likely than 6.7%. That portfolio is also more volatile, which means you are more likely to hit 5% on average, but larger oscillations around the average will deplete your capital.
You completely misunderstand what SWR represents.

It's the safe withdrawal rate (so far, we're talking about the past only), that let your money last 30 years, even in the worst 30-year periods.

You don't need to make 4% for a 4% SWR to work. You're allowed to spend your principal. You're talking about something else entirely. You're talking about starting with a $1 million, and 30 years later, still having $1 million (in 2021 dollars).

It only takes about 1% real in returns for one to pull 4% a year for 30 years and not go broke.. A 50/50 portfolio, even if bonds remained at 0% real for the full 30 years, would only need stocks to return 2% real, which is BELOW expected 10-year returns.

3.33% SWR only requires 0% real for your money to last 30 years. It doesn't require 3.33% returns.

You're talking about something completely different from the rest of us.

We're not shooting for 7% returns from stocks, we only need 1%-2% over 30 years. The bar is VERY low.
Then you are already setting yourself for depletion even with favorable market returns.
I expect the long-term returns of stocks over 30 years to be fairly close to the historical average (6%-7% real). I'll be happy to get half that (3% real over 30 years), even though there will indeed be a gradual depletion of resources over time.

But I'm prepared for 1%-2% real. That's a good pretty safe place to be... When your worst case only requires 1% real from your entire portfolio.

That's why I say it's a very low bar.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

vineviz wrote: Mon Apr 12, 2021 3:22 pm
HomerJ wrote: Mon Apr 12, 2021 3:11 pm
JackoC wrote: Mon Apr 12, 2021 3:04 pm Sometimes the reason I think. If you're working hard and scrimping to put together a portfolio that will work at 4% SWR and somebody tells you it's not enough, it's a bummer. People will rationalize why the bearer of unwelcome news must be wrong, Human Nature 101 (the bearer of bad news isn't necessarily right just *because* people don't want to hear the message, but in some cases it's obvious the response is affected by not wanting to hear it).
So if I start posting that 0.5% SWR is necessary, and you push back against that, I can just dismiss your arguments as you rationalizing away "bad news"?

Or could it be that I would just be wrong?
Anyone who says something like " 0.5% SWR is necessary" is wrong, if for no other reason than the SWR isn't a choice. It's an outcome.
Okay, I'll say it's a possible outcome for the next 30 years. That's what my model shows.

If you push back on my model, it's probably because you're rationalizing that I'm wrong because you don't like to hear that you need 200 years of expenses to retire for 30 years. Right?

Anyone who disagrees with me is just doesn't like hearing bad news. It can't possibly be that model is wrong.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

HomerJ wrote: Mon Apr 12, 2021 3:27 pm
vineviz wrote: Mon Apr 12, 2021 3:22 pm
HomerJ wrote: Mon Apr 12, 2021 3:11 pm
JackoC wrote: Mon Apr 12, 2021 3:04 pm Sometimes the reason I think. If you're working hard and scrimping to put together a portfolio that will work at 4% SWR and somebody tells you it's not enough, it's a bummer. People will rationalize why the bearer of unwelcome news must be wrong, Human Nature 101 (the bearer of bad news isn't necessarily right just *because* people don't want to hear the message, but in some cases it's obvious the response is affected by not wanting to hear it).
So if I start posting that 0.5% SWR is necessary, and you push back against that, I can just dismiss your arguments as you rationalizing away "bad news"?

Or could it be that I would just be wrong?
Anyone who says something like " 0.5% SWR is necessary" is wrong, if for no other reason than the SWR isn't a choice. It's an outcome.
Okay, I'll say it's a possible outcome for the next 30 years. That's what my model shows.

If you push back on my model, it's probably because you're rationalizing that I'm wrong because you don't like to hear that you need 200 years of expenses to retire for 30 years. Right?

Anyone who disagrees with me is just doesn't like hearing bad news. It can't possibly be that model is wrong.
Note that JackoC said, right in the passage you quoted, that "the bearer of bad news isn't necessarily right just *because* people don't want to hear the message", so I don't know what you're fighting against.

But if you said there is a 10% chance that the SWR will be 0.5%, I WOULD look for a problem in your model because that's a pretty incredible result.

If you said there's a 0.01% chance that the SWR will be 0.5%, I'd say that you COULD be right but I wouldn't want to plan based on such a remote possibility.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by JackoC »

HomerJ wrote: Mon Apr 12, 2021 3:11 pm
JackoC wrote: Mon Apr 12, 2021 3:04 pm Sometimes the reason I think. If you're working hard and scrimping to put together a portfolio that will work at 4% SWR and somebody tells you it's not enough, it's a bummer. People will rationalize why the bearer of unwelcome news must be wrong, Human Nature 101 (the bearer of bad news isn't necessarily right just *because* people don't want to hear the message, but in some cases it's obvious the response is affected by not wanting to hear it).
So if I start posting that 0.5% SWR is necessary, and you push back against that, I can just dismiss your arguments as you rationalizing away "bad news"?

Or could it be that I would just be wrong?
I believe the part in parentheses in my post you quoted covered that, maybe you didn't get around to reading it. :happy . As I said, the bearer of bad news in general could be wrong. But sometimes it seems obvious that not wanting to have parades rained on is a significant factor.

And clearer in case of somebody suggesting 2.8% (I didn't see 0.55% in this thread), as real SWR with very low chance of failure v 4% real SWR previously having had notionally the same very low chance of failure. Doesn't mean 4% real SWR has very high chance of failure from now, doesn't mean people can't 'adjust' (people could start at 8% and adjust, just adjust more...). But I believe there's a serious discussion how applicable past almost uniform success of 4% (real) SWR was vs. expectation now for similarly bullet proof real SWR. In investing theory context, not under the various straw man arguments, obfuscations and tangents which riddle threads like this and make we think I'm right about rain on parades.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by willthrill81 »

Thesaints wrote: Mon Apr 12, 2021 3:11 pm
HomerJ wrote: Mon Apr 12, 2021 2:47 pm
Thesaints wrote: Mon Apr 12, 2021 2:06 pm
geerhardusvos wrote: Mon Apr 12, 2021 1:34 pm Can you tell us why it has worked and why it would be lucky to work in the future? You are the one making the claim. Are you saying you have a grasp of economic variables to an extent that it allows you to understand the probabilities of future outcomes enough to make claims about the potential success or failure of withdrawal rates moving forward?
That's what I wrote in my previous posts, haven't I ?
If you use a 60/40 portfolio and the "40" part yields nothing, then you are forced to make 4% (ex-inflation) with the remaining "60". That means a 6.67% yield (again, plus inflation), which is around the upper boundary of today's expectations. Chances of failure, i.e. not getting 4% out of such a portfolio, are quite high.
One can overload on stocks: A 80/20 portfolio "only" requires 5% return from stocks, which is certainly more likely than 6.7%. That portfolio is also more volatile, which means you are more likely to hit 5% on average, but larger oscillations around the average will deplete your capital.
You completely misunderstand what SWR represents.

It's the safe withdrawal rate (so far, we're talking about the past only), that let your money last 30 years, even in the worst 30-year periods.

You don't need to make 4% for a 4% SWR to work. You're allowed to spend your principal. You're talking about something else entirely. You're talking about starting with a $1 million, and 30 years later, still having $1 million (in 2021 dollars).

It only takes about 1% real in returns for one to pull 4% a year for 30 years and not go broke.. A 50/50 portfolio, even if bonds remained at 0% real for the full 30 years, would only need stocks to return 2% real, which is BELOW expected 10-year returns.

3.33% SWR only requires 0% real for your money to last 30 years. It doesn't require 3.33% returns.

You're talking about something completely different from the rest of us.

We're not shooting for 7% returns from stocks, we only need 1%-2% over 30 years. The bar is VERY low.
Then you are already setting yourself for depletion even with favorable market returns. When returns are unfavourable depletion will be so fast that you will panic.
It certainly has not escaped you attention that in all those studies about SWR the backtesting showed a large number of outcomes pointing to capital not being reduced, or even increasing, at the end of the 30 years. The average result was in fact being left with about the same money one started with.
Trying to be left with zero money at the end of 30 years of equal withdrawals, if one had any reason to pursue such an endeavor, is extremely difficult to achieve.
Any depletion of one's portfolio after 30 years of '4% fixed real dollar' withdrawals was not a common historical occurrence, as the graph below from Kitces shows. I believe it only happened in about 11 out of 117 periods. And in most of those 11 instances, more than 50% of the starting balance was still intact.

Image

And it's worth noting that in many of the above periods, bond yields were negative. From 1941-1981, bonds lost about -1.6% annualized. So I don't buy the argument that 'expected bond yields are negative, so the 4% rule is in serious jeopardy'.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

willthrill81 wrote: Mon Apr 12, 2021 3:57 pm Any depletion of one's portfolio after 30 years of '4% fixed real dollar' withdrawals was not a common historical occurrence, as the graph below from Kitces shows. I believe it only happened in about 11 out of 117 periods. And in most of those 11 instances, more than 50% of the starting balance was still intact.

Image

And it's worth noting that in many of the above periods, bond yields were negative. From 1941-1981, bonds lost about -1.6% annualized. So I don't buy the argument that 'expected bond yields are negative, so the 4% rule is in serious jeopardy'.
Thank you. So you see that the expected value of the portfolio return has been even more than 4%+inflation.
Let's circle back to my observation:
With 40% of your portfolio yielding zero (I'm not even saying it is negative after inflation), the remaining 60% has to provide a 4%+inflation return.
That is equal to 6.67%+inflation. With a P/E above 40 that's not the most likely result going forward.

I think it is a fundamentally different point of view. Some say "returns in the past have always been ample; no need to worry about withdrawal strategy failure". Other say "Withdrawal strategy did not fail in the past because of very generous returns. Just wait until returns are much lower, i.e. now !"
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

Thesaints wrote: Mon Apr 12, 2021 4:03 pmWith a P/E above 40 that's not the most likely result going forward.
You seem to forget that we are talking about 30 years.

We may indeed have poor returns for the next 10 years or even longer.

But bad years are followed by good years.

If you believe in valuations and "expected" returns, then you have to believe it both ways.

If we have 10 bad years, then valuations are likely to be lower, and expected returns will be higher for the next 10 years.

And your thought that nothing will change in the bond arena for 30 years straight is, well, to be nice, likely incorrect.

A 30-year retirement doesn't depend solely on short-term returns, in either stocks or bonds.

Someone who retired in 2000 with valuations at 40 still has made like 7% nominal a year over the past 21 years.

Those first 10 years were bad indeed, but, so far, bad years are followed by good years.

Someone who retired in 1966 experienced like 16 years of bad stock returns (AND negative bond returns), yet still 4% worked (okay 3.8%) over 30 years, because the 16 years of bad returns were followed by 14 years of good returns.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by willthrill81 »

Thesaints wrote: Mon Apr 12, 2021 4:03 pm
willthrill81 wrote: Mon Apr 12, 2021 3:57 pm Any depletion of one's portfolio after 30 years of '4% fixed real dollar' withdrawals was not a common historical occurrence, as the graph below from Kitces shows. I believe it only happened in about 11 out of 117 periods. And in most of those 11 instances, more than 50% of the starting balance was still intact.

Image

And it's worth noting that in many of the above periods, bond yields were negative. From 1941-1981, bonds lost about -1.6% annualized. So I don't buy the argument that 'expected bond yields are negative, so the 4% rule is in serious jeopardy'.
Thank you. So you see that the expected value of the portfolio return has been even more than 4%+inflation.
Let's circle back to my observation:
With 40% of your portfolio yielding zero (I'm not even saying it is negative after inflation), the remaining 60% has to provide a 4%+inflation return.
That is equal to 6.67%+inflation. With a P/E above 40 that's not the most likely result going forward.

I think it is a fundamentally different point of view. Some say "returns in the past have always been ample; no need to worry about withdrawal strategy failure". Other say "Withdrawal strategy did not fail in the past because of very generous returns. Just wait until returns are much lower, i.e. now !"
It's certainly possible that the combination of high valuations and low bond yields may mean that those who employ the '4% rule' (not that anyone ever does) over the next 30 years might finish with less than they started with. But that's an acceptable outcome to most. If it isn't for you, then you need to consider using the perpetual withdrawal rate instead.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by 9mm »

HomerJ wrote: Mon Apr 12, 2021 4:10 pm
Thesaints wrote: Mon Apr 12, 2021 4:03 pmWith a P/E above 40 that's not the most likely result going forward.
You seem to forget that we are talking about 30 years.

We may indeed have poor returns for the next 10 years or even longer.

But bad years are followed by good years.

If you believe in valuations and "expected" returns, then you have to believe it both ways.

If we have 10 bad years, then valuations are likely to be lower, and expected returns will be higher for the next 10 years.

And your thought that nothing will change in the bond arena for 30 years straight is, well, to be nice, likely incorrect.

A 30-year retirement doesn't depend solely on short-term returns, in either stocks or bonds.

Someone who retired in 2000 with valuations at 40 still has made like 7% nominal a year over the past 21 years.

Those first 10 years were bad indeed, but, so far, bad years are followed by good years.

Someone who retired in 1966 experienced like 16 years of bad stock returns (AND negative bond returns), yet still 4% worked (okay 3.8%) over 30 years, because the 16 years of bad returns were followed by 14 years of good returns.
When will people start listening to HomerJ and WillThrill? The giant leaps some make and lack of historical consciousness is astounding.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Normchad »

In the past, the 30 year SWR in *most years* was significantly higher than 4%. 4% is the worst. At most times in history, 5, 6, or 7 would have been just fine. So 4 isn’t the number for “just skating by” in the past, it was the very worst.

It is possible that the next 30 years will be even worse than the worst we have ever seen. That is possible. And it is always possible. These studies and proclamations always imply that’s it’s more than just a possibility though. They make it sound like a certainty. It feels like they are saying “if you take more than 2.8%, you are doomed”, which is a very different thing. But I guess nobody reads your studies if you just say “4% is probably still fine, but there is a slightly greater than normal chance that it’s not”.

I allow the possibility that the next 30 years could be the worst ever. However, I also think the next 30 years could be *even more awesome* than any other 30 year period ever. Human ingenuity is amazing. Productivity is amazing. The Cold War is over, etc etc etc.

30 years is a long time. Everything we see and think now will change drastically in the next 30 years. 30 years ago, if you predicted 2-3% inflation decade after decade, you would have been laughed out of this forum. If you had said global population would top 7 billion, and there would be enough food for everybody, people would have scoffed.

Since we like the “appeal to authority” around here, a quote from Morgan Houssel.
Hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. Pessimism can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by afan »

The argument that past success may not apply here is based on us having historically high valuations for both stocks and bonds. To the extent that PE ratios predict long term stock returns, they imply poor real returns for stocks and current yields imply similarly poor returns for bonds. Thus, so the argument goes, "This time it really is different". If you follow forecasts of expected returns from here, they suggest that a retiree may see worse performance than previously observed in the US.

Who knows whether this will happen? For planning purposes, it is worth taking into consideration. For some, taking this into consideration will mean developing a flexible withdrawal strategy and a lifestyle they can maintain if returns are low. For others, it means accumulating extra money while they have the capacity. For a lucky few who were not planning to withdraw as much as 4% anyway, it means nothing will change.

But as this thread has demonstrated, saying predictions that 2.8% is the maximum SWR for the next 30 years is no more right or wrong at this point than is 4%. We have to see what happens to know.

My complaint with Wade Pfau is not this particular prediction or the reasoning behind it. My concern is the constant marketing of annuities as a solution. Even when asked about the effects of inflation he keeps pushing annuities. He models high costs of simple taxable investing to make the annuities or whole life insurance look less worse. Those things are not helpful for the people who take him seriously.

As for his prediction as to what a SWR may be going forward? Free country, he is welcome to his opinion, just like anyone else.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by abc132 »

vineviz wrote: Mon Apr 12, 2021 2:52 pm
Grt2bOutdoors wrote: Mon Apr 12, 2021 2:17 pm A 2.8 percent SWR is going to leave ALOT of money on the table for the heirs to spend.
I want to be clear, because it's easy for people to talk past each other in conversations like this.

The SWR isn't a choice that retirees get to make: it's a measure of the retirement income capacity a portfolio is able to provide. It's not a recommended withdrawal rate, in other words.

People can (and probably should) choose to start retirement at a higher withdrawal rate than the 2.8% SWR being estimated by Pfau and others.
It seems like the weakness in such an argument is that people can and do come up with different forward expectations - the future is just that cloudy. SWR having a technical definition (10% fail rate) doesn't make the value actionable unless those forward estimates are reliable. Tells us how you came up with your current example of 3% expected, and we can check how well expected values using that same method worked in the past.

We won't know if any SWR is/was accurate because we don't know the true failure rate, but we can measure the accuracy of someone's method of estimating expected forward returns. If their estimation method for forward returns is not accurate historically, we can say with at least some confidence that they have limited ability to forward predict today, even if they think forward estimates should be lower than the past.

It seems likely that anyone's ability to forward estimate expected values is poor enough that the 2.8% value is so inaccurate as to not be actionable. The SWR is not 2.8% if different assumptions going into the same technical definition can give 4.0%, 5.1% , or 2.1% SWR.

Saying it is between 2.1% and 6.9% (2 sigma) based on one's own historical ability to predict forward returns would be a much better way to present this information.

I would be interested in seeing the range of values for anyone's SWR calculation that also includes their methods historical ability to predict forward returns.

I suspect there is a reason nobody does this, that the answer will include values so low and high that the calculation will be no better than just sticking with the 4% rule.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by 9mm »

Normchad wrote: Mon Apr 12, 2021 4:46 pm In the past, the 30 year SWR in *most years* was significantly higher than 4%. 4% is the worst. At most times in history, 5, 6, or 7 would have been just fine. So 4 isn’t the number for “just skating by” in the past, it was the very worst.

It is possible that the next 30 years will be even worse than the worst we have ever seen. That is possible. And it is always possible. These studies and proclamations always imply that’s it’s more than just a possibility though. They make it sound like a certainty. It feels like they are saying “if you take more than 2.8%, you are doomed”, which is a very different thing. But I guess nobody reads your studies if you just say “4% is probably still fine, but there is a slightly greater than normal chance that it’s not”.

I allow the possibility that the next 30 years could be the worst ever. However, I also think the next 30 years could be *even more awesome* than any other 30 year period ever. Human ingenuity is amazing. Productivity is amazing. The Cold War is over, etc etc etc.

30 years is a long time. Everything we see and think now will change drastically in the next 30 years. 30 years ago, if you predicted 2-3% inflation decade after decade, you would have been laughed out of this forum. If you had said global population would top 7 billion, and there would be enough food for everybody, people would have scoffed.

Since we like the “appeal to authority” around here, a quote from Morgan Houssel.
Hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. Pessimism can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness.
“but it’s not rocket science!!!!” “it’s obvious that current valuations and rates means we are in the riskiest time ever in history for withdrawal rates!!” :oops:

Great quote above from Houssel. Negativity and jumping to conclusions is often masquerading as critical thinking by some on this thread/forum.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by marcopolo »

afan wrote: Mon Apr 12, 2021 5:08 pm The argument that past success may not apply here is based on us having historically high valuations for both stocks and bonds. To the extent that PE ratios predict long term stock returns, they imply poor real returns for stocks and current yields imply similarly poor returns for bonds. Thus, so the argument goes, "This time it really is different". If you follow forecasts of expected returns from here, they suggest that a retiree may see worse performance than previously observed in the US.

Who knows whether this will happen? For planning purposes, it is worth taking into consideration. For some, taking this into consideration will mean developing a flexible withdrawal strategy and a lifestyle they can maintain if returns are low. For others, it means accumulating extra money while they have the capacity. For a lucky few who were not planning to withdraw as much as 4% anyway, it means nothing will change.

But as this thread has demonstrated, saying predictions that 2.8% is the maximum SWR for the next 30 years is no more right or wrong at this point than is 4%. We have to see what happens to know.

My complaint with Wade Pfau is not this particular prediction or the reasoning behind it. My concern is the constant marketing of annuities as a solution. Even when asked about the effects of inflation he keeps pushing annuities. He models high costs of simple taxable investing to make the annuities or whole life insurance look less worse. Those things are not helpful for the people who take him seriously.

As for his prediction as to what a SWR may be going forward? Free country, he is welcome to his opinion, just like anyone else.
Those two things are not unrelated. I have no doubt Dr. Pfau honestly believes in the work he is doing. But, it should not come as a surprise to anyone that studies coming out of an institution set up largely to train insurance industry professionals would repeatedly come to the conclusion that the solution to the current retirement funding challenge is the use of more insurance products. One does not need to ascribe evil intent, or ad hominem attacks, to understand that such unintentional bias is prevalent in many situations.

This topic has been discussed ad nauseam here. The current article being discussed isn't even original source material. It is another author quoting Dr. Pfau from a previous work he did, which was also discussed here in great length when it came out. With pretty much the same players talking past each other. I don't foresee either group changing the other's mind.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

Normchad wrote: Mon Apr 12, 2021 4:46 pm
It is possible that the next 30 years will be even worse than the worst we have ever seen. That is possible. And it is always possible. These studies and proclamations always imply that’s it’s more than just a possibility though. They make it sound like a certainty. It feels like they are saying “if you take more than 2.8%, you are doomed”, which is a very different thing. But I guess nobody reads your studies if you just say “4% is probably still fine, but there is a slightly greater than normal chance that it’s not”.
Anyone who is getting "“if you take more than 2.8%, you are doomed” from anything written by an expert like Pfau is seeing something other than what was actually said or implied by the author.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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HanSolo
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HanSolo »

geerhardusvos wrote: Mon Apr 12, 2021 9:14 am We have 150 years of data, that’s a very very good trend. You seem to think that we are in some sort of novel time period.
Maybe we are.

I'm wondering if there ought to be 3 different projections for SWR:

1. Assuming that most of the withdrawal period doesn't include massive Fed intervention like the current intervention.

2. Assuming that most of the withdrawal period includes massive Fed intervention like the current intervention.

3. Assuming that most of the withdrawal period includes Fed intervention that's more massive than #2 ("more" means exceeding #2 to a similar degree that #2 exceeds #1).

I'm wondering if we'd get different recommendations in each case.
HomerJ wrote: Sun Apr 11, 2021 1:34 pm We can check Pfau from 10 years ago... He was comically wrong.
JackoC wrote: Mon Apr 12, 2021 10:19 am ... even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I'm wondering which of the above is more comical.

I'm wondering if Pfau was "wrong" because he used #1 as a baseline assumption (i.e., that the markets would reflect the performance of the economy rather than the performance of Fed engineering).

I'm wondering if the 4% SWR assumption is still solid only because of the market results that were achieved by moving from #1 (as in most of the past 150 years) to #2 (as we have presently).

And I'm wondering, if moving from #1 to #2 was required for us to keep our assumptions intact (the assumptions based on the above-referenced 150 years), then will we need to move from #2 to #3 at some point (for similar reasons as having to move from #1 to #2), in order to keep our assumptions intact and maintain the 4% SWR recommendation?

Just askin'.
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vineviz
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

abc132 wrote: Mon Apr 12, 2021 5:16 pm It seems like the weakness in such an argument is that people can and do come up with different forward expectations - the future is just that cloudy. SWR having a technical definition (10% fail rate) doesn't make the value actionable unless those forward estimates are reliable. Tells us how you came up with your current example of 3% expected, and we can check how well expected values using that same method worked in the past.
That's not actually a weakness, you know. All that is required is a consistent way of estimating expected returns at two different points in time, once when a 4% failed in the past (e.g. 1966) and once today.

Start with the expected real return on bonds. At the end of 1965 the expected real return of 10-year Treasury bonds was roughly 3%, whereas today it is roughly -0.6%.

That's the easy part: now we just need an estimate of the expected equity risk premium for the end of 1965 and for today. And to answer the question of "is a 4% SWR more or less likely to fail over the 30 years from 2021 than it was from the 30 years from 1966, all you need to estimate is whether the expected equity risk premium is higher or lower now than then. And more to the point, given the bond estimate we already have, we can back into the assumption for how much HIGHER the expected ERP would need to be now than then in order to give the SAME chance of a 4% WR failing.

And if you know anyone who, with a straight face, can defend an expected nominal return for stocks of 12% going forward from here I'd love to meet them. In order to NOT believe that the chance of a 4% WR failing in the future are higher than they were in 1966, that's what you'd need to EXPECT stocks to return over the next 30 years. It's not a "they COULD return that much if we get lucky" number: it's the expected nominal return with 2% inflation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

marcopolo wrote: Mon Apr 12, 2021 5:45 pm I have no doubt Dr. Pfau honestly believes in the work he is doing. But, it should not come as a surprise to anyone that studies coming out of an institution set up largely to train insurance industry professionals would repeatedly come to the conclusion that the solution to the current retirement funding challenge is the use of more insurance products. One does not need to ascribe evil intent, or ad hominem attacks, to understand that such unintentional bias is prevalent in many situations.
Keep in mind that virtually every economist knows that if investors were rational then almost everyone would be using private market annuities to provide for more of their retirement income.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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HomerJ
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

HanSolo wrote: Mon Apr 12, 2021 6:18 pm
geerhardusvos wrote: Mon Apr 12, 2021 9:14 am We have 150 years of data, that’s a very very good trend. You seem to think that we are in some sort of novel time period.
Maybe we are.

I'm wondering if there ought to be 3 different projections for SWR:

1. Assuming that most of the withdrawal period doesn't include massive Fed intervention like the current intervention.

2. Assuming that most of the withdrawal period includes massive Fed intervention like the current intervention.

3. Assuming that most of the withdrawal period includes Fed intervention that's more massive than #2 ("more" means exceeding #2 to a similar degree that #2 exceeds #1).

I'm wondering if we'd get different recommendations in each case.
HomerJ wrote: Sun Apr 11, 2021 1:34 pm We can check Pfau from 10 years ago... He was comically wrong.
JackoC wrote: Mon Apr 12, 2021 10:19 am ... even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I'm wondering which of the above is more comical.

I'm wondering if Pfau was "wrong" because he used #1 as a baseline assumption (i.e., that the markets would reflect the performance of the economy rather than the performance of Fed engineering).

I'm wondering if the 4% SWR assumption is still solid only because of the market results that were achieved by moving from #1 (as in most of the past 150 years) to #2 (as we have presently).

And I'm wondering, if moving from #1 to #2 was required for us to keep our assumptions intact (the assumptions based on the above-referenced 150 years), then will we need to move from #2 to #3 at some point (for similar reasons as having to move from #1 to #2), in order to keep our assumptions intact and maintain the 4% SWR recommendation?

Just askin'.
All you are saying is that some other variable showed up... Well duh, that's what we've been saying too... There are too many variables to make accurate predictions... Economics is far harder than rocket science.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by marcopolo »

vineviz wrote: Mon Apr 12, 2021 6:54 pm
abc132 wrote: Mon Apr 12, 2021 5:16 pm It seems like the weakness in such an argument is that people can and do come up with different forward expectations - the future is just that cloudy. SWR having a technical definition (10% fail rate) doesn't make the value actionable unless those forward estimates are reliable. Tells us how you came up with your current example of 3% expected, and we can check how well expected values using that same method worked in the past.
That's not actually a weakness, you know. All that is required is a consistent way of estimating expected returns at two different points in time, once when a 4% failed in the past (e.g. 1966) and once today.

Start with the expected real return on bonds. At the end of 1965 the expected real return of 10-year Treasury bonds was roughly 3%, whereas today it is roughly -0.6%.

That's the easy part: now we just need an estimate of the expected equity risk premium for the end of 1965 and for today. And to answer the question of "is a 4% SWR more or less likely to fail over the 30 years from 2021 than it was from the 30 years from 1966, all you need to estimate is whether the expected equity risk premium is higher or lower now than then. And more to the point, given the bond estimate we already have, we can back into the assumption for how much HIGHER the expected ERP would need to be now than then in order to give the SAME chance of a 4% WR failing.

And if you know anyone who, with a straight face, can defend an expected nominal return for stocks of 12% going forward from here I'd love to meet them. In order to NOT believe that the chance of a 4% WR failing in the future are higher than they were in 1966, that's what you'd need to EXPECT stocks to return over the next 30 years. It's not a "they COULD return that much if we get lucky" number: it's the expected nominal return with 2% inflation.
Wait, you switched from real to nominal returns.

Sure, no one is expecting 12% nominal returns.
But, no one is expecting double digit inflation either, are they?

Why would 12% nominal be needed with 2% inflation?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

vineviz wrote: Mon Apr 12, 2021 6:54 pm
abc132 wrote: Mon Apr 12, 2021 5:16 pm It seems like the weakness in such an argument is that people can and do come up with different forward expectations - the future is just that cloudy. SWR having a technical definition (10% fail rate) doesn't make the value actionable unless those forward estimates are reliable. Tells us how you came up with your current example of 3% expected, and we can check how well expected values using that same method worked in the past.
That's not actually a weakness, you know. All that is required is a consistent way of estimating expected returns at two different points in time, once when a 4% failed in the past (e.g. 1966) and once today.

Start with the expected real return on bonds. At the end of 1965 the expected real return of 10-year Treasury bonds was roughly 3%, whereas today it is roughly -0.6%.

That's the easy part: now we just need an estimate of the expected equity risk premium for the end of 1965 and for today. And to answer the question of "is a 4% SWR more or less likely to fail over the 30 years from 2021 than it was from the 30 years from 1966, all you need to estimate is whether the expected equity risk premium is higher or lower now than then. And more to the point, given the bond estimate we already have, we can back into the assumption for how much HIGHER the expected ERP would need to be now than then in order to give the SAME chance of a 4% WR failing.

And if you know anyone who, with a straight face, can defend an expected nominal return for stocks of 12% going forward from here I'd love to meet them. In order to NOT believe that the chance of a 4% WR failing in the future are higher than they were in 1966, that's what you'd need to EXPECT stocks to return over the next 30 years. It's not a "they COULD return that much if we get lucky" number: it's the expected nominal return with 2% inflation.
10-year expected returns are not 30-year expected returns.

Actual returns are better data points than "expected returns".

You don't have enough data points to assume a normal distribution around or below the 0% return line. These are not independent variables. There IS intervention by the Fed, and by Congress, and humans change how they invest once returns go negative. These are variables you have not modeled, and cannot model.

You are unable to model accurately the odds in the past. You are unable to model accurately the odds today.

You are therefore unable to accurately know if the odds are better or worse today.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by retiringwhen »

marcopolo wrote: Mon Apr 12, 2021 7:16 pm Wait, you switched from real to nominal returns.

Sure, no one is expecting 12% nominal returns.
But, no one is expecting double digit inflation either, are they?

Why would 12% nominal be needed with 2% inflation?
12 - 2 = 10%, therefore 10% real returns are needed. It sounds just as bad.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

marcopolo wrote: Mon Apr 12, 2021 7:16 pm Wait, you switched from real to nominal returns.

Sure, no one is expecting 12% nominal returns.
But, no one is expecting double digit inflation either, are they?

Why would 12% nominal be needed with 2% inflation?
I should have stuck with real returns: if you know anyone who, with a straight face, can defend an expected real return for stocks of 10% going forward from here I'd love to meet them.
"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: Another 2.8% SWR Article Quoting Wade Pfau

Post by 2pedals »

Can we have the final, definitive thread on safe withdrawal rates for the 2020's?
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vineviz
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

HomerJ wrote: Mon Apr 12, 2021 7:19 pm Actual returns are better data points than "expected returns".
If we had a way of knowing what the actual future returns are we wouldn't be having this discussion.

We don't know the future, though, so we have to plan based on expectations.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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