Another 2.8% SWR Article Quoting Wade Pfau

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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

We can certainly discuss whether the new SWR is 2.8%, or another number.
What instead is undeniable is that in the present scenario 4% is a lot less safe than before and it doesn't take a professor to understand this simple fact, although it seems to escape more than a few over here.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Derpalator »

whereskyle wrote: Sun Apr 11, 2021 12:54 pm
Leesbro63 wrote: Sun Apr 11, 2021 9:50 am I hesitate to start yet another "4% won't work" SWR thread, but I saw this WSJ article and think anything quoting Wade Pfau will be of interest to Bogleheads:

https://www.wsj.com/articles/retirement ... 1617929631

"Wade Pfau, a professor at the American College of Financial Services, has run tests that support Mr. Bengen’s earlier research. But Prof. Pfau says someone retiring today and taking fixed inflation-adjusted withdrawals from a portfolio shouldn’t use the 4% rule; he calculates the safe number is just 2.8%, mostly because bond rates have tumbled."
Why do "the experts" expect long-term inflation to stay the same or go up at the same time they expect a massive, protracted economic slowdown?
It could and did happen. The mid to late seventies to early eighties. I still remember Jimmy Carter, the sweater, the turned-down thermostat in the White House, and the "malaise" speech. Anything is possible and should be planned for, on some level. Gee that sounds so depressing.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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This topic is now in the Investing - Theory, News & General forum.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by chipperd »

Leesbro63 wrote: Sun Apr 11, 2021 9:50 am I hesitate to start yet another "4% won't work" SWR thread, but I saw this WSJ article and think anything quoting Wade Pfau will be of interest to Bogleheads:

https://www.wsj.com/articles/retirement ... 1617929631

"Wade Pfau, a professor at the American College of Financial Services, has run tests that support Mr. Bengen’s earlier research. But Prof. Pfau says someone retiring today and taking fixed inflation-adjusted withdrawals from a portfolio shouldn’t use the 4% rule; he calculates the safe number is just 2.8%, mostly because bond rates have tumbled."
Your hesitation is warranted, esp. given that this is, again, about a guy who is financially supported by the insurance industry and, not coincidently, tries to plant fear in solid retirement planning that don't have annuities as part of that planning process.
Bottom line, we all have our biases, but Pfau has a real conflict of interest. I would suggest conflicts of interest be noted by any poster quoting a financial professional as a disclaimer.
Disclaimer: I'm financially supported by self and as such, have a bias towards my own opinions.
BTW, the graduation rate from that American College of Financial Services is in the mid 30% range. What a rip off.
Last edited by chipperd on Mon Apr 12, 2021 5:28 am, edited 2 times in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Freefun »

This is why I'm following Kitces' approach to a bond tent to manage SWR. In my case it's more of a cash tent. My expenses are largely discretionary so I can cut back significantly if needed.

https://www.kitces.com/blog/managing-po ... -red-zone/
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by whereskyle »

Derpalator wrote: Mon Apr 12, 2021 2:08 am
whereskyle wrote: Sun Apr 11, 2021 12:54 pm
Leesbro63 wrote: Sun Apr 11, 2021 9:50 am I hesitate to start yet another "4% won't work" SWR thread, but I saw this WSJ article and think anything quoting Wade Pfau will be of interest to Bogleheads:

https://www.wsj.com/articles/retirement ... 1617929631

"Wade Pfau, a professor at the American College of Financial Services, has run tests that support Mr. Bengen’s earlier research. But Prof. Pfau says someone retiring today and taking fixed inflation-adjusted withdrawals from a portfolio shouldn’t use the 4% rule; he calculates the safe number is just 2.8%, mostly because bond rates have tumbled."
Why do "the experts" expect long-term inflation to stay the same or go up at the same time they expect a massive, protracted economic slowdown?
It could and did happen. The mid to late seventies to early eighties. I still remember Jimmy Carter, the sweater, the turned-down thermostat in the White House, and the "malaise" speech. Anything is possible and should be planned for, on some level. Gee that sounds so depressing.
Yep, it did happen. And a 60/40 portfolio (using Intermediate Treasuries as the bond holding) starting withdrawals at any year in the 1970s supported a 4% withdrawal rate adjusted up for inflation each year.

The point I'm making is not that stagflation is impossible. It's that even if it does occur, what reason do we have to believe it would be so "massive" or "protracted" enough that the same old conservative withdrawal rate wouldn't work?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

vineviz wrote: Sun Apr 11, 2021 8:15 pm
geerhardusvos wrote: Sun Apr 11, 2021 7:52 pm A 4% WR has worked for 30 year retirements 99% of the time with a 75/25 portfolio. That’s 150 years of data.
A 4% WR worked most of the time in the past. It might work in the future, but it is LESS likely to work in the future than it was in the past.
I find this proposition interesting. Aside from the emotional / cognitive dissonance responses it generates, it presents a conundrum:

1. If basic modeling of DCF for stocks and real returns for bonds hold true (and we're not living through a very short anomaly), then the intermediate term future may be long odds for getting historical real returns. It's not unreasonable to think this may increase SOR risks and increased SOR may mean either increased portfolio failure or decreased withdrawal rates.

2. If DCF modeling has broken down because QE (or other factors) have caused asset inflation to such an extent that fundamental analysis has lost some value, then all sorts of alternate realities can come into play.

My academic education would cause me to lean to #1, my time in VC, focusing on disruption, makes me sympathetic to #2.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

Freefun wrote: Mon Apr 12, 2021 5:12 am This is why I'm following Kitces' approach to a bond tent to manage SWR. In my case it's more of a cash tent. My expenses are largely discretionary so I can cut back significantly if needed.

https://www.kitces.com/blog/managing-po ... -red-zone/
Whether one calls it a bond tent or a rising equity glide path, I'm aligned with this:
"the point of the bonds is not to drive returns, but to manage retirement risks and exposure to equity bear markets"
When there is lots of cheap capital sloshing around the world, the market doesn't need to reward lenders / bond holders with risk-free investments that offer meaningful real income.
Last edited by watchnerd on Mon Apr 12, 2021 7:11 am, edited 1 time in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by aristotelian »

I don't have a WSJ subscription. I'm less interested in the WSJ article than the actual report it is summarizing. Does anyone have a link to Pfau's research? I am not seeing the report calculating 2.8%. Is this just back of the napkin math?

I see in April 2020 he "calculated" 2.4% and urged investors to take their money and buy an annuity. Anyone who took that advice a year ago would have missed out on 50% gains. https://www.thinkadvisor.com/2020/04/14 ... y-in-half/

I suspect he is simply adjusting the usual 4% recommendation for lower bond yields without also reflecting lower inflation expectations.

He is correct that SWR research is backwards looking and the future is not guaranteed to be like the past.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

aristotelian wrote: Mon Apr 12, 2021 7:10 am I don't have a WSJ subscription. I'm less interested in the WSJ article than the actual report it is summarizing. Does anyone have a link to Pfau's research? I am not seeing the report calculating 2.8%. Is this just back of the napkin math?
It does not have a link.

The Pfau mention is just a footnote, the last paragraph of an article that is mostly about variable withdrawal methods:
Wade Pfau, a professor at the American College of Financial Services, has run tests that support Mr. Bengen’s earlier research. But Prof. Pfau says someone retiring today and taking fixed inflation-adjusted withdrawals from a portfolio shouldn’t use the 4% rule; he calculates the safe number is just 2.8%, mostly because bond rates have tumbled.
So, yeah, could be napkin math. Or not.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Slacker »

59Gibson wrote: Sun Apr 11, 2021 4:44 pm
David Jay wrote: Sun Apr 11, 2021 1:50 pm
HomerJ wrote: Sun Apr 11, 2021 1:34 pmWe can check Pfau from 10 years ago... He was comically wrong.
You mean like here? viewtopic.php?t=174030

His 2% SWR included 1% AUM and .67 ER. Effective SWR for DYI Boglehead would have been 3.6% without challenging any of Pfau's assumptions.
+1. This is very important. Nearly all of the swr doomsayers "this time is different, so 2-2.8%" are slinging annuities/and or their assumptions are so chock full of fees to drag the wd rate down to the 2s.
Are these expense assumptions still at play here? (I.e. is the 2.8% SWR being espoused really a claim to a 4.4% SWR for a bogleheads investor -> not far from Bengens upwardly revised SWR?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by halfnine »

Slacker wrote: Mon Apr 12, 2021 7:28 am
59Gibson wrote: Sun Apr 11, 2021 4:44 pm
David Jay wrote: Sun Apr 11, 2021 1:50 pm
HomerJ wrote: Sun Apr 11, 2021 1:34 pmWe can check Pfau from 10 years ago... He was comically wrong.
You mean like here? viewtopic.php?t=174030

His 2% SWR included 1% AUM and .67 ER. Effective SWR for DYI Boglehead would have been 3.6% without challenging any of Pfau's assumptions.
+1. This is very important. Nearly all of the swr doomsayers "this time is different, so 2-2.8%" are slinging annuities/and or their assumptions are so chock full of fees to drag the wd rate down to the 2s.
Are these expense assumptions still at play here? (I.e. is the 2.8% SWR being espoused really a claim to a 4.4% SWR for a bogleheads investor -> not far from Bengens upwardly revised SWR?
You can't just add the fees back on at the end. That is not how it works and this has been discussed before. I could be wrong but my recollection is that fees of around 1% actually came out to around an increase of 0.6% instead. What fees of 1.67% equates to I'll leave as an exercise for others.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by BabaWawa »

HomerJ wrote: Sun Apr 11, 2021 1:34 pm
retiringwhen wrote: Sun Apr 11, 2021 1:31 pm
Que1999 wrote: Sun Apr 11, 2021 1:03 pm This is just amusing to me at this point. Didn't Bill Bengen just say the new SWR is around 5% a few months ago?

Man oh man, this stuff changes on a whim! It's all just noise. Don't worry about it, no one knows what's gonna happen.
Actually, Bengen and Pfau are looking at the same data and coming to different conclusions.

Bengen believes that inflation has largely been "beaten" so it is less of a risk to portfolios going forward, thus less concern about current low interest rates (which at a real rate level are bad but not the worst we've seen, the high inflation periods of the past had some really awful real rates.)

Pfau appears to be more concerned about inflation thus the pessimism when combined with already high asset valuations.

Who's right? I don't know, let's check back in 10-15 years.
We can check Pfau from 10 years ago... He was comically wrong.
How do we know he's wrong after 10 years? Isn't SWR a principle that guides our withdrawals in retirement over a 30 year period?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by aristotelian »

Thesaints wrote: Mon Apr 12, 2021 1:46 am We can certainly discuss whether the new SWR is 2.8%, or another number.
What instead is undeniable is that in the present scenario 4% is a lot less safe than before and it doesn't take a professor to understand this simple fact, although it seems to escape more than a few over here.
If you accept that the current market is especially risky, any number you pick will be more risky now than in the past. The question is how much confidence do you need. Certainly seems prudent to a) not retire the moment you hit 4% in a bull market and b) save some extra cushion in case you happen to be in the 5% of worst outcomes. Not sure going all the way down to 2.8% is necessary given 3.75% has been successful 100% of the time.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by SeasOfCheese »

"There is no way to retire safely, keep working and paying taxes." - US Government.

"There is no way to retire safely, keep saving and paying 1.67% AUM+ER fees." - Wall St.

Did I get that correct?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Leesbro63 »

SeasOfCheese wrote: Mon Apr 12, 2021 8:30 am "There is no way to retire safely, keep working and paying taxes." - US Government.

"There is no way to retire safely, keep saving and paying 1.67% AUM+ER fees." - Wall St.

Did I get that correct?
+1. Excellent!
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by geerhardusvos »

000 wrote: Mon Apr 12, 2021 12:04 am
HomerJ wrote: Sun Apr 11, 2021 11:32 pm You don't know. No one does.
So, would you say you do or do not know whether the 4% WR is safe?
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. Historical data matters, and the current environment likely isn’t as bad as previous environments. Does anyone know what will happen in the future or the probabilities of specific withdrawal rates? No, of course not. But the burden of proof is more on the folks who think that the next 150 years will be substantially different than the previous 150 years. That’s obvious, regardless of whether or not you agree. A 4% WR might not be safe over the next 30 years, but it is, based on the historical data, extremely likely to be just fine. You and others consistently fail to listen to this point, and you have some doom and gloom view of the current market situation that somehow makes some thing that has been extremely safe, not safe. You have provided no meaningful data or helpful insight into why the 4% WR would stop working over the next 30 years. Pfau has been so miserably wrong in the past, that it’s obvious we shouldn’t listen to him, but we just pay attention to the market instead. Spend more when the market is up, reduce spending when the market is down. It’s that easy.

Nisiprius had a helpful post in this regard above, linking to Taylor‘s post.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by geerhardusvos »

Thesaints wrote: Mon Apr 12, 2021 1:46 am We can certainly discuss whether the new SWR is 2.8%, or another number.
What instead is undeniable is that in the present scenario 4% is a lot less safe than before and it doesn't take a professor to understand this simple fact, although it seems to escape more than a few over here.
You don’t know that the present scenario is a lot less safe for normal retirements. A 4% WR has worked at 99% of the time with the 75/25 portfolio for 30 year retirements. That’s extremely safe, and nothing about the current market says definitively that the next 30 years will be any different. What is actually escaping more people is the fact that they have no idea what the future holds, and that historical data matters. What historical data are you using to make your claim? What current date are you using to make your claim?

If it’s such a simple fact, why has Pfau been so terribly wrong previously?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by geerhardusvos »

BabaWawa wrote: Mon Apr 12, 2021 7:47 am
HomerJ wrote: Sun Apr 11, 2021 1:34 pm
retiringwhen wrote: Sun Apr 11, 2021 1:31 pm
Que1999 wrote: Sun Apr 11, 2021 1:03 pm This is just amusing to me at this point. Didn't Bill Bengen just say the new SWR is around 5% a few months ago?

Man oh man, this stuff changes on a whim! It's all just noise. Don't worry about it, no one knows what's gonna happen.
Actually, Bengen and Pfau are looking at the same data and coming to different conclusions.

Bengen believes that inflation has largely been "beaten" so it is less of a risk to portfolios going forward, thus less concern about current low interest rates (which at a real rate level are bad but not the worst we've seen, the high inflation periods of the past had some really awful real rates.)

Pfau appears to be more concerned about inflation thus the pessimism when combined with already high asset valuations.

Who's right? I don't know, let's check back in 10-15 years.
We can check Pfau from 10 years ago... He was comically wrong.
How do we know he's wrong after 10 years? Isn't SWR a principle that guides our withdrawals in retirement over a 30 year period?
Using historical data, there is no scenario where the portfolio tripled or quadrupled and then failed to survive over 30 years. What HomerJ is saying is very likely true. The portfolio doubling in real terms has even been extremely safe. There have been around 500% real returns over the last 10 years, making the 2010 retiree bulletproof, likely for 50 years or more using 4% WR. In fact they can likely use a 5% WR or more.

Pfau has provided some seriously flawed advice and drawn some seriously wrong conclusions, enough to where many of us are done listening to him.
Last edited by geerhardusvos on Mon Apr 12, 2021 10:42 am, edited 1 time in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by willthrill81 »

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.
At this point, Pfau is very much the 'boy who cried wolf'. Maybe one of his lowball predictions will eventually come to pass. But his track record so far has been dismal.

I do think that the combination of high stock valuations and low bond yields means that there isn't likely to be much upside potential for those starting off a 30 year retirement by withdrawing 4% of their portfolio. But that's very different from saying that there is a substantial probability that the forward 30 year SWR will be one-third lower than it has ever been since 1871. Extraordinary claims require extraordinary evidence, and Pfau has not been good at providing even mediocre evidence. He's made unrealistically positive assumptions about annuities while simultaneously making unrealistically negative assumptions about stocks, almost enough to make someone wonder if the annuity industry was funding him. Oh, wait...
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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JoMoney wrote: Mon Apr 12, 2021 12:08 am For a 30 year period as the SWR methodology used, 1/30 would be 3.33% and only needing enough growth to keep up with inflation.
If your expectation is -.5% real, why bother with the risk in stocks ?
Remember that a SWR isn't the expectation, which would roughly be the 50th percentile outcome: it's the rate that prevents portfolio depletion - assuming no change in withdrawal rate - in a "worst case" (usually 10th percentile) outcome.

An 80/20 portfolio could have an expected real return of +3% or so and, in the case of poor sequence of returns, still result in a 2.8% SWR.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by willthrill81 »

geerhardusvos wrote: Mon Apr 12, 2021 9:23 am
BabaWawa wrote: Mon Apr 12, 2021 7:47 am
HomerJ wrote: Sun Apr 11, 2021 1:34 pm
retiringwhen wrote: Sun Apr 11, 2021 1:31 pm
Que1999 wrote: Sun Apr 11, 2021 1:03 pm This is just amusing to me at this point. Didn't Bill Bengen just say the new SWR is around 5% a few months ago?

Man oh man, this stuff changes on a whim! It's all just noise. Don't worry about it, no one knows what's gonna happen.
Actually, Bengen and Pfau are looking at the same data and coming to different conclusions.

Bengen believes that inflation has largely been "beaten" so it is less of a risk to portfolios going forward, thus less concern about current low interest rates (which at a real rate level are bad but not the worst we've seen, the high inflation periods of the past had some really awful real rates.)

Pfau appears to be more concerned about inflation thus the pessimism when combined with already high asset valuations.

Who's right? I don't know, let's check back in 10-15 years.
We can check Pfau from 10 years ago... He was comically wrong.
How do we know he's wrong after 10 years? Isn't SWR a principle that guides our withdrawals in retirement over a 30 year period?
Using historical data, there is no scenario where the portfolio tripled or quadrupled and then failed to survive over 30 years. What HomerJ is saying is very likely true. The portfolio doubling in real terms has even been extremely safe. There have been around 500% real returns over the last 10 years, making the 2010 retiree bulletproof, likely for 50 years or more using 4% WR. In fact they can lightly use a 5% WR or more.
Even Pfau would agree that a a portfolio that has doubled 10 years into retirement is now good to go, because if the starting WR was 4%, the withdrawal rate would now be 2% if the retiree didn't increase withdrawals, and you've trimmed a 30 year withdrawal period down to 20 years. If a 2% withdrawal rate doesn't work over a 20 year period of time, SWRs will be the least of anyone's worries.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by JackoC »

vineviz wrote: Sun Apr 11, 2021 7:24 pm
geerhardusvos wrote: Sun Apr 11, 2021 6:37 pm
vineviz wrote: Sun Apr 11, 2021 2:37 pm The model used at ERN is much more problematic than the one used by Pfau and most other professionals.
We’ve proved this wrong over and over again, vineviz....
You’re mistaken, I’m afraid.
Expecting real bond yields of -1% to provide the same SWR as real bond yields of +2% is a common error, but an error nonetheless.
Yep. The more heavily the portfolio is heavily in bonds, the more obviously erroneous it is to use past bond return data to calculate a 'probability' of failure at a given withdrawal rate. Yet this basic error is epidemic*. If you use a high allocation to long term TIPS, it's not a 'prediction' that 4% SWR is too high for 30+ yrs: it just is. Rolling 5 yr TIPS to a 30 yr horizon doesn't get around it. The expected return of that is only higher than today's 30 yr if you assume a consistently negative term premium. And it introduces more downside (when future 5 yr TIPS yields are even lower than now's). Likewise buying nominal bonds to long horizon introduces more downside risk (of high inflation). Both strategies, rolling TIPS or using long term nominals, introduce upside (future TIPS yields higher than now/inflation lower than expected, respectively), presumably roughly as much upside as downside if the market is not mispriced. But SWR failure rate is driven by downside scenario's. A '% failure rate' will be minimized, using bonds, by locking in today's real yield as far out as possible. That's obviously not +2%, nor the past distribution of bond returns around that +2% even relevant.

Stocks will very likely earn more than bonds from a given starting point if the future is anything like the past. But again '% failure rate' of an 'SWR' is driven by downside scenario's. For stocks to help reduce % failure rate their future *downside* scenario's have to beat what you can lock in with long term real bonds now.

Which is certainly possible. But the real question is what you assume for future variance of stock return. It's clear expected return of stocks now is lower than past long term average return. Stock valuations are much higher now, as they basically *should* be because expected return on the safer alternative is so low (it's doubtful *expected* real return on 10/30 yr was ever close to -0.6%/+0.1% in the past, *realized* real return on nominal 10/30 yr was negative on realized inflation far above expectation: not the same thing). So is future variance also lower? That's the central question of 'SWR' IMO, rather than diddling with the basically meaningless distribution of past returns, or slinging ad hominem ('shilling for the insurance industry') or even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.

Pfau's basic method is correct: use today's expected return, project a variance**, and simulate. Not that it's easy to pick that variance. And if the focus is '% failure must be below X' then stocks aren't as good an instrument as they are when you value upside to a greater degree***. And in fact 'the insurance industry' can help you directly control the risk that the length of time you expect to be eg. 30 yrs turns up to be 40. Although the general lack of CPI adjusted annuities is a serious problem IMO.

* I'm not commenting on 'ERN' since I'm not familiar with it. But 'FIRECALC' does this and is frequently quoted on this forum.
**variance doesn't imply 'normal distribution', a fat tailed distribution still has a variance.
***which is why 'I'd like to be heir to a person with 2.8% SWR' is true for the heir (actually obvious, excluding emotional or dependency issues the lower the SWR the better, for heirs) but says nothing about whether it's too low for the older person.
Last edited by JackoC on Mon Apr 12, 2021 10:27 am, edited 2 times in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Hebell »

My reason for going below the 4% rule is because it doesn't work for most other countries. We have been blessed in the United States to have a large land mass with extensive natural resources and agricultural capacity combined with oceans around us, minus the devastation on our own soil after world wars. We also had a concentrated bump in productivity/GDP as women entered the workforce en masse in the 1970s.

Given the globalization of the economy and our linked supply chains and aging demographics I'd have to think our SWR would be more akin to international SWRs. Which fall below 4%.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by vineviz »

Scott S wrote: Sun Apr 11, 2021 8:59 pm Hasn't the real yield on bonds been negative before?
The realized real yield has been negative before with some regular, but the expected real yield has rarely been as low as it currently is. And we've never had a starting expected real return on bonds this low AND ALSO experienced a particularly poor sequence of returns in stocks.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

JackoC wrote: Mon Apr 12, 2021 10:19 am Which is certainly possible. But the real question is what you assume for future variance of stock return. It's clear expected return of stocks now is lower than past long term average return. Stock valuations are much higher now, as they basically *should* be because expected return on the safer alternative is so low (it's doubtful *expected* real return on 10/30 yr was ever close to -0.6%/+0.1% in the past, *realized* real return on nominal 10/30 yr was negative on realized inflation far above expectation: not the same thing). So is future variance also lower? That's the central question of 'SWR' IMO, rather than diddling with the basically meaningless distribution of past returns, or slinging ad hominem ('shilling for the insurance industry') or even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I think there are some who don't believe that current stock valuations will lead to reduced future returns.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by JackoC »

watchnerd wrote: Mon Apr 12, 2021 10:24 am
JackoC wrote: Mon Apr 12, 2021 10:19 am Which is certainly possible. But the real question is what you assume for future variance of stock return. It's clear expected return of stocks now is lower than past long term average return. Stock valuations are much higher now, as they basically *should* be because expected return on the safer alternative is so low (it's doubtful *expected* real return on 10/30 yr was ever close to -0.6%/+0.1% in the past, *realized* real return on nominal 10/30 yr was negative on realized inflation far above expectation: not the same thing). So is future variance also lower? That's the central question of 'SWR' IMO, rather than diddling with the basically meaningless distribution of past returns, or slinging ad hominem ('shilling for the insurance industry') or even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I think there are some who don't believe that current stock valuations will lead to reduced future returns.
There are 'some' who will believe just about anything, if convenient enough. :happy
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by geerhardusvos »

watchnerd wrote: Mon Apr 12, 2021 10:24 am
JackoC wrote: Mon Apr 12, 2021 10:19 am Which is certainly possible. But the real question is what you assume for future variance of stock return. It's clear expected return of stocks now is lower than past long term average return. Stock valuations are much higher now, as they basically *should* be because expected return on the safer alternative is so low (it's doubtful *expected* real return on 10/30 yr was ever close to -0.6%/+0.1% in the past, *realized* real return on nominal 10/30 yr was negative on realized inflation far above expectation: not the same thing). So is future variance also lower? That's the central question of 'SWR' IMO, rather than diddling with the basically meaningless distribution of past returns, or slinging ad hominem ('shilling for the insurance industry') or even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I think there are some who don't believe that current stock valuations will lead to reduced future returns.
Anyone who looks at the historical data knows that high valuations (ie high Cyclically Adjusted PE Ratio) usually means that the coming years have lower expected returns. Just like after a bull there's usually a bear, and visa-versa. We just don't know how long the bulls and bears will last when we're in them.

That being said, even with the current valuations and current rates, there's no reason to believe a 4% WR won't survive for the next 30 years, and besides, in reality, almost no one strictly withdraws exactly 4% of their portfolio each year with no regard for market performance and their need. We don't need to keep worrying about the 4% WR for normal/traditional retirements. Lower returns for the next 10 years and lower rates doesn't necessarily prove anything either way. To espouse otherwise is dishonest, and the constant "4% WR is less safe now than at any time in history" nonsense on this forum is exhausting and unprovable, and honestly, it's more annoying and damaging than the FIRE bros who are dogmatic about a "4% rule"
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by quantAndHold »

Hebell wrote: Mon Apr 12, 2021 10:24 am My reason for going below the 4% rule is because it doesn't work for most other countries. We have been blessed in the United States to have a large land mass with extensive natural resources and agricultural capacity combined with oceans around us, minus the devastation on our own soil after world wars. We also had a concentrated bump in productivity/GDP as women entered the workforce en masse in the 1970s.

Given the globalization of the economy and our linked supply chains and aging demographics I'd have to think our SWR would be more akin to international SWRs. Which fall below 4%.
https://www.forbes.com/sites/wadepfau/ ... the-world/
Ahhh, thank you, I had seen that article and I was looking for it. The thing about that dataset is it shows that in places and years where 4% failed, the country had some sort of economic collapse. War, hyperinflation, etc. Which is certainly a possibility in the US too, nobody can predict what will happen in the next 50 years. But I would argue that you can’t save yourself from that kind of scenario by simply having a higher savings rate, because where 4% fails, it tends to fail catastrophically, and then even 2% fails.

I mean, I agree that with current valuations, people with 4% withdrawal rates are probably going to leave less on the table for their heirs than they would have a decade ago. But that isn’t failure, and his data about the past doesn’t really point to high valuations being a primary cause of SWR failure.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by White Coat Investor »

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.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by halfnine »

quantAndHold wrote: Mon Apr 12, 2021 10:48 am
Hebell wrote: Mon Apr 12, 2021 10:24 am My reason for going below the 4% rule is because it doesn't work for most other countries. We have been blessed in the United States to have a large land mass with extensive natural resources and agricultural capacity combined with oceans around us, minus the devastation on our own soil after world wars. We also had a concentrated bump in productivity/GDP as women entered the workforce en masse in the 1970s.

Given the globalization of the economy and our linked supply chains and aging demographics I'd have to think our SWR would be more akin to international SWRs. Which fall below 4%.
https://www.forbes.com/sites/wadepfau/ ... the-world/
Ahhh, thank you, I had seen that article and I was looking for it. The thing about that dataset is it shows that in places and years where 4% failed, the country had some sort of economic collapse. War, hyperinflation, etc. Which is certainly a possibility in the US too, nobody can predict what will happen in the next 50 years. But I would argue that you can’t save yourself from that kind of scenario by simply having a higher savings rate, because where 4% fails, it tends to fail catastrophically, and then even 2% fails.

I mean, I agree that with current valuations, people with 4% withdrawal rates are probably going to leave less on the table for their heirs than they would have a decade ago. But that isn’t failure, and his data about the past doesn’t really point to high valuations being a primary cause of SWR failure.
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.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

watchnerd wrote: Mon Apr 12, 2021 10:24 am
JackoC wrote: Mon Apr 12, 2021 10:19 am Which is certainly possible. But the real question is what you assume for future variance of stock return. It's clear expected return of stocks now is lower than past long term average return. Stock valuations are much higher now, as they basically *should* be because expected return on the safer alternative is so low (it's doubtful *expected* real return on 10/30 yr was ever close to -0.6%/+0.1% in the past, *realized* real return on nominal 10/30 yr was negative on realized inflation far above expectation: not the same thing). So is future variance also lower? That's the central question of 'SWR' IMO, rather than diddling with the basically meaningless distribution of past returns, or slinging ad hominem ('shilling for the insurance industry') or even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I think there are some who don't believe that current stock valuations will lead to reduced future returns.
Citation? I don't think anyone on these boards has ever said that (Well, maybe if you mean long-term returns)

But 4% is used BECAUSE it's always possible that future returns will be low. 4% is designed around "reduced future returns".

4% is like carrying around a umbrella every single day just in case it rains... And then someone posts on this board "Oh my gosh, the chance of rain is higher today than yesterday!"

And we shrug, because we already have an umbrella.

It's not that we don't believe low returns are possible or even probable. It's that we've already accounted for low returns in our plan.
Last edited by HomerJ on Mon Apr 12, 2021 12:14 pm, edited 1 time in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

aristotelian wrote: Mon Apr 12, 2021 8:02 am If you accept that the current market is especially risky, any number you pick will be more risky now than in the past. The question is how much confidence do you need. Certainly seems prudent to a) not retire the moment you hit 4% in a bull market and b) save some extra cushion in case you happen to be in the 5% of worst outcomes. Not sure going all the way down to 2.8% is necessary given 3.75% has been successful 100% of the time.
I agree with all you say and the part in bold is especially important. 4% might have been the SWR; now it is a LSWR. There can be no doubt about that.
geerhardusvos wrote: Mon Apr 12, 2021 9:19 am You don’t know that the present scenario is a lot less safe for normal retirements. A 4% WR has worked at 99% of the time with the 75/25 portfolio for 30 year retirements. That’s extremely safe, and nothing about the current market says definitively that the next 30 years will be any different. What is actually escaping more people is the fact that they have no idea what the future holds, and that historical data matters. What historical data are you using to make your claim? What current date are you using to make your claim?

If it’s such a simple fact, why has Pfau been so terribly wrong previously?
Bond returns are the lowest they have ever been and they have to stay that way. Therefore the past 150 years of history is not such a guarantee of success.
To compensate bond returns one has to load up on stocks, higher volatility ensues and volatility is the enemy of those in a withdrawal phase.
The only way for bond yields to go substantially up is a minor catastrophe for financial markets which would wipe out a substantial chunk of retirees portfolios, again increasing their risk of failure.
It is not really rocket science.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

Thesaints wrote: Mon Apr 12, 2021 12:01 pmBond returns are the lowest they have ever been and they have to stay that way.
What? Why? For how many years? Where did you come with up with this idea?
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Re: Another 2.8% SWR Article Quoting Wade Pfau

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HomerJ wrote: Mon Apr 12, 2021 12:09 pm What? Why? For how many years? Where did you come with up with this idea?
https://fred.stlouisfed.org/series/GFDEBTN

https://www.usgovernmentspending.com/us ... _pie_chart
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

Thesaints wrote: Mon Apr 12, 2021 12:15 pm
HomerJ wrote: Mon Apr 12, 2021 12:09 pm What? Why? For how many years? Where did you come with up with this idea?
https://fred.stlouisfed.org/series/GFDEBTN

https://www.usgovernmentspending.com/us ... _pie_chart
Debt to GDP has been this high before... You are making a huge assumption that interest rates cannot possibly go up ever again. And it's not like they have to go up a lot.

https://tradingeconomics.com/united-sta ... ebt-to-gdp

Click on the Max button.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by WoodSpinner »

gatorking wrote: Mon Apr 12, 2021 11:03 am Article is available here:
https://archive.ph/bBkLa
Sigh, wondering how many folks discussing this topic actually read the article?

It’s worth a read — not much new info.

I would like to see the details of Dr. Pfau’s analysis, not sure it’s applicable to my situation.

I do think BigERNs analysis is very thorough and he provides his model so you can tinker with the assumptions and understand the probabilities impacted.

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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

duplicate
Last edited by HomerJ on Mon Apr 12, 2021 12:29 pm, edited 1 time in total.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

HomerJ wrote: Mon Apr 12, 2021 11:50 am
watchnerd wrote: Mon Apr 12, 2021 10:24 am
JackoC wrote: Mon Apr 12, 2021 10:19 am Which is certainly possible. But the real question is what you assume for future variance of stock return. It's clear expected return of stocks now is lower than past long term average return. Stock valuations are much higher now, as they basically *should* be because expected return on the safer alternative is so low (it's doubtful *expected* real return on 10/30 yr was ever close to -0.6%/+0.1% in the past, *realized* real return on nominal 10/30 yr was negative on realized inflation far above expectation: not the same thing). So is future variance also lower? That's the central question of 'SWR' IMO, rather than diddling with the basically meaningless distribution of past returns, or slinging ad hominem ('shilling for the insurance industry') or even more comical arguments ('returns past 10 yr have been good, so he's wrong') against Pfau.
I think there are some who don't believe that current stock valuations will lead to reduced future returns.
Citation? I don't think anyone on these boards has ever said that (Well, maybe if you mean long-term returns)
I don't think I've seen it expressed here, or at least not by anyone who knows their stuff.

I have seen it expressed on some FIRE forums, though.

Usually by folks who are also advocating for pushing the envelope with 5+% SWRs.

The coda is often something like, "Well, if I'm wrong, I'll just go live out of my van in Costa Rica #YOLO".
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by SeasOfCheese »

HomerJ wrote: Mon Apr 12, 2021 12:22 pm Debt to GDP has been this high before... You are making a huge assumption that interest rates cannot possibly go up ever again.

https://tradingeconomics.com/united-sta ... ebt-to-gdp

Click on the Max button.
That debt was due to WW2. And back then the USA was the most powerful, fully functioning economy in the world. (And that debt was still largely inflated away.)

The current debt is due to transfer payments. The economy is arguably a shell of the manufacturing powerhouse it was. And there is no political will to stop spending anywhere in DC.

So yield curve control (and inflation) is inevitable. Or so the argument goes (and it is one I tend to take very, very seriously).
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by quantAndHold »

halfnine wrote: Mon Apr 12, 2021 11:37 am
quantAndHold wrote: Mon Apr 12, 2021 10:48 am
Hebell wrote: Mon Apr 12, 2021 10:24 am My reason for going below the 4% rule is because it doesn't work for most other countries. We have been blessed in the United States to have a large land mass with extensive natural resources and agricultural capacity combined with oceans around us, minus the devastation on our own soil after world wars. We also had a concentrated bump in productivity/GDP as women entered the workforce en masse in the 1970s.

Given the globalization of the economy and our linked supply chains and aging demographics I'd have to think our SWR would be more akin to international SWRs. Which fall below 4%.
https://www.forbes.com/sites/wadepfau/ ... the-world/
Ahhh, thank you, I had seen that article and I was looking for it. The thing about that dataset is it shows that in places and years where 4% failed, the country had some sort of economic collapse. War, hyperinflation, etc. Which is certainly a possibility in the US too, nobody can predict what will happen in the next 50 years. But I would argue that you can’t save yourself from that kind of scenario by simply having a higher savings rate, because where 4% fails, it tends to fail catastrophically, and then even 2% fails.

I mean, I agree that with current valuations, people with 4% withdrawal rates are probably going to leave less on the table for their heirs than they would have a decade ago. But that isn’t failure, and his data about the past doesn’t really point to high valuations being a primary cause of SWR failure.
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.
I think you’re basically right, but with one nitpick. His data doesn’t show cases where 4% failed but 2% would have been successful. His data shows countries where SWR’s dropped to below 1% and 0.1%. In essence, there was no SWR at all that would have worked for those countries.

The other thing is our definition of failure. This is talking about picking a withdrawal rate in year 1 of retirement, then never adjusting it based on the state of the portfolio. If real life, that doesn’t happen. If someone is in a situation where they saved enough for a 4% SWR, but they’re in an environment where safe is actually 3.8%, at some point along the line, they will adjust their withdrawals to compensate for a smaller portfolio size. So “failure” doesn’t mean running out of money, it means reducing spending partway through retirement, which often happens anyway as people age. The main risk in this case is to people who’ve planned such a lean retirement that there’s nothing left to adjust.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

HomerJ wrote: Mon Apr 12, 2021 12:22 pm
Thesaints wrote: Mon Apr 12, 2021 12:15 pm
HomerJ wrote: Mon Apr 12, 2021 12:09 pm What? Why? For how many years? Where did you come with up with this idea?
https://fred.stlouisfed.org/series/GFDEBTN

https://www.usgovernmentspending.com/us ... _pie_chart
Debt to GDP has been this high before... You are making a huge assumption that interest rates cannot possibly go up ever again. And it's not like they have to go up a lot.

https://tradingeconomics.com/united-sta ... ebt-to-gdp

Click on the Max button.
How do you propose to fit a doubled up "interests" slice in the pie ? Double interest is not even that extreme. Rates have been several times higher than now.
It is abundantly clear that nor the Fed, nor the BCE, will "ever" raise rates. Just like the BOJ has don for the past quarter of a century.
They can't say it openly, of course, but that does not mean people don't know.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

SeasOfCheese wrote: Mon Apr 12, 2021 12:32 pm
HomerJ wrote: Mon Apr 12, 2021 12:22 pm Debt to GDP has been this high before... You are making a huge assumption that interest rates cannot possibly go up ever again.

https://tradingeconomics.com/united-sta ... ebt-to-gdp

Click on the Max button.
That debt was due to WW2. And back then the USA was the most powerful, fully functioning economy in the world. (And that debt was still largely inflated away.)

The current debt is due to transfer payments. The economy is arguably a shell of the manufacturing powerhouse it was. And there is no political will to stop spending anywhere in DC.

So yield curve control (and inflation) is inevitable. Or so the argument goes (and it is one I tend to take very, very seriously).
And yet Japan has a debt to GDP ratio of 237% and has more of a deflation problem than an inflation problem.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by Thesaints »

quantAndHold wrote: Mon Apr 12, 2021 12:43 pm The other thing is our definition of failure. This is talking about picking a withdrawal rate in year 1 of retirement, then never adjusting it based on the state of the portfolio. If real life, that doesn’t happen. If someone is in a situation where they saved enough for a 4% SWR, but they’re in an environment where safe is actually 3.8%, at some point along the line, they will adjust their withdrawals to compensate for a smaller portfolio size. So “failure” doesn’t mean running out of money, it means reducing spending partway through retirement, which often happens anyway as people age. The main risk in this case is to people who’ve planned such a lean retirement that there’s nothing left to adjust.
Well, having to lower withdrawals is failure for a fixed withdrawal method. Otherwise, it never fails.
There is another interesting fact to be appreciated: all those studies backtesting a certain SWR assume the retiree has "infinite courage", so to speak.
They classify as failure only running out of money. If at the end of the 30 years one is left with $1, that would rank as "success".
Now, put yourself in the retiree shoes for a moment: His/hers balance is plunging. It is true that ex-post a market recovery will support their 4%, or whatever, continued withdrawal, but they don't know it ex-ante !. Also, they have no guarantee they will croak as the clock strikes the 30 years mark.
An actual safe withdrawal rate is much more complicated than those "studies" portray.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by nisiprius »

I don't know that 4% is safe. I think 4% is a reasonable planning number.

In their February 1998 article, Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable, Cooley & al. the word "safe" does not appear. What does appear is a perfectly clear statement:
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.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by dsasdg »

vineviz wrote: Sun Apr 11, 2021 1:01 pm
whereskyle wrote: Sun Apr 11, 2021 12:54 pm
Leesbro63 wrote: Sun Apr 11, 2021 9:50 am I hesitate to start yet another "4% won't work" SWR thread, but I saw this WSJ article and think anything quoting Wade Pfau will be of interest to Bogleheads:

https://www.wsj.com/articles/retirement ... 1617929631

"Wade Pfau, a professor at the American College of Financial Services, has run tests that support Mr. Bengen’s earlier research. But Prof. Pfau says someone retiring today and taking fixed inflation-adjusted withdrawals from a portfolio shouldn’t use the 4% rule; he calculates the safe number is just 2.8%, mostly because bond rates have tumbled."
Why do "the experts" expect long-term inflation to stay the same or go up at the same time they expect a massive, protracted economic slowdown?
For one thing, I’m not seeing any such claim here.

For another, a combination of rising inflation and slow economic growth is always a possibility
I think it was possible because in the 1970s, union workers could still get their part. After that, they couldn't get their part. Therefore, there was no higher inflation.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by geerhardusvos »

Thesaints wrote: Mon Apr 12, 2021 12:01 pm
geerhardusvos wrote: Mon Apr 12, 2021 9:19 am You don’t know that the present scenario is a lot less safe for normal retirements. A 4% WR has worked at 99% of the time with the 75/25 portfolio for 30 year retirements. That’s extremely safe, and nothing about the current market says definitively that the next 30 years will be any different. What is actually escaping more people is the fact that they have no idea what the future holds, and that historical data matters. What historical data are you using to make your claim? What current date are you using to make your claim?

If it’s such a simple fact, why has Pfau been so terribly wrong previously?
Bond returns are the lowest they have ever been and they have to stay that way. Therefore the past 150 years of history is not such a guarantee of success.
To compensate bond returns one has to load up on stocks, higher volatility ensues and volatility is the enemy of those in a withdrawal phase.
The only way for bond yields to go substantially up is a minor catastrophe for financial markets which would wipe out a substantial chunk of retirees portfolios, again increasing their risk of failure.
It is not really rocket science.
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.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by HomerJ »

Thesaints wrote: Mon Apr 12, 2021 12:44 pmIt is abundantly clear that nor the Fed, nor the BCE, will "ever" raise rates.
Nothing is ever abundantly clear in economics. That's your giant mistake.
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Re: Another 2.8% SWR Article Quoting Wade Pfau

Post by watchnerd »

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.

In their February 1998 article, Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable, Cooley & al. the word "safe" does not appear. What does appear is a perfectly clear statement:
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.
PV backtest of the last 10 years says, for my port, I have:

*Perpetual* Withdrawal Rate = 5.34%

Of course, I don't plan for that....
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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