Wade Pfau's Retirement (2.2% SWR, Annuities)

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smectym
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by smectym »

dbr wrote: Mon Aug 15, 2022 10:52 am
White Coat Investor wrote: Mon Aug 15, 2022 10:48 am
Kaione wrote: Mon Aug 15, 2022 10:03 am He suggests using annuities instead of bonds for guarding against sequence of return risks. As far as I can tell he also suggests 2.2% SWR because 4% only worked before due to rates of bonds and interest levels in the past.

I had the impression that people thought negatively of annuities, but i'm not sure. What do you guys think about his ideas?
I wish I could be Wade's heir.
Actually not because all those annuities take away from what can be inherited unless he is using period certain annuities or some other trick to allow heirs to get the money.
randomguy
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by randomguy »

michaeljc70 wrote: Tue Aug 16, 2022 8:59 am

We also don't typically use a 6% SWR (to match the long term real return of stocks) because very few retirees have 100% in equities.
Sure but you get pretty close with a 50/50 allocation

6% real from equities
2% real from bonds
no SORR

Your SWR is about 5.5. With 0% real from bonds you are a bit over 5%. Hold 70/30 and you should be fine. Ignoring SOR and assuming historical average numbers rather historical worst numbers are the issues more than AA.
humblecoder
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by humblecoder »

This is an interesting topic for those of us who are approaching retirement.

On the one hand, you don't want to run out of money. On the other hand, you don't want to leave too much money on the table. The latter is a risk that is not talked about as much on here. There are no prizes for the person who dies with the most money unspent, and it is sad (in my opinion) if a person isn't able to enjoy the fruits of their labor out of fear or risk averseness (is that a word? :-))

Historically, a 4% SWR has had 100% success for a 30 year retirement and a balanced investment portfolio. One flaw is that there is a non-trivial probability that you might end up with a sizable portfolio upon death. Plus, by the time you realize that you can spend more, you may no longer be able to spend that money, due to health. You would probably get the most personal enjoyment about spending that money early in retirement, but that's exactly when you have the most uncertainty.

To try and counter this risk, you can annuitize SOME of your savings. This guarantees you a certain floor of income for your entire life that won't run out. Of course, that isn't perfect either, since most private annuities aren't inflation indexed, so you now have that risk. You also have the risk that the insurance company goes out of business, although I would argue that this risk isn't that great given the regulations and reserves that insurance companies have to abide by.

Another tool is to defer Social Security as long as possible, as this will give you a higher level of guaranteed income that also happens to be inflation indexed. Then possibly supplement this with an annuity to cover any gaps in your basic living expenses. Then you are free to use your remaining portfolio for more discretionary spending. If it runs out due to market worst case scenarios and whatnot, well at least you aren't going to be destitute since you have guaranteed income to meet your basic needs.

As you can see, there are no perfect answers. Even the experts can't agree on this stuff, so what chance do we mortals have? :-)
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by iim7V7IM7 »

Kaione wrote: Mon Aug 15, 2022 6:23 pm
iim7V7IM7 wrote: Mon Aug 15, 2022 4:15 pm What source are you citing Wade from?
For the 2.2%? https://www.youtube.com/watch?v=Z28JqpJXAWo
Thanks for that. There is quite a bit of underlying “bad chicken dinner” in that video. The sponsor is a poorly rated insurance company who is selling annuity and Wade is the guest.

https://www.investopedia.com/nassau-fin ... ew-5202334

I really wish that Wade would not participate in these types of videos because they can be interpreted by the naïve in an uninformed way. I don’t question his motivations, more the sponsoring hosts of the discussion. While I do agree that low yields on bonds together with a high Shiller CAPE for stocks is concerning looking forward, no one honestly knows how long these conditions will sustain, so projecting forward assuming it continues is a bit of speculation foolhardiness.

Looking at Wade’s Dashboard that he mentions on the video Retirement Researcher has not been updated since April 2021. That video was made in February 2021 so it is not that different.

https://retirementresearcher.com/dashboard/

The 10-year Treasury was yielding about 1.6% in April 2021 and is yielding nearly 2.9% August 2022. The interesting thing is if you look at his dashboard figure, it says 2.39% for a 50% equity /50% fixed income portfolio; BUT it is based on not falling below 15% of its initial balance in 30-years. That was not what Bill Bengen’s 4% SAFEMAX was based upon. I thought that he said a 4% SWR + CPI had a 95% chance of not running out of money with 30-years of withdrawals. He did not have a terminal balance criterion of +/-15% of the initial balance. This is a key difference in my opinion. While I never doubt Wade’s math, I think his dashboard is looking at quite different acceptance criteria than Bengen’s SAFEMAX concept. I would be curious to see a similar analysis without his terminal balance criterion.

The 4% SAFEMAX worked for retirees starting in 1966, so it is still a reasonable benchmark. I also think studies like Morningstar’s that suggest 3.3% assumed bad periods for more than 15-years which also may be an unrealistic scenario (Michael Kitces paper). There have been a myriad of research papers questioning the 4% SAFEMAX (including Vanguard’s which I believe suggested 3.7%).

Given that we do not need to blindly continue to withdraw like robots when market conditions are poor and David Blanchett’s research on spending behavior through retirement as people age, it is still a useful starting point for many to consider. I think that the insurance industry has done decades of disservice by selling complex poorly performing whole life and variable annuity products to naïve investors. There is a specific role for annuitization in the context of a broader income plan, but of course it continues to be oversold.

Some investors could consider annuitizing a portion of their fixed income into a SPIA later in their retirement to mitigate against longevity risk. For someone is using a 30-year plan (ages 65 to 95) after age 80 when the mortality credits overcome the various costs of annuitization they certainly could consider annuitizing a portion of their fixed income to mitigate supporting their essential expenses if they were to live beyond age 95.
smectym
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by smectym »

dbr wrote: Mon Aug 15, 2022 10:52 am
White Coat Investor wrote: Mon Aug 15, 2022 10:48 am
Kaione wrote: Mon Aug 15, 2022 10:03 am He suggests using annuities instead of bonds for guarding against sequence of return risks. As far as I can tell he also suggests 2.2% SWR because 4% only worked before due to rates of bonds and interest levels in the past.

I had the impression that people thought negatively of annuities, but i'm not sure. What do you guys think about his ideas?
I wish I could be Wade's heir.
Actually not because all those annuities take away from what can be inherited unless he is using period certain annuities or some other trick to allow heirs to get the money.
Period certain annuities do have their place, especially for younger (<75 or 80) annuitants. Filling the gap between retirement and social security at 70 worked well for us. Period certain also curtails (though does not eliminate, of course) inflation risk. Period certain allows a much smaller capital allocation to meet a specific “$ per month” target than a life annuity, at younger ages. The “$ per month” are also usually partially tax-free—an advantage over IRA withdrawals. The balance can be invested, potentially toward another annuity later (maybe, by then, a life product) if the need is still there. There are a few other advantages as well

Always pros and cons; annuities are often unnecessary or sub-optimal solutions, and if an annuity is indicated, sometimes a life annuity is indeed the better choice. But “period certain” can fit the bill in some situations.
JackoC
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by JackoC »

Wanderingwheelz wrote: Mon Aug 15, 2022 10:23 am
1. I think most of the time one sees the “4% Rule” here, it’s to discredit it not to give it a stamp of approval.

2. If the “2.2% Rule” were to supplant it, the economy would completely tank from lack of consumption and many workers would never be able to retire at all, at least beyond basic rent, food and clothing.
1. I think it's pretty mixed, it still has a lot of support. I believe qualitatively it is poorly supported since the historical evidence is over periods where prevailing bond and stock earnings yields were significantly higher than now.

2. The part about the effect on economy may be tongue in cheek. What would (supposedly) happen to the economy because I shift my savings/spending plan to something I conclude is more suitable for me is entirely irrelevant. And it's not at all clear in a country with a constant enormous federal fiscal and current account deficit that the thing to worry about is too much savings. The savings rate for most national/societal welfare in the long run is complicated, and inevitably political because economically a $ of public dissaving (deficit) cancels a $ of private (or corporate) saving and vice versa. But again maybe you were kidding, sorry to belabor the point if so.

I agree with Pfau 'directionally' that lower expected return now compared to the geometric average return does mean setting aside a past answer like 4% as 'the' answer. But, based on past long threads about Pfau's particular papers, part of the reason for a *much* lower SWR would be healthy/good health habits well educated upper middle class Americans (some or all those factors are present in overwhelming majority of people on this forum would be my guess) can have life *expectancies* (50% point) well into their 90's. Overall LE trend in US isn't good lately but it's not that relevant to personal planning for people not affected by particular negative socio-economic and life style factors and most people here aren't. Partly, Pfau is exploring (some might say 'pushing' I don't think that's fair) annuities as a tool and pointing out the SWR might be very low if you have to assume a very long life, rather than let annuities deal part of that risk.

But sure 2.2% is very low under traditional assumptions of length of retirement. Without black boxes we can easily calculate that 3.3% lasts 30 yrs at 0% real return. But I estimate the real after tax expected return of my portfolio around 1.7% (using 4% real pre tax for stocks and bonds what they yield now, my tax brackets, almost all in taxable), 0% isn't *that* much of a deviation on the downside. For those with lower taxes (or mainly IRA, where the amount is really notional*(1-tax rate) but that amount grows at the pre tax return), would show up better. But if shooting for very high 'success %' over much longer than 30 yrs in a plausible downside case from now's expected return as I'd estimate something in the 2's isn't ridiculous. On many threads about Pfau's work in more detail I don't recall any post pointing out some major obvious mistake he's making.

And people saying 'well you wouldn't actually withdraw X% first year and inflation adjusted $ amount thereafter, you'd adapt if things didn't go well' are right and wrong. Right, people would 'adapt' (ie cut back their standard of living) gradually if things went poorly. But the historical findings don't assume that. It's not relevant to say 'well I could cut back' to counter somebody saying X% would have been extremely likely to work in the previous return distribution *without ever cutting back*, but from now it's less likely to.
Last edited by JackoC on Tue Aug 16, 2022 10:03 am, edited 3 times in total.
michaeljc70
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by michaeljc70 »

randomguy wrote: Tue Aug 16, 2022 9:34 am
michaeljc70 wrote: Tue Aug 16, 2022 8:59 am

We also don't typically use a 6% SWR (to match the long term real return of stocks) because very few retirees have 100% in equities.
Sure but you get pretty close with a 50/50 allocation

6% real from equities
2% real from bonds
no SORR

Your SWR is about 5.5. With 0% real from bonds you are a bit over 5%. Hold 70/30 and you should be fine. Ignoring SOR and assuming historical average numbers rather historical worst numbers are the issues more than AA.
Your SWR is a function of a few things. The most important being term and AA. You are quoting SWR numbers and I have no idea if that is for a 30 year retirement, 50 year retirement, 20 year retirement, in perpetuity.... Also, a lot of people are fine with having to cut back a little if they do encounter one of the worst case scenarios. Personally, looking at the revised Trinity Study or using FireCalc I look for my plan to work without modification >90% of the time. If I have to skip a few vacations because of a bad SOR I can.

According to the revised trinity Study with 50/50 and a 5% SWR the chances of success are 15 yrs = 100%, 20 yrs = 99%, 25 yrs = 85%, 30 yrs = 70%, 35 yrs = 59% and 40 yrs = 45%. For 75/25 AA and 30 years you only have a 78% chance of success. I don't see what good a calculation assuming no SORR is because there is always SORR.

BTW..in the dataset I typically use (1926-2017) the Real return of the S&P 500 is close to 9%. 11.9% nominal and 3% inflation on average.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by JackoC »

michaeljc70 wrote: Tue Aug 16, 2022 9:56 am
randomguy wrote: Tue Aug 16, 2022 9:34 am
michaeljc70 wrote: Tue Aug 16, 2022 8:59 am

We also don't typically use a 6% SWR (to match the long term real return of stocks) because very few retirees have 100% in equities.
Sure but you get pretty close with a 50/50 allocation

6% real from equities
2% real from bonds
no SORR

Your SWR is about 5.5. With 0% real from bonds you are a bit over 5%. Hold 70/30 and you should be fine. Ignoring SOR and assuming historical average numbers rather historical worst numbers are the issues more than AA.
Your SWR is a function of a few things. The most important being term and AA. You are quoting SWR numbers and I have no idea if that is for a 30 year retirement, 50 year retirement, 20 year retirement, in perpetuity.... Also, a lot of people are fine with having to cut back a little if they do encounter one of the worst case scenarios. Personally, looking at the revised Trinity Study or using FireCalc I look for my plan to work without modification >90% of the time. If I have to skip a few vacations because of a bad SOR I can.

According to the revised trinity Study with 50/50 and a 5% SWR the chances of success are 15 yrs = 100%, 20 yrs = 99%, 25 yrs = 85%, 30 yrs = 70%, 35 yrs = 59% and 40 yrs = 45%. For 75/25 AA and 30 years you only have a 78% chance of success. I am not sure where you are getting your calculation from. The average of 6% and 2% is 4% not 5.5% SWR.

BTW..in the dataset I typically use (1926-2017) the Real return of the S&P 500 is close to 9%. 11.9% nominal and 3% inflation on average.
You're disputing the fine points around an assumption basically different than Pfau's (or mine). You assume the expected return is estimated mainly or wholly by looking at past returns. I assume it's mainly estimated by looking at yield and valuation now. Which comes out quite differently lately. I assume 4% real pre tax return for equities and would be willing to admit (to an *actual* pessimist :happy ) that there's a fraction of % of arbitrary optimism to get that round figure. If you assume the past return is the expected return now, 'SWR' comes out differently. Likewise FireCalc etc will use the past distribution of realized pre tax bond returns centered around 2.5%, I'd just use what bonds yield now as the best estimate in efficient market, fraction of 1% real pre tax, nor do I see why I have to 'simulate' that when I could just buy long term bonds now. That's the basic debate. It's not mainly a particular special sauce of Wade Pfau's, it's mainly the expected return and variance assumptions (lower expected return than historical, but assuming same variance for a lack of a reason to assume that's lower also, or it could be higher, who knows?). Again, secondarily Pfau emphasizes that many retirees are or should be planning for longer retirements than particular past studies assumed (though people using tools like FireCalc can make that change themselves, the distribution of returns though is hardwired as the 1871-recent historical one).
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HomerJ
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

Valuethinker wrote: Tue Aug 16, 2022 4:06 am
HomerJ wrote: Mon Aug 15, 2022 2:47 pm
Kaione wrote: Mon Aug 15, 2022 10:03 am He suggests using annuities instead of bonds for guarding against sequence of return risks.
Wade consults for annuity companies. Conflict of interest.
As far as I can tell he also suggests 2.2% SWR because 4% only worked before due to rates of bonds and interest levels in the past.
4% worked in the past in the U.S. when bond rates were low (even negative in real terms).

Wade suggests 2.2% SWR for two faulty reasons. He's looking at the entire world's financial history 1900-today, which includes countries like Italy, Germany, and Japan during World War II (really, all of Europe suffered during World War II). So he's adding in some very low international historical rates which bring the average down.

4% worked in the U.S. And 4% mostly worked internationally too, if you look from 1950-2020, instead of using the World War I and World War II years.
One could argue the modern version of WW1 or WW2 involves the use of nuclear weapons so we don't need to worry about it. Our asset portfolios will be worth 0, if we are even alive.

However I don't think we have reinvented human nature. The 21st century has some knotty problems. We are already running the biggest war in Europe seen since 1945. And getting on for one of the biggest wars since 1945 generally -- on the scale of Korea, Vietnam & Iran-Iraq wars (smaller than any of those 3 - so far). The rate of artillery shell expenditure has not been seen since Korea or Vietnam, I don't think. Energy crisis. Inflation. Environmental crisis. It's easy to see how we could rerun the 1970s, or even the 1930s. Those supercycles of capital destruction which seem to be intrinsic to stock market capitalism. You get these long periods of capital accumulation and then intense and highly destructive crises -- usually around failure of financial intermediaries (but not always). China is going through one now - the collapse of the largest property bubble in human history leading to the largest corporate financial distress in recorded history. (Marx certainly said these cycles were intrinsic to capitalism. I don't see any evidence that we refuted that - given that the 1870s crisis, the early 1930s crisis and the 2008 crisis all happened and in the last case, we have full knowledge of the predecessor cases (although we don't really have good stats for the 1870s one)).

I wouldn't throw out international evidence. Even the inconvenient bits.
It's not about throwing out inconvenient international evidence.

It's recognizing that if your country is invaded and bombed to rubble, all bets are off.

At that point, you are in survival mode, and you're not worried about having enough discretionary expenses to go on 2-3 vacations a year, and out to eat twice a week.

Seems very silly to save twice as much money (and work years longer) in an attempt to keep your "desired" retirement lifestyle going even if your hometown is invaded by tanks. It's not going to happen.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by ScubaHogg »

Does he actually say this? For a 30 year retirement?

30 year tips are yielding like .84% today. It’s trivially obvious that I could spend more over 30 years than 2.2%. Even at 0 real yield that’s like 3.3%.
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

humblecoder wrote: Tue Aug 16, 2022 9:41 am This is an interesting topic for those of us who are approaching retirement.

On the one hand, you don't want to run out of money. On the other hand, you don't want to leave too much money on the table. The latter is a risk that is not talked about as much on here. There are no prizes for the person who dies with the most money unspent, and it is sad (in my opinion) if a person isn't able to enjoy the fruits of their labor out of fear or risk averseness (is that a word? :-))

Historically, a 4% SWR has had 100% success for a 30 year retirement and a balanced investment portfolio. One flaw is that there is a non-trivial probability that you might end up with a sizable portfolio upon death. Plus, by the time you realize that you can spend more, you may no longer be able to spend that money, due to health. You would probably get the most personal enjoyment about spending that money early in retirement, but that's exactly when you have the most uncertainty.

To try and counter this risk, you can annuitize SOME of your savings. This guarantees you a certain floor of income for your entire life that won't run out. Of course, that isn't perfect either, since most private annuities aren't inflation indexed, so you now have that risk. You also have the risk that the insurance company goes out of business, although I would argue that this risk isn't that great given the regulations and reserves that insurance companies have to abide by.

Another tool is to defer Social Security as long as possible, as this will give you a higher level of guaranteed income that also happens to be inflation indexed. Then possibly supplement this with an annuity to cover any gaps in your basic living expenses. Then you are free to use your remaining portfolio for more discretionary spending. If it runs out due to market worst case scenarios and whatnot, well at least you aren't going to be destitute since you have guaranteed income to meet your basic needs.

As you can see, there are no perfect answers. Even the experts can't agree on this stuff, so what chance do we mortals have? :-)
Good post.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

JackoC wrote: Tue Aug 16, 2022 9:55 am I believe qualitatively it is poorly supported since the historical evidence is over periods where prevailing bond and stock earnings yields were significantly higher than now.
No, the 4% number represents the WORST times in the past.

During the good times in the past, when bond and stock yields were "significantly higher than now", one could have pulled 6% or even 7% or 8% a year and not run of out of money.

No one is counting on high bond and stock yields with the 4% plan.

Because the 4% withdrawal represents the times in our past when stocks and bonds did poorly. Very poorly. Great Depression times. 25% unemployment times. 1966-1982 times, where the DOW was 1000 in 1966 and STILL 1000 in 1982, AND bonds did poorly because interest rates were rising AND we had double-digit inflation for most of a decade.

And still 4% worked (okay 3.9%)

4% is a great starting point. And one should be flexible, able to spend less in bad times. If 4% represents bare-bones survival, then keep working.

But for most people here, with Social Security, it's probably more like 2%-3% + SS to cover all your base expenses, and another 1%-2% for fun, but important to you, stuff.

"Failure" of a 4% withdrawal plan probably means taking 2 vacations a year instead of 4 vacations a year (or 4 cheaper ones), for a few years during a downturn for most people here. If things get that bad, Great Depression bad, you'll be happy to have your base expenses well covered.

"Failure" doesn't equal living under a bridge eating cat food.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by michaeljc70 »

JackoC wrote: Tue Aug 16, 2022 10:15 am
michaeljc70 wrote: Tue Aug 16, 2022 9:56 am
randomguy wrote: Tue Aug 16, 2022 9:34 am
michaeljc70 wrote: Tue Aug 16, 2022 8:59 am

We also don't typically use a 6% SWR (to match the long term real return of stocks) because very few retirees have 100% in equities.
Sure but you get pretty close with a 50/50 allocation

6% real from equities
2% real from bonds
no SORR

Your SWR is about 5.5. With 0% real from bonds you are a bit over 5%. Hold 70/30 and you should be fine. Ignoring SOR and assuming historical average numbers rather historical worst numbers are the issues more than AA.
Your SWR is a function of a few things. The most important being term and AA. You are quoting SWR numbers and I have no idea if that is for a 30 year retirement, 50 year retirement, 20 year retirement, in perpetuity.... Also, a lot of people are fine with having to cut back a little if they do encounter one of the worst case scenarios. Personally, looking at the revised Trinity Study or using FireCalc I look for my plan to work without modification >90% of the time. If I have to skip a few vacations because of a bad SOR I can.

According to the revised trinity Study with 50/50 and a 5% SWR the chances of success are 15 yrs = 100%, 20 yrs = 99%, 25 yrs = 85%, 30 yrs = 70%, 35 yrs = 59% and 40 yrs = 45%. For 75/25 AA and 30 years you only have a 78% chance of success. I am not sure where you are getting your calculation from. The average of 6% and 2% is 4% not 5.5% SWR.

BTW..in the dataset I typically use (1926-2017) the Real return of the S&P 500 is close to 9%. 11.9% nominal and 3% inflation on average.
You're disputing the fine points around an assumption basically different than Pfau's (or mine). You assume the expected return is estimated mainly or wholly by looking at past returns. I assume it's mainly estimated by looking at yield and valuation now. Which comes out quite differently lately. I assume 4% real pre tax return for equities and would be willing to admit (to an *actual* pessimist :happy ) that there's a fraction of % of arbitrary optimism to get that round figure. If you assume the past return is the expected return now, 'SWR' comes out differently. Likewise FireCalc etc will use the past distribution of realized pre tax bond returns centered around 2.5%, I'd just use what bonds yield now as the best estimate in efficient market, fraction of 1% real pre tax, nor do I see why I have to 'simulate' that when I could just buy long term bonds now. That's the basic debate. It's not mainly a particular special sauce of Wade Pfau's, it's mainly the expected return and variance assumptions (lower expected return than historical, but assuming same variance for a lack of a reason to assume that's lower also, or it could be higher, who knows?). Again, secondarily Pfau emphasizes that many retirees are or should be planning for longer retirements than particular past studies assumed (though people using tools like FireCalc can make that change themselves, the distribution of returns though is hardwired as the 1871-recent historical one).
Understood. But that isn't much of a debate to me. Using 100 years of real data vs. guessing what future returns might be in 10, 20 or 30 years is a no brainer for me. I haven't seen any study that shows a useful correlation between current PE and/or interest rates and returns over the next 30 years.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

Note that Pfau started talking about low SWRs in the 2%-3% range back in 2010 and 2011.

He was pretty sure then too, that his calculations showed that future returns would likely be poor for both stocks and bonds going foward.

Anyone who retired in 2011 certainly has been able to pull more than 2.2% or 4% or even 6% probably.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by michaeljc70 »

HomerJ wrote: Tue Aug 16, 2022 10:55 am Note that Pfau started talking about low SWRs in the 2%-3% range back in 2010 and 2011.

He was pretty sure then too, that his calculations showed that future returns would likely be poor for both stocks and bonds going foward.

Anyone who retired in 2011 certainly has been able to pull more than 2.2% or 4% or even 6% probably.
But the S&P 500 is only 460% higher since 2010. :shock:
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by Dottie57 »

HomerJ wrote: Mon Aug 15, 2022 2:47 pm
For instance, my wife I will get around $40,000 a year in Social Security... I could see spending SOME of our bond money to get another $20,000 a year in SPIA payments... That would get us up to $60,000 a year for life, which covers all our base expenses (The SS is inflation-adjusted, but the SPIA is not, so I'd have to buy another SPIA 15 years down the road probably)

Then I'd leave the rest in investments (both stocks\bonds) to use for discretionary spending and for possible inheritance.
I am a bit worried about the possible drop in SS payments. It might make sense to put enough money into an SPIA to cover a cut. I had stopped considering SPIA as rates dropped.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by Zeno »

Following
Last edited by Zeno on Tue Aug 23, 2022 6:43 pm, edited 1 time in total.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by vitaflo »

HomerJ wrote: Mon Aug 15, 2022 2:47 pm Wade suggests 2.2% SWR for two faulty reasons. He's looking at the entire world's financial history 1900-today, which includes countries like Italy, Germany, and Japan during World War II (really, all of Europe suffered during World War II). So he's adding in some very low international historical rates which bring the average down.

4% worked in the U.S. And 4% mostly worked internationally too, if you look from 1950-2020, instead of using the World War I and World War II years.
This is an important point that should be reiterated. Wade did a lot of studies on SWR for other countries where residents only held their own countries equities (like many in the US do). Japan fared the worst with a 0.25% SWR (the US was close to the top). Then he did the same with a global market weight of international equities. Most countries fared better (obviously the US then had a lower SWR). Japan in particular did much better when using a market weight of international equities with an SWR of, you guessed it, 2.2%
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by tibbitts »

Dottie57 wrote: Tue Aug 16, 2022 11:23 am
HomerJ wrote: Mon Aug 15, 2022 2:47 pm
For instance, my wife I will get around $40,000 a year in Social Security... I could see spending SOME of our bond money to get another $20,000 a year in SPIA payments... That would get us up to $60,000 a year for life, which covers all our base expenses (The SS is inflation-adjusted, but the SPIA is not, so I'd have to buy another SPIA 15 years down the road probably)

Then I'd leave the rest in investments (both stocks\bonds) to use for discretionary spending and for possible inheritance.
I am a bit worried about the possible drop in SS payments. It might make sense to put enough money into an SPIA to cover a cut. I had stopped considering SPIA as rates dropped.
It's frustrating to me that people who retired in the late '80s after SS was "fixed" the last time enjoyed a significant level of confidence in what their SS would be over their lifetime. This and the coming years until SS is fixed again (presumably after the deadline and multiple temporary fixes have been negotiated) have the highest degree of uncertainty. You can't just put money into an SPIA to compensate because it won't be inflation-adjusted.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by Wanderingwheelz »

Zeno wrote: Tue Aug 16, 2022 11:34 am
humblecoder wrote: Tue Aug 16, 2022 9:41 am This is an interesting topic for those of us who are approaching retirement.

On the one hand, you don't want to run out of money. On the other hand, you don't want to leave too much money on the table. The latter is a risk that is not talked about as much on here. There are no prizes for the person who dies with the most money unspent, and it is sad (in my opinion) if a person isn't able to enjoy the fruits of their labor out of fear or risk averseness (is that a word? :-)) ....
I was always moved by newspaper stories about the school janitor who lived a simple life then, upon death, unexpectedly bequeathed his school's library $1M.

Our plan is to use a PWR (or as close to it as possible), with VPW's "worst case" as a ceiling "double check." So 2.2% doesn't sound unreasonable to me. We are pretty much already there now based upon an X analysis.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by MikeG62 »

Dottie57 wrote: Tue Aug 16, 2022 11:23 am
I am a bit worried about the possible drop in SS payments. It might make sense to put enough money into an SPIA to cover a cut. I had stopped considering SPIA as rates dropped.
I am not worried about this at all.

There is not a chance in my mind that any administration is going to allow that to happen due to the impact of that decision at the next election.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by jimkinny »

Kaione wrote: Mon Aug 15, 2022 10:03 am He suggests using annuities instead of bonds for guarding against sequence of return risks. As far as I can tell he also suggests 2.2% SWR because 4% only worked before due to rates of bonds and interest levels in the past.

I had the impression that people thought negatively of annuities, but i'm not sure. What do you guys think about his ideas?
There are good reasons to buy SPIA's and good reasons not to buy an annuity. Much depends on your individually situation and biases. Wade Pfau has a book that you could buy.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by tibbitts »

MikeG62 wrote: Tue Aug 16, 2022 12:52 pm
Dottie57 wrote: Tue Aug 16, 2022 11:23 am
I am a bit worried about the possible drop in SS payments. It might make sense to put enough money into an SPIA to cover a cut. I had stopped considering SPIA as rates dropped.
I am not worried about this at all.

There is not a chance in my mind that any administration is going to allow that to happen due to the impact of that decision at the next election.
It's already happened, with the changes to SS tax policies, etc. So I wouldn't count on "any administration" in the future not doing what other ones have done in the past.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by dad2000 »

2.2% SWR is apocalyptic and I'm not buying, especially for Bogleheads. Maybe for people who are financially illiterate and have not positioned themselves for retirement. I'm using 3.3% and will adapt as necessary.

If I assume that returns will be that bad, I wouldn't retire until I am debt free, mortgage and all. That's my plan anyway, and I assume the same for many BHers (except for possibly a small mortgage). We are likely in the top decile in terms of retirement readiness. No matter the conditions, our financial quality of life in retirement is likely to remain in that top decile. Other than an unanticipated and crippling medical expense, our spending will adapt to the conditions. If we can't make it, then the world won't be worth living in anyway.

As I look at the current world landscape, I think there are far greater risks to my well-being than poor market returns. I'm looking at making my final home in a place that promotes healthy living, that's in low risk categories for extreme heat, wildfire, flooding, and water shortages.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by MikeG62 »

tibbitts wrote: Tue Aug 16, 2022 1:20 pm
MikeG62 wrote: Tue Aug 16, 2022 12:52 pm
Dottie57 wrote: Tue Aug 16, 2022 11:23 am
I am a bit worried about the possible drop in SS payments. It might make sense to put enough money into an SPIA to cover a cut. I had stopped considering SPIA as rates dropped.
I am not worried about this at all.

There is not a chance in my mind that any administration is going to allow that to happen due to the impact of that decision at the next election.
It's already happened, with the changes to SS tax policies, etc. So I wouldn't count on "any administration" in the future not doing what other ones have done in the past.
Most people outside of this forum don’t understand the impact of tax law changes. Completely different optics than lowering benefits for those who are currently receiving benefits.

It is simply not going to happen and I most certainly would not plan for or worry about it.

Honestly, I’d worry as much about being struck by lightening as the monthly benefit amount for those receiving benefits being reduced.

There are so many other ways for the government to deal with the shortfall, and they will most certainly pursue those options instead of cutting benefits.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by tibbitts »

MikeG62 wrote: Tue Aug 16, 2022 1:52 pm Most people outside of this forum don’t understand the impact of tax law changes. Completely different optics than lowering benefits for those who are currently receiving benefits.

It is simply not going to happen and I most certainly would not plan for or worry about it.

Honestly, I’d worry as much about being struck by lightening as the monthly benefit amount for those receiving benefits being reduced.

There are so many other ways for the government to deal with the shortfall, and they will most certainly pursue those options instead of cutting benefits.
I agree that most people don't understand. And the last time I was young enough that I didn't even worry about my claiming age being bumped by a year and change. But add an IRMAA-like penalty/tax/whatever to SS benefits and some will start paying attention, even if you don't want to call that a reduction in SS benefits.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by vineviz »

HomerJ wrote: Tue Aug 16, 2022 10:48 am
JackoC wrote: Tue Aug 16, 2022 9:55 am I believe qualitatively it is poorly supported since the historical evidence is over periods where prevailing bond and stock earnings yields were significantly higher than now.
No, the 4% number represents the WORST times in the past.
No one disputes that 4% represents the worst outcome in recent US history. That's not at issue.

The issue that some of us are trying to emphasize is that we need not apply the historical record to a future that doesn't resemble history.

For mid-1960s retirees, it took a pretty bad sequence of returns to produce a SWR of less than 4%. For 2022 retirees, it would take a much less bad sequence of returns to do the same because the real expected returns for stocks and bonds NOW are lower than they were THEN.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

MikeG62 wrote: Tue Aug 16, 2022 1:52 pm
tibbitts wrote: Tue Aug 16, 2022 1:20 pm
MikeG62 wrote: Tue Aug 16, 2022 12:52 pm
Dottie57 wrote: Tue Aug 16, 2022 11:23 am
I am a bit worried about the possible drop in SS payments. It might make sense to put enough money into an SPIA to cover a cut. I had stopped considering SPIA as rates dropped.
I am not worried about this at all.

There is not a chance in my mind that any administration is going to allow that to happen due to the impact of that decision at the next election.
It's already happened, with the changes to SS tax policies, etc. So I wouldn't count on "any administration" in the future not doing what other ones have done in the past.
Most people outside of this forum don’t understand the impact of tax law changes. Completely different optics than lowering benefits for those who are currently receiving benefits.

It is simply not going to happen and I most certainly would not plan for or worry about it.

Honestly, I’d worry as much about being struck by lightening as the monthly benefit amount for those receiving benefits being reduced.

There are so many other ways for the government to deal with the shortfall, and they will most certainly pursue those options instead of cutting benefits.
One way it could affect us Bogleheads and not cost a politician at the polls is to mean-test Social Security. So it only affects "the rich" (top 10% or top 5%)

So OUR benefits (those of us who have saved $1 million+) could indeed be cut... I agree the odds are low, but I wouldn't say chances are equal to struck by lightening low.
Last edited by HomerJ on Tue Aug 16, 2022 2:20 pm, edited 1 time in total.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

vineviz wrote: Tue Aug 16, 2022 2:14 pm
HomerJ wrote: Tue Aug 16, 2022 10:48 am
JackoC wrote: Tue Aug 16, 2022 9:55 am I believe qualitatively it is poorly supported since the historical evidence is over periods where prevailing bond and stock earnings yields were significantly higher than now.
No, the 4% number represents the WORST times in the past.
No one disputes that 4% represents the worst outcome in recent US history. That's not at issue.

The issue that some of us are trying to emphasize is that we need not apply the historical record to a future that doesn't resemble history.

For mid-1960s retirees, it took a pretty bad sequence of returns to produce a SWR of less than 4%. For 2022 retirees, it would take a much less bad sequence of returns to do the same because the real expected returns for stocks and bonds NOW are lower than they were THEN.
"Expected" returns are a fantasy. The error bands are super wide. The models haven't held up for 30 years. There's also not a clean normal distribution around the median "expected" return point. These aren't just random independent returns. As we get closer to 0% or negative real returns, the external variables change.

You are unable to calculate the odds that 4% is more likely to fail starting from 2022 than the 1960s, because you don't know enough.

You think you do, but economics is not a real science, not like you think. We don't have enough data points, governments get involved, even human emotions are involved.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by nigel_ht »

Valuethinker wrote: Tue Aug 16, 2022 4:06 am
HomerJ wrote: Mon Aug 15, 2022 2:47 pm
Wade suggests 2.2% SWR for two faulty reasons. He's looking at the entire world's financial history 1900-today, which includes countries like Italy, Germany, and Japan during World War II (really, all of Europe suffered during World War II). So he's adding in some very low international historical rates which bring the average down.

4% worked in the U.S. And 4% mostly worked internationally too, if you look from 1950-2020, instead of using the World War I and World War II years.
One could argue the modern version of WW1 or WW2 involves the use of nuclear weapons so we don't need to worry about it. Our asset portfolios will be worth 0, if we are even alive.
So we all agree that the ultra low SWR values for Germany, Japan, China and Russia can be ignored.
However I don't think we have reinvented human nature. The 21st century has some knotty problems. We are already running the biggest war in Europe seen since 1945. And getting on for one of the biggest wars since 1945 generally -- on the scale of Korea, Vietnam & Iran-Iraq wars (smaller than any of those 3 - so far).
Which are years covered in SWR studies of developed nations. I would ignore the SWR values for Korea, Vietnam, Iran and Iraq retirees around those years though...
The rate of artillery shell expenditure has not been seen since Korea or Vietnam, I don't think.
If the artillery shell expenditure is being applied against your country then the SWR values should be ignored.
Energy crisis. Inflation. Environmental crisis. It's easy to see how we could rerun the 1970s, or even the 1930s.
Which is covered in the historical data set for the US.
Those supercycles of capital destruction which seem to be intrinsic to stock market capitalism. You get these long periods of capital accumulation and then intense and highly destructive crises -- usually around failure of financial intermediaries (but not always). China is going through one now - the collapse of the largest property bubble in human history leading to the largest corporate financial distress in recorded history. (Marx certainly said these cycles were intrinsic to capitalism. I don't see any evidence that we refuted that - given that the 1870s crisis, the early 1930s crisis and the 2008 crisis all happened and in the last case, we have full knowledge of the predecessor cases (although we don't really have good stats for the 1870s one)).
I dunno that I agree that there are "super cycles of capital destruction" that drive SWR to very low levels like WWI/WWII and even if I did...I don't think that any normal financial tool like AA, SWR, or whatever can mitigate against them anyway.

2.2% SWR will also fail in those scenarios.
I wouldn't throw out international evidence. Even the inconvenient bits.
You throw out the ones where the markets were bombed out of existence or simply closed and assets seized...I believe when you do that the result is not 2.2%...
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by nigel_ht »

vineviz wrote: Tue Aug 16, 2022 2:14 pm
For mid-1960s retirees, it took a pretty bad sequence of returns to produce a SWR of less than 4%. For 2022 retirees, it would take a much less bad sequence of returns to do the same because the real expected returns for stocks and bonds NOW are lower than they were THEN.
If expected returns was a compelling story then we would all be market timing...the odds would be in favor of you improving your overall returns vs buy and hold.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by vineviz »

HomerJ wrote: Tue Aug 16, 2022 2:19 pm You are unable to calculate the odds that 4% is more likely to fail starting from 2022 than the 1960s, because you don't know enough.
Anyone paying attention knows enough to see that the probablility of 4% failing over the next 30 years is higher than it was in the 1960s.
Last edited by vineviz on Tue Aug 16, 2022 8:17 pm, edited 3 times in total.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by vineviz »

nigel_ht wrote: Tue Aug 16, 2022 2:44 pm If expected returns was a compelling story then we would all be market timing ....
That's untrue, and pretty much a non-sequitur.

Every investor relies on some form of expected returns, not just day traders and market timers.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by nigel_ht »

vineviz wrote: Tue Aug 16, 2022 2:46 pm
nigel_ht wrote: Tue Aug 16, 2022 2:44 pm If expected returns was a compelling story then we would all be market timing ....
That's untrue, and pretty much a non-sequitur.
Why is this untrue?

If you can tell me that expected returns of stocks and bonds as an indicator is sufficiently compelling that we should use a 2.2% SWR number for retirement planning instead of 4% then why wouldn't you find it compelling enough do tactical asset allocation changes (aka market timing) based on that same indicator?

If it's actionable enough to nearly halve SWR then it should be actionable enough to move to asset classes that have a higher probability of doing better.

That folks aren't willing to do this is an indicator that the "expected returns" argument is not sufficiently compelling (for bogleheaders anyway) to drop to a 2.2% SWR rate for planning purposes...

Now, I don't care which way it is...I'm a heretic that doesn't cringe at the thought of changing AA based on market conditions as long as you can prove to me that whatever predictive metric you are using has a good real world track record and not just "it worked well in MC testing".
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by marcopolo »

nigel_ht wrote: Tue Aug 16, 2022 4:24 pm
vineviz wrote: Tue Aug 16, 2022 2:46 pm
nigel_ht wrote: Tue Aug 16, 2022 2:44 pm If expected returns was a compelling story then we would all be market timing ....
That's untrue, and pretty much a non-sequitur.
Why is this untrue?

If you can tell me that expected returns of stocks and bonds as an indicator is sufficiently compelling that we should use a 2.2% SWR number for retirement planning instead of 4% then why wouldn't you find it compelling enough do tactical asset allocation changes (aka market timing) based on that same indicator?

If it's actionable enough to nearly halve SWR then it should be actionable enough to move to asset classes that have a higher probability of doing better.

That folks aren't willing to do this is an indicator that the "expected returns" argument is not sufficiently compelling (for bogleheaders anyway) to drop to a 2.2% SWR rate for planning purposes...

Now, I don't care which way it is...I'm a heretic that doesn't cringe at the thought of changing AA based on market conditions as long as you can prove to me that whatever predictive metric you are using has a good real world track record and not just "it worked well in MC testing".
And what metrics would those be?
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by nigel_ht »

marcopolo wrote: Tue Aug 16, 2022 4:26 pm
nigel_ht wrote: Tue Aug 16, 2022 4:24 pm
vineviz wrote: Tue Aug 16, 2022 2:46 pm
nigel_ht wrote: Tue Aug 16, 2022 2:44 pm If expected returns was a compelling story then we would all be market timing ....
That's untrue, and pretty much a non-sequitur.
Why is this untrue?

If you can tell me that expected returns of stocks and bonds as an indicator is sufficiently compelling that we should use a 2.2% SWR number for retirement planning instead of 4% then why wouldn't you find it compelling enough do tactical asset allocation changes (aka market timing) based on that same indicator?

If it's actionable enough to nearly halve SWR then it should be actionable enough to move to asset classes that have a higher probability of doing better.

That folks aren't willing to do this is an indicator that the "expected returns" argument is not sufficiently compelling (for bogleheaders anyway) to drop to a 2.2% SWR rate for planning purposes...

Now, I don't care which way it is...I'm a heretic that doesn't cringe at the thought of changing AA based on market conditions as long as you can prove to me that whatever predictive metric you are using has a good real world track record and not just "it worked well in MC testing".
And what metrics would those be?
I dunno...some folks are saying expected returns is one. I'm not quite a believer...hence I'm just buying and holding.

Some folks like momentum/moving average/etc...I can see that but also haven't pushed the "I Believe" button yet...at least not enough to actually implement...

Just because I'm open to the idea doesn't mean I've found anything compelling yet...but if something takes 4% SWR down to 2.2% that's not some subtle indicator...that's an "OMG you need to work X extra years before you can retire" indicator.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by nigel_ht »

HomerJ wrote: Tue Aug 16, 2022 10:48 am
"Failure" of a 4% withdrawal plan probably means taking 2 vacations a year instead of 4 vacations a year (or 4 cheaper ones), for a few years during a downturn for most people here. If things get that bad, Great Depression bad, you'll be happy to have your base expenses well covered.

"Failure" doesn't equal living under a bridge eating cat food.
With a $2M portfolio yes.

With a $200K portfolio you are much closer to under bridge cat food than skipping vacations...having 4% work matters more in regular retirement planning than it does for HNW folks...
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by marcopolo »

nigel_ht wrote: Tue Aug 16, 2022 4:37 pm
marcopolo wrote: Tue Aug 16, 2022 4:26 pm
nigel_ht wrote: Tue Aug 16, 2022 4:24 pm
vineviz wrote: Tue Aug 16, 2022 2:46 pm
nigel_ht wrote: Tue Aug 16, 2022 2:44 pm If expected returns was a compelling story then we would all be market timing ....
That's untrue, and pretty much a non-sequitur.
Why is this untrue?

If you can tell me that expected returns of stocks and bonds as an indicator is sufficiently compelling that we should use a 2.2% SWR number for retirement planning instead of 4% then why wouldn't you find it compelling enough do tactical asset allocation changes (aka market timing) based on that same indicator?

If it's actionable enough to nearly halve SWR then it should be actionable enough to move to asset classes that have a higher probability of doing better.

That folks aren't willing to do this is an indicator that the "expected returns" argument is not sufficiently compelling (for bogleheaders anyway) to drop to a 2.2% SWR rate for planning purposes...

Now, I don't care which way it is...I'm a heretic that doesn't cringe at the thought of changing AA based on market conditions as long as you can prove to me that whatever predictive metric you are using has a good real world track record and not just "it worked well in MC testing".
And what metrics would those be?
I dunno...some folks are saying expected returns is one. I'm not quite a believer...hence I'm just buying and holding.

Some folks like momentum/moving average/etc...I can see that but also haven't pushed the "I Believe" button yet...at least not enough to actually implement...

Just because I'm open to the idea doesn't mean I've found anything compelling yet...but if something takes 4% SWR down to 2.2% that's not some subtle indicator...that's an "OMG you need to work X extra years before you can retire" indicator.
Got it.

I agree that if a reliable proven metric existed, I would be all for market timing. B&H is not a suicide pact.

But, as far as I can tell, despite all the blustering from some people every time the market take a little dip about "how obvious" it was, and how easy it is to do better, I have not seen any compelling evidence that such metrics exist.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by PicassoSparks »

OR, it’s an argument to consider various mechanisms for raising the floor of your retirement income.

The SWR calculations are based in the idea that you choose a rate and then mechanically adjust the withdrawal according to inflation. Even the slightest increase in flexibility of spending means that you can safely start at a higher withdrawal rate and then respond to the sequence of returns that you are dealt.

Things like social security, inflation protected securities, SPIAs or (if they existed) inflation adjusted annuities can be methods for raising the floor of how flexible you might need to be in case of really bad luck.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by vineviz »

nigel_ht wrote: Tue Aug 16, 2022 4:24 pm
Why is this untrue?

If you can tell me that expected returns of stocks and bonds as an indicator is sufficiently compelling that we should use a 2.2% SWR number for retirement planning instead of 4% then why wouldn't you find it compelling enough do tactical asset allocation changes (aka market timing) based on that same indicator?

If it's actionable enough to nearly halve SWR then it should be actionable enough to move to asset classes that have a higher probability of doing better.
For one thing, I never endorsed using a 2.2% SWR for retirement planning. I'm pretty sure I only pointed out that the probability of a 4% withdrawal rate failing is higher than it was historically.

As for market timing, there are many reasons you might not choose to attempt it REGARDLESS of your expectations about future returns. Even if a strategic change in asset allocations were indicated (and keep reading to see why it might not be), a change from a strategic asset allocation approach to a tactical asset allocation approach could still be a terrible idea.

More saliently, if the expected returns of ALL financial assets are lower than they were historically then it doesn't necessarily follow that a change in asset allocations is the right response to lower expected returns. When stocks, bonds, and cash all have lower expected real returns the optimal portfolio (using whatever metric you want to use) might very well remain unchanged.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by RubyTuesday »

vineviz wrote: Tue Aug 16, 2022 2:44 pm
HomerJ wrote: Tue Aug 16, 2022 2:19 pm You are unable to calculate the odds that 4% is more likely to fail starting from 2022 than the 1960s, because you don't know enough.
Anyone paying attention knows enough to see that the probably of 4% failing over the next 30 years is lower than it was in the 1960s.
Did you intend to “lower” or “higher”?

Because just above you said
vineviz wrote:I'm pretty sure I only pointed out that the probability of a 4% withdrawal rate failing is higher than it was historically.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by 9-5 Suited »

If I had a 30 year retirement horizon and believed my safe withdrawal rate to be under 3.3% based on a portfolio of stocks and bonds, why wouldn’t I just opt for a TIPS ladder and lock in a 3.3% withdrawal rate? These WRs like 2.2% just seem preposterously conservative to me.

I have no real perspective on annuities except that they seem like a good replacement for a portions of one’s bond portfolio once one reaches 70+. Yields on the annuities generally appear to generate more cash flow than safe treasury bonds and provide longevity insurance.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by iim7V7IM7 »

Wade has set different criteria then Bill Bengen did for some reason beyond me.

- Wade Pfau’s dashboard is defining an SWR > 90% chance of surviving 30-years with a terminal balance +/- 15% of the starting balance!
- Wade’s dashboard last posted in April 2021 has a 2.39% SWR, but the 10-year Treasury yield was about 1.6%!
- Bill Bengen’s 4% SWR was based on > 95% chance that it supported income across a 30-year time horizon. There is no terminal balance requirement.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by Zeno »

Following this thread
Last edited by Zeno on Sun Aug 21, 2022 6:20 pm, edited 2 times in total.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by CRC_Volunteer »

Wanderingwheelz wrote: Mon Aug 15, 2022 8:39 pm Put me in the group who would rather draw 4% and “barely fail” (not that I’d ever let that happen), then be forced to withdraw only 2.2% for an entire retirement and be left with the knowledge that others would mostly be the recipients of all my hard work put into saving and investing instead of me.
+1
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by nigel_ht »

iim7V7IM7 wrote: Tue Aug 16, 2022 6:04 pmk
Wade has set different criteria then Bill Bengen did for some reason beyond me.
Maybe saying 2.2% SWR generates more interview requests than 3.something SWR…
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by vineviz »

RubyTuesday wrote: Tue Aug 16, 2022 5:33 pm
vineviz wrote: Tue Aug 16, 2022 2:44 pm
HomerJ wrote: Tue Aug 16, 2022 2:19 pm You are unable to calculate the odds that 4% is more likely to fail starting from 2022 than the 1960s, because you don't know enough.
Anyone paying attention knows enough to see that the probably of 4% failing over the next 30 years is lower than it was in the 1960s.
Did you intend to “lower” or “higher”?

Because just above you said
vineviz wrote:I'm pretty sure I only pointed out that the probability of a 4% withdrawal rate failing is higher than it was historically.
Yes. Thank you. The probability of 4% failing is higher. It is less likely to succeed.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by goodenyou »

Damn. The FIRE crowd in their mid 30s could be in for a rude awakening.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by HomerJ »

vineviz wrote: Tue Aug 16, 2022 8:15 pm
RubyTuesday wrote: Tue Aug 16, 2022 5:33 pm
vineviz wrote: Tue Aug 16, 2022 2:44 pm
HomerJ wrote: Tue Aug 16, 2022 2:19 pm You are unable to calculate the odds that 4% is more likely to fail starting from 2022 than the 1960s, because you don't know enough.
Anyone paying attention knows enough to see that the probably of 4% failing over the next 30 years is lower than it was in the 1960s.
Did you intend to “lower” or “higher”?

Because just above you said
vineviz wrote:I'm pretty sure I only pointed out that the probability of a 4% withdrawal rate failing is higher than it was historically.
Yes. Thank you. The probability of 4% failing is higher. It is less likely to succeed.
You really don't know. But if it make you feel better to think you do, then fine.

We will never know the answer. If 2022-2052 works out fine, you will always be able to say it was just probabilities, and oh, so sorry for all the people who worked an extra 10 years because you scared them... You will still believe your odds calculation was correct, and they just got lucky.

You will go to your death bed thinking you were right the whole time, because you will always have an out.

You might even be right. Note, I'm not saying you're wrong... I'm saying you don't know. But you will never have proof that you are wrong, so you will always be able to believe you were right.

I wish I could be that certain about something.... Wait, no I don't.
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Re: Wade Pfau's Retirement (2.2% SWR, Annuities)

Post by Grt2bOutdoors »

MarkRoulo wrote: Mon Aug 15, 2022 6:02 pm
Kaione wrote: Mon Aug 15, 2022 10:03 am He suggests using annuities instead of bonds for guarding against sequence of return risks. As far as I can tell he also suggests 2.2% SWR because 4% only worked before due to rates of bonds and interest levels in the past.

I had the impression that people thought negatively of annuities, but i'm not sure. What do you guys think about his ideas?
2.2% withdrawl rate is 45x annual spending.

You can buy a TIPS ladder out to 30 years (real yields go from 0.25% to almost 1%) for only 30x annual spending. This leaves you with 15x, which you can dump into 30 year TIPS and expect to have 15 years of real spending available then, plus an additional ~30%, which is almost 5 more years. So you can probably get 50 years of retirement spending out of 45x annual spending saved. This seems ... overly conservative for someone retiring at 65.

How long is he planning on being retired?
Either he is directing his message to the FIRE crowd or those who make it into the 100+ age band. Looking at the population as a whole, only a slim percentage of people will make it into either grouping unless of course you marry or partner up with someone significantly much younger than you. Then maybe will you have a shot at a 45 year retirement. Social Security mortality tables are a useful guide in one’s longevity.
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