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

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

Post by McQ »

A new paper looks at sustainable withdrawal rates using contemporary mortality and a much more comprehensive set of international stock and bond returns: “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets,” https://papers.ssrn.com/sol3/papers.cfm ... id=4227132

Mark Hulbert glosses it here if you would prefer the Cliff Notes version: https://www.marketwatch.com/story/forge ... =home-page.

It’s way lower than anything seen in Bengen or the Trinity study*

*And Morningstar too, [Disrespectful comment removed by admin LadyGeek].
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Re: Maybe Wade Pfau was over-optimistic …

Post by Zeno »

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Billy C
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Re: Maybe Wade Pfau was over-optimistic …

Post by Billy C »

A 1.9% safe withdrawal rate is a problem if someone is paying an advisor 1% of AUM.

Even the 0.3 % that Vanguard PAS charges would consume nearly 1/6 of spendable income under this scenario.
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CletusCaddy
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Re: Maybe Wade Pfau was over-optimistic …

Post by CletusCaddy »

Any analysis that produces less than a 3.33% SWR is literally non-sensical.

That’s because the SWR period is defined as 30 years, and with TIPS you could literally immunize your entire sequence of withdrawals from inflation with zero real return for 30 years.

A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Escapevelocity »

CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm Any analysis that produces less than a 3.33% SWR is literally non-sensical.

That’s because the SWR period is defined as 30 years, and with TIPS you could literally immunize your entire sequence of withdrawals from inflation with zero real return for 30 years.

A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
I’ve been waiting for someone to make this argument. Of course, we only arrived at this reality with TIPS very recently as they were yielding zero or less real until just a short time ago. The real yield of circa 2% with TIPS changes everything
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Lawrence of Suburbia
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lawrence of Suburbia »

A certain tiny smidgen of scaremongering, in my view.

Okay, I didn't read the whole thing (my ADD makes reading anything more complicated than how to boil an egg intolerable) but, I did scan the para near the top of pg. 12, where they state that a 3.3% SWR still has a negligible chance of failure.
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Re: Maybe Wade Pfau was over-optimistic …

Post by randomguy »

This is the expected result. Monte carlo simulators pretty much always pump out lower numbers than using historical data. It is up to you to figure out which one you believe. You would need to walk through all their assumptions that are programed into the MC to decide how you like them. And if the weightings in the developed country portfolio matches how you are investing. In the end the big debate with international is how to handle WWI/WWII. I have no problem believing if the US is bombed to rubble, that our SWR are going to be low. But I am not sure if that is the end game, if any SWR is really going to be safe. And then we can debate how useful 1890-1920 data is. And so on.
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Re: Maybe Wade Pfau was over-optimistic …

Post by randomguy »

CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm Any analysis that produces less than a 3.33% SWR is literally non-sensical.

That’s because the SWR period is defined as 30 years, and with TIPS you could literally immunize your entire sequence of withdrawals from inflation with zero real return for 30 years.

A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
They are using a slightly different SWR definition with some blend of life expectancy in there so some people do need to make it 35 years. It makes it hard to do comparisons with trinity.. You are mixing the different assets, the effects of monte carlo returns instead of historical, and different lifespans.

And yes you are right. Butt only if you go 100% TIPs. Would you take a 5% SWR with a 100% chance of being broke or would you go with a 4% SWR with a 5% chance of going broke and a 50% chance of doubling your money? Lots of people are going to go for that second option...
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Re: Maybe Wade Pfau was over-optimistic …

Post by billaster »

Okay, these guys are wack.

To get their 1.9% withdrawal rate they are assuming that the longevity of today's newborns will be over 105 years by the time they retire. So their projection is based on someone born today who retires at 65 and then at least one spouse lives an additional 40 years.

So their 1.9% is based on newborns projected to a time 105 years in the future, that is, the year 2127. Good luck with that projection. I wonder what kind of pertinent stuff might happen over the next 105 years.

Maybe before fretting about a 1.9% withdrawal rate we let these babies get into their 40s or 50s before worrying about withdrawal rates over 100 years into the future.

Like I said, these guys are wack.
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Re: Maybe Wade Pfau was over-optimistic …

Post by CletusCaddy »

Zeno wrote: Fri Sep 30, 2022 10:58 pm
CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm Any analysis that produces less than a 3.33% SWR is literally non-sensical.

That’s because the SWR period is defined as 30 years, and with TIPS you could literally immunize your entire sequence of withdrawals from inflation with zero real return for 30 years.

A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
It is always helpful to know where people are coming from, where they are in their investment journey. Taleb would call it “skin in the game,” perhaps.

So can you share your details? Age, current AA, retirement plans? I gather you are early 40’s. Last year you were considering a job that paid $600K. Are you still working? When will you retire? Do you have children? A desire to leave an inheritance?

More directly, are you 100% TIPs?

I am trying to figure out if you are making an argument or, instead, also holding a position that reflects your argument.

We are living it. And holding 100% TIPs is beyond the realm of reasonableness to me. I’m an equity guy though, and TIPs make my eyes gloss over. We are only holding FI as a SORR defensive measure. I am hoping to be the richest guy in the cemetery though so I can leave it to my children and charities.
Where did I recommend everyone should go 100% TIPS?

I am making the argument that TIPS forms the floor of SWR by definition. Any shift away from 100% TIPS to equities should only increase the SWR, because the expected returns on equities is always higher than TIPS. If you didn’t believe that, well, you’d be your 100% TIPS straw man.
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Re: Maybe Wade Pfau was over-optimistic …

Post by SimpleGift »

The returns data from this study comes from 38 developed countries over the 1890 to 2019 period. As shown in the study's summary table below, the ex-U.S. developed markets SWRs have been a fraction of the U.S. market's SWRs. No doubt that the U.S. has been favored historically, with no world wars on its home soil, and with little of the geopolitical turmoil experienced by many of the ex-U.S. developed countries since 1890.
  • Image
    Note: The 1%, 5% and 10% chance of financial ruin is defined as exhausting the portfolio before death of last survivor.
    Source: Anarkulova et al., Page 21.
But one has to question how relevant these historical ex-U.S. developed market returns are to the retirement planning of 21st century investors today? In order to consider them, we'd have to somehow believe that the future holds a similar degree of risk from world war and geopolitical turmoil as was experienced by them since 1890. I'm not seeing it.
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Lawrence of Suburbia
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lawrence of Suburbia »

Are they assuming annual WR percentages adjusting upwards each year for inflation like Bengen and Trinity? In other words, the usual static robot march?

Are the effects of buying SPIAs as an income floor ever considered?
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Re: Maybe Wade Pfau was over-optimistic …

Post by Phyneas »

As something of an aside, is it a normal result of SWR studies that increasing your equity allocation beyond 60% is not expected to increase the SWR?
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Re: Maybe Wade Pfau was over-optimistic …

Post by invest4 »

* The Hulbert bit was as expected. Something to grab eyeballs, but either requires a bit more investigation to make a reasonable assessment or can be readily dismissed.

* 1.9%..nah. However, I do believe less than 4% would be prudent and personally aspire for 3%.

* In the end, the fundamentals have not changed

- Live beneath your means

- Save and invest what you reasonably can

- Enjoy life along the way
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Re: Maybe Wade Pfau was over-optimistic …

Post by MH2 »

This paper was published to SSRN, so it wasn't peer reviewed. It's also structured more along the lines of a conference submission (low page count) and the lead author is a PhD student. The coauthors are credible, but I would treat this very much as a work in progress.

Anyway, the list of included countries is somewhat problematic. I don't know what conclusions you can draw from a sample that includes pre-WW2 observations from countries such as Latvia, Lithuania, Poland, &c. The same argument can be made for other WW2/Cold War participants and countries that experienced hyper-inflation.

if the take away is that living in a war-torn or otherwise unstable country is bad for your net worth...
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Re: Maybe Wade Pfau was over-optimistic …

Post by MH2 »

SimpleGift wrote: Fri Sep 30, 2022 11:25 pm The returns data from this study comes from 38 developed countries over the 1890 to 2019 period. As shown in the study's summary table below, the ex-U.S. developed markets SWRs have been a fraction of the U.S. market's SWRs. No doubt that the U.S. has been favored historically, with no world wars on its home soil, and with little of the geopolitical turmoil experienced by many of the ex-U.S. developed countries since 1890.
The frustrating thing is that all of these issues can be accounted for with a couple of controls. This would be a good opportunity to show, e.g., the effects that something like hyper-inflation or a global war could have on withdraw rates.

My gut feeling is that the authors are tee'ing up something more insightful. That said, I don't know if I would be using this as a reason to reassess my SWR if I were at or nearing retirement.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Alpha4 »

billaster wrote: Fri Sep 30, 2022 11:14 pm Okay, these guys are wack.

To get their 1.9% withdrawal rate they are assuming that the longevity of today's newborns will be over 105 years by the time they retire. So their projection is based on someone born today who retires at 65 and then at least one spouse lives an additional 40 years.

So their 1.9% is based on newborns projected to a time 105 years in the future, that is, the year 2127. Good luck with that projection. I wonder what kind of pertinent stuff might happen over the next 105 years.

Maybe before fretting about a 1.9% withdrawal rate we let these babies get into their 40s or 50s before worrying about withdrawal rates over 100 years into the future.

Like I said, these guys are wack.
From what I read in that paper, the cohort retiring in 2085 (i.e. today's newborns) at age 65 has a median longevity of 93.9 years, not 105 years. They state "For example, Table III shows that the median longevity for a couple retiring in 2085 is 15% longer than that for a couple retiring in 2022 (28.9 years versus 25.2 years". 65 + 28.9 is 93.9, not 105. Was that "one spouse or the other (presumably most often the female since they tend to have better longevity than males) living an additional 40 years past 65" a median scenario, 90th percentile scenario, 95th percentile scenario, or 99th percentile scenario"?

If it was a near worst-case (i.e. 90th/95th/99th percentile rather than median or average) then that means that something like an SPIA, DIA, QLAC, QLAT, or RCLA could be used to "chip some of the fat tails off" of the actuarial risk of outliving one's money, so to speak.
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Re: Maybe Wade Pfau was over-optimistic …

Post by TN_Boy »

McQ wrote: Fri Sep 30, 2022 8:55 pm A new paper looks at sustainable withdrawal rates using contemporary mortality and a much more comprehensive set of international stock and bond returns: “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets,” https://papers.ssrn.com/sol3/papers.cfm ... id=4227132

Mark Hulbert glosses it here if you would prefer the Cliff Notes version: https://www.marketwatch.com/story/forge ... =home-page.

It’s way lower than anything seen in Bengen or the Trinity study*

*And Morningstar too, [Disrespectful comment removed by admin LadyGeek].
It's difficult to take this real seriously, although I do think that worrying about retirements longer than 30 years makes sense. In the original studies, even for retirements that "succeeded" sometimes the retiree was left with little money at the 30 year mark.

Here is a headliner ...
To achieve a 1% ruin probability, for example, retirees must adopt a withdrawal rate of just 0.80% (i.e., $8,000 of withdrawals per year for $1 million in savings).
Hmm. I'm having trouble with that.

My biggest problem was understanding exactly how they handled the pooled ex-US developed sample. If I missed the full description, just tell me what page it is on.

1) Did they just average the monthly returns of the developed countries (ranging from large economies like England, Germany, Japan, etc to tiny countries like Luxemburg) or did they weight by ... GDP for example? GDP would obviously vary over the years.

2) Did they correct for WWs?

3) I don't personally find data ranging back to the late 1800s interesting for either US or international securities.

I think that how a researcher handles non-US data is pretty important. For example, the stock market performance of a really small country is not interesting. It's just not. I think you have to look at the larger economies with well functioning stock markets and correct for issues like being bombed to rubble in WW II.

There have been other studies looking at how SWR for non-US investors would have worked and I think they were less ... pessimistic.
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Re: Maybe Wade Pfau was over-optimistic …

Post by wade »

The past returns. I wrote a paper with a similar theme as this 12 years ago and that's what led me down this whole rabbit hole of safe withdrawal rates in the first place. None of this really matters all that much in real world retirement spending plans anyway, though. It's just a simple method for calibrating general expectations.

https://www.financialplanningassociatio ... %20PDF.pdf
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Re: Maybe Wade Pfau was over-optimistic …

Post by HomerJ »

wade wrote: Sat Oct 01, 2022 9:26 am None of this really matters all that much in real world retirement spending plans anyway, though.
Except that people DO take papers like this and what you wrote in 2010 seriously.

These academic musings DO affect real people and their real retirement plans.
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Re: Maybe Wade Pfau was over-optimistic …

Post by SimpleGift »

MH2 wrote: Sat Oct 01, 2022 7:42 am
SimpleGift wrote: Fri Sep 30, 2022 11:25 pm The returns data from this study comes from 38 developed countries over the 1890 to 2019 period. As shown in the study's summary table below, the ex-U.S. developed markets SWRs have been a fraction of the U.S. market's SWRs. No doubt that the U.S. has been favored historically, with no world wars on its home soil, and with little of the geopolitical turmoil experienced by many of the ex-U.S. developed countries since 1890.
The frustrating thing is that all of these issues can be accounted for with a couple of controls. This would be a good opportunity to show, e.g., the effects that something like hyper-inflation or a global war could have on withdraw rates.
Right. While showing the effects of hyper-inflation or world war on historical withdrawal rates might be a noteworthy addition to the academic body of financial knowledge, it still strikes me that these studies have close to zero relevance for prospective retirees who are planning their 21st century retirement portfolios.

In short: A world of difference between "financial archaeology" and what retirees need to plan for their future today.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Florida Orange »

When everybody wants a definitive answer but there isn't one, you get information that is simultaneously extremely important and almost completely irrelevant. Paradoxes abound. Conundrums persist. The Dude abides.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Phyneas »

SimpleGift wrote: Sat Oct 01, 2022 10:36 am
MH2 wrote: Sat Oct 01, 2022 7:42 am
SimpleGift wrote: Fri Sep 30, 2022 11:25 pm The returns data from this study comes from 38 developed countries over the 1890 to 2019 period. As shown in the study's summary table below, the ex-U.S. developed markets SWRs have been a fraction of the U.S. market's SWRs. No doubt that the U.S. has been favored historically, with no world wars on its home soil, and with little of the geopolitical turmoil experienced by many of the ex-U.S. developed countries since 1890.
The frustrating thing is that all of these issues can be accounted for with a couple of controls. This would be a good opportunity to show, e.g., the effects that something like hyper-inflation or a global war could have on withdraw rates.
Right. While showing the effects of hyper-inflation or world war on historical withdrawal rates might be a noteworthy addition to the academic body of financial knowledge, it still strikes me that these studies have close to zero relevance for prospective retirees who are planning their 21st century retirement portfolios.

In short: A world of difference between "financial archaeology" and what retirees need to plan for their future today.
If there is even one more World War, the chances of many of us retiring will be pretty slim. Also, of what real value is a large share of data from a time without central banks, modern economic theory/tools, modern and future technologies, and widespread fiat based currencies. The future will have its own share of significant problems, but I'd wager they are unlikely to be the same as the past problems, or at least, to exist in the same context.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lawrence of Suburbia »

Based on some of those numbers, it appears I need to get my hands on about $2 millon more than I've got currently. :( :happy ... easy-peasy, right? ... It's times like this that it's good to take solace in the consolations of philosophy. Or maybe listen to "All Things Must Pass" ...
Florida Orange wrote: Sat Oct 01, 2022 10:56 am When everybody wants a definitive answer but there isn't one, you get information that is simultaneously extremely important and almost completely irrelevant. Paradoxes abound. Conundrums persist. The Dude abides.
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Last edited by Lawrence of Suburbia on Sat Oct 01, 2022 11:30 am, edited 1 time in total.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Florida Orange »

Lawrence of Suburbia wrote: Sat Oct 01, 2022 11:23 am
Florida Orange wrote: Sat Oct 01, 2022 10:56 am When everybody wants a definitive answer but there isn't one, you get information that is simultaneously extremely important and almost completely irrelevant. Paradoxes abound. Conundrums persist. The Dude abides.
"We are Nihilists, Lebowski; we believe in NOTHING!"
That must be exhausting.
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Re: Maybe Wade Pfau was over-optimistic …

Post by PicassoSparks »

CletusCaddy wrote: Fri Sep 30, 2022 11:19 pm I am making the argument that TIPS forms the floor of SWR by definition. Any shift away from 100% TIPS to equities should only increase the SWR, because the expected returns on equities is always higher than TIPS. If you didn’t believe that, well, you’d be your 100% TIPS straw man.
This isn’t right. Equities increases *expected* return, not guaranteed return. When we invest in them, we do it because is raises (significantly!) the ceiling while risking lowering the floor. We are subject to sequence of return risk, which means we can fall short of the expectation. The SWR rate is about defining what rate of withdrawal survives even the worst sequences. If you examine the simulations, most of the time, a SWR-selected withdrawal regime ends with much, *much* more money than it started with. That excess unspent capital (and the corresponding constraints on your lifestyle) is the cost of a mechanical SWR.
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Re: Maybe Wade Pfau was over-optimistic …

Post by billaster »

Financial ruin? Really?

Come on, guys. Surely you can do better than a Dickens novel from the 1850s. There are no poor houses. We have Social Security today and a couple can collect up to $100,000 a year, especially the sorts of people this article is intended for.

I realize that the term can have a special meaning among financial advisors but all the more reason not to take them seriously if that is the chosen vocabulary of their profession.
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Re: Maybe Wade Pfau was over-optimistic …

Post by petulant »

I've been seeing this headline about a 1.9% safe withdrawal rate on marketwatch when I've checked S&P 500 daily movements the last few days. The marketwatch article was prompted by the same research as this thread. I am disappointed that user McQ is now apparently trying to match marketwatch headlines for clickbait, especially when the research results were driven entirely by the inclusion of countries devastated by war, which has long been known to be a driven of terrible SWR calculations. This is not news.
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Re: Maybe Wade Pfau was over-optimistic …

Post by afan »

What are the correct countries, periods and events to include in an effort to guess the future? If you say "only post WWII US," then you get an optimistic answer.
Once you admit that other countries and other periods have had far lower returns, then you need to consider whether the optimistic outlook is justified. You need to consider how bad the low end could be.

Whether one adjusts spending and retirement date depends on attitudes towards risk. 1.9% is no less or more correct than 4%. Both are derived from datasets of SOME real world outcomes. Pick the one you think is most likely to reflect future events. Then switch off your crystal ball.
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Re: Maybe Wade Pfau was over-optimistic …

Post by petulant »

afan wrote: Sat Oct 01, 2022 12:29 pm What are the correct countries, periods and events to include in an effort to guess the future? If you say "only post WWII US," then you get an optimistic answer.
Once you admit that other countries and other periods have had far lower returns, then you need to consider whether the optimistic outlook is justified. You need to consider how bad the low end could be.

Whether one adjusts spending and retirement date depends on attitudes towards risk. 1.9% is no less or more correct than 4%. Both are derived from datasets of SOME real world outcomes. Pick the one you think is most likely to reflect future events. Then switch off your crystal ball.
I didn't say to plan around just the US post-WWII. There is a lot of room to look at, say, other countries with poorer financial market returns since WWII. But obviously having your country devastated by losing a war would make your financial assets less able to support your standard of living. But it doesn't make sense to plan your retirement around this kind of event. Doing so essentially means that you would save more financial assets in the event a war destroys the value of financial assets. That doesn't make sense. At some point you have to accept that a modern western standard of living is historically contingent and uncontrollable--there is no strategy to protect it from cataclysm.
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Re: Maybe Wade Pfau was over-optimistic …

Post by TN_Boy »

petulant wrote: Sat Oct 01, 2022 12:17 pm I've been seeing this headline about a 1.9% safe withdrawal rate on marketwatch when I've checked S&P 500 daily movements the last few days. The marketwatch article was prompted by the same research as this thread. I am disappointed that user McQ is now apparently trying to match marketwatch headlines for clickbait, especially when the research results were driven entirely by the inclusion of countries devastated by war, which has long been known to be a driven of terrible SWR calculations. This is not news.
I think that a bit harsh. Though I would hope McQ participates in discussing the paper so that we all understand the methodology (see my questions for example) and then people can make decisions on whether they believe it actually moves the discussion on SWRs forward. From what I've seen it does not, but perhaps I'm missing something.

I'd be more than happy for Wade Pfau to also make a few more comments. I might or might not agree with them, but I'd like to hear them.
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Re: Maybe Wade Pfau was over-optimistic …

Post by afan »

We use 110 as the max age of the second to die. 1% long term real return on a balanced portfolio. If markets do better than that, then we will have more money when we die than forecast. Hardly the end of the world. If things turn out substantially worse, then we will be OK for a while. At some point, returns could be so bad that we run out of money. That is all this planning can tell you.

Pick a different set of assumptions and you get a different set of outcomes. If one knew what the future would bring, then one could pick the correct assumptions. Since all history is at best an imperfect guide, there is little point in declaring that one dataset is appropriate and another misleading.

We can check back in 35 years and see who was correct.

Interesting to see a forecast based on different data. 1.9 is more than we plan to spend, so I feel no need to claim that it must be wrong to maintain my plans.

Whatever happens in the markets will happen, no matter what assumptions I make in planning.

I am always puzzled by the vehemence with which people claim they can predict the future.
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Re: Maybe Wade Pfau was over-optimistic …

Post by MarkRoulo »

SimpleGift wrote: Fri Sep 30, 2022 11:25 pm The returns data from this study comes from 38 developed countries over the 1890 to 2019 period. As shown in the study's summary table below, the ex-U.S. developed markets SWRs have been a fraction of the U.S. market's SWRs. No doubt that the U.S. has been favored historically, with no world wars on its home soil, and with little of the geopolitical turmoil experienced by many of the ex-U.S. developed countries since 1890.
  • Image
    Note: The 1%, 5% and 10% chance of financial ruin is defined as exhausting the portfolio before death of last survivor.
    Source: Anarkulova et al., Page 21.
But one has to question how relevant these historical ex-U.S. developed market returns are to the retirement planning of 21st century investors today? In order to consider them, we'd have to somehow believe that the future holds a similar degree of risk from world war and geopolitical turmoil as was experienced by them since 1890. I'm not seeing it.
I expect that if you polled European investors in 1910 very few of them would have seen World War 1 in the future. Even fewer would have seen that this would be followed by a second World War 20 years after the first ended.

The future is difficult to predict.

In any event, the paper seems to have made the following adjustments to the Trinity study:
  • They used developed world returns rather than US returns. Since the US was one of the big financial winners of the 20th century this reduced the 'safe' withdrawal rate
  • They assumed more than 30 years in retirement. With the money needing last longer, some rates that would have succeeded when needing to last only 30 years now failed. This lowers the 'safe' withdrawal rate, too.
  • They used a Monte Carlo simulator rather than just the historical record.
  • They seem to consider a 5% chance of failure acceptable (rather than the 0%). This pushes the 'safe' rate up.
Item (1) and (2) seem to be the dominant factors. German returns for the 20th century were very bad, for example. This is what happens when you lose two world wars and have a bout of hyper-inflation between then. The list of developed countries they used included the following:
  • The United Kingdom (from 1890)
  • The Netherlands
  • Belgium
  • France
  • Norway
  • Germany
  • Denmark
  • Switzerland
  • US (from 1890)
  • Canada (from 1891)
  • Argentina (from 1895)
  • ...
  • Greece (from 1920)
  • Czechoslovakia (from 1920)
  • ...
  • Japan (from 1930)
  • Portugal (from 1930)
  • Italy (from 1931)
  • ...
It should be obvious from looking at the additions that the return would drop. Japan was not a good place to invest from around 1930 - 1950 and again from 1990 to today. Portugal had a number of very bad decades starting in 1930. Same with Italy and Greece. Czechoslovakia from 1930 - 1990 was pretty iffy. And Argentina was a wealthy nation in per-capita GDP in 1900. Then things went ... poorly.

So, yeah, if you add these to your return mix things will get worse.

The assumption from the folks arguing that 25x saving is enough to retire (even if none of them plan to follow the 4% rule blindly for withdrawals ...) is that data from these countries and those times is not relevant to the US today. The authors clearly feel that this is not so clear because, again, in 1910 the folks in Europe didn't see a World War coming, either.

If you want to claim that "25x savings is enough baring an exceptionally long life AND baring a catastrophe such as WW1 or WW2 [though not necessarily a war catastrophe] AND baring a Japanese style collapse" then I suspect there will be little disagreement.

The disagreement is whether those caveats are important enough that one shouldn't just ignore them.
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Re: Maybe Wade Pfau was over-optimistic …

Post by petulant »

The issue isn't whether war is relevant at all; the issue is whether it's reasonable to include losing a major war in your decision-making around financial assets, the decision to retire, and withdrawal strategy. Of course war is a risk and it affects your standard of living. But a devastating war is a binomial event that affects your financial assets in a way that is practically unmoored from the balance of the financial assets. Consider the following:

1. There is no devastating war. In this event, the safe withdrawal rate is going to be around 4%; even if it's a bit lower or greater, there is a clear line from savings decisions, to whether to retire, and the withdrawal strategy.

2. There is a devastating war that your country loses. In this event, the real supply of goods and services will decline from some measure of boycott and industrial reallocation to war production/service; at the end of the war, all claims you have will be worthless, your family may be relocated, your assets seized. Your standard of living will be rationed away, inflated away, destroyed, or some other combination. Having twice as many worthless units of currency is still worthless.

Every day we are buying reverse lottery tickets where we as individuals could randomly die or have a great disease, or our whole society could lose its mind and enter a devastating war. Financial portfolios are built on the assumption we do not hit the reverse lottery ticket; building a strategy around having "enough" in the event of hitting the reverse lottery ticket is nonsensical. You want to have enough in the 1% chance of a cataclysm? You're going to wildly oversave for the 99% situation, and even in the 1% scenario the financial assets are still worthless and you are actually completely dependent on the charity of your neighbors and on the largesse of government policy. You might as well run a Monte Carlo situation based on 65 million years of data inputs and conclude that the SWR is 0% because in the worst 5% of cases a meteor will strike the Yucatan peninsula and cause a mass extinction.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lee_WSP »

CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
Wouldn’t an annuity also provide a floor?
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Re: Maybe Wade Pfau was over-optimistic …

Post by CletusCaddy »

Lee_WSP wrote: Sat Oct 01, 2022 1:20 pm
CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
Wouldn’t an annuity also provide a floor?
Not against inflation
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lee_WSP »

CletusCaddy wrote: Sat Oct 01, 2022 1:21 pm
Lee_WSP wrote: Sat Oct 01, 2022 1:20 pm
CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
Wouldn’t an annuity also provide a floor?
Not against inflation
I Forgot that they no longer provide that product.
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Re: Maybe Wade Pfau was over-optimistic …

Post by SimpleGift »

MarkRoulo wrote: Sat Oct 01, 2022 12:59 pm I expect that if you polled European investors in 1910 very few of them would have seen World War 1 in the future. Even fewer would have seen that this would be followed by a second World War 20 years after the first ended.

The future is difficult to predict.
Thank you for your insightful summary of the paper. Yes, the future is hard to predict — but one has to ask whether the degree of economic dislocation experienced by the war-impacted developed countries in the 20th century (chart below) is likely to recur in the 21st century? And are the asset returns from this period actually relevant to the future?
Since most of us did not experience firsthand the war-related economic dislocations of the 20th century, it is easy to underestimate their impact. But personally — and perhaps myopically — I have a hard time seeing this degree of economic disruption in the developed world, from any source, repeating in the 21st century.
Last edited by SimpleGift on Sat Oct 01, 2022 4:30 pm, edited 2 times in total.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lawrence of Suburbia »

CletusCaddy wrote: Sat Oct 01, 2022 1:21 pm
Lee_WSP wrote: Sat Oct 01, 2022 1:20 pm
Wouldn’t an annuity also provide a floor?
Not against inflation
In my view, the function of an annuity (SPIA) today is to provide a sort of minimum income you can't outlive. It's longevity insurance, as opposed to an 'investment', really. The way it is used in a lot of retirement planning is to pay for your most basic expenses (food, housing, utilities perhaps) for a good number of years, while freeing up the retiree to buy more risky assets (more stocks, fewer bonds?) to hopefully stay ahead of inflation.

The big caveat here obviously is, it seems to me it probably only works out in the sort of low-inflation environment we've been blessed with in recent decades.

I'd love it if Wade (or anyone else hip to SPIAs in a retirement plan) would chip in here and correct my assumptions about this.
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Re: Maybe Wade Pfau was over-optimistic …

Post by zaboomafoozarg »

I'm saving for a 2% withdrawal rate because of research like this.

The future doesn't look good compared to the past, as the past year has made abundantly clear.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Leesbro63 »

CletusCaddy wrote: Fri Sep 30, 2022 10:05 pm Any analysis that produces less than a 3.33% SWR is literally non-sensical.

That’s because the SWR period is defined as 30 years, and with TIPS you could literally immunize your entire sequence of withdrawals from inflation with zero real return for 30 years.

A 100% TIPS portfolio defines the floor of SWR, in other words.

As a matter of fact, right now TIPS across the entire yield curve are yielding 2% real. So the SWR floor is actually more like 5% right now.
Not for larger taxable portfolios. TIPS would erode due to taxflation, especially in times like this with high inflation,
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Re: Maybe Wade Pfau was over-optimistic …

Post by Leesbro63 »

Lawrence of Suburbia wrote: Sat Oct 01, 2022 2:24 pm
CletusCaddy wrote: Sat Oct 01, 2022 1:21 pm
Lee_WSP wrote: Sat Oct 01, 2022 1:20 pm
Wouldn’t an annuity also provide a floor?
Not against inflation
In my view, the function of an annuity (SPIA) today is to provide a sort of minimum income you can't outlive. It's longevity insurance, as opposed to an 'investment', really. The way it is used in a lot of retirement planning is to pay for your most basic expenses (food, housing, utilities perhaps) for a good number of years, while freeing up the retiree to buy more risky assets (more stocks, fewer bonds?) to hopefully stay ahead of inflation.

The big caveat here obviously is, it seems to me it probably only works out in the sort of low-inflation environment we've been blessed with in recent decades.

I'd love it if Wade (or anyone else hip to SPIAs in a retirement plan) would chip in here and correct my assumptions about this.
Your caveat is even bigger than you acknowledged. Retirees who bought non-inflation adjusted annuities in 1966 lived out their lives with ever decreasing purchase power.
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Re: Maybe Wade Pfau was over-optimistic …

Post by abc132 »

Lawrence of Suburbia wrote: Sat Oct 01, 2022 2:24 pm The big caveat here obviously is, it seems to me it probably only works out in the sort of low-inflation environment we've been blessed with in recent decades.

I'd love it if Wade (or anyone else hip to SPIAs in a retirement plan) would chip in here and correct my assumptions about this.
For portfolios without a 30 year ladder of real bonds, you are dependent on stocks returning something to keep up with inflation. When I tried annuity + stocks vs stocks + bonds for various levels of inflation and returns, it seemed that traditional Boglehead portfolios were hit just as hard as those with annuities.

Watch out for those that talk about inflation with respect to a 100% annuity portfolio without acknowledging the recommendation has been to replace BONDS with an annuity and keep the stocks for potential growth and inflation protection. All boats tend to sink or swim together with respect to inflation, and there is not necessarily anything makes the annuity a significantly worse choice. Using the annuity for longevity protection is a more popular recommendation here than for 30+ years of spending, and providers clearer benefits than supporting the income floor for all of retirement.
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Re: Maybe Wade Pfau was over-optimistic …

Post by afan »

The problem is that the argument for annuities is usually "an income you cannot outlive." It would be better described as "a declining real cash flow you cannot outlive." For most people most of the money they get from an annuity will be return of their initial investment. Only once they have been paid back in full will they start seeing any income at all.
How much that income is worth depends on the inflation rate over the term of the annuity.
Even low inflation rates take a bite over a long retirement. High inflation rates can become painful and permanent reductions in real cash flow quite quickly.
With bonds or annuities in a rising rate environment, at least you have the chance to reinvest the interest at higher rates, assuming you do not spend it all. With annuities, people often plan to spend the cash flow and have nothing to reinvest. With bonds, until late retirement people often have reinvested interest, which can be invested and partially offset the losses to inflation.
Last edited by afan on Sat Oct 01, 2022 4:04 pm, edited 1 time in total.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Lawrence of Suburbia »

abc132 wrote: Sat Oct 01, 2022 3:26 pm
Lawrence of Suburbia wrote: Sat Oct 01, 2022 2:24 pm The big caveat here obviously is, it seems to me it probably only works out in the sort of low-inflation environment we've been blessed with in recent decades.

I'd love it if Wade (or anyone else hip to SPIAs in a retirement plan) would chip in here and correct my assumptions about this.
For portfolios without a 30 year ladder of real bonds, you are dependent on stocks returning something to keep up with inflation. When I tried annuity + stocks vs stocks + bonds for various levels of inflation and returns, it seemed that traditional Boglehead portfolios were hit just as hard as those with annuities.

Watch out for those that talk about inflation with respect to a 100% annuity portfolio without acknowledging the recommendation has been to replace BONDS with an annuity and keep the stocks for potential growth and inflation protection. All boats tend to sink or swim together with respect to inflation, and there is not necessarily anything makes the annuity a significantly worse choice. Using the annuity for longevity protection is a more popular recommendation here than for 30+ years of spending, and providers clearer benefits than supporting the income floor for all of retirement.
Yes! I should've made it clearer that I was speaking of a theoretical portfolio with somewhere between perhaps 20-40% in a SPIA, tops. Not anything close to a majority of a retirees' assets. And yes the more SPIA percentage, the fewer bonds; but keep the equities growing to lessen the effects of inflation.
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Re: Maybe Wade Pfau was over-optimistic …

Post by SimpleGift »

petulant wrote: Sat Oct 01, 2022 1:20 pm The issue isn't whether war is relevant at all; the issue is whether it's reasonable to include losing a major war in your decision-making around financial assets, the decision to retire, and withdrawal strategy.
In an excellent paper on the historical impacts of war upon financial assets in the 20th century, Niall Ferguson ponders the strangely minimal impact upon the financial markets of the 1962 Cuban missile crisis — i.e., the closest we've come to a nuclear hot war in the modern era:
Niall Ferguson wrote:A world war waged with conventional weapons had roughly calculable financial implications... By contrast, a world war involving multiple H-bombs was beyond the realm of probabilistic thinking. It was not merely incalculable; it was well-nigh unimaginable. For this reason, investors were probably best advised to continue business as usual. If it had come to a Third World War in 1962, the performance of their portfolios would have been the last thing on their minds.
While investors today can perhaps estimate the impact upon financial assets of various global disasters (pandemics, earthquakes, regional conflicts, etc.), the impact of world war in the nuclear age has become something beyond calculation in any probabilistic framework — so, interestingly, is likely not even a market input anymore.
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Re: Maybe Wade Pfau was over-optimistic …

Post by McQ »

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

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

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

Conversely, your point about whether SWR analyses should include wars does raise a key question. I don't see that the answer is a foregone conclusion, and hope we can debate the question here in this thread.
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Re: Maybe Wade Pfau was over-optimistic …

Post by McQ »

abc132 wrote: Sat Oct 01, 2022 3:26 pm
For portfolios without a 30 year ladder of real bonds, you are dependent on stocks returning something to keep up with inflation. When I tried annuity + stocks vs stocks + bonds for various levels of inflation and returns, it seemed that traditional Boglehead portfolios were hit just as hard as those with annuities.
...
Hello abc132: the bolded analysis is of some interest to me. Did you post your results here at BH, or are they in a paper, or ...?
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Re: Maybe Wade Pfau was over-optimistic …

Post by abc132 »

McQ wrote: Sat Oct 01, 2022 5:14 pm
abc132 wrote: Sat Oct 01, 2022 3:26 pm
For portfolios without a 30 year ladder of real bonds, you are dependent on stocks returning something to keep up with inflation. When I tried annuity + stocks vs stocks + bonds for various levels of inflation and returns, it seemed that traditional Boglehead portfolios were hit just as hard as those with annuities.
...
Hello abc132: the bolded analysis is of some interest to me. Did you post your results here at BH, or are they in a paper, or ...?
I just used a simple Excel sheet to compared X% stocks and Y% bonds to X% stocks and Y% annuity while picking an expected stock return, annuity payment, bond return, and inflation value and performing annual withdrawals. These were constants for each scenario and were the expected value. A simple example would be taking whatever you think the current expected stock and nominal bond returns, the current annuity payment you can get, and then increasing inflation numbers to see which portfolio can be depleted first in 30 years due to inflation. From there I would also try lower and higher stock returns (maybe 0% real to 7% real) and see what inflation rate is needed to make (stock+ bond) last longer than (stock + annuity).

If I remember correctly the annuity tended to help slightly when inflation numbers were still single digits. I was looking at portfolios where the annuity could provide the income floor, which would fall in the portfolio size greater than 30x expenses range.

This was not a broad enough study to post any results as it was just for my own interest.
Last edited by abc132 on Sat Oct 01, 2022 6:06 pm, edited 2 times in total.
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Re: Maybe Wade Pfau was over-optimistic …

Post by McQ »

TN_Boy wrote: Sat Oct 01, 2022 8:37 am ...
My biggest problem was understanding exactly how they handled the pooled ex-US developed sample. If I missed the full description, just tell me what page it is on.

1) Did they just average the monthly returns of the developed countries (ranging from large economies like England, Germany, Japan, etc to tiny countries like Luxemburg) or did they weight by ... GDP for example? GDP would obviously vary over the years.

2) Did they correct for WWs?

3) I don't personally find data ranging back to the late 1800s interesting for either US or international securities.

I think that how a researcher handles non-US data is pretty important. For example, the stock market performance of a really small country is not interesting. It's just not. I think you have to look at the larger economies with well functioning stock markets and correct for issues like being bombed to rubble in WW II.

There have been other studies looking at how SWR for non-US investors would have worked and I think they were less ... pessimistic.
Hello TN_Boy, here is a stab at answering the question you asked. I'm going off my understanding of their section 3. I am only moderately confident that I understand the method and hope others will correct as needed.

Your #1:
-returns are never averaged, except across assets within country/month. International returns, country by country, are capitalization-weighted; but international returns are not included in their base case. Rather, there are two pools, developed and US. Within each pool there is, say, N strings of stock returns, one string for each country. The string could be as long as (2019 - 1890) * 12. The actual historical sequence is preserved within string--1929 returns precede 1930 precede 1931 etc. The four asset returns for a month within country are locked together and preserved.

-at this point they could have stopped and analyzed all possible rolls of length M1, M2, Mn (=mortality). That would have been a strictly historical analysis, redone country by country and mortality length by mortality length, and they could still have got odds of failure (from a frequentist perspective).

-instead, from the complete set of four-fold strings they pick a start month and a country;
-then they draw a block length (mean length 120 months = 10 years). If that exceeds the country string length available (e.g., a 2015 start date in the US, with only four years left), they draw another block length and apply it to some other part of the sample and another start date, splicing that string onto the first.
-they do this until whatever mortality length being tested is filled (string spliced enough to be long enough).
-and then they make withdrawals against the spliced string and find if/when the funds run out before mortality.
-and, very important: they do that millions of times, which is where the odds of failure come from.

An unusual sort of Monte Carlo simulation, in which many but not all 10-year historical sequences are preserved, but where most mortality lengths contain a mash up of strings of different provenance. Possibly intended to give the analysis enough mathematical heft to have a shot at a peer-reviewed academic finance journal.

your 2 and 3:
yes, all years are included (Germany in 1923, Japan in 1945, etc.). Missing months (NYSE closed most of the last half of 2014) received interpolated returns.

re Old data. That is a hardy perennial in these SWR discussions: whether including the distant past makes the analysis worse or better. Your dismissal of 1890 etc. would carry more weight if you would put down a marker: "nothing before this date, and everything after, because X fundamentally changed." A standard example: don't mix bond returns from before and after the gold standard lapsed.

But could I not also say: "nothing before 20xx, because there weren't any internet or social media stocks then, with their new and awesome business models, making those returns irrelevant when looking forward from today." Slippery slope, once you start discarding history.

Myself, I prefer to include every bit of quality data available.
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