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

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randomguy
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Re: Maybe Wade Pfau was over-optimistic …

Post by randomguy »

vineviz wrote: Sun Oct 02, 2022 8:03 pm
randomguy wrote: Sun Oct 02, 2022 7:01 pm
MarkRoulo wrote: Sun Oct 02, 2022 4:09 pm
I think the authors would argue that there might be a chance of two bad sequences happening back-to-back (though they don't know what that probability is) and they want to capture this. If one was sure that this could never happen, then one could embed that reversion to the mean logic/probability in a Monte Carlo simulation. The catch with excluding it is that if the chance IS REAL and non-zero then excluding it gives us a false sense of security.
On the other hand by not having mean reversion, they give a false sense of pessimism.
Except that the methodology they used DOES include whatever mean reversion the markets exhibit: that's the point of the 10-year block bootstrapping.

From the paper:
Block lengths are drawn from a geometric distribution with an average block length of 120 months. These long blocks allow the simulation to reflect short-term characteristics such as persistent return volatility and long-term characteristics like mean reversion in stock returns.
In any event, in practical terms it's a relatively unimportant factor. At a 5th or 10th percentile level, the presence or absence of realistic levels of mean reversion is nearly invisible in the outputs.
I missed the part where when the are picking out a strand they use prior market conditions to weight selection. Care to point out to me where in the paper that mean reversion is happening? When I read they were treating each thread as an independent event. But again maybe I missed it.
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McQ
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Re: Maybe Wade Pfau was over-optimistic …

Post by McQ »

MarkRoulo wrote: Sun Oct 02, 2022 3:46 pm
McQ wrote: Sat Oct 01, 2022 5:08 pm ...

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.
I don't think we will reach a conclusion.

I will ILLUSTRATE (not prove) why with a few examples that begin as questions.

Question #1: What was the homicide rate in New York City from 2000 - 2010?

Homicide rate is commonly reported as homicides per 100,000 and the US as a whole was a bit over 9.0 in 2000. This dropped to about 4.5 in 2014 and has since risen to 6.5. For reference, Baltimore runs over 50. And upper middle class suburbs often see a rate of around 1.0.

So ... New York City saw around 6,000 homicides over those ten year (so 600 per year) and had a population of around 8 million. This works out to about 7.5 per 100,000. Quite good for a large city compared to the US as a whole.

But there is a catch and it is a big one. The 6,000 count does NOT include the 3,000 people killed on 9/11. I would have a difficult time arguing that flying airplanes into a building full of people didn't count as homicide, but the official stats for NYC *exclude* those deaths for 2001 (the official number of homicides as 649).

If one is trying to ascertain the chances of getting killed in NYC over the next 30-50 years should those deaths be excluded from the backward looking sample because this is unlikely to happen again? Or because it is rare? Or should they be included because every so often this sort of thing DOES happen even if we probably won't get an exact repeat?

Rare events are tough to model, partially because they are rare so we don't have a good idea of the true underlying probability.

I'm not going to offer an answer, but I think this question illustrates well the stats problem to solve.

Question #2 (This is a variation on #1): What is the average homicide rate in Europe compared to the US?

If one looks up the basic statistics one finds something like, "European countries tend to have homicide rates 1/3 - 1/4 that of the US."

Which is a pretty reasonable answer and addresses the question most people care about if they are going to Europe on holiday or trying to make some sort of point about gun control.

But it excludes the 12,000,000 people murdered in the Holocaust (1933 - 1945).

Another way to view the homicide rate is that in any given year the European rate has been quite a bit lower than that of the US, but there have been a few years that were INSANELY HIGH compared to the US.

Note that we can play this game even today because when Russian missiles are aimed at Ukrainian hospitals that almost certainly doesn't show up in the basic homicide statistics for Ukraine though the folks are just as dead as if they had been murdered.

So ... retain the data with World Wars and Great Depressions (and Argentina and Japan post-WW2) or remove it because these events are: (a) rare and, (b) unlikely to be repeated?

I don't think "we" are going to converge on an answer.
Excellent post, great examples of the statistical issues in play. Stretching my math competence to the limit, I believe I see the term "nonlinearity" used to sum up the issues raised by your examples.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by McQ »

iim7V7IM7 wrote: Sun Oct 02, 2022 10:47 am I recommend reading Wade’s 2017 book “How Much Can I Spend in Retirement?” for his comprehensive review of various fixed and variable withdrawal strategies. He provides a very nice overview of their pros and cons and how they perform. He covers

- Bengen’s constant inflation adjusted strategy,
- fixed percentage withdrawals,
- endowment formulas,
- Bengen’s hard dollar floor and ceiling approach,
- Vanguard’s floor and ceiling approach,
- Kitces ratcheting rule,
- Guyton and Klinger’s decision rules,
- Zolt’s glide path rule and
- RMDs (actuarial methods such as Blanchett’s)

He also re-introduces the concept of a Pay Rule from his 2015 paper to evaluate each against vs a simple probability of failure (e.g., retiree accepts X% probability that their wealth falls below a threshold amount of $Y (in inflation adjusted terms) by year Z of retirement (probability, amount and year). This is a better way in my opinion for a retiree to assess performance parameters of each approach.

The “dash board” on his website is over interpreted in my opinion. 1) he has not updated it since April 2021 (things have changed quite a bit in 1-1/2 years), 2) the 2.39% and 3.50% withdrawal rates listed have very different acceptance criteria from Bill Bengen’s.

- The 2.39% for a 50/50 asset allocation assumes a 90% probability that real wealth does not fall below 15% of its initial level by year 30 of retirement
- The 3.50% for a 75/25 asset allocation assumes 80% probability that real wealth does not fall below 10% of its initial level by year 25 of retirement

These really cannot be compared to Bengen’s 1994 paper because they add different things to the estimate. Bengen just wanted to have enough money at the beginning of year 30 to support the inflation adjusted withdrawal.

I feel that Wade gets way too much guff here as being an annuity salesman, being too conservative or in some cases using unrealistic assumptions such as longevity or annual investment expenses. I believe his research contributions to retirement planning thinking are valuable to consider. They frankly have helped me think through things.
Very helpful, especially the bulleted list of what Wade Pfau has examined.
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Re: Maybe Wade Pfau was over-optimistic …

Post by McQ »

TN_Boy wrote: Sun Oct 02, 2022 1:09 pm
McQ wrote: Sat Oct 01, 2022 6:04 pm
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.
McQ,

Thanks for getting back to me. In reverse order, okay, I don't like 1890, what start date do I like :-). Fair question. I don't know. Frankly the post WW II period seems a lot more useful than earlier times, due to massive changes in the world, but obviously that leaves us with relatively few data points, and well, 2020 is rather different than 1946 too. I will say that when you start with mid 20th century, you have a situation where the US is the dominant economic and military power, and the US dollar is the world's reserve currency. I believe those factors do affect US stock returns.

Including WWs ... yeah, I just think (for example) the German stock market experience in the 20s through the 40s doesn't tell me much about what SWR is achievable. I don't know the best way to work around that sort of thing. More generally, what returns from what countries are somehow "not valid?"

As to the 1st question, the method still seems odd to me. I'm looking at page 8. Let me ponder that a bit more. If the block length is 10 years, then of course they are randomly picking non-adjacent blocks for a country to get the full 30+ year simulation for a given country?

Going to Figure 1, page 22. The graph has a single line for developed sample and a single line for the US sample. So the developed sample is just the totaled up results of all the non-US country samples. Where each simulation result had the same "weight." I.e. if 50% of the simulations using, for example, Slovakia failed, that counts the same as if 50% of the samples using England failed? And the overall failure at each payout rate is the total failures across simulations from all countries. And of course that figure is where the incredibly low value for a 1% failure rate comes from. Hmm.
Between us, TN_boy, and with the help of Mark Roulo, I think we are getting somewhere with teasing out the key assumptions of the paper. My understanding is that you are correct: Slovakia strings of return get the same weight as UK strings back when the UK was the global hegemon. Each is just one more sample from the unobserved infinite population of return strings.

Next, and more in the authors’ defense: although most mortality lengths will be longer than 120 months, requiring a mash up of return strings from different countries and times, the mashup points are few in number. About 1 in 119 successive month pairs will be fabricated. The other 118 will be intact historical sequences. I assume this is why they avoided a conventional Monte Carlo simulation: they can argue that most time series have been preserved using the block method. In this thinking each country’s return string, at any level of granularity, is again just a sample from the infinite population of possible return strings. Therefore mashing up strings is not a problem, because the spliced string could sometime occur. Splicing two random draws from the plenum is no different than drawing one string of that length.

But here we come face to face with the problem that besets all such simulations, from my perspective as a historian. On the analysis above, every mortality length longer than 120 months contains a fabricated join of two strings from two different sources. On average 1/119 of all the simulation runs are suspect. A withdrawal rate that failed 1% of the time may have only failed on a problematic fake—one where the Weimar Germany string was tacked onto a Canada string ending in 1933 followed by a US string ending in March 2009. A chimera, not existing in history.

Next, and here other posters share your view, it is all very well for the authors to trumpet the fact that they have avoided survivorship bias by including Germany 1923, Japan 1945, Portugal in its Civil War, Austria after the loss of an empire, yada yada. Survivorship bias is bad; but mixing apples and oranges is also bad. It is not clear to me that the returns seen in Germany in 1923 belong to the same population as the returns I may expect as a US investor in 2022. Combining disparate populations and treating them as one leads to error.

If we add up the war losers, the countries invaded (Belgium), the empires destroyed, the victims of revolution and civil war, and count up the problematic return months, we probably have another 2-5% of the total sample.

With 1% fabrications and 5% war months, the discovery that a certain withdrawal rate would have failed 5% of the time … loses its punch.

It would be ideal if the authors would rerun the study with the exclusions I mentioned. The SWR would go up, I am certain; but I don’t know by how much. It’s conceivable that in the war sample, there is no sustainable withdrawal rate of more than a basis point or two, because wealth destruction was ultimately so great.

The reported rate of 1.9% then represents a fruit salad, with the apple of war loss returns mixed in with the orange of peacetime returns and the berry of victory returns.
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Re: Maybe Wade Pfau was over-optimistic …

Post by nigel_ht »

randomguy wrote: Fri Sep 30, 2022 10:26 pm 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.
Yes, in this case I don’t think it passes the sniff test.
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.
Yes, my retirement portfolio is the least of my worries if we get bombed to rubble.

It’s a scenario that no rational financial retirement plan can address…
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Re: Maybe Wade Pfau was over-optimistic …

Post by nigel_ht »

SimpleGift wrote: Sat Oct 01, 2022 7:42 pm
Yes, but "how low the bad end was" during the economic disasters for developed countries in the 20th century (table below) seems far removed from "how low the bad end could be" for developed countries in the 21st century:
  • Image
    Source: Barro, Rare Disasters & Asset Markets in the 20th Century.
In the 21st century, should we be planning for geopolitical events in which major developed economies suffer 25% or greater concurrent losses in real GDP-per-capita? With two world wars and a global depression, this happened three times in the last century. The scale and scope of this economic instability in the developed world seems highly unlikely to recur in the century ahead, to my mind.
1929 is included and that’s not the driving factor in SWR failure rate…instead 1966 and inflation was.

Can we see a worse than historical outcome for the US? Yes.

But the our SWR is not going to be like it was for Germany post WWI and WWII or Japan post WII when all their cities and industries were rubble.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by 9-5 Suited »

vineviz wrote: Sun Oct 02, 2022 9:30 pm
9-5 Suited wrote: Sun Oct 02, 2022 8:34 pm I guess take a 1.9% withdrawal rate if you wish - I promise I will not be, and I feel not a single ounce of regret about it.
I don't think retirement researcher has "make "9-5 Suited" feel regret" as a goal.

The goal is pretty much simply to help investors make sensible plans for their retirement, by providing evidence about what is likely to work and what is unlikely to work.

It's not manufactured pessimism, but rather an acknowledgement of the reality of the situation we face.
It’s only the reality of the situation we face, however, if you accept that their input data are a relevant reflection of forward probabilities for your own situation. I do not grant that, and I don’t think it serves the investor community well to be overly conservative when there’s also the risk of overworking and underspending for wants. I don’t want my personal utility function to be exclusively about not running out of money based on a withdrawal method that is barely even plausible to practice in real life.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by nigel_ht »

9-5 Suited wrote: Sun Oct 02, 2022 8:34 pm They are so ridiculously one-directional, biased heavily in favor of ever-lower withdrawal rates.
Bengan has revised SWR/SAFEMAX upwards a bit. If you look over at portfolio charts there are some backtested AAs that generate higher SWR. Just doing 3-Fund bumps SWR up.

So I think that if you diversify more than vanilla 60/40 with a SWR above 4% then picking 4% should be sufficiently conservative if you also have some
margin built into your expense estimates.

SWR also doesn’t factor in SS…that can be a big boost depending on how far away it is for you.

My feeling is that until we lose the USD as a reserve currency, being one of the largest economies and superpower status, US treasuries get to keep its “flight to safety” bonus and we get to play some monetary and political games other countries can’t.

That means we have more tools to avoid or at least mitigate some bad outcomes.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

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vineviz wrote: Sun Oct 02, 2022 9:30 pm
9-5 Suited wrote: Sun Oct 02, 2022 8:34 pm I guess take a 1.9% withdrawal rate if you wish - I promise I will not be, and I feel not a single ounce of regret about it.
I don't think retirement researcher has "make "9-5 Suited" feel regret" as a goal.

The goal is pretty much simply to help investors make sensible plans for their retirement, by providing evidence about what is likely to work and what is unlikely to work.

It's not manufactured pessimism, but rather an acknowledgement of the reality of the situation we face.
The reality of the situation that we face is that we are the global superpower with a contiguous empire covering one third of the North American continent with neighbors that aren’t able (or inclined) to invade us.

We are net energy and food exporters.

We have the dominant global reserve currency.

We have the largest economy.

Bad things can still happen to us and our economy and by extension our stock market…but until Pax Americana ends we have significant hard advantages vs anyone else.

And while the British Empire fell in the span of 50 years it took two world wars to do it…

1.9% WR is manufactured pessimism and generally intended to sell something…whether financial product or academic reputation…
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by SimpleGift »

Via PM, a Forum member asked, if we are going to exclude the war-ravaged countries of the 20th century, which countries' historical asset returns should we be looking at to determine expected asset returns for the 21st century?

A quick look at one of the Credit Suisse Yearbooks yielded the list of ten countries below — showing real (inflation-adjusted), geometric average returns from 1900 to 2016:
  • .........................................Stocks..................Bonds
    Australia....................6.8%.................1.7%
    Canada......................5.7%.................2.2%
    Ireland.......................4.4%.................1.6%
    New Zealand..............6.2%.................2.1%
    Norway......................4.3%.................1.8%
    Spain.........................3.6%.................1.8%
    Sweden......................5.9%.................2.7%
    Switzerland................4.4%.................2.3%
    United Kingdom.........5.5%.................1.8%
    United States..............6.4%.................2.0%
    AVERAGE........................5.3%......................2.0%
In short, if we expect 5% real from stocks and 2% real from bonds in the 21st century, this should be good enough for most retirement planning purposes, in my view. Since there isn't a wide variance in the returns of the selected countries, perhaps this is close to what can intrinsically be expected from war-free, shareholder-friendly capitalist enterprise.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by AlohaJoe »

SimpleGift wrote: Sun Oct 02, 2022 11:44 pm Via PM, a Forum member asked, if we are going to exclude the war-ravaged countries of the 20th century, which countries' historical asset returns should we be looking at to determine expected asset returns for the 21st century?
I'm not sure we can exclude Spain and Ireland that easily. Spain had a civil war from 1936-1939 that was so bad it resulted in one of the most famous paintings of the 20th century (Guernica).

And Ireland had its war of independence from 1919-1921, admittedly much lower intensity.

It just shows how hard it is to "control" for something like this to make everyone happy.
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Re: Maybe Wade Pfau was over-optimistic …

Post by Poe22 »

Zeno wrote: Sun Oct 02, 2022 4:04 pm
Poe22 wrote: Sun Oct 02, 2022 3:26 pm Planning with the worst SWR is like living as if you'd die within the next minute. Who in his right mind does that?
I would flip that around and frame it this way: the future is unknowable -- except for death, which is certain -- so plan accordingly.
I agree with most of what you say. I guess my example about living as if you were to die immediately was ill-chosen, because it hasn't got all that much to do with MC-simulations and SWR.

What I actually meant to say: MC-simulations might lead people to think that the worst case scenario is way more probable than it actually is.

I like Rick Ferry's opinion on MC-simulations: https://www.investmentnews.com/monte-ca ... not-215328
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by Ben Mathew »

The reason you can get extremely low withdrawal rates in SWR studies is that the strategy is fundamentally extremely conservative. It has to be because it's assuming that you won't adjust withdrawals. If you do adjust withdrawals in response to portfolio performance, withdrawal rates can be significantly higher.

SWR has to assume very high expected returns--8.5% stocks and 3.1% bonds (historical US averages)--to produce 4% withdrawal rates. Confront it with lower expected returns and withdrawal rates plummet.

This post shows withdrawals rates for a 30 year retirement with a 35/65 portfolio. It compares SWR withdrawals against a cautious ABW withdrawal schedule with sufficient underconsumption in early years to make withdrawals much more likely to increase over time than decrease over time (specifically, 3x more likely to have increased than decreased by the end of retirement):

(A) If expected return = historical average (8.5% stocks and 3.1% bonds)
SWR: 4%
ABW: 5.2%

(B) If expected return = 4.0% stocks and 0.7% bonds
SWR: 2.6%
ABW: 3.5%

So even a cautious variable withdrawal plan delivers around 30% to 35% more starting income than SWR does. Even if the market ends up doing very badly and long term returns are down to the 5th percentile, ABW income by the end of retirement will still be a healthy 3.4% of the starting portfolio in A and 2.3% of the starting portfolio in B. This is not that much worse than SWR's income throughout. And of course if the market performs even worse and drops below the 5th percentile, SWR will go bankrupt while ABW will make the necessary cuts and keep going.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

nigel_ht wrote: Sun Oct 02, 2022 11:28 pm
The reality of the situation that we face is that we are the global superpower with a contiguous empire covering one third of the North American continent with neighbors that aren’t able (or inclined) to invade us.
Investing like you're special, superior, and invulnerable only works until it doesn't.

If this paper doesn't convince people of that, they're immune to evidence.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by randomguy »

Ben Mathew wrote: Mon Oct 03, 2022 2:45 am

So even a cautious variable withdrawal plan delivers around 30% to 35% more starting income than SWR does. Even if the market ends up doing very badly and long term returns are down to the 5th percentile, ABW income by the end of retirement will still be a healthy 3.4% of the starting portfolio in A and 2.3% of the starting portfolio in B. This is not that much worse than SWR's income throughout. And of course if the market performs even worse and drops below the 5th percentile, SWR will go bankrupt while ABW will make the necessary cuts and keep going.
What was the ABW withdrawal rate for the 1966 retiree in say 1981? Somewhere down around 3% right? That is a pretty significant drop from 4%. There are no free lunches the money you are spending later comes from not spending it earlier.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by LadyGeek »

Acronym decoder:

ABW = Amortization based withdrawal
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by randomguy »

vineviz wrote: Mon Oct 03, 2022 6:08 am
nigel_ht wrote: Sun Oct 02, 2022 11:28 pm
The reality of the situation that we face is that we are the global superpower with a contiguous empire covering one third of the North American continent with neighbors that aren’t able (or inclined) to invade us.
Investing like you're special, superior, and invulnerable only works until it doesn't.

If this paper doesn't convince people of that, they're immune to evidence.
You see what you want to see. You are seeing evidence for a low SWR because it matches your world view. Other people go I am investing in a diversified portfolio (across countries and time) and not into small countries (are they really weighting the USA and Slovakia the same? That seems nuts) with limited mean reversion and somewhat unrealistic lifespans.As always it is incredibly easy to get computers to spit numbers. It doesn't mean the numbers mean anything.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

randomguy wrote: Mon Oct 03, 2022 6:37 am As always it is incredibly easy to get computers to spit numbers. It doesn't mean the numbers mean anything.
The fact that data makes some people uncomfortable is not a good reason to ignore the data.

Academic research like this should almost never be read through a lens of “do I like the findings or not?” or “should I blindly apply the findings of this study to my situation?”.

If more people got in the habit of reading research because they want to learn about the world then improvement wouldn’t be quite the struggle it sometimes is.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by TN_Boy »

vineviz wrote: Mon Oct 03, 2022 7:01 am
randomguy wrote: Mon Oct 03, 2022 6:37 am As always it is incredibly easy to get computers to spit numbers. It doesn't mean the numbers mean anything.
The fact that data makes some people uncomfortable is not a good reason to ignore the data.

Academic research like this should almost never be read through a lens of “do I like the findings or not?” or “should I blindly apply the findings of this study to my situation?”.

If more people got in the habit of reading research because they want to learn about the world then improvement wouldn’t be quite the struggle it sometimes is.
I think you are being too dismissive of the comments here ... several of us are looking at the paper's methodology in a fair amount of detail and not finding it compelling. We are not ignoring the data, and this is not a reflexive "the US is best!" response.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

TN_Boy wrote: Mon Oct 03, 2022 7:28 am
vineviz wrote: Mon Oct 03, 2022 7:01 am
randomguy wrote: Mon Oct 03, 2022 6:37 am As always it is incredibly easy to get computers to spit numbers. It doesn't mean the numbers mean anything.
The fact that data makes some people uncomfortable is not a good reason to ignore the data.

Academic research like this should almost never be read through a lens of “do I like the findings or not?” or “should I blindly apply the findings of this study to my situation?”.

If more people got in the habit of reading research because they want to learn about the world then improvement wouldn’t be quite the struggle it sometimes is.
I think you are being too dismissive of the comments here ... several of us are looking at the paper's methodology in a fair amount of detail and not finding it compelling. We are not ignoring the data, and this is not a reflexive "the US is best!" response.
I think I'm being the right amount of dismissive.

You're right, there are many coherent comments here which reflect a desire to understand the paper's methodology and make a reasoned effort to see how the findings might apply to their personal plans.

There are other comments, complete with references to "superpowers", "global empires" and the like that seem designed to dismiss the paper's findings on purely emotional grounds.

There are other comments that suggest a desire to just ignore the research and carry on doing what they want to do.

I embrace the first group of comments and push back on the latter two groups.

I, too, take exception to some parts of the authors' methodology (and in some cases their lack of clarity about what the methodology actually was). Even so, there is plenty to learn IMO and some interesting techniques that I haven't seen used in SWR reproach that I think are potentially useful.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by Escapevelocity »

Garco wrote: Sun Oct 02, 2022 10:25 am I am in my late 70's. I have a retirement fund accumulation of >$3 million. I am taking RMD's from a tax-deferred investment account.

While I'm taking what's required from the tax-deferred account, I'm not not spending it all. I also receive monthly Social Security checks. And I have property, some of which will be turned into cash within the next year.

So what is "SAFE"? Even if I live to 90 I'm not going to run out of cash.
In my opinion, the whole discussion is not relevant to your scenario. You have no risk of portfolio failure unless you get into some shady investments.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by abc132 »

The first question I would ask is why a study taking blocks of historical returns is any better than just looking at the range of historical returns for all countries. My conclusion is that just looking at separate countries actual SWR results gives a range of results that is more useful than the simulated results.

Next up we look at the various levels of conservatism:

- SWR studies do not include social security, a product that is indexed to inflation and has around 8% higher payment each year you wait up until age 70.
- SWR studies do not account for simple actions we are likely to be able to take, like having some level of optional spending that can be cut, or the ability to generate some sort of income.
- SWR studies do not account for the chance of death before the end of the period
- SWR studies do they consider the use of longevity products - the portfolio itself and market returns are the only tools being utilized

When you combine all of these things you get a number that is not the number you would want to use if you want an X% chance of failure.

Next up is what is actionable about such numbers. Ask the people saying how important low SWR results are for specific actionables:
- How much longer should I expect to work?
- How much more do I need to save to retire in X years?
- How much less do I need to spend?
- What specific action should I be taking and by what specific amount (save 20% instead of 17%, etc)

How much different will the above "actionable" numbers be in a few years?

Lastly, if the purpose of SWR is to help determine how to spend money without much risk of failure, we have to consider the alternatives that allow higher levels of spending with less chance of failure. A calculation that is based on conservatism that ignores safer and higher results does not make any sense at all, and yet that is what those calculating SWR results typically do. You want to be ultra conservative so you gamble on the market so that you can spend less money per year. The thing that would make sense is to plot 10% (worst), 30% (poor), 50% (average), 70% (good) and 90% (best) returns for each choice and choose according to risk vs reward. This should include social security, longevity products, and the ability to cut optional spending or earn some sort of income.

Those making decisions based on the 10% worst outcomes (typical SWR calculations) or less should consider guaranteed products that offer higher levels of annual spending. Those making decisions at the 20-30% (poor) level with some flexibility should be more willing to take a gamble on the market, but they should also be using numbers higher than the SWR calculation based on their risk tolerance.

The SWR number in a vacuum is fairly useless given that only a small percentage would find their optimum choice at that number.
Last edited by abc132 on Mon Oct 03, 2022 10:55 am, edited 1 time in total.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by randomguy »

Escapevelocity wrote: Mon Oct 03, 2022 10:04 am
Garco wrote: Sun Oct 02, 2022 10:25 am I am in my late 70's. I have a retirement fund accumulation of >$3 million. I am taking RMD's from a tax-deferred investment account.

While I'm taking what's required from the tax-deferred account, I'm not not spending it all. I also receive monthly Social Security checks. And I have property, some of which will be turned into cash within the next year.

So what is "SAFE"? Even if I live to 90 I'm not going to run out of cash.
In my opinion, the whole discussion is not relevant to your scenario. You have no risk of portfolio failure unless you get into some shady investments.
Well you could study how often social programs fail..... But yes if you aren't taking money out of a portfolio, portfolio failure really doesn't exist.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by SimpleGift »

Just to note that this same group of authors published a paper last year that gives more insight into the database they developed for stock returns:
Anarkulova et al. wrote:We characterize the distribution of long-term equity returns based on the historical record of stock market performance in a broad cross section of 39 developed countries over the period from 1841 to 2019. Our comprehensive sample mitigates concerns over survivor and easy data biases that plague other work in this area. A bootstrap simulation analysis implies substantial uncertainty about long-horizon stock market outcomes, and we estimate a 12% chance that a diversified investor with a 30-year investment horizon will lose relative to inflation. The results contradict the conventional advice that stocks are safe investments over long holding periods.
  • Image
My concern for modern day investors, who are planning their retirements, is that by including the war-ravaged developed countries of Europe and Japan, plus adding an assortment of semi-developed countries to their database (Czechoslovakia since 1926, Chile since 1927, Argentina since 1947, etc.), they have created a sample of historical returns without much relevance for the 21st century ahead.

Their sample of historical returns almost guarantees lower SWRs and lower probabilities of stocks beating inflation, compared with more relevant historical return data that today's retirement planners should be using, in my view.
Last edited by SimpleGift on Mon Oct 03, 2022 11:33 am, edited 1 time in total.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by randomguy »

SimpleGift wrote: Mon Oct 03, 2022 10:55 am Just to note that this same group of authors published a paper last year that gives more insight into the database they developed for stock returns:
So is the methodology they are for returns is along the lines of

a) div up each country returns by month in local currencies
b) Pick one of these months at random
c) Then take x+ months after this sample where x is controlled by a distribution and their are some rules for missing data
d) loop back to b until you have enough months of data
Then repeat 1 million times to get a distribution.

Am I missing something? That is how I read the first posted paper but it seemed very odd so I figured I must be mistaken but this one seems to make it much clearer that is what they are doing...
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

SimpleGift wrote: Mon Oct 03, 2022 10:55 am My concern for modern day investors, who are planning their retirements, is that by including the war-ravaged developed countries of Europe and Japan, plus adding an assortment of semi-developed countries to their database (Czechoslovakia since 1926, Chile since 1927, Argentina since 1947, etc.), they have created a sample of historical returns without much relevance for the 21st century ahead.

Their sample of historical returns almost guarantees lower SWRs and lower probabilities of stocks beating inflation, compared with more relevant historical return data that today's retirement planners should be using, in my view.
I caution against overestimating the degree to which the dataset being used by the authors of this paper is influencing the conclusions we should draw from the research.

In addition to broadening the dataset, these authors are using some assumptions and methods that differ from prior SWR research (e.g. uncertain longevity instead of a fixed 30-year withdrawal, a focus on 5th percentile outcomes instead of more conventional 10th percentile outcomes, etc.). Some of these changes are arguably improvements, but they make it hard to compare this results from this paper with the results form other papers.

Is it possible that the headline withdrawal rates from this study are more conservative than ones real-world modern investors should plan around? Sure, and in fact it is even likely.

On the other hand, it's also likely that past SWR research produced headline withdrawal rates that are more optimistic than the ones real-world modern investors should plan around.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by abc132 »

vineviz wrote: Mon Oct 03, 2022 12:41 pm On the other hand, it's also likely that past SWR research produced headline withdrawal rates that are more optimistic than the ones real-world modern investors should plan around.
That's simply not true given the over-conservative nature of the SWR results. Using SWR, you might need 14-16 years of income for the markets to preserve withdrawals for the last 10 years with a non-zero failure rate. But of course we can guarantee much more with much less by using an annuity for longevity purposes. Something like 10-12 years of expenses annuitized in our 80's would would give a higher success rate and provide longevity protection.

It simply doesn't make sense financially to gamble on the market in the potential failure scenario.

The SWR estimate has always been overly conservative while leaving longevity risk.

Since nobody bothers to do realistic studies, it is not a given that current SWR numbers are better than the old ones.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by LadyGeek »

I removed a disrespectful post. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
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New study on Safe Withdrawal Rate - Side discussion

Post by nigel_ht »

vineviz wrote: Mon Oct 03, 2022 6:08 am
nigel_ht wrote: Sun Oct 02, 2022 11:28 pm
The reality of the situation that we face is that we are the global superpower with a contiguous empire covering one third of the North American continent with neighbors that aren’t able (or inclined) to invade us.
Investing like you're special, superior, and invulnerable only works until it doesn't.

If this paper doesn't convince people of that, they're immune to evidence.
It took significant world events to make the British Empire fall. It also depends on when you believe the decline of the British Empire stated. Some Americentric might say 1781 when Cornwallis surrendered to Washington. Others would start with WWI or even WII.

4% should be fine until we see an indication of the decline of the American Empire.

Amusingly the first volume of Edward Gibbon's "History of the Decline and Fall of the Roman Empire" was published in 1776...perhaps if Brendon's "The Decline and Fall of the British Empire" has the same amount of foreshadowing then 2008 is when we started our decline...and 2016, when China's PPP GDP overtook ours is our Battle of Yorktown.

If so, we may be good for another hundred and fifty years or so.

But yeah, I'm not going to invest as if the US was Belgium or Weimar Germany...if you count that as evidence then...well, we will have to agree to disagree...
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by SimpleGift »

vineviz wrote: Mon Oct 03, 2022 12:41 pm Is it possible that the headline withdrawal rates from this study are more conservative than ones real-world modern investors should plan around? Sure, and in fact it is even likely.

On the other hand, it's also likely that past SWR research produced headline withdrawal rates that are more optimistic than the ones real-world modern investors should plan around.
Agree completely. Perhaps the key takeaways from this excellent discussion thread are:
  • • Using strictly U.S. historical stock returns, one can derive SWRs around 4% (Bengen).

    • Using the entire kitchen sink of global stock returns, including every possible country that might have been considered "developed" at some point, one can derive SWRs around 2% (Anarkulova et al. in this paper).
So what then is a reasonable SWR assumption, for folks planning their retirement in the 21st century? My sense is, using historical developed market data from fairly stable, war-damage-free, stockholder-friendly countries, one can derive a conservative and useful SWR expectation for the decades ahead in the 3%-3.5% range. Time will tell.
Last edited by SimpleGift on Mon Oct 03, 2022 1:48 pm, edited 1 time in total.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

abc132 wrote: Mon Oct 03, 2022 1:05 pm
vineviz wrote: Mon Oct 03, 2022 12:41 pm On the other hand, it's also likely that past SWR research produced headline withdrawal rates that are more optimistic than the ones real-world modern investors should plan around.
That's simply not true given the over-conservative nature of the SWR results.
A sustainable withdrawal rate cannot, by "nature" be over-conservative. The results are what they are.

The year-to-date return of Vanguard Total Stock Market ETF (VTI) is -24.8%. That is not "over-conservative" or "under-conservative". It is just the rate of return for that asset in that period of time.

The SWR works the same way.

An investor need not decide to use a constant dollar withdrawal method in order to gain a benefit from research like this: more accurate planning inputs will benefit ALL investors, regardless of which withdrawal method they personally employ.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

nigel_ht wrote: Mon Oct 03, 2022 1:46 pm But yeah, I'm not going to invest as if the US was Belgium or Weimar Germany...if you count that as evidence then...well, we will have to agree to disagree...
We don't have to read back hundreds of years to find a period of time in which countries like Belgium and Germany occupied a place on the world financial stage much like the one occupied by the U.S. in the second half of the 20th century.

But any student of economic history knows that there are only a few bad breaks separating a prosperous financial system from a failed one.

Of course we shouldn't plan as if failure is imminent. But we also shouldn't plan as if it is impossible.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by Harry Livermore »

I skimmed the article. Who knows.
I have always lived below my means and have been flexible in my spending habits. Once retired, I plan on being debt-free, in a lower COL locale than I am currently, and to use some variation of the VPW. As long as I'm physically able, I will likely continue doing my own car and home maintenance, and would consider working if necessary.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by randomguy »

SimpleGift wrote: Mon Oct 03, 2022 1:46 pm
• Using the entire kitchen sink of global stock returns, including every possible country that might have been considered "developed" at some point, one can derive SWRs around 2% (Anarkulova et al. in this paper).[/list]
If you use a stricaly historical stock returns, you will derive a SWR around 3.5%

If you follow the methodology in this paper (invest all your money in Belgium for 5 years, Germany for 12, 8 in Slovakia, 5 in Argentine) from random time periods, you will get results similiar to the paper. Note that I have a feeling that bonds are as big of killer as stocks in a lot of these cases. Lots of these countries at one point or another had inflation periods that made the 70s look tame....
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by nigel_ht »

SimpleGift wrote: Mon Oct 03, 2022 10:55 am Just to note that this same group of authors published a paper last year that gives more insight into the database they developed for stock returns:
Anarkulova et al. wrote:...Our comprehensive sample mitigates concerns over survivor and easy data biases that plague other work in this area. A bootstrap simulation analysis implies substantial uncertainty about long-horizon stock market outcomes, and we estimate a 12% chance that a diversified investor with a 30-year investment horizon will lose relative to inflation. The results contradict the conventional advice that stocks are safe investments over long holding periods.
The concern over survivorship bias is, IMO, pointless.

The collapse of the US stock market is IMO an unmitigable event for anyone without mid 8 figures.

If you accept the author's conclusion that "The results contradict the conventional advice that stocks are safe investments over long holding periods." then you might as well quit the forum...what this implies is that the authors had a conclusion in mind and then massaged the data to support it.

This statement is interesting:

"The distribution suggests that the −21% real return realization in Japan over the past 30 years is not exceedingly rare. In fact, this observation lies in the 9th percentile of the wealth distribution. Although this evidence suggests that Japanese investors were unlucky, their experience appears to be a reflection of the substantial risk exposures of long-term equity investors."

And yet, if we look at the results as StillGoing did in another thread we find that Japan's post 1950's SWR is 5%.
StillGoing wrote: Wed Apr 20, 2022 12:24 pm
Just for interest since I had the numbers to hand (returns are from open source JST database at https://www.macrohistory.net). The start year of the dataset for the given country is indicated and the column labelled 'All' is the SAFEMAX value for all the data (the final year is 2015), the column labelled 'post-1950' contains only retirements starting in 1950 and afterwards. All values are for 60% stocks, 40% bonds with annual rebalancing and withdrawals, a 30 year retirement, and no fees.

Code: Select all

		Start	All	Post 1950
USA		1872	3.7	3.7
UK		1872	2.9	3.8
Australia	1900	3.2	3.2
Belgium		1872	1.3	3.2
Switzerland	1900	3.2	3.2
Germany		1872	0.0	3.8
Denmark		1872	4.1	4.1
Spain		1900	1.8	1.8
Finland		1890	1.3	4.1
France		1872	0.4	1.6
Italy		1872	1.1	1.5
Japan		1886	0.1	5.0
Netherlands	1900	3.3	3.5
Norway		1881	2.7	2.7
Portugal	1880	0.5	0.5
Sweden		1872	2.3	4.3
Interestingly, the worst retirements for Germany appear not to be caused by WWII, but result from the hyperinflationary period in the 1920s. However, the lowest values for Japan and France are related to WWII. The poor SAFEMAX for Portugal arises from the Carnation Revolution in 1974, while the SAFEMAX for Spain also occurs for retirements starting in the early 1970s.

Note that for some countries, the SAFEMAX values are different using the JST dataset compared to those calculated using the Dimson, Marsh, and Staunton dataset (which is the one that Pfau and others tend to use - I don't have access to that). Differences can arise from different returns (which of course depends on the exact 'index' chosen and how well it is processed) and from different inflation series (e.g. the UK has at least 4 perfectly plausible historical inflation series prior to 1948 when the official measure was first adopted - depending on which inflation series is chosen this makes difference in SAFEMAX of up to 20 basis points and up to a 50 basis point difference in SWR for particular retirement years).

cheers
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As for the countries that have very low post 1950 SWR...well, like I said above...I'm not going to invest as if the US was Portugal or Spain.

I picked Belgium but they did well enough after the war.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by nigel_ht »

vineviz wrote: Mon Oct 03, 2022 1:56 pm
nigel_ht wrote: Mon Oct 03, 2022 1:46 pm But yeah, I'm not going to invest as if the US was Belgium or Weimar Germany...if you count that as evidence then...well, we will have to agree to disagree...
We don't have to read back hundreds of years to find a period of time in which countries like Belgium and Germany occupied a place on the world financial stage much like the one occupied by the U.S. in the second half of the 20th century.
When did Belgium or Germany have the largest empire and largest GDP? Before us was the British Empire. Before them was the Spanish Empire. Arguably there was no global power before that...even if you count the Holy Roman Empire that was nominally German. A Habsburg was on the throne of Spain and Portugal but they were separate powers.

The dataset of Global Empires consists of 3.5 empires...if you count the French somewhat in between Spain and England.
But any student of economic history knows that there are only a few bad breaks separating a prosperous financial system from a failed one.

Of course we shouldn't plan as if failure is imminent. But we also shouldn't plan as if it is impossible.
Perhaps you can give us an example of when a country like the US that failed after a few bad breaks that wasn't on the order of WWI, WWII or Franco-Spanish war that spanned 25 years and effectively ended Spain as a global power with the rise of France as a major continental power.

If you count the Holy-Roman Empire as "Germany" then there's the Thirty Years War that saw a 50% decline in population in some parts of what is now modern Germany.

Empires don't go down willingly. Generally a lot of bloodshed is involved.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

nigel_ht wrote: Mon Oct 03, 2022 2:57 pm Perhaps you can give us an example of when a country like the US that failed after a few bad breaks that wasn't on the order of WWI, WWII or Franco-Spanish war that spanned 25 years and effectively ended Spain as a global power with the rise of France as a major continental power.
You mean, when was the last time a country experienced financial turmoil OTHER THAN all the times a country experienced financial turmoil that you can remember?

Again, no one is talking about the complete failure of a country and the study we are discussing is designed to allow for a reasoned discussion about withdrawal rates WITHOUT clouding the picture with emotional hyperbole. There's a whole range of outcomes in between infinite domination and complete collapse, and the authors here are making a good faith (IMHO) effort to quantify that range of outcomes.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by TN_Boy »

randomguy wrote: Mon Oct 03, 2022 11:31 am
SimpleGift wrote: Mon Oct 03, 2022 10:55 am Just to note that this same group of authors published a paper last year that gives more insight into the database they developed for stock returns:
So is the methodology they are for returns is along the lines of

a) div up each country returns by month in local currencies
b) Pick one of these months at random
c) Then take x+ months after this sample where x is controlled by a distribution and their are some rules for missing data
d) loop back to b until you have enough months of data
Then repeat 1 million times to get a distribution.

Am I missing something? That is how I read the first posted paper but it seemed very odd so I figured I must be mistaken but this one seems to make it much clearer that is what they are doing...
Thanks to SimpleGift for digging that older paper out. I skimmed parts of it, and it does seem the methodology is explained in more detail, also the authors discuss some of the concerns about use of country results during WWs, use of smaller countries, etc. I hope to dig into that paper a little more today or tomorrow.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by nigel_ht »

vineviz wrote: Mon Oct 03, 2022 3:11 pm
nigel_ht wrote: Mon Oct 03, 2022 2:57 pm Perhaps you can give us an example of when a country like the US that failed after a few bad breaks that wasn't on the order of WWI, WWII or Franco-Spanish war that spanned 25 years and effectively ended Spain as a global power with the rise of France as a major continental power.
You mean, when was the last time a country experienced financial turmoil OTHER THAN all the times a country experienced financial turmoil that you can remember?
You are an intelligent individual. You know what I'm asking. When was that last time the leading global power suffered from a catastrophic SWR number that didn't involve a global economic disaster or global war?
Again, no one is talking about the complete failure of a country and the study we are discussing is designed to allow for a reasoned discussion about withdrawal rates WITHOUT clouding the picture with emotional hyperbole. There's a whole range of outcomes in between infinite domination and complete collapse, and the authors here are making a good faith (IMHO) effort to quantify that range of outcomes.
Except that the point has been that including those instances...like Weimar German...in the calculation skews the results to an unrealistically low number as does using data from small countries that are more easily impacted by negative events. You don't compare Belgium to the US. You compare Belgium to Maryland.

You would compare SWR for the EU to SWR for the US.

Is it a good faith effort? I don't know, but I will say that it is a deeply flawed one regardless of the authors' intent.

AND you said:
vineviz wrote: Mon Oct 03, 2022 1:56 pm But any student of economic history knows that there are only a few bad breaks separating a prosperous financial system from a failed one.
I am not a student of economic history so perhaps there is some event I missed...but I think the term "failed" here means, if not the complete failure of the country, a significant collapse of the country's economic system like the hyperinflation experienced in Weimar Germany.

Now you can point to Venezuela as a failed economy caused by a few bad breaks in terms of self-destructive national leadership...but I'm going to assert that Venezuela is effectively a failed state where leaving is the best course of action if you can manage it.

In any case, I agree...we shouldn't be talking about scenarios that include the complete failure of a country so data points like Weimar Germany or post war Japan should be excluded from the data set.

Now Japan post 1950 IS a good example because, despite the epic Nikkei crash, it seems SWR was pretty high.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by Zeno »

(Following)
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by abc132 »

vineviz wrote: Mon Oct 03, 2022 1:48 pm
abc132 wrote: Mon Oct 03, 2022 1:05 pm
vineviz wrote: Mon Oct 03, 2022 12:41 pm On the other hand, it's also likely that past SWR research produced headline withdrawal rates that are more optimistic than the ones real-world modern investors should plan around.
That's simply not true given the over-conservative nature of the SWR results.
A sustainable withdrawal rate cannot, by "nature" be over-conservative. The results are what they are.
The SWR can be overly conservative if we can spend more sustainably by simply making more reasonable investing choices. You may have lost site of the risk taking in choosing to hold 50% stocks regardless of our situation. Are you now of the opinion that holdings stocks does not give us risk? Your safe spending rate has to be overly conservative because you put too much stock risk in the portfolio in the last 10 years.

vineviz wrote: Mon Oct 03, 2022 1:48 pm
The year-to-date return of Vanguard Total Stock Market ETF (VTI) is -24.8%. That is not "over-conservative" or "under-conservative". It is just the rate of return for that asset in that period of time.

The SWR works the same way.
Your SWR calculation certainly works that way but you also have to ignore how BAD the decisions you are making are by relying entirely on the market. We say you shouldn't hold stocks for expenses within the next few years but of course that is exactly what you are doing late into your SWR calculations with a few years of expenses remaining.
vineviz wrote: Mon Oct 03, 2022 1:48 pm An investor need not decide to use a constant dollar withdrawal method in order to gain a benefit from research like this: more accurate planning inputs will benefit ALL investors, regardless of which withdrawal method they personally employ.
I think they would benefit from calculations that use more reasonable financial decisions. If I want to buy a home in three years I don't hold half that money in stocks, why would anyone be so foolish to do so with money they need to live on?

Forget about withdrawal method, let's just start with reasonable investing choices and derive a number that actually makes sense.

Don't forget you calculated a SWR around 3% while also saying that starting with 4% spending is reasonable with respect to that SWR. I'm not seeing the scenario you present where people starting with 4% are doing something majorly wrong, or where we need lower SWR calculations to improve our behavior.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

nigel_ht wrote: Mon Oct 03, 2022 3:31 pm

In any case, I agree...we shouldn't be talking about scenarios that include the complete failure of a country so data points like Weimar Germany or post war Japan should be excluded from the data set.
No. You still misunderstand, it seems.

Of course we should be taking about the whole range of possible outcomes. Why can we learn by ignoring any outcomes we don’t like?
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by nigel_ht »

vineviz wrote: Mon Oct 03, 2022 4:09 pm
nigel_ht wrote: Mon Oct 03, 2022 3:31 pm
In any case, I agree...we shouldn't be talking about scenarios that include the complete failure of a country so data points like Weimar Germany or post war Japan should be excluded from the data set.
No. You still misunderstand, it seems.

Of course we should be taking about the whole range of possible outcomes. Why can we learn by ignoring any outcomes we don’t like?
In the context of retirement planning I disagree. Retirement financial tools are not well suited to mitigate against these kinds of cases. Therefore planning a retirement around any scenario that only supports a SWR of 0-0.5% is silly. Even 1.9% is silly.

Finally, you haven't provided an example where a prosperous financial system turned into a failed one. I'm not calling you out...I'm just simply curious what you're thinking about so I can think about what I would do in such a scenario if I thought the US could suffer the same fate.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by SimpleGift »

nigel_ht wrote: Mon Oct 03, 2022 2:26 pm And yet, if we look at the results as StillGoing did in another thread....
Great work by StillGoing calculating the SWRs for various developed countries post-1950 (data below), using the Jorda-Shularick-Taylor database). These post-1950 SWRs will perhaps be helpful for today's retirement planning, even if we just take an equal-weight average of all the international SWRs and pair that with the U.S. post-1950 SWR:
  • Image
This yields SWRs in the range of 3.5%-3.7% for globally-diversified portfolios with 60% stocks and 40% bonds, with annual rebalancing and withdrawals, and a 30 year retirement. Pretty reasonable numbers, to my mind.

Code: Select all

USA		3.7
UK		3.8
Australia	3.2
Belgium		3.2
Switzerland	3.2
Germany		3.8
Denmark		4.1
Spain		1.8
Finland		4.1
France		1.6
Italy		1.5
Japan		5.0
Netherlands	3.5
Norway		2.7
Portugal	0.5
Sweden		4.3
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by vineviz »

nigel_ht wrote: Mon Oct 03, 2022 4:25 pm
vineviz wrote: Mon Oct 03, 2022 4:09 pm
nigel_ht wrote: Mon Oct 03, 2022 3:31 pm
In any case, I agree...we shouldn't be talking about scenarios that include the complete failure of a country so data points like Weimar Germany or post war Japan should be excluded from the data set.
No. You still misunderstand, it seems.

Of course we should be taking about the whole range of possible outcomes. Why can we learn by ignoring any outcomes we don’t like?
In the context of retirement planning I disagree. Retirement financial tools are not well suited to mitigate against these kinds of cases. Therefore planning a retirement around any scenario that only supports a SWR of 0-0.5% is silly. Even 1.9% is silly.
Again, this position depends on a fundamental misconception about the nature of planning.

Understanding and accepting the possibility of a poor outcome is NOT the same thing as planning on that poor outcome as the EXPECTED result.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by TN_Boy »

SimpleGift wrote: Mon Oct 03, 2022 4:28 pm
nigel_ht wrote: Mon Oct 03, 2022 2:26 pm And yet, if we look at the results as StillGoing did in another thread....
Great work by StillGoing calculating the SWRs for various developed countries post-1950 (data below), using the Jorda-Shularick-Taylor database). These post-1950 SWRs will perhaps be helpful for today's retirement planning, even if we just take an equal-weight average of all the international SWRs and pair that with the U.S. post-1950 SWR:
  • Image
This yields SWRs in the range of 3.5%-3.7% for globally-diversified portfolios with 60% stocks and 40% bonds, with annual rebalancing and withdrawals, and a 30 year retirement. Pretty reasonable numbers, to my mind.

Code: Select all

USA		3.7
UK		3.8
Australia	3.2
Belgium		3.2
Switzerland	3.2
Germany		3.8
Denmark		4.1
Spain		1.8
Finland		4.1
France		1.6
Italy		1.5
Japan		5.0
Netherlands	3.5
Norway		2.7
Portugal	0.5
Sweden		4.3
I can't recall what the source(s) are, but 3.5% ish is my recall of what SWRs based on ex-US developed countries have been.

Post 1950 is what I personally consider the "best" set of data, with the obvious problem that is not many data points. But I'm as happy with that as I am with data from eras obviously completely different than the modern world. Not relevant data is ... not relevant. But everybody has a different thought on what data is relevant.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by TN_Boy »

vineviz wrote: Mon Oct 03, 2022 4:44 pm
nigel_ht wrote: Mon Oct 03, 2022 4:25 pm
vineviz wrote: Mon Oct 03, 2022 4:09 pm
nigel_ht wrote: Mon Oct 03, 2022 3:31 pm
In any case, I agree...we shouldn't be talking about scenarios that include the complete failure of a country so data points like Weimar Germany or post war Japan should be excluded from the data set.
No. You still misunderstand, it seems.

Of course we should be taking about the whole range of possible outcomes. Why can we learn by ignoring any outcomes we don’t like?
In the context of retirement planning I disagree. Retirement financial tools are not well suited to mitigate against these kinds of cases. Therefore planning a retirement around any scenario that only supports a SWR of 0-0.5% is silly. Even 1.9% is silly.
Again, this position depends on a fundamental misconception about the nature of planning.

Understanding and accepting the possibility of a poor outcome is NOT the same thing as planning on that poor outcome as the EXPECTED result.
I think the problem people have with many outlier scenarios is there doesn't seem to be an investment model that will handle them, and they are unlikely. If I had a financial planner and he or she wanted to spend five minutes talking about what to do if the US economy was destroyed, I'd say sure, for the entertainment value. But more than five minutes and I'd get restless.

It just seems to me that unless a scenario:

1) Has a reasonable chance of occurring and
2) There is a financial tactic to handle that scenario

it's not that interesting, from a planning standpoint*.

Now, a financial plan might want to enumerate likely and unlikely scenarios, the former to build a plan for, the latter to explain why they are being ignored. And the client might come back and say, well, I don't want to ignore scenario X.

Is that what you are getting at? Or is simply that you feel SWRs like 1% to 2% are likely enough that they should be discussed and ... some plan built.

* some people do get into the disaster scenarios, I grant you. There is one poster on this forum that plans for something like up to 10 years of skilled nursing for both spouses, along with a 1 or 2% SWR. That strikes me as over the top, but it's not impossible that could happen and some people are very conservative.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by GaryA505 »

Studies (and results) like this are why I'm leaning heavily towards using Wade Pfau's "Safety First" approach for retirement income. To guarantee that you have a very small chance of running out of money before you die, you have to use a really small withdrawal rate. However, since that small chance is very small, it almost never happens and the retiree is likely to end up with a big pile of cash when they are really old. What good is that? So instead, set up a basic income floor that you can't outlive with SS, pension, and annuities. Then take more risk with the rest, in mostly stock. I'm fortunate in that I seem to have the assets to pull that one off. Not everyone can, so some of them have to take their chances with the probabilistic approach.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by Garco »

I read studies like this with a certain degree of skepticism. Maybe my reading is too influenced by my own history and financial setup. Specifically, suppose I retire at age 70 with a tax-deferred retirement fund amounting to $2.5 million and I begin drawing SS at that time. With any reasonable withdrawal rate (driven by RMD requirements) we're not going to run out of money, assuming a few other key factors: 1) We have decent health and excellent health insurance (in addition to Medicare). 2) We own our home outright, and 3) We have no outstanding debt or other financial obligations (e.g., paying tuition support to the children/grandchildren).
Last edited by Garco on Mon Oct 03, 2022 8:25 pm, edited 1 time in total.
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Re: Maybe Wade Pfau was over-optimistic … [New study on Safe Withdrawal Rate]

Post by abc132 »

GaryA505 wrote: Mon Oct 03, 2022 5:22 pm Studies (and results) like this are why I'm leaning heavily towards using Wade Pfau's "Safety First" approach for retirement income. To guarantee that you have a very small chance of running out of money before you die, you have to use a really small withdrawal rate. However, since that small chance is very small, it almost never happens and the retiree is likely to end up with a big pile of cash when they are really old. What good is that? So instead, set up a basic income floor that you can't outlive with SS, pension, and annuities. Then take more risk with the rest, in mostly stock. I'm fortunate in that I seem to have the assets to pull that one off. Not everyone can, so some of them have to take their chances with the probabilistic approach.
Keep in mind everyone has to save over 50x expenses if they plan based on the 1.9% SWR.

They have to do that in spite of the fact that they could have guaranteed the 30 years of expenses and while keeping 20 years of stocks for potential growth.

I would go so far as to say it is irrational to think the SWR is 1.9% while not choosing to guarantee the 30 years of expenses along with 20 years worth of stocks for potential growth. This can be accomplished through bond ladder or through an annuity.
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