tag:blogger.com,1999:blog-6167053228142922997.post3170045653252029301..comments2023-10-30T11:57:40.433-04:00Comments on Wade Pfau's Retirement Researcher Blog: An Efficient Frontier for Retirement IncomeAnonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.comBlogger38125tag:blogger.com,1999:blog-6167053228142922997.post-64780757185065218192014-12-23T15:43:48.925-05:002014-12-23T15:43:48.925-05:00Thank you, but I think there may be some factual p...Thank you, but I think there may be some factual problems with what you are saying. Just quickly about the final point, I hope people are not confused about the difference between an annuity payout rate and the underlying internal rate of return. I never found that point to be confusing, and thus never viewed any sort of bait and switch there. I can't remember hearing anyone state that incorrectly before either.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-91389042824110546822014-12-17T03:42:49.189-05:002014-12-17T03:42:49.189-05:00The 4% rule is deceptive. From Jan 1 1999 to Jan 1...The 4% rule is deceptive. From Jan 1 1999 to Jan 1 2014 a portfolio of 33% S&P stocks and 67% aggregate bond market index provided a return on 5.6% when a simple elementary annual re-balancing strategy was employed. Best of all the bond/stock portfolio is 100% liquid, taxed at a lower rate, and you WILL get a better return on investment when it's all said and done. With annuities they bait you with the high interest payment rate but screw you with the ROI. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-43432465520490182472014-05-20T16:51:38.112-04:002014-05-20T16:51:38.112-04:00Thanks Steve.
It was a pleasure speaking. About ...Thanks Steve.<br /><br />It was a pleasure speaking. About the efficient frontier, the thing is that all the stock/SPIA combos are on the frontier. No SPIAs to 100% SPIAs. The point one chooses depends on personal preferences, which in turn depend on capital market expectations. It's hard to say for sure what direction most people would lean with this consideration, but at least the payout rate on a SPIA looks more attractive as one becomes increasingly pessimistic about a sustainable withdrawal rate.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-26480966387668797632014-05-20T16:48:17.559-04:002014-05-20T16:48:17.559-04:00Great article. Thank you for speaking at our incom...Great article. Thank you for speaking at our income planning summit in Indianapolis a couple of weeks ago. It was great to have our unique income strategies validated with your research. Based on your later research you co-authored for Morningstar where the new safe rate is 2.8%...would you make any changes to the efficient frontier work as it relates to having more SPIAs?Steve Vasgaardhttp://wealthwithwisdom.comnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-53069693162132179442013-12-10T15:02:20.354-05:002013-12-10T15:02:20.354-05:00Eric,
You are using the phrase "held to dura...Eric,<br /><br />You are using the phrase "held to duration." Do you mean "held to maturity"? It's not the same thing, but it seems that this is what you mean. Though, of course, you can't hold a bond fund to maturity. But you could hold it to duration. But to eliminate interest rate risk from an individual bond, you have to hold to maturity rather than to duration. <br /><br />You've also got to distinguish between holding a lump-sum investment in a bond fund without any new investments or withdrawals. Then your argument might be more applicable, though I don't know of specific research about it. It seems the answer would depend on whether all of the bonds held in the fund are held to maturity, and also there is an issue of reinvestment risk within the bond fund as bonds matured before the date that the fund owner wants to spend the money. <br /><br />When you are withdrawing from a bond fund though, interest rate risk and sequence risk always becomes relevant. I think Brent's statement is correct. Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-55410276899170704982013-12-08T23:39:48.801-05:002013-12-08T23:39:48.801-05:00"Turnover in a bond fund causes losses to be ..."Turnover in a bond fund causes losses to be realized whereas the individual bonds receive their original YTM. Systematic withdrawal from a bond fund exposes the investor to all sorts of risks that negatively impact retirement income including interest rate risk and sequence risk." <br /><br />--Any research out there to back this up? It seems this has become an axiom of sorts among advisors. I believe mathematically (ignoring transactions costs) a bond fund with reinvested dividends and held to duration will provide the same return as holding an individual bond to duration. The implication that bond funds are subject to interest rate risk and individual bonds are not is flat wrong. Wade, any research out there that compares a bond fund to individual bonds? Obviously for specific liability matching bond makes sense, but for general spending needs which 90% of a retirement portfolio is used for I do not buy that individual bonds are better than a fund which are more cost effective and liquid (assuming you are interested in more than just treasury bonds)Eric Burkholderhttps://www.blogger.com/profile/03462977620380516766noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-39885478470409272632013-04-22T14:55:35.468-04:002013-04-22T14:55:35.468-04:00
Hi, thank you, and yes. Though you might like to ...<br />Hi, thank you, and yes. Though you might like to add that separately at the start in the way that Social Security is added separately. It will then suggest less need for SPIAs than without the pension.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-8329762136981488072013-04-21T12:34:34.617-04:002013-04-21T12:34:34.617-04:00Hi, Wade, A very interesting article, with lots to...Hi, Wade, A very interesting article, with lots to think about. Would it be correct to assume that a joint lifetime pension benefit would fit into "the equation" just as well as an SPIA? Thanks for your efforts to educate. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-79271370362699040812013-04-09T15:46:17.921-04:002013-04-09T15:46:17.921-04:00Sorry, that is not the right post. Here is the on...<br />Sorry, that is not the right post. Here is the one:<br /><br /><a href="http://wpfau.blogspot.com/2013/01/annuitizing-assets-now-or-later.html" rel="nofollow">http://wpfau.blogspot.com/2013/01/annuitizing-assets-now-or-later.html</a>Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-11100151861181350472013-04-09T15:45:24.538-04:002013-04-09T15:45:24.538-04:00Hi,
Thank you for reading. I've made an effort...Hi,<br />Thank you for reading. I've made an effort to address your question here:<br /><br /><a href="http://wpfau.blogspot.com/2011/08/safe-withdrawal-rates-and-life.html" rel="nofollow">http://wpfau.blogspot.com/2011/08/safe-withdrawal-rates-and-life.html</a><br /><br />Best wishes, WadeAnonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-21097790110911397942013-04-08T18:36:56.369-04:002013-04-08T18:36:56.369-04:004/8/13. I just read your Efficient Frontier for Re...4/8/13. I just read your Efficient Frontier for Retirement Income. I am interested in a SPIA. I believe the monthly annuity you will receive is very dependent on the current interest that you can currently get on common investments. Since we are currently in a ridiculous time of extremely low rates. Wouldn't it be a bad time to start a SPIA. That is, What are the trade-offs of waiting for the interest rates to go up. <br />Thanks.<br />I am only anonymmousw because I am not familiar with blogs.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-17032084828455329882012-10-12T01:11:48.096-04:002012-10-12T01:11:48.096-04:00
Derek,
Thank you. Your suggestion to convert bon...<br />Derek,<br /><br />Thank you. Your suggestion to convert bonds into annuities could very well be right. What you are saying sounds quite reasonable and I hope to be able to simulate those types of scenarios as well one of these days.<br /><br />Thank you, WadeAnonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-40206275925073681712012-10-10T14:14:07.311-04:002012-10-10T14:14:07.311-04:00sorry for the allocation formatting. I will try so...sorry for the allocation formatting. I will try something different, see if it comes out any better<br /><br />age....SPIAs....cash....bonds....stocks<br />65.....25.......10......15.......50<br />70.....35.......10......10.......45<br />75.....50.......10......5........35<br />80.....65.......10......5........20<br />85+....80.......10......0........10Anonymoushttps://www.blogger.com/profile/05715923932714221467noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-81776796661176727312012-10-10T13:57:37.975-04:002012-10-10T13:57:37.975-04:00Thank you so much, Dr Pfau, this is really helpful...Thank you so much, Dr Pfau, this is really helpful research.<br />For some, living on the "frontier" of SPIAs and stocks is obviously the place to be. <br />My questions concern whether living right on the frontier is the best place for most retirees. <br />Given all the things that could go financially wrong over 30 years of retirement, most retirees would want, (in early retirement at least)to retain a significant percentage of liquid assets.<br />My guess is that most would be prudent to perhaps start with annuitizing only what is needed (along with soc. sec) to provide survival spending: food, housing, health). Then over the years they could do gradual annuitizing to take advantage of the "frontier" (and of increasing SPIA returns as one ages)<br />The problem comes for those who annuitize only a small amount of assets at first (eg 25% ) and put ALL the rest in stocks. If the stock market does really bad for several years (especially early in retirement) withdrawals for emergencies and other basic non-survival spending (eg a vehicle) could devastate those funds. <br />Surely it would be better in the early years of retirement to have a small amount of cash and bonds to avoid touching those stocks for say 4-5 years. <br />perhaps an allocation % might look something like this<br /><br />age SPIAs cash bonds stocks<br />65 25 10 15 50<br />70 35 10 10 45<br />75 50 10 5 35<br />80 65 10 5 20<br />85+ 80 10 0 10<br /><br />while such an approach gets most of the benefits of the "frontier", by staying back a little from the front it reduces the chances of getting shot by nasty arrows of drastic stock downturns.<br />The headline from your research ,then, is maybe not "maybe you dont need bonds in retirement" but rather "you should consider converting most of your bonds into annuities". <br /> I appreciate your research is theoretical at this stage and cannot answer these issues completely, but I look forward to the practical applications that I am sure will eventually come.<br />I look forward in eager anticipation.<br /><br />derekAnonymoushttps://www.blogger.com/profile/05715923932714221467noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-12291215356028876272012-10-07T18:02:20.013-04:002012-10-07T18:02:20.013-04:00I hope you are joking.
I am trying to specificall...I hope you are joking.<br /><br />I am trying to specifically be inclusive rather than homophobic, actually, by not automatically assuming that the default type for a couple is opposite sex.<br /><br />Yes, it is important. Because mortality rates and survival probabilities differ for men and women, so a same-sex couple would have a different outcome than an opposite sex couple.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-18141962617582635312012-10-07T16:32:13.192-04:002012-10-07T16:32:13.192-04:00"Heterosexual" couple??? Is that really ..."Heterosexual" couple??? Is that really important? Your homophobia is showing,Wade.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-80521119702776179332012-10-07T08:47:08.285-04:002012-10-07T08:47:08.285-04:00Thank you for sharing. This is a great summary of ...Thank you for sharing. This is a great summary of a whole lot of important and relevant issues! You are right about cognitive issues, and also that is a good point about how people don't realize that 4% is designed specifically for a 30 year retirement and the withdrawal rate can be higher for shorter retirement durations.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-55233807309063495742012-10-03T12:07:35.357-04:002012-10-03T12:07:35.357-04:00I like your new paper assessing Stocks & SPIAs...I like your new paper assessing Stocks & SPIAs. I decided to follow a stock/SPIA ladder strategy after much reading, doing some of my own analysis, and researching bonds and bond funds. SPIAs do not get enough attention and I hope this will get the industry rolling. It seems to me that we have two different industries that don't have much interaction: Insurance companies and stock/bond brokers, each wanting to sell their own package. My simple analysis showed that there's a good chance you can leave a decent inheritance using stocks/SPIAs. Also, having longevity insurance with SPIAs avoids some major problems with bonds and bond funds: difficulty in selection, interest and default risk, bond ladders aren't liquid (you can't just easily change their size),... SPIAs help with two other thing that don't get much attention when you reach your mid-80's: (1) will you have the mental acuity to assess you financial situation, and (2) how emotionally difficult will it be to withdraw huge % from your nest egg as predicted by the 4% model. I hope to see more on this topic.DDS5591noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-12048190926660836062012-09-28T10:23:12.708-04:002012-09-28T10:23:12.708-04:00Thanks. Yes, I think you are right. Fees are surel...Thanks. Yes, I think you are right. Fees are surely important. But I am using real SPIA quotes, which have the implicit fees already incorproated. All of the strategies I consider are based on the prices for customers at Vanguard.<br /><br />About lifestyle choices, are you referring to what I call the lifestyle goal? I did make a more recent blog post which also shows the results for a 1%, 3%, and 5% withdrawal rate to achieve the lifestyle goal. <br /><br />http://wpfau.blogspot.jp/2012/09/the-other-day-i-posted-about-new.htmlAnonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-6555336932764130222012-09-28T06:42:37.644-04:002012-09-28T06:42:37.644-04:00Wade, I saw this link on Oblivious Investor. As I ...Wade, I saw this link on Oblivious Investor. As I mentioned in the comment section there, I believe it's the pooling of longevity risk that makes annuities superior to bonds. However, I question the role of fees... Perhaps this is a basis for further study? Also, what's the sensitivity to lifestyle choices and deviation from assumptions? That is to say, on a practical level, how does life dependency affect the conclusions in this study?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-34312565061540906262012-09-27T09:19:32.608-04:002012-09-27T09:19:32.608-04:00Thanks, taxes is a complicated issue and I am not ...Thanks, taxes is a complicated issue and I am not sure if there is any general answer as each person will have a different case.<br /><br />Annuities have some tax deferral properties, but then all of their income is taxed at regular income tax rates.<br /><br />Systematic withdrawals have more taxes upfront when the portfolio is larger and interest and dividends accrue, but also there is some beneficial tax treatment for dividends and capital gains.<br /><br />Taxes are certainly important, but I think each person will have a different set of circumstances that they will need to incorporate before making a final decision.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-75639952611009030272012-09-27T09:16:18.338-04:002012-09-27T09:16:18.338-04:00Darrow, thanks. I still need to read Otar. That is...<br />Darrow, thanks. I still need to read Otar. That is a gaping hole in my background. I have his 2 books. I didn't realize that he has done something similar. I will check that.<br /><br />You ask a good question. I am not thinking of a reserve fund in the traditional sense here, in that you have 6 months or whatever of spending needs set aside in less volatile assets. Actually, you should still probably have that, but it is not incorporated here.<br /><br />That reserve of assets I am thinking of is more broad and goes beyond your lifestyle spending goals. There are many potentially very expensive risks, and one clear way to manage those risks with with a buffer of financial assets. And that y-axis is sort of a before-the-fact expectation about the amount of assets you can hope for on average. I think for many people it will be less important than meeting spending needs, which is why I represent it just as the median outcome instead of one of the worst-case outcomes. But I should explore some more about different definitions for the y-axis. 100% stocks definitely has a bigger up-and-down distribution than the other possibilities, that is for sure.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-85463247676641119002012-09-27T09:08:36.966-04:002012-09-27T09:08:36.966-04:00Chris,
Thanks for the info about making a calcula...Chris,<br /><br />Thanks for the info about making a calculator. I will look into that more once I get all the features added which I think are needed first.<br /><br />Mike is right. The y-axis just gives you an idea about how much you can expect to have left on average (50% of the time there will be more, and 50% of the time there will be less), whereas the x-axis shows how much you can spend in a bad luck scenario. <br /><br />These are not the same points in the distribution, and I think this is a confusing point that would be nice to improve somehow. It's not the case that the leftover assets from the y-axis can be used to fill in the needs on the x-axis, because in some of the simulations you do run out of financial assets. That is the point that the x-axis is trying to get at.<br /><br />About your other question, the survival probabilities go through age 119, though the probability of living that long is extremely low. But it is possible. Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-51747689364233919702012-09-26T22:39:48.312-04:002012-09-26T22:39:48.312-04:00Yes, delaying annuitization will probably improve ...Yes, delaying annuitization will probably improve the efficient frontier. I still need to get to that.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-16015491353809091652012-09-26T19:50:17.703-04:002012-09-26T19:50:17.703-04:00Great article.
Im curious though, what would the ...Great article.<br /><br />Im curious though, what would the results have been taking overall taxes into consideration say by using tax free muni bonds.<br /><br />I would think the overall tax situation may alter things but im not really sure.matt jnoreply@blogger.com