Author Topic: NYT article - recent study by Wade Pfau (SWR guy) and Michael Kitces  (Read 3109 times)

pac_NW

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Thoughts on this article?  http://nyti.ms/18WfF5Y

arebelspy

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Re: NYT article - recent study by Wade Pfau (SWR guy) and Michael Kitces
« Reply #1 on: September 15, 2013, 08:35:52 AM »
Here's the tl;dr summary:
Quote
Even in a worst case, they found that new retirees who start with 30 percent in stocks and slowly increase that allocation by 1 percentage point a year to 60 or 70 percent in stocks would be able to withdraw 4 percent of their portfolio for about 30 years. Someone who held 60 percent in stocks and 40 percent in bonds over 30 years would run out of money two years earlier, but would also have to endure a bumpier ride, the researchers said. (These results assumes stocks will grow about 6.5 percent a year, on average and after inflation, while bonds will increase 2.4 percent).

Please don't discount it due to the last line, they ran trials under all sorts of assumptions.  Pfau knows what he's doing.

In other words, the old advice was start with higher stocks, and ease more into bonds as you age (get more conservative as you age, the old rule of thumb was to have 100-your age as the stock percent of your portfolio).  This article is saying slowly start buying more stocks and upping your stock exposure as you age.

My response is: ...yeah, and?  We know stocks return more than bonds.  If you can retire with enough money for a 30/70 stock/bond AA to support you at a 4% SWR, increasing the stock percentage will increase the longevity of your portfolio.

I think this is "news" to the mainstream, but - IMO - anyone who has studied ER, played with FIRECalc (now cfiresim), read the studies, etc.. It's not surprising.

IMO the best thing to do is just have a high stock percent (say, 80/20, or even 90/10) and learn some self control to not panic when the market is selling off.  I understand some have a much lower risk tolerance, but if they do, and ER with 70% bonds, do you really think they'll have the courage to INCEASE their stock holdings in retirement?  I don't.  So again, best solution is to learn to ignore the market's fluctuations and ride it out (adjusting spending, if necessary, and rebalancing, but not selling off).
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fiveoclockshadow

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Re: NYT article - recent study by Wade Pfau (SWR guy) and Michael Kitces
« Reply #2 on: September 15, 2013, 08:43:49 AM »
I think the research is more nuanced than that. Increase bonds as approaching retirement then increase equities into retirement. That's different than hold 80/20 forever. Of course with FIRE things are different since drawdown starts much earlier.

The best reference I know of is Bernstein's The Ages of the Investor which gives a good high level outline of the risk trade offs when transitioning to drawdown.

arebelspy

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Re: NYT article - recent study by Wade Pfau (SWR guy) and Michael Kitces
« Reply #3 on: September 15, 2013, 08:52:55 AM »
I think the research is more nuanced than that. Increase bonds as approaching retirement then increase equities into retirement. That's different than hold 80/20 forever.

Of course - I think you misread my post.  The research is for the former.  I was arguing for the latter.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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arebelspy

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Re: NYT article - recent study by Wade Pfau (SWR guy) and Michael Kitces
« Reply #4 on: September 15, 2013, 08:54:36 AM »
Here's the actual paper, so you don't just have to read an NYT summary: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.