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Pfau is interested in protecting only because he is focused on the worse of all possible cases. Actually I think he is just looking for attention and publications, but that is a different story. He has been promoting his protection ideas for several years so he his advice clearly backfired for that entire time period and anyone who followed his advice lost lots of potential returns. Continuing to follow his advice is only going to lead to more losses. Of course, he can always make the argument that eventually he might be right and the sky might fall.
I am a regular reader of pfau and have not found him to be overly protective at all. He recommends no allocations in particular and is strictly a math guy.
He believes his models do show that going forward will be below average and mathamatically the 4% rule may require adjustment.
But even so that has no bearing on him being bearish at all.
I have not seen him ever advise not to be in equities or even suggest allocations.
I am a regular reader of pfau and have not found him to be overly protective at all. He recommends no allocations in particular and is strictly a math guy.
He believes his models do show that going forward will be below average and mathamatically the 4% rule may require adjustment.
But even so that has no bearing on him being bearish at all.
I have not seen him ever advise not to be in equities or even suggest allocations.
For years he has been predicting low returns on investments and for years he has been wrong. I call it bearish to predict low returns.
Here are the allocations suggested by Pfau:
[SIZE=3]"Rising equity glidepaths that start around 20%-40% in equities and finish at 50%-70% in equities are generally optimal" This is a quote from the 2013 glidepath paper co-written with the other paragon of optimism, Kitces....tweedledee and tweedledum.
[/SIZE]
i still agree with the rising glide path . am following it myself going from 40 to 50% equities. but that has little to do with being bullish or bearish.
starting retirement spending in an immediate down turn can be the most dangerous . after a year or 2 of run ups the effect on your portfolio is totally different. spending down with losses out of the gate are no different than a trader having a string of losses day one.
the excessive cash you need to pull out if longer than expected can be excessive and gone for ever no matter how much markets pick up later.
once you clear a couple of up years the spending in down turns has almost no effect and is all built in to the 4% safe withdrawal rate ,.
but that is not true if you get hammered year one and it extends out 5 years ..
so i fully agree it can prevent quite a bit of grief up front dealing with the entry years in that fashion. i think the financial industry would be wise in adopting that as standard operating procedure when handing out advice.
whether you choose to follow is another thing but that is true of everything we hear about.
.... i think the financial industry would be wise in adopting that as standard operating procedure when handing out advice.
......
Actually I think this is one of the worst ideas I have heard and there is good reason that this will not become a SOP for those investors about to retire.
Pfau and Kitces get attention and publications by warning about the consequences of being overinvested if the market drops and does not recover for a prolonged period. A more likely scenario is being too conservative at the beginning of retirement when good returns have the most effect. Especially at this time with low bond returns and high stock returns, a low stock allocation assures poor returns and long term consequences.
you have a bunch of concepts mixed up into one. in fact you are assumimng the complete opposite of what they said. so here is what that white paper pointed out.
pfau and kitces are not predictors . they are not saying today ,tomorrow or the next day are going to be poor.
they are saying the retirement time frame ,meaning 30 years will be below average because of low rates and high valuations if you are starting retirement now since the retracement of 2013 .
that can effect the ability of the old 4% safe withdrawal rate and equities are very important . so important that unlike conventional wisdom which says reduce equities as you age they are saying RAISE YOUR ALLOCATIONS .
LETS REPEAT THAT : IT IS IMPORTANT THAT RETIREES RAISE THEIR ALLOCATIONS TO EQUITIES THROUGH RETIREMENT , NOT DECREASE THEM.
folks typically are taught to reduce equities as they age .
you are going to end up at the same allocation you would have had eventually , the only difference is how you go about it and typically it can be a higher allocation to equities.
the other thing there is nooooo disputing is that markets are random year to year. one years action has no bearing on the next .
MATHAMATICALLY A HIT YEAR ONE OF YOUR RETIREMENT THAT EXTENDS A FEW YEARS DOES FAR MORE DAMAGE THAN TRYING TO GO FOR EXTRA GAINS EARLY ON WILL ADD A BENEFIT . unless you are not drawing down much because of a pension then it is not business as usual as if in your accumulation stage.
there is a big difference between drawing 4% or more vs just some fun money you can cut back on if markets crap the bed RIGHT OUT OF THE GATE YEAR ONE..
if that downturn should take 5 years to recover the damage is not recoverable at all since at 4% inflation adjusted the excess money spent down can never compound again.
unlike you who have a few years of up cycles under your belt and luckily had no early hit you can go as high as you like in equity allocations , even 100% and you should be fine . especially since you are not living off withdrawals but a pension.
a new retiree starting out of the gate like myself still needs to clear a few up cycles while spending down or the risk is my first year can be very hurtful.
if i have to pull a full 80k out a year my first few years with no gains that is going to be painful. 5 YEARS CAN SEE ALMOST 500K INFLATION ADJUSTED EVAPORTATE BEFORE MY FIRST UP CYCLE . that is horrible considering i shouldn't be burning any principal yet and my gains cover it.
the last part which is not disputable either is mathamatically the first 15 years determine all of your outcome and if the first 15 years you fall below 2% real return as an average there is no recovery and pay cuts will have to be taken.
we have zero % real return from bonds today so 40% of a 60/40 mix is already dead in the water and it can can take much of the decade to come back since higher rates and higher inflation go hand in hand.
the longer term out look for equities since the retracement is below average performance going out also for much of the next decade as things revert back to the mean from the last few years.
all in all their method is only a reversal to protect the first few years. giving up a bit of gain the first few years has ZERO EFFECT on your budget you planned around. not getting hit with a down turn out of the gate has a dramatic effect on the budget you planned around.
i think they have a great solution to an age old problem .
increasing equities over retirement and being able to stand up to an early hit if it happens and have the same budget as just risking it all the first few years as we have done in the past ,i think is a big jump forward in retirement portfolio planning.
Last edited by mathjak107; 02-22-2015 at 02:48 AM..
when you think about it conventional wisdom and target funds decrease equities through the accumulation stage. many of us grow our money over time using dollar cost averaging in .
well the decumulation stage is opposite the accumulation stage and spending down is actually dollar cost averaging in reverse.
we sell less from our portfolio when markets are up and more when it is down. that is a good thing as opposed to the accumulation stage when dollar cost averaging in when markets are down is better .
it only seems to reason then the reverse should be true in the decumulation stage that unlike the target fund through the accumulation stage cutting equities, the path in the decumulation stage should be the reverse as well and increasing equities as time goes on should be done not decreasing them as typically done.
if you look at the typical path now and what target funds attempt to mimic we have equities decreasing as we get closer to retirement. but what pfau and kitces says , for best results the story does not end there , once we enter retirement we start to dollar cost average back in again building up equities..
the old adage you should have your age in bonds is really not true at all.
A research paper co-authored by Rob Arnott, CEO of Research Affiliates, argues that target date funds take risk and return off the table too quickly for pre-retirees, and that they are forcing millions of retirement investors into negative-return fixed income vehicles, mainly bonds.
best results are likely to be increasing equity allocations by 2% a year up to your desired allocation.
according to pfau and kitces , will that outperform never decreasing equities into retirement and maintaining a high level all the way though ? likely not.
will it beat conventional wisdom and target fund action ? for sure
will it protect your income in the case you are the unlucky sole that gets hit with poor years right at year one ? for sure again.
so the answer is if you have nerves of steel and want to enter retirement with the same high allocations you had all along , then do it.
but if you want to do it with a little less upside and more downside ptrotection which is what most folks do than the rising glide path is the best option of both worlds .
Last edited by mathjak107; 02-22-2015 at 04:50 AM..
"they are saying the retirement time frame ,meaning 30 years will be below average because of low rates and high valuations if you are starting retirement now since the retracement of 2013 ."
That sound like a prediction to me. In fact they have been predicting poor market returns for many years not just since 2013.
"MATHAMATICALLY A HIT YEAR ONE OF YOUR RETIREMENT THAT EXTENDS A FEW YEARS DOES FAR MORE DAMAGE THAN TRYING TO GO FOR EXTRA GAINS EARLY ON WILL ADD A BENEFIT"
This makes no sense. Sure IF there is a big and prolonged drop in stocks, then having little or no exposure would be great. This is the crux of the problem with Pfau and Kitces. Their recommendations are indeed based on a prediction of very poor market performance for a prolonged period of time.
Pushing for a relatively high stock allocation late into retirement also makes little sense. At that point the size of the portfolio will have been decreased and any potential gains from investment returns will be minimum and any large drop in the market could jeopardize the possibility of having the portfolio last until death.
You can argue these points as long as you want, but there is a bottomline. If I had followed the "glide path" for the past 4 years since I retired my portfolio would be much smaller. It would be about one third less than it is now. That is a huge difference in my comfort level and future lifestyle.
I do agree that the old approach to retirement investing is obsolete. At one time those who approached retirement were advised to have a very conservative portfolio. That corresponded to the times when hardly anyone was expected to live more than a few years in retirement. Now most of us are hoping for 30 years in retirement.
i think you are failing to see they are recommending higher allocatios not less. standard fair is either target funds which reduce you or some age in bonds calculation which cuts equities as you age.
they are saying increase equities from those standardized way of doing things.
that is hardly being bearish or doom and gloom.
if you are staying the same through all ages that is not the normal trend of either the industry or target funds. while the risks are higher the rewards of staying fully invested are higher.
but they can come at a price if you need to pull that 80k a year with zero gains from day one as in my case. i won't risk the first few years costing me an extra couple of 100k selling at losses .
the potential reward is not worth the extra risk of having my budget shot to heck out of the gate.
on the other hand i will have higher equity levels than most all the way through the rest of the years as they sell stock and convert to cash and bonds . my equity level will be rising as i convert because i see to it that it does .
it comes down to more gains in the beginning in equities or potentially more gains at the end when conventional methods grow less and less over time.
by the way we are headed over to do a photoshoot at our favorite location if you are in the area
Last edited by mathjak107; 02-22-2015 at 07:40 AM..
"the potential reward is not worth the extra risk of having my budget shot to heck out of the gate." I guess we are just in different financial positions. For me the extra 1/3 I got was worth the risk. With luck and a few more years of good returns, I will pick up another 1/3 of my portfolio value. Having my portfolio double since retirement will be worth what I consider to be very minimal risk.
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