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Investing Blog Roundup: Retirement Portfolio Management

The famous “Trinity Study” (in which three professors from Trinity University used historical data to determine the rate at which you can spend from a retirement portfolio without a high chance of depleting it) was performed 14 years ago. But it’s still referenced quite frequently in current financial writing.

I’m becoming more and more confident that Wade Pfau is the researcher of today whose work we’ll still be discussing many years down the line.

Admittedly, his writing is a bit more technical than most articles on this blog. But it’s still pretty accessible (the graphs help!), and unlike a lot of other research, it’s easy to see how Pfau’s work is applicable to real life situations.

The following are a handful of articles from Pfau that I’ve enjoyed over the last couple weeks. I hope you enjoy them as well.

Investing Articles

Other Money-Related Articles

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  1. What I would like to know, Mike, is in a nutshell what specifically about Wade’s work do you consider so revolutionary and significant (compared to all the other dozens of writers out there discussing retirement issues). Does he add concepts not found, for example, in Otar? And would his research cause you to revise any of the recommendations you made in your Can I Retire book?

    Thank you, however, for providing a list of essential Pfau articles I can consult without wading (excuse the pun) through all the content on his website.

  2. Larry,

    I’m not sure that any one particular piece of his work is revolutionary, per se. Rather, it’s that he keeps hammering out new research. And each time, it’s addressed directly at a specific, practical question (or set of questions) about how to manage a portfolio.

    When comparing to “the other dozens of writers out there discussing retirement issues,” I think a primary difference is that he’s actually doing new research. Most — including me — are not. We’re just reading other people’s research and attempting to present it in ways that are more accessible to the general public.

    To make a comparison to Otar, I must add the caveat that it’s been a couple years now since I read Otar’s book. I remember enjoying it and finding it quite insightful. But I also remember thinking that the assumptions going into many of his examples were truly bizarre (e.g., assumption of 1% alpha per year with no particularly good reason and hypothetical portfolios with strangely large allocations to Canada), and that made me meaningfully less confident in the applicability of his conclusions other than in a very broad sense.

    Edited to add: At this time, I do not think I would make any major changes to the suggestions in my Can I Retire? book.

  3. I guess that part of what I’m getting at – and I don’t have your book at hand to verify – is that as I recall you recommend 4% as an upward safe withdrawal rate based on the Trinity Study, and Wade (as confirmed by a recent Darrow Kirkpatrick post on the same topic) seems to think that might be too risky, and a SWR of 2% may be more realistic. Which would mean, naturally, that people facing retirement have to save even more than they are now.

  4. Mike,

    Thanks a lot for the nice post! I appreciate it.

    Larry, that 2% may be on the rather low side.

    The “Lower Future Returns and Safe Withdrawal Rates” post Mike links to above looks at another way to consider this issue, and while the news is still more pessimistic than the historical data, perhaps something in the neighborhood of 3 or 3.5% is more reasonable. The issue now is that bond yields are so much lower than historical averages.

    But beyond that, the direction I am moving toward now is that the whole safe withdrawal rate issue of minimizing a failure rate is the wrong way of thinking about the problem. Once you consider other income resources outside of your financial portfolio, you may be able to tolerate higher failure rates. You will still have other income remaining.

    That issue comes up in the “Partial Annuitization in Retirement” post, because failure rates are not applicable when you consider strategies with guaranteed income sources. Your income doesn’t fall to zero.

  5. I think when we get close to our drawdown, I will try to keep about 5 (five) years worth of expenses in cash, or near-cash. That way we might avoid having to begin a drawdown right when the market is/was tanked. Selling into a down market at the beginning would not be the way to start retirement, IMHO.

    Sam I Am

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