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Post by roi2020 on Dec 1, 2021 1:34:13 GMT
hondo , that tax-free transfer works only for VG OEF to VG ETF class, but not for others. This is because VG has patented ETF classes for most of its indexed OEFs. That VG patent is expiring soon (and greedy VG hasn't licensed it to ANYONE), and then probably others can also use this device too. Instead of creating a new family of ETFs, Vanguard opted to create ETFs which were new share classes of existing mutual funds. Vanguard and Gus Sauter (former Chief Investment Officer) were awarded a patent for this innovation. This patent expires in 2023 while six related patents were due to expire this year. |
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Post by anovice on Dec 1, 2021 13:19:11 GMT
hondo , that tax-free transfer works only for VG OEF to VG ETF class, but not for others. This is because VG has patented ETF classes for most of its indexed OEFs. That VG patent is expiring soon (and greedy VG hasn't licensed it to ANYONE), and then probably others can also use this device too. Instead of creating a new family of ETFs, Vanguard opted to create ETFs which were new share classes of existing mutual funds. Vanguard and Gus Sauter (former Chief Investment Officer) were awarded a patent for this innovation. This patent expires in 2023 while six related patents were due to expire this year. Maybe this is the reason for Vanguard's new found love for their actively managed funds. |
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Post by Chahta on Dec 1, 2021 13:28:35 GMT
Why was that a patented thing? Seems trivial. I haven't compared them but seems that OEF/ETF should have the same exact performance with only fees differing.
Investopedia: "Under an obscure provision of the federal tax code, passed by Congress in 1969, if a mutual fund honors a redemption request by giving the investor shares of appreciated stock in lieu of cash, no capital gains tax is due.
However, since retail investors expect to receive redemptions in cash, this alternative is rarely used by mutual funds. On the other hand, ETFs employ it aggressively."
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Post by Mustang on Dec 3, 2021 21:45:33 GMT
I find it interesting that Morningstar is touting 3.3% as a replacement for the 4% rule. Yet, their own analysts have shown over and over again that 4% works.
John Rekenthaler wrote an article in Morningstar (October 8, 2020) “The Math for Retirement Income Keeps Getting Worse: Revisiting the 4% Withdrawal Rule.” He said in 2013 he thought everything was OK. He now writes we are in changing times. He compared a 2013 retirement to a 2020 retirement. He said in 2013 the yield on treasury bonds was 3.6% and inflation was 2.3%. That made the real return 1.3%. In 2020 he said that yield was 1.4% and inflation was 1.7%. That made the real return negative. He showed that a portfolio of 100% treasury bonds would run out after 24 years. As for stocks, Rekenthaler said in 2013 the price/earnings ratio of the S&P 500 was 17. In 2020 it was 27. (The norm is around 20.) According to the Shiller CAPE (Cyclically Adjusted Price Earnings) ratio he was using that meant the market is overvalued, that prices are too high and a correction is coming. Using Buffet’s forecasting formula he tested a portfolio of 50% S&P 500 stocks and 50% treasury bonds and showed that it survived a 30-year payout period. That’s interesting! In spite of the eye catching headline, he proved it could still work.
Another Morningstar analyst (Amy Arnott “Will the Real Retirement Income Number Please Stand Up, March 3, 2021) using Monte Carlo simulations and a different set of assumptions found that the 4% Rule had an 86% chance of success. Not bad considering many think 70% is acceptable but she seemed to be shooting for 90%.
Two other Morningstar analysts, Chistrine Benz and John Rickenthaler (What’s a Safe Retirement Spending Rate for the Decades Ahead, November 11, 2021), were also shooting for 90%. They included their assumptions in the report: equity returns 6-11%, fixed income returns 2-3.5%, inflation 2.1% and a 30-year payout period. Here is a comparison or safe withdrawal rates to Pfau’s historical data findings. The top number is for a portfolio that is 75% stock, the bottom 50% stock.
Payout Period Computer History
15-years 6.0%/6.4% 6%/6%
20-years 4.7%/4.9% 5%/5%
30-years 3.2%/3.3% 4%/4%
40-years 2.7%/2.8% 4%/3%
The results were pretty close except for the 30-year payout. Which is the most commonly quoted and misunderstood safe withdrawal rate.
This is interesting. Bonds have a 4-7% lower return but in every payout period the computer gave the portfolio with the biggest share of bonds a higher initial withdrawal rate. They said the initial withdrawal rate could be increased from 3.3% to 3.9% by reducing the probability of success to 80%. (Arnott’s said a 4% withdrawal rate had an 86% probability of success.) Sandidige was correct when he said small changes in inputs makes large changes in outputs
John Rickenthaler now has a new study out (Better Stocks than Bonds in Retirement, Dec 2, 2021) that shows a higher safe withdrawal rate than 3.3%. Inputs determine outputs. This time he is only going back 80 years but he doesn't use actual historical data so forget about deflationary periods and double-digit inflation. He uses average returns, standard of deviations, and inflation. Looking for a 90% success rate he looked at three portfolios: 100% stock, 50% stock, and zero stock. The 50% stock portfolio was not the 50/50 allocation used in most studies but a 50/40/10 with 10% in cash. That would mean lower average returns. His conclusion was that portfolios with zero stocks did poorly. That is not a surprise. All bond portfolios did poorly in the other studies as well.
For his 50% stock portfolio his lowest safe withdrawal rate (SWR) was around 3.75% (worst case from the chart for 1945 not 1966 as historical data shows). His 1965 retirement had approximately 3.9% SWR. Considering 10% of portfolio earns nothing that pretty much validates the 4% Rule. What surprised me is that his chart showed that the safe withdrawal rate for the 50/40/10 portfolio is plus or minus 5.5% since 1980 which is higher than the 100% stock portfolio during one of the biggest bull markets ever.
Note: There is a big difference between including a 10% cash bucket in the portfolio and placing it outside the portfolio like Early Retirement Now did. Having $1 million in the portfolio (including cash) would mean a $40,000 initial withdrawal. Having $1 million in assets with 90% in the portfolio and 10% out would mean a $36,000 initial withdrawal.
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Post by Tibbles on Dec 5, 2021 21:36:26 GMT
"I find it interesting that Morningstar is touting 3.3% as a replacement for the 4% rule. Yet, their own analysts have shown over and over again that 4% works" (Mustang). That is, they have shown that 4% HAS worked, IN THE US. But see this article by Pfau, with its interesting chart of the historical safemax for each of 20 countries. Pfau isn't sure the US will continue to be the world beater it has been in the past. retirementresearcher.com/4-rule-work-around-world/Here's an excerpt: "An argument in support of the 4% rule is that the post-1926 U.S. historical period included a number of calamitous market events (Great Depression, Great Stagnation of the 1970s, etc.). As such, the argument goes, it is hard to imagine an even more dire situation awaiting future retirees. The historical success of the 4% rule suggests that we can reasonably plan for its continued success in the future. But from a global perspective, asset returns enjoyed a particularly favorable climate in the twentieth-century United States, and to the extent that the U.S. may experience mean reversion in the twenty-first century, present conceptions of safe withdrawal rates may be unsafe. Prospective retirees must consider whether they are comfortable basing retirement decisions on the impressive but perhaps anomalous numbers found in historical U.S. data. In planning for retirements in the future, it is unclear whether asset returns of this century will continue to be as favorable as they were in the twentieth century, or whether savers and retirees should plan for something closer to the average international experience." |
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Post by yogibearbull on Dec 5, 2021 22:23:55 GMT
Tibbles, well said. The recent experience of 3+ decades allowed very generous withdrawal rates, even much better than the rule of thumb of lump-sum of 250x the monthly withdrawals. Boring VWINX could do it with just 90x - 124x. LINK
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Post by Mustang on Dec 6, 2021 3:43:20 GMT
"I find it interesting that Morningstar is touting 3.3% as a replacement for the 4% rule. Yet, their own analysts have shown over and over again that 4% works" (Mustang). That is, they have shown that 4% HAS worked, IN THE US. But see this article by Pfau, with its interesting chart of the historical safemax for each of 20 countries. Pfau isn't sure the US will continue to be the world beater it has been in the past. retirementresearcher.com/4-rule-work-around-world/Here's an excerpt: "An argument in support of the 4% rule is that the post-1926 U.S. historical period included a number of calamitous market events (Great Depression, Great Stagnation of the 1970s, etc.). As such, the argument goes, it is hard to imagine an even more dire situation awaiting future retirees. The historical success of the 4% rule suggests that we can reasonably plan for its continued success in the future. But from a global perspective, asset returns enjoyed a particularly favorable climate in the twentieth-century United States, and to the extent that the U.S. may experience mean reversion in the twenty-first century, present conceptions of safe withdrawal rates may be unsafe. Prospective retirees must consider whether they are comfortable basing retirement decisions on the impressive but perhaps anomalous numbers found in historical U.S. data. In planning for retirements in the future, it is unclear whether asset returns of this century will continue to be as favorable as they were in the twentieth century, or whether savers and retirees should plan for something closer to the average international experience." I have seen some of that data before. I thought it was interesting that the worst case scenario for most of those countries came just before WWI (1914-1918) or WWII (1939-1945). A 30-year payout period would have included the war years when those countries' industries were bombed out of existence and the years of recovery that followed. Retiring at the beginning of a war that devastates the country would be a huge sequence-of-return failure. Even if the country's industry wasn't destroyed many of those countries were occupied and their industries were used to help fund the German war machine.
Think about a 1914 retirement in Germany (1914-1943). The payout period lasted through WWI, the Great Depression where countries tried to export their unemployment through tariffs, the war reparations which not only devastated the German economy but also led to the rise of the Nazi party and WWII. and most of WWII. I think it is amazing that the safe withdrawal rate was as high as 1%.
US industry was not affected by either war which is why we exited WWII as the world's only superpower (both economically and militarily).
Pfau said, "From the perspective of a U.S. retiree, the question is this: Will the future provide the same asset return patterns as in the past, or should Americans expect mean reversion that would lower asset returns to levels more in-line with the experiences of other countries? International readers should keep in mind that the 4% rule is based on U.S. historical data, and mileage has varied quite dramatically for other countries."
I am certain that Pfau's analysis is correct. I am not certain that it applicable to a US retiree today unless you are expecting World War III where US industry is bombed out of existence. Therefore, I do not think that returns will fall in line with the experiences of other countries. Without war I suspect the safe withdrawal rates of other countries will be more like that of the US.
The 4% Rule was not established by looking at the returns of the last three decades. If I remember correctly the last 30 years would have allowed a safe withdrawal rate somewhere around 7.5%. The 4% Rule was based on the worst case scenario (1966).
P.S. If you have any analysis that shows problems with the 4% Rule please post a link. I'm interested in reading them. So far most of the analysis I've read pointing out problems have been apples to oranges comparisons.
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Post by retiredat48 on Dec 6, 2021 4:26:49 GMT
Curious Mustang…have you read James Otar works? Here is an old post of mine Post #3618318 I'd like to add to Bill's post regarding Jim Otar. Otar has a very informative website for investors who want to learn more about retirement financial longevity and strategy. His website is available without registering: www.retirementoptimizer.com A few years ago I read Mr. Otar's book, "Unveiling the retirement myth", and found it most enlightening. Otar's website has a lot of info, I recommend it highly. Bill, thanks for posting an outstanding reference. edit to add…his book can be downloaded for free, or sometimes costs $5 R48 |
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Post by Tibbles on Dec 6, 2021 8:43:17 GMT
I too doubt that we’ll be hit by falling bombs. But we face serious problems, as usual, and we’re increasingly a house divided. And quite apart from that, investment returns (and thus SWRs) may be lower than in the past because shareholders are increasingly seen as just one class of stakeholders.
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Post by Mustang on Dec 6, 2021 11:00:33 GMT
Curious Mustang…have you read James Otar works? Here is an old post of mine Post #3618318 I'd like to add to Bill's post regarding Jim Otar. Otar has a very informative website for investors who want to learn more about retirement financial longevity and strategy. His website is available without registering: www.retirementoptimizer.com A few years ago I read Mr. Otar's book, "Unveiling the retirement myth", and found it most enlightening. Otar's website has a lot of info, I recommend it highly. Bill, thanks for posting an outstanding reference. edit to add…his book can be downloaded for free, or sometimes costs $5 R48 No I haven't. I have heard the name and I think I've read an article about his red and green zones. From the information in the link he seems to have been influenced by Bengen's initial study and he is definitely into the math. I'm a rookie at this and have only been researching withdrawal strategies the last couple of years since I retired for the third time in 2018. So I have a huge advantage of reading the research others are done.
In his link, My Story about the Luck Factor, he was one of the first to write about sequence-of-returns in 2000. That is only six years after Bengen's publication and two years after the Trinity study. It is interesting that almost everyone talks about sequence of returns today. That seems like such a short time ago yet most of what we discuss was unknown and financial advisors were using averages.
In his link to his article on the flaws of Monte Carlo simulations he confirms the opinions of other authors that I've read (or maybe they confirm his). One article quoted James Sandidge of the Sandidge group who said, "Accumulating wealth is a linear process and predictable, but in the nonlinear world of retirement income, returns and standard deviation are not predictors of success and therefore are unreliable inputs for Monte Carlo analysis,” wrote James Sandidge, principal of the Sandidge Group. “ Retirement income is governed by chaos theory which makes it unpredictable. Small changes in inputs makes large changes in outputs and the more the analyst tries to include the more wrong the analysis is."
Small changes in inputs makes large changes in outputs. Using the right distribution curve appears to be extremely critical. Otar discusses the various distribution curves and shows that using one distribution curve leads to errors. He showed that three were needed. I suspect this is why a lot of financial advisors using Monte Carlo simulations accept a 70% probability of success.
It was interesting. Thanks for the link. I may have to buy his book.
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Post by retiredat48 on Dec 12, 2021 4:13:54 GMT
Curious Mustang…have you read James Otar works? Here is an old post of mine Post #3618318 I'd like to add to Bill's post regarding Jim Otar. Otar has a very informative website for investors who want to learn more about retirement financial longevity and strategy. His website is available without registering: www.retirementoptimizer.com A few years ago I read Mr. Otar's book, "Unveiling the retirement myth", and found it most enlightening. Otar's website has a lot of info, I recommend it highly. Bill, thanks for posting an outstanding reference. edit to add…his book can be downloaded for free, or sometimes costs $5 R48 No I haven't. I have heard the name and I think I've read an article about his red and green zones. From the information in the link he seems to have been influenced by Bengen's initial study and he is definitely into the math. I'm a rookie at this and have only been researching withdrawal strategies the last couple of years since I retired for the third time in 2018. So I have a huge advantage of reading the research others are done.
In his link, My Story about the Luck Factor, he was one of the first to write about sequence-of-returns in 2000. That is only six years after Bengen's publication and two years after the Trinity study. It is interesting that almost everyone talks about sequence of returns today. That seems like such a short time ago yet most of what we discuss was unknown and financial advisors were using averages.
In his link to his article on the flaws of Monte Carlo simulations he confirms the opinions of other authors that I've read (or maybe they confirm his). One article quoted James Sandidge of the Sandidge group who said, "Accumulating wealth is a linear process and predictable, but in the nonlinear world of retirement income, returns and standard deviation are not predictors of success and therefore are unreliable inputs for Monte Carlo analysis,” wrote James Sandidge, principal of the Sandidge Group. “ Retirement income is governed by chaos theory which makes it unpredictable. Small changes in inputs makes large changes in outputs and the more the analyst tries to include the more wrong the analysis is."
Small changes in inputs makes large changes in outputs. Using the right distribution curve appears to be extremely critical. Otar discusses the various distribution curves and shows that using one distribution curve leads to errors. He showed that three were needed. I suspect this is why a lot of financial advisors using Monte Carlo simulations accept a 70% probability of success.
It was interesting. Thanks for the link. I may have to buy his book.
(Sorry I didn't see reply till now). Very good mustang.BTW I think his book is about $5 online download...and sometimes free. (I mean the book of his that I am familiar with--maybe he has a new one!). I liked the book because his charts/graphs of withdrawals for every year, are excellent visual aids in coming to grips with what is happening, for various withdrawal rates selected, for each past year. I confess to not following the works of the guru's too closely now, as I am way past these concerns. But my "hobby" keeps me searching new things. R48 |
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