meeting your retirement goals with the pp

[mathjak107]

i just have zero confidence that the pp has enough equities for a high success rate while spending down  . especially in the face of gold which has been a falling weight  and interest rates poised to rise as a trend as opposed to the 40 year fall the pp has seen pretty much except for a few bumps.

But here's the thing.  If LT rates go up because of economic growth (i.e. people want to lend money above the rate of inflation to get a real return), then equities will go up.  But if LT rates go up due to higher inflation expectations, then gold will benefit.  If LT rates go up because of Fed-induced illiquidity, then all assets will go down in nominal terms while cash goes up in real purchasing power terms (this year).  Three different scenarios that only the PP has all covered.  So how can you lose?

The fourth possibility I see is that of the GoGo 60's which ruined all portfolios not just the PP.  The GoGo 60's had an unusual environment of the economy roaring, increasing inflation and stocks underperforming.  Since gold was impractical for most to buy, there was nothing to offset the increase in LT rates, whether it was from economic growth, higher inflation or both.

And you say not to worry about remote scenarios?  Well, you're acting as if the fourth possibility could occur.  Before you bet the farm on a 50/50 portfolio, you better figure out if the portfolio duration now matches what it would have been in the GoGo 60's.

there is no link at all between the price of gold and normal inflation levels. unless we see hyper inflation gold may do little  and in fact has lagged inflation .

[MachineGhost]

Here's the bad news.

20-year T-Bonds at its lowest yields had a 16.4 year modified duration.
30-year T-Bonds at its highest yields had a 7.2 year modified duration.

However, I'm confused.  I do not see any combination of 50% equities and 50% Treasuries that would have provided a 2% real return per year for the first 15 years during the GoGo 60's.  Mathjak, can you explain???

[MachineGhost]

Houston, we got a problem!  These are the 15-year real returns for the PP that fall below 2%.  Not sure how I missed this before.

1972 1986 0.31%
1973 1987 -0.58%
1974 1988 -0.98%
1975 1989 -0.34%
1976 1990 -0.56%
1977 1991 -0.39%
1978 1992 -0.28%
1979 1993 0.24%
1980 1994 -1.85%
1981 1995 -0.72%
1982 1996 0.34%
1983 1997 -0.42%
1984 1998 0.35%
1985 1999 0.47%
1986 2000 -0.64%

What is this implying?

[Tyler]

The minimum 15-year real CAGR for the PP is 3.4%.  So I'm not sure where you're getting those numbers.

[MachineGhost]

The minimum 15-year real CAGR for the PP is 3.4%.  So I'm not sure where you're getting those numbers.

Yeah, I thought they suddenly looked crazy.  I'll have to find the bug tomorrow.

[mathjak107]

are you including reinvest dividends and interest ?

[mathjak107]

so i am not quite sure what it is a 50/50 mix in retirement isn't living up to except the fact it has failed zero times at 4% inflation adjusted over every 30 year time frame and it has left more money than you started out with at the end of 30 years 90% of the time.

Okay I see, so the 2% real first 15 years only matters when you actually retire if you want to make it for 30 years at 4% SWR.  Accumulation stage is irrelevant insofar as you don't undershoot the capital you actually need to retire.

So as I suspected, increased equity and decreased bond duration ala 50/50 is merely the hack to deal with high inflation in absence of legal gold.  So the PP should perform great going forward because the gold will counteract any bond damage and the cash lowers the effective duration.  If bond yields go up on economic growth, then equity will participate.

What I'd like to see now is what the portfolio durations were during those worst 15-year periods, because we have extreme durations at present that I believe are historically unprecedented.  You can't make a blanket statement that 50/50 is going to survive your retirement when you never had a simultaneous 50-year duration in stocks and a 17-year duration in T-Bonds before (or whatever it would be for 5-year Notes at current low rates).  The PP should not go past those historical portfolio duration if it wants a chance of surviving before all the evidence is fully in.

all that counts for the most part is sequence of those returns and inflation .  that is all pass or fail is really  based on.  average returns mean  nothing to the pass or fail of a time frame ..


only the actual 15 year average real return has meaning not the individual years average returns.

the years from 1987 to 2003 were some of the best average returns in the market in history .

we averaged almost 14% cagr.

if you left the rate of inflation to grow the portfolio and withdrew everything else for spending depending on the order the losses and gains came in you would get some wild differences in the pile at then end.

just playing around with the  order and shifting it in to different sequences on a 100k portfolio  the same exact average return would leave you with a balance after 30 years of negative 76,629.00 to a plus 187,606.00 .

the same average return depending on the order has amazing spreads to it.

that is what retirement planning looks at , not average returns or interest rates.

you have 3 variables effecting that sequence each year ,  market returns , interest rates and inflation.

famed researcher moshe milevsky rocked the financial world back in the day when his now famous study "sequence of returns and retirement ruin " was first published in the journal for financial planning.

he blew minds showing how the same averages could be put in different orders of sequence and have as much as a 15 year difference in how long the money would last.


dr milevsky also did extensive study's in using single premium annuity's in conjunction with your own investing  too.

for anyone with a real interest in retirement planning i suggest his books and papers .


be warned though , the pages and pages of math will make your hair hurt    lol.

[mathjak107]

The above chart is showing Intermediate bonds,  I thought only 5-year T-Notes passed the 90% test? 

BTW, 90% is not good enough.  2 standard deviations is 95%.  The gap is huge enough to drive a Mack truck through when using Monte Carlo analysis.  Do you really want to risk being in that losing 10%?

With a 3% SWR the vanilla PP should be fine at close to 3 standard deviations (99%).  Problem solved.

5 year bonds and 50/50 mix passed  100% of the time frames in bill bengans original safemax study (acually 3.98%.

the failures did not happen until the trinity study when 7-10 year corporate' s with higher volatility in the portfolio were used.

if you notice the chart is  re-worked from the trinity study from 7-10 year corporates to using 5 year bonds like bill bengan did.  then it was subjected to all the different allocations and withdrawal rates.  that was something bill's safemax study did not do as bill was looking for the  safe withdrawal rate to get everyone passed .  since 50/50 was the most popular retirement allocation he worked with that to find  the ideal draw rate that had  zero failures through the worst possible time frames to date ...


but 25% equity over 30 years has had a lot of failures  at 4% . true the pp has gold and leveraged long term bonds to help a bit more but so far gold has not added to the party at this point and leveraged 30 years may have strong head winds no longer adding to that 25% equity success rate but taking away now in the mirror image of the last 40 years trend..

sending gold and bonds in a rising interest rate long term trend  to bail out a 25% stock position when spending down may be like sending the andrea dorea to rescue the titanic


retiring near term and looking at every 30 year time frame for equities the results have been almost the same within a few points of return , i would sooner gamble on shorter term bonds and a 50% equity position today than bet on gold and bonds making a consistent loser namely  25% equity's work out.


just my own feeling , i may not be right  but i think this is no time to gamble on something that cannot actually be tested to see if it could even make it through those 4 worst time frames in history.


i think everyone gets why i am so distrusting of the pp going forward so we can put that part to bed .  lets move on to other aspects of retirement planning and what we can do to get a better success rate and make wiser choices when it comes to ss and insurance products.

i think that has more value then debating the future for the pp..

[mathjak107]

so being i have just 3 weeks left the plan will be to delay ss if the markets do not crash .  if markets stay healthy once things settle down  i will use the cash portion i rounded up the last few months in my 401k  and spend that down first decreasing rmds and taking  it out at lower tax brackets then i wrote it off .

but rather than excessively spend down invested  assets if markets are down  by a lot i  would rather file in january for ss at 63 and 3 months. so the ss will act as a back stop .

taxes should hold in the 15% bracket  first year in retirement even with a 6 figure draw .  the two years cash i set a side and  and  a small emergency fund should allow that bracket  to happen.

. i should be able to squeeze in some zero capital gain tax selling from the taxable account  but that will depend on whether i take ss at 63 or let it ride longer.

we have a 23k pension coming in and we get  interest payments from the lease rights sale for 3 more years before they pay us in full  so except for what has been some large fund distributions  we should stay fairly low in taxes . but if i take ss i will be just over the 15% bracket so no tax free capital gains in that case..

once you figure in the checks you didn't take and what you would give up in compounded gains on money invested in assets the 6% increase ss gives you from 62 to fra and the 8% from fra to 70 may not be worth it since it is not an actual return unless you are still working and not spending assets down.

figuring a balanced fund ,  delaying until 70 can take 22-24 years just to break even . if you figure TIPS  with lower returns you are stll talking 20-22 years.

that is a very very long time to reach ground zero.  most calculations never consider the assets you are spending down in to the equation  or the fact until i file my wife who is already collecting will not get a 3k spousal  kicker added to her amount since once i file at any age  she gets more added to her own.

but if you live to 95 the delaying is worth it as you can a 6% real return on what amounts to a gov't bond. but you do have to make it  until 90 for even  a 5% real return.

to me it is to much of a bet on your longevity.

i think i rather place my bets on market performance instead of my longevity.

[MachineGhost]

i think everyone gets why i am so distrusting of the pp going forward so we can put that part to bed .  lets move on to other aspects of retirement planning and what we can do to get a better success rate and make wiser choices when it comes to ss and insurance products.

i think that has more value then debating the future for the pp..

Well, I do think you are right.  There's no doubt now the gold bear market was offset by the bond bull.  The converse is not necessarily true since I can see both suffering under extended good conditions of Prosperity.  And if there is higher inflation but below the chokepoint of 5% that tanks stocks, what guarantee is it that gold will respond?  It's a lot to put all the pressure on just 25% of stocks to make up for bonds and gold stinking.

It really makes me question if Browne and Coxon really thought this through rather than just data mining 100 years in the 70's which would been a worse set of a history for testing out scenarios than now.  After all, they originally came up with the commodity-heavy PRPFX which was clearly a strong bias of the goldbug 70's.  And then Browne dumbed it down it to the PP in 1987.  What about the possibility that gold is still overweighted due to their goldbug/Austrian biases?

I'll put this to bed.  We can live with a 3% SWR.  But I personally think fixing the flaws of the PP are more important than circumventing around them.

[screwtape]

once you figure in the checks you didn't take and what you would give up in compounded gains on money invested in assets the 6% increase ss gives you from 62 to fra and the 8% from fra to 70 may not be worth it since it is not an actual return unless you are still working and not spending assets down.

figuring a balanced fund ,  delaying until 70 can take 22-24 years just to break even . if you figure TIPS  with lower returns you are stll talking 20-22 years.

I'm already at fra + 1 month and will delay as long as I'm still working which I plan to do for two more years. I did the same kind of calculations as you and came up with the same conclusion that delaying isn't the no-brainer that everybody says it is, and that's even considering the survivor benefit for my 17 years younger wife. Posting this finding on some other forums however, I was castigated for assuming that I could get the kind of market returns I was predicting, whereas SS is a guaranteed annuity.

Even though I'm not fully convinced, I probably will delay until 70 because my wife's salary is almost enough to pay the bills by itself so I wouldn't have to touch the portfolio very much for those 2 years. And besides, the max SS income of > $42k I will be due looks pretty nice.

[mathjak107]

even TIPS would take more than 20 years.

I guess they are not as smart as us on other forums .

[mathjak107]

i think everyone gets why i am so distrusting of the pp going forward so we can put that part to bed .  lets move on to other aspects of retirement planning and what we can do to get a better success rate and make wiser choices when it comes to ss and insurance products.

i think that has more value then debating the future for the pp..

Well, I do think you are right.  There's no doubt now the gold bear market was offset by the bond bull.  The converse is not necessarily true since I can see both suffering under extended good conditions of Prosperity.  And if there is higher inflation but below the chokepoint of 5% that tanks stocks, what guarantee is it that gold will respond?  It's a lot to put all the pressure on just 25% of stocks to make up for bonds and gold stinking.

It really makes me question if Browne and Coxon really thought this through rather than just data mining 100 years in the 70's which would been a worse set of a history for testing out scenarios than now.  After all, they originally came up with the commodity-heavy PRPFX which was clearly a strong bias of the goldbug 70's.  And then Browne dumbed it down it to the PP in 1987.  What about the possibility that gold is still overweighted due to their goldbug/Austrian biases?

I'll put this to bed.  We can live with a 3% SWR.  But I personally think fixing the flaws of the PP are more important than circumventing around them.

I think the flaw is the fact that 25% equity's long term has grown little in comparison to even conservative 40/60 mixes , not even considering 60/40 is about as conservative as I think someone should be in the growth phase .  as well as 25% equity's has  failed in spending down simulations more often then not.

the pp counted  on decades of a bull market in bonds to bail it out in that respect and the big risk now unlike ever before is the long term trend may be over and leverage ain't your friend when you are on the wrong side of it.

in my opinion it is no longer neutral but making a heavy  bet on the direction of interest rates this late in the cycle .

I truly believe no portfolio is buy and die forever. it may take decades but eventually it needs some modifications at some point.

[iwealth]

What I'd like to see now is what the portfolio durations were during those worst 15-year periods, because we have extreme durations at present that I believe are historically unprecedented.  You can't make a blanket statement that 50/50 is going to survive your retirement when you never had a simultaneous 50-year duration in stocks and a 17-year duration in T-Bonds before (or whatever it would be for 5-year Notes at current low rates).  The PP should not go past those historical portfolio duration if it wants a chance of surviving before all the evidence is fully in.

How are you calculating a duration for stocks? This concept is foreign to me.

[mathjak107]

so being i have just 3 weeks left the plan will be to delay ss if the markets do not crash .  if markets stay healthy once things settle down  i will use the cash portion i rounded up the last few months in my 401k  and spend that down first decreasing rmds and taking  it out at lower tax brackets then i wrote it off .

but rather than excessively spend down invested  assets if markets are down  by a lot i  would rather file in january for ss at 63 and 3 months. so the ss will act as a back stop .

taxes should hold in the 15% bracket  first year in retirement even with a 6 figure draw .  the two years cash i set a side and  and  a small emergency fund should allow that bracket  to happen.

. i should be able to squeeze in some zero capital gain tax selling from the taxable account  but that will depend on whether i take ss at 63 or let it ride longer.

we have a 23k pension coming in and we get  interest payments from the lease rights sale for 3 more years before they pay us in full  so except for what has been some large fund distributions  we should stay fairly low in taxes . but if i take ss i will be just over the 15% bracket so no tax free capital gains in that case..

once you figure in the checks you didn't take and what you would give up in compounded gains on money invested in assets the 6% increase ss gives you from 62 to fra and the 8% from fra to 70 may not be worth it since it is not an actual return unless you are still working and not spending assets down.

figuring a balanced fund ,  delaying until 70 can take 22-24 years just to break even . if you figure TIPS  with lower returns you are stll talking 20-22 years.

that is a very very long time to reach ground zero.  most calculations never consider the assets you are spending down in to the equation  or the fact until i file my wife who is already collecting will not get a 3k spousal  kicker added to her amount since once i file at any age  she gets more added to her own.

but if you live to 95 the delaying is worth it as you can a 6% real return on what amounts to a gov't bond. but you do have to make it  until 90 for even  a 5% real return.

to me it is to much of a bet on your longevity.

i think i rather place my bets on market performance instead of my longevity.

Mathjak and Tyler:  I'm really, really looking forward to hearing about your retirement adventures, financial and otherwise.  Please know that I'm green with envy, and plan to live vicariously through you two for at least 5 more years.  So please share all! 

my wife and I have a passion for photography so we have lots of trips going up on the to do list.

this has been 40 years in the making .

been investing like crazy since 1987 , especially in nyc special real estate situations and my portfolio I managed to grow through the years.

[screwtape]

i think everyone gets why i am so distrusting of the pp going forward so we can put that part to bed .  lets move on to other aspects of retirement planning and what we can do to get a better success rate and make wiser choices when it comes to ss and insurance products.

i think that has more value then debating the future for the pp..

Well, I do think you are right.  There's no doubt now the gold bear market was offset by the bond bull.  The converse is not necessarily true since I can see both suffering under extended good conditions of Prosperity.  And if there is higher inflation but below the chokepoint of 5% that tanks stocks, what guarantee is it that gold will respond?  It's a lot to put all the pressure on just 25% of stocks to make up for bonds and gold stinking.

It really makes me question if Browne and Coxon really thought this through rather than just data mining 100 years in the 70's which would been a worse set of a history for testing out scenarios than now.  After all, they originally came up with the commodity-heavy PRPFX which was clearly a strong bias of the goldbug 70's.  And then Browne dumbed it down it to the PP in 1987.  What about the possibility that gold is still overweighted due to their goldbug/Austrian biases?

I'll put this to bed.  We can live with a 3% SWR.  But I personally think fixing the flaws of the PP are more important than circumventing around them.

Interesting how much the thinking in this thread mirrors what William Bernstein said in the first review of M.T. and Craig's book on Amazon...

I also believe that very few of its new fans will have the long-term discipline to stick with it when two of its riskiest and least conventional components, long Treasuries and gold, underperform, as they inevitably must at some point.

http://www.amazon.com/review/R20DI5V8YW ... tore=books

[mathjak107]

especially since over every long term period spanning decades conventional investing blew the doors off the pp even being exposed to the same events in each time frame the pp is protecting against.

most of the time what you are protecting against is not risk , it is just volatility and you are paying a giant price to do that.

yeah , i get it , not every one has the pucker factor for volatility . so even a 40/60 fund like wellesly left the pp in the dust over 30 year periods .

in effect you are paying a big price for protection that time just gives you for free .

as you saw with todays just about 2% drop in TLT  which is like a 300 point drop in the dow  you are playing a very risky game with interest rates today.

i am soooooo strongly of the opinion even a 60/40 mix using shorter maturity bond funds will out perform the pp over and over .  these are no times to bet the ranch on interest rates which if you look at your returns on long term bonds are the gamble you are taking.  TLT  has fallen almost 9% in the last 90 days .

my total bond fund bnd has fallen 1.65% .  my shorter term bond funds like bsv have fallen  1/10 %  , VTIP has fallen 1/4% , my floating rate bond funf ffrhx is acually up a fraction of a point.

[mathjak107]

i mentioned it in one of the threads so i know i am repeating myself.

the biggest financial mistake people make is not sleeping with the enemy.

they only hang out with , read and argue  the side of the folks they hang out with.

they never really learn what is in the enemy's head so they never get a rounded view.
it is always good to have someone with an opposing view that makes sense whether you agree or not.

because i always say the only time you can make a good choice about something is when you can jump on either side of the fence and argue each side perfectly.

i can go  in any forum and spew the virtues of the pp . i can argue for it as  much as i can argue against it.


i hope you can do that too before you make a decision and lose money or valuable time .


i love how fast folks here are at compiling data , it really is quite interesting hanging here .

signed "the pagan "

[Pointedstick]

I can argue for a stock-heavy portfolio too. Probably we all can. Most of us started out that way and made conscious decisions to do something else after determining that they didn't have the characteristics we were looking for. Almost nobody jumps into the PP first thing in their investing career.

[mathjak107]

except me , i did .  i got caught in the crash of 1987 as a new investor .  found harry's books and gave it ago.

i got bored with it  as well as started to get left behind so i ended up finding the fidelity insight newsletter  and followed the models until two weeks ago when i molded my own for retirement.

i couldn't have made a better move as 100k in the pp would have been like 970k  while the growth model was over 2 million and was through all the same events as the pp  over the time frame.

the newsletter took the pressure off me as to what to do as each weekly update gave us hand holding and the ability to stay the course even through 2008.

i never had to 2nd guess myself or plan my next move.

my entire portfolio mgmt was 30 seconds a week for 27 years.

[Tyler]

Some are maximizers who want the highest returns and are willing to wait decades for time to eventually save them when things go bad.  The anticipated future payoff justifies the volatility, and they cannot comprehend leaving "more" on the table.  Others are optimizers who want predictable, perfectly sufficient returns and are willing to trade off the possibility of future riches beyond what they believe they need to be happy.  The security justifies the potentially lesser long-term returns, and they cannot comprehend taking unnecessary risk chasing riches beyond what is already more than "enough".

Both positions are fine, but those on opposite sides may never truly understand the other.  It comes down to personality, and I'm sure there's a spectrum in between and beyond.  Like HB might suggest in How I Found Freedom, one should invest in a way that matches their nature and not waste their energy battling others for perceived portfolio supremacy.  I would just recommend re-thinking things if your nature happens to be schizophrenic and you have trouble sticking to any plan.  One must truly know themselves before they can wisely invest for themselves. 

[mathjak107]

everything you said is true.

but today a typical time frame for investing for retirement is 25-40 years so whether folks choose to do something that long or not that is a personal issue and has nothing to do with investment  potential ,volatility or risk.

so like testing things in a laboratory that is how we have to compare investments.

it is like as a  competitive target shooter to compare guns i use a bench rest . that takes me and my bad habits out of the equation.

once you know what is producing best results then you can decide what fits your personality and what trade offs you are willing to make..

but if you don't know what those other benefits are and you only go by the data presented to you by those who share your view  you may never really learn what the complete story is so you can't make  a valid decision  .

i am sure so many here believed that by picking some date in the 1970's they were stress testing the pp against some pretty bad times for purposes of retirement spending  .  but the truth is they were not. they were testing a piece of a time frame that belonged to early time frames they couldn't test .

since it is the first 15 years that did these groups in by jumping to the end of the line in the 1970's you bypassed the years  in the 1960's that made them fail in the first place.

[Tyler]

but if you don't know what those other benefits are and you only go by the data presented to you by those who share your view  you may never really learn what the complete story is so you can't make  a valid decision

I think you'll find this board is far less insular than most.  The people here have a wide breadth of investing experience and most did not start with the PP by any means.  Many have active VPs and discuss other investing options all the time.  Welcome!

[mathjak107]

i find this board amazing . here i am , the non believer and i haven't been cursed at yet.

this is unheard of in other forums.

i see very little emotions involved. we have facts , figures and data presented in an educational manner.  man i love arguing here  ha ha ha

[Tyler]

i am sure so many here believed that by picking some date in the 1970's they were stress testing the pp against some pretty bad times for purposes of retirement spending  .  but the truth is they were not. they were testing a piece of a time frame that belonged to early time frames they couldn't test .

since it is the first 15 years that did these groups in by jumping to the end of the line in the 1970's you bypassed the years  in the 1960's that made them fail in the first place.

Since you mentioned facts and reason... 

The 60s were not magical as the biggest retirement failure start period in history.  They were terrible for stocks, and were naturally the worst times for the Bengen and Trinity studies because they exclusively studied stock heavy portfolios.  Using the exact same methodology, more diverse portfolios would have very different worst years.  We don't know when those years are for every portfolio, and since the PP only holds 25% stocks it very well may not be the 60's.

That point aside, you're completely correct that the PP cannot be backtested as far back as stock/bond portfolios.  There are almost assuredly times in the past where it would have performed worse than it has in the last 43 years.  We can only make judgments based on the data we have.  One is free to prefer more time-tested portfolios if that helps them sleep better at night.