Wafe Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, has sent an e-mail to the authors of the famous (infamous?) Trinity study of safe withdrawal rates for retirees asking the authors whether it was their intent when preparing the study to identify the safe withdrawal rate for retirees. Here are his words:
“Okay, I took care of it. I was a little timid about contacting them, as I was publicly critical of their study in the past. But first I apologized to them for that. Then I explained my concerns about 4% for retirees since the mid-1990s. Valuations was a part of my list. I’ve even invited Prof. Walz to give a seminar at my university, as he is in Hong Kong during the spring term. This matter is settled.”
There’s been a debate raging on the internet re this question for nine years now. The debate is referred to as “The Great Safe Withdrawal Rate Debate.”
Numerous discussion boards and blogs have banned honest posting on the safe withdrawal rate matter after seeing the rage (which has at times evidenced itself in death threats, defamation and long-ongoing internet harassment campaigns) evidenced by those who believe in the Buy-and-Hold investing strategy when accurate reports of the safe withdrawal rate are posted. Buy-and-Holders view accurate reporting of the safe withdrawal rate as a threat to the dominant model for understanding how stock investing works.
The reason why the Old School safe withdrawal rate studies do not include an adjustment for valuations is that they are rooted in a belief in the Efficient Market Theory (developed by University of Chicago Economics Professor Eugene Fama), an academic construct that posits that the community of investors always considers all factors bearing on stock prices when setting stock prices and that overvaluation and undervaluation are thus logical impossibilities. Yale University Economics Professor Robert Shiller discredited the Efficient Market Theory (and the Buy-and-Hold strategy rooted in a belief in its principles) with research done in 1981 (and replicated many times in the three decades since) showing that valuations affect long-term returns. If valuations affect long-term returns, both overvaluation and undervaluation are obviously real phenomena.
Pfau has expressed numerous concerns about the Trinity study but does not share my view that the study needs to be corrected.
My view is that the study needs to be corrected because the safe withdrawal rate is the product of a mathematical calculation and it looks very bad when investors hear two wildly different reports as to the results of that mathematical calculation. Common sense tells us that something fishy is going on when different people make such wildly different claims for the result of the same mathematical calculation.
Thus, the friction generated by this “controversy” (there of course is no genuine controversy over what the numbers say — the historical stock-return data is public information and anyone who has ever gone to the trouble to check the data has found that Shiller is right that valuations affect long-term returns, at least in the 140 years of historical data available to us today) cannot go away without a resolution of the question of whether valuations really do affect long-term returns or not. I think it would be wonderful if as a society we could explore all of the amazing breakthrough insights that follow from Shiller’s research (I write weekly about these insights in my “Valuation-Informed Indexing” column at the www.ValueWalk.com site) and that only becomes possible when we open investing boards and blogs to honest posting on safe withdrawal rates and other critically important investment-related topics.
Pfau’s view is that it is possible that the Trinity authors did not intend to identify the safe withdrawal rate. He points out that the study uses the phrase “sustainable withdrawal rate” rather than “safe withdrawal rate.” I do not see the significance of this point given that the two phrases signify the same thing. A sustainable withdrawal rate is a safe withdrawal rate and a safe withdrawal rate is a sustainable withdrawal rate. I presume that “safe withdrawal rate” became the popular term because it is shorter.
Pfau also notes that the Trinity authors properly identify the withdrawal rate that has always survived historically. The problem with this argument is that the thousands of us who have expressed a desire that honest posting be permitted have been saying since May 2002 that the entire “controversy” could be put to rest in seconds if the Buy-and-Holders would be willing to refer to the number generated by the Trinity study (4 percent) as the Historical Surviving Withdrawal Rate (HSWR) rather than the Safe Withdrawal Rate (SWR). The Buy-and-Holders have been unwilling to consider this idea. If it were to become widely known that the Trinity study and the other Old School SWR studies report the HSWR rather than the SWR, the millions of investors who need to know the SWR to plan their retirements would lose interest in those studies. The SWR has great value as a planning tool. The HSWR does not.
John Greaney, the author of the Old School SWR study that appears at the www.RetireEarlyHomePage.com web site, has started a thread at the Motley Fool Retire Early board (honest posting on the subject of early retirement is no longer permitted at the board) suggesting that Pfau may be denied tenure because he has crossed Greaney by asking the authors of the Trinity study a question about their intent in preparing the study. The intimidation tactic is typical of Greaney’s behavior going back to the morning of May 13, 2002, when I put a post to that same board (at a time when honest posting on early retirement was not only permitted but encouraged) pointing out the analytical errors in the Old School studies.
The encouraging news is that, while in the old days, there would within a few hours have been scores of posts put forward by Buy-and-Holders endorsing Greaney’s intimidation tactics, in this case Greaney’s post has gone unanswered. This is how change happens. There’s a famous post by Ghandi in which he observes something to the effect (I am paraphrasing) that “first they ignore you, then they ridicule you, then they attack you, then they say that everyone knew you were right all along.”
I think it would be fair to say that Pfau’s suggestion that perhaps the Trinity authors had never intended to identify the safe withdrawal rate brings us to the “then they say that everyone knew that you were right all along” stage of this particular “battle.” Let’s all pray that the Trinity authors are able to work up the grace and courage to say something in response that pushes the ball even a little bit farther ahead.
Heaven help us all!
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