Set forth below is the text of a recent post that I put to another blog entry at this site:
Ok, but again, being able to purchase a single premium immediate annuity late in life allows for a higher SWR. So would you agree all studies not including this critical factor get the numbers wildly wrong and should be corrected immediately? Simple question.
See for example:
“The results were rather striking; on a Monte Carlo basis, the 4.5% withdrawal rate for a moderate growth portfolio had a 12.6% risk of depletion, while annuitizing 25% of the assets dropped the risk of failure to 7.8% and annuitizing half the portfolio dropped it down to only 3.3%”
I don’t say that a study that fails to account for the effect of buying an annuity is wrong or needs to be corrected.
But I DO say that someone who employs death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs to block people from learning about the effect of buying an annuity is guilty of financial fraud and is on his or her way to life in a prison cell.
Intent to deceive is an element of the crime of financial fraud.
The person who leaves out a discussion of annuities in an SWR study has no intent to deceive. So there is no crime. If that person engages in the behaviors listed above, then he DOES evidence an intent to deceive. Then you have a crime.
John Greaney did not wake up one morning and say to himself:”I know what I will do. I will craft a retirement study that gets all the numbers wrong and thereby cause millions of people to suffer failed retirements and bring down the U.S. economy.” He made a perfectly understandable mistake. If he had acknowledged that mistake, we all would have moved forward in our understanding of these issues and we would not be living through an economic crisis today. It is the cover-up that is the crime here, not the mistake.
You are suggesting that people can leave things out of studies and that that’s okay. I don’t agree that something as big as the valuations factor should ever be left out. But I also believe that there are millions of people who do not view valuations as being as important as I believe them to be and I obviously believe that those people have a right to produce retirement studies. There are lots of people who like Greaney’s study and the other Old School SWR studies even after learning that those studies do not contain an adjustment for the valuation level that applies on the day the retirement begins. I believe that there is a way for those people to produce and share the retirement studies that they want to produce and not end up going to prison.
The way to do it is to produce the study the way that Greaney did and then to add a note saying: “This study does not contain an adjustment for the valuation level that applies on the day the retirement begins. There is peer-reviewed research indicating that that is an important factor. Studies containing such adjustments produce very different numbers. To get a full explanation of why some people think the valuations factor is so important, please go to the page [provide link here] where my friend Rob Bennett sets forth his Retirement Risk Evaluator calculator and read the materials at his site explaining why he thinks this is a better way to identify the safe withdrawal rate.”
When you do it that way, you are not deceiving anyone. You are presenting the case for what you think the SWR is with your own work but you are also putting your reader on notice that there is another school of thought in the academic community re how such calculations should be made. You are shifting the burden to the reader of the study to decide which model to follow when crafting his retirement plan. Take subterfuge out of the picture and you take prison sentences out of the picture.
It is not possible to make sense of any of this without taking into consideration the broader context in which all the events that have taken place have taken place. Humankind did not come into existence with complete knowledge of how stock investing works. We have been picking things up day by day for a long time now. We achieved a huge advance in 1965 when Eugene Fama discovered that short-term timing never works. I view that insight as the second most important insight in the history of investing analysis.
Fama made a mistake. Bogle had not yet founded Vanguard. So long-term timing was not a practical option in 1965. So Fama did not think to examine whether it works or not. If he knew what Shiller was going to discover years later, he would have announced his finding by saying that “Short-term timing never works.” But he didn’t appreciate the significance of the distinction between short-term timing and long-term timing. So he just said: “Timing never works.” That got us onto a path that led to an economic crisis more than 40 years later.
If these matters were not so important, the mistake would have been corrected in 1981, when Shiller showed that long-term timing always works and is always 100 percent required. But these matters are terribly important. They affect people’s life savings and people’s hopes for their futures. An entire industry had been built up promoting the Buy-and-Hold strategy between 1965 and 1981. The good and smart people who worked in this industry were too embarrassed to acknowledge their mistake. A common human defense mechanism that comes into play in such circumstances is cognitive dissonance. They rationalized the mistake away. They told themselves that it wasn’t that big a deal. And then they rationalized not pointing out the defect in their strategy to others on grounds that it was not such a big deal.
I believe that it is a very, very big deal. I believe that the mistake needs to be acknowledged and corrected.
Millions of good and smart people don’t see it. They think that Buy-and-Hold works well enough.
The answer is not to suppress discussion of the differences between the two models. If it is ENCOURAGE exploration of the differences between the two models. It is by talking these things over that we all learn. I believe that the result of a national debate is that we all are going to become Valuation-Informed Indexers. But I am of course as prone to errors and misunderstandings as any of my other fellow humans. So I have to acknowledge that there is at least a theoretical possibility that it could go the other way, that the national debate could lead to an enhanced confidence in the merits of Buy-and-Hold.
Either way, having the debate is a positive. If the dominant model is flawed, we need to warn people of the dangers of following that model. If the dominant model is perfect in every way, people need to hear that so that they will appreciate the dangers of going along with what this Shiller fellow says and what this Bennett fellow says.
It is not possible that the right thing for me to do here is to agree to keep quiet about what I have learned about what follows from Shiller’s “revolutionary” (his word) findings. All of the scores of powerful insights that our communities have developed together (with me playing the lead role in encouraging the debate to go forward) need to be debated on a national scale, at every discussion board and blog on the internet.
Will there still be prison sentences after that is done?
If I had the power to make a deal where we would drop all the prison sentences in exchange for having the national debate, I would take that deal in two seconds. I would be a fool not to do so for a host of reasons.
I don’t have that power, Anonymous. I can advance lots of words making the case that we are all capable of making the sorts of mistakes that you Goons made and that we all should be merciful in our judgments and all that sort of thing. I am 100 percent happy to do that. So my willingness to do that is not an issue here.
I do not get to set the length of the prison sentences. That is done by the millions of middle-class Americans who are in the process of seeing their retirements fail. I have obligations to those people every bit as strong as my obligations to you Goons and to the Wall Street Con Men. I need to BALANCE the competing interests.
I am 100 percent happy to do everything in my power to help you out. That’s not an issue. But you have to understand that my power to help you out diminishes with every passing day that the Ban on Honest Posting remains in place. You are going to go to prison not just because you committed all the elements of the crime of financial fraud. You are going to go to prison because you committed all the elements of the crime of financial fraud AND because millions of people are angry about it.
There are not millions of people angry about it today. That’s why you are not in prison today. There are going to be millions of people angry about it following the next crash. I don’t believe that at that time any words that I put forward to appease the anger of those millions of people are going to make much difference. So the time available to us to work together to get your prison sentence shortened a bit is running out. That’s my sincere take.
I hope that all helps a bit.
Please let me know if you want to work together. If you do NOT want to work together, the sensible play for you is just to wait this thing out. If I am wrong and Bogle is right, we probably will not even see another price crash. So you are off the hook in that case. I obviously believe that we are going to see a crash and so I frequently warn you and others of the dangers of letting this thing play out in the way in which it is appears likely it will play out. But if I am wrong, nothing that I say matters, you know? It’s your life. Please feel free to play it whatever way you think best. But please understand that I intend to do the same from my side of the table. I think it would be best for all of us to come clean re these matters by the close of business today.
My best and warmest wishes go out to you and yours during this holiday season. Love is the answer. It’s not a close call.