Wade Pfau: “Bennett Desperately Wants Someone Besides Him to Say That the Trinity Study Needs to Be Corrected, But I’ve Explained That This Isn’t How Research Works”

Academic researcher Wade Pfau has posted a blog entry making a remarkable claim — John Greaney was right all along in his safe withdrawal rate claims and Rob Bennett caused all the trouble by not promptly acknowledging this! The blog entry is called Valuations and Withdrawal Rates.

Juicy Excerpt #1: Yes. If you want to keep using 4% it is up to you, but what was ultimately shown by people applying Campbell and Shiller’s regression methodology to this question is precisely this outcome suggested by intercst. This is the end of the debate. So what have people been discussing for the past 10 years? I think the answer lies in the misstep hocus took in his follow-up reply later that afternoon.

Juicy Excerpt #2: Current conditions matter more than historical averages, stocks are risky even over the long term, and markets are unpredictable.

Juicy Excerpt #3: It is why financial economists find it so perplexing to discuss the concept of a safe withdrawal rate. There isn’t one. The U.S., even since 1871, represents a rather unique period in world history. The worst-case that showed up during this time can hardly be expected to be representative of the future.

Juicy Excerpt #4: He just finished explaining why we don’t have enough data to have a good understanding about the full range of potential outcomes, and then he wants to torture the data more by trying to define different safe withdrawal rates for different valuation levels based on even more limited subsets of data? Though creative, it doesn’t work.

Juicy Excerpt #5: I do think valuations may help gain insights about what the withdrawal rate will be, but this certainly does not make the estimates safer.

Juicy Excerpt #6: Hocus desperately wants someone besides him to say that the Trinity study needs to be “corrected,” but I’ve explained that this isn’t how research works. Rather, new studies with new methodologies come to replace old studies. This is a case, however, in which old studies were already available to suggest that we shouldn’t project the findings of the Trinity study forward to future retirees.

Juicy Excerpt #7: A number of leading financial economists (including Zvi Bodie, Laurence Kotlikoff, Moshe Milevsky, William Sharpe, and others) have condemned the 4% rule. Financial economists do not respect the Trinity study for a variety of reasons.

Juicy Excerpt #8: Just as historical withdrawal rate outcomes don’t guarantee future safety, the relationship between valuations and withdrawal rates can change as well. We are still prone to black swans.

Juicy Excerpt #9: Past is not necessarily prologue. Don’t treat the predictions coming from a model incorporating valuations as a guaranteed annuitization rate from your portfolio, especially when trying to extrapolate outcomes when valuations reach previously unseen levels. Trying to estimate safe withdrawal rates after incorporating valuations does not “correct” anything. End of story.

There was a discussion of Wade’s post at the Goon Central board. The thread is titled Wade Pfau Sets Hocus Straight.

I posted the following words as a comment to the blog entry, but Wade deleted them:

Hocus desperately wants someone besides him to say that the Trinity study needs to be “corrected,” but I’ve explained that this isn’t how research works.

This is shameful stuff, Wade. I am very disappointed in you.

You’ve visited the Motley Fool’s Retire Early board. If you look at more than that single thread, you will see that there were threads appearing at that board on a daily basis in which my fellow community members were relying on the 4 percent rule to plan their early retirements. Those people are in very bad shape today. Not because they did anything wrong. They did the right thing. They checked the research. The research told them that their early retirements were “100 percent safe” (that’s the phrase used in Greaney’s “study”). We owe those people nothing, according to Wade Pfau. Rob Bennett very much does not agree.

Was a retirement that began in January 2000 and that took a 4 percent withdrawal safe or was it not? There are 20 places in your words above in which you indicate that you don’t think it was safe. And yet there is no need for a correction in the studies that caused millions of middle-class people to believe they were doing something safe when they were in fact doing something wildly risky?

I don’t know precisely what the ethical standards in your profession call for in this sort of situation, Wade. My common sense tells me that there are standards that address this sort of behavior. You know about the death threats and defamation and other intimidation tactics that Lindauer and Greaney have been employing for 10 years now to silence discussion of these questions. You shouldn’t be aligning yourself with them in any way, shape or form, I know that much for certain.

If Shiller is right (and there is now 30 years of research backing up his findings), we are in the early days of this economic crisis. We have another 65 percent price drop ahead of us. People are not going to find the safe withdrawal rate “joke” so funny when we are all living through the Second Great Depression.

I have the greatest possible respect for the research you did on the effect of valuations on long-term returns. I have told you that I think it merits a Nobel prize and I stand by that assessment today. I have long considered you a personal friend and I cherish that friendship and I still call you a friend today.

But today I need in conscience to say that you are a friend of whom I am ashamed.

I of course wish you the best in all your future endeavors and hope that there comes a day when we will be able to look back at these sad and difficult times and laugh at the foolishness we displayed in our behavior at the time. Please take good care.

Rob