Hi Guys,
The recent paper by Professors Pfau & Dokken on the erosion of the 4% retirement drawdown rule allows me to get out my old broken record that extols the virtues of Monte Carlo analysis.
I have done this so any times that MFO members must be tired of my pontifications on the subject. No matter, this is an important topic that should encourage those not mathematically inclined to use the Monte Carlo tool. Mathematical sophisticated is not required.
What is required is the persistence and the thought process to define some plausible what-if scenarios for the long term marketplace. You guys do this all the time when committing money to various financial products. The Monte Carlo tool will do the needed calculations. It is not necessary to look under the hood to comprehend the machinery. That only depends on your interest level.
For the purposes of exploring the various dimensions of this retirement withdrawal issue, I recommend the Monte Carlo code accessible on the Portfolio Visualizer website. Here is a direct Link to their version of a Monte Carlo simulator:
https://www.portfoliovisualizer.com/monte-carlo-simulation
I encourage you to visit this tool and play games with it. With just a little effort you can easily examine numerous scenarios that will permit you to develop a feel for which parameters are important and which are not. Have some fun.
The conclusions that Pfau & Dokken reached were basically preordained by the conservative assumptions that they made. The old 4% drawdown rule was doomed by their pessimistic assumptions. I actually agree with some of them, but not all. You must decide for yourself both the merits and shortcomings of them.
Understand that Pfau & Dokken postulated a 30 to 40 year portfolio survival requirement. They presumed a 95% portfolio survival criteria. You get to choose these based on your own situation. They assumed that the equity market is too high based on the current Shiller’s P/E10 ratio, and simultaneously projected an equity regression-to-the-mean.
Pfau & Dokken also assumed that long-term bond returns would be perturbed modestly from its present low rate of return. But they also hypothesized that annual inflation rates would average 3%. That’s lower than the historical average, but is not consistent with the postulated depressed long-term bond annual rate of return.
Since most retirement analyses make adjustments for the inflation rate, this is a critical paired set of inputs. I recommend you play what-if games with these parameters, especially the inflation rate. The Portfolio Visualizer tool allows this parameter to be easily changed. Just do it.
Pfau & Dokken are smart, experienced researchers. But recognize that their findings were predetermined by a set of conservative assumptions. It’s likely that you agree with some but take issue with others. The Portfolio Visualizer tool will allow you to measure the impact of this plethora of assumptions.
In the Simulation Model box of the code, I recommend you click to the “Parameterized Returns” which will permit you to input your estimate of annual “expected return” and “volatility” (standard deviation) for your portfolio. You can change these to explore how survival outcomes change. Also try different Inflation estimates to test their impact on portfolio survival rates. Enjoy.
I hope you find my post useful, but more importantly, I hope you visit and try the referenced Monte Carlo code.
Best Regards.

Re: davidrmoran

“This seems very strange, but I have a math question ...
Once you are down to the 2% and lower SWR, is it not the case that you might as well put it all under the mattress and take out what you need till it's gone, given life expectancies? ... Okay, put it all into bonds...”

Actually, I think the key 'math' involved is simple subtraction.
I believe that they key thing here is the importance of keeping your investing costs low.
If you don’t, it is difficult to make things “work”.
As noted in the Appendix of the whitepaper mentioned in the original post, the authors assume investing costs of 160+ bps per year, with 100 bps for a financial advisor and 60+ bps for mutual funds.
It seems to me that these high costs, rather than any fancy math or simulations, accounts for the bulk of the reduction in the sustainable spending rate. This is more important, I think, than the peculiarities of the current market environment.
Note: Respectfully, I find it more than a little (!) disingenuous for the authors to “bury” this high cost assumption at the end of an Appendix to a whitepaper, since I don’t believe they reference the specific cost numbers in the original magazine article.
Or to put it another way, suppose the investor’s investors justify a 400 bps (4%) sustainable withdrawal rate, BUT they then have to pay 100 bps to a F/A and 60+ bps for their mutual funds.
Well, that would leave the investor with 400 - 160 bps to spend (before taxes!) of about 240ish bps per year, which is NOT that different from the figures derived using more complex calculations and assumptions.

@expatsp- Well sir, thank you very much for such a generous offer. I personally don't have any South American financial exposure, so it's just a matter of morbid curiosity on my part. Dilma's apparently leading Brazil to a very bad place, and additionally there's the general economic deterioration due to the fall in oil income, and the major scandals involving highly placed businessmen, the national oil company, and of course, politicians. Also, the recent coverage regarding the extreme pollution of the waterways to be used for the Olympics was very disheartening, not so much for the Olympics themselves but rather that the Brazilians are doing stuff like this to themselves.
The government chaos will undoubtedly turn their attention away from the protection of the environment out in the frontier areas, so we may expect the usual rapine to continue and probably accelerate there. Altogether, not a pretty picture.
Thanks for your comments!

@Scott, @Old_Joe, What would you like to read about Brazil? I'm a financial journalist down here, always looking for ideas to pitch my editor.

Find an allocation that meets your risk tolerance and long-term goals, keep cash needed from the portfolio in the next 5 years in CDs, cash or short-term bonds, then turn off the financial channels & don't listen to talk radio (both of which are a waste of time that could be spent doing something positive). And remember that the vast majority of people have NO money to worry about.

Pure robots are definitely faster - the data are "untouched by human hands".
The impression I get of mass marketed portfolio management services (e.g. Fidelity Portfolio Advisory Services) is that they have a few different portfolios (possibly comprised of a gazillion funds, likely built with "robotic" assistance), and they match you to the closest portfolio. For their 1% fee or so, they provide some handholding ("stay the course"), and talk to you.
Vanguard provides a financial plan, and I'm confident uses the "robotic" tools to allocate investments based on longer discussions with you, and what your needs and time frames are. A bit less cookie cutter. John Markoff talks about AI vs IA (intelligence augmentation); Vanguard would appear to be taking the latter approach.
He was on CSPAN a week ago, talking more generally about robots replacing humans:
http://www.c-span.org/video/?327812-5/washington-journal-john-markoff-robots-manufacturing

WHY 4% COULD FAIL
Sep 1, 2015 • Wade Pfau & Wade Dokken
http://www.fa-mag.com/news/why-4--could-fail-22881.html
Our research shows that Americans retiring in 2015 need to be far more conservative in their withdrawal rates during retirement. The historic 4% annual withdrawal rate is over two times the level that Americans can safely withdraw without expecting to outlive their assets. The real safe withdrawal rate, accounting for fees and today’s stock and bond market levels, is under 2% per year.
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Above is a link to a very interesting article that explores impediments to current implementation of a 4% (+ subsequent inflation adjustments) retirement withdrawal rate.
However, the version of the article in the Financial Advisor Magazine ("FA Mag") Sep 2015 issue is a little confusing for a couple of reasons.

First, the article as rendered (either in print or online) suffers from typos or mis-referenced figures that make it more difficult to follow than it should be.
Second, some key assumptions do not appear in the article but can only be found in the appendix of the related whitepaper. These relate to the mutual fund costs and financial advisor fees.
Specifically, a financial advisor fee of 100 bps, and average mutual fund expense ratios of 67 bps for stocks and 60 bps for bonds.

Below is the whitepaper link which appears at the beginning of the FA Mag article. NOTE: It asks for name and contact information. Whitepaper contains assumptions in an Appendix and the whitepaper's figures are properly referenced and completely labelled. I suggest you read the Appendix first.
WHITEPAPER
http://www.fa-mag.com/rethinking-retirement-wealthvest-0815
And here - from Professor Pfau's website/blog is page with references and links to earlier papers on related topics :

WADE PFAU RETIREMENT RESEARCHER READING ROOM & BLOG
http://retirementresearcher.com/reading/
http://retirementresearcher.com/blog/
-----------------------------------------------------------------
NOTE
Wade Pfau is Professor of Retirement Income at the American College for Financial Services in Bryn Mawr, PA.
Wade Dokken is Co Founder & Co President of WealthVest Marketing, a firm that designs, markets, and distributes fixed and fixed index annuities.

It is unlikely in the extreme that an investor would be invested in the stock market virtually all the time, but then haplessly trade OUT of the market just prior to a giant up day, only to then re-enter the market --- and then repeat that same error again and again...
Much more likely: If you are "unlucky enough" to miss most of these big up days, its probably because you also missed a a good piece of the major down moves during which these brief counter-trend rallies occur --- and are thus well ahead of the buy-and-holders.
A good primer on this fallacy is explained in more eloquent detail in the book "Buy Hold and Sell" by financial advisor Ken Moraif (he repeatedly makes the annual Barron's Top Advisor list)

And if I'm not mistaken, Ken Moraif managed to do just that 2 weeks ago when he gave his "sell everything" order after the market closed on Friday so that anyone who followed his advice sold all their stocks on Monday morning at virtually the worst point possible and all their mutual funds at the close on Monday, not far from the worst, just to miss the crazy rally on Wednesday and Thursday. Of course it's always possible that the trend has changed and this little mishap will be lost in the details, but the taxes those people had to pay on their gains will require a bit more downside before they get back to even.
Much has been made about the difficulty of timing the market, but this guy isn't "just" a timer, he's an "all-or-nothing" timer. That's strikes me as more than a bit risky for the average investor.

You'd think charging 5-plus percent loads on their funds, they'd be able to provide a higher regular dividend.
There's not much I like in the financial sector (I own zero) but I do waffle between TRP and BEN as possible candidates to own.

I remember the jokers from Salomon Smith Barney coming to my workplace during the teck-wreck, making this very same argument. (SSB served as "advisors" --cheerleaders really -- for our 401k, offering monthly "education" [i.e. propagandizing for an equity culture] during lunch at our company.)
About once a year, they tossed out the "you must stay invested, lest you miss out on the few big "up" days...." They were hacks, and the argument is fallacious. And the idea about missing (only) the top up days is a buy and hold MYTH.
The overwhelming number of the biggest up days (%age-wise) in the US stock market, occur during BEAR markets. -- The big up days are essentially violent, but BRIEF counter-trend rallies (probably driven by a combination of short-covering and traders looking to buy, then bank a very quick profit) during down-cycles. Most of of these big up days occured during the 1930's, then again during the 08-09 crisis. Another was in the aftermath of the one-day sell-off in 1987.
It is unlikely in the extreme that an investor would be invested in the stock market virtually all the time, but then haplessly trade OUT of the market just prior to a giant up day, only to then re-enter the market --- and then repeat that same error again and again...
Much more likely: If you are "unlucky enough" to miss most of these big up days, its probably because you also missed a a good piece of the major down moves during which these brief counter-trend rallies occur --- and are thus well ahead of the buy-and-holders.
A good primer on this fallacy is explained in more eloquent detail in the book "Buy Hold and Sell" by financial advisor Ken Moraif (he repeatedly makes the annual Barron's Top Advisor list)

http://www.sec.gov/Archives/edgar/data/357204/000100329715000387/wc4979-4.htm
497 1 wc4979-4.htm
WESTCORE TRUST
Supplement dated September 4, 2015 to the Westcore Equity and Bond Funds Prospectus, dated April 30, 2015, as supplemented July 6, 2015 and July 22, 2015, and the Westcore International Small-Cap Fund Summary Prospectus, dated April 30, 2015.
Effective September 15, 2015, the Westcore International Small-Cap Fund (the “Fund”) will reopen to new investors.
All references to the Fund being closed to new investors are deleted from the Westcore Equity and Bond Funds Prospectus and the Westcore International Small-Cap Fund Summary Prospectus.
If you own your Fund shares through a financial intermediary (your “Service Organization”), you may wish to contact your Service Organization directly to verify the Fund’s availability for new purchases as some Service Organizations may require additional time to reopen the Fund.
Please retain this supplement for future reference.

I'm having difficulty making a fund selection and hope to tap the wisdom of this group for any thoughts you may have, particularly since many of you are Vanguard investors and may be familiar with the nuances of the two funds I'm contemplating.
Here's the situation: in order to simplify my financial life, I recently moved our "emergency fund" (equivalent to about 6 months of our living expenses) to a new and separate brokerage account at Vanguard. One reason is the ability to add small amounts to Vanguard funds on a regular basis--this is not an account we are looking to drastically grow, but still would like to pop in a few bucks a month.
Half the funds are kept in cash; the other half will be in a conservative Vanguard fund. I'm really torn between the Wellesley Income fund and the Tax Managed Balanced fund, mostly because of taxes since it is in a taxable account. How worried should I be about this? VWINX has high portfolio turnover, and is certainly not as tax-efficient as VTMFX. However, Wellington Management is without a doubt stellar, and I think there is an opportunity for downside protection. VWINX held up quite nicely in 2008 and 2011. I also prefer the more conservative allocation of VWINX.
I anticipate this to be a *very* long-term holding, so I'm not concerned with short-term gains, but should I be considering the tax equation more and opt for VTMFX? Your thoughts are greatly appreciated.

For those that have a number of accounts along with a good number of mutual funds I formulated a sleeve management system that has helped me greatly. It might also provide you with some ideas that you can incorporate in something you might choose to develop for yourself.
The article speaks to a concern no doubt many have; but, it falls short and fails to offer direction as to how to solve the concern other than to go see a financial planner.
For those interested ... Here is what I did and I it found that it worked so well for me that I have chosen to stay with probally more funds than I absoutely need as I could probally reduce the number down to about thirty (three per sleeve) and still incorporate my system.
The system was derived from a betting system I used at the dog track many years ago. In this system I'd usually bet ten races and in these races I'd bet my three best picks in each race to win, place or show. Folks, I usually left the track with more money than I came with. So, for me, my system worked even better than I first thought it ever would. Even today, I still make an occasional trip to Daytona (visting friends) and bet the dogs using my system ... and, I still wear a smile as I usually come away with more money than went with.
Some ask me ... How you do you do this? If they were readers of the Observer then they would know. My wife knows, but our friends don't. So let's keep it to ourselves.
My Investment Sleeve Management System (09/02/2015)
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve & each investment area monthly; and, the portfolio as a whole at least quarterly although I do it monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from or to the cash area with some nav exchanges taking place.
Here is how I have my asset allocation broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis on the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc.
Cash Area (Weighting Range 5% to 25%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%)
Fixed Income Sleeve: GIFAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, JNBAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%)
Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX
Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX
Domestic Equity Sleeve: ANCFX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%)
Global Sleeve: AJVAX, ANWPX, NEWFX, PGROX, THOAX & THDAX
Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, IACLX, SPECX & VADAX
Small/Mid Cap Sleeve: IIVAX, PCVAX, PMDAX & VNVAX
Specialty Sleeve: CCMAX, LPEFX & TOLLX
Over the past 90 days, or so, the four most recent additions are AJVAX, GIFAX, JNBAX & VNVAX. The four most recent discards are CFLGX, DEMAX, PASAX & SGGDX. Total number of funds currently held equal fifty.
I wish all ... "Good Investing."
Old_Skeet

We tend to look at YTD because it's a convenient and fairly common starting point for comparing numbers within a defined period of time. But we tend to forget that as far as the universe is concerned, there's nothing magical or even particularly significant about Jan 1. We might just as well arbitrarily start our comparison period on April 1... in fact, that might actually make more sense given the foolishness of the financial arena.
There's probably a psychological factor there too- it makes it less painful to mentally write off a bad YTD as just a lousy single year, while we remember the good ones (and next year is sure to be better. Maybe.). Skeet is right about looking at the longer view.

This is a rather tiresome old-fashioned view on SRI and ESG--environmental social and governance--based investing that has been refuted by academic evidence. Click here: https://institutional.deutscheawm.com/content/_media/Sustainable_Investing_2012.pdf
A key excerpt from this report is the following:
"100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity. In effect, the market recognizes that these companies are lower risk than other companies and rewards them accordingly....
89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company’s exhibit accounting-based outperformance. Here again, the market is showing correlation between financial performance of companies and what it perceives as advantageous ESG strategies, at least over the medium (3-5 years) to long term (5-10 years)."
In fact, I think the idea that "personal beliefs don't belong in your retirement account" actually is a reflection of the personal beliefs of many of the authors who routinely bash SRI/ESG without looking at the academic evidence, revealing their own biases. The fact is trillions of dollars are now invested globally according to some sort of SRI/ESG principles with little negative effects and in many cases positive ones:
fa-mag.com/news/sri-assets-up-76--since-2012--study-says-19953.html

http://www.sec.gov/Archives/edgar/data/915802/000091580215000072/stickergrandeurpeakemergingm.htm
1 stickergrandeurpeakemergingm.htm
FINANCIAL INVESTORS TRUST
Grandeur Peak Global Stalwarts Fund
Grandeur Peak International Stalwarts Fund
Grandeur Peak Global Micro Cap Fund
(the “Funds”)
SUPPLEMENT DATED SEPTEMBER 1, 2015 TO THE FUNDS’ PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 29, 2015
As of the date of this Supplement, shares of the Grandeur Peak Global Stalwarts Fund and the Grandeur Peak International Stalwarts Fund are now offered for sale, and shares of the Grandeur Peak Global Micro Cap Fund are not currently being offered for sale.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE. YOU MAY DISCARD THIS SUPPLEMENT ONCE SHARES OF THE FUNDS ARE OFFERED FOR SALE.

That'll do it but I'm guessing his day job isn't hurting his bottom line. Now I wonder if Mick Jagger was also in on it. Pretty astute financial guy from what I've heard.

FYI: (Click On Download) Bloomberg View columnist Barry Ritholtz interviews Paul McCulley. McCulley was the chief economist and managing director at PIMCO. They discuss the financial crisis, the state of the global economy and more.
Regards,
Ted
http://www.bloomberg.com/podcasts/masters-in-business/

@Old_Joe, there is a link on their website that goes into some detail what they do. Very informative.
https://ipro.americancentury.com/en/landing-pages/the-stowers-institute-for-medical-research.html
Jim Stowers, the founder of American Century, previously Twentieth Century, was well known as a modest living man. Old cars and brown bag lunches were his trademarks so to speak. I have his book, Yes You Can Achieve Financial Independence. It should be required reading for children today. Frugality is not a dirty word at all.

Michael...if you like the idea of divi payors, pay close attention to what Scott recommends for reits...in your deferred account. Always do your own research, but it's worked nicely for me. That's a nice addition to a portfolio.

Personally in regards to real estate, things that come to mind in the moment - may be others, but just throwing some things out... as noted above, always do your own research.
No particular order:
1. Starwood Property (STWD) Somewhat dull, excellent management, not going to be a home run ever but high income that I have a degree of confidence will remain stable and grow. Will benefit from rising rates and the presentation on the company's website has outlined how much they will benefit.
2. Ventas (VTR) Has been obliterated, but high-quality healthcare REIT that is somewhat cheaper in the literal sense now after they did a spin-off. I'm not against the major names in healthcare REITs, but feel Ventas is particularly high quality.
3. Kennedy Wilson (KW). Not much of a yield, but interesting integrated real estate company (not a REIT) that owns real estate and provides services (auctions, etc.) Somewhat volatile. Famed investor Prem Watsa's Fairfax Financial had a large stake in Kennedy Wilson (although I believe a significant amount and possibly all of it is convertible preferred) as of recently, I'm not sure what the stake is at this point. From the end of 2014 letter: "We have invested $629 million in real estate investments with Kennedy Wilson over the last five years. Through
refinancings, sale of some loan portfolios and gains on hedging contracts on Japanese yen, we have received
distributions of $465 million. Our total net cash investment in real estate investments with Kennedy Wilson is
therefore now $164 million, and that investment is probably worth about $350 million. We have yet to sell though,
while our cash flow return of 11.2% is very acceptable. Also, we continue to own 10.7% of Kennedy Wilson
(11.5 million shares): our cost was $11.90 per share, and the shares are currently trading at $26.19."
--
4. Equity Lifestyle Properties (ELS). Sam Zell chaired REIT that is heavily into RV/campground/retirement communities. Lots of waterfront/near water land. Compelling (while not everyone is going to be into RVs, where the land is is the thing) but not cheap at all and not a great dividend. Still, unique and worth having on radar.
I'm trying to post the rest of this but it's not letting me, I keep getting an error.