Are you a "Constrained Investor" retiree?

More ground breaking research from Professor of Retirement Income Wade Pfau. If you’re a “Constrained Investor”, we have an annuity for you.

In fairness to Professor Pfau, not all of his research is bad. Some years back he published a groundbreaking “white paper” on the 2% safe withdrawal rate which inadvertently revealed that you could double your retirement income by dumping your financial advisor – splendid stuff.



I’ve never heard the term “Constrained Investor”. Until I understand that I didn’t want to follow your link. So I googled it.

What a read there makes no sense to me. It specifically excludes Social Security and pensions. When I exclude those as instructed it says I am constrained, 3.24%. When I reduce my required income by my SS and pensions that changes to 1.85%. Talking about the income you need, yet excluding the income you get???

When I then followed the link to the article on Monte Carlo Simulations it didn’t say anything about pensions or SS, whether to include or exclude.

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I don’t think it’s supposed to make sense. But they have an $8,000/year subscription program that can solve the problem for you. Click on the “Pricing” tab. {{ LOL }}

The biggest problem with the “4% rule” is that it relies on low-fee index funds, so there’s really no way for Wall Street or a financial advisor to make money off “the 4% rule”. Thus, they need to come up with higher fee products that solve the “problem” of the 4% rule.

The 4% rule is very likely to leave you with more money than you can spend at the end of 30 years. For someone who retired in 1994 with a 60% stock/40% fixed income portfolio, they’re now sitting on about 4 times their starting balance as they take their 30th annual withdrawal. And that represents just about the median 30-year ending value for all the rolling 30-year periods examined. About half the time, you end 30 years of withdrawals with even more money remaining in the portfolio.



It’s probably a BS term that he came up with. But essentially, you could think about it very roughly as the state of -

Spending / Assets > SWR

And he may define SWR differently than others do.

I just thought of something interesting as a kind of rebuttal to those who push hard against calculated safe withdrawal rates (like 4% for a 60/40 portfolio for 30 years). While it’s obviously not an exact analog, it can be very instructive. Private foundations are required to distribute 5% of their assets each year … and yet there exist foundations that have been around for way longer than 30 years. For example, the Ford Foundation has been around for more than 85 years (a close relative of mine worked for them a few decades ago).



That was actually how I came up with a 4% withdrawal rate for myself. Great minds think alike. {{ LOL }}

When I quit working in 1994, I hadn’t seen William P. Bengen’s landmark work on “Determining Withdrawal Rates Using Historical Data”, FPA Journal, October 1994. I didn’t come across the article until after I’d been retired for about a year.

I knew that large charitable foundations and college endowments managing their investment portfolio as a perpretuity usually limit their annual spending to 5% of assets. But of course, the annual dollar amount of that 5% spending went up and down with the value of the endowment. I was looking for a withdrawal rate that I could reliably increase with inflation over time, so I knew that had to be less than 5%. I chose 4% as a wild guess and felt comfortable with that since it was less than the dividend and interest income being generated by my retirement portfolio at the time.


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The difference, of course, being that the 5% number foundations deal with can flex up and down as needed based on recent market performance. Bad market one year? Fund fewer programs the next year, while still spending 5%. Retirees, on the other hand, typically have certain base costs that can’t be lowered in a bad year.

Home Fool


Yes, of course. That’s why I specifically said “obviously not an exact analog”. BUT, nevertheless, in the years of heavy research (and sometimes vitriolic arguments), people also did simulations of taking fixed percentages of portfolio instead of 4% indexed by inflation each year thereafter. People also did simulations of taking 4%, and either indexing by inflation or “restarting” at 4% after a string of good returns. People did all sorts of things (heck we even had some folks that tried to suggest taking 8%, and one total nut who wanted to take some percent from a completely fixed-income portfolio … even after it was shown that the fixed-income portfolio on its own, with no withdrawal at all, could barely outpace inflation!) There was no end to the discussion about what might be a safe withdrawal rate, and what might be a good, or “the best”, combination of investment mix to do so. Anyway, even though taking X% each year would last forever by definition, it is a meaningless distinction as there were always periods where it ended up being impractical - in the sense that with the right string of bad years, you end up taking X% of a too small number to actually live on. So, while your savings will indeed last forever, there might be a few years in between where you can’t eat. Or alternatively, you have to earn and save for 85 years before it becomes practical.

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Private foundations can and do raise new money. A 90 year old retiree cannot.


Try giving money to the Ford Foundation. They apparently don’t accept contributions at all. But that wasn’t the point. The point was that the reason that rule was put into place is because when that legislation was passed, the intent was that foundations wouldn’t remain large, or growing, forever. Yet, even with a required 5% distribution rate, many did remain “forever” and even grew. But again, I am not using it as a direct analogy, just as an interesting or perhaps even instructive data point.