Wednesday, November 16, 2011

Japan 1990 --- A Black Swan for Retirees? No.

Matthew Amster-Burton wrote a nice article about my "Getting on Track for a Sustainable Retirement" at 

His article includes comments from Professor Zvi Bodie, who thinks my approach to retirement planning with a well-diversified portfolio is too exposed to black swans. I have great respect for Professor Bodie's work, and I'm honored to know he has even looked at my article, _and_ I can't disagree with his overall view. 

As I showed in my article, "An International Perspective on Safe Withdrawal Rates", things have indeed gotten very bad at times for other developed market countries.  Japan's experience in the years following World War II set a devastating worst-case scenario for anyone to contemplate.  Basically, hyperinflation, followed by stock and bond returns that couldn't keep pace, destroyed any chance for a successful retirement, though post-war Japan was probably not a place where people would have had an opportunity to enjoy a peaceful retirement anyway.

Just, I wish to add, the reason for writing my recent article about TIPS is that I don't think TIPS can be treated as invulnerable to these sorts of black swans.  Will the US really keep repaying TIPS owners in the event of a hyperinflation?  Will non-TIPS owners stand for that as their own life savings transform into just enough to buy a loaf of bread? I don't know.

Just one more brief point, Prof. Bodie mentions a 1990 retiree in Japan as experiencing such a black swan event.  But retiring in 1990 Japan with a well-diversified portfolio would not have been so bad.  1990 is too recent to look at the typical 30-year retirement period, but here are the maximum sustainable withdrawal rates for new retirees over a 15-year period in each year of the historical record for a fixed 40/60 portfolio of stocks and bonds. These are higher than 30-year withdrawal rates, naturally. But they will be closely correlated, because due to sequence of returns risk, what happens early in retirement has a major impact on the final outcome. While the Japanese retiree in 1990 didn't have things great compared to other US and Japan retirees, it wasn't so bad. The big killer for retirements is not stock market losses alone.  It's inflation and the impacts that can have on real market returns.  Granted, that is what TIPS are designed to protect against.  And that is why TIPS should be an important part of one's retirement portfolio.  But I don't think it should be the only part, especially for those still saving for retirement.

I don't really have a good ending for post this yet.  But there are a few things I'm working on related to this subject of retirement and inflation, so please stay tuned.


  1. Wade - thanks for this post. I know it's still a work in progress but it's the first chart I've seen that shows MSWR for a 15 year retirement. I'm a Financial Planner that focuses on retirement income planning for my clients. Most research (Bengen, Kitces, etc) shows 30 year SWR's. But I recently had a client in his late 70's come to me to discuss retirement income. Seems like a 4% SWR would be inappropriate for someone with what could be a less-than-30 year lifespan. Michael Kitces and I emailed about this and he mentioned that even he hadn't done (or seen) the research on 15 - 20 year SWR's. Which brings me to my point: as a client ages and their retirement timeline moves from 30 to 20 to 10 years, the SWR should (I think) be raised to counter the effect of a declining lifespan. I, for one, continue to focus on a 4.5% - 5% SWR (I use Bengen's research plus Cuts/Freezes/Raises advocated by Guyton & Klinger) even when a client is in his/her 70's/80's. But, that doesn't "seem" right. Anyhow, thanks for letting me spill my thoughts and thanks for your research on this subject. I've subscribed to get your updates via email.



  2. Brad,

    Thanks. I made a new post with an answer:

    Best wishes, Wade