I've meant to write a post about academic papers for some time and I received an email recently that gives me a great opportunity.
“I generally think highly of [Dr. Redacted’s] work. . . But I’ve been puzzled by why his results sometimes weren’t more thorough – they are sometimes like abstract points . . . They can’t be applied without significantly more refinement and sometimes can lead to a wrong conclusion.”Exactly.
But the problem, I believe, is not with the academic research – which is as it should be – but with our expectations and our over-reading of the conclusions. Sometimes, we just miss the point. Other times, we try too hard to convert theory into practical advice. And lastly, we're not the intended audience.
Let's look at those one point at a time.
It seems that many people unfamiliar with how academic research works are looking for a study that shows the one way to plan for retirement that is better than all previous recommendations and is the single best way to plan. As they say on police dramas, that ain't gonna happen.
Research is often an “experiment” that provides new information that we should consider and perhaps use to modify our previous beliefs to some extent. Or as someone said, “science is the process of continually improving your answer.” If you expect the next big academic paper to provide “the answer” that supersedes everything we used to think that we knew was correct, your expectations are too high. A good piece of research simply improves on the previous answer. It rarely replaces it.
So, is research sometimes "like abstract points"? Yes, often. One definition of abstract is “theoretical” and most academic research is theoretical, that is “concerned with or involving the theory of a subject or area of study rather than its practical application.”
Molding theory into practical application is the next challenge. Sustainable withdrawal rates research is, I think, an excellent example. Most studies use constant-dollar withdrawals, a spherical cow that is useful for research but problematic in practical application. No rational retiree is going to continue to spend the same amount every year once she observes that she is going broke. The technique is useful to understand the process of sequence of returns risk, but it is way too simple a model to predict outcomes for an actual retiree.
As a highly-respected retirement researcher once told me, “Bengen did an outstanding job showing that sequence risk exists, but then trying to identify a safe withdrawal rate was a fool's errand.”
Unfortunately, Money magazine and other popular media outlets translated this research directly into practical advice for several years before the 2007-2009 market crash convinced them that people really need to spend less money when they become less wealthy. The risk is not so much that you will deplete your savings with SWR as that you will irretrievably lose your lifestyle.
The comment above that research papers can sometimes lead to wrong conclusions is spot on but, again, this is more a problem with our conclusions than with the research. Here's an example. Wade Pfau and Michael Kitces caused a stir (a sign of good research) by writing a paper entitled, Reducing Retirement Risk with a Rising Equity Glide Path. Their research suggests that “rising equity glide paths from conservative starting points can achieve superior results.” One well-known retirement expert immediately tweeted something to the effect of, “Great idea - let's put all 95-year olds 100% in stocks.”
That wasn't the point of the research, but the effects were predictable. Clients asked if I thought they should be following a rising glide path and invest more in equities when they are older. I told them that they should decide that when they are older – I have no idea what their financial situation will be when they are 95.
Wade Pfau agreed, telling me that a custom asset allocation will always be better. He believed their findings simply suggest that if we knew nothing about a client other than his or her age, or if the retiree were only willing to do the absolute minimum of planning, a rising glide path would be the best bet.
He added that this is probably the best strategy for a target-date mutual fund that needs to serve a broad range of retirement investing needs. He also felt that the most interesting finding of the research is that you can sometimes “reduce both the probability of failure and the magnitude of failure for client portfolios” by increasing market risk. Not that everyone should adopt a rising glide path upon retirement and stick with it come what may, though this is what many concluded.
Sometimes, we just miss the point. David Blanchett wrote a paper that inspired the term “the Blanchett Smile” (download PDF). Many readers understood his findings to suggest that expenses begin to decline at retirement, bottom out about the mid-point, and then increase until death, in the shape of a smile. The “smile” Blanchett found, however, showed the acceleration of spending, not the amount of spending. The amount always trended downward, at about 2% or so per year for appropriately-spending retirees, throughout retirement. Only the acceleration of the downward trend (it's first derivative) eventually turned upward.
Misreading academic papers isn't a problem only among do-it-yourself retirees. After I wrote about this at Advisor Perspectives, a top-notch retirement adviser privately thanked me. He said that he had been present when Blanchett presented the paper and that he completely missed this point, as did, he believed, everyone sitting near him.
My last point is an important one: we are not the intended audience for academic papers. They are written primarily for other academics, who will review the papers before publication. Consequently, they tend to make modest claims that can be strongly supported by the evidence provided. Claims more like “increasing portfolio risk has the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios” rather than “everyone should follow a rising glide path.”
(Be even more cautious of "pseudo-academic papers" that are not peer-reviewed and thoroughly cited.)
I'm not suggesting that you stop reading academic papers on retirement finance. I am suggesting that you understand their intent and use considerable care in trying to apply their findings to your own personal situation. Treat them as another piece of evidence and weigh them accordingly.
(Interestingly, I've found that the retirement field is not the only one where academic research has a strong following among lay readers. I found a website where non-scientists express great interest in cosmic physics. I find that encouraging.)
While academic papers aren't intended for a broad audience, the authors of those papers often write books, blogs and columns for the press that are. Wade Pfau, for example, does an excellent job of explaining his research to a broader audience of advisers and even do-it-yourselfers at several places, including newsletters to which you can subscribe, the Advisor Perspectives website, and his own Retirement Researcher blog. William Bernstein has written many brilliant books and over the years has intentionally made them more and more accessible.
Dr. Moshe Milevsky is another excellent writer. While I don't recommend most people tackle his papers about lifetime probability of ruin and the reciprocal gamma distribution (it kept me up nights until my tenth reading), I just finished the second edition of Pensionize Your Nest Egg, co-written by Milevsky and certified financial planner, Alexandra Macqueen, and find it quite readable. (Macqueen clearly helps balance Milevsky's inner quant.) It provides a strong argument for the circumstances under which and to what extent one should employ annuities. Spoiler: if you have a lot of wealth or a little, they may be less effective than for those in between.