Our old friend Ed Easterling has published a new book that takes on “the mostly silly [Old School] research on safe withdrawal rates,” according to John Mauldin, who posted an excerpt from the book at his site.
Ed participated in “A Special Afternoon with Ed Easterling” that was held at the Safe Withdrawal Rate Research Group a number of years back. He was kind and helpful to both John Walter Russell and me. I think it is wonderful that he has written a book that will help get the word out to the millions of retirees who will likely be suffering failed retirements in days to come because of their reliance on the demonstrably false claims put forward in these “studies” (not one of the studies has been corrected in the nine years since I put a post to the Motley Fool board pointing out the analytical error in the methodology used in them).
Two Cents wrote a blog post today at the Balance Junkie blog about this.
Set forth below are several juicy excerpts from the book:
Juicy Excerpt #1: Most analysts and models suggest that a retiree can withdraw 4% to 5% of the original balance each year, increased annually to cover inflation, and still have a very good chance of not running out of money. The models, however, often do not use reasonable assumptions and do not sufficiently consider risk.
Juicy Excerpt #2: Many models use historical average rates of return. As previously reflected across multi-decade periods in the stock market, average rarely happens. Most often, returns from the market are either well above average or well below average.
Juicy Excerpt #3: For retirees who are primarily invested in the stock market, the most significant factor determining future returns is the level of valuation at the time of initial investment, as measured by the P/E ratio. So the level of the P/E at retirement has a significant impact on the individual investor’s chances of success in retirement.
Juicy Excerpt #4: Twenty years from now, a response of “who knew?” won’t be much comfort for retirees in the employment line at the local job fair. This is especially true since a rational understanding of history and the drivers of longer-term stock market returns can help today’s retiree avoid that surprise.
Juicy Excerpt #5: Retirees during secular bear markets may be limited to withdrawal rates that are less than 3%.