Set forth below is the text of a comment that Wade Pfau posted to a recent blog entry here:
Hi Rob,
I know you like getting to the point, but I think your comment about Mr. Bengen causing failed retirements is too harsh. Just a couple of things to keep in mind:
1. As you know, he was the one to point out that 7% is not safe because of sequence of returns risk. In that regard, he made a very positive contribution by bringing expectations down from 7% to 4%.
2. He notes that 4% is the worst-case scenario from history. Though he puts more faith in the idea that history already provided some bad situations (Great Depression, Great Stagnation) and so we are unlikely to get an outcome even worse, I am comfortable with the way that he does highlight 4% as the SAFEMAX. I like this approach better than the probability tables in the Trinity study.
3. It still isn’t obvious that 2000-era or more recent retirees will have withdrawal rates below 4%. It is likely, but not guaranteed, so in that regard your comment is too strong.
4. Mr. Bengen is keeping an open mind about valuations. I think there is still some confusion since Michael Kitces 2008 article didn’t recognize that high valuations could cause even lower withdrawal rates (that is something he corrected in a later blog post). Financial planners seem to be most familiar with Michael’s article and not his follow-up. But Mr. Bengen is recognizing that there is something going on here and he is still working through it.
5. Researchers shouldn’t be blamed if they didn’t think of everything when producing their research. He made a great contribution, and others are extending his work. He is keeping an open mind and not dismissing these extensions.
Best wishes and happy holidays.
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