A poster named “Nisiprius” recently advanced the following wonderful post to the Bogleheads Forum:
Sucker looking for certainty where there is no certainty: So, how much can I safely withdraw?
Guru: Well, right now things look great. This year you could certainly–
Sucker: No, no, no. Tell me more than “this year.” I want to plan ahead. I want to know a nice, safe rate, with a good safety margin built on. One that will be sustainable into the future under varying market conditions.
Guru: OK, here’s a Worth magazine article by Peter Lynch who had a colleague run numbers, and he says a portfolio of 100% stocks–preferably individual selections from among Moody’s Dividend Achievers but an S&P 500 index fund will do–has safely sustained 7% withdrawals under all market conditions that have ever occurred.
Sucker: So, 7%, right?
Guru: Oh, no, no, no. Things do not look so good any more. This study by three Trinity University professors says that the sustainable withdrawal rate is only 4%.
Sucker: But, but, but… I specifically asked for a number that would work under all future market conditions.
Guru: Well, in 1995 we thought 7% would work under all market conditions. But, that was then, this is now.
Sucker: So 4% is the right number? A good planning number? One that doesn’t make any false optimistic assumptions but allows for the full range of things that typically occur? A number that will work even if the markets runs its normal cycles of good and bad times?
Guru: Yes. Some experts think a bit more, but, yes, 4% is a good number.
Sucker: So, this is not some false-optimism 7%. This has the safety margin built in, right? This has the allowance for normal wear and tear. This is a number good for the next three decades, right?
Guru: That is what every expert and every sophisticated computer analysis is telling us. Yes.
Sucker: So, I can withdraw 4%, eh?
Guru: Oh, no, no, no. It seems things are not turning out as well as we expected. Gordon equation… interest rates… Try 3%….
Precisely so. How much do you want to bet that, following the next crash, our friends among the Wall Street Con Men will be telling us that the new word is that no withdrawal rate above 2 percent could ever possibly be safe and that we all better get about the business of lowering our stock allocations dramatically if we know what is good for us?