The Wall Street Journal on March 1 published an article titled Say Goodbye to the 4% Rule for Retirement.
Juicy Excerpt: Conventional wisdom says you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year, without running out of money for at least three decades….In recent years, the 4% rule has been thrown into doubt.
Set forth below is the text of an e-mail that I sent to Kelly Greene, the author of the article. The subject box for the e-mail reads: “It’s More Than Just the SWR Studies That Need to Be Corrected.”
My name is Rob Bennett. My bio is here.
Congratulations on your article “Say Goodbye to the 4% Rule for Retirement.” This is important stuff.
There’s another story here — the story of why this is only coming out now (I have been writing about the errors in the Old School safe withdrawal rate studies going back to May 2002). The problem with the old studies is that they do not adjust the safe withdrawal rate for valuations. That same error is made in all other areas of investing analysis.
The error carries over from the days when there was a widespread belief in the Efficient Market Theory (EMT). If the EMT were legitimate, the Old School SWR studies would work. Yale Economics Professor Robert Shiller discredited the EMT with his 1981 research showing that valuations affect long-term returns. If valuations matter (there is now 32 years of peer-reviewed academic research confirming Shiller’s 1981 finding), it is not possible to make ANY investment decision without taking the valuation level that applies at the time the choice is being made into account.
For example, a regression analysis of the historical return data shows that the most likely 10-year annualized return in 1982 was 15 percent real. In 2000, the number was a negative 1 percent real. There is no one stock allocation that makes sense in both sets of circumstances. Those who follow Buy-and-Hold strategies (strategies in which the investor keeps his stock allocation stable at all times) are thereby permitting their risk profile to get wildly out of whack. Investors must CHANGE their stock allocations in response to big shifts in valuations to have any realistic hope of long-term investing success.
I have a calculator at my web site (“The Retirement Risk Evaluator”) that identifies the SWR that applies at all possible P/E10 levels.
I also have a calculator (“The Stock-Return Predictor”) that performs the regression analysis needed to identify the most likely annualized 10-year return starting from any possible P/E10 level.
I have done research with Wade Pfau showing that investors who take valuations into consideration when setting their stock allocations thereby reduce the risk of stock investing by 70 percent (Please see the graphic on Page 11 which shows that the Maximum Portfolio Drawdown drops from 60 percent to 20 percent for investors who take valuations into consideration). The reason why we have as a society not yet moved away from promotion of Buy-and-Hold strategies is not that the research-supported case is not strong. It is that this change is so big that it is hard for those who are schooled in the conventional thinking to accept the far-reaching (and very exciting) implications of the change.
Please let me know if you have questions.
I wish you the best of luck in all your future endeavors.