Wade Pfau recently published an article in the Wall Street Journal titled What Is the Sustainable Spending Rate for Retirees in 2016? I thank my Goon friend Anonymous for letting me know about the article.
Juicy Excerpt #1: An alternative way to view the historical data is to go beyond merely considering past withdrawal rate outcomes by seeing how they relate to retirement date values of the underlying sources of returns. We can find a way to investigate these implications by following the approach described in 1998 by John Campbell and Robert Shiller. They found useful predictive power in estimating the relationship between Shiller’s PE10 and the subsequent ten-year real return for stocks.
Juicy Excerpt #2: Sustainable withdrawal rates from a diversified portfolio including stocks can be expected to share this relationship with market valuations.
Juicy Excerpt #3: Until 1986, we can see that the relationship between the predictions and the actual values is close. The two variables (PE10 and interest rates) can explain 55% of the fluctuations in the historical spending rates.
Juicy Excerpt #4: this is not an estimate of the “safe” withdrawal rate. It is not a conservative guess about a safe withdrawal rate, but rather it is the best guess based upon the historical relationship between withdrawal rates, market valuations, and interest rates. It could end up being more or less (we won’t know which for another thirty years). To be conservative, a lower withdrawal rate is required to account for the additional random fluctuations from outside the model. This analysis further confirms the idea that the 4% withdrawal rate cannot be treated as safe for retirees in today’s market environment.
Juicy Excerpt #5: A 4% withdrawal rate should never be treated as an almost guaranteed annuitization rate from one’s assets, but this is especially true for today’s retirees.
Juicy Excerpt #6: These exercises about looking at the impacts of interest rates and market valuations illustrate that assumptions about future returns matter a great deal.
Juicy Excerpt #7: Unfortunately, we do not know what the future will bring, and, ultimately, retirees should remain cautious and flexible.