Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
There has never been a 30 year period in which a 4% withdrawal rate has not worked. To focus on this issue, however, is wrong if we are trying to determine the primary reason retirement plans fail. The primary cause is lack of sufficient savings. Given that this is your biggest mistake, it is not surprising that you attempt to avoid this topic and look to blame someone or something else.
You are correct that there has never been a 30-year period in which a 4 percent withdrawal rate has not worked, Sammy But that reality doesn’t tell us that a 4 percent withdrawal is safe for retirements beginning at any possible valuation level. In a world in which valuations affect long-term returns, you need to take valuations into consideration when identifying the safe withdrawal rate. Take valuations into consideration and the number you get for people who retired at the top of the bubble is 1.6 percent real. That’s nothing close to 4 percent.
Say that you had a friend who was an alcoholic and you were trying to persuade him to take a cab home from a party where he got drunk. Say that he told you that he had driven home drunk on three prior occasions and had been hospitalized in each case but was still alive and that, thus, it was safe to drive drunk. Would that persuade you? Huh? The fact that he was hospitalized each time he drove drunk tells us that driving drunk is a high-risk activity, not a safe one.
So it is with retiring at a time of high valuations and using a 4 percent withdrawal rate. There have been three occasions prior to the current era in which people could have done this. In each of the three cases, retirees who used a 4 percent withdrawal would have seen a wipe-out of most of their retirement portfolios but would have had a few dollars remaining in their portfolios at the end of 30 years. How is it safe to have a retirement portfolio reduced to a few dollars? It’s not. It’s high-risk. The phrases “high-risk” and “safe” are not synonyms.
4 percent is of course safe at moderate or low valuation levels, just as it is safe to drive when one is not drunk. But driving drunk is never safe. And retiring at a time of high valuations with a 4 percent withdrawal rate is never safe. It is possible that such a retirement will survive. That has happened. But the retiree doesn’t know in advance what sort of return sequence is going to come up. Since he doesn’t know, he should be choosing a withdrawal rate that is at least reasonably safe, not one that is extremely high risk. We certainly should not be encouraging him to use the extremely risky withdrawal rate by assuring him that it is safe. Again — Huh?
This is my sincere take re these terribly important matters, in any event. I naturally wish you the best of luck in all your future life endeavors, my long-time Buy-and-Hold friend.