I’ve posted Entry #360 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There Is No Floor on Safe Withdrawal Rates.
Juicy Excerpt: There’s another factor that Kitces ignores in his claim that the 4 percent figure is a floor. It’s not only valuations that determine the safe withdrawal rate. The other big factor is the return sequence that applies. Two different return sequences that produce the same long-term return do not necessarily produce the same safe withdrawal rate; one that takes more money out of the portfolio in the early years of the retirement will generally produce a smaller safe withdrawal rate because it causes the portfolio size to drop to dangerously low levels before the gains needed for it to recover come into play. The 4 percent figure comes from a time-period in which valuations were high but from a returns sequence that was on the lucky side; the reality is that retirements taking a 4 percent withdrawal and beginning in 1929 had only a 50 percent chance of working out (these retirements ultimately survived but they were not safe when they were initiated because we did not know at the time that a lucky return sequence would play out).
So even if valuations were no higher in 2000 than they were in the earlier times that produced the 4 percent number, it would not have been right to say in 2000 that a 4 percent withdrawal was safe. Calculations that take both factors (the valuations factor and the returns sequence factor) into account indicate that retirements beginning at that time and calling for a 4 percent withdrawal had only a 30 percent chance of surviving 30 years. Not safe!