“The SWR Emporor Is Wearing No Clothes”

That’s a phrase that appeared in a post to the Early Retirement Forum put up by a poster named “Mikey.” (He now uses the screen-name “HaHa”).

I thought that was a good way of pointing out how lame the arguments are that are used by defenders of retirement planning tools based on the findings of conventional-methodology safe withdrawal rate studies. Here is a list of ten of the arguments most frequently advanced by defenders of today’s highly misleading and highly dangerous retirement planning tools, along with my thoughts on why those arguments are less than persuasive:

1) No one puts any confidence in the numbers generated by retirement planning tools. If that were so, why would people bother to produce them? Why would people go to web sites looking for them?

2) People don’t rely solely on the flawed tools in planning their retirements. That’s so. But how does that justify misleading people as to what the historical stock-return data says about safe withdrawal rates? It doesn’t.

3) The tools are only meant to provide rules of thumb. Even accurate tools only provide rules of thumb. No methodology is so powerful that it allows us to see into the future. Still, reports of what the historical data says should be accurate.

4) Everybody provides false numbers in their retirement planning tools. We all have mothers who have pointed out to us the flaws of the “everybody else is doing it!” defense. It’s not so, in any event. William Bernstein reported the safe withdrawal rate accurately in his book. Scott Burns reported it accurately in his column. John Walter Russell reported it accurately at his web site.

5) The people saying that valuations matter might be wrong. All of them? All wrong? Peter Bernstein got it all wrong? And Rob Arnott got it all wrong? And Scott Burns got it all wrong? And John Walter Russell got it all wrong? And William Bernstein got it all wrong? And Andrew Smithers got it all wrong? I don’t think so. All of these people no doubt have gotten some things wrong. But if any of them are right even on the basics of the safe withdrawal rate topic, most of today’s retirement planning tools need to be fixed.

6) If we report the numbers accurately, we will get complaints from people who would like the numbers to be higher. This is an argument that Bill Sholar, publisher of the FIRECalc retirement calculator, pulled out of his trick bag in a discussion recently held at the Early Retirement Forum. The entire point of using historical stock-return data to determine what is safe is to root your retirement plans in something objective. Retirement planning tools that rely on public opinion polls to determine what withdrawal rates are safe are not the products of science. They are the products of science fiction.

7) Retirees can cut back on spending when their retirements look like they are going to fail. The point of planning a retirement is to avoid the need for big spending cutbacks after you hand in your resignation. Planning tools should not be designed so that cutbacks are going to be required in the event that stocks perform in the future much in the way in which they always have in the past.

8 ) People are not prepared to accept what the historical data really says about the long-term returns likely to be provided by stocks purchased at times of high valuations. This is true to a point. But it is not entirely so. We have heard hundreds of Financial Freedom Community members express a desire to know the realities of what the historical data says. In any event, it is better for people who are over-invested in stocks to deal with whatever emotions they experience in learning that when they still have the option of selling some shares at good prices.

9) People will lose hope that they will be able to retire if we use accurate numbers in our retirement planning tools. Not so. The historical data shows that retirees willing to make adjustments in their stock allocations can obtain a safe withdrawal rate of 4 percent even with stocks at the valuation levels they are at today.

10) There’s a chance that the retirements that are being planned based on the flawed retirement planning tools will survive anyway. This is so. However, it does not justify telling aspiring retirees that withdrawal rates that are risky are safe. The words “safe” and “risky” are not synonyms. They are antonyms.

Mikey got it right.