Bloomberg BusinessWeek just came out with a story by Chris Farrell that refers to “three scholarly articles” I have written. I think the article is very well done, and I thought I would summarize the three articles he has in mind with that reference.
In the last few months, I’ve written three articles about retirement withdrawal rates which each use a different methodology, but all arrive at the same general conclusion. That is, recent retirees in the U.S. are in danger of experiencing maximum sustainable withdrawal rates that fall below the 4% rule of thumb that most financial planners consider to be safe.
The first of these papers I finished at the start of September, but thanks to the amazing speed of the Journal of Financial Planning, it is already published. I really have to give that journal credit. They received my paper on September 1, gave me pre-review comments several days later, provided me with 3 full referee reports after only one month (one of those referee reports was particularly full of excellent comments), and then after accepting my revised article got everything prepared so that it was published on December 1st. They are also allowing it to be freely downloaded from their webpage (at least during December). I wish other academic journals could follow their lead (for many journals, it is normal to wait several years between submission and publication), but that’s another matter. This article is:
Pfau, W. D., “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?" Journal of Financial Planning. Vol. 23, No. 12 (December 2010). 52-61.
If that link stops working, you can also find the article here:
It argues that from an international perspective, the U.S. enjoyed particularly impressive asset returns in the twentieth century compared to other developed market countries. The 4% rule was safe in only 4 of these 17 countries, and even that was possible only with the use of particularly favorable assumptions. U.S. investors should not necessarily expect to have it so well looking forward.
The second article is:
Pfau, Wade D. "Will 2000-Era Retirees Experience the Worst Retirement Outcomes in U.S. History? A Progress Report after 10 Years." Munich Personal RePEc Archive Paper #27107. November 2010.
This article provides a progress report of where 2000 retirees stand 10 years after their retirement date compared to retirees in all the other years since 1926. I find that the rate of wealth depletion in nominal terms is higher for the 2000 retiree than pretty much for anyone else. While inflation has been relatively moderate since 2000, the rate of real wealth depletion is not the worst for the 2000 retiree, but this is hardly reassuring given how market fundamentals look 10 years after the retirement date.
And last but not least:
Pfau, Wade D. "Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures." Munich Personal RePEc Archive Paper #27487. December 2010.This article uses earnings valuations, dividend yields, and nominal bond yields to predict the maximum sustainable withdrawal rates for recent retirees. I find that a model using these 3 variables fits the historical data pretty well, and that the relationship seems to be based on something substantive and not just a spurious result. Using this model, I estimate that the maximum sustainable withdrawal rates will be very low for recent retirees.