Saturday, November 19, 2011

How Much is Too Much? (Wall Street Journal)

Kelly Greene's new article, "How Much Is Too Much?" does an effective job surveying the uncertainties surrounding sustainable retirement withdrawal rates in recent years. I'm honored to have my research be included in her review.  And also I'd like to thank Michael Kitces for sharing my research with her. Kelly even links here.  For readers looking for the spreadsheet she mentions, you can find further descriptions about what you need to know to use it as well as the actual spreadsheet here.

This can also be a good chance for me to give a quick overview about a couple of important issues related to the themes of Kelly Greene's article

I've been pursuing three different research approaches about how Americans should get use to lower withdrawal rates in the future. One of these is what Kelly discusses. 

A second one is my review of safe withdrawal rates for 17 countries from the December 2010 Journal of Financial Planning, in which I argue that Americans enjoyed a rather remarkable 20th century, and the 4% rule may partly be an accident of American history.  It didn't work nearly as well in most other countries, and perhaps we shouldn't expect it to continue working so well in the future.  I summarize this research in a column at Advisor Perspectives

The third approach is looking at how quickly Americans retiring in 2000 have been burning through their savings compared to retirees at other points in history.  This is actually related to the research Kelly discusses from T. Rowe Price.  I will have an article about this coming out in the Winter 2011 Journal of Investing, and for now you can see a working paper version about this. As well, this article is somewhat more brief and summarizes these three above approaches as well. [Note, for these research article links, you need to follow the links to download the article as a PDF. They are available and free of charge]. Todd Tresidder (Financial Mentor) has also written an excellent overview of issues related to safe withdrawal rates.

But at the same time, while the above is all doom and gloom, researchers Michael Finke and Duncan Williams at Texas Tech University helped persuade me to the notion that it isn't necessarily the "end of the world" if one runs out of savings.  It depends on how flexible one can be with their spending and on how much guaranteed income they will still have from other sources.  I explained their initial research findings in a column at Financial Advisor, and now I have combined forces with them to write a research article about this theme

Just this week, Doug Nordman (Military Retirement and Financial Independence blog) wrote what I thought was an excellent article combining these issues from my research about how the 4% rule may fail but also how that may not always be so terrible.

As well, if you've never heard of me, please let me introduce you to my research on "safe savings rate."  I argue that traditional retirement planning, which focuses on safe withdrawal rates and wealth accumulation targets, is misguided. One should instead focus on their savings rate.  The reason is related to how market valuations fluctuate so much over time, and to how difficult it actually is to know if you are on track to meeting a wealth accumulation target even just a few years away.  So focus on what you can control rather than on what you can't control.

My research articles from the Journal of Financial Planning which discuss this are "Safe Savings Rates" and "Getting on Track for a Sustainable Retirement."  Not everyone wants to read research articles, and some columnists who wrote great introductions about these ideas include Felix Salmon and Dan Moisand (for safe savings rates) and Matthew Amster-Burton (for getting on track). I also wrote another column called "Retirement Planning and Worst-Case Scenarios" for Advisor Perspectives which gives my further thoughts about how to think about the possibility that things may be worse for future retirees than anything we've experienced before in the U.S.

This week in Advisor Perspectives I wrote a column expressing my concerns about whether an all-TIPS portfolio may be a viable alternative for retirement savers. I will also publish a research article in the January 2012 JFP which synthesizes my views about how one can put all of these concerns together and create a "do it yourself" safe withdrawal rate. Since it is not published yet, that link is to the draft version.

Finally, I also highly recommend blogs by the Oblivious Investor and Bob Seawright for more background on retirement planning. The Oblivious Investor explains investing issues very well and has written a short book helping many people prepare for retirement, and Bob Seawright emphasizes the important role of annuities to help reduce some of the anxieties that may come with planning for the unknown.


  1. Thanks very much for linking to my column, Wade. Not only did I enjoy writing about your research, but it's been helpful in my own retirement planning.

  2. No problem, Matthew. Thanks again for writing an excellent column.