Tuesday, August 2, 2011

Presentation on Safe Savings Rates

In June, I enjoyed the opportunity to present about "safe" savings rates to the Society of Financial Service Professionals.  I thought I'd provide a link for my presentation slides. These slides also include a few figures and results that I could not fit into the original paper.

While on the issue, one point about safe savings rates that I do try to emphasize a lot but still have trouble communicating properly is that it doesn't incorporate any safe withdrawal rate.  Dan Moisand's new column in the July 2011 issue of Financial Advisor communicates this point rather well, I thought.  Here is the description from his article:

The savings rates required to accumulate enough to employ the 4% rule were every bit as volatile as the differing withdrawal rates. They ranged from 10.89% to 37.7%. If markets did well during retirement, less was needed to start the final 30 years, and if markets were poor, more was needed. When Pfau noticed that the periods of high required savings corresponded to periods where far less was actually needed during the subsequent retirement, he abandoned the 4% number and used actual retirement results to determine the needed savings. The volatility of the needed savings amount dropped significantly.

Related to this, I do very much acknowledge a caveat that we could experience a new worst-case scenario that leads to a new higher "safe" savings rate.  This could make abandoning the 4% rule more scary.  In recent years, this issue hasn't been relevant, as we have been experiencing the situation where "safe" savings rates will call for using a low withdrawal rate (at its lowest, the "safe" savings rates approach indicates that a 2000 retiree use a 2.7 percent withdrawal rate), rather than a high withdrawal rate like the 9.06% for 1921 retirees. I had an opportunity to discuss more about worst-case scenarios in a recent article for Advisor Perspectives.