Sunday, April 22, 2012

A Closer Look at the Assumptions Behind Safe Withdrawal Rates (SWRs)

Table 2.4  A Closer Look at the Assumptions Behind Safe Withdrawal Rates (SWRs)    Assumption Changing the Assumption Causes SWRs to be… 1 U.S. historical data is sufficiently representative Lower 2 Investors earn index returns: no fees or underperformance Lower 3 Financial portfolio is tax-deferred Lower 4 No desire to leave a bequest or safety margin Lower 5 Planning horizon for 4% rule is 30 years Could go either way 6 Retirees always spend a constant inflation-adjusted amount Higher 7 Only a few asset classes are available Higher 8 Retirees do not adjust withdrawals based on market returns Higher 9 Retirees maintain a fixed asset allocation throughout retirement Higher 10 Goal of retirement is to minimize failure probabilities Higher


2 comments:

  1. Wade, I would like to see more explanation for your thoughts on some of these. Some of the causalities aren't obvious to me. Also, #10 could make a post in and of itself. For instance, it's my understanding that focusing on probability of failure leads to more aggressive asset allocation vs. considering probability AND CONSEQUENCES of failure.

    Thanks
    -Dan

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    Replies
    1. Thanks Dan,

      I am planning to explain more about all of these. Some I've already explained. About #10, please see here:

      http://wpfau.blogspot.jp/2012/04/rethinking-safe-withdrawal-rates.html

      and also the links from there.

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