Click here to read the "Rethinking Retirement" Whitepaper.

Recent research that Dr. Wade Pfau and I have conducted finds that investors retiring as of January 1, 2015, who pursue a traditional 4% withdrawal rate from their savings to fund retirement have a more than 50% chance of outliving their savings. Last month in Financial Advisor, we detailed our research on safe withdrawal rates for retirees and the findings that could disrupt the current idea about what savings can safely be generated during a person’s retirement. Taking into account the person’s investment decisions, the real safe withdrawal rate is much closer to 2% and could be lower.

But we also believe that understanding investor behavior is key to understanding the withdrawal figure.

How many of your clients fear outliving their money, and how many of them fear dying? In a recent national survey of more than 1,100 retirees and pre-retirees between the ages of 50 and 65, the fear is resounding: More than 70% of these respondents fear outliving their assets, while only 30% fear dying. Simply stated—investors had tremendous anxiety about the prospect of outliving their funds.

It’s important to show your clients that the fears of dying and outliving assets are essentially in conflict, and you must address these concerns as you frame the situation for them and show them how their spending and investing patterns will allay their fears and affect outcomes.

Another critical psychological consideration is where your clients are today, after two major market corrections in the past 15 years, the largest housing market collapse in over 75 years and the deepest recession since the Great Depression. In this type of environment, are they seeking more risk or less risk?

We found—again, overwhelmingly—that investors in this age group are considerably more conservative about investment risk than they were 10 years ago.

Our firm, WealthVest, became fascinated with the literature on sustainable withdrawal rates in late 2014. The U.S. 10-year Treasury bond yield slipped below 2%. Before the current turmoil, U.S. interest rates had dropped below 2% only one time in the past 145 years, in 1941. Since 2013, worldwide interest rates have been at nearly unprecedented lows. The German bund yield for a 10-year maturity fell below 0.5%.

Conversely, the U.S. equity market in late 2014 was at record highs (expressed in terms of the Shiller CAPE PE 10 ratio)—levels seen only in 1929, from 1998 to 2000 and from 2007 to 2008.

Of course, someone retiring when valuations are this high would be cursed with a high likelihood of negative returns, plus 10-year average annual returns far below long-term market averages. Likewise, someone would be fortunate—and, therefore, able to justify very high safe withdrawal rates—when bonds had high yields and stock PE ratios were low (suggesting there would be long-term above-average appreciation).

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