Low interest rates and fully valued stocks may force advisors to throw the 4 percent safe-withdrawal rule out the window.

Ten-year Treasury bond rates have been under 2 percent only one time before, in 1941, while the 10-year cyclically adjusted P/E ratio for stocks is at the same level it was in 1929.

That “should suggest lower spending rates for retirees,” said Wade Pfau, professor of retirement income at The American College.

“I’m not saying the 4 percent rule won’t work, but it’s at a lot less than the 95 percent [confidence level] that the historical data suggest,” Pfau said of his recent research on withdrawal and market assumptions at Financial Advisor magazine’s seventh annual Inside Retirement conference in Dallas on Thursday.

With a 60/40 allocation, the safe rate for 30 years comes to 2.20 percent with a 10 percent chance of failure and a 1.93 percent withdrawal rate for a 5 percent chance of failure, he said.

Those estimates use a “lot of harmful assumptions” that drop the safe rate, Pfau said. He assumed that interest rates would move higher, toward historical averages and that equity returns would be lower than historical averages during the first 10 years of retirement. Pfau also adjusted for inflation and assumed fees of 1.6 percent.

“We’re not going to have the 4 percent [economic] growth like we had last century, so that puts the 4 percent rule under more stress,” said Pfau’s co-researcher, Wade Dokken, president and founder of WealthVest Marketing.

Safe withdrawal rates vary over time as the market valuations change, Pfau and Dokken said.

“It is the luck of the draw when that client turns 65” and retires, Dokken said. At the secular market low in 1982, a new retiree may have been able to withdraw 8 percent.

Drawing out less when portfolio values fall is a good way to help sustain longevity and reduce the deadly sequence-of-bad-returns risk, Pfau said.

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