This nightmare scenario of high inflation and low returns would have required an initial withdrawal rate of 3.6% to sustain the portfolio over 30 years. Had it been real, it would have redefined “SAFEMAX” (currently 4.5%) for the high-inflation regime.
Past Behaviors Into The Future
As I am sure the reader of this article is painfully aware, no overarching theory of finance exists that would allow us to predict the movement of markets, inflation, currencies or any of the other quantities so critical to our clients’ retirement plans. The methods of analysis and correction I have presented here depend on the continuation of past behaviors into the future. Over the last eight years, investors and retirees have enjoyed the dual benefits of strong returns from financial assets and low inflation. It would be hubris to assume these conditions are permanent, and we must be alert to circumstances that may supersede, or invalidate, our previous experience. Thus, please use my recommendations with care.
William Bengen is a retired financial advisor who first conceived the 4.5% SAFEMAX withdrawal rate. He lives in La Quinta, Calif.