Over a 40-year horizon, the highest rate is sustained with 40% stocks, though this spending rate has fallen to 1.55%. However, in the real world few retirees will accept a 10% chance of outliving their money.

Generally, accepting a higher chance for failure, with its accompanying downside risks, allows for more opportunity to seek the equity premium through a higher stock allocation. Nonetheless, with the 50% failure rate we can observe the actual best guess about the sustainable spending rate without building in any conservatism for the estimate.

With 100% stocks, it is 3.38% over 30 years and 2.74% over 40 years. Of course, those worried about outliving their assets will want to spend less initially so that they do not have a 50% chance of running out of retirement funds. Even though the retirement horizon is long, stocks have less opportunity to demonstrate a long run equity premium because of the sequence risk that causes the early market returns to weigh disproportionately on the ultimate retirement outcomes. Low interest rates, high stock market valuations and financial advisory fees all contribute to lower sustainable spending rates than implied by the 4% rule.



Conclusion
The dual impacts of sequence and longevity risk create a very real possibility with investments that one cannot support their desired lifestyle over their full retirement. These risks can be pooled in vehicles such as annuities, resulting in higher lifetime withdrawal rates. The alternative—retirees spending conservatively early in retirement or cutting back dramatically after sequence of return failure—is an option few of them desire.

The U.S. historical record has been used to estimate that 4% is a reasonably conservative initial spending rate to self-manage these risks. However, the analysis included here has suggested this is not the case, and that the 4% rule is significantly more risky for today’s retirees who face fees, low bond yields, high stock market valuations and increasing longevity expectations. The “safe withdrawal rate” is considerably lower for new retirees in 2015.

Wade Pfau, Ph.D., CFA is a professor of retirement income at the American College. Wade Dokken is the founder of WealthVest Marketing.
To see the white paper on which this article is based, as well as included footnotes, visit the September 2015 issue at www.fa-mag.com/news/retirement-
rethinking-22785.html?section=40
.

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