Despite the ubiquity of the issue in financial planning circles, most prospective clients I encounter have never heard of the 4 percent rule or “safe withdrawal rates”.  Those that have are often more anxious about retiring. 

In part, this is their nature. They are concerned so they dig into the matter of making their savings last and are exposed to the various takes on the subject. But, I also think some of the anxiety exists because many financial advisors frame the numbers from a perspective that induces fear.

It starts with simple things like terminology. The use of the term “safe withdrawal rate” naturally sets an expectation that there is an unsafe rate as well. Too often, the advisor fails to help out by not getting the client to see that if 4 percent is the “safe” rate, 4.1 percent is not really “unsafe”, its just slightly less safe. 

I run into a couple of folks every year that think that if they exceed the safe rate at all, they are endangering their financial security. Truly unsafe rates are much higher than the safe rates. 

The sample size is small but many of the most anxious people have read an article suggesting that the safe rate is below 4 percent. There are a number of studies that suggest such, many of which use equity valuations to assume below average equity returns or extrapolate current low interest rates over future retirements.

I don’t take any issue with most of these studies or their findings per se. They examined what they examined, the results were what they were, and they provide views from important angles. I take issue with using these lower estimates as a mandate to be extremely conservative and reduce spending early in retirement or postpone retirement.

Of course, just because something has never happened doesn’t mean it never will any more than something that has always happened can be counted on to always occur in the future. Nonetheless, a 4 percent starting rate increased for inflation, survived the worst-case historic scenario for plain vanilla, 50/50 large cap/intermediate government bonds mix annually rebalanced over 30-year time frames. 4 percent has never failed.

According to “What Returns Are Safe Withdrawal Rates REALLY Based Upon?”, by Michael Kitces on his Nerd’s Eye View blog, the worst cases, using publicly available Shiller data going back to 1871, actually had decent nominal average returns over the 30-year periods. There was no correlation between the average 30-year returns for stocks or bonds and the corresponding initial withdrawal rates.

It was the real returns over the first 15 years that was more telling. Correlation between the real returns over the first 15 years and the safe rates was quite high making today’s valuations and interest rates an important consideration. The average real return for the first 15 years of the four worst case scenarios averaged a mere .86 percent and one of them had a negative real return. It has taken far below average returns to create problems not merely weaker returns.

Worst case. That also means all other cases were better. How much so?  Bill Bengen used a 50/50 mix in his 1994 paper credited with the birthing the “4 percent rule” but the lowest initial withdrawal rate that worked from the 60/40 mix from the Shiller data was closer to 4.5 percent. The average safe starting rate was roughly 6.5 percent. 

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