Moreover, there was a 96 percent probability that starting at 4.5 percent resulted in a portfolio balance that was at least equal to the balance on day one of retirement even after 30 years of inflation adjusted withdrawals. The median balance after 30 years was 4.6X the initial balance. In inflation adjusted terms the ending value exceeded the start value in nearly 70 percent of the periods and the median result was 1.6X.
I’m not saying that a 4.5 percent starting rate will again end up being a safe rate over the next 30 years. No one knows that. Valuations are high and interest rates are low. Maybe the next thirty years will be the first in which that rate failed.
Still, the possibility of weaker returns due to valuations does not necessarily mean that we should advise a new 65-year-old retiree with $1,000,000 that they better spend less than $40,000 over their first year or they are endangering their financial security.
Typical safe withdrawal rate framing assumes more than just a set of returns.
First, it assumes a 30-year time frame. Yes, we are expected to live longer than our parents and grandparents on average but most people 65 and older are still not expected to survive 30 years. A significant number will, but they are still a minority.
Last year, I counselled a healthy 80-year-old widow who had stopped going out or playing golf. She cut back after reading an article that skipped the 30-year assumption when covering what a safe rate of spending would be. She had been spending about 4.8 percent of her nest egg, but the article scared her.
Now, she may live to be 110. She will surely try. But once she understood that what she had read omitted an assumption of a 30-year time frame, she went back to what she had been doing.
Second, of those that do survive 30 years, many will not be spending at the same inflation adjusted level at which they started retirement. Studies back up what I have seen anecdotally over the last quarter century advising retirees. Most people spend differently (more health care, less recreation for instance) and spend less as they age in real terms. Few need to increase spending in lockstep with inflation like the safe withdrawal studies usually assume.
Third, the safe withdrawal framework assumes no changes to spending are made regardless of how the portfolio does. That is just not how people behave. When accounts get hit hard by markets or even when they just muddle along, people adapt their spending to accommodate their wealth level.
During the 08/09 markets, many clients had reduced spending long before any numbers were crunched to assess to what extent that was a good idea. It was not us telling them they had to cut back. It just came instinctively and naturally to them to make that choice.