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Can We Predict the Sustainable Withdrawal Rate for New Retirees?

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  • Pfau, Wade Donald

Abstract

I investigate how well market valuation and yield measures predict the maximum sustainable withdrawal rate (MWR) that a person can use with their retirement savings to obtain inflation-adjusted income over a 30-year period. The regression framework includes variables to predict long-term stock returns, bond returns, and inflation (the components driving a retiree's remaining portfolio balance). It produces estimates that fit the historical data well. This study suggests that a 4 percent withdrawal rate cannot be considered as safe for U.S. retirees in recent years when the cyclically-adjusted price-earnings ratio has experienced historical highs and the dividend yield has experienced historical lows. Nevertheless, there are important qualifications for these predictions. Most importantly, they depend on out-of-sample estimates as the circumstances of the past 15 years have not been witnessed before. Readers persuaded by this analysis may wish to include TIPS and other assets as a part of their portfolios, and recent retirees should closely monitor their spending and portfolio balance. Maintaining flexibility with retirement spending is important. More generally, this framework can guide new retirees toward a reasonable range for their expected MWR so that the 4 percent rule need not be blindly followed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30877.

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Date of creation: 12 May 2011
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Handle: RePEc:pra:mprapa:30877

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Related research

Keywords: safe withdrawal rates; retirement planning; market valuation; price-earnings ratio; dividend yield; stock returns; bond returns;

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References

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  1. Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Can We Predict the Sustainable Withdrawal Rate for New Retirees?
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-05-16 06:58:00
  2. Can We Predict the Sustainable Withdrawal Rate for New Retirees? Supplemental Materials
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-05-10 04:23:00
  3. Safe Withdrawal Rates and Retirement Date Market Conditions
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-04-11 05:42:00
  4. Lower Future Returns and Safe Withdrawal Rates
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-04-13 02:40:00
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Cited by:
  1. Pfau, Wade Donald, 2011. "Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation," MPRA Paper 35329, University Library of Munich, Germany.
  2. Pfau, Wade Donald, 2011. "Retirement Withdrawal Rates and Portfolio Success Rates: What Can the Historical Record Teach Us?," MPRA Paper 31122, University Library of Munich, Germany.
  3. Finke, Michael & Pfau, Wade Donald & Williams, Duncan, 2011. "Spending flexibility and safe withdrawal rates," MPRA Paper 34536, University Library of Munich, Germany.
  4. Pfau, Wade Donald, 2011. "Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work," MPRA Paper 31900, University Library of Munich, Germany.

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