IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/27487.html
   My bibliography  Save this paper

Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures

Author

Listed:
  • Pfau, Wade Donald

Abstract

This study attempts to quantify whether a 4 percent withdrawal rate can still be considered as safe for U.S. retirees in recent years when earnings valuations have been at historical highs and the dividend yield has been at historical lows. We find that the traditional 4 percent withdrawal rule is likely to fail for recent retirees. The maximum sustainable withdrawal rate (MWR) for retirees may continue declining even after the peak in earnings valuations in 2000. Our lowest point estimate for an MWR with a 60/40 allocation between stocks and bonds is 1.46 percent for new retirees in 2008. We also discuss confidence intervals for these predictions. The regression framework with variables to predict long-term stock returns, bond returns, and inflation (the components driving the retiree's remaining portfolio balance) produces estimates that fit the historical data quite well, and we use backtesting for a further robustness check. Nevertheless, there are important qualifications for these predictions. In particular, they depend on out-of-sample estimates as the circumstances of the past 15 years have not been witnessed before, and there is always potential for structural changes which could leave recent retirees in better shape than suggested by the model. Looking forward, this methodology can guide new retirees toward a reasonable range for their MWR so that the 4 percent rule need not be blindly followed.

Suggested Citation

  • Pfau, Wade Donald, 2010. "Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures," MPRA Paper 27487, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27487
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/27487/1/MPRA_paper_27487.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Wade D. Pfau, 2010. "An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?," GRIPS Discussion Papers 10-12, National Graduate Institute for Policy Studies, revised Oct 2010.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Trinity Study Updates
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-04-01 17:46:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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.
    2. Pfau, Wade Donald, 2010. "Will 2000-era retirees experience the worst retirement outcomes in U.S. history? A progress report after 10 years," MPRA Paper 27107, University Library of Munich, Germany.
    3. 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.
    4. Meng, Channarith & Pfau, Wade Donald, 2011. "Retirement savings guidelines for residents of emerging market countries," MPRA Paper 31682, University Library of Munich, Germany.
    5. Jason Scott & John Watson, 2013. "The Floor-Leverage Rule for Retirement," Discussion Papers 13-013, Stanford Institute for Economic Policy Research.
    6. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2017. "Decumulation, Sequencing Risk and the Safe Withdrawal Rate: Why the 4% Withdrawal Rule leaves Money on the Table," Discussion Papers 17/06, Department of Economics, University of York.
    7. Jeffrey Brown & James Poterba & David P. Richardson, 2017. "Do Required Minimum Distribution Rules Matter? The Effect of the 2009 Holiday on Retirement Plan Distributions," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.
    8. Finke, Michael & Pfau, Wade Donald & Williams, Duncan, 2011. "Spending flexibility and safe withdrawal rates," MPRA Paper 34536, University Library of Munich, Germany.
    9. Meng, Channarith & Pfau, Wade Donald, 2011. "Safe withdrawal rates from retirement savings for residents of emerging market countries," MPRA Paper 31080, University Library of Munich, Germany.

    More about this item

    Keywords

    safe withdrawal rates; retirement planning; market valuation; price-earnings ratio; dividend yield. stock returns; bond returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27487. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.