Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle
Focusing on a “safe withdrawal rate” and then deriving a “wealth accumulation target” to achieve by the retirement date is the wrong way to think about retirement planning. Such a formulation isolates the working (accumulation) and retirement (decumulation) phases. When considered together, the lowest sustainable withdrawal rates (which give us our idea of the safe withdrawal rate) tend to follow prolonged bull markets, while the highest sustainable withdrawal rates tend to follow prolonged bear markets. The focus of retirement planning should be on the savings rate rather than the withdrawal rate. The “safe savings rate” may be based on historical simulations as the savings rate which proves sufficient to support the desired retirement expenditures from a lifecycle perspective including both the accumulation and decumulation phases. Safe savings rates derived in this manner are less volatile than withdrawal rates and imply a lower ex-post cost to having been overly conservative. Unlike the 4 percent rule, there is not a universal "safe savings rate," but guidelines can be created. Starting to save early and consistently for retirement at a reasonable savings rate will provide the best chance to meet retirement expenditure goals. Actual withdrawal rates and wealth accumulations at retirement may be treated as almost an afterthought in this framework. But the savings plan should be adhered to regardless of whether it seems one is accumulating either more or less wealth than is needed based on traditional criteria.
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- Wade D. Pfau, 2009.
"Lifecycle Funds and Wealth Accumulation for Retirement:Evidence for a More Conservative Asset Allocation as Retirement Approaches,"
GRIPS Discussion Papers
09-15, National Graduate Institute for Policy Studies.
- Wade D. Pfau, 2009. "Lifecycle Funds and Wealth Accumulation for Retirement: Evidence for a More Conservative Asset Allocation as Retirement Approaches," GRIPS Discussion Papers 10-10, National Graduate Institute for Policy Studies, revised Sep 2010.
- Pfau, Wade Donald, 2010. "Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures," MPRA Paper 27487, University Library of Munich, Germany.
- 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.
- Wade D. Pfau, 2010. "The Portfolio Size Effect and Lifecycle Asset Allocation Funds: A Different Perspective," GRIPS Discussion Papers 10-11, National Graduate Institute for Policy Studies.
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