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Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle

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  • Pfau, Wade Donald

Abstract

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.

Suggested Citation

  • Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28796
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    File URL: https://mpra.ub.uni-muenchen.de/29599/2/MPRA_paper_29599.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Pfau, Wade Donald, 2010. "Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures," MPRA Paper 27487, University Library of Munich, Germany.
    3. 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.
    4. 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.
    5. Elroy Dimson & Paul Marsh & Mike Staunton, 2004. "Irrational Optimism," Financial Analysts Journal, Taylor & Francis Journals, vol. 60(1), pages 15-25, January.
    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. Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-02-11 10:19:00
    2. Safe Savings Rates & Current Withdrawal Rates
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-04-25 10:16:00

    Citations

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    Cited by:

    1. Wiafe, Osei K. & Basu, Anup K. & Chen, En Te, 2020. "Portfolio choice after retirement: Should self-annuitisation strategies hold more equities?," Economic Analysis and Policy, Elsevier, vol. 65(C), pages 241-255.
    2. Pfau, Wade Donald, 2011. "Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation," MPRA Paper 35329, University Library of Munich, Germany.
    3. Pfau, Wade Donald, 2011. "Can We Predict the Sustainable Withdrawal Rate for New Retirees?," MPRA Paper 30877, 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. 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.
    6. Pfau, Wade Donald & Kariastanto, Bayu, 2012. "An international perspective on “safe” savings rates for retirement," MPRA Paper 39066, University Library of Munich, Germany.
    7. Finke, Michael & Pfau, Wade Donald & Williams, Duncan, 2011. "Spending flexibility and safe withdrawal rates," MPRA Paper 34536, University Library of Munich, Germany.
    8. Pfau, Wade Donald, 2012. "Choosing a Retirement Income Strategy: Outcome Measures and Best Practices," MPRA Paper 39145, University Library of Munich, Germany.
    9. Steven James Lee, 2021. "Does Fixed Income Buffer against Fraud Shocks?," JRFM, MDPI, vol. 14(10), pages 1-22, October.
    10. Lu Fan & Richard Stebbins & Kyoung Tae Kim, 2022. "Skint: Retirement? Financial Hardship and Retirement Planning Behaviors," Journal of Family and Economic Issues, Springer, vol. 43(2), pages 354-367, June.

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    More about this item

    Keywords

    safe withdrawal rates; retirement planning; lifetime perspective; safe savings rate; wealth accumulation targets; retirement spending goals; SAFEMAX; SAFEMIN;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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