Pfau, Wade Donald (2010): Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures.
Download (458kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures|
|Keywords:||safe withdrawal rates, retirement planning, market valuation, price-earnings ratio, dividend yield. stock returns, bond returns|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C20 - General
N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S.; Canada: 1913-
D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance
|Depositing User:||Wade D. Pfau|
|Date Deposited:||17. Dec 2010 00:54|
|Last Modified:||12. Feb 2013 15:15|
Arends, Brett. 2010. "Warning: Retirement Disaster Ahead." Wall Street Journal (October 27).
Arnott, Robert D. 2004. "Sustainable Spending in a Lower-Return World." Financial Analysts Journal, vol. 60, no. 5 (September/October): 6-9.
Bengen, William P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning, vol. 7, no. 4 (October):171-180.
Bengen, William P. 2006. Conserving Client Portfolios During Retirement. Denver, CO: FPA Press.
Bennett, Rob. 2010. "The First Retirement Calculator That Gets the Numbers Right." Google Knol. Available from http://knol.google.com/k/rob-bennett/the-first-retirement-calculator-that/1y5zzbysw7pgd/5# (Accessed on September 27, 2010).
Bob’s Financial Website. 2008. "SWRs versus Returns." Available from http://www.bobsfinancialwebsite.com/ReturnsVsSWRs.html (Accessed on September 27, 2010).
Britten-Jones, Mark, Anthony Neuburger, and Ingmar Nolte. 2010. "Improved Inference and Estimation in Regressions with Overlapping Observations." The Review of Financial Studies. forthcoming.
Campbell, John Y., and Robert J. Shiller. 1998. "Valuation Ratios and the Long-Run Stock Market Outlook." Journal of Portfolio Management, vol. 24 , no. 2 (Winter):11-26.
Dimson, Elroy, Paul Marsh, and Mike Staunton. 2004. "Irrational Optimism." Financial Analysts Journal, vol. 60, no. 1 (January/February):15-25.
Fullmer, Richard K. 2008. “The Fundamental Differences in Accumulation and Decumulation.” Journal of Investment Consulting, vol. 9, no. 1 (2008): 36-40.
Greaney, John. 2002. “Safe Withdrawal Rates and P/E Ratios.” Available from http://www.retireearlyhomepage.com/pestudy1.html (Accessed on December 8, 2010).
Kitces, Michael E. 2008a. "Resolving the Paradox - Is the Safe Withdrawal Rate Sometimes Too Safe?" The Kitces Report (May).
Kitces, Michael E. 2008b. "Is the Safe Withdrawal Rate too safe? Or too aggressive!?" Available from http://www.kitces.com/blog/index.php?/archives/29-Is-the-Safe-Withdrawal-Rate-too-safe-Or-too-aggressive!.html (Accessed on September 27, 2010).
Otar, Jim C. 2009. Unveiling the Retirement Myth: Advanced Retirement Planning Based on Market History. Thornhill, Ontario: Otar & Associates.
Pfau, Wade D. 2010a. “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?" Journal of Financial Planning, vol. 23, no. 12 (December):52-61.
Pfau, Wade D. 2010b. "Will 2000-Era Retirees Experience the Worst Retirement Outcomes in U.S. History? A Progress Report after 10 Years." Munich Personal RePEc Archive Paper #27107 (November).
Russell, John W. undated. "Safe Withdrawal Rates versus Valuations." Available from http://www.gummy-stuff.org/JWR.htm (Accessed on September 28, 2010).