Pfau, Wade Donald (2011): Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle.
Download (314kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle|
|Keywords:||safe withdrawal rates; retirement planning; lifetime perspective; safe savings rate; wealth accumulation targets; retirement spending goals; SAFEMAX; SAFEMIN|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S.; Canada: 1913-
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General
N - Economic History > N2 - Financial Markets and Institutions > N21 - U.S.; Canada: Pre-1913
D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance
|Depositing User:||Wade D. Pfau|
|Date Deposited:||14. Feb 2011 20:36|
|Last Modified:||12. Feb 2013 14:55|
Bengen, William P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7, 4 (October): 171-180.
Bengen, William P. 2006. Conserving Client Portfolios During Retirement. Denver: FPA Press.
Bogle, John C. 2009. Enough: True Measures of Money, Business, and Life. Hoboken, New Jersey: John Wiley and Sons.
Dimson, Elroy, Paul Marsh, and Mike Staunton. 2004. "Irrational Optimism." Financial Analysts Journal 60, 1 (January/February): 15-25.
Guyton, Jonathan T. 2004. "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?" Journal of Financial Planning 17, 10 (October): 54-62.
Ibbotson, Roger, James Xiong, Robert P. Kreitler, Charles F. Kreitler, and Peng Chen. 2007. "National Savings Rate Guidelines for Individuals." Journal of Financial Planning 20, 4 (April): 50-61.
Jacobs, David B. 2006. “Is Failure an Option? Designing a Sound Withdrawal Strategy.” Unpublished Draft Paper (October).
Kitces, Michael E. 2008. "Resolving the Paradox - Is the Safe Withdrawal Rate Sometimes Too Safe?" The Kitces Report (May).
Kotlikoff, Laurence J. 2008. “Economics’ Approach to Financial Planning.” Journal of Financial Planning 21, 3 (March).
Pfau, Wade D. 2010a. "Lifecycle Funds and Wealth Accumulation for Retirement: Evidence for a More Conservative Asset Allocation as Retirement Approaches." Financial Services Review 19, 1 (Spring): 59-74.
Pfau, Wade D. 2010b. “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?" Journal of Financial Planning 23, 12 (December): 52-61.
Pfau, Wade D. 2010c. "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).
Pfau, Wade D. 2010d. "Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures." Munich Personal RePEc Archive Paper #27487 (December).
Pfau, Wade D. 2011. "The Portfolio Size Effect and Lifecycle Asset Allocation Funds: A Different Perspective." Journal of Portfolio Management 38, 1 (Fall): forthcoming.
Schleef, Harold J., and Robert M. Eisinger. 2011. "Life-Cycle Funds: International Diversification, Reverse Glide Paths, and Portfolio Risk." Journal of Financial Planning 24, 1 (January): 50-58.
Available Versions of this Item
- Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle. (deposited 14. Feb 2011 20:36) [Currently Displayed]