Wade Pfau has a white paper posted at FA Mag that pretty much blows up the 4% (retirement withdrawal rate) rule or attempts to anyway. Pfau lists several different factors for why 4% may prove to be too optimistic going forward including longer life spans (the 4% rule was originally conceived with a 30 year retirement and now 40 years may make more sense), the prospect for lower equity market returns (which may or may not happen) and historically low interest rates which we know we have but who knows how long they will remain low and various fees related to investing. No mention of taxes though.

Pfau looks at all sorts of portfolio permutations and for some context he finds that a 100% allocation to equities a safe withdrawal rate for a 30 year time horizon is 3.38% and 2.74% for a 40 year time horizon. With a 40% allocation to stocks the 30 and 40 year sustainable withdrawal rates are 2.1% and 1.49%.

1.49%? Get a grip, it is not that dire for a whole bunch of reasons. For a little context of my own, a 4% withdrawal rate invested in cash at zero percent will last 25 years. That is not a recommendation obviously as 4% of $X in 2040 would be worth a lot less than today (could easily be a 50% inflation haircut) but that point has helped conversationally to make the point.

A 4%withdrawal rate can still work but it has always been the case that 3.5% would be better and 3.0% would be better still. It is also not a good assumption to think you’ll never spend principal. If you have taxable accounts, a Roth IRA and a traditional IRA it likely will make sense to deplete an account for maximum tax efficiency and then move on to the next one which as I have said before will be uncomfortable at first.

A much bigger threat to financial plan success in my opinion are human factors related to poor decision making (panic selling after a large decline) and spending habits that are clearly unsustainable. Some folks will do all the right things but have some sort of bad luck (grown children who get into trouble or some sort of health event that requires going deep into savings) but like market results, bad luck is beyond any reasonable control.

Also missing was the idea that people adapt to whatever their financial reality becomes, many people do anyway. I’ve written hundreds of posts about people I’ve encountered who have adapted one way or another as well as sharing articles from others that also address different ways to adapt.

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