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

Pfau, Wade D.
May 2011
Journal of Financial Planning;May2011, Vol. 24 Issue 5, p42
Academic Journal
• Focusing on a "safe withdrawal rate" and then deriving a "wealth accumulation target" to achieve by the retirement date may not be the best way to approach 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 that proves sufficient to sup- port the desired retirement expenditures from a life-cycle 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 being overly conservative. Unlike the 4 percent rule for a safe withdrawal rate, 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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