Can We Predict the Sustainable Withdrawal Rate for New Retirees?

Pfau, Wade D.
August 2011
Journal of Financial Planning;Aug2011, Vol. 24 Issue 8, p40
Academic Journal
• This paper investigates how well market valuation and yield measures predict the maximum sustainable withdrawal rate (MWR) people can use with their retirement savings to obtain inflation-adjusted income over a 30-year period. • The regression framework includes variables to predict long-term stock returns, bond returns, and inflation (the components driving a retiree's remaining portfolio balance). It produces estimates that fit the historical data well. • This study suggests that, in projecting long-term sustainability for recent U.S. retirees, a 4 percent withdrawal rate cannot be considered safe when the cyclically adjusted price-earnings ratio has experienced historical highs and the dividend yield has experienced historical lows. • Nevertheless, there are important qualifications for these predictions. Most importantly, they depend on out-of-sample estimates, as the circumstances of the past 15 years have not been witnessed before. • Readers persuaded by this analysis may wish to include TIPS and other assets in their portfolios, and recent retirees should closely monitor their spending and portfolio balances. Maintaining flexibility with retirement spending is important. • More generally, this framework can guide new retirees toward a reasonable range for their expected MWR so that the 4 percent rule need not be blindly followed.


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