Safe Withdrawal Rates
November 8, 2011
As a consequence, tests using US data should provide for relatively high SWRs from retirement savings. From an international perspective, the US enjoyed a particularly favorable climate for asset returns in the twentieth century, and to the extent that the US may experience mean reversion in the current century, SWRs as presently calculated may no longer seem so safe.
The results have shown that from an international perspective, a 4% withdrawal rate has been problematic. The calculated SWR exceeds 4% in only three of the other 16 countries: Canada, Sweden, and Denmark. As for other countries, the most unfortunate retiree of all was a Japanese person retiring in 1940, whose maximum SWR was a miserably low 0.47% as high inflation and low real returns plagued Japan during and after the war. Six countries experienced withdrawal rates below 3%: Spain, Italy, Belgium, France, Germany, and Japan. In Italy, the 4% rule failed 62.5% of the time, and in Japan, such high withdrawals were sustainable for only three years in the worst-case scenario.
For stock allocations between 30% and 90%, the US enjoyed higher SWRs than any country except for Canada. For the US, the maximum occurs at 57% to 60% stocks, but unlike many of the countries that show a much more pointed hump, the maximum is only slightly less for stock allocations between about 30% and 80%. Except for Switzerland, retirees in the various countries were generally better off when holding at least 50% of their savings in stocks.
Safe withdrawal rates did not derive their safety from conservative asset allocations.
In several ways, my assumptions provide an overly optimistic view of withdrawal rates. In each year for each country, I assumed that retirees have the perfect foresight to choose the specific fixed asset allocation among their country’s stocks, bonds, and bills that would provide the highest withdrawal rate. Relaxing this assumption, for instance, and instead using a 50/50 asset allocation for stocks and bonds across the board would cause the 4% rule to fail at least once in every country. I also assumed that retirees do not have to pay any portfolio management or advisor fees from their assets beyond what they otherwise withdraw for their expenses.
On the other hand, researchers have demonstrated that including more financial assets, using dynamic rules to adjust withdrawals to market conditions, and changing rebalancing strategies can all serve to increase SWRs, and these modifications have not been incorporated here. Furthermore, some of the worst outcomes were connected with World Wars I and II, and investors who are confident that world war is a relic of the past may feel comfortable ignoring those cases, or may at least assume that during World War III retiring comfortably would be the last thing on their mind.
These findings may be rather frightening. After all, who but the wealthiest could possibly save enough to live comfortably using the SWR of 0.47% based on global historical data? From the perspective of a US retiree, the issue is whether the future we will experience the same asset return patterns as in the past, or whether Americans should expect mean reversion that would lower asset returns to levels more in line with what many other countries have experienced. It may be tempting to hope that asset returns in the twenty-first century US will continue to be as spectacular as in the last century, but it should not be casually assumed.
Wade Pfau, Ph.D., CFA, is an associate professor of economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan. He maintains a blog about retirement planning research at wpfau.blogspot.com
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
