Is It Now the “3.3% Rule”?

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Recently a highly respected financial publisher issued a research paper claiming that the “safe” withdrawal rate from tax-advantaged retirement portfolios could be as low as 3.3%, due to the high valuations of financial investments. As you may know, as an outcome of ongoing research, I recently increased my estimate of the “worst-case” withdrawal rate to 4.7% (for a 30-year time horizon).

How do we make sense of these two widely disparate results?

In the recent past, there have been other claims of low safe withdrawal rates, some less than 3%, made by researchers for whom I have a great deal of respect. What has been lacking in support of these claims are “scenarios”: illustrations of year-by-year assumptions of returns, CPI, and dollar withdrawals, so I could examine the prognostication in detail. These are the bread-and-butter elements of my “deterministic” historical approach but are apparently not so easy to produce using Monte Carlo methods, by which these much lower withdrawal rates have been generated.

Fortunately, in this instance, the author of the study very kindly responded to my request for further information and sent me the spreadsheets used in their simulations. I am very grateful for this, as it allows me to examine the details of their work and discover, finally, why my results differ so much from theirs.