The Fiction of Safe Withdrawal Rates

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Safe: adjective; protected from or not exposed to danger or risk

We all agree what the word “safe” means. That’s not the case, however, when that word is used in the context of withdrawals from a retiree’s investment portfolio. In that context, safe elicits a wide variety of definitions, from 4% or more all the way to my definition: There is no safe withdrawal rate.

In a November 2021 article, I explained why, in practice, the safe withdrawal rate is a fiction:

There is a fatal flaw that underlies the hundreds or thousands of analyses and academic papers that have been written (about the safe withdrawal rate). All are based upon “backtesting” to justify the 4% rule: All of them assume that the investor never sells any of the investments. Think back over your own experience. During a period of significant market declines or extreme volatility, has fear ever driven you to sell some of your own investments? If you’re a financial advisor reading these words, I ask you, Does the “never sell” assumption align with your own experiences with clients?

In a May 2020 article in USA Today, Bill Bengen, the originator of the 4% rule, pointed to historically high equity valuations and inflation as reasons retirees should reduce withdrawals below 4%. In anticipation of a likely recession, Bengen also advised retirees to reduce their exposure to stocks and bonds. Bengen was giving good advice. But the selling of securities, however advisable, was never an assumption baked into the calculations governing the determination of a safe withdrawal rate.

By October 2020, Bergen’s perspective on the safe withdrawal rate changed. He identified 4.5% as the maximum safe withdrawal rate for retirees at that time.