Can We Predict the Sustainable Withdrawal Rate for New Retirees?

Wade Pfau

MPRA Paper from University Library of Munich, Germany

Abstract: I investigate how well market valuation and yield measures predict the maximum sustainable withdrawal rate (MWR) that a person 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 a 4 percent withdrawal rate cannot be considered as safe for U.S. retirees in recent years 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 as a part of their portfolios, and recent retirees should closely monitor their spending and portfolio balance. 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.

Keywords: safe withdrawal rates; retirement planning; market valuation; price-earnings ratio; dividend yield; stock returns; bond returns (search for similar items in EconPapers)
JEL-codes: C15 C20 D14 G11 N22 (search for similar items in EconPapers)
Date: 2011-05-12
New Economics Papers: this item is included in nep-age
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Citations: View citations in EconPapers (6)

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