No. of Recommendations: 18
both explains the 4% rule and revises it upward to 4.7%...
Lovely omen of a secular market top?
The safe withdrawal rate is founded foursquare on the likely forward returns from the investments within it. Broad US market prices are (depending on the metric) either at or very near their most expensive ever and real bond rates are pretty low. So, there are reasonable discussions to be had about the best way to calculate a safe or appropriate withdrawal rate, but no matter which way you do it, the number you arrive at today should be near its lowest ever for.
My own view is different, in that I think living from a portfolio with ANY formulaic withdrawal amount is not very smart. Axiomatically, only a very small number of people will live to be VERY old, and therefore in aggregate it's perverse for 100% of the people to plan their investments against that scenario. Only pooled schemes for longevity risk make sense.
My baseline view of the optimal approach goes like this:
* Estimate your life expectancy. Maybe add a couple/few years. Say you come up with 88.
* Put aside around 10-20% of your money (this can be estimated), in inflation-protected government bonds maturing then.
* Spend the rest of your money more or less in a straight line so that you run out of cash around age 88. No need to sit in cash, stay invested in tings with positive real returns: if it runs out a bit early, just skip to next step.
* When the big pile has run dry, around the time that the bonds mature, put that reserved money into an immediate annuity. At age 88 (or whatever), immediate annuities have pretty big payout rates.
It's not too hard to estimate what fraction you have to put aside so your real annual consumption is flat between the two eras. If you die before your target switchover date the cost of the annuity is still in your estate, unlike with a deferred annuity purchased immediately. Your income is very much higher in both withdrawal and annuity eras than even the most risky/high-rate version of SWR will allow, while having zero instead of low risk of running out of money.
Jim
