A Not So Safe Retirement Withdrawal Rate: Financial Advisors' Daily Digest

by: SA Gil Weinreich


Neal Frankle unpacks the question of a safe withdrawal rate for retirees.

Ronald Surz: Target-date fund objectives are duplicitous.

Lance Roberts thinks “the grand scheme of things” is too long a horizon for most investors.

Kudos to financial planner Neal Frankle, CFP, for his contribution to the safe withdrawal rate discussion in today's SA. In particular, I appreciate that he makes note of something that I find almost always goes unaddressed in these sorts of discussions: Specifically, that past performance is no guarantee of future returns.

Of course, that boilerplate warning is tacked on to every mutual fund prospectus. But when it comes to the subject of saving for retirement, it seems that the number crunchers assume that if the market produced X% with various investments over the past Y years, then it will do so again. I understand that the potency of the U.S. economy is virtually without precedent in the history of capitalism. But where is it written that in the case of the U.S., past performance does guarantee future returns? How is the U.S. exempt from history, whose key insight is specifically that things change?

That requires a certain flexibility and conservatism in financial planning. Here's how Neal addresses the past performance issue:

The studies that investigated safe inflation-adjusted retirement withdrawal rates are very helpful. But in truth, they are only a jumping-off point. First, remember that between 1926 and 2010, the domestic stock market did very well. It would be a mistake to assume that such stellar returns will be repeated. Second, interest rates are quite a bit lower now than they were over most of the period studied. Periods with similar interest rates were not modeled in these studies."

That means we may not be able to fully apply the lessons of the past to map out a secure future. Stop and think about what might happen to our reader if he invests in a 50-50 portfolio and needs to liquidate some of his fixed income portfolio just as rates climb. It's possible that both his fixed income and his equity would take a severe shellacking, cause his values to diminish quickly and therefore throw the entire survivability issue up in the air."

Let's cite just one issue to make this discussion more concrete: The financial commentariat's current expectation is reflation. That changes the game for retirement. If you want the classic 4% withdrawal, you need 6% returns (or higher, if the inflation rate goes north of 4%). Of course, until recently, the problem has been low yield. The point is that each period offers its unique challenges regarding withdrawal of income.

Read the whole article here to get other critical insights on these vexing questions. And get in touch if you have other questions you'd like our financial advisor contributors to consider addressing in their articles. Please share your thoughts on this topic, and herewith, a few advisor-related links on today's SA: