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An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?

Author

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  • Wade D. Pfau

    (National Graduate Institute for Policy Studies)

Abstract

Numerous studies about sustainable withdrawal rates from retirement savings have been published, but they are overwhelmingly based on the same underlying data for US asset returns since 1926. From an international perspective, the United States enjoyed a particularly favorable climate for asset returns in the twentieth century, and to the extent that the US may experience mean reversion in the current century, "safe" withdrawal rates may be overstated in many studies. This paper explores the issue of sustainable withdrawal rates using 109 years of financial market data for 17 developed market countries in an attempt to provide a broader perspective about safe withdrawal rates, as financial planners and their clients must consider whether they will be comfortable basing decisions using the impressive and perhaps anomalous numbers found in the past US data. From an international perspective, a 4 percent real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided "safety" in 4 of the 17 countries. A fixed asset allocation split evenly between stocks and bonds would have failed at some point in all 17 countries.

Suggested Citation

  • Wade D. Pfau, 2010. "An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?," GRIPS Discussion Papers 10-12, National Graduate Institute for Policy Studies, revised Oct 2010.
    • Handle: RePEc:ngi:dpaper:10-12
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    File URL: https://grips.repo.nii.ac.jp/?action=repository_action_common_download&item_id=1033&item_no=1&attribute_id=20&file_no=1
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2010-09-21 09:18:00
    2. Three Scholarly Articles - BusinessWeek
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2010-12-18 19:46:00
    3. Safe Withdrawal Rate for a U.S. Retiree Invested in the World Developed Markets
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-04-18 08:24:00
    4. Trinity Study Updates
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-04-01 17:46:00
    5. The Shocking International Experience of the 4% Rule
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-05-05 11:31:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2017. "Decumulation, Sequencing Risk and the Safe Withdrawal Rate: Why the 4% Withdrawal Rule leaves Money on the Table," Discussion Papers 17/06, Department of Economics, University of York.
    2. Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.
    3. Jeffrey Brown & James Poterba & David P. Richardson, 2017. "Do Required Minimum Distribution Rules Matter? The Effect of the 2009 Holiday on Retirement Plan Distributions," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.
    4. Prendergast, Michael, 2022. "Econometric Models for Computing Safe Withdrawal Rates," OSF Preprints jd2xg, Center for Open Science.
    5. Meng, Channarith & Pfau, Wade Donald, 2011. "Retirement savings guidelines for residents of emerging market countries," MPRA Paper 31682, University Library of Munich, Germany.
    6. Pfau, Wade Donald, 2010. "Will 2000-era retirees experience the worst retirement outcomes in U.S. history? A progress report after 10 years," MPRA Paper 27107, University Library of Munich, Germany.
    7. Pfau, Wade Donald, 2011. "Retirement Withdrawal Rates and Portfolio Success Rates: What Can the Historical Record Teach Us?," MPRA Paper 31122, University Library of Munich, Germany.
    8. Finke, Michael & Pfau, Wade Donald & Williams, Duncan, 2011. "Spending flexibility and safe withdrawal rates," MPRA Paper 34536, University Library of Munich, Germany.
    9. Pfau, Wade Donald, 2010. "Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures," MPRA Paper 27487, University Library of Munich, Germany.
    10. Jason Scott & John Watson, 2013. "The Floor-Leverage Rule for Retirement," Discussion Papers 13-013, Stanford Institute for Economic Policy Research.
    11. Meng, Channarith & Pfau, Wade Donald, 2011. "Safe withdrawal rates from retirement savings for residents of emerging market countries," MPRA Paper 31080, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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