Friday, February 11, 2011

Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle

Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle
Wade Donald Pfau (National Graduate Institute for Policy Studies, February 11, 2011) 

 
Take-away for retirees and those close to retirement: If you saved 16.62% of pay each year for 30 years preceding retirement, are targeting a 30-year pay-out period, invested 60% equities/40% fixed income pre-retirement (and intend to keep this investment mix post-retirement with annual rebalancing), received pay increases each year equal to the increase in inflation, then historical data shows that you can withdraw whatever you need each year after retirement to have inflation adjusted income from accumulated savings of 50% of your final year's pay. The 16.62% figure refers to what was needed in the worst-case scenario from the historical data. If some of these assumptions don't apply, you need to make necessary adjustments in your withdrawal rate. Table 1 of Pfau's paper provides hints for adjusting for experience different from base assumptions.