Monday, February 11, 2013

Paper Poses New Withdrawal Rate Method
(Plansponsor, February 8, 2013)

Another paper on the same theme from Blanchett, Finke and Pfau (see "The 4 Percent Rule is Not Safe in a Low-Yield World).  While I applaud the work of these gentlemen in showing that using the 4% rule, or any other "safe" withdrawal rate may be dangerous, I find that the authors are simply demonstrating the weaknesses of relying on the Monte Carlo method to determine an initial withdrawal rate that is subsequently increased by inflation.  Yes, the assumptions they use for expected future experience are more sophisticated than those used in previous studies (they assume expected interest rates will rise in the future rather than remain constant).  But, even this more sophisticated model makes no adjustment for possible future experience that deviates from assumed experience (or actual spending).  In the Plan Sponsor article, Blanchett says, I acknowledge that this [model] may not be relevant in five years when bond yields are [assumed to be] higher." I also had to laugh when I read, "the average person running these [Monte Carlo] simulations is getting a falsely successful picture."  No average retiree I know is running Monte Carlo simulations in her spare time.

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