The New Consensus That the Safe Withdrawal Rate Studies Are in Error Is the First Step Toward Far Bigger Discoveries


Valuation-Informed Indexing #149

by Rob Bennett

I put my famous post to the Motley Fool’s Retire Early board reporting on the errors in the Old School safe withdrawal rate studies on the morning of May 13, 2002. It would be fair to say that some of the biggest names in the field have questioned my sanity re that one in the 11 years since.

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On March 1, 2012, I enjoyed some long-deferred vindication in the form of an article in the Wall Street Journal titled Say Goodbye to the 4 Percent Rule. Yippie! I won! It’s over! We can all move on!

Not quite.

It’s over and it’s not over at the same time.

The intellectual battle is certainly over. When things have reached a point where one of the most influential newspapers in the world (and one that focuses on investing issues to boot) is saying that the Old School studies are dangerous, it truly is over for the Old School studies. No one is going to be pushing these studies as studies that provide helpful retirement guidance in years to come. That’s a very important step forward.

But I have followed this issue too long to believe that this article settles the matter.

The debate over whether it is necessary to take valuations into consideration when calculating the safe withdrawal rate has never been an intellectual debate. Intellectually, it was always as simple as determining the sum of two plus two to figure out that the Old School safe withdrawal rate studies were in error. Shiller showed with research produced in 1981 that valuations matter. The Old School studies don’t consider valuations. So the Old School studies get the numbers wrong. It didn’t take us 11 years to figure out that one.

What is has taken us 11 years to do is to come to begin to come to terms with what Shiller has taught us with his revolutionary research.

Knowing that valuations matter changes everything that we once thought we knew about how stock investing works. Everything. It’s not possible to overstate how big a change we are talking about here.

I talk about the implications in all my writings. I am the only one I know who does that. But all of us sense how big a deal this is.

I know this because I watch to see how people react to my writings. People react warily. People see that something big is at stake. But they hold back from saying so themselves because —

Well, because humans fear change.

This is a very positive change. We shouldn’t fear it. But we do. It’s in our nature to like stability. And this one turns everything upside down. So it is going to take some more time for us to come to terms with the realities that I have been trying to put before people’s eyes for eleven years now.

I’ll share with you the text of an e-mail that I wrote to the author of the Wall Street Journal article, Kelly Greene. The e-mail points to the follow-up points that the Wall Street Journal (and lots and lots of other newspapers, to be sure) need to explore before we can truly say that we have as a society put the safe withdrawal rate saga to rest.


My name is Rob Bennett. My bio is here.

Congratulations on your article “Say Goodbye to the 4% Rule for Retirement.” This is important stuff.

There’s another story here — the story of why this is only coming out now (I have been writing about the errors in the Old School safe withdrawal rate studies going back to May 2002). The problem with the old studies is that they do not adjust the safe withdrawal rate for valuations. The same error is made in all other areas of investing analysis.

The error carries over from the days when there was a widespread belief in the Efficient Market Theory (EMT). If the EMT were legitimate, the Old School SWR  studies would work. Yale Economics Professor Robert Shiller discredited the EMT with his 1981 research showing that valuations affect long-term returns. If valuations matter (there is now 32 years of peer-reviewed academic research confirming Shiller’s 1981 finding), it is not possible to make ANY investment decision without taking the valuation level that applies at the time the choice is being made into account.

For example, a regression analysis of the historical return data shows that the most likely 10-year annualized return in 1982 was 15 percent real. In 2000, the number was a negative 1 percent real. There is no one stock allocation that makes sense in both sets of circumstances. Those who follow Buy-and-Hold strategies (strategies in which the investor keeps his stock allocation stable at all times) are thereby permitting their risk profile to get wildly out of whack. Investors must CHANGE their stock allocations in response to big shifts in valuations to have any realistic hope of long-term investing success.

I have a calculator at my web site (“The Retirement Risk Evaluator”) that identifies the SWR that applies at all possible P/E10 levels.

I also have a calculator (“The Stock-Return Predictor”) that performs the regression analysis needed to identify the most likely annualized 10-year return starting from any possible P/E10 level.

I have done research with Wade Pfau showing that investors who take valuations into consideration when setting their stock allocations thereby reduce the risk of stock investing by 70 percent (Please see the graphic on Page 11 which shows that the Maximum Portfolio Drawdown drops from 60 percent to 20 percent for investors who take valuations into consideration). The reason why we have as a society not yet moved away from promotion of Buy-and-Hold strategies is not that the research-supported case is not strong. It is that this change is so big that it is hard for those who are schooled in the conventional thinking to accept the far-reaching (and very exciting) implications of the change.

Please let me know if you have any questions.

I wish you the best of luck in all your future endeavors.


Rob Bennett has recorded a podcast titled “Passive Investing Is the Most Emotional Investing Strategy of Them All.”  His bio is here. 

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