What’s Missing from the Wall Street Journal Article Saying “Goodbye” to the 4% Rule


Valuation-Informed Indexing #146

by Rob Bennett

I was happy to see the recent Wall Street Journal article saying “Goodbye” to the Old School safe withdrawal rate studies and the infamous 4 Percent Rule (the idea that it is safe for retirees to withdrawal 4 percent of their retirement portfolio each year regardless of the valuation level that applied on the day their retirement began). I have been writing about the dangers of these studies for 11 years now. They will cause millions of middle-class people to suffer failed retirements in days to come, in the event that stocks continue to perform in the future anything at all as they always have in the past. I don’t just say “Goodbye” to those studies. I say “Goodbye and Good Riddance!”

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That said, I find a lot of things lacking in the article. Six things, to be precise.

1) Why Are We Only Learning Now of the Errors Made in the Studies?

The article points out that people have lost confidence in the 4 Percent Rule because their portfolios are being depleted so quickly now that we are in a bear market. Is the fact that bear markets show up every now and again such a surprise? Shouldn’t the “experts” who prepared these studies have considered the possibility that there might again be a bear market someday back at the time when they were preparing the “studies”? It sure seems so to me.

2) Why Does the Article Not Make Note of the 11 Years of Criticism of the Studies?

I of course have a personal interest in this one. I discovered the errors in the studies way back in May 2002. But it is not just me who is being denied the credit due him here. John Walter Russell spent eight years of his life researching this issue. Michael Kitces spoke out about the errors in the studies years ago. Wade Pfau has spoken out. Ed Easterling has spoken out. Should we not be giving these people credit for the fine work they have been doing for years now that they have been vindicated by the “experts” who denied or ignored their findings for so many years?

3) Why Does the Article Not Demand that the Errors in the Studies Be Corrected?

The Wall Street Journal article is not the first major article reporting that the retirement studies are in error. Still, the studies have not been corrected to this day. Aspiring retirees who enter a Google search to learn what the ‘experts” say about putting together a retirement plan are still going to come across these studies and perhaps make use of them in planning their retirements. Shouldn’t we be demanding that those who made the mistake get about the business of making corrections to their studies before more unsuspecting retirees are pulled in by them?

4) Why Does the Article Not Examine Why the Errors Were Made in the First Place?

Making mistakes need not be such a terrible thing. It is often by making mistakes that we learn new things. But the learning process is short-circuited if we never ask the “Why?” question. The error in these studies are not hard to uncover. I saw it the first time I looked at one of them (the error is that the studies do not adjust for the valuation level that applies on the day the retirement begins). Should the author of the article not be interviewing people in this field to learn whether they have learned from the mistake and are taking steps to see that it is not repeated?

5) Why Does the Article Not Point Its Readers to the New School (Valuation-Adjusted) Retirement Studies and Calculators?

Again, I have a personal interest. I developed (with John Walter Russell) the first New School retirement calculator, The Retirement Risk Evaluator. Still, it seems like a natural to provide a link to a New School calculator in an article pointing out the errors made in the Old School ones. Not only would it make me happy to see the Wall Street Journal help me spread the word about my New School calculator. Lots of my fellow bloggers would notice such a development. If my calculator were promoted in the Wall Street Journal, I am confident that we would see lots of New School calculators developed by lots of different people in coming days. That would be a wonderful thing, no?

6) Why Does the Article Not Discuss the Social Impact of Millions of Failed Retirements?

The story here is an investing story. Aspiring retirees turned to the Old School SWR studies for help in planning their retirements and the Old School SWR studies let them down. Fine. But studies that cause millions of people to suffer failed retirements have ramifications that extend far beyond the investing realm. We are going to need to make decisions as a society somewhere down the road as to what we are going to do about the millions of elderly people who are going to be seeing their retirement plans collapse. Are we going to allow these people to be put out on the street (they did nothing wrong– they followed the advice of the “experts”)? Or are we going to bail these people out, incurring trillions in additional debt to do so? There are big public policy questions in play here.

We don’t talk about these issues today because they scare us. My take is that it is better to talk about them. It is by refusing to come to terms with our fears that we permit them to gain power over us. Had we taken the errors in the Old School SWR studies seriously when we first learned about them, we wouldn’t be in the mess we are in today. If we begin taking the implications of our late acknowledgment of the errors in the studies more seriously today, we will find ourselves in better circumstances tomorrow than we are likely to end up in if we continue to push the “Snooze” button when we hear alarm bells ringing.

Rob Bennett has recorded a podcast titled “Jeremy Grantham Tells the Truth (Straight, No Chaser) About Stock Investing.” His bio is here. 


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Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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