There Is No Floor on Safe Withdrawal Rates

history of the u.s market Safe Withdrawal RatesRitaE / Pixabay

Valuation-Informed Indexing #360 on the question of safe withdrawal rate and whether it even exists

By Rob Bennett

Michael Kitces argues in his recent podcast interview with the MadFientist blog that there is a floor on safe withdrawal rates — that the number cannot go below 4 percent. I do not agree.

It’s an odd argument for Kitces to make. He gained some fame in early 2008 for making the argument that the safe withdrawal rate can rise to levels above 4 percent. Until he made his case, the conventional belief was that that safe withdrawal rate is always the same number. I think he is right that the safe withdrawal rate can rise to higher levels and I believe that understanding this advances our understanding of how safe withdrawal rates work in a significant way. But it undermines the case to maintain that the number can change in only one direction — that it can move upwards but not downwards.

Kitces explains that the reason why the rate can rise to higher levels is that it is highly dependent on the valuation level that applies on the day the retirement begins. Since stocks provide an average annual return of 6.5 percent real and since the convention in calculating the rate is to permit the portfolio to diminish to within one dollar of zero over 30 years (so that a return of zero for 30 years would produce a safe withdrawal rate of 3.3 percent), the 4 percent number is a counter-intuitively low number. The reason why it is so low is that the idea behind the safe withdrawal rate concept is to look at worst-case scenarios.

While there have been a small number of times in U.S. history when withdrawal rates above 4 percent would not have worked, the reality is that there have been very few of them. Outside of the onset of the three secular bear markets that we have lived through since 1870 (we are now living through the fourth secular bear market but we of course do not yet know what withdrawal rate is the highest that will work for this time-period), withdrawal rates higher than 4 percent would work fine. So Kitces asks — Why not tell investors that, so long as valuation levels are not as high as those that brought on the three secular bear markets, higher withdrawal rates are entirely prudent?

That’s sensible and balanced thinking. It’s high valuations that cause just about all the trouble that is to be seen in the world of stock investing. It’s one thing to go with a low number because you want to be sure that you are covered in the event that a worst-case scenario turns up but it is something else again to apply the worst-case scenario from times of high valuations to retirements beginning at far less risky times for stock investing.

So the idea that the safe withdrawal rate is usually higher than 4 percent is sound. However, I don’t think that it is sound and balanced thinking to believe that, while valuations can pull the safe withdrawal rate above 4 percent, they can never pull it down lower than that. The safe-withdrawal-rate calculator housed at my site reports a safe withdrawal rate for retirements beginning in January 2000 (when the P/E10 value was 44) of 1.6 percent.

Kitces fully acknowledged the strong correlation between valuations and safe withdrawal rates. But he ignores the fact that in the late 1990s we reached valuation levels higher than any that have ever applied before in concluding that the 4 percent figure that applied in earlier time-periods represent a floor. If no withdrawal of greater than 4 percent worked for retirements initiated when we were at a P/E10 of 33, it seems highly imprudent to assume that 4 percent withdrawals will work for retirements beginning at that price level. My thinking on this question is that the safe withdrawal rate that applied in 2000 MUST be lower than any we have ever seen before (since the valuation level that applied then was so much higher.)

There’s another factor that Kitces ignores in his claim that the 4 percent figure is a floor. It’s not only valuations that determine the safe withdrawal rate. The other big factor is the return sequence that applies. Two different return sequences that produce the same long-term return do not necessarily produce the same safe withdrawal rate; one that takes more money out of the portfolio in the early years of the retirement will generally produce a smaller safe withdrawal rate because it causes the portfolio size to drop to dangerously low levels before the gains needed for it to recover come into play. The 4 percent figure comes from a time-period in which valuations were high but from a returns sequence that was on the lucky side; the reality is that retirements taking a 4 percent withdrawal and beginning in 1929 had only a 50 percent chance of working out (these retirements ultimately survived but they were not safe when they were initiated because we did not know at the time that a lucky return sequence would play out).

So even if valuations were no higher in 2000 than they were in the earlier times that produced the 4 percent number, it would not have been right to say in 2000 that a 4 percent withdrawal was safe. Calculations that take both factors (the valuations factor and the returns sequence factor) into account indicate that retirements beginning at that time and calling for a 4 percent withdrawal had only a 30 percent chance of surviving 30 years. Not safe!

Another oddity that I heard in the Kitces interview is that he took reassurance that 4 percent is a floor for the safe withdrawal rate from data showing safe withdrawal rates of “3 to 4 percent” in other countries. A showing that a 3 percent withdrawal rate works is not a showing that a 4 percent withdrawal is safe!

One of the problems that I believe that all of us involved in safe withdrawal rate analysis face is that the numbers produced at times of high valuations are shockingly low. I believe that our minds kick in with efforts to find ways around what the brutal numbers are telling us. It is my belief that we are better off accepting what the numbers say and drawing the lesson that high valuations are a worse poison than just about any of us realize today. The answer is not to comfort ourselves with arguments that there is a floor to the safe withdrawal rate but to get to work persuading investors of the need to not let valuations get too out of hand.

Rob’s bio is here.

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About the Author

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.”

23 Comments on "There Is No Floor on Safe Withdrawal Rates"

  1. It has already played out, Rob. My retirement plan worked. Your’s failed. Learn from your mistakes.

  2. It will be interesting to see how things play out, Sammy.

    My best and warmest wishes to you and yours.


  3. As expected, you run from the facts because you can’t refute them.

    Your retirement plan failed for the same reason as other people:LACK OF SUFFICIENT SAVINGS.

    The answer to your problem is clear. Stop spending your time telling everyone else how they are wrong, go back to work and save more money.

  4. If you answer the question above, we will know where we stand, Sammy.

    Of course the question is rhetorical. I know the answer. You do not divide by two.

    If the market is efficient, there is no need to divide by two. If the market is efficient, Buy-and-Hold is the ideal strategy. If the market is efficient, the safe withdrawal rate studies are accurate.

    But if valuations affect long-term returns, the safe withdrawal rate studies are in error and the market is not efficient and all investors need to divide the numbers on their portfolio statements by two to know the true, lasting values of their portfolios.

    That’s it.

    Shiller’s 1981 findings truly were “revolutionary,” just as he said. Shiller deseved his Nobel prize. There was a time when we did not know that we need to divide by two when stocks are priced at two times fair value. Now we do. At least we today know this intellectually. 90 percent of us still do not accept it emotionally.

    We’re working on it! We’re working on it!

    We are as a nation working our way through a process that will take us from Buy-and-Hold to Valuation-Informed Indexing. It’s scary for Buy-and-Holders to let in that their portfolios are only worth one-half of the amount that they have thought they were worth. But the benefits of letting in that research-proven reality are huge. So we will get there. It’s just a matter of time.

    My job is to make the transition go as smoothly as possible for every single person involved. I cannot deny the reality that we all need to divide by two, no matter how uncomfortable it makes people feel to hear that. But I need to do what I can to help make the medicine go down as easily as possible. That’s what I always try to do.

    I hope that helps a small bit, my long-time Buy-and-Hold friend.


  5. Again, you try your typical diversionary tactic. You cannot support any of your comments with facts.

    The bottom line remains this:

    1. There has never been a successful case of VII implementation, including your failed track record.

    2. Numbers buy and hold strategies have had long track records of success

    3. There has never been a 30 year period in which a 4% withdrawal rate has not worked.

    The biggest joke is that your plan (which you have listed hundreds of times on your website) is that your entire retirement plan relies on a big stock market crash, followed by having your name splashed on the front page of the New York Times, those that don’t agree with you all going to prison and John Bogle helping you cash in on a$500 million windfall of settlement payments you think that unnamed Wall Street people owe you.

  6. When you plan your financial future, do you use the number on your portfolio statement as the amount of wealth that you have invested in stocks or do you divide by two?


  7. You talk about all your supporters, yet no one will even support you at your website, even though they can post anonymously. There is no real “documentation” at your website. It is merely your opinion. Yet all these topics are diversionary on your part.

    The facts remain at there has been no 30 year period in which a 4% withdrawal rate has not worked, meaning John Greaney has been right all along, while you continue lying. The fact also remains that there has been no successful case of any implemented VII strategy, including you, yet we have continued documented success with various buy and hold strategies.

    The research into actual outcomes continues to demonstrate in every way that you are wrong. When you lie about it, you are just making it worse.

  8. There are thousands of people who have spoken over the course of the past 15 years in support of my right to post honestly re safe withdrawal rates and scores of other critically important investment-related topics. All of their comments are documented at my web site. I have a slide at the top of every page of the site that runs over 200 of these comments, some from a number of the biggest names in the field. I’ve never been in the majority. I am very much in the minority — about 10 percent of the population today believes that valuations affect long-term returns. But I have never had a problem generating support for my work. About 10 percent of every board population offers the most effusive praise for my work that I have ever seen offered for anyone’s work. It is an extremely gratifying and humbling experience to hear the sorts of positive things that many people have said about the work that I have done over the past 15 years.

    But it is true that those people stop speaking once they see the reaction of many Buy-and-Holders to their words of praise. People don’t expect to see that sort of behavior in our society. People have lived long lives and never seen that sort of behavior before and it shocks them and they silence themselves in response. One of the best illustrations of the general phenomenon that I have seen was when Carl Richards sent me an e-mail telling me that my web site was his favorite on the internet, that he had learned more from me that from anyone else on the subject of investing, that he thought that the work that I was doing was of “huge value” and that he was banning me from his site because some Buy-and-Holders who visited the site had told him that they would never visit again if my words continued to appear there.

    That’s the problem that we face as a society. If we allow people to say what they truly believe re investing advice, as we allow people to say what they truly believe in every other field of human endeavor, we will be able collectively to take things to a very good place. But if we don’t, we are stuck with Buy-and-Hold and all that follows from it. If we are not even able to make the case for why this strategy is so dangerous, we cannot win converts to the approach supported by the last 36 years of peer-reviewed research. The only way to move forward is to permit honest and civil discussions and, since the Buy-and-Holders are in the majority today, the practical reality is that they possess the power to stop such discussions from going forward.

    Carl was the keynote speaker at a recent FinCon event. That means that he had about 2,000 people cheering on his words. Had he said at that event what he told me in his e-mail correspondence with me, that he views my site as the best investing site on the internet today, none of the things that you say here would be so, Sammy. I would have so many people coming to my site today that there wouldn’t be enough hours in the day for me to answer all the questions directed at me. The people who would be asking those questions would be people who need help and who I would be happy to help if only circumstances were different. No one gains by our collective decision to deny those people the help they need and want. But the reality is that those people cannot gain access to the help they need and want today.

    Carl is afraid to say the word that he would need to say for those people to get the help they need. There is a Social Taboo that stops us all from speaking openly and plainly and frankly about the 36 years of peer-reviewed research showing that valuations affect long-term returns. This Social Taboo is the #1 biggest public policy problem facing our society today, in my assessment. It is this Social Taboo that served as the primary cause of the economic crisis that began in 2008 and that is probably the biggest cause of most of the political frictions that we have seen evidence themselves in recent years.

    I don’t believe that I am helping us overcome that Social Taboo by keeping quiet about my belief that the last 36 years of peer-reviewed research is legitimate research. I believe that each time one of us makes a decision to keep quiet about his or her true beliefs, it makes it that much harder for all the others who want to speak honestly to work up the courage to do so. Our Buy-and-Hold friends made a mistake. When the mistake was discovered, their first reaction was not to fix it but to cover it up. And our decision was to go along with the cover-up because that was the easier path to take in the short-run. Now, 36 years later, here we are, with millions having suffered in an economic crisis brought on by our cowardice.

    I believe that we need to be charitable in the comments that we make about the Buy-and-Hold strategy and about our Buy-and-Hold friends who advocate this strategy. But I also believe that we need to be honest about the 36 years of peer-reviewed research showing that there is precisely zero chance that this strategy could ever work in the long-term in the real world. I believe that the answer lies in mixing charity and honesty in the proper proportions. Yes, we need to be nice. Kindness is a virtue, But it is not nice to be quiet about errors that have been made in studies that millions of people have used to plan their retirements. That’s a very, very, very cold kind of kindness, in my assessment.

    I wish you all the best that this life has to offer a person, Sammy.


  9. Funny how you talk about your “friend”. On your website, you talk about the “thousands” with failed retirements, yet can’t link to one single person. You just make up imaginary people. At the same time, you have been given many links to successful buy and hold outcomes, yet you ignore those. Further, as pointed out thus week, yet again, there has never been a 30 year period in which a 4% withdrawal rate has never worked. That fact alone blows away makes your endless diatribes meaningless. Lastly, your the one sitting here with the failed retirement plan, yet you want to lecture everyone else.

    You need to stop attacking everyone else. We are not your problem. You are.

  10. Stocks have provided an annualized real return of 2.25 percent real since 2000, Sammy. Is that working?

    I had a friend at the big consulting firm that I worked at who used a calculator to determine how many years it would be before he had enough to retire on. The calculator used an assumption that stocks would provide an annual return of 6.5 percent real. He made his asset allocation decisions based on what that calculator told him. He’s obviously far, far, far behind where he expected to be 18 years ago. He’s not the only one. There are millions who in some way or another planned their futures with the thought that stocks would continue to provide normal returns after we pumped prices up to the insanely dangerous levels that we pumped them up to in the late 1990s.

    Buy-and-Hold has not continued to work. Buy-and-Hold has never worked. Valuations have been affecting long-term returns since the first stock market opened for business and all evidence is that valuations will be continuing to affect long-term returns for as long as there are humans living on this planet. Saying that Buy-and-Hold has always worked is like saying that drinking heavy has always worked to dispel the emotional problems one faces while working through the struggles of life. Drinking gives TEMPORARY relief. But it makes your problems worse down the road. It’s the same with engaging in the fantasy that you can push prices up to crazy levels by borrowing profits from the future and not pay a price for it down the line.

    I love stocks. But I love human reason too. That means that I like to form realistic ideas of what investing in stocks will do for me at different price levels. There’s 36 years of peer-reviewed research showing that the long-term return on stocks depends on the valuation level at which they are purchased. That’s not Buy-and-Hold. That’s Valuation-Informed Indexing.

    The record is there for all to see and the level of emotion of those trying to use the record to defend their favored strategies is there for all to see as well. If you want to know where you stand re stocks today, you need to divide your portfolio value by two to reflect the reality that stocks are today priced at two times fair value. If you fail to make that adjustment, you are not interested in forming an accurate assessment of what the record says. The record is telling you what you need to know but you are blocking out the message because you don’t care to hear it.

    None of us needs to wait until we are 90 to know whether Buy-and-Hold or Valuation-Informed Indexing is superior. We need to look into our hearts and reach a conclusion as to whether it is true that valuations affect long-term returns. The conclusion that we reach re that question will determine all calculations that we do from that point forward. I have concluded that the last 36 years of peer-reviewed research in this field is legitimate research. I have concluded that Nobel Prize Winner Shiller is right and that Nobel Prize Winner Fama is wrong.


  11. You can’t wait until you are 90 for your plan to come through, Rob. Buy and hold has continued to work, while people like, peddling timing schemes have continued to fail. The record is there for all to see.

  12. Investing is a lifetime thing, Sammy. Stocks are priced at two times fair value. If prices fall 50 percent and your portfolio value is cut in half, you are going to be trying to figure some things out, just like everybody else.

    I believe that my best hope to not be surprised too much is to assume that stocks will continue to perform in the future at least something as they always have in the past. Once upon a time, I thought that was the idea behind Buy-and-Hold, which is why I was a Buy-and-Holder once upon a time.

    We obviously have different beliefs re how stock investing works. It is my belief that you should encourage as many people who hold my beliefs as possible to join in the conversation at boards where you participate. Why? The more you know about other ways of thinking about things, the less likely you are to be surprised down the road. It’s not the things you don’t know that hurt you most, it’s the things that you think you know for sure that just ain’t so. Always hear the other guy out. Always take advantage of opportunities to have your beliefs challenged in an effective way.

    My sincere take.


  13. Hope that works out for you, Rob. As for me, I decided I didn’t want to be 60 years old and still trying to figure out if my plan was going to work.

  14. Makes sense.


  15. Let’s see. So you are somewhere around 60 right now, so you would need that immediate crash, followed by a lack of recovery for about 30 years to show a failure in the 4% withdrawal rate. That puts you at around 90 years old. Perhaps you should leave us a forwarding address to your nursing home so that we can get back to you by that time.

  16. Okay, Sammy.

    Please take good care.


  17. Get back to us when you find a failed 30 year period and/or you find a VII track record of success. Until then, don’t count on me to jump on board with your failed plan.

  18. I continue to believe that the last 36 years of peer-reviewed research in this field is legitimate research, Sammy.

    I wish you all good things.


  19. As you now admit, there has never been a 30 year period in which 4% did not work. Further, you have yet to show one person that has yet to experience a retirement failure due to John Greaney’s work. At the same time, your retirement plan failed and there is not one single documented success of anyone that has implemented VII.

    Tell you what, Rob. You can get back to us once we have gone through an entire 30 year period of time in which a 4% withdrawal rate doesn’t work.

  20. It’s true that there has never been a 30-year time-period in which a 4 percent withdrawal rate did not work.

    It is NOT true that that shows that a 4 percent withdrawal rate is safe for people retiring at the sorts of valuation levels that have applied in recent years.

    In 1929, the P/E10 level was 33. That’s the highest we have ever seen outside of the late 1990s. The odds of a retirement beginning in 1929 and calling for a 4 percent withdrawal surviving for 30 years were 50 percent. The return sequence that came up was a lucky one and the retirements survived. But there was a 50 percent chance that they would fail. So they were not safe, they were just lucky.

    For retirements beginning in 2000, it was worse. The P/E10 level was 44. So the chance that those retirements would survive was only 30 percent. A retirement with only a 30 percent chance of working out is NOT safe. It is high-risk.


  21. Yet, as pointed out to you on your website is that there has never been a 30 year period when a 4% withdrawal rate has not worked. This fact alone caused you further embarrassment, so you made the claim that Greaney ‘s work destroyed thousands of retirements. You were unable to support that comment as well, so you decided to threaten a poster that they would be in front of a jury. The posts at your website are just embarrassing for you Rob. They are filled with emotion, yet lack factual substance. That is a key problem for you here as well as the investment community expects comments to be factual supported.

  22. The odds are very strong that we are going to see retirement failures. We will have to decide as a society where to place the blame for those retirement failures. I would not put Kitces near the top of the list of those who have caused the problem. For example, I have posted at his web site and he has always been welcoming and never in any way abusive. I’ve engaged in lots of e-mail correspondence with Michael and he has been extremely helpful in that e-mail correspondence. So it is my belief that he is in pretty good shape.

    However, I do think that people who have confidence that the last 36 years of peer-reviewed research is legitimate research should be challenging this idea that Kitces has put forward that there is some sort of floor on safe withdrawal rates. There is no floor. The safe withdrawal rate can go as low as we elect as a society to push it and we have elected during the Buy-and-Hold Era to push it pretty darn low. It is my view that Michael encourages us (presumably without meaning to) to push it even lower when he suggests that, no matter how irresponsible we act as investors, we can never push the safe withdrawal rate below this imaginary (in my view!) floor.


  23. Do you believe Kitces errors (as you describe) will result in retirement failures? If so, do you think Kitces will be going to prison along with all the others you have listed on your website?

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