An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?

Journal of Financial Planning: December 2010


Executive Summary

Numerous studies about sustainable withdrawal rates from retirement savings have been published, but they are overwhelmingly based on the same underlying data for U.S. asset returns since 1926.

From an international perspective, the United States enjoyed a particularly favorable climate for asset returns in the 20th century, and to the extent that the United States may experience mean reversion in the current century, “safe” withdrawal rates may be overstated in many studies.

This paper explores the issue of sustainable withdrawal rates using 109 years of fi nancial market data for 17 developed market countries in an attempt to provide a broader perspective about safe withdrawal rates, as fi nancial planners and their clients must consider whether they will be comfortable basing decisions on the impressive and perhaps anomalous numbers found in past U.S. data.

The paper uses a historical simulations approach, considering the perspective of individuals retiring in each year of the historical period. Because the assumed retirement duration is 30 years and the data end with 2008, retirements take place between 1900 and 1979. For each country and in each retirement year, the paper optimizes across the three domestic fi nancial assets, fi nding the fi xed asset allocation that provides the highest sustainable withdrawal rate over the next 30 years, while controlling for a number of other structured assumptions.

From an international perspective, a 4 percent real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided “safety” in 4 of the 17 countries. A fi xed asset allocation split evenly between stocks and bonds would have failed at some point in all 17 countries.

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Retirement Savings and Income Planning