My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Wednesday, February 12, 2014

How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does! - Part 4

On Monday, I discussed modern studies that continue to view the 4% withdrawal rule as feasible in today's current environment. Today, I look at various reports and studies by retirement experts who feel the 4% rule of thumb is excessive based on statistical simulations and the inclusion of worldwide market data amongst other reasons. In addition, for those who feel a constant spending strategy is flawed, whether, the withdrawal rate is 2, 3 or 4 percent, I offer some alternative spending approaches.

The Naysayers: Studies that suggest a 2%-3% Withdrawal Rate may be a Good Starting Point

What William Bernstein has to Say

William J. Bernstein is a well-respected financial theorist, who is referenced in many of the articles I’ve read on the safe withdrawal question.

In this Wall Street Journal article by Jonathan Clements, Mr. Bernstein says the following: "Two percent is bullet-proof, 3% is probably safe, 4% is pushing it and, at 5%, you're eating Alpo in your old age...If you take out 5% and you live into your 90s, there's a 50% chance you will run out of

For those who wish to read what Mr. Bernstein has to say, here is Part 1, Part 2 and Part 3 of his series titled “The Retirement Calculator from Hell”. In Part 3 he comments:

“The historically naive investor (or academic) might consider reducing his monthly withdrawals to a very low level to maximize his chances of success. But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand.”….."But if you believe that we’re about to encounter a bad returns sequence or simply wish to leave a few baubles to your heirs, you’re right back to 3% again.”

What Wade Pfau has to Say

Wade Pfau is a vocal modern day opponent of using a 4% withdrawal rate. Wade is a retirement researcher who has a Ph.D. in economics from Princeton and is currently Professor of Retirement Income at The American College. Wade has a popular blog, called appropriately, Wade Pfau's Retirement Researcher Blog .

In Wade’s 2010 paper “An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?” he makes clear his issue with previous withdrawal studies when he says:

“It is widely acknowledged and understood that the applicability of these withdrawal rate studies depends on the future behaving with the same patterns as the past. But a potential problem with the findings of so many of the existing studies is that they are based on the same Ibbotson Associates’ Stocks, Bonds, Bills, and Inflation (SBBI) monthly data on total returns for U.S. financial markets since 1926, a time interval for which there are fewer than three nonoverlapping 30-year periods. Either these data are used directly for historical simulations or bootstrapping approaches, or used to calculate parameters for Monte Carlo simulations. The problem is that the period covered by this data may have been a particularly fortuitous one for the United States. If one thinks of the world as a Monte Carlo simulation, then the single path observed in the 20th-century United States may not represent its true underlying distribution of returns, and future returns are likely to be lower.”

In this 2013 article in the Journal of Financial Planning, by Wade, Michael Finke and David M. Blanchett titled “The 4 Percent Rule Is Not Safe in a Low-Yield World” it states:

“Pfau (2010) showed, the demonstrated success of the 4 percent rule is partly an anomaly of U.S. market returns during the 20th century. In most other countries, sustainable initial withdrawal rates fell below 4 percent. This study indicates that there is nothing inherently safe about the 4 percent rule. When withdrawing from a portfolio of volatile assets, surprises may happen. This study demonstrates that when financial planners recalibrate assumptions for Monte Carlo simulations to market conditions facing retirees in 2013, the 4 percent rule is anything but safe. This research also shows that a 2.5 percent real withdrawal rate will result in an estimated 30-year failure rate of 10 percent. Few clients will be satisfied spending such a small amount in r­etirement.”

With all due respect to Wade, I certainly hope he is wrong, because you may not have to worry about retirement, as you may not ever be able to save enough to stop working.

The Journal of Financial Planning has a very interesting discussion involving William Bengen, Jonathan Guyton and Wade Pfau in this article titled "Safe Withdrawal Rates: What Do We Really Know?"

What Michael Nairne has to Say

After reading all these academic studies, I started wondering what someone who manages money for clients in the “real world” would say. This led me to ask Michael Nairne, CFP, RFP, CFA, president of Tacita Capital Inc. who writes the Serious Money column for the Financial Post, for an opinion. I solicited Michael’s opinion since we have mutual clients and I have come to appreciate he is not only technically savvy, but a stock market historian. Michael suggested the problem with the 4% rule is "that a singular historic 'backtest' represents just one perspective on withdrawal rates". As illustrated in his article, “The Plight of the Conservative Retiree”, Michael says "the underlying average annual real return experience that funded these assumptions was about 2% for government bonds and 7% for equities. Expected annual real returns going forward are much lower today – about 1% for government bonds and 5% or so for stocks. He feels that for the typical, large cap and bond portfolio, a lower number is better – say 3% or so".

Safe Withdrawal Rates - Tweaks and Variations for Today's World

So whether you are a William Bengen fan and have selected a 4% withdrawal rate or think Wade Pfau has it right and have selected a withdrawal rate of 2.5% -3%, you still may still hear Moshe Milevsky whispering in your ear, that any rule that has a constant withdrawal rate grown by inflation is a horrible rule. Well, don't fret. Colleen M. Jaconetti and Francis M. Kinnry Jr. wrote a 2010 research report titled "A more dynamic approach to spending for investors in retirement". The authors express some of the same concerns as Moshe Milevsky about the 4% rule (constant dollar amount withdrawal adjusted for inflation), most specifically that:

"This strategy is indifferent to the performance of the capital markets, with the result that investors may accumulate unspent surpluses when markets perform well and face spending shortfalls when markets provide poor returns. In either case, the strategy provides short-term spending stability; however, the long-term consequences (positive or negative) can be significant if an investor does not make as-needed adjustments along the way."

The authors note that the common alternative to the 4% rule; basing your spending on a percentage of your portfolios actual value at the end of the prior year can also be problematic in that your withdrawal rates may fluctuate widely in the short-term, while your actual short-term costs are fixed.

Jaconetti and Kinnry attempt to address the limitations of the two above alternatives by introducing a hybrid approach to sustainable spending. They suggest you consider applying a ceiling and a floor to percentage based withdrawals. Under this approach, you:

"calculate each year’s spending by taking a stated percentage of the prior year-end portfolio balance. The investor also calculates a “ceiling” and “floor” by applying chosen percentages to the prior year’s spending amount. The investor then compares the three results. If the newly calculated spending amount exceeds the ceiling, the investor limits spending to the ceiling amount; if the calculated spending is below the floor, the investor increases spending to the floor amount."

You can read the paper for more details, but the authors model portfolio using a constant dollar spending amount ran out of money 2,900 time out of the 10,000 computer simulations, while the model portfolio using the hybrid approach only ran out 1,100 times. In more than half the computer simulations, the percentage of portfolio approach resulted is having less money to spend than the retiree's initial spending target.

Todd Tresidder a financial coach wrote a terrific article titled "Are Safe Withdrawal Rates Really Safe". Unfortunately I did not discover this article until after I had wrote much of this series, but if you are not sick of this topic yet, I strongly suggest your read his article. He says that:

"unfortunately, no simple 'plug and play' model has surfaced to replace the 4% rule (which probably explains why is has persisted despite inaccuracy)."

He then provides a four step process to serve as a guideline for a safe withdrawal rate that includes a "correct and adjust" step. Essentially he is saying stay flexible. You should feel free to adjust a 4% withdrawal rate to 3%, reduce or eliminate the inflation adjustment or alter any part of your withdrawal strategy to protect your retirement fund.

Planning – It is not an Eight Letter Word

Please keep this very poignant excerpt from the Trinity Study in mind when considering your safe withdrawal rate.

“The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning”.

I would suggest that planning should not be limited to your withdrawal rate, but should also be considered in respect of the accumulation of your retirement nest egg.

Believe it or not, you are only two-thirds of the way through the series. In Part 5 you will read about the various factors that impact your retirement and make it virtually impossible to know how much money you really require to retire. Then finally, in Part 6, I provide some numbers to determine how much you need for your retirement nest egg.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Well, THAT was depressing. I worry about having enough for a comfortable retirement, worry about my wife having enough if she lives to 100, we plan and save, and still the academics basically say 'good luck with all that'. Sigh.

    Maybe I'll call a sales rep and have them whisper some good news in my ear.

    1. Glenn, don't worry, it will get more depressing the next two posts :)

  2. Not sure I follow the rationale. If I earn 6% and withdraw 4%, I would expect to increase my capital base. Even if I only earn 4%, I should expect that my capital would stay intact. Maybe I am missing something here.

    Bob T

    1. Your way works if your 6% increases to cope with 30 years of inflation. (e.g. if your 6% earned actually grows each year to at least match the rate of inflation.) If not, then gradually you have to use your capital to continue to live. For e.g. when my father in law retired in the 1980s he had a whopping big pension of $20,000 a year. It was luxury. By the 2010s it didn't seem like such a great pension. (It is not indexed to inflation.)

      Also, many retirees won't have a large enough amount saved to live off of the earnings only. Many need to use a blend of earnings and capital to give them enough to live on. It sounds like you've done an excellent job of saving and investing!

    2. Thx Bet, can I hire u to answer any questions :). In addition to the inflation factor Bet notes, is the 6% you earned net of fees as Michael James likes to note and does it take into account income taxes? Several factors let alone the 10 or so I will note on Monday

  3. As for the drawdown during the distribution stage of retirement, a safe percentage figure depends on several moving parts. The most important part is what are you invested in and what returns are you expected to get. The higher your fixed income is the lower your percentage should be depending on your life expectancy. That said it may be necessary to also reduce your percentage with a high equity content of low dividend payers during down markets. I have close to a 100% content of dividend growers which have long records of increasing their dividends at a greater rate than inflation. I'm not at all worried with a 4% drawdown. My dividend yield exceeds this figure by a good margin so I need not sell any stocks unless dividends are cut. I have plans in place to replace stocks with other candidates should dividend freezes or cuts occur.

    1. Bernie, thx for providing your strategy. There are various ways to make this work. However, you probably have a fairly large nest egg to live off of just dividends. Not asking you to provide this info, but after tax and inflation (which your dividend increases protect) I wonder what is your withdrawal rate? An average dividend rate less tax less some inflation, less some fees, would seem to result in a 3-3.5% withdrawal amount at max. If you are ok with it, I would would be interested to know what is your actual yearly withdrawal rate before or after tax. Thx

    2. I'm sorry if I gave the impression that I'm currently withdrawing from my portfolio. I've been retired about two years now but, so far, haven't had need to tap into my TFSA, RRSP or open account. I'm 63 and currently living comfortably off my company pension, bridge (equivalent to OAS) & CPP. My plans are to leave my RRSP untouched until forced to at 71. At that time I want to draw 4% (before tax) per annum unless plans change and I need to do it earlier. I have the advantage of a much younger spouse so 4% drawdowns are allowable in a RRIF.

      Dividend growth investors always speak of drawdowns in before tax terms as taxes vary widely from person to person or country to country for that matter. I have learned much of the dividend growth investing strategies from reading articles and comments in "Seeking Alpha". Many of the retired folks there have had no worries with drawing down 4 to 5% of their portfolios, before tax, exclusively from their dividend income. I see no reason to doubt them.

    3. Hi Bernie

      Thx. The key word for me is company pension. A pension as I discuss in the next installment of this series changes the whole dynamics of retirement planning. Anyways, you sound like you have a well thought out plan and even have factored in your wife's lower withdrawal requirement, good on you.

  4. The plan as outlined is that by withdrawing 4% per annum, you will not run out of money irrespective of how large your nest egg is. There are so may good quality stocks that pay well in excess of 4% that increase yearly. For example, BCE (5.25%), IPL (4.48%), and CIBC (4.30%). And these are just the ones that are well known and there is no accounting here for capital appreciation (or losses). So, if you are withdrawing 4% of your retirement savings, you will never touch your capital.

    Bob T

    1. Hi Bob,

      I follow, but it depends upon your tax rate amongst other factors. If you are a high or near high rate taxpayer, you only clear 3.2% or so on a 4.5% div.

  5. It's unfortunate that we need to call it a risk that we may live to an old age. Hopefully we don't need to get into strategies to reduce that risk!

    If there is one thing the government should do it is reducing the vast unpredictability this causes. We're too busy talking about how to give people a retirement they never saved for to consider that option, even though it costs much less. Reducing that risk might even create an incentive for more people to plan ahead.

    1. Richard

      Interesting thought. Only problem is "we would now be talking about how to give people a retirement they never saved for" for even more years :)