Safe Savings Rates: A New Approach to Retirement Planning Over the Lifecycle

Journal of Financial Planning, Vol. 24, No. 5, May 2011

15 Pages Posted: 3 Jul 2011

See all articles by Wade D. Pfau

Wade D. Pfau

The American College for Financial Services; Retirement Researcher

Date Written: May 1, 2011

Abstract

Focusing on a “safe withdrawal rate” and then deriving a “wealth accumulation target” to achieve by the retirement date may not be the best way to approach retirement planning. Such a formulation isolates the working (accumulation) and retirement (decumulation) phases. When considered together, the lowest sustainable withdrawal rates (which give us our idea of the safe withdrawal rate) tend to follow prolonged bull markets, while the highest sustainable withdrawal rates tend to follow prolonged bear markets. The focus of retirement planning should be on the savings rate rather than the withdrawal rate. The “safe savings rate” may be based on historical simulations as the savings rate which proves sufficient to support the desired retirement expenditures from a lifecycle perspective including both the accumulation and decumulation phases. Safe savings rates derived in this manner are less volatile than withdrawal rates and imply a lower ex-post cost to having been overly conservative. Unlike the 4 percent rule, there is not a universal "safe savings rate," but guidelines can be created. Starting to save early and consistently for retirement at a reasonable savings rate will provide the best chance to meet retirement expenditure goals. Actual withdrawal rates and wealth accumulations at retirement may be treated as almost an afterthought in this framework. But the savings plan should be adhered to regardless of whether it seems one is accumulating either more or less wealth than is needed based on traditional criteria.

Keywords: safe withdrawal rates, retirement planning, lifetime perspective, safe savings rate, wealth accumulation targets, retirement spending goals, SAFEMAX, SAFEMIN

JEL Classification: C15, D14, G11, G17, N21, N22

Suggested Citation

Pfau, Wade D., Safe Savings Rates: A New Approach to Retirement Planning Over the Lifecycle (May 1, 2011). Journal of Financial Planning, Vol. 24, No. 5, May 2011, Available at SSRN: https://ssrn.com/abstract=1876224

Wade D. Pfau (Contact Author)

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States

HOME PAGE: http://www.retirementresearcher.com

Retirement Researcher ( email )

1900 Gallows Rd, Suite 350
Vienna, VA 22182
United States

HOME PAGE: http://www.retirementresearcher.com

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