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A Paradigm Shift in Retirement Planning: Integrated Approach Reveals New Insights

Retirement planning has long been approached as a two-phase process, with the working and retirement phases treated separately. However, significant research has shed light on the benefits of integrating these phases to gain a more comprehensive understanding of retirement planning. This article challenges traditional notions of “safe withdrawal rates” and “wealth accumulation targets” and emphasizes the significance of the “safe savings rate” in achieving your desired retirement expenditure goals. By considering the interplay between pre- and post-retirement phases, a fundamental rethinking of retirement planning strategies becomes imperative.

In the traditional approach, retirement planning literature focuses on finding a “safe withdrawal rate” for the retirement phase, which is then used to calculate a “wealth accumulation target” necessary to fund desired retirement spending. Conversely, research on the accumulation phase primarily revolves around strategies to achieve the wealth accumulation target. However, there has been a dearth of literature that links these two phases in an integrated manner. But by linking the pre and post-retirement phases we can more clearly understand how people can achieve a level of retirement income that they find acceptable.

Upon closer examination of the integrated approach, we can see that the concepts of “safe withdrawal rates” and “wealth accumulation targets” are almost an afterthought for planning purposes. Instead, the focus should shift towards the “safe savings rate” – the minimum savings rate required to accumulate enough wealth to afford desired retirement expenses. Individuals who save at their “safe savings rate” are likely to achieve their retirement spending goals, regardless of their actual wealth accumulation and withdrawal rates. Notably, the safe savings rate derived through this integrated approach exhibits less volatility than historical maximum sustainable withdrawal rates, leading to a lower ex-post cost associated with being overly conservative.

Debunking the Universal “Safe Withdrawal Rate”

Unlike the widely known 4 percent rule, which suggests a universal safe withdrawal rate, there is no one-size-fits-all “safe savings rate.” Nevertheless, guidelines can be established to assist individuals in determining their appropriate savings rate. What is clear is that starting to save early and consistently for retirement at a reasonable savings rate will provide the best chance to meet retirement expenditure goals. You don’t have to worry so much about actual wealth accumulation and actual withdrawal rates, as they vary so much over time anyway. 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.

As well, worrying about the “safe withdrawal rate” and a “wealth accumulation target” is distracting and potentially harmful for those engaged in the retirement planning process. Recent Americans may have not saved enough or retired early because an outstanding market performance may have brought them to their traditional wealth accumulation goals earlier than expected. At the same time, someone saving during a bear market who is nowhere near reaching a traditional wealth accumulation goal may have given up saving or needlessly delayed their retirement, when it is precisely such individuals who could have enjoyed higher withdrawal rates.

Understanding Sustainable Savings Rates

Briefly, the methodology involves integrating the working and retirement phases to determine the savings rate needed to finance the planned retirement expenditures for rolling 60-year periods from the data. The baseline individual wishes to withdraw an inflation-adjusted 50 percent of her final salary from her investment portfolio at the beginning of each year for a 30-year retirement period. Prior to retiring, she earns a constant real salary over 30 working years, and her objective is to determine the minimum necessary savings rate to be able to finance her desired retirement expenditures. Her asset allocation during the entire 60-year period is 60/40 for stocks and bills. Data is from Robert Shiller’s webpage for the S&P 500 and Treasury bills.

To see the basic story, note in Figure 1 that historical maximum sustainable withdrawal rates (MWRs) for 30 years of inflation-adjusted withdrawals with a 60/40 asset allocation have historically exhibited significant volatility. 

[Figure 1 – Maximum Sustainable Withdrawal Rates for 60/40 Asset Allocation, 30 Year Retirement Period]


Regarding the volatility of MWRs, Figure 2 shows a very close relationship in which the MWR tends to fall after a year with high real portfolio returns and rise after negative returns.

[Figure 2 – Change in Maximum Sustainable Withdrawal Rates vs Real Portfolio Returns for 60/40 Asset Allocation, 30 Year Retirement Period]

If we turn William Bengen’s SAFEMAX calculations on their head to calculate a safe savings rates in isolation from the following retirement period, we will find very volatile savings rates as well. Figure 3 shows the savings rates needed to accumulate 12.5 times final salary by the retirement date (50 percent replacement rate / 4 percent planned withdrawal rate).

[Figure 3 – Minimum Necessary Savings Rate to Accumulate 12.5x final Salary Maximum Sustainable Withdrawal Rates]

But what is also fascinating and important to note is how the pattern of these minimum necessary savings rates (MSRs) closely follows that of the corresponding maximum sustainable withdrawal rates (MWRs). Figure 4 shows more about that relationship.

[Figure 4 – Comparing MSRs and MWRs by Retirement Year]

Next, Figure 5 provides the main results, showing both the savings rate needed to accumulate 12.5 times final salary (this is the MSR described above) and the lifecycle-based minimum savings rate needed to finance her desired expenditures (LMSR). The LMSR curve is the main contribution of this research. In the context of Bengen’s original study, the maximum value of the LMSR curve (which is 16.62 percent in 1918) becomes the SAFEMIN savings rate from a lifetime perspective that corresponds to Bengen’s SAFEMAX withdrawal rate. Had the baseline individual used a fixed 16.62 percent savings rate, she would have always saved enough to finance her desired retirement expenses, having barely accomplished this in the worst-case retirement year of 1918.

[Figure 5 – Minimum Necessary Savings Rates Under Isolated and Integrated Approaches]

Retirement planning in the context of the LMSR curve is less prone to making large sacrifices in order to follow a conservative strategy. In the context of safe withdrawal rates, if someone used a 4 percent withdrawal rate at a time that would have supported an 8 percent withdrawal rate, she is sacrificing 50 percent of her potential retirement spending power. But in the context of safe savings rates, if someone saved at a rate of 16.62 percent at a time when she only needed to save 9.34 percent (this is the lowest LMSR value, occurring for the 1901 retiree), she is sacrificing only a little over 7 percent of her annual salary as surplus savings.

By prioritizing the “safe savings rate” over traditional measures such as safe withdrawal rates and wealth accumulation targets, individuals can develop more robust retirement plans. And, importantly, focusing on your “safe savings rate” also allows you to better calibrate your pre-retirement spending patterns to your desired post-retirement spending, as opposed to simply shooting for a pre-determined wealth accumulation target. Considering your retirement plan holistically you can improve more precisely design the plan that works for you.

To find out more about the most important risks to your retirement, read our ebook the 7 Risks of Retirement Planning.

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