Most retirement planning tools offer dangerous advice to retirees seeking to determine how much they can afford to withdraw each year from their stock portfolios, according to a four-year research project.
Most retirement planning tools offer dangerous advice to retirees seeking to determine how much they can withdraw each year from their stock portfolios, according to a four-year research project. Rob Bennett, founder of the Financial Freedom Community (a group of Internet discussion boards), today announced the launch of an effort to bring the community's findings to the attention of retirees before the flaws in the retirement planning tools cause millions of busted retirements.
“Thousands of the world’s best savers and investors--middle-class workers who achieve financial freedom in their 40s or 50s--have studied this question in great depth,” said Bennett. “All of the evidence points to the same conclusion--most retirement planning tools are gravely flawed.”
The flaw is that most retirement planning tools identify a single withdrawal rate as “safe.” For example, a retirement planning tool might state that a retiree with an 80 percent S&P stock allocation can safely withdraw an inflation-adjusted 4 percent of her portfolio each year. The reality is that the safe withdrawal rate varies with changes in valuation levels. When stocks are at low valuations, the safe withdrawal rate for this allocation rises to 6 percent or more. When stocks are at high valuations, it drops to 2 percent or less.
The Financial Freedom Community’s findings have been supported by two widely recognized investment experts--Dallas Morning News Columnist Scott Burns and William Bernstein, author of “The Four Pillars of Investing.” Burns wrote in a June 2005 column that: "A growing school of thought believes future withdrawal rates should be reduced to reflect expected lower future returns.” Bernstein stated in his book that analyzes based on historical stock-return data but failing to make adjustments for changes in valuation levels offer results that are “highly misleading” at times of high valuations.
The first step being used to warn retirees of the dangerous retirement planning tool claims is the formation of the www.Early-Retirement-Planning-Insights.com web site. The new site contains over 100 articles describing the most important safe withdrawal rate research of recent years, the work done by John Walter Russell.
Rob Bennett writes the daily “Financial Freedom Blog” and is the author of “Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work.” He is also publisher of the PassionSaving.com web site.