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Short Summary
Main recommendation: Plan retirement spending around a safe withdrawal rate of about 2.7 percent of your portfolio rather than the traditional four percent rule, because the four percent figure relies on U.S.-centric historical data that overstates both returns and safety. The video draws on research using 38 developed countries from 1890 to 2019, corrects for survivorship and data-availability biases, and adjusts for longevity risk.
Key Points
- The four percent rule starts with a 4% withdrawal in year one, then adjusts that dollar amount for inflation each year, based on William Bengen's 1994 study of U.S. stocks and intermediate-term Treasuries in a 50/50 portfolio.
- Much of the U.S. historical advantage reflects luck: one 2022 study estimates U.S. stocks' realized risk premium exceeded the expected premium by about 2 percentage points, split roughly evenly between luck (disasters not materializing) and learning (investors lowering required returns over time).
- Testing a broad sample of developed markets, including those that failed, produces a much lower safe rate, about 2.26 percent for a domestic 60/40 portfolio for a 65-year-old couple in 2022.
- Longevity matters: the study uses Social Security mortality tables, where life expectancy ranges widely (5th percentile 12.3 years, 95th percentile 35.5 years), and longer expected lifespans for future retirees and Canadians push the safe rate toward 2.7 percent.
- International diversification helps: moving part of the equity allocation into international stocks raises the safe rate to about 2.85 percent (24% international) or 3.02 percent (90% international), even after assuming an extra 0.5% annual cost.
Details Worth Noting
- Concrete instructions: Start from a 60/40 stock-bond portfolio, since the study found higher stock allocations did not raise safe spending and a target date fund underperformed the 60/40. Diversify the equity portion internationally, which the study modeled as moving some or most of the equity allocation into international stocks, with a 0.5% annual cost assumption. Set a spending rate near 2.7 percent for a retiree with a long expected lifespan, and consider a lower figure for taxable accounts because taxes were not included.
- The four percent rule's 30-year horizon was too short for many retirees today, and the new analysis instead uses mortality tables to model variable lifespans.
- Retirement withdrawals are often not fixed in practice: retirees may adjust spending, earn other income, receive government pensions that reduce portfolio withdrawals over time, defer pensions to increase benefits, or buy annuities.
- Empirical evidence suggests retirees often increase spending with inflation at a rate about one percentage point below inflation, which is more conservative than constant inflation-adjusted withdrawals.
- Tilting toward smaller, lower-priced stocks and corporate bonds may help improve safe withdrawal rates, but the speaker emphasizes that this improves on a baseline near 2.7 percent, not four percent.
- The speaker cites Scott Cederburg, one of the paper's co-authors, who in a podcast clip notes that post-war and post-2000 data show similar loss probabilities (~19%), and that Japan's 1990 crash shows major losses aren't limited to wars or small markets.
Bottom Line
Retirement spending plans based on the four percent rule may be too aggressive, especially for those who expect long lives or hold U.S.-heavy portfolios; a more realistic starting point is around 2.7 percent, with flexibility in actual spending.
