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Professor Wade Pfau: 3% is the new 4% Safe Withdrawal Rate (SWR)?

Professor Wade Pfau: 3% is the new 4% Safe Withdrawal Rate (SWR)?

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This article was first posted July 1, 2014.

A Retire Early reader sent me this CNN Money Magazine article touting Wade Pfau's "research" a while back. Dr. Pfau, is a "professor of retirement income" at something called the American College for Financial Services. The American College provides "professional training to all types of financial practitioners". Presumably they have an interest in maintaining a high level of fee & commission income to the profession.

Forget the 4% withdrawal rule

Almost every asset you can invest your nest egg in now looks expensive by historical standards. What's more, argues Wade Pfau, this has big implications for how you draw down from your savings the money you need to live on. If he's right, it throws one of the best-known retirement guidelines right out the window.


"The probability that a 4% withdrawal rate will work in the future is much lower," he says. His new safe starting point: a 3% drawdown. That means that if you've saved $1 million, you're living on $30,000 a year before Social Security and any other sources of income you might have, not $40,000. Ouch.


Here's a link to Pfau's "research" report.

Low Bond Yields and Safe Portfolio Withdrawal Rates

From page 9 of the report:

Each scenario in the analysis is based on a 10,000-run Monte Carlo simulation. Taxes and Required Minimum Distributions (RMDs) from the portfolio are ignored. The analysis assumes a 1.0% fee, or negative alpha, that is deducted from the portfolio value annually. This fee is included to account for unavoidable retirement portfolio expenses paid by the investor (e.g., mutual fund fees, advisor fees, account fees, etc.) for investment management.


Well, duh. I agree that you can only withdraw 3.00% if you're letting a financial advisor and the mutual fund managers he or she recommends skim 1.00%, but why would you do that? You can put together a diversified portfolio at a low-fee provider like Vanguard for 0.10% in fees or less and take the 4% SWR you're entitled to.

Resources for more information

Vanguard's fees are costing me a new car? (2013) You'll have to save a lot more for retirement if a financial advisor and the mutual fund managers he recommends are taking a lot of your wealth in excessive fees.

The Federal Thrift Savings Plan: A Model for the Private Sector? (2008) Lobbying arm of the mutual fund industry complains that it's not fair to compare their products to the low costs of the TSP.

ExxonMobil Savings Plan Brochure (PDF) -- Fund expense ratios and 401k mgmt fee on page 17 of document. Annual fees ranges from 2 basis points for the bond fund to 6 basis points for the international equity fund.

USA Today -- Are fees draining your 401(k) retirement savings? (Aug 25, 2009) Article notes that some small company 401(k) plans can have annual fees & expenses as high as 4.8% of assets.

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