Recent research by an American professor, Wade Pfau (working in Japan) (2), has shed some more light on the topic of safe withdrawal rates. His conclusions add a cautionary note for retiring expatriates of US and other nationals alike, when it comes to the 4% safe withdrawal rate. While most researchers have taken historical data of US markets as their base, Pfau made the effort to gather historical data of stock and bond markets of 17 countries. His aim was to investigate whether different countries would produce different results on which to base a more generalised “safe withdrawal rate”.
It is important here to note that the US markets have been in the top quartile of performers, both in stocks and in bonds. Canadian markets show returns very similar to those of the US. In addition, it is clear to see that the European countries have performed considerably worse than e.g. the US and Canada. In short, what these data show is that US markets have outperformed most other markets.
If the historically lower returns for Europeans – amongst others – are indicative of the future, one would expect that a safe withdrawal rate of 4% would surely be too high an estimate for them.
Pfau’s analysis addressed this second point. His research indeed showed considerably lower safe withdrawal rates for many European countries: Germany, France and Belgium were placed in the 1 to 2% safe withdrawal range. On the other hand, the rates for the UK and Holland were not too far off the 4% mark (in the 3% range). Another aspect of Pfau’s analysis may have a bearing on the expectation of Americans retiring in the US as well. The out-performance of US markets could be interpreted as
representing a “positive bias” (4) in relation to the other (e.g. European, and Asian) markets.
Various reasons are given for this out-performance, among them the fact that the US economy suffered relatively little from the two World Wars, whereas European and Asian markets suffered prolonged declines. If indeed, there has been a positive bias in the historic data of US markets, then going forward 4% would also be too high an estimate for Americans (and Canadians). Of course, we do not know whether historic data are indicative of what the future holds and whether historic data of the US markets represent a positive bias or not. When it comes to retirement planning though I suggest it is wiser to err on the pessimistic than optimistic side. So perhaps best to see 4%, especially for Europeans, as the optimistic scenario. When planning for retirement I recommend to include scenarios with lower percentage withdrawal rates as well.