What are safe withdrawal rates from non-US investments?

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QUESTIONS TO CONSIDER
Does money invested in a US stock index fund have at least a 95% chance of lasting for 30 years at an annual withdrawal rate of 4% (excluding taxes and fees, and with withdrawals adjusted for inflation each year)?
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SUMMARIES OF STUDIES
Total studies in list: 4
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1
Maximum Withdrawal Rates: An Empirical and Global Perspective
"Standard analysis of retirement strategies involves evaluating their failure rate. One of the shortcomings of this approach is that a strategy may have a low failure rate and at the same time leave a large unintended bequest. Maximum withdrawal rates, by definition, exhaust a portfolio by the end of the retirement period, thus leaving no bequest; they can be used both to assess the likelihood of sustaining any chosen level of inflation-adjusted withdrawals, and more generally to evaluate retirement strategies. This article provides a comprehensive historical perspective on maximum withdrawal rates in 21 countries over 115 years with 11 asset allocations ranging from 100% stocks to 100% bonds."
AUTHOR
Javier Estrada
PUBLISHED
2018 in The Journal of Retirement
UNRANKED SOURCE
2
Safe Withdrawal Rates for Retirees in the United Kingdom: Where did the 4% rule come from and what is the impact of today’s low bond yields?
"Against the background of the UK pension freedom legislation, it is important that retirees have areasonable expectation of the proportion of their assets they can withdraw each year to fund theircost of living, while ensuring sufficient capital remains to deliver a similar level of income into thefuture. This is commonly known as the ‘safe withdrawal rate’.There is a growing body of literature on safe withdrawal rates for retirees, however most ofthis research is based on the historical returns of assets used by investors in the United States.While there has been some more recent research using projected returns for the United States(Blanchett, Finke, and Pfau, 2013) its applicability to the UK is questionable. Given the unique marketenvironment for UK-based investors today, it makes more sense to base withdrawal rates off theexpectations for UK-based investors than the history or projected returns for another country.In this paper we explore safe withdrawal rates from the perspective of historical returns, bothinternational and domestic, but more importantly we provide estimated safe withdrawal rates for UKbased investors based on our current return expectations. There are three primary findings from thisresearch. First, that while the historical performance of stock and bond markets in the UK has beenrelatively similar to the global average, future expected returns in the UK, especially in the near-term,are likely to be considerably lower. Second, given these lower returns, safe withdrawal rates arerelatively low, and may decrease further when incorporating future improvements in mortality (i.e.,people keep living longer in retirement) and the impact of fees. Finally, a balanced portfolio is likelythe best allocation for UK retirees. Overall, while these findings are less optimistic than past researchon the topic of safe withdrawal rates, they are nevertheless an important starting place for retireesand financial advisers today."
AUTHORS
Sue Watt
Dan Kemp
Marc Buffenoir
David Blanchett
PUBLISHED
2016 in Morningstar Research
UNRANKED SOURCE
3
Safe withdrawal rates from retirement savings for residents of emerging market countries
"Researchers have mostly focused on U.S. historical data to develop the 4 percent withdrawal rate rule. This rule suggests that retirees can safely sustain retirement withdrawals without outliving their wealth for at least 30 years, if they initially withdraw 4 percent of their savings and adjust this amount for inflation in subsequent years. But, the time period covered in these studies represents a particularly favorable one for U.S. asset returns that is unlikely to be broadly experienced. This poses a concern about whether safe withdrawal rate guidance from the U.S. can be applied to the situation in other countries. Particularly for emerging economies, defined-contribution pension plans have been introduced along with under-developed or non-existing annuity markets, making retirement withdrawal strategies an important concern. We study sustainable withdrawal rates for a sample of 25 emerging countries and find that the sustainability of a 4 percent withdrawal rate differs widely and can likely not be treated as safe. The results suggest, as well, high stock allocations in the portfolio mix are not the optimal choice for retirees in emerging market countries."
AUTHORS
Wade Donald Pfau
Channarith Meng
PUBLISHED
2011 in National Graduate Institute for Policy Studies
UNRANKED SOURCE
4
An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?
"Numerous studies about sustainable withdrawal rates from retirement savings have been published, but they are overwhelmingly based on the same underlying data for US asset returns since 1926. From an international perspective, the United States enjoyed a particularly favorable climate for asset returns in the twentieth century, and to the extent that the US may experience mean reversion in the current century, "safe" withdrawal rates may be overstated in many studies. This paper explores the issue of sustainable withdrawal rates using 109 years of financial market data for 17 developed market countries in an attempt to provide a broader perspective about safe withdrawal rates, as financial planners and their clients must consider whether they will be comfortable basing decisions using the impressive and perhaps anomalous numbers found in the past US data. From an international perspective, a 4 percent real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided "safety" in 4 of the 17 countries. A fixed asset allocation split evenly between stocks and bonds would have failed at some point in all 17 countries."
AUTHOR
Wade D. Pfau
PUBLISHED
2010 in National Graduate Institute for Policy Studies
UNRANKED SOURCE







ADDITIONAL STUDIES TO CONSIDER ADDING TO LIST
Total additional studies: 28
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Optimal Withdrawal Strategy for Retirement-Income Portfolio
"At the onset of retirement, investment advisors make crucial recommendations to
clients concerning asset allocation, as well
as dollar amounts they can safely withdraw annually, so clients will not outlive
their money. This article utilizes historical investment data as a rational basis for
these recommendations. It employs graphical interpretations of the data to determine
the maximum safe withdrawal rate (as a
percentage of initial portfolio value), and
establishes a range of stock and bond asset
allocations that is optimal for virtually all
retirement portfolios. Finally, it provides
guidance on "mid-retirement" changes of
asset allocation and withdrawal rate.

At the onset of retirement, investment advisors make crucial recommendations to
clients concerning asset allocation, as well
as dollar amounts they can safely withdraw annually, so clients will not outlive
their money. This article utilizes historical investment data as a rational basis for
these recommendations. It employs graphical interpretations of the data to determine
the maximum safe withdrawal rate (as a
percentage of initial portfolio value), and
establishes a range of stock and bond asset
allocations that is optimal for virtually all
retirement portfolios. Finally, it provides
guidance on "mid-retirement" changes of
asset allocation and withdrawal rate."
AUTHORS
David Blanchett
Peng Cheng
Marciej Kowara
PUBLISHED
2012 in Retirement Management Journal

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Determining Withdrawal Rates Using Historical Data
"At the onset of retirement, investment advisors make crucial recommendations to
clients concerning asset allocation, as well
as dollar amounts they can safely withdraw annually, so clients will not outlive
their money. This article utilizes historical investment data as a rational basis for
these recommendations. It employs graphical interpretations of the data to determine
the maximum safe withdrawal rate (as a
percentage of initial portfolio value), and
establishes a range of stock and bond asset
allocations that is optimal for virtually all
retirement portfolios. Finally, it provides
guidance on "mid-retirement" changes of
asset allocation and withdrawal rate."
AUTHOR
William P. Bengen
PUBLISHED
1994 in Journal of Financial Planning

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Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe
"This paper establishes new guidelines for determining the maximum "safe"
initial withdrawal rate, defined as (1) never requiring a reduction in withdrawals
from any previous year, (2) allowing for systematic increases to offset inflation,
and (3) maintaining the portfolio for at least 40 years.

z It evaluates the maximum safe initial withdrawal rate during the extreme period
from 1973 to 2003 that included two severe bear markets and a prolonged early
period of abnormally high inflation.

z It tests the performance of balanced multi-asset class portfolios that utilize six
distinct equity categories: U.S. Large Value, U.S. Large Growth, U.S. Small
Value, U.S. Small Growth, International Stocks, and Real Estate.

z Two portfolios (65 percent equity and 80 percent equity) are evaluated in
conjunction with systematic Decision Rules that govern portfolio management,
sources of annual income withdrawals, impact of years with investment losses
and withdrawal increases to offset ongoing inflation.

z This paper finds that applying these Decision Rules produces a maximum
"safe" initial withdrawal rate as high as 5.8 percent to 6.2 percent depending on
the percentage of the portfolio that is allocated to equities."
AUTHOR
Jonathan T. Guyton
PUBLISHED
2004 in Journal of Financial Planning

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The Simplest, Safest Withdrawal Rate
"ew financial planning topics have garnered as much attention as safe withdrawal rates (SWRs), but a key question remains unanswered: Can retirees sustain a 4% withdrawal rate with minimal risk? With the recent introduction of 30-year TIPS, the answer is now yes.

Retirees can withdraw up to 4% per year (on an inflation-adjusted basis) over a 30-year period from a portfolio consisting of solely 30-year TIPS with very high success rates. Unlike a traditional stock-bond portfolio, a TIPS portfolio is not exposed to risk from the equity or fixed-income markets or from unanticipated inflation. The only source of risk is from volatility in real interest rates.

The implications of these results are clear. If a retiree has sufficient funds to support a 4% withdrawal rate over 30 years, then those funds should be invested in TIPS. Funds should only be invested in stocks and bonds if the required withdrawal rate is greater than 4%.

I will discuss how we modeled the TIPS portfolio and then compare it to the results of a 60/40 stock/bond portfolio. I will analyze the performance of a 60/40 portfolio assuming stock and bond returns based on historical averages and show how it performs if more modest “new normal” stock returns are assumed. Lastly, I will look at the results of the 60/40 portfolio if inflation is modeled as a random variable instead of as a constant rate."
AUTHOR
Robert Huebscher
PUBLISHED
2011 in Advisor Perspectives

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Sensitivity of Safe Withdrawal Rates to Longevity, Market and Failure Risk Preferences with Implications for Asset Allocation
"Retirees face longevity risk, or the risk of living longer (or less long) than expected; market risk, or the risk of poor investment returns over the retirement horizon, and finally; failure risk, or the risk of running out of money before death. The authors examine the sensitivity of these three risks to asset allocation and Safe Withdrawal Rates, and offer a model to optimize these factors in order to minimize the three primary risks in the context of personal preferences. Finally, a forecast model is proposed to link Safe Withdrawal Rates to contemporaneous stock market valuations and interest rates, with strong statistical significance."
AUTHORS
Michael Guan
Rodrigo Gordillo
Mike Philbrick
Adam Butler
PUBLISHED
2013 in SSRN Electronic Journal

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A Safer Safe Withdrawal Rate Using Various Return Distributions
"A common conundrum faced by most people approaching retirement is the amount of money they can safely withdraw from their retirement portfolio without the risk of depleting the portfolio over their retirement horizon. The advice that most retirees will hear is the 4 percent rule—a retiree who faces normal retirement conditions can make an annual inflation-adjusted withdrawal equal to 4 percent of the original portfolio without risk of depleting the portfolio.

This rule of thumb has helped bring a disciplined approach to retirement withdrawal strategy. However, tests of the 4 percent rule using simulation methodology have assumed that expected returns are drawn from a lognormal distribution—an assumption that lacks empirical support.

The important question, therefore, is whether the choice of method used to represent the future affects estimates of the sustainability of a retirement portfolio.
We test the 4 percent rule by creating plausible retirement scenarios using standard methodology, but assuming that expected returns can conform to various distributions.

Our analysis indicates that a 4 percent withdrawal rate will result in portfolio failure with greater probability (18 percent) than previously believed, and the truly “safe” withdrawal rate—2.52 percent—is significantly smaller than previously believed."
AUTHORS
Joseph M. Goebel
Manoj Athavale
PUBLISHED
2011 in CFA Digest

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RELATIVES IN RESIDENCE: RELATEDNESS OF HOUSEHOLD MEMBERS DRIVES SCHOOLING DIFFERENTIALS IN MOZAMBIQUE.
"Children typically receive investments from their fathers, but absent fathers often invest at low levels. In fathers' absence, what types of non-fathers invest heavily in children? This paper investigates educational participation as a reflection of childhood investments on Ibo Island, Mozambique, where only one third of school-aged children live with their biological fathers. Father-present children generally attended school at the highest rates. Stepchildren and father-absent relatives (e.g. grandchildren, nieces) attended school at comparably high rates if any co-residing children were father-present. This may signal high altruism among present fathers toward some non-offspring. Consistent with this result, a fixed-effects model indicates that, within the same household, adult males invested equally in their own children, relatives, and stepchildren. However, prejudicially lower investments were made in children who were unrelated to the household's adult males; this result has strong negative implications for the wellbeing of African children who are fostered by non-relatives."
AUTHOR
Sara Lopus
PUBLISHED
2017 in Journal of Marriage and the Family

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Safe Withdrawal Rates: A Guide for Early Retirees
"When talking about withdrawal rates in retirement it's hard to ignore the 4% rule. The origin of this rule goes back to the work of Bengen (1994, 1996, 1997, 2001) and Cooley, Hubbard and Walz (1998, 2011), more commonly known as the Trinity Study. The Trinity Study showed that withdrawing 4% of the portfolio value at the beginning of retirement and subsequently adjusting the withdrawals for inflation, will likely sustain a 30-year retirement in a portfolio comprised of 50-100% stocks and 0-50% bonds.

This result is relevant to the average retiree with a horizon of only 30 years and not the typical early retiree with a much longer horizon, though. We perform extensive simulations and case studies targeted at early retirees and show that the longer horizon and today's expensive equity valuations will likely necessitate a lower initial withdrawal rate."
AUTHOR
Ern EarlyRetirementNow
PUBLISHED
2017 in SSRN Electronic Journal

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Nonsurgical removal of a rectal foreign body using a vacuum extractor. Report of a case.
"Purpose: Rectal foreign bodies can be extracted by nonsurgical methods. However, glass objects require technical considerations to minimize morbidity and may necessitate surgical extraction. We describe a technique that allowed safe transanal extraction of a glass foreign body and avoided laparotomy.

Methods: A patient with a history of a previous rectal foreign body that required laparotomy presented with another incarcerated rectal foreign body. After attempts at manual extraction failed, spinal anesthesia was induced, and an obstetric vacuum extractor was used to transanally withdraw the glass foreign body.

Results: The glass foreign body was withdrawn uneventfully using the vacuum extractor. Laparotomy was avoided. The patient was hospitalized for observation and discharged 24 hours later.

Conclusions: Use of the delivery vacuum extractor provided a safe, cost-effective method of glass foreign body removal by the transanal route. Literature review found no other reports of rectal foreign body removal by this method.

"
AUTHORS
S O Johnson
T H Hartranft
PUBLISHED
1996 in Diseases of the Colon and Rectum

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Estimating Provisional Acceptable Residues for Extralabel Drug Use in Livestock
"In 1996, the United States Congress passed legislation (Animal Medicinal Drug Use Clarification Act, AMDUCA), which allows some veterinary or human drugs to be used off label in food-producing animals. In order to implement this Act and protect the U.S. consumer, tolerances or safe concentrations are required before a withdrawal time can be estimated for extralabel drug use. Use of foreign MRLs to satisfy these data needs may not be applicable because of differences in safety standards between the U.S. and other countries. This paper presents strategies that can be used to derive equivalent safe concentrations, referred to as provisional acceptable residues (PARs), that may then be used to estimate drug withdrawal times. Health-based methods are proposed for calculating a PAR for a tissue. Procedure A partitions 50% of the acceptable daily intake (ADI) to edible tissues and reserves the remainder for milk. Procedure B equally partitions the ADI into all edible tissues. Procedure C partitions 50% of the ADI to milk and equally partitions the remaining 50% ADI into edible tissues. Simulations were performed for florfenicol, tetracycline, dexamethasone, azaperone, ivermectin, eprinomectin, and doramectin. In general, these simulations resulted in derivation of conservative PARs, which did not result in daily intakes of residues greater than the health-based ADI. These simulations demonstrated that provided the safe concentrations or equivalent PARs are based on rigorous toxicology safety data (e.g., NOELs, ADIs), the safety of food animal products will not be compromised. It is proposed that these PARs can be used for estimating withdrawal times after extralabel drug use or inadvertent exposure to an environmental contaminant where no approved withdrawal time exists. Finally, implementing similar transparent methods could have a positive impact on international harmonization and trade."
AUTHOR
R Baynes
PUBLISHED
1999 in Regulatory Toxicology and Pharmacology

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Low Bond Yields and Safe Portfolio Withdrawal Rates
You can view the abstract at: https://doi.org/10.3905/jwm.2013.16.2.055
AUTHORS
Wade D. Pfau
Michael Finke
David M. Blanchett
PUBLISHED
2014 in The Journal of Wealth Management

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A safe alternative to endoscopic removal of blunt esophageal foreign bodies.
"An alternative to the endoscopic removal of blunt esophageal foreign bodies is proposed. A Foley catheter is inserted into the esophagus and its balloon is utilized to extract the foreign body under fluoroscopic control. Experience with over 100 children with blunt esophageal foreign bodies has led us to conclude that the technique is easily performed, safe, and highly cost-effective. To protect the esophagus, care must be taken to ensure that the foreign body has no sharp or ragged edges, that it has been in place less than two weeks, and that there is no underlying esophageal disease. To ensure that no compromise of the airway occurs, several safeguards are employed, including orally inserting and withdrawing the catheter, monitoring the procedure fluoroscopically, and placing the patient in a prone oblique position with the fluoroscopic table steeply inverted."
AUTHORS
J B Campbell
L C Foley
PUBLISHED
1983 in Archives of otolaryngology (Chicago, Ill. : 1960)

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Maximum Withdrawal Rates: An Empirical and Global Perspective
You can view the abstract at: https://doi.org/10.3905/jor.2018.5.3.057
AUTHOR
Javier Estrada
PUBLISHED
2018 in The Journal of Retirement

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Maximum Withdrawal Rates: An Empirical and Global Perspective
"Standard analysis of retirement strategies involves evaluating their failure rate. One of the shortcomings of this approach is that a strategy may have a low failure rate and at the same time leave large unintended bequests. Maximum withdrawal rates, by definition, exhaust a portfolio by the end of the retirement period, thus leaving no bequest; they can be used both to assess the likelihood of sustaining any chosen level of inflation-adjusted withdrawals, and more generally to evaluate retirement strategies.

This article provides a comprehensive historical perspective on maximum withdrawal rates considering 11 asset allocations, 21 countries, and 115 years."
AUTHOR
Javier Estrada
PUBLISHED
2017 in SSRN Electronic Journal

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La crisi in Afghanistan: l’intervento militare e il recente disimpegno internazionale in una prospettiva regionale
"The paper delves into the Afghanistan crisis in a regional perspective. It frames the regional and international influences in the country emphasizing the interdependence between global and regional interferences. It argues that regional actors tend to gain more freedom of action in Afghan affairs when global actors – empires or superpowers – disengage from the country. Conversely, when global powers are intervening (as during the Great Game, the Soviet occupation or the US intervention since 2001), regional actors lose their sway. Accordingly, the paper investigates the recent crisis in Afghanistan identifying three phases starting from the US mission launched in the aftermath of the 9/11 terrorist attacks: the G.W. Bush approach to the military campaign in Afghanistan (2001-8); the Af-Pak Strategy implemented by the Obama administration (2009-14); the years of international withdrawal (2015-19). For each period, the analysis underlines the activism of regional actors in Afghanistan and how it becomes prominent when the global power tends to disengage."
AUTHOR
Andrea Carati
PUBLISHED
2019 in Eurasiatica

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How to Determine Maximum Gas Withdrawal Rates
AUTHOR
Robert J. Baker
PUBLISHED
1984 in Opflow

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Maximum Withdrawal Rates: A Novel and Useful Tool
You can view the abstract at: https://doi.org/10.1111/jacf.12268
AUTHOR
Javier Estrada
PUBLISHED
2017 in Journal of Applied Corporate Finance

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THE ASSOCIATION CARBAMAZEPINE-MIANSERIN IN OPIATE WITHDRAWAL: A DOUBLE BLIND PILOT STUDY VERSUS CLONIDINE
"Our clinic has fortuitously developed the therapeutic use of the association of mianserin (maximum daily dose 90 mg) and carbamazepine (maximum daily dose 400 mg) in opiate withdrawal management. If animal studies have suggested efficacy of mianserin in such indication, no human studies have been performed. To test the efficacy of such an association, a comparison was made to clonidine (maximum daily dose 0.600 mg) in a one week treatment period according to a double blind pilot study design. Thirty-two patients were included (16 in each treatment group). The two treatments did not differ in the intensity of the withdrawal, according to the rate of retention in treatment and symptoms, and the psychic distress which were auto-evaluated every other day with the Opiate Withdrawal Questionnaire and several Visual Analog Scales (VAS). The clonidine group, however, scored significantly higher (P < 0.05) on the VAS rating of the global feeling of satisfaction on the last day. The patients in the mianserin group fortuitously had a moderately lower number of daily heroin intakes but there was no significant correlation between this variable and the global OWQ scores on Days 1, 3, 5 and 7. Given the size of the groups, we cannot conclude that the association carbamazepine-mianserin is as effective as clonidine, but a real effectiveness is probable. A study versus placebo would be necessary to draw more definitive conclusions."
AUTHORS
D DASCAL
Ph BUDRY
A VELARDI
G BONDOLFI
Ch BRYOIS
G BERTSCHY et al
PUBLISHED

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Highly regarded source
Global Carbon Cycling on a Heterogeneous Seafloor
FUNDERS
US National Science Foundation , Shelf Sea Biogeochemistry Programme , NERC and Defra
"Diverse biological communities mediate the transformation, transport, and storage of elements fundamental to life on Earth, including carbon, nitrogen, and oxygen. However, global biogeochemical model outcomes can vary by orders of magnitude, compromising capacity to project realistic ecosystem responses to planetary changes, including ocean productivity and climate. Here, we compare global carbon turnover rates estimated using models grounded in biological versus geochemical theory and argue that the turnover estimates based on each perspective yield divergent outcomes. Importantly, empirical studies that include sedimentary biological activity vary less than those that ignore it. Improving the relevance of model projections and reducing uncertainty associated with the anticipated consequences of global change requires reconciliation of these perspectives, enabling better societal decisions on mitigation and adaptation."
AUTHORS
Roberto Danovaro
Chih-Lin Wei
Simon Thrush
Martin Solan
Karline Soetaert
Paul V.R. Snelgrove et al
PUBLISHED
2017 in Trends in Ecology & Evolution

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Boundary Condition Effects on Maximum Groundwater Withdrawal in Coastal Aquifers
"Prevention of sea water intrusion in coastal aquifers subject to groundwater withdrawal requires optimization of well pumping rates to maximize the water supply while avoiding sea water intrusion. Boundary conditions and the aquifer domain size have significant influences on simulating flow and concentration fields and estimating maximum pumping rates. In this study, an analytical solution is derived based on the potential-flow theory for evaluating maximum groundwater pumping rates in a domain with a constant hydraulic head landward boundary. An empirical correction factor, which was introduced by Pool and Carrera (2011) to account for mixing in the case with a constant recharge rate boundary condition, is found also applicable for the case with a constant hydraulic head boundary condition, and therefore greatly improves the usefulness of the sharp-interface analytical solution. Comparing with the solution for a constant recharge rate boundary, we find that a constant hydraulic head boundary often yields larger estimations of the maximum pumping rate and when the domain size is five times greater than the distance between the well and the coastline, the effect of setting different landward boundary conditions becomes insignificant with a relative difference between two solutions less than 2.5%. These findings can serve as a preliminary guidance for conducting numerical simulations and designing tank-scale laboratory experiments for studying groundwater withdrawal problems in coastal aquifers with minimized boundary condition effects."
AUTHORS
Jian Luo
Yiming Chen
Chunhui Lu
PUBLISHED
2012 in Ground Water

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Improving GNSS Ambiguity Acceptance Test Performance with the Generalized Difference Test Approach.
"In Global navigation satellite system (GNSS) data processing, integer ambiguity acceptance test is considered as a challenging problem. A number of ambiguity acceptance tests have been proposed from different perspective and then unified into the integer aperture estimation (IA) framework. Among all the IA estimators, the optimal integer aperture (OIA) achieves the highest success rate with the fixed failure rate tolerance. However, the OIA is of less practical appealing due to its high computation complexity. On the other hand, the popular discrimination tests employ only two integer candidates, which are the essential reason for their sub-optimality. In this study, a generalized difference test (GDT) is proposed to exploit the benefit of including three or more integer candidates to improve their performance from theoretical perspective. The simulation results indicate that the third best integer candidates contribute to more than 70% success rate improvement for integer bootstrapping success rate higher than 0.8 case. Therefore, the GDT with three integer candidates (GDT3) achieves a good trade-off between the performance and computation burden. The threshold function is also applied for rapid determination of the fixed failure rate (FF)-threshold for GDT3. The performance improvement of GDT3 is validated with real GNSS data set. The numerical results indicate that GDT3 achieves higher empirical success rate while the empirical failure rate remains comparable. In a 20 km baseline test, the success rate GDT3 increase 7% with almost the same empirical failure rate."
AUTHORS
Lei Wang
Ming Li
Lili Shen
Peng Zhang
Ruizhi Chen
Yanming Feng et al
PUBLISHED
2018 in Sensors (Basel, Switzerland)

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The 4 Percent Rule is Not Safe in a Low-Yield World
"The safety of a 4% initial withdrawal strategy depends on asset return assumptions. Using historical averages to guide simulations for failure rates for retirees spending an inflation-adjusted 4% of retirement date assets over 30 years results in an estimated failure rate of about 6%. This modest projected failure rate rises sharply if real returns decline.

As of January 2013, intermediate-term real interest rates are about 4% less than their historical average. Calibrating bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, causes the projected failure rate for retirement account withdrawals to jump to 57%. The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low interest rate environment.

Some planners may wish to assume that today’s low interest rates are an aberration and that higher real interest rates will return in the medium-term horizon. Although there is little evidence to support this assumption, we estimate how a reversion to historical real yields will impact failure rates. Because of sequence of returns risk, portfolio withdrawals can cause the events in early retirement to have a disproportionate effect on the sustainability of an income strategy.

We simulate failure rates if today's bond rates return to their historical average after either 5 or 10 years and find that failure rates are much higher (18% and 32%, respectively for a 50% stock allocation) than many retirees may be willing to accept. The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio."
AUTHORS
David Blanchett
Wade Pfau
Michael S. Finke
PUBLISHED
2013 in SSRN Electronic Journal

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Retirement Withdrawal Rates and Portfolio Success Rates: What Can the Historical Record Teach Us?
"Countless current and prospective retirees now rely on portfolio success rates calculated from the historical data for different retirement withdrawal strategies when planning their own retirements. Past history-based studies ushered forth what has become known as the 4 percent rule for retirement withdrawals, as historically 4 percent with inflation adjustments has served as a relatively safe withdrawal rate in the United States. But this study investigates whether the safety of the 4 percent rule achieved with an aggressive asset allocation is an appropriate conclusion to draw from the historical record. Historical portfolio success rates calculated from U.S. data may present a misleadingly rosy picture. In the time period covered by key withdrawal rate studies, financial markets in the United States performed exceedingly well from an international perspective, and such continued successes should not simply be assumed. Second, rolling historical simulations have made high stock allocations look more attractive than may be justified by over-representing a portion of the historical record in which bonds performed exceedingly poorly. Third, and most importantly, historical portfolio success rates teach the wrong lesson from the historical data as they do not account for the changing circumstances facing recent retirees. High earnings multiples, low dividend yields and low nominal interest rates indicate that conservative retirees should adjust their forecasts for future asset returns downward, which further implies lower sustainable withdrawal rates. For prospective retirees, the real lesson provided by the historical data is not past portfolio success rates, but rather to see how maximum sustainable withdrawal rates have related to the underlying sources of asset returns."
AUTHOR
Wade Donald Pfau
PUBLISHED
2011 in National Graduate Institute for Policy Studies

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Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures
"This study attempts to quantify whether a 4 percent withdrawal rate can still be considered as safe for U.S. retirees in recent years when earnings valuations have been at historical highs and the dividend yield has been at historical lows. We find that the traditional 4 percent withdrawal rule is likely to fail for recent retirees.

The maximum sustainable withdrawal rate (MWR) for retirees may continue declining even after the peak in earnings valuations in 2000. Our lowest point estimate for an MWR with a 60/40 allocation between stocks and bonds is 1.46 percent for new retirees in 2008. We also discuss confidence intervals for these predictions. The regression framework with variables to predict long-term stock returns, bond returns, and inflation (the components driving the retiree's remaining portfolio balance) produces estimates that fit the historical data quite well, and we use backtesting for a further robustness check.

Nevertheless, there are important qualifications for these predictions. In particular, they depend on out-of-sample estimates as the circumstances of the past 15 years have not been witnessed before, and there is always potential for structural changes which could leave recent retirees in better shape than suggested by the model. Looking forward, this methodology can guide new retirees toward a reasonable range for their MWR so that the 4 percent rule need not be blindly followed."
AUTHOR
Wade Pfau
PUBLISHED
2010 in SSRN Electronic Journal

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Joint Effect of Random Years of Longevity and Mean Reversion in Equity Returns on the Safe Withdrawal Rate in Retirement
"Using historical data on inflation-adjusted total equity returns (price change plus dividend) from the S&P 500 from 1926 to 2017, this paper develops a simulation-based model to determine the safe, inflation-adjusted withdrawal rate from a portfolio of assets. The model, named the Realistic Retirement Simulator (RRS), improves upon other simulation models by directly addressing two factors that significantly affect the safe withdrawal rate: (1) uncertainty about the number of years of retirement, i.e., at what age will the retiree die; and (2) mean reversion in equity returns. RRS models the number of years in retirement as a random factor based on the Social Security Administration’s 2015 Actuarial Life Table. The mean-reverting stock return model within RRS is statically calibrated to the 1926 to 2017 S&P 500 data. With these two key factors addressed and assuming future equity returns follow the historical record, RRS shows that a 65-year-old male retiree can withdraw 6% of the starting portfolio balance each year from a 100% stock portfolio with a 90% success rate; a 4% withdrawal rate is 99% successful. A simulation model that does not address these two key factors—and the author is not aware of single model that addresses both factors—shows that a 4% withdrawal rate results in a 90% success rate for a retirement lasting 30 years. At the 90% success level, about half of the increase from 4% to 6% comes from treating the length of the retirement as a random factor and other half comes from the mean-reverting model. Many scenarios are run to show how the success rate changes when RRS input assumptions are changed, e.g., age of retiree or stock/bond mix of retiree’s portfolio. Of particular importance is the assumption that future equity returns will repeat the historical record. If the future, long-run trend for equity returns is a 4% compound annual growth rate (CAGR) instead of the 6.93% observed in the historical data, RRS shows that a withdrawal rate of 4% has a success rate of 95%. Regardless of the assumption about future equity returns, directly modeling uncertainty in the length of retirement and mean reversion in equity returns results in more accurate and higher estimates of the safe withdrawal rates compared to models that do not directly address these factors."
AUTHOR
Donald Rosenthal
PUBLISHED
2018 in SSRN Electronic Journal

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Asset Valuations and Safe Portfolio Withdrawal Rates
"Bond yields today are well below and stock market valuations are well above their historical average. There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously. Both current bond yields and stock values have been shown to predict near-term returns.

Portfolio returns in the first decade of retirement have an outsize impact on retirement income strategies. Traditional Monte Carlo simulation approaches generally do not incorporate market valuations into their analysis. In order to simulate how retirees will fare in a low return environment for both stocks and bonds, we incorporate the predictive ability of current valuations to simulate its impact on retirement portfolios.

We estimate bond returns through an autoregressive model that uses an initial bond yield value where yields drift in the future. We use the cyclically adjusted price-to-earnings (CAPE) ratio as an estimate of market valuation to predict short-run stock performance. Our simulations indicate that the safety of a given withdrawal strategy is significantly affected by the initial bond yield and CAPE value at retirement, and that the relative impact varies based on the portfolio equity allocation.

Using valuation measures current as of April 15, 2013, which is a bond yield of 2.0% and a CAPE of 22, we find the probability of success for a 40% equity allocation with a 4% initial withdrawal rate over a 30 year period is approximately 48%. This success rate is materially lower than past studies and has sobering implications on the likelihood of success for retirees today, as well as how much those near retirement may need to save to ensure a successful retirement."
AUTHORS
Wade Pfau
Michael S. Finke
David Blanchett
PUBLISHED
2013 in SSRN Electronic Journal

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Spending Flexibility and Safe Withdrawal Rates
"Shortfall risk retirement income analyses offer little insight into how much risk is optimal, and how risk tolerance affects retirement income decisions. This study models retirement income risk in a manner consistent with risk tolerance in portfolio selection in order to estimate optimal asset allocations and withdrawal rates for retirees with different risk attitudes. We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk averse clients with moderate guaranteed income sources.

The ability to accept greater shortfall probabilities means that risk tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio. A risk tolerant client may prefer a withdrawal rate of between 5 and 7 percent with a guaranteed income of $20,000. The optimal retirement portfolio allocation to stock increases by between 10 and 30 percentage points and the optimal withdrawal rate increases by between 1 and 2 percentage points for clients with a guaranteed income of $60,000 instead of $20,000."
AUTHORS
Duncan Williams
Wade Pfau
Michael S. Finke
PUBLISHED
2011 in SSRN Electronic Journal

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Investment, Wage Goods, and Industrial Policy
"Raising and sustaining long-run growth rates is made more difficult by the complexity of economic growth and by the complexity of growth theory debates. Nonetheless, the investment rate is central to long-run growth and development. Growth sustained by high investment rates will also involve structural change: a shift of resources into high-productivity economic activities. This chapter combines discussion of investment—why it matters, what economic policies help to raise investment rates and keep them high—with discussion of ‘industrial policy’. But the terrain of industrial policy has expanded to take account of new high-productivity activities, of servicification, and of agribusiness; policy officials thus need to refine the criteria used to make resource allocation and incentive decisions accordingly. A particularly important political economy constraint on investment rates is the non-inflationary supply of wage goods."
AUTHORS
John Sender
Christopher Cramer
Arkebe Oqubay
PUBLISHED
2020 in African Economic Development (Book)

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QUESTIONS TO CONSIDER
Does money invested in a US stock index fund have at least a 95% chance of lasting for 30 years at an annual withdrawal rate of 4% (excluding taxes and fees, and with withdrawals adjusted for inflation each year)?
18 studies
Submitted by: KKrista 83

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