Just How Safe are ‘Safe Withdrawal Rates’ in Retirement?

This study considers one of the cornerstone questions in the retirement income debate; namely, what’s a safe withdrawal rate for retirement? This question is of particular importance to Australia’s superannuation system, which is characterised by having compulsory contributions during the retirement saving (or accumulation) phase, but no compulsory requirement to annuitise lump sums at the commencement of the retirement income (or distribution/decumulation) phase. As a result, many retirees face a classic asset–liability mismatch, the need to fund relatively short- and medium-term retirement spending needs with a long-term investment strategy. This study tests one of the most popular heuristics that have arisen from the safe withdrawal debate, specifically the 4% rule. Our findings question the validity of this approach using historical international return data.