by Wade Pfau
This book is very narrow in scope but highly detailed. It is an in depth look into withdrawal rates for retirees who have chosen to invest most of their wealth in the stock market. This is an exceptional resource for the standard F.I.R.E. investor with a large nest egg in index funds. If you want to go deeper into the origin, and rationale of the venerable 4% rule then this is the book for you.
Insights
I found the discussion early in the book about different types of risk to be quite useful. How do you best balance your investment and withdrawal strategy to hedge against not only sequence of returns risk, but also longevity risk, inflation, lifestyle, legacy, etc.. A simple market based approach requires a heavy focus on sequence of returns risk. You might be able to do more with less if you also think through your longevity risk and what the market based portfolio is costing to hedge that.
I also liked the discussion of the difference between technical liquidity and true liquidity. If you have a large portfolio that you can access then you have technical liquidity. But if all of that money is needed to fund your basic needs then you can’t safely withdraw more than your expenses to cover unforeseen issues. Money above and beyond your basic needs is the true liquidity in your portfolio.
The 4% Rule
This is the bulk of the book and it is quite detailed. Some of the main points I took from the book were the basis of the rule and its assumptions. For instance the rule as stated assumes you are using at least a 50% portfolio of stocks, but the probability of success increases as you increase the stock allocation. Also the 4% rule does not take fees into account. So you need to watch the fees if you are using this to estimate your safe withdrawal rate.
Interestingly the success rates of 5% and higher withdrawal rates was not drastically low. So if you are willing to take a higher risk then higher withdrawal rates might be a reasonable decision.
Recommendation
This book is highly recommended to anyone with an interest in the technical and theoretical basis of the oft quoted 4% rule for retirement account withdrawals. I found it to be a very valuable and insightful book on the topic of safe withdrawal rates.
