Safe Withdrawal Rates

Safe Withdrawal Rates

Guest: Dr. Geoff Considine
Episode 49
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The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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  1. Guest Introduction: Dr. Geoff Considine
  2. What Does "Safe Withdrawal Rate" Mean?
  3. The 4% Rule
  4. A Brief History on Safe Withdrawal Analysis
  5. Safe Withdrawal Rates for Different Time Horizons
  6. Equity Premium
  7. Monte Carlo Simulations

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Guest Introduction: Dr. Geoff Considine

Nicole DeMartino:  Hello and welcome to The Lange Money Hour. We are talking smart money tonight with retirement and estate planning expert Jim Lange, who is also the author or two editions of Retire Secure! and The Roth Revolution. Tonight he is joined by Dr. Geoff Considine. Geoff are you on the line?

Geoff Considine: I am.

Nicole DeMartino:  Wonderful, welcome! Geoff joins us from Colorado tonight where he is the president and founder of Quantex and the author of A Survival Guide for a Post-Pension World.  Geoff is an expert in asset management, analytics and research so he is the perfect guest to join us tonight as we talk about safe withdrawal rates when planning for your retirement.

Jim Lange:  I would like to start with something that I have actually never done before which is actually having an either a correction or an addition from a prior show.  The last show, we had a guy named Sandy Botkin on and he did a very nice job talking about, he’s actually a former IRS agent, and a CPA and an attorney, he talked a lot about the different tax saving tips and I thought he was a very good guest.  He is also a big fan of people and for people to start their own little side business and eventually even have their side business be their main business and that’s fine.  In the world of authors, which is, frankly, usually the type of people I get as guests because they are experts and they have something to say, but some of them are a little but outrageous. And Sandy said something that really was outrageous and I didn’t call him on it.   But it happens a lot, when I think later on, “Oh gee, I should have said this or I should have said that,” but he said something that I really should not have let go, but I did.  He said, again, he wants everybody to develop their own business, and he said something like, “Well, if you have your job, spend as little time as possible, just do whatever you can just to get by, while you are developing your side business.  Do just enough to not get fired.”  Then I made a joke and said, “Well, that doesn’t apply to my employees” and that’s all well and good but really what I should have said is, “No, Sandy, there’s a lot of people, in fact, I would say the majority of the listeners, who might have put in 20 or 30 years or they are still working and they take a lot of pride in what they do.  They do a good job and they do something useful for society, which is frankly most of my friends, acquaintances, clients and the vast majority of people I run into and there are people like me who are self-employed and some people would say we are self-employed because we are unemployable.”  In either case, I shouldn’t have let him get away with that and I am going to have a rare correction or an addition where I say, “No, I disagree.”  If you have a job, and let’s even say you drink Sandy’s kool-aid, and you say, “Someday, I am going to go out on my own and figure out my own business,” that’s fine. In the meantime, while you have your job, do a good job and then at some point if you go out on your own, give your employer sufficient notice and then go out on your own.  If you are going to stay with your employer, then you owe it to him, yourself, your own clients to do the best job. Anyway, I wanted to get that out of the way because it bothered me.  Anyway, back to Geoff.  Geoff are you still here?

Geoff Considine:  I sure am.

2. What Does “Safe Withdrawal Rate” Mean?

Jim Lange:  Ok, Geoff this show was advertised as a safe withdrawal show and I know that you have other areas of expertise.  In fact, in your book, safe withdrawals was only one section.  On the other hand when you type in ‘safe withdrawal rates’ in Google, you’re all over the place. You have articles and you have obviously been writing about it and I think that is a component of your software.  So, could you start with, let’s just say, the basics on what do people mean or what do advisors mean when they talk about the safe withdrawal rate and  whatever you think the standard definition is, is that your definition?  So what is the safe withdrawal rate?

Geoff Considine:  Okay, that’s a great place to start and, by the way, thanks for having me on. The whole debate about safe withdrawal rates is really a consequence of the move from traditional pensions to defined contribution pensions where you are going to be living on what you managed to save and invest over your lifetime.  And where the challenge comes in is, you’ve spent your whole life working and saving and investing and you come upon retirement and you have a portfolio of assets and people need to try and figure out how much money they can safely plan on drawing each year to be able to sustain a long term income in retirement.  So that is really the definition of a safe withdrawal rate, basically how much money you can plan on withdrawing based on the size of your portfolio for the balance of your life with an acceptable probability of running out of money.

3. The 4% Rule

Jim Lange:  Alright, now one question I get about safe withdrawal rates is whether we use 4% or 5% and we will get into that later.  People say, “Well, does that mean if I spend 4%...” and let’s just use a million dollars because it is a nice round number, so you have a million dollar portfolio, and somebody says, “…now, does that mean if I take out $40,000 per year, I am going to die with a million dollars? Or does that mean I am going to be able to a spend $40,000 a year, and I should include inflation in that, and then when I die there is nothing left?”

Geoff Considine:  Ok good question and your later clarification was crucial.  Where the 4% rule comes from, which is what you happened to refer to, is based on the idea if I retire with a million, the 4% rule says that I can draw $40,000 my first year in retirement and escalate that amount by 3% to keep up with inflation for the rest of my life and I will have a high probability of being able to sustain that income for the balance of my life.  But, no, you should not plan on retiring with the million.  It requires that you have the possibility of you spending the million, not that you will, or not that you will on average, but you have a good chance of spending down the entire balance.

Jim Lange:  Alright then, so the safe withdrawal rate is not really a rate designed to pass money on to your heirs, it is really just to make sure that you have sufficient money to live during your life time.  Is that correct?

Geoff Considine:  Well let me clarify, though, because this is a really important point.  On average, if you follow the 4% rule, if you draw that amount, you will have a fairly substantial estate at your death.  The 4% rule is based on the worst case scenario or the worst cases.  So, the idea is that, on average, you have money and a pretty substantial estate left but you need to plan bad scenarios, so there is a meaningful probability that you would draw down your entire portfolio.   You should expect to leave a substantial bequest and substantial as a fraction of what you retire with. 

Jim Lange:  Okay, let’s say for discussions sake we have somebody that retired in 2008 with his million dollars and then, all of a sudden, boom! He loses a substantial amount in the market and he’s probably going to, let’s say, stay with that 4% rate. He is probably not going to leave substantial amount of money, in fact, is he going to have a problem doing the 4%, right?

Geoff Considine:  Ok very good question.  So you have someone who retires before the crash, and let’s say they retire with a million dollars, and they are planning to pull out the $40,000 a year, inflation adjusted, the rest of their life.  After 2008, if they just continue to draw that amount, they have a very high probability of failure not being able to fund their long term retirement.

Jim Lange:  Alright but the 4% withdrawal rate does anticipate that we are going to have another 2008, that we are going to have another, in effect, ‘crash’ and that is presumably built into those numbers.  On average, the investments have done better than 4% over time and, in addition, that was true and if people got the average rate, if you will, and it was more than 4% and they just drew their 4%, then they would end up dying with their million dollars and more.  What you are saying is the safe withdrawal rate is 4% because you have to take into account the fact that you are going to have at least the possibility of those down years.

Geoff Considine:  Right and that’s a really important point.  There are an awful lot of calculators floating around, including on the web, which ignore investment risks.  So, they treat your portfolio as though, if you think your portfolio is going to make 7% a year, then they will treat your portfolio like it is going to make 7% every year and so, of course, you withdrawal more than 4% in that situation.   The problem is that returns for any portfolio that is a mix of fixed income and equities are somewhat volatile and so there will be situations where you will be drawing a higher fraction of your portfolio relative to its current value.  So if $40,000 is 4% of what you retired with and your portfolio is down 20%, and you draw $40,000, you are obviously drawing a proportionately higher fraction of your portfolio which is then not there to enjoy the recovery.    It is the volatility of investments that really drives the 4 % rule.  If you ignore volatility, life is much easier but the fact is you simply can’t get equity-like returns without that volatility. 

4. A Brief History on Safe Withdrawal Analysis

Jim Lange:  Ok, and by the way, I do want to get to your software solution, which I think is both unique and the next step, but before we get to that, if we can do a real quick history of the analysis because, even without your software, maybe you can’t say that, maybe it’s just an integral part of the way you think and who you are, but if we can do a quick history of that analysis and to see whether you agreed with that 4%, let’s say, before you add your analysis. And I know your analysis is not just changing the 4%, it’s actually something you do proactively regarding investments.  If we can just do a real quick history, because the other thing that I mentioned to you earlier was about Bill Bengen. Bill Bengen was one of the pioneers in the area, and I think he wrote very articulately about it. He was actually on the show and he was kind of like the ‘classic’ safe withdrawal guy and I kind of consider you the more ‘modern’ safe withdrawal guy.  I don’t know if that’s fair or not but if we can do a real quick history and then get to where you have taken it.

Geoff Considine:  Sure.  Right, well Bill Bengen was really the pioneer in this area and I think he did some of the first, if not the first, and is known as being the first person to really take the volatility of the market in to account in terms of calculating safe withdrawal rates.  And, basically, it was his work and there is also a study called “The Trinity Study” that used historical market data to go through and, say, essentially, take real sequences of market returns.  Say, “If I retired in this year and started to draw certain amounts, how much could I safely withdrawal?”  And it looked at every year of history for which we have market data and then look at how successful you could be with the given draw rate and basically, what the early studies showed is that the 4% draw rate was sufficiently low that you would never run out of money through all the market history for which we have data and there was an exceedingly low probability that you would run out of money. 

Jim Lange:  I don’t mean to correct you but this is something I always kind of wonder about, a lot of the people that I work with are conservative by nature and things like ‘exceeding low’ might not quite do it for them. Are you talking about 70%, 90%, 99%, I hate to be this exact but, frankly, these are some issues that people are concerned about because, sometimes, I have even read some of the material, even some of your material, it says if you take out this much then you have a 70% chance, then that means you have a 30% chance of running out of money, which is obviously what we are trying to avoid.  So if you can be a little bit more specific about that, I would appreciate it.

Geoff Considine:  Let me be very specific.

Jim Lange:  All right I like that. By the way, I love this, because it is the difference in getting a Ph.D. who’s studied this for years and years and knows what they are doing rather than getting some joker who’s just kind of making it up as he goes or he read something and he’s trying to spit it back out.  I love when you say, yes, you are going to be very specific. 

Geoff Considine:  Ok now you may have to have a correction on this because I don’t remember exactly, but in my recollection of Bengen’s original study, he found that a 4% withdrawal rate was absolutely safe for the historical period that he looked at.  That you would never go broke with the 4% rule over that period.

Jim Lange:  Ok

Geoff Considine:  Now, later work that attempted to incorporate more uncertainty, which is to say, to account for the fact that given a certain sample of history that’s not representative of everything that could possibly happen, that is simply one snap shot of history.  And the later work that attempted to put more statistical analysis around the historical values, in other words more uncertainty around it, came up with results that were more like an 80% probability of being able to fund a 30 to 40 year retirement.  The numbers do vary when you go from a single period in history to, which we have absolute data for, history never repeats itself. So the challenge of going beyond that, is to then say, “What can we say?”  So, for instance, saying that something has never happened before in a 50 or 60 year market history doesn’t mean it will never happen, it just means it didn’t happen in that period.  So when people attempted to expand the probability to cover the range of things that appear to be possible based on the historical statistics, the probability of failure naturally rose.  So it is more common today to see probabilities of failure, somewhere in the 80 to 90% range, simply because we recognize that one snap shot of history is not sufficient to give the range of all possible things that could happen.  Of course, the extreme cases are what we refer to as ‘black swans’, the fact that you have never seen a black swan doesn’t mean that one doesn’t exist.  Even without going to those really extreme events, simply looking at the given period of history doesn’t give you the range of all things that are possible, it simply gives you one snap shot of what is possible.

Jim Lange:  So, for example, if you use the 30 year period and I don’t know if Bill did that or not, but if you didn’t include the depression or, for example, most of his work was before 2008, and you didn’t include that downturn, then you would obviously have a higher percentage of success, even if it 100% compared to taking in the possibility that, well, something that didn’t happen during that period could happen, therefore it’s not as high.

Geoff Considine:  What is a little more worrisome is the fact that the market evolves.  The market today is not the same market that it was.  So there are people out there who believe, for instance, that given the way markets have evolved, we have high frequency traders and increased influence of those kinds of players in the market, and extreme events have become more probable because there are more giant leverage players.  And so I think the really big picture from my perspective is that looking at history is a great idea, I mean, it is what we have, however you should always assume that it is one snapshot of the possible.  In terms of building statistical models, you have to try to use history to give you a sense of going simply beyond what has happened, to what might happen, and that actually leads very directly from pure historical studies to more of the Monte Carlo studies, which is what I developed in my software and what a number of other companies have developed as well.  

Nicole DeMartino:  You know this would be a good point for us to take a break and when we come back, Goeff, can talk about that.     We are going to take a break.  You are listening to The Lange Money Hour, we are live here, so if you have any questions. (412)233-9385.  We will be right back.

Jim Lange:  I do want to get to your Monte Carlo analysis, Geoff, in a minute but there is something…I think it would be premature to just say the classic solution is 4%.  And one of the reasons why I don’t think that is even the classic answer is because we haven’t distinguished between how many years you need the money.  So let’s just take two people: one is maybe 60 years old and they have a million dollars they are in very good health, and they might live 30 years or even longer and compare that with someone who is perhaps 90 or 95 years old and is not in good health.  Obviously, just intuitively, the 95 year old can take a much higher withdrawal rate than 4% and never run out of money.  Whereas the healthy 60 year old has to be a little bit more conservative because he is going to live longer.  If you can tell me some thoughts that you’ve had and then, maybe we will also give the listeners some of the classic analysis that Bill Bengen did on that and then we will get to your Monte Carlo, if that is ok?

Geoff Considine:  Sure, absolutely.  Well of course you are correct.  The 4% rule is based on the idea of someone retiring today and how much they could draw as a fraction of their portfolio.  The older you are, if you were to, say, be 70 and reset, and say, “I am going to reevaluate my withdrawal rate,” of course you will be able to draw a higher fraction because you will be looking to sustain income for a smaller number of years.  The real challenge to the survival rate is all about longevity risk.  Obviously the older you are, the less longevity risk you face.  In fact, one of the more important evolutions that has become known as part of the 4% rule, is that you should do exactly that.  So you start out at age 65 and say, “I’m retiring and I have a million dollars and I am withdrawing $40,000 a year,” but the idea is to come and reevaluate, do that same kind of an analysis as you get older.  So, basically, the idea is to take the amount you have, say, 3 years later and look at your age and reevaluate what a new safe withdrawal rate is given your age and you can do that using either historical data or software tools.

Jim Lange:  Which we will get to in a minute.  Now, the other thing that I would like to stress though is I don’t want to just base it on age, I actually want base it on life expectancy.  Of course, I sometimes joke with people and say, “How long are you going to live?”  Then they make a joke back, but then we actually get into some serious discussion, of “Well, my dad was 87 when he died” or maybe “He was 60 but he smoked, so we don’t really know because I don’t smoke” or “Well, I had this cancer” or whatever it is.  In that, I don’t want to go strictly with what somebody’s age is, I would rather, and for lack of better information, I just ask the client what they think their best guess is.  I try to be conservative though, when somebody is 60 and they say they well maybe I’ll make it to 85, rather than look at the 25 year, I might rather look at the 30 or 35 just on the chance that they will survive longer than they might think. 

Geoff Considine:  Absolutely.  Longevity varies dramatically based upon your family history, how healthy you are, behavioral factors and, of course, there is always an important consideration that is your bequest motive.  If you really want to leave a substantial estate for your heirs, then your decisions will also be quite different than if you had a different or less of a bequest notice. 

Jim Lange:  The other factor is that, usually, assuming that we are talking to a married couple, to me, I always have to consider the longer of the two lives.  So let’s say for discussion sake, I think it is starting to change, but let’s say traditionally the husband is either the same age or older and has a shorter life expectancy. Then, we might gear it towards the woman’s life expectancy because we have to provide for both spouses.

Geoff Considine:  Certainly.

5. Safe Withdrawal Rates for Different Time Horizons

Jim Lange:  Alright, so what I thought I would do before we get into your analysis, with the Monte Carlo and what you’re bringing up to it, I thought I would just tell that to people, because Bill Bengen actually did come up with safe withdrawal rates for different time horizons.  What I am actually going to do is take a minute to go over those and when I asked Bill the analysis, what Bill had was actually before the down turn of 2008 and 2009 and I said, Do you think that still applies today?”  He hedged a little bit and he said, “Well, you know, I’m not sure we can expect quite the returns we did in the past but at least nobody has redone them.”  I think his implication was that if they go down, they won’t go down by much. 

Anyway here they are, because I think this is relevant for our listeners.  Again, this isn’t fixed in stone and obviously a lot of people, including you by the way, might very strongly disagree, and I’m also not going to be further talking about something that is really important, which is to talk about the asset allocation, which I know is critical and I know it is critical in your analysis.  So, I am going to skip that part too, so I am skipping something that is very important, but I think rather than skipping it, I will just say what Bengen’s analysis was, which was with a 10 year life expectancy, he calculated a safe withdrawal rate of 8.9%.  With a 15 year life expectancy, he calculated a safe withdrawal rate of 6.3%.  With a 20 year life expectancy, he calculated a 5.2%, with a 25 year life expectancy, 4.7%.  With a 30 year life expectancy 4.4%, with a 35 year life expectancy 4.3%, with a 40 year life expectancy a 4.2%, and with a 45 year life expectancy of 4.1%.  So he was even a tiny bit higher that 4%.  Anyway, you may have some disagreements with those numbers and I expect you would.  I just wanted to get some of the classic analysis down.  Let me ask you this before we get into the issue of different ages, could you say if you can, in layman’s terms, what you did to analyze it?  How you think that what you are doing is the next step and, then also perhaps tie that into your software because I know we have a lot of professional financial advisors and a lot of quantitative types that like to do some of this stuff themselves? Your software might be a great tool for all of those sets of people.  Maybe just starting with what Monte Carlo is and what you did with it.

Geoff Considine:  Sure. Okay, so Bengen’s study and other historical studies take and look at history and say, “Okay, looking at various points in history, how would things have turned out?”  By the way, one thing that is important and I don’t remember of the top of my head, is that in Bengen’s is he looking at a 60/40 portfolio, 60% equities 40% bonds?

Jim Lange:  Well, what he’s doing is he is changing the allocation as you age.  I didn’t go through this but, for example, a 15 year portfolio, he had a 30% equity allocation, but for a 45 year life expectancy, he had a 65% allocation. So he is basically increasing the percentage of fixed income as somebody ages. 

Geoff Considine:  Ok, so in terms of looking at periods of history, you have two limitations.  One is that what happened is simply one snap shot of what is possible and the other is we don’t have a really long time series of the diverse asset class.  In other words, there are asset classes that simply weren’t traded and for which we don’t believe we have very reliable index data going back.  So, the purpose of Monte Carlo simulation as opposed to history is to try to combine what we can get from historical data with a statistical model to give a broader sense of what’s possible, rather than simply what happened in one trip through history.  So the idea is simply to cover a broader range of what’s possible than you can with a single market history. The other thing the Monte Carlo usually incorporates is some way to adjust base line estimates of the returns we can expect going forward.  That’s one of the biggest criticisms of using true historical data to look at survival rates, is that we have gone through a period which most researchers believe, particularly in the US, has delivered higher returns for equities than we should expect going forward and there are a variety of reasons that the research shows that.  One is, compared to other economies, we seem to have gotten an unfairly high or a fortunately high equity risk premium over the last 50 years or so, which is to say we have gotten more return from equities that we should have expected.  On the basis of fundamentals, there are fundamentals models to predict, the kind of returns we should expect from equities versus less risky assets and on that basis we also expect we are going to lower returns going forward, which is probably what Mr. Bengen was referring to, in terms of how we might revise terms downward.

6. Equity Premium

Jim Lange:  I hate to interrupt but if you can go back for just one minute.  I want to make sure everybody’s with us.  You use the term that I think a lot of financial advisors are familiar with which is ‘equity premium.’  Perhaps you could explain that to our listeners. 

Geoff Considine:  Thanks for calling me out on that.  There is an idea that equities should return more to investors because they are riskier.  The idea is that risk and reward go hand in hand and so investors should rationally expect to get higher long term returns taking on the risk of equities.  That is referred to as the equity risk premium and it is usually measured relative to a risk free asset or some very low risk asset such as T-bills.

Jim Lange:  Which used to be risk free.

Geoff Considine:  Right. So the idea of the equity risk premium is that additional return you get from risky assets, like equities that reward you for taking on that risk.  And again, in those terms, the feelings of the results for a lot of research out there, is that the equity risk premium will be lower going forward than we have seen in the market as a whole over the last 50 or 60 years.

Jim Lange:  Do you have numbers for either historically or what you think is going to be the equity premium?

Geoff Considine:  Now that is a very interesting question.  Actually, just today, I was reviewing a new piece of research that comes out every year from Credit Suisse, and, basically, there are three academics named Elroy Dimson, Paul Marsh, and Mike Staunton that go through and look at the global equity risk premium and then estimate, basically, what we can expect going forward.  They have even revised their estimates down somewhat this year from last year and they are normally pretty conservative.  Basically, as a rule of thumb, I think we should probably expect, in terms of our average annual returns for equities nominal, in other words, we are all in, of say 8 to 8 and a half percent a year, as the expected return. Realistically, there are some reasons why that might go a bit lower but that is arithmetic average annual returns.  Compounds could mean your return could be lower than that because of volatility.   For instance, in terms of my analysis, I presume a baseline of about 8%.

Jim Lange:  And I know all the engineers are going, “Eight percent, are you kidding, where can you get 8%?”

Geoff Considine:  And again that’s nominal, not real.  But in terms of the after inflation, which is the real return, a 5% in equities given their volatility and the history is pretty much what I see in the research coming out.  Although it is kind of hard to believe, looking at how we have been doing in the market lately, you know, the last five years and it certainly could be lower and I wrote an article several years ago called “The 800 Pound Gorilla of Retirement Planning.”   There is no question that what you assume about the equity risk, about the base line return from equities, has an enormous impact on what comes out of these calculations.  If you use historical data, things will look quite rosy.  If you lower the equity risk premium, things can look a lot worse. 

Jim Lange:  Alright, okay, again, I didn’t mean to interrupt you.

Geoff Considine:  No, it was really an important question.   It was definitely on the things that I wanted to make sure we got into the discussion as well.

Nicole DeMartino:  Jim before you move on, I think this is a good place for us to take another break.  You are listening to The Lange Money Hour, Where Smart Money Talks

Jim Lange:  So we were talking about Monte Carlo simulations and why don’t you finish that discussion if you would, Geoff, and then I also want to get into some of the things that you wrote about in terms of how people can increase their safe withdrawal rate.  But if you could talk about the Monte Carlo simulations and how your software ties in and what your software adds to the mix, I think our listeners would be most interested.

7. Monte Carlo Simulations

Geoff Considine:  Okay, thanks.  So the key with Monte Carlo is that, first, you can expand the range of possible outcomes, which is really important to protect against the really extreme downside events.  You can adjust the equity risk premium, and, again, the current equity risk premium for instance, that we use in the software as a base line is lower than the historical equity risk premium, which in most research is correct and it also tends to lead to more conservative plans.  And, finally, you can do asset allocation that is much more specific than you can do using historical data because as I mentioned, the asset classes that are available today in very low cost vehicles such as ETF’s or index funds simply weren’t available to investors over the very long sample period and even if you have proxy data in the form of indexes that you can use to represent those asset classes, it is simply less meaningful because those were not actually traded that way back in those earlier decades.  So being able to experiment with much more sophisticated asset allocation is a really powerful tool.

Jim Lange:  So I guess, in one way, you have to be more conservative taking into account other possibilities, but on the other hand, and I think one of the points of your research is, if you are better diversified, that the additional safety from diversification will allow you to have a higher withdrawal rate.  Is that fair?

Geoff Considine:  That is a fair statement.

Jim Lange:  Alright, what does your software add to the analysis and how might you, let’s say, disagree? And you know, I kind of ran off some numbers that, in effect, Bill Bengen did, do your conclusions or is it really too much of a case by case basis and that’s the whole point of it or that’s one of the points of using your software?  And then also if you can tell people where to get your software.

Geoff Considine:  Well, in general, what I found, and actually it is quite surprising, withdrawal rates on the order of 45% actually do seem to come out fairly consistently from the Monte Carlo tool, consistent with the historical analysis.  And the reasons are that on the one hand, we do have lower expected returns than we have had over long periods of history, but the greater diversification effects that we can test for and build in because of these additional asset classes that are available allow you to boost your returns relative to the risk levels you are taking on, and so those two tend to be sort of a natural offset.  And so, actually, as a rule of thumb, the four-ish, a little over 4% safe withdrawal rate as a sort of rule of thumb, back to the envelope, is actually remarkably good.

Jim Lange:  Alright, now, I was going to ask, for how many years are we talking about, if your base line is 4%?

Geoff Considine:  A base line of, say, 4% for a high probability of being able to fund a 30 year retirement.  Now that does not mean you are guaranteed to not run out of money, in fact, the probability is sort of like an 80% probability of not running out of money over a 30 year retirement.  So you still have a 1 in 5 chance of running out of money, which doesn’t sound terribly attractive. On the other hand, as an important point that was raised years ago by William Bernstein,  that I imagine many of your listeners are familiar with,  Bill Bernstein did some of the early Monte Carlo analysis to look at retirement planning and he makes the case that you really can’t do very much better than an 80% confidence level.  And to believe we can have a 100% confidence level of being able to fund our retirement is just unrealistic, because even in the best situations, we simply don’t understand the range of possible future outcomes that well.  So his point is plan for something like an 80% probability simply because we would love to plan for a higher one, but there is simply always that risk of extreme events out there that you can’t plan for. 

Jim Lange:  Alright, and let’s assume, for discussion sake, that we have a lot of conservative listeners out there, who are fiscally conservative, and say, “You know something, 80% doesn’t sound bad, but that means there is 20% of the time I am not going to make it.”  Now, does that mean they are going to be starving and destitute and in the street?  And could you talk about the concept of changing expectations after an event? For example, I have a lot of clients who were planning on retiring earlier and then after the market downturned and they said, “Well, I’m not going to retire.” So actually, they change their behavior, rather than increase the risk of running out of money.  And I guess the corresponding thing would be for someone who has retired, that they could consider how much money they could spend.  So could you talk about the not necessarily static model 4 or 5%, but what people actually do?   And, by the way ,we are starting to run out of time and I know that I promised you that you could talk a little bit about your software.  You have been really great to ensure information. If you can just give a quick description of your software or give people contact information for getting it.

Geoff Considine:  Okay, thanks. I will address the substance issue first.  One of the things I have found in my research and a number of others have as well, is that the most powerful way to lean towards a more successfully funded retirement is to have flexibility in your plan.  And rules like the 4% rule really are contingent upon the idea that you will draw a constant income regardless of what happens, and in real life, we certainly hope that people don’t do that.  And that’s where, in the book that I wrote called Survival Guide for Post-Pension World, I went through a series of sensitivity studies looking at how changes and behaviors, such as delaying retirement, or changing your income or saving more can all really have a major impact on the probabilities of successfully funding retirement.  So know that will certainly improve things and, in fact, that is the most powerful tool that most people have at their disposal, is changes in behavior both before and in retirement.  The staying power of the 4% rule is simply that it is a simple guide line and rule of thumb.  Hopefully, people do more detailed and specific analysis both before retirement and during retirement and that’s a lot of what the tools I developed are for.

Jim Lange:  Alright and why don’t you tell people, because we are really going to run out of time soon, why don’t you just say, I’m going to quit giving people such excellence substance and I am going to talk a little bit about my software.  Because I think that, frankly, it might be very interesting, particularly for some of the financial professionals and for some of the quantitative type engineers and physicists and other quantitative types and I know that we have a lot of them in our audience. 

Geoff Considine:  Alright and thank you for my opportunity to give my plug.  Quantext Portfolio Planner is the software that I developed and you can learn about it at  You can apply for and download a free trial and try out all the bells and whistles and it helps you to build a portfolio out of real funds, ETF’s and individual stocks and it will do Monte Carlo simulations on your real portfolio and then project risks and retirement survival rate given whether you are pre or post retirement and given your savings rate and what your withdrawal rate is in retirement. 

Jim Lange:  Again, can you give that contact information one more time?

Geoff Considine:  Sure.  It is

Nicole DeMartino:  Wonderful, Geoff, thank you so much for joining us.  This was Dr. Geoff Considine. Again, his website is  We had a great show tonight, you can always reach us at the office (412) 521-2732 and

Jim Lange:  And I actually have one other quick note. If people are interested in the safe withdrawal rate and they wanted to hear what Bell Bengan said, that is actually on our archives.  If you go to and click on “Listen Now,” you can listen to the classic safe withdrawal guy which is Bill Bengan and that is basically an hour long show.

Nicole DeMartino:  Absolutely, all of our shows are posted on, all of our archives and we also have the transcripts on there too.   So if you like to read better than listen, feel free to download those whenever you like.  Again, thank you very much for listening to The Lange Money Hour, have a great evening. 


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James Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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