Trying to figure out how much money you can safely withdraw from an investment portfolio each year is challenging. Some use rules of thumb such as 4%, but the real answer must depend on the types of investments and total fees and commissions paid each year. Jim Otar has studied this problem extensively, but has a questionable built-in assumption.
Otar’s book Unveiling the Retirement Myth is available free online for a limited time. It contains a near endless supply of worked examples where Otar checks the likelihood of running out of money in retirement based on real historical rates of return over the last 100+ years.
Readers are told to “ignore any retirement plan that includes a forecast” but implicit in Otar’s analyses is the assumption that the future will look like the past – plus a twist. The author replaces historical dividend returns with roughly the current dividend level: 2%. Otar says that using historical dividend yields “creates an artificially higher degree of outperformance compared to prevailing dividend yields.”
If this is true, then isn’t it also misleading to use historical bond returns when currently bond yields are very low? And isn’t it overly pessimistic to use historical inflation figures when inflation is low right now? This handicapping of stock returns affects almost every worked example in the book.
Some might suggest that it makes sense to handicap stocks somewhat because they are risky. The problem is that the author ends up handicapping stock returns doubly. First Otar removes most of the dividends from stock returns and then he analyzes the volatility of these lowered returns to recommend even lower allocations to stocks in retirement portfolios.
It’s no wonder that Otar recommends “never allocate more than 50% of your assets to equities in any portfolio, ever.” Another consequence of the reduced dividend assumption is the conclusion that the percentages of stocks and bonds in a portfolio doesn’t seem to affect how long it takes to run out of money. Yet another is that it makes various types of annuities including the variable types with guaranteed minimum withdrawals look better than they are.
The approach Otar takes to analyzing portfolio longevity in the first half of the book is very interesting. I’d like to see it done using more reasonable return assumptions. Chapters 21 to 26 about seeking positive alpha are mostly an exercise in data mining. Overall, I’m glad I read the book for some useful ways of thinking about retirement, but I disagree with many of the conclusions.