What If Everything You Thought You Knew About Retirement Planning Turned Out to Be Wrong?

The following is a guest post.

I’m not joking.

I recently authored a Google Knol with an exceedingly strange title — “The First Retirement Calculator That Gets the Numbers Right.” It’s about a calculator that I developed the contains something that no existing calculator does — an adjustment for the valuation level that applies on the day the retirement begins.

We better figure out whether that is necessary or not. If it is, there are millions of people who are going to be suffering failed retirements in days to come because they relied on retirement calculators that get all the numbers wrong. If it isn’t, I sure would like to learn that before making an even bigger fool of myself.

There are a good number of people who think I am wrong. In fact, I have been banned from a good number of popular investing boards and blogs for letting people know about the bad retirement numbers. Morningstar said that I was being “inflammatory” by doing this. A poster at the Financial WebRing Forum said that he found me polite but also “irritating.”

But others have encouraged me in my belief that valuations matter. Rahiv Sethie, an economics professor at Columbia University, said that my analysis is consistent with the findings of Yale Professor Robert Shiller (author of Irrational Exuberance) and “could be true.” Maryland Financial Planner Michael Kitces described my retirement calculator as “fascinating.” And Carl Richards, owner of Clearwater Asset Management, said that the work I have done in the investing field is “of huge value.”

So which is it? Am I a nutcase? Or am I kinda, sorta on the right track? It would be nice to know for sure one way or the other.

I never went to investing school. I never managed a big fund. It shouldn’t be possible for me to be the first person to develop a retirement calculator that gets the numbers right. I mean, come on! But the numbers generated by my retirement calculator are very different from the numbers generated by all the other retirement calculators. That much is clear. And the reason for the difference is that mine contains a valuations adjustment and the others do not. And big names in the field like William Bernstein have said that valuations affect long-term returns as a matter of “mathematical certainty.” So….

The difference is that the other calculators say that a retiree can safely take out 4 percent of the inflation-adjusted value of his portfolio each year and be sure that his retirement will not fail for 30 years. My calculator says that at times of low valuations it would be safe to take out 9 percent but that at times of high valuations it would not be entirely safe to take out more than 2 percent. For a retiree with a portfolio of $1 million, that’s the difference between living on $90,000 per year, $40,000 per year or $20,000 per year. It’s no small thing.

I’d be grateful if you would take a look at the Google Knol explaining the thinking that went into development of the calculator. If you think I am wrong, please let me know why. If you think I’m right, please let me know why you think that (you might want to let some of the people with the retirement calculators that get the numbers wrong know too). It would be nice to get to the bottom of this.

I have spent eight years of my life studying these questions and I believe strongly that I am right. Every bit of evidence that I have looked at tells me that I am. But the last thing in the world that I want to do is to steer people wrong on the numbers they are using to plan their retirements. It creeps me out that I am the only one out there today saying that the safe withdrawal rate is a number that changes.

Could it be that it is only everything that Rob Bennett believes about retirement planning that is wrong? If so. I hope that someone will soon be able to set me straight.

Rob Bennett developed The Retirement Risk Evaluator, the retirement calculator discussed in this blog entry.