Guest: Karsten Jeske, Ph.D., CFA — economist, early retiree, and author of EarlyRetirementNow.com
Host: Alex Sukhanov (Nauma)
Recorded: September 5, 2 PM PT / 5 PM ET
Introduction
The Safe Withdrawal Rate (SWR) is one of the most debated topics in retirement planning. Many rely on the well‑known “4% rule” to determine when they’re financially independent. Today, opinions are split: some say 4% is too conservative and leads to oversaving; others argue that, with today’s high CAPE (cyclically adjusted price‑to‑earnings ratio), 4% is too aggressive.
Karsten Jeske, Ph.D., CFA, previously taught economics at Emory University in Atlanta and worked at the Federal Reserve Bank of Atlanta as well as at BNY Mellon Asset Management in San Francisco. He retired in 2018 and now runs the personal finance blog EarlyRetirementNow.com.
Karsten joined our Personal Finance Learning Session this Friday to discuss safe withdrawal rates and answer your questions! Below is a lightly edited transcript from our live Q&A.
Interview Transcript
Alex: To kick us off, what are the most common mistakes people make with the 4% rule?
Karsten: The 4% rule is a decent starting point, especially if you’re 10 years from retirement and need a rough target. One over 4% is 25x—so aim for about 25× your annual expenses. But as you get closer, you should personalize. If you’re retiring very early—say early 30s—4% is likely too aggressive given the long horizon. If you’re in your late 40s or 50s, you may have Social Security or a pension kicking in later, which lets you lower withdrawals then. Market conditions matter too: retiring at a market peak calls for more caution than retiring after a 30–40% drawdown. In practice, a “4% rule” can mean anything from ~2.8% to ~6%, depending on your personal situation and market valuations.
Alex: Some personalities suggest 7–8% withdrawal rates. Is there an upper bound?
Karsten: There isn’t a universal ceiling because future cash flows (deferred comp, business sale, etc.) can justify higher initial rates. But tying withdrawals to long‑run average equity returns (e.g., “stocks return 8% real, so withdraw 8%”) ignores sequence risk. If you start too high and markets drop early, you may be forced to cut spending dramatically. I consider the widely cited 8% figure too aggressive for most.
Alex: You often talk about “idiosyncratic” factors. What do you mean?
Karsten: Idiosyncratic = personal. Age, longevity in your family, future cash flows, and your bequest goals (leave nothing vs. preserve principal) all affect your safe rate. Two families with the same portfolio size can have different sustainable withdrawals because their inputs differ.
Alex: What is the Shiller CAPE and why does it matter for SWR?
Karsten: The CAPE is a valuation metric: price divided by 10‑year average inflation‑adjusted earnings of the index. It’s simple yet predictive of long‑term (10‑year) real returns—not next month’s move. I publish CAPE data on my blog and also discuss adjustments (e.g., corporate tax regimes or payout ratios) to make historical comparisons more apples‑to‑apples. When valuations are high, expected returns are lower, so initial withdrawal rates should be lower and vice versa.
Alex: During your accumulation years (2000–2018) the point‑to‑point S&P 500 return was modest, yet you still retired. Why?
Karsten: Dollar‑cost averaging. Starting work at peaks (2000, then 2008) didn’t feel great, but buying on the way down boosts the internal rate of return on those contributions. Valuation sensitivity is less critical for accumulators than for retirees; it’s vital at the withdrawal stage.
Alex: How does retirement length change the safe rate?
Karsten: It’s not linear. Doubling the horizon from 30 to 60 years doesn’t cut SWR in half. Think of it like mortgages: going from 15 to 30 years doesn’t halve the payment. For very long retirements, SWR might fall by ~15–20%, not 50%. That’s good news for early retirees.
Alex: Has the financial system “matured” enough that old data are too conservative?
Karsten: Two offsetting effects. Better policy may mean fewer Great Depression‑style collapses (good for SWR), but expected returns—risk‑free rates and equity premia—may be lower (bad for SWR). I still want 100–150 years of history in simulations to capture both deflationary recessions and inflationary shocks like the 1970s.
Alex: Do we really need bonds, or should we go all‑equities?
Karsten: All‑equity maximizes average returns but also maximizes sequence risk. Historically, the “sweet spot” for SWR tends to be ~60–80% equities (often ~75%), with the rest in high‑quality bonds. Bonds can be the source of withdrawals during equity drawdowns, reducing the need to sell stocks low.
Alex: Retiree spending isn’t flat: early‑retirement splurge, mid‑retirement slowdown, late‑life health costs. What does SWR mean with variable withdrawals?
Karsten: Model it. If you know spending will decline later, you can often start a bit higher. Huge late‑life expenses (e.g., potential long‑term care in your 80s) typically have surprisingly small impact on initial SWR due to discounting. Big one‑time outflows—helping kids with a down payment, for instance—should be explicitly scheduled in the plan and stress‑tested, with some timing flexibility if markets are down.
Alex: What about glide paths in retirement?
Karsten: Research suggests a rising‑equity glide path in retirement can help: start nearer 60/40, then increase equity share over time. It hedges early sequence risk (you’re more bond‑heavy right out of the gate), while restoring the growth engine later. Oddly, most target‑date funds do the opposite after retirement.
Alex: How should taxes factor into withdrawal planning?
Karsten: My published toolkits report pre‑tax withdrawals; you then apply your effective tax. In the U.S., retirees can often engineer very low federal taxes—e.g., use the standard deduction for ordinary income, realize 0% long‑term capital gains within the 0% bracket, and do annual Roth conversions to manage future RMDs. Tax outcomes vary widely by household, so model your own flows.
Alex: Do people actually stick to constant, inflation‑adjusted withdrawals in real life?
Karsten: Almost nobody does. Spending naturally varies (cars, home repairs, travel). More importantly, plans should be time‑consistent: each year, “re‑retire” by updating your horizon, portfolio level, and any new information (health, pensions, etc.). That implies adaptive withdrawals rather than a forever fixed rule.
Alex: For those worried about oversaving vs. undersaving—advice?
Karsten: Use good planning tools and run personalized simulations. Many people fear the 4% rule and end up withdrawing 2%, sacrificing lifestyle unnecessarily. Proper modeling can give you the confidence to use a higher, yet safe rate—while keeping an “airport buffer” so you don’t cut it too close.
Alex: Thoughts on annuities and TIPS ladders?
Karsten: The commodity‑like product with reasonable pricing is the SPIA (single premium immediate annuity). It delivers nominal cash flows, so inflation risk is the trade‑off. A TIPS ladder removes inflation risk but lacks longevity insurance. For very young retirees, I’d keep these as modest components at most; for traditional retirees, a safety‑first sleeve can make sense.
Alex: With real TIPS yields around the mid‑2% range at times and high equity valuations, should retirees tilt more to bonds?
Karsten: If you’ve “won the game,” starting closer to 60/40 is defensible, then glide back toward higher equity later. Accumulators can remain stock‑heavy, but retirees facing sequence risk may prefer the cushion.
Alex: You’ve been retired for seven years. Any surprises?
Karsten: I’m busier than expected—writing, conferences, some advisory work, plus family and volunteering. Retirement doesn’t have to mean boredom.
How to Reach Karsten
Blog: EarlyRetirementNow.com
Social: https://x.com/ErnRetireNow
This interview has been edited for length and clarity.