The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction

Update: We posted the results from parts 1 through 8 as a Social Science Research Network (SSRN) working paper in pdf format:

Safe Withdrawal Rates: A Guide for Early Retirees (SSRN WP#2920322)

We just calculated over 6.5 million safe withdrawal rates. Well, not by hand, of course, but by writing a computer program that loops over all possible combinations of retirement dates, and other model parameters. Not a big surprise here, but it took a lot of work to put this together. We can’t possibly fit all results into one single post, so we publish our results in multiple parts. Today, we briefly introduce our research and some baseline results. Stay tuned for more to come in the next few weeks/months:

The plan to work on this research came after one of those moments when we realized that if you want something done right and exactly applicable to our own situation, we just have to do it ourselves. We wanted to do a lot more robustness analysis than we had seen anywhere in the blogging world.

Nonconformist among the nonconformists

Intriguingly, very few early retirement planners or bloggers question the validity of the 4% safe withdrawal rate rule. When you retire in your 30s or even 40s you are by nature nonconformist. You question the consensus, the people with the McMansions and the full-size SUVs in the driveway. People who are otherwise extremely suspicious about everything consensus suddenly eat up the 4% rule without much questioning or checking under the hood:

  • People take the Trinity Study at face value and extrapolate the 30-year windows from Trinity to 50+ years for the early retirement crowd (bad, bad, bad idea, see Part 2 of our series!!!),
  • It’s probably not a good idea to use a withdrawal rate calibrated to the average retiree since 1926 when today’s equity valuation is much less attractive than the average since 1926, see Part 3 of this series.
  • Social Security will also save your behind come age 67 (uuhhhm, good luck with that, see Part 4 of this series!).
  • Folks wave their hands about how one can just slow consumption growth (it’s not that easy, see Part 5 of this series!),
  • and wave their hands about how the 4% rule did just fine in 2001 and 2008 (believe me, it didn’t; see Part 6 of this series!)

Has anybody actually done some serious simulations that are truly applicable to the FIRE community? Something comparable to the original Trinity Study, but with more bells-and-whistles and robustness checks applicable to the FIRE community? I don’t like the “hand-me-down” research targeted at my parents’ retirement. So, when you want something done, and done right, you gotta do it yourself! Which is what we did with the 6.5 million safe withdrawal rates.

What we do to be more relevant for early retirees

  1. The study is done at a monthly frequency (not just annual like cFIREsim), starting with equity and bond returns in January 1871 and going through September 2016. It would be unrealistic for us to withdraw funds only once per year at the beginning of the year and have – on average – 6 months of cash sitting around in our checking account.
  2. We look at the sustainable withdrawal rates over 30, 40, 50, and 60-year windows. It’s still a good idea to keep the 30-year window for comparison, though this window length is simply too short for us in the early retirement community.
  3. We look at different target final values, i.e., calibrate maximum withdrawal rates to deplete the capital (final value=0), preserve the inflation-adjusted initial capital (final value=100% of initial value) and some steps in between (final value=25%, 50%, 75% of inflation-adjusted initial value). This is useful for retirees who are uncomfortable with the idea of running out of money at some future date and/or plan to leave a bequest to their children, grandchildren, and charitable organizations.
  4. We extrapolate past the current history and append equity and bond returns after September 2016. To this end, we assume long-term average returns for equities going forward (about 6.6% real p.a.). For bonds, we assume a low real return over the first 10 years: only 0% real p.a., which is actually slightly above the 9/30/2016 10Y yield (1.61%) minus the inflation expectation at the time (~2%). After the initial 10 years, bonds too will return their long-term average of 2.6% real per year. We should note that these return assumptions are likely going to generate higher sustainable withdrawal rates due to the absence of return volatility.
  5. We study how different the safe withdrawal rates and success probabilities were in various equity valuation regimes. Specifically, how do safe withdrawal rates and success probabilities look like for different Shiller CAPE ratio regimes? We did a similar study before using, but now we can rely on our own monthly simulations and easily loop over all sorts of other model parameter values.
  6. We can study the impact of reducing the monthly withdrawals over time. This mimics the assumption that some people consume less as they age. Or we can take into account the impact of lower withdrawals once retirees start collecting Social Security.
  7. We study how alternative withdrawal strategies, e.g., dynamic withdrawal rules rates based on equity valuation (Shiller CAPE) would have performed during this time.

Methodology in detail

We use monthly total return data (including dividends/interest) for the S&P500 and 10-year Treasury Bonds from January 1871 to September 2016. We realize that some other researchers use slightly higher yielding corporate bonds. Notice, though, that this higher yield comes at the price of higher correlation with equities and thus less diversification. Our analysis yielded that the exposure in the LQD ETF (iShares investment-grade corporate bonds) has roughly the exposure of 75% government bonds (IEF = 7-10-year US Treasuries) and 25% US equities (VTI = Vanguard US Total Equity Market ETF). So, a 60% equities 40% corporate bond portfolio has about the same return characteristics as a 70% equities, 30% government bond portfolio if you like to translate our portfolio weights into a Stock vs. Corporate Bond portfolio. The Barclays Agg (iShares ticker AGG) is somewhere in between.
Monthly returns and monthly CPI inflation are translated into monthly real returns. We assume that the retiree has withdrawn an initial amount equal to one-twelfth of the targeted withdrawal rate at the market closing price of the previous month. The remainder of the portfolio grows at the real market return during the current month. At the end of the month the retiree withdrawals the next monthly installment and rebalances the portfolio weights to the target equity and bond shares. We assume that the portfolio is subject to a 0.05% drag from fees for low-cost mutual funds.

Why 6.5 Million Safe Withdrawal rates?

We calculate safe withdrawal rates for all possible combinations of 1) starting dates, 2) retirement horizons, 3) equity weights, 4) final asset values and 5) withdrawal patterns:

  • 1739 possible retirement start dates between February 1, 1871, and December 1, 2016.
  • 4 different retirement horizons: 30, 40, 50, and 60 years
  • 21 different equity weights from 0% to 100% in 5% steps (bond weight = 100%-equity weight)
  • 5 different final asset value targets: 0%, 25%, 50%, 75% and 100% of real inflation adjusted initial asset value
  • 9 different withdrawal patterns. The baseline assumes that withdrawals are adjusted in line with CPI inflation, but we also allow for slower than CPI-growth. We also check how lower withdrawal rates 20 or 30 years after the retirement start date (to account for Social Security income) will impact the maximum sustainable withdrawal rates.

Hence, we calculate 1739 x 4 x 21 x 5 x 9 = 6,573,420 different safe withdrawal rates.

Base Case Results

Here’s a table, roughly the same structure as they use in the Trinity Study. Major changes:

  1. we use retirement lengths of 30-60 years and
  2. withdrawal rates only between 3% and 5% in 25 basis point step. No serious long-term retirement planner with a horizon of 50-60 years would ever even consider a withdrawal rate above 5%, anyway, given that equities return “only” about 6.6% and you have to account for volatility and sequence of return risk.

The success criterion is a final asset value of zero as in the Trinity Study.

Success Rates for different SWRs, by equity share and retirement horizon (1871-2015)

A few conclusions from this table:

  • The success rates for a 30-year horizon are roughly consistent with the Trinity study.
  • Success probabilities stay very high at all horizons when using 75-100% equity shares and withdrawal rates of 3.5% and under.
  • Success probabilities deteriorate quite a bit when the retirement horizon goes from 30 to 60 years.
  • It may be true that for a 30-year horizon, an equity share of 50-100% gives consistently high success rates if the withdrawal rate is 4% or lower. Essentially the main result of the Trinity Study! But for longer horizons, 100% stocks gives the highest success rate. This goes back to our earlier research that showed that over long horizons bonds can have extended drought periods and only equity-like returns are a guarantee for not running out of money over long horizons. For example, a 4% withdrawal rate has a 95% success probability in a 50%/50% over 30 years, but only 65% over 60 years. The failure probability is 7 times higher over the 60-year horizon!
  • A 5% withdrawal rate would have an unacceptably low success rate even after 30 years, and certainly after 60 years. As stated above, no early retiree should get anywhere close to a 5% withdrawal rate.

Another way to look at the data: Plot a time series chart of different safe withdrawal rates over time both for 30-year and 60-year horizons. In the chart below I use an 80% equity weight and 20% bond weight, pretty common among bloggers. Unsurprisingly, the 60-year withdrawal rates are significantly below the 30-year rates. There are only a few occasions where the 30-year SWR drops below 4%, but a 60-year retirement horizon has a few stubbornly long episodes with 3.5-4% withdrawal rates. So, 3.5% is the new 4%! What’s worse, in future posts, we will show that you’d likely have to reduce the 3.5% even further to account for a) today’s high CAPE ratio and b) a higher final asset target!!!

Safe Withdrawal Rates: 30 vs. 60-year horizons: 80% Stocks, 20% Bonds

Another way to slice the data; same chart but as a scatter plot instead of time series chart, see below. The 30-year safe withdrawal rate is on the x-axis and 60-year withdrawal rate is on the y-axis. The dots are all under the 45-degree line, no surprise here! On average, the 60-year SWR are more than a full percentage point below the 30-year SWR (below the 45-degree line), but in the region where it really matters, when the SWRs are low, the difference is “only” about 0.5%.

Safe Withdrawal Rates: 30-year horizon (x-axis) vs. 60-year horizon (y-axis). Blue line = 45-degree line

So much for the sneak preview today. We hope you enjoyed this research so far. More topics coming over the next few weeks/months:

Thanks for stopping by. Please leave your comments, questions and suggestions below!




168 thoughts on “The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction

  1. Fascinating ERN! This study deserved to be done, and who better than you to do it. Just like I suspected, 3.5% may be the “new 4%” for early retirees with 40-60 year horizons. And, as we both say in many of our articles, stock heavy portfolio is the way to go. Great work.

    Liked by 1 person

  2. Amazing work as always, ERN…and many thanks for the shout! Now I’ve gotta go find my socks, which got blown off somewhere around here…

    This is definitely the robust-iest SWR analysis out there! Only 6.6 million simulations, though? I was hoping for at least 6.7 million.

    I like your programming for future posts, and I’m eager to see what you come up with. Here’s a parameter that I think would be interesting to study (but which I ain’t about to try modeling myself): What’s the impact/damage to portfolio longevity if there’s a one-time “splurge” (that sends that year’s withdrawal rate to, say, double the average) that happens relatively early on in the retirement phase – say, sometime during years 1-5 of a 50 year horizon? I ask because this seems to be a killer of lots of retirees’ portfolios: They’re relatively “set” initially and then they dump a bunch of dough on retirement toys like a new car or house remodel or something… It’d be useful to know A) how much of an impact that one-time splurge has on the overall SWR for the retiree; and/or B) how much time that one-time splurge takes off the longevity of the portfolio, given an otherwise safe withdrawal rate for the portfolio.

    Yeah, it’s a tall order. And I’d like the dressing and croutons on the side, please. So no worries about actually modeling it since your agenda’s already full – but something that’d be interesting (to me at least).

    Thanks as always for an awesome read, ERN!

    Liked by 1 person

    • Thanks, FL! That’s a great compliment. Next time, hold on to your socks! 🙂
      That suggestion about how is clearly worth pursuing. I will think about that more and see how to best implement a spending shock like that. That should also get us above the magic 6.7 million mark! Whew!

      Liked by 1 person

  3. I love the analysis and thought you put behind your SWR studies. I can’t tell you how helpful it is to me in formulating my plans when I hit FIRE. The main struggle for us FIRE folks is the long tail and certainty around a 50 or 60 year retirement. For that reason, I think the safest bet I have is to keep my investments 100% in stocks (as they are today). And it sounds like your analysis supports this.

    One suggestion for a future topic, something that keeps me up at night, is finding the appropriate solution for long term care. That’s the scenario where at the end of the tail, say 40 to 45 years from now, my cost of living doubles due to needing more care. Is the solution simply to buy LTC insurance and building that into my baseline cost of living, or do I model out the increased cost of living in the out years if/when I need the care? I’d love to hear your thoughts on this and what your plan is. Thanks!

    Liked by 1 person

  4. I love your analysis! It makes things do much more applicable to FIRE.

    I plan to do the opposite of what Financial Libre suggests and try to structure my”early retirement” as continuing to work/volunteer for years afterwards, but only worrying about getting enough to support a cheap lifestyle and not continuing to build my retirement fund. Retiring to teaching English in southeast Asia or volunteering with an aid organization that would only provide food and housing are a couple of ideas. Even just working as a locum tenens physician for a couple of months a year for the first few years. This will hopefully keep retirement interesting and allow me and my family to continue to contribute to society while freeing me from having to maintain constant employment. It would also let us be relatively location independent and live around the world.

    This would have the added benefit of allowing our nest egg to continue to grow for a while before withdrawing from it as well as shortening the time period of eventual withdrawal. I’ll be anticipating your further analysis. Oh, and if you click on my link, I will get around to completing my blog setup soon… 🙂

    Liked by 1 person

  5. Ideally I would prefer to stick to an asset allocation between stocks and bonds and rebalance even in the contribution phase so that when stocks are highly valued more of my money goes to bonds and vice versa to maintain that asset allocation.
    But if your study indicates that 100% stocks is the way forward for FIRE situations; then should anyone even bother contributing to bonds? Also you mention CAPE ratio as a measure of overvaluation. So shouldn’t that come into the picture in some form when trying to decide if one should contribute to bonds or stocks

    Liked by 1 person

  6. You’ve solved the biggest concern I’ve had with firecalc and its ilk that yearly you are only looking at a few hundred examples of timeframes, so I like the monthly view. I might add one more scenario to run. Pick a country like Japan or a major country in Europe and do a same analysis on their returns. I say this as in some ways I also view the US past performance as potentially unique to a economy in its infancy (though perhaps Japan is unique as well) so I do worry sometimes if the American exception economy is largely over.

    Liked by 1 person

    • Thanks FTF! That’s a great suggestion. The simulation wouldn’t be as thorough as for the U.S. because I don’t have the long series for equity and bond returns going back to 1871 (145 years!). But a case study with a shorter history might be something I should do. Cheers!


  7. Awesome post. The vast number of combinations takes me back to the days when making large numbers of compounds( combinatorial chemistry) was going to revolutnize drug discovery. Eh, not so much! I think your work will be a tad more useful to the finance community than combinatorial chemistry was to pharma.

    We are fortunate that we will have a pension as base income hence our WR is going to be rather low ~2%, not factoring in SS. We have expectations of leaving a legacy fund to our children and charity. Really looking forward to the next installment and how the lower WR impacts the potential size of legacy fund.

    Like FTF, also wonder what the impact a US based versus global equities portfolio would look like in terms of the WR scenarios. Has Pfau or Kitces done this type of anlaysis already?

    Fine , fine work ERN. Hope you and family have a great holiday season and get some well EaRNed rest. Cheers.

    Liked by 1 person

  8. Can’t say enough about your approach to the analysis we are all focused on. Just posting to say THANKS and I look forward to the next installments. My selfish question would be along the lines of — can you build an “ERN-cFIREsim” tool, or share a Google doc where one could enter individual variables to test the impact within this framework? I honestly don’t know how much effort something like that would take.

    Liked by 1 person

    • Hi FIREby2021! Thanks for the suggestion! That would be a nice tool. I am probably not tech savvy enough to put together a whole cFIREsim tool by myself but maybe a quick and dirty Google Sheet could be doable. Will have to think how to implement this.


  9. Thanks for sharing this research. I agree that we’ve all hung our hats on the 4% rule because it’s simple and seems conservative, but now I guess we need to use the 3.5% rule.
    That means working a few more years, but I guess it’s better to know that now than when I’m 75 or 80.

    Liked by 1 person

  10. Very useful results and analysis indeed! This confirms how I must retarget to transition into FI life.

    My first thought after reading was “twenty years ago, this would have been someone’s successful PhD thesis or early research publication, now it’s a strong-hobbyist labor of love — we’ve come so far”.

    Liked by 1 person

  11. Just a dumb question on withdrawal rates. Is the money withdrawn supposed to be used just for living expenses, or also cover taxes? Your return assumption for equity seems high for after-tax, in which case I’m assuming that the withdrawal is meant to cover taxes as well. But I know it’s not apples to apples so just wanted to clarify.

    thanks for this, very helpful.

    Liked by 1 person

    • I don’t know the tax situation of everybody, so the calculations here are the gross wothdrawals. They consist of a) principal/cost basis in taxable accounts and some regular after-tax IRAs (=tax-free), b) long-term capital gains and dividends (taxed at state and federal level, though at lower rate), and c) ordinary income from 401(k) etc. withdrawals.
      Depending on the composition of your withdrawal and your tax rates you’ll have to assign another haircut to the SWR. Ouch!
      Thanks for pointing that out!


  12. […] Avoid The 4% Rule To Stay A Millionaire In Retirement: This is as good a place as any to really get going. The “traditional” 4% Rule is hardly bulletproof and could bankrupt you before you die. So you should avoid it. Here’s what to do instead. (Additional 4% Rule articles that might also be useful if this topic is of particular interest are here (The 4% Rule, Inflation, and Building Wealth In Retirement) and here (A (Slightly) Happier 4% Rule). Bro blogger ERN also has done some amazing work on these topics here.) […]


  13. Thanks for the great work! It’s amazing how much of an impact shifting from a 30 year to a 60 year time horizon negatively impacts success rates.

    I can’t help but wonder why, though, you lumped all the withdrawal strategies together. Even just using a tool like FIRECalc, it’s easy to see that flexible withdrawal strategies can really increase success rates and provide greater total income over time from a portfolio than fixed withdrawal strategies. Further, I’m not sure how many people, especially early retirees, would ever actually use a fixed withdrawal strategy anyway.

    Liked by 1 person

    • I like the fixed withdrawal rates because
      a) they are simple to handle
      b) I don’t like wild swings in my post retirement consumption amounts, especially because there’s a significant mandantory spending amount (health care and rent/mortgage)
      c) there is only one single success criterion: the final value. With variable withdrawal amounts we’d be comparing apples and oranges. If you retire in 1993 and start with 4% you will increase your real withdrawals substantially. If you start in 2000 you would significantly cut your withdrawal amount when compared to the initial amount.
      I will look at the Gruyton Klinger rule some time in the future but I doubt that it is a panacea. Example: If 4%initial withdrawal and then adjusted for CPI fails over 60 years then GK will either also fail or will have long stretches of lower withdrawal amounts. There is no free lunch!


  14. That’s simply the best modern study about the 4% rule.
    Thank you so much for having put all this data together!
    Would be great to see the impact of fees (TERs) and maybe taxes on it.
    I live in a country with dividend tax (taxed as income), no capital gain tax but wealth tax.
    I plan to retire in a country with flat dividend and capital gain tax but no wealth tax.

    Liked by 1 person

    • Oh, thanks a lot!
      Regarding fees: I subtracted 5bps (0.05%) p.a. to account for ETF expense ratios.
      Regarding taxes: A quick and dirty way would be to gauge what’s the impact of the taxes on the yearly return and assign a haircut to the SWR by that amount to get the after-tax SWR.
      Example 1: 75% of wealth subject to 0.20% wealth tax => reduce SWR by 0.15%.
      Example 2: Out of my withdrawals 80% is capital gains/dividends, 20% cost basis, cap gains/div are taxed at 25%. Then the after-tax SWR = pretaxSWR*(0.2+0.8*0.75).


      Liked by 1 person

  15. This is a great analysis and I have appreciated your entire series on safe ROW. For people looking to formulate their strategy and are looking to put this in practice I have found this to be a useful resource as well: It basically provides a framework to track your ROW against your baseline and adjust accordingly. If you follow the ERE guidelines, you will likely not have to make many adjustments in ROW.

    Liked by 1 person

    • Nice link, thanks for sharing. Personally, I’d caution about meddling with the CPI-adjustments too much. In our post here:
      Part 5: Cost of Living Adjustments
      we looked at some of the options. Maybe CPI-0.5% could work. Anything higher and you run out of purchasing power after 40-50 years.
      Again: What works for the average 67-year-old may not work for the average early retiree who has a busy travel schedule for the next 30 years…


  16. […] My projected retirement date is early 2018. If there is another “International Day of Happiness” in March that year, I might even be able to retire on that day. Preparing for that change in lifestyle will be the plan for 2017. One issue I grapple with right now, is how much money is enough to buy myself out of the workforce? That’s another way of saying “What’s a safe withdrawal rate?” So, I have been doing a lot of research on that topic, see our series on safe withdrawal rate research. […]


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