The Ultimate Guide to Safe Withdrawal Rates – Part 4: Social Security and Pensions

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)

After a one-week hiatus over the holidays when we wrote about a lighter topic (dealing with debt, booze, and cigarettes, go figure), let’s return to the safe withdrawal rate topic. We’ve already looked at:

  • the sustainable withdrawal rates over 30 vs. 60-year windows (part 1),
  • capital depletion vs. preservation (part 2)
  • and the current expensive equity valuations (part 3).

The bad news was that after all that number-crunching, the sensible safe withdrawal rate with an acceptable success rate melted down all the way to 3.25%. So much for the 4% safe withdrawal rate! That 25x annual spending target for retirement savings just went up to 1/0.0325=30.77 times. Ouch! Sorry for being a Grinch right around Christmas time!

But not all is lost! Social Security to the rescue! We could afford lower withdrawals later in retirement and, in turn, scale up the initial withdrawals a bit, see chart below. How much? We have to get the simulation engine out again!

With Social Security (and/or a pension) later during retirement, we can afford higher initial withdrawal rates!

Our personal situation

Under the current Social Security setup, Mr. ERN is eligible for Social Security at age 62, which is 18 years after the planned retirement. But we will likely wait until Mr. ERN is in his late 60s to maximize the Social Security benefit. That’s roughly 25 years into our 60-year retirement. Together with the benefit from Mrs. ERN and a small legacy pension for Mr. ERN, we expect a total combined annual benefit of about 0.01 times our financial net worth at the start of our retirement. That’s all under the (rosy?) assumption that there are no benefit cuts in Social Security, whether through adjustments in the benefits formula, changes in the retirement age or some form of means-testing. The likelihood of benefit cuts is a whole separate topic for a future post, though.

So, 35 years worth of 1% extra income during a 60-year retirement horizon affords us a 1% / 60 x 35 = 0.583% extra withdrawal, right? Withdraw 3.25%+0.583%=3.833% for the first 25 years and 2.833% for the next 35 years, which combined with the social security benefit generates a fixed real consumption path of 3.833% of initial net-worth. Almost back to 4%, how cool is that? Almost too good to be true! Well, unfortunately, this back-of-the-envelope calculation is too good to be true. The time value of money messes up the entire calculation! In other words, Social Security benefits many years in the future are going to be worth a lot less in today’s dollars. And even worse, the dreaded Sequence of Return Risk (SoRR) comes into play here again because we front-load the withdrawals. How much of a haircut do we have to apply to our calculation? We need to look at our simulations to find out.

SWR simulations: 1871-2015

The baseline simulation (more scenarios below), is what we call “25Y-1%” where we start with a withdrawal rate x% in the first year, inflation-adjust over time and take the withdrawals from the portfolio down by 1 percentage point (also adjusted for inflation) once we draw Social Security benefits. For each possible starting date, we solve for the withdrawal rate that exactly matches our final value target (50% of beginning value, in real terms) after 60 years.

In the scatterplot below we do the usual analysis as before: Compare SWRs in two different scenarios: No Social Security (x-axis) vs. our likely Social Security benefits (y-axis). Of course, all dots are above the 45-degree line indicating a higher SWR, but not by much.

Safe Withdrawal Rates over a 60-year horizon for a 100% Equity portfolio: Baseline (no Social Security) (x-axis) vs. Social Security Benefits after 25 years, amounting to 1% of T=0 Net Worth (y-axis). Blue line = 45-degree line.

Because the scatterplot above was so hard to decipher, let’s plot the increase in the SWR due to the Social Security benefits on the y-axis, see chart below. I do this for all months, but I also mark the dots when the CAPE ratio was between 20 and 30 (12/31/2016 CAPE is around 28, according to Professor Shiller, page accessed on January 2, 2017). The increase in the SWR from our Social Security assumption is a lot leaner than the back-of-the-envelope calculation. Bummer! The SWR increase ranges from about 0.12% to just under 0.25%, with a median of around 0.18%. This will not bring our SWR back to 4%!

Safe Withdrawal Rates over a 60-year horizon for a 100% Equity portfolio: Baseline (no Social Security) (x-axis) vs. increase in SWR due to Social Security Benefits after 25 years.


Same chart as above, but as a time-series chart. Increase in SWR due to Social Security Benefits after 25 years.

How about other Social Security and Pension assumptions?

We look at a total six scenarios, three starting dates: 20, 25, and 30 years into retirement and two different benefit levels: 1% and 2% of the initial retirement nest egg. So, for example, if you have a $1,000,000 portfolio and expect $20,000 in benefits after 30 years you’d look at the 30Y-2% model. As we mentioned above, our own personal situation comes closest to the 25Y-1% model.

Instead of plotting the scatterplots above, let’s just display one summary statistics table about how much the different Social Security / Pension models increase the SWR, see table below, specifically the median increase. Note that the order is from the smallest to the largest discounted sum of benefits (30Y-25Y-20Y). We calculate the median increase for all months, for months with a CAPE between 20 and 30, and also for months when the CAPE was between 20 and 30 and the baseline SWR was below 4%. We calculated the latter because we wanted to see how much of a difference our Social Security would have made when we really have to rely on it due to bad financial market performance.

Median Increase in the SWR from getting Social Security benefits. 100% equity weight, 60-year horizon.

In our personal situation, we’d expect a 0.191% increase not conditioning on the CAPE regime, 0.179% for today’s CAPE regime, and 0.164% conditional on actually having to rely on Social Security. Hmmm, slightly disappointing. What’s particularly unfortunate in our calculations is that the increase in the SWR is lower when we need it the most, namely when the CAPE is high and the baseline SWR is already below 4%. Unless you expect very generous benefits, Social Security will not serve as a panacea for the 4% rule!

A little side note: Do you notice something in that table above? The incremental effect on the SWR exactly doubles when going from 1% to 2% worth of Social Security benefits. That’s no coincidence. It’s a mathematical result. So if you happen to expect Social Security and/or Pension benefits amounting to, say, 1.3% of your initial net worth, simply take the 1% figure above and multiply by 1.3. I don’t want to bore everybody with the arithmetics behind our calculations, but maybe in a future post, we will do a  mathematical appendix, gasp!!! Stay tuned!

Failure rates of different SWRs

We can also look at the failure rates of different withdrawal rates between 3 and 4% in 25bps steps, see table below.

Failure Rates of different initial SWRs (columns) under two CAPE regimes (top=current, bottom=all months), Social Security parameters (rows), 60-year horizon, 50% final asset value target, 100% equity weight.

Bottom line: If you’re unlucky and face adverse capital marker returns early on in retirement and you keep withdrawing your initial rate then your portfolio will be so compromised by the time you reach your Social Security age that it won’t make much of a difference anymore.

So, in today’s environment, the highest withdrawal rate we’d personally be comfortable with is 3.5%. That has a 3.9% failure rate. The 4% SWR would have had a 28.8% failure rate in the absence of Social Security and only a pretty generous benefit worth 2% p.a. and 20 years after the retirement would significantly reduce the failure rate to 11.7%. Under all other parameterizations, the failure rates were still around 20%. Unacceptably high!

Conclusion: Even before accounting for potential future benefit cuts, Social Security benefits will not make a huge difference in the Safe Withdrawal Rate and will most definitely not save the 4% rule!

Appendix: Data, data, and more data

Let’s look at some more data tables that cover more assumptions. Hopefully, this can serve as a reference for readers who want to look beyond the ERN family assumptions and see how the failure rates would have looked like in their personal situation.

  • Retirement horizon: 60 years (first table) and 50 years (second table). We don’t even display anything below 50 years considering that most folks in the FIRE crowd will retire in their 30s, maybe early 40s.
  • Today’s CAPE regime (20-30) in the top half of each table vs. unconditional on CAPE regime in the bottom half of each table, just for reference.
  • Three different social security parameters: None at all, 1% benefits after 25 years (ERN family assumption), 2% benefits after 30 years (for example $1,000,000 portfolio and $20k in benefits after 30 years).
  • Four different equity shares: 70/80/90/100%. I don’t even go below 70% because the failure rates get so much worse. Also, recall that the bond index I use here is a 10y Treasury index with no credit risk. A 30% allocation to a safe government bond index plus 70% equities roughly corresponds to a 40% allocation to investment grade bonds plus 60% equities. We definitely do not recommend going below that equity allocation to preserve long-term sustainability of the portfolio.
  • Capital Depletion vs. 50% final asset target (left vs. right half of table)
  • Five different withdrawal rates between 3 and 4% in 0.25% steps.
60-Year horizon failure rates of different Withdrawal Rates (columns), with different final asset targets (left=capital depletion, right=50% FV target), for different CAPE regimes (top=current CAPE regime, bottom=all months), and Social Security assumptions and equity shares (rows).
50-Year horizon failure rates of different Withdrawal Rates (columns), with different final asset targets (left=capital depletion, right=50% FV target), for different CAPE regimes (top=current CAPE regime, bottom=all months), and Social Security assumptions and equity shares (rows).

We hope you enjoyed today’s post. Stay tuned for more installments of this series!


52 thoughts on “The Ultimate Guide to Safe Withdrawal Rates – Part 4: Social Security and Pensions

  1. Honestly ERN, this Safe Withdrawal Rate series is superb! Where the hell have you been all my life?!! This is some next level shit here. These analyses seem very easily publishable in academic journals.

    Liked by 1 person

  2. Yet more amazing stuff, ERN! Thanks for this outstanding series.

    It’s interesting to see the strong effect of CAPE in the 20 to 30 interval since that’s below what I’d consider the “critical threshold” of 30, where CAPE’s implications for future returns start to look really nasty. I assume the CAPE data used from Shiller are those reaching back to 1881… Any idea how things look if only “modern era” CAPE data are used – from, say, 1980 forward, or even 1950 forward?

    That’s great news that you’ve got some pension coming your way – a nice complement to any SS payments you all might receive. My personal view on SS is that, if it’s still around once the Libre household becomes eligible, that’s great…but I’m not counting on it. And, as your analysis here shows, it (fortunately or unfortunately) doesn’t seem to make much difference for planning.

    Great work, ERN, and thanks again! Looking forward to the next installments.

    Liked by 1 person

    • Thanks FL! I will check how the incremental effect of SocSec was in the early vs. late period. I can’t imagine it’s that different, though. Give me day or two.
      I follow the same approach: Take SocSec when I can get it, but by no means rely on it. It’s a little bit like a surprise second dessert. 🙂

      Liked by 1 person

    • I added one chart above (and below in my comment as well): The incremental benefit of the 25Y-1% Social Security payment as a time-series plot. Looks like the benefit is now more consistently below 0.2%, while between 1870 and 1950 it had some wild swings.
      Also, for high CAPE ratios the benefit of SocSec is usually lower, which is quite intriguing. I would have thought that you discount the future benefit at the capital market return rate and if returns are low then the benefit appears high. Very susprising result!

      Liked by 1 person

  3. Five more parts to this series!?! Excellent.

    I assume SS will be there for me in some form, but it’s tough to guesstimate at what amount and at what age I might see a benefit. Like FinanciaLibre, I’m not factoring it into my plans and will consider it a nice bonus.

    If the tax laws somehow remained unchanged for 29 years, I’d be eligible for the highest SS draw and required to take RMDs in the same year. Some lifestyle inflation may be in store at that point.


    Liked by 1 person

    • Thanks! Yes, same here. I will probably do the lifestyle inflation and/or it will go towards the future grandkids. 🙂 Not counting on it, but it will be welcome and find a good purpose when I get SocSec.
      By the way, for us “oldies” past the big 4-o: We may just scrape by without major benefit cuts. That’s because politicians always say that “If you’re over 55 we will not touch your benefits”
      So, all I have to hope for is to make it to 55 (the Trust Fund may just last that long, cross my fingers) before they make any significant cuts to SocSec. 🙂


  4. Seriously loving this analysis. Thought provoking as always ERN, thank you!

    Let me attempt to capture my situation and what I’ve learned today:

    1) Our estimated pension benefit projects to be 3.1% of initial FIRE net worth. Pension is NOT inflation adjusted. Will begin receiving benefit 25 years post-FIRE.

    2) Our estimated Social Security benefit will begin around the same timing. Given this is inflation adjusted, I’m only going to assume it will help “preserve” the discounted value of my future pension benefit, but not be an additive benefit.

    3) Let’s assume the annual benefit will be 3% of initial FIRE net worth, after 25 years (“25Y-3%”).

    4) Using your most conservative “CAPE 20-30, <4% SWR" bucket, I get 3 x 0.164% = 0.492% as a median SWR increase for our estimated situation (60-year time horizon, 80-100% equity allocation).

    5) Given we also would like to bequeath ~50% of initial portfolio value, assuming 60-year horizon & 80% equity allocation in your summary table above, I would assume our "25Y-3%" failure rate would be more than acceptable for an SWR of 3.5% (i.e., failure rate of less than 1%), given what I might interpolate based on your "25Y-1%" line item. Would you be willing to run your machine to confirm? I #heart your idea of a mathematical appendix!

    Liked by 1 person

    • Wow, 3.1% of net worth plus SocSec. You hit the jackpot. True, the pension has no COLA, so we probably have to apply a haircut to it. But you should be able to almost plan for a 30-year horizon for the financial assets. So despite the FIRE setup, he Trinity Study actually applies to you. Cheers!


      • Thanks. Big Oil benefit. I agree, it’s a wonderful blessing.

        So just to take this another step, I discounted the 3.1% non-COLA pension benefit using 2% inflation, and landed on a Future Value (FV) of 2.1% of my initial (real) net worth at the 25-year mark. Ignoring SoSec, I could roll with the “25Y-2%” as a model which appears to keep me in the green re: failure rate for a 3.5% SWR planning basis.


  5. Is the “new” 30.77 multiplier based on pre-tax or actual spending. By way of example, if a retiree intends to spend $100,000/year post tax (lets say 130,000 pre-tax/20% tax rate) would savings need to be $3,077,000 or $4,000,100

    Liked by 1 person

  6. Yep, that sequence risk combined with underestimating the true value of a future SS income stream is a deadly combo. Will have cat food being served up on a platter if you are not careful.

    I love the handy dandy six scenario table. We will be 16 and 22 yrs respectively from an age 67 social security claim. Let’s call it 20 years for simplicity. We expect to get a total 2.8% of our retirement nest egg on an annual basis assuming nothing changes in a major way. Let’s see….. So from your table, we should be looking at an additional 0.75% to the SWR we are considering. A nice thought actually if we feel the urge to go that way. Perhaps in some years we can splurge a bit more.

    A terrific post, we feel grateful for your wisdom sharing!

    Liked by 1 person

  7. Great work!
    Question about something I find counter-intuitive. In the appendix with data, data and more data, the failure rates for the 50 year and 60 year horizons seem to move in different ways for the two goals of remaining capital:
    If you aim at capital depletion, and pick otherwise the same parameters (social security, SWR and equity share), the outcomes behave as I would imagine: The 50 year horizon shows lower failure rates than the 60 year horizon.
    But if you aim to retain 50% of your capital, the outcomes go the other way, the 50 year horizon shows *higher* failure rates than the 60 year horizon.
    Do I see this correctly? How would that work?

    Liked by 1 person

    • I also found that counter-intuitive at first. But it makes perfect sense. Under capital depletion, the success probability has to go down with the horizon. If you ran out of money after 50y there is no coming back after 60y. Not so with the capital preservation. If you merely miss the $500,000 mark by 50 years by a few thousand dollars, you still have a chance to recover by year 60. In fact, considering the long-term average equity return of 6.6% (real, not nominal), you have a good chance of turning around at least a few %-points that failed over a 50y horizon.
      We explained a similar issue in Part 2:

      Another intriguing result from this chart: The 60-year capital preservation rule had a slightly higher (!) success rate than the 30-year capital preservation rule, at least for high enough equity shares. How is that possible? It’s quite intuitive: If your portfolio value was, say, 90% after 30 years, then you would have failed the 30-year capital preservation condition. But with the average portfolio return above 4% for a high enough equity share, you can likely get above the 100% target again over the next 30 years.

      Thanks for the awesome question!


  8. “Social Security benefits many years in the future are going to be worth a lot less in today’s dollars.”

    Great post, but I’m a little confused by this statement you made regarding the time value of money. Social security benefits currently have COLA built in, so wouldn’t the benefits be worth the same in today’s dollars? I’m sure you took this into account but just wanted some clarification.

    For purposes of planning I looked at our expected benefits and figure we will get about 75% benefit in today’s $. For example, if our spending were 75k and benefits 25k I would need 75k for x years and 50k for the remainder. There are of course many other variables that go into SS benefits but I like to break it into two chunks like this. My brain is not smart enough to do more complex math 🙂

    Liked by 1 person

    • Haha, thanks for your comment.
      First of all, my bad, the way I wrote this was a bit ambiguous.
      All along I am taking into account that SocSec is adjusted for inflation. In fact, I am running the entire operation in the “real space” with real returns, real withdrawals, real portfolio values, real final portfolio value targets, etc. So if someone gets a 2% SocSec benefit and has a $1,000,000 portfolio today it means that the future benefit is $20,000 in today’s dollars (much more in nominal dollars 25Y down the road). And I also assume that this SocSec benefit will get adjusted for CPI every year (hence, stays constant in the real space).

      What I meant by “less valuable” is purely related to discounting future benefits at the real portfolio return rate. So, time preference is not just due to inflation but also comes from the real return rate. Or in other words, in nominal space I discount future payments at nominal rates of return (=inflation+real return), so in real space I still have to discount future real payments by the real rate of return. Hence, future SocSec payments are worth less even if already adjusted for CPI.

      Sorry for rambling! 🙂


  9. Another fantastic post in your outstanding series, which is incredibly more useful and relevant for us FIRE crowd than the Trinity Study. Great job! (and the same comment applies to the COLA post)

    A couple of questions:
    1. In line with FIREby2021, my pension/social security benefit is estimated to be higher than 1 or 2%. I’m not in the US, and my pension is estimated to be about 3.75% of my net worth at FIRE time (FIRE net worth = $1,200,000 and pension = $45,000, inflation adjusted). I’m aware that I’m very lucky with this pension scheme as it gives me a very serious buffer. Would you consider refining the table under “Failure rates of different SWRs” using benefit levels of 0% to 4% benefit by 0.5% increments?

    2. Would you consider releasing your Excel files at the end of the series? I understand if you don’t, but your data set would be a gold mine!

    3. Have you considered the impact of declining population growth on long-term stock returns? I haven’t given too much thought about it yet to be honest. In the US, the population tripled in the last 100 years from 100 to 320 millions. However, by 2100 the population in the US is likely to reach 450 millions “only” based on UN forecasts [1]. What is the potential impact on stock market returns? How does productivity growth compare to population growth on GDP and stock market growth?
    Most of the demographic growth in the next century will be in Africa, where the population will increase from 1 to 4 billion… but I won’t be investing my retirement assets there.

    Cheers and thanks again!


    Liked by 1 person

    • Great comment, Johan!
      If your benefits are that much higher, you can probably just plan with a 30Y retirement horizon with your assets and plan for a fully paid retirement afterward. Let me check how I can release a spreadsheet with some of the calculations. To be precise: None of the calculations were done with a spreadsheet. It’s done with a computational programming language (Matlab and its free-of-charge GNU clone Octave). But I will look into how we can publish a simplified spreadsheet or Google sheet for people to play around with. Great comment!

      Demographic change: Yes, that’s on my mind. Fortunately, the U.S. is still growing, but I think that the demographic shift to slower growth and higher median age may imply lower yields for bonds and lower returns for stocks. Another reason to be conservative with the SWR and not apply caution when comparing with past returns. Thanks for pointing that out!



  10. Excellent work — a little deep for me.

    I’m 60 & just retired…$850k in tax-deferred & $50k non-tax-deferred. Just started SWR of 4.5%. Planning on taking SS at age 70 ($40k annually). Planned on adding inflation (2%) to initial SWR annually. Is my SWR too conservative?

    Liked by 1 person

    • Congrats! Good idea to delay SS until later!
      Whether your WR is conservative or not depends crucially on what you do to your withdrawals once SS kicks in.
      If you were to keep withdrawing the same 4.5% from your portfolio and use the SS for additional consumption (health care, gifts to kids, etc.) then 4.5% seems a bit aggressive. I would take that down 3.75% maybe 4%.
      If you were to reduce you withdrawals dollar for dollar when you receive SS then 4.5% seems overly conservative. You get about 4.4% worth of SS, so it’s a matter of making the portfolio last for only 10 years. You could easily increase your WR to 5.5%, even 6% for the first 10 years. So withdraw $54k (900k*0.06) for the first 10 years (inflation-adjusted) then reduce the portfolio withdrawals by about 3/4 once SS kicks in. That should easily last you through a 35-40Y retirement. But again: If you don’t reduce the withdrawals when you get SS this would be a crazy high WR.
      I created a Google Sheet with your case, see here:
      50/50 portfolio. A pension worth 4.4% of the initial portfolio after 10 years, etc. Looks like 6% is the failsafe SWR.

      Good luck!


  11. Great reading I am slowly getting through all of these articles. My husband and I retired early 4 years ago (so we have been lucky with good returns early in our retirement). Since then I have been self educating myself on retirement SWR to ensure we do not outlive our money. We want to enjoy ourselves while we are young(especially since I have been on a budget my entire adult life!) but make sure we do not go crazy and regret binging early in our journey. As everyone who has this dream of FIRE knows all of the sacrifice that it takes to do this. Currently we have $770,000 in TaxDeff (converting this over to an ROTH IRA over the next couple of years) and $308,000 in taxable. We also own a vacation rental which brings in around $15,000 net each year. We are 11 years from a 2.2% pension and 16years from a 6% SS. We have been withdrawing an avg 4% but I see us drifting to between 4.5% and 5%. So far all of the scenarios show that that is OK and that we could even drift higher. I have us going down to a SWR of 1% when we start receiving SS. We are at a 75/25 allocation and do not have kids so we are looking at capital depletion sceneries. We are also looking to sell our vacation rental when we get tired of managing the property and that will convert into about $210,000 of taxable money. We currently live outside the US and while we file our taxes we are not having to owe taxes yet. I would love to get your insight on whether we have been too aggressive or right on track. Most of our expenses are discretionary so it would be easy to ramp down but not as fun.
    Thanks for all of your hard work in the area!


    Liked by 1 person

    • Thanks for stopping by! You seem to be in a pretty good spot. It seems that you are mostly bridging the gap between now and the substantial cash flows that follow in11/16 years down the road. Even the eternal pessimist in me has to admit that you are very well positioned. The 4% rule is trouble mainly for folks who have no or much lower benefits and much further in the future.
      So, congrats, you are in extremely good shape! Best of luck!!! 🙂


  12. Thanks for your comments. I am going to continue doing a close read of the entire series of articles. These are great for the money geek that I am! It definitely has been a hard transition from a saver to a spender.

    Liked by 1 person

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