Why is Retirement Harder than Saving for Retirement? (SWR Series Part 27)

Welcome back! It’s time to add another piece to the Safe Withdrawal Rate Series (see here for Part 1). After churning out over 20 parts in this series so far I wanted to sit back and reflect on some of the things I’ve learned from my research. And something occurred to me: Withdrawal strategies in retirement aren’t easy! Contrast that with Mr. Money Mustache’s Shockingly Simple Math of Early Retirement post and Jim Collins’ Equity Series that was rewritten into a book The Simple Path to Wealth (paid link). Very influential posts and they are among my favorites, too!  So, naturally, I agree 100% that saving for retirement is relatively simple!

Saving for Early/traditional retirement: three simple ingredients!

Disclaimer: Saving for retirement with a savings rate of 50% or more as is common in the FIRE crowd requires a great deal of discipline. Especially over a 10+ year time span. It’s not easy! Only the math behind it is simple! It’s a bit like dieting; conceptually very simple – healthy diet plus exercise – but it’s not that easy to implement and stick to the plan!

Then, shouldn’t retirement be just as simple? Why am I making everything so complicated? I’m approaching 30 parts in this series, many of them with heavy-duty math and simulations and still a few topics on my to-do list! Am I making everything more complicated than necessary? Am I just trying to show off my math skills? Of course not! Just because saving for retirement is relatively simple it doesn’t mean we can just extrapolate that simplicity to the withdrawals during retirement. And that’s what today’s post is about: I like to go through some of the fundamental factors that make withdrawing money more complicated than saving for retirement. Think of this as an introduction to the SWR Series that I would have written back then if I had known what I know now! 🙂 Ironically, some of the issues that make saving for retirement so simple are the very reason that withdrawing during retirement is more challenging! So, let’s take a closer look…

1: Saving for retirement has an ambiguous success criterion and “failure” is a lot less painful!

So, you want to save a million dollars over the next 10 years to retire? Would you call your plan a failure if after 10 years you make it to $900,000? It’s still a $900,000 success, not a $100,000 failure! The exact net worth target will likely be a moving target anyway! Likewise, I wouldn’t call it a failure if it takes you 11 or 12 years to reach your target! That’s still pretty impressive!

Not so in retirement. If you have a 50-year horizon and the money runs out after 40 years I would call that a failure, and a pretty painful one, too! If you look at the retirement research (Trinity Study, my SWR series, etc.) there is a mathematically unambiguous cutoff; if your portfolio runs out of money within 30 years that’s a failure. If you have even one single dollar left the Trinity Study would still call that a success.

2: Flexibility is a lot easier while saving for retirement!

Related to the previous point: Imagine someone’s plan to save a million dollars over ten years falls short by $100k or even $200k. It’s not the end of the world! Simply work an additional year or two. Especially for the early retirement crowd, it’s no big deal if you retire “only” 24 years before a traditional retiree instead of 25 years. Flexibility is a bit harder when you’re retired. If your money runs out at age 80, you can’t just “die a few years earlier.” Or just go back to work for a few more years.

Of course, critics would argue that most early retirees will use flexibility to save their early retirement way before they risk running out of money. But as I showed in some of the recent SWR Series posts (see Part 23, 24 and 25), this form of flexibility is not without pitfalls either. It’s certainly not as simple as some people want to make it! Everyone can tighten the belt by 30% or 40% or even 50% and consume less (or go back to work part-time) but my simulations in those previous posts show that the duration of your flexibility can be really unpleasant. In some of the cases, flexibility involved going back to part-time work not for years but two decades. Not really a workable solution for me!

3: A stock market crash is a lot more worrisome in retirement

The number one concern of equity investors is a bear market. But I’ve made this point on many occasions already (ChooseFI podcast episode 35 or my recent post on why the stock market isn’t exactly a Random Walk): under certain conditions, a bear market is not the worst thing that can happen to young investors. What do I mean by “under certain conditions?” If a bear market takes the shape of most previous ones: a sharp drop and a swift recovery, think 2008/9 and the strong recovery that followed. If you’re still in the accumulation phase and far from retirement you can even benefit from that temporary drop thanks to dollar cost averaging (DCA). That’s because if you keep contributing to your nest egg during the bear market you can really turbo-charge your net worth! I did that in 2008/9 myself!

But in retirement, you face the flip side of DCA: Sequence Risk. Instead of buying more shares per dollar we’re now depleting the portfolio at a faster rate while the market is depressed. Let’s look at the following numerical example of a “typical” bear market:

  • 12 months of flat (real) returns,
  • A 40% drop over 18 months,
  • A new bull market over 7.5 years with a cumulative return of about 170% (just over 14% p.a.) to bring the average compound return to 5% (real) over the 10 years!
Numerical Example of a bear market and subsequent recovery. 1 year flat, 1.5 years bear market (-40% total) and subsequently 7.5 years of 14.2% annual returns. Total CAGR of 5%.

But remember, this is the cumulative return of a portfolio without withdrawals. Let’s assume we used a 4% withdrawal rate. Since the market returned a full percentage point more than our withdrawal rate we should not worry, right? Wrong! Let’s look at what happens with the portfolio if we factor in a 4% withdrawal rate, see below. Even after 10 years, the portfolio is still below the starting value, all compliments of Sequence Risk. By the way, the chart below is also a nice illustration for why that whole “flexibility mantra” (see point 3 above) is so misplaced. Flexibility, i.e., withdrawing less than initially planned due to a severely depleted portfolio can last much longer than the bear market. For example, when taking the withdrawals into account the portfolio value spends about 60 months below 70. Much longer than the 18 months of the bear market!

The market recovers. But the portfolio doesn’t even though the withdrawal rate (4%) is below the average return (5%), due to Sequence Risk!

4: While saving, returns and contributions pull in the same direction…

… and while withdrawing they pull in opposite directions. Why does this matter? I find the following analogy helpful. Imagine you’re paddling in a canoe. Downstream! It’s relatively simple to reach your destination. A combination of paddling and gravity will take you downstream. If you get tired from paddling you can rest for a while and let the stream take you. And, vice versa, if the stream slows down you can compensate with paddling a little harder. Simple! But it would be crazy to conclude that paddling upstream is also simple!

The danger of extrapolation: Paddling downstream is easy! That doesn’t mean that paddling upstream is easy as well! Picture credit: pixabay.com

How does this relate to personal finance? Think of the stream as the contributions and withdrawals and paddling as the portfolio returns. Saving for retirement is like paddling downstream and it’s pretty simple for the reasons mentioned above. Withdrawing money would be analogous to paddling against the stream and hoping the stream doesn’t take you too far back: over the waterfall = running out of money, arghhh! The unpleasant side effect of this: if your paddling speed is about as fast as the stream (capital preservation) or slightly slower than the stream (targeting capital depletion) then small changes to the withdrawal rate can have large and unpredictable effects to the final portfolio value.

To illustrate this, let’s look at the following case study. In the chart below I look at the evolution of the portfolio of the January 1965 retirement cohort using different initial withdrawals. Assume that we start with a $1,000,000 initial portfolio (80% stocks, 20% bonds) and vary the initial withdrawal amounts between $32,000 and $37,000. A relatively small range of withdrawal amounts (15%) but the final value after 50 years ranges from running out of money (i.e., a negative final value) to actually growing your (real, CPI-adjusted) portfolio by about 55%. Relative to the initial portfolio value that’s a range of about 170% and that’s all by varying the withdrawal amounts by 15%!

The January 1965 cohort with an initial portfolio of $1,000,000 and different initial withdrawals (subsequently adjusted for CPI). 80% Stocks, 20% Bonds. Small changes in withdrawals amount to substantial differences in final portfolio values after 50 years!

This would look very different when saving for retirement: If two savers start with $0 and one saves 15% more then the final value is also (roughly) 15% more (subject to some constraints, like contributions limits in retirement plans, etc.).

5: FIRE contributions vs. capital gains

The “miracle” of compound interest makes it possible to grow small amounts into large piles of money over the years and decades. Below is a chart of a simulated portfolio if you invest $1 in the first month, increase the contributions by 2% CPI each year and get an 8% (nominal) return p.a. The portfolio grows to over $6,000 over the 45 years (540 months). Less than $900 of that (14%) comes from your contributions and the bulk (86%) is from capital gains.

$1 saved every month (and adjusted by 2% p.a. inflation) grows to more than $6,000! Thanks to compounding!

But saving for early retirement is (likely) quite different. If you save for “only” 15 years then a good chunk of your retirement net worth comes from your contributions, not capital gains. Let’s look at that same numerical example again but zoom in to 15 years: After 15 years, 54% of the portfolio is still from contributions (and it would be a whopping 67% after 10 years, at least in this example) see chart below. Achieving FIRE you’ll have to be 54% saving/frugality expert and “only” 46% investing expert.

Same calculation over a 15-year horizon: more than half of the final value comes from contributions!

What changes when we withdraw money? It depends on the horizon! Let’s look at the simple calculations below. Imagine we start with a $1,000,000 initial portfolio and an initial $40,000 withdrawal, adjusted for 2% inflation every year. Over a very long horizon, say, 60 years we’d withdraw a total of more than $4.5m. Why not $2.4m (=60x$40,000)? These are nominal dollars, so the withdrawals are adjusted for 2% inflation every year! In any case, if I start with $1m and I withdraw a total of $4.5m I’d have to generate at least $3.5m in capital gains to make sure I don’t run out of money. Out of every $100 of withdrawals, $78 come from capital gains and only $22 from the initial net worth. That’s much harder than traditional retirement where most of the withdrawals come from just drawing down the principal.

Because early retirees have to rely so heavily on capital gains they are more susceptible to asset return volatility, Sequence Risk, etc. and all that makes early retirement much more uncertain and unpredictable than accumulating assets!

$1m initial portfolio, $40k initial withdrawal, then adjusted by 2% inflation every year. Stats over 30, 40, 50 and 60 years when targeting capital depletion.


In one respect, saving for retirement is hard; 50%+ savings rates for a decade or more takes a lot of discipline, especially when everyone around you is living the high life! And retirement is pretty sweet and easy as yours truly can attest, sipping a bottle of Pilsner Urquell while staying in Prague right now as part of our ERN Family World Tour. But simple vs. complicated reverses when I look at the mathematical and financial aspects of accumulating vs. decumulating assets. Now, saving for (early) retirement is relatively simple. Start early and invest in passive index funds – mostly equities, especially for young investors. Rinse and repeat until you reach your savings target. Conceptually very simple! But withdrawing money is more challenging, as I have pointed out here on the blog so many times. I get the impression, though, that in the FIRE community this little “detail” is brushed over quite often. And thus everybody is looking for simple solutions: 4% Rule, flexibility, hand-waving, extrapolating the “simple math” to the withdrawal phase. But withdrawing money in retirement is a serious challenge and conceptually much harder than accumulating assets. Maybe this was already obvious to readers here on the blog but I felt that I should make this point very explicitly in a separate blog post!

PS: “Withdrawal Strategies for Early Retirees” was a topic interesting enough to be included on the program at the upcoming FinCon (make sure you register here if you haven’t already). There will be a “Money Conversations” session featuring Physician on FIRE, Jonathan and Brad from ChooseFI and yours truly, Big ERN. It’s scheduled for 10am on Saturday – make sure you stop by!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

Picture Credit: Pixabay

100 thoughts on “Why is Retirement Harder than Saving for Retirement? (SWR Series Part 27)

  1. consider the 1905 retiree:

    — soon after, the Panic of 1907 caused the market to drop 50%
    — soon after that, the federal income tax was established…. additional “expenses”
    — crazy inflation in the early ’20’s (some cases were over 20% !!)
    — at the ending of their 30 years…they are in the Great Depression !!
    — (and, of course, they don’t get any social security since that was established much after their working years…so they don’t have any credits)

    I consider that period a “worse case”… and it was a real example

    1. Oh, my, that would have been a wild retirement. I hope that going forward we don’t have 2 world wars, two depressions (there was another one in the early 20 before the Great Depression!), the 1907 banking crash, and all the other headaches.

      1. ..and I didn’t even mention the bank failures, especially in the twenties, before the Glass-Steagall Act and the formation of the FDIC… the reason for the meme about burying your money in the backyard as then at least it’s there and you can get to it.

        {of course, those same individuals would have had to deal with the 1902-4 recession (after the 1901 stock crash), the recession of 1913-14 as well as the post-WW1 recession of 1918, in addition to the short but deep recession of 1920-21 that you mentioned (and the milder 1923-24 and 1926-27 recessions, as well). They would have had to survive the Depression of 1882-85 (with it’s 1884 Panic) and the Depression of 1893, which had been the worst prior to the Great Depression, in prior years…now how’s that for survivorship?}

        Of course, I don’t have info on how many could actually “retire” in the current sense as that would have been unusual for most; the need for extended families to care for aged members was more likely.

        1. Nice! You know your (economic) history!
          In a way that’s all comforting. The SWR studies that go back to 1871 indicate that 1929 and/or 1965 are still the worst starting cohorts. Should bode well for today’s retirees. Can’t imagine that what’s ahead of us is worse than 1929-1933.

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