*You might have noticed that I haven’t published any guest posts for a while. I even explicitly state on my contact page that I’m no longer interested in publishing any guest posts. But every once in a while you make an exception to the rule. David Graham, actually, Dr. David Graham (FIPhysician), has been on a roll with a bunch of top-notch guest posts on other personal finance blogs; first writing for the White Coat Investor blog on Roth Conversions, then two guest posts on Physician on FIRE, first on Asset Location in Retirement, and then on Buffer Stock and Bucket Strategies to alleviate Sequence Risk in retirement. All really important topics! And after sending a few emails back and forth with the good Dr. Graham we agreed on a topic for him to publish a guest post here on the ERN blog, **Instead of using backward-looking historical return windows, as I would normally do in my SWR Series, why not check the sustainability of the 4% Rule with forward-looking return projections? Vanguard and a lot of financial companies publish those every year. Sounds like an interesting exercise! So, without further ado, please take over **Dr. Graham…*

As we all know, ERN is the man when it comes to Safe Withdrawal Rate (SWR) and FIRE. Reading between the lines, he has a different opinion on SWRs for a 60-year retirement vs. a more traditional 30-year plan. Obviously, using only historical data, it is more difficult to study SWR with rolling 60-year stock and bond returns than 30-year periods. Nevertheless, FIRE often subscribes to the 4% rule despite a prolonged period of income demands on the accumulated nest egg. In order to further understanding of the 4% rule over a longer than usual planned retirement, let’s visualize the 4% rule over a 60-year period and see what we can learn.

### Case Presentation

Assume a $1 million dollar portfolio is invested via a Three Fund Portfolio. There is $500,000 in a brokerage account, $400,000 in a 401k, and a Roth IRA worth $100,000. As for asset location, the Roth is invested only in US Stock. The brokerage account and 401k split the rest of the assets in a 60/40 or 90/10 stock/bond asset allocation. Withdrawals are from the brokerage account first, the 401k second, and the Roth last.

*[ERN: This also assumes flat/constant asset returns in line with the Vanguard 2019 Global Market Outlook, more on that below. Also, within the 3-fund portfolio, there’s an 80/20 split between U.S. stocks and International stocks (developed and emerging). So, for example, the 60/40 portfolio has 48% U.S. Stocks, 12% International Stocks and 40% U.S. Total Bond Market Fund.]*

### 60/40 Portfolio with 4% SWR

In Figure 1, at age 31 there is a 4% withdrawal from the account. That is $40,000 (4% of $1M). Assume inflation is a fixed 2% per year in this example, so the next year, $40,800 is withdrawn. A common misconception of the 4% rule is that you use inflation to adjust the 4%. You don’t. Only in the first year do you use 4% to calculate the withdrawal amount. In subsequent years, use inflation to increase the *dollar amount*. In this instance the 2% yearly inflation increase is $40,800, $41,616, $42,448, etc.

Since investments in the portfolio increase in value, the slow inflation of the withdrawal amount stays close to 4% *withdrawal percentage* for about a decade. Then, the withdrawal percentage increases rapidly. After 44 years, it depletes the portfolio. Monte Carlo simulation predicts a mere 18% chance that this plan will succeed.

### Assumptions, Assumptions

In this simulation, assumptions are everything. Bengen’s original 4% rule and the subsequent Trinity study use historical data. As we all know, past performance is not indicative of future results. Recently, Vanguard released assumptions for 10-year returns. I utilize these assumptions in this scenario. For full disclosure, Big ERN cautioned me about using 10-year projections for results over 60 years.

*[ERN: True! I don’t think it’s unrealistic or even outright wrong to assume low returns for the entire 60-year horizon. Certainly, I personally hope that high valuations today (stocks and bonds!) cause low returns only over the medium term, say, over the next 10 years, before we revert back to more average returns, say, around 6.7% real for equities and 1.5% real for (government) bonds. But I can also rationalize persistently low *

*asset returns going forward, certainly much lower than previously experienced. A lower trend GDP growth, lower population growth, high government debt causing higher future taxes, etc. may all lead to leaner real asset returns going forward. Over several decades! Again, I hope that will not materialize but it’s a good exercise to see how a 60-year retirement would perform under persistently low returns. As a “kick the tires” exercise!]*

Nonetheless, it is interesting to look at to see how different SWR perform given these assumptions. Again, there are limitations on historical data when looking at such prolonged time frames.

He also states that people don’t usually run out of money due to low average returns, but because of Sequence Risk. True, but as Kitces points out, prolonged mediocre returns can be worse than a market crash.

*[ERN: Agree. A nice example would be the 2008/9 crash, which was actually not that bad from a Sequence Risk perspective. The drop was swift, and so was the recovery. A 60/40 portfolio with a 4% Rule would have recovered quite nicely from that bear market. Contrast that with the 1965/66 retirement cohorts: they experienced lackluster returns until the early 1970s, then multiple recessions. Those made the mid-60s some of the worst retirement cohorts on record. But just to be sure, that case would still qualify as Sequence Risk, in my book!]*

In addition, assume a 2% inflation rate year over year in this scenario. Obviously, inflation is lumpier than that, and inflation adds additional complexity to resulting conclusions.

### Future (Expected) Returns

Instead of using historical data, let’s assume that Vanguard’s assumptions hold on average for 60 years. They have a nifty Infographic with the following assumptions for 10-year returns: US equities 4-6%, US bonds 2.5-4.5%, International equities 7.5-9.5%. *[ERN: these are all nominal returns, always keep in mind the big distinction!]* For this example, we will use 5%, 3.5%, and 8.5% returns, respectively.

*[ERN comment 1: People may find the 5% return expectation for U.S. Stocks way too low. And remember, that’s only 3% after inflation! But historically, the 10-year return expectations were about in-line with 1/CAPE. With a Shiller CAPE at around 30, that would put the real expected return at around 3.3%, roughly in line with the Vanguard estimate.]*

*[ERN comment 2: I personally find the 3.5% expected return gap between international and domestic stocks a bit large. 1-2% seems more realistic.** Two weeks ago, when I looked at the return expectations produced by JP Morgan and Bank of New York Mellon, the gap between U.S. all-caps and international stocks was closer to 1% (BNYM) to 2% (JPM). **Even with only 12% portfolio weight in international stocks, the roughly two additional percentage points mean 0.24% extra annualized return, which will make a big difference over 60 years!]*

Above you can see what a difference a small change in SWR makes over time. Now, we start with a 3.25% withdrawal from the portfolio. Note the bump around age 52. Reviewing cash flows, the brokerage account runs out of money at that time and the 401k is tapped resulting in increased tax payments.

*[ERN: I love this level of detail. Normally, we don’t take into account the tax implications. I did a more personalized and detailed analysis in most of the case studies I did in 2017/18, looking at both asset allocation, asset location and taxation. But **in the context of the Safe Withdrawal Rate Series, I normally assume you simply withdraw 1/(1-TaxRate)xTargetConsumption. So you have to gauge your average tax rate in retirement and distinguish between gross and net withdrawals!]*

Over time, the withdrawal percentage slowly increases. Monte Carlo simulation results in a 44% chance of success.

### Remaining Portfolio in the 60/40 Example

Above, see how much money is left after 60 years when you use a 60/40 portfolio. In green, with a 4% SWR, you run out of assets. In blue, the lower 3.25% SWR grows slowly over time. $1.6M remains after 90 years (mostly in the Roth). *[ERN: This is in nominal dollars, so don’t get too excited about the $1.6m: that’s worth only about $500k in real inflation-adjusted dollars!!!]*

### Trinity Study and More Aggressive Asset Allocation

We know from the Trinity Study that more aggressive asset allocations performed better over longer periods of time. What if the portfolio is aggressively invested in stocks?

Now we can see how a more aggressive portfolio affects a 4% SWR. Here, it takes almost 50 years before inflation of the withdrawal amount starts to affect the withdrawal percentage. If you are more aggressive in your stock to bond ratio, you can tolerate a higher SWR. Monte Carlo simulation supports a 34% chance of success.

Starting with a more aggressive portfolio and a lower SWR, you see the SWR never increases above 3.25%. Portfolio value continues to increase over time and Monte Carlo predicts a 53% chance of success.

A brief word about Monte Carlo simulation. Generally, when doing financial planning, the goal is to get Monte Carlo between 80-90% of success. More than that, and a plan is a failure because you die with too much money. Less than that, and there is a good chance that your plan will fail due to running out of money. Despite Monte Carlo simulation’s obvious issues, it is interesting to note—given such a long time frame—success rates of all these plans are quite low.

In green, you see the remaining portfolio balance of 4% SWR with the 90/10 portfolio. Only the 3.25% SWR with a 90/10 portfolio demonstrates significant growth over time, potentially ending up with over $6M in assets.

### Lessons Learned for SWR over 60 years

Other obvious limitations, aside from the assumed returns noted above, are too numerous to mention in this methodology. However, FIRE folks should be interested to see how 4% vs 3.25% SWR affects portfolios over 60 years. We also know from the Trinity Study that there is a sweet spot for asset allocation. You want to have enough stocks for longevity planning and to fight off inflation.

ERN points out that Sequence of Return Risk (SORR) is the main concern early on and suggests being conservative early in early retirement and then using a rising equity glidepath. Kitces also has some interesting work on planned allocation strategies with equity glidepaths or bond tents. And ERN wrote about glidepaths using historical simulations in Part 19 and Part 20 of the SWR Series.

### How Does this Simulation Hold Up to ERN’s Model?

ERN has the best data on the internet, seen above. This table might just be the coolest thing on the internet in relation to FIRE. Note that 30 vs. 60 years is very predictive of any portfolio asset allocation surviving. With a 4% withdrawal rate over 60 years, however, 100% stocks succeed 89% of the time and 50% stocks only 65%. Also, obvious to all, the higher the stock percentage, the better the outcome.

### Conclusion

Sixty years is a long time. Most of us aren’t even that old, and it is hard to conceive of what the world will look like then. The SWR for a planned 60-year retirement is not 4%. The rule of 25x is a good starting point, but not the final solution to early retirement.

* * *

About the author: David Graham, MD is an Infectious Diseases physician and a Registered Investment Advisor in the state of Montana. His blog can be found at FiPhysician.com

*[ERN: Thanks, Dr. Graham! I learned a lot! Based on my own research, I’m obviously not a big fan of the 4% Rule, certainly not for a 60-year retirement horizon. Dr. Graham’s methodology makes me even more nervous about the 4% Rule: The 60/40 portfolio runs out of money after a little more than 40 years, even without any return volatility and thus without Sequence Risk. The Monte Carlo Simulation success probabilities are also woefully low. **And this already assumes aggressive return expectations for the non-U.S. equity portion. **So, while I can understand when people criticize historical simulations (“past results are no guarantee for future results”) the alternative, i.e., using forward-looking return estimates looks almost worse if you take into account today’s valuations.]*

### We hope you enjoyed today’s post. Looking forward to your comments below!

This is similar to what my portfolio will be, except I have $500k in real estate rather than in brokerage. $200k in a primary residence with no loan, and $300k in a rental property I hope will bring in $25k/year with no loan. Plus I and my spouse will have pensions. Our income form these should get us up to 4%. Thanks for this analysis!

Nice! Obvisouly, pensions will make the 4% Rule more sustainable. If they start early enough and they are large enough!

Hi Big Ern!

I’m a fan of your blog and your SWR series. Have recommended the series to tons of people.

I have a problem determining my own SWR rate. My problem is that I am from and live in India. Our market history is not long enough and our inflation history is too volatile to do the kind of studies you have done. Some research has been done by Pfau but not a lot. Also due to tax laws and other reasons I cannot invest freely in US markets.

How would you go ahead determining SWR in such a case? I am currently FI at 2.75% withdrawal but considering working till 2.5%. Any advice?

Thanks,

DB

Adding a bit more context: I’m 35.

Also my country is pretty fast growing in terms of GDP (highly correlated with real equity returns) and inflation is currently low (sub 4%). Not trying to portray an overly rosy picture, just trying to give context that it’s not exactly Venezuela.

Backward-looking simulations don’t work in that case.

India has a lower CAPE than the US but one of the highest in the EM world. So, I think what you’re doing is the right approach. Start from a 3.5% (=28.6x) and use a cushion. Sounds like 2.75% (=36.4x) is already quite substantial. Not sure you have to go all the way to 2.5% (=40x).

Thanks so much for your inputs, appreciate it!

Wow. Dr. Graham has really burst onto the financial blogging scene. He has been insightful, detailed, and prolific. He wrote the guest posts listed as well as other posts at WealthyDoc.org and DrBreatheEasyFinance.com

He is bold to submit a post on the 4% rule to big ERN. Yet, he came through well.

I don’t have the mind or understanding of a Big ERN or David. I need to keep things simple and revert to rules of thumb. I think in the long-term 3%, give or take 0.5%, is about right depending on investments and assumptions.

So that ends up a 33X rule, rather than a 25X rule.

But another key point about the Early Retiree: They have options.

Most are ambitious and strategic. They intentionally or unintentionally make money or build businesses. They are also young enough to be able to return to work later, even if they don’t want to or don’t plan on that.

Therefore the “4% rule” is still okay for them. The risk isn’t tremendous because of those “off-the-spreadsheet” options.

If you use the portfolio visualizer monte carlo engine one of the stats it gives is perpetual SWR which generally is about 3%

I use this tool as well. Too many variables to describe in an article. But plugging different scenarios in the tool can be very insightful.

Intersting tool. I use it too, ocasionally. But with the caution that Monte Carlo has its limitations.

Pretty scary! I played around with the MC engine and it often gives you lower success rates than with plain old historical analysis!

Thanks!

Very true about the options/flexibility. It’s all a numbers game. Does the additional income bridge the gap between a safe 3.25% and noso-safe 4.0%? Is the income steady enough to do so? For how many years do I want to do this side hustle/business, etc.?

I wouldn’t want to budget too much side income and certainly not a side income for too many years. So, for me personally the extra income is too low and short-term to make a difference.

I would add the impacts of climate change policies (whether you believe in the science or not) as a reason future investment returns may remain stubbornly low for a long time.

lol wut

Don’t forget UFO’s and aliens… since UFO are in recent news…

Uncertainty about the effects and probably equally important the policies that address climate chanage could certainly make future returns less generous. Good point!

Beautiful analysis. I combat SOR in 2 ways. I have risk adjusted “portfolios” not just a portfolio. One portfolio my main retirement portfolio consist of a small TIRA about 500K plus SS plus brokerage and TLH. I did an analysis of tax code “progressiveness” and it seems the government gives the man or woman with about 500K plus SS the best break. Taxes are 12%, the deductible is a large % of your income, SS is tax advantaged and inflation adjusted, cap gains taxes are 0. I read a report the median pre tax account is 500-600K so that means a lot of voters own median accounts so it looks to me like the government used that data as a middle class retirement. If you RMD a 500K TIRA at 3.5% return you get about 20K/yr an rising slowly for the next 20 years so that looks like an annuity inflation adjusted (because RMD is progressive) that pays around 20K to 30 K slowly rising over 20 years. That mixed with say 30K of SS (25,5K taxable) keeps you in the12% bracket for a LONG time. Eventually you will breakthrough to 22% but it may be a couple decades. So looking middle class is a good look for ordinary income.

Despite the “fair share” rhetoric the tax code is set up to soak the rich and as soon as you cross 22% your are rich and liable to get soaked. The soaking gets really bad at the top of the 24% where the cliffs and surcharges are abundant. So the mainstay of my portfolio is to look middle class for as long as I can. The brokerage fills in my excess need. I simply withdraw some brokerage at 0% cap gains to boost income. It makes the brokerage into something akin to a Roth. You can risk the brokerage more aggressively or less depending on the size of the brokerage. I consider my brokerage to be my SWR source. I consider my ordinary income stream to be more of a fixed asset stream like a pension. My WR on my brokerage to make up the difference is only 2%, quite impervious to SOR. My brokerage will last a long time at this WR.

My third portfolio is my Roth. I consider that my self insurance. I cleaned out the TIRA of everything BUT 500K in Roth conversion which happens between retirement and RMD. I’m 67 and still Roth converting till age 70 (or 72) depending on SECURE act legislation. The Roth money is un-necessary to my retirement income but will play large in time of disaster. It’s my back-up portfolio. S O R only affects a portfolio open to withdrawal, other wise a closed or accumulating portfolio behaves like a state function. The return may be variable based on market exposure but in the end its principal plus interest until you start withdrawing money. Presuming growth after 10 years I will feel comfortable cracking the Roth for some play money etc. The Roth also immunizes my wife should I kick the bucket. Her tax burden will increase and OUR SS income will decrease to a single survivors income so a little extra juice will be useful. In this scenario taxes are minimized all the way to age 90.

Glide paths are interesting and relevant to the 60 year discussion. I think the reason glidepaths work is it takes a long time for a mistake to manifest. 4% over 60 years is clearly a mistake when you run out of dough at 44. If you make that mistake at 80 you’re dead long before it can manifest. I think also that’s why SOR tends to become not relevant late in a portfolio. SOR can be viewed as a mistake not of your own making. My analysis is the portfolio is liable to SOR for about half it’s term so a 60 year retirement is SOR liable for at least 30 years. A 30 year is liable for 15 years 5 years pre and 10 years post with SOR ensuing as a force at year 5.

Such an interesting post, my thanks to you both

Tax regimes will change six times by then.

Very true! I hope though, that the traditional middle-class tax brackets will not be messed up too badly! 🙂

Thanks Gasem for your input. Almost your own guest post (let me know if interested!!!)

Very interesting and correct point about the “sweet spot” in the tax code. Around $50k retirement budget (maybe up to $80k) is still very tax-efficient. If you want to go much above that you’re really getting soaked. First while working you need an income in the 6-digits (and potentially from a state with a high tax rate, CA, NY, etc) and you get soaked there and then again in retirement.

I like the idea of the quasi-annuity in the IRA. 3.5% expected return should be easily achievable with relatively low risk. Sounds like a nice approach for traditional retirees.

As always, thanks for you valuable comments! 🙂

I think there is a lot more error than we realize in early retirees’ estimates of how much income they need, and the effects of lifestyle changes on their nominal withdraw needs. Moving from a HCOL area to a LCOL area would change all the assumptions when it comes to withdraw needs and susceptibility to inflation. So would an ambition to tour the country for a few years in a $250k RV or getting a boat – in a negative way!

There is a risk of working extra years/decades to hit a 3.25% WR only to find that once retired your car and clothes last 15 years, your mortgage is dead, the kids are independent, and your actual WR is lower than planned. I think a person with a 4% WR living in a HCOL area spending 40%+ of their budget on housing (e.g. California, New England, PNW) could reasonably contingency plan to move to a LCOL area where housing costs a quarter as much (e.g. Kansas City, Indianapolis, The South) IF their account is depleted a certain amount. In this contingency their WR might permanently decrease 20-30% and a virtuous cycle ensues with lower tax rates.

I hear you!

But: I have already moved from a HCOL area to a lower COL area. So that lever is no longer there for me. Except I want to uproot my family and move really deep into the boonies. Yeah, as a last resort I’d do that, but I’d prefer not to.

Also keep in mind that the probability of you needing flexibility is much higher than the often quoted 4% Rule failure probabilities, due to “flexibility false alarms” see my SWR series 23, 24, 25.

So, to use your words, with your flexibility approach there is also the risk of moving from a HCOL area to rural XYZ and then finding out that the market bounced back quickly (e.g. 2009 onward). You should have just stayed in place, but you can now no longer afford to move back to your old home. You are stuck in rural XYZ! A Type I error!

+1 for a guest post by GASEM on tax-minimization strategies.

I wrote a 4 part series on that if you want to look it over: http://mdonfire.com/2019/05/23/parsing-cash-flow-in-retirement/

An incredibly useful post, that chart near the end is indeed one of the most valuable FIRE items on the whole internet!

As an early retiree myself, i found this post very reassuring. We quit earning significant money at age 52 so a 60 year retirement may be unrealistic but my family live long so a 40+ year journey must be planned for even now, 3 years later. My point: this work applies to more than just the 30-something FIREd person.

I’m definitely going to review our ROW and investment allocations based on this. Thanks!

THanks! Great point! 40-60 year retirements are not necessarily that different from the pure numbers perspective.

Can we get a version of “The Table” that focuses on the range from 75%-100% stocks? I think it’s clear that a high stock allocation is necessary for a long retirement. The question is, how high? Is 90% optimal, or do we even need any bonds at all? What if we use riskier, higher-yield bonds?

Part 2 and 3 of the SWR series have charts of success probabilities by equity weight:

https://earlyretirementnow.com/2016/12/14/the-ultimate-guide-to-safe-withdrawal-rates-part-2-capital-preservation-vs-capital-depletion/

https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/

Example:

https://i2.wp.com/earlyretirementnow.com/wp-content/uploads/2016/12/swr-part2-chart11.png?zoom=1.375&resize=776%2C822&ssl=1

“In subsequent years, use inflation to increase the dollar amount. In this instance the 2% yearly inflation increase is $40,800, $41,161, $41,984, etc.”

I’m not getting the sequence here. Can someone explain this to me?

Value is related to purchasing power, a car may cost 40K in 2019 and with inflation would cost 40,800 with 2% inflation in 2020 and $41,161 in 2021. If you wanted to buy that car in 2021 you would need an additional 1,161 dollars beyond the price in 2019. In 2021 40K would no longer have enough purchasing power to buy that car.

Year 2: 40k x 1.02

Year 3: 40k x 1.02^2

Year 3: 40k x 1.02^3

etc.

40,000×1.02=40,800

40,800×1.02=41,616

41,616×1.02=41,984 etc.

>Note the bump around age 52. Reviewing cash flows, the brokerage account runs out of money at that time and the 401k is tapped resulting in increased tax payments.

Then shouldn’t the hypothetical person have done partial Roth conversions beforehand to even out (and minimize) their taxes over time? (Google “Tax-Efficient Spending Strategies From Retirement Portfolios” and “Kitces” for Michael Kitces’s article on the topic).

Good point. Especially if one could fill up the $24k in standard deduction.

No, you can’t do partial Roth conversions prior to age 59.5 without paying the 10% early withdrawal penalty. You can access your IRA/401k money before then with a 72(t) SEPP but that money is then out of the IRA and can’t be converted to a Roth.

Actually no 10% penalty for conversions from traditional IRAs to Rothe IRAs per IRS publication 590-A.

“Converting From Any Traditional IRA Into a Roth IRA

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions won’t apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.”

Well there you go! Everything is different for FIRE.

?? You mean you were wrong!

Meh, Vanguard has been making predictions for a long time, and none of them have been particularly accurate. I’d take their projections with a grain of salt. Based on what they’ve put out for the past decade, I don’t feel like they are any better at making accurate projections than any other advisor out there.

Your line of reasoning sounds like the Thanksgiving Turkey Fallacy. Equities are expensive. I think it’s essential to reduce our return expectations.

Even more transparent with bonds:

You can look up bond yields everywhere on the web. They are lower than past bond returns. You won’t be getting 6% returns on gov. bonds if the yields are 2% today!

Big ERN, You are a Dr. as well – don’t sell yourself short. If anything your Doctorate is much more relevant to this topic than his.

On a different note: Who is looking at 60 year SWRs? Do you expect to live to 90 having retired at 30? This sounds pretty ridiculous.

Thanks! Oh, and I’m very proud of my PhD myself, no worries! 🙂

60 years sounds like a long time. My wife was 35 when we retired, so 60 years isn’t that outrageous. But if someone insists on 50 years, especially when retirees are in their 40s that’s fine with me, too. My experience is that there’s very little difference in the SWRs between, say 48 years, 50 years, 55 years and 60 years.

There IS a LARGE difference between 30 and 60 years, though. See Part 2 of the SWR series. 🙂

Thank you Dr Dave and Big ERN. What a great post! With all the comments from Big ERN this feels like a discussion between two great minds. Very informative to see projected returns confirm the lower safe withdrawal rates for longer horizons found when using historical data.

Question about what Monte Carlo success rate means. The article illustrates that the 90/10 portfolio results in a safe withdrawal rate never above 3.25% using projected returns. This makes great sense to me given what we’ve seen from the historical data. It’s also mentioned a 53% Monte Carlo success rate. What does this success rate mean? Maintaining real inflation adjusted purchasing power? Leaving a bequest of the starting value in nominal terms? Or dare I say the scary proposition of a 47% (100%-53%) chance of running out of money? Your thoughts are appreciated.

I’m not sure I would worry too much about Monte Carlo in a 60 year retirement projection. The Monte Carlo used in this projection generates 1000 stochastic volatile returns and if you look through ERNs site, you can see some detail why he likes historical returns rather than Monte Carlo (or assumed future returns for that matter).

Nothing is predictable beyond 20 years IMHO with a 4% WR. If the portfolio is passive like a index portfolio, you simply buy market return for market risk and effectively by definition can not out perform. By owning market risk your portfolio is at the mercy of the brilliant rockets and sharp knives in the C suite. You basically become like a flea on a dog and you may think your the master of the universe but your really just a passenger on the dog’s patootie. What has typically paid off in America is productivity. The whole country is designed to be productive. Even the rivers that flow into each other were the logistics by which iron ore from Minnesota and low sulfur coal from Montana all joined to the Mississippi and eventually wound up in the steel plants of St Louis and Chicago. Once steel, it was moved by rail. Abundant cheap steel = huge productivity. 5 east west rivers join the Mississippi which is north south = productivity. Productivity is also a function of creative destruction. High quality cheap steel was impossible till the invention of blast furnaces and the Bessemer process, this is an example of creative destruction. Modern farming is another example and standardized assembly lines. So your retirement is dependent on productivity and creative destruction, at least mine is.

Those rely on a stable political climate and population cohesion, so where we will be in 20 years much less 60 years is anybodies guess given we look like we are headed for tribalism. I tend to like Monte Carlo better than reward looking techniques precisely for this reason. FIREcalc looks back to 1871. That like 6 years after the Civil war. No cars, rabbit paths for highways, barely communication, barely rail travel, virtually no education, agrarian economy, what does 1871 have to do with my future in 2039 much less 2079? I’ve grown comfortable living a probable future life (as predicted by Monte Carlo) compared to a future virtually assured to not look anything like the past provided by historical analysis. Create the distribution and plan to succeed in the worst 10% scenario. That means you have a 9/10 chance of winning aka running out of breath before you run out of money, pretty good odds

Thanks FIPhysician. I’m generally aware that Monte Carlo is more “conservative”, since a purely random sequence of returns results in scenarios that are truly horrific in comparison to the historical record, which is mean reverting. Still, I’d be curious what kind of spending regime would be required to bring the Monte Carlo success percentage into the 80% to 90% range mentioned in the article. Any thoughts? Is this something you looked at in your modeling?

I didn’t focus on the Monte Carlo results. If you wanted to increase your odds, you could increase the return assumptions or decrease your SWR!

You can play around with this at PortfolioVisualizer yourself! 🙂

If 0 is the cutoff between failure and success then it’s the same success criterion nominal and real. So, yes, not running out of of money is considered a success. For leaving a bequest we’d need to slightly lower the SWR a bit more. Scary! 🙂

Big ERN,

I love your analyses and backing up the work with relevant numbers.

I had a quick question on the withdrawal rate as it relates to dividend stocks. For a stock with a yield of 3%, is that still considered part of the withdrawal rate? Or withdrawal rate strictly relates to selling of stock? I understand that dividend is nothing but selling of stock (as the price is reduced) that results in a taxable event but would appreciate your take on this.

Thanks,

RatRaceQuit

Good question. All safe withdrawal rate simulations always take into account “total returns” so dividends and capital gains/losses of stocks.

The tax implication of dividends is something everyone has to deal with on a one-by-one basis. Most retirees will manage to stay in the lower tax brackets where dividends and LongTerm cap gains are tax-free on their federal return.

Hey Big Ern! I was reading this early paragraph and trying to understand what he was trying to say. Is the math correct on this? The first withdrawal is with 2% inflation but I am not sure of the others. I’m not trying to throw rocks but I didn’t understand what the common misconception was.

“A common misconception of the 4% rule is that you use inflation to adjust the 4%. You don’t. Only in the first year do you use 4% to calculate the withdrawal amount. In subsequent years, use inflation to increase the dollar amount. In this instance the 2% yearly inflation increase is $40,800, $41,161, $41,984, etc.”

I found the issue. It should just be $40800, $41616, $42448. Looks like the 6’s and 1’s got mixed up which messed up the further math.

That’s right! Thanks for checking. I will correct the typo.

Shane. I’ll throw in another possibility for the “misconception”. As stated correctly in the post, the DOLLAR amount is adjusted upwards each year based on inflation (and regardless of market conditions). The misconception could be that the WITHDRAWAL PERCENTAGE amount is adjusted upwards each year based on inflation. Using the 2% inflation assumption, year 1 would be 4%, year 2 would be 4.08%, year 3 would be 4.16%, etc. This may seem minor, but it has a huge effect later on since it does not account for market value as the 1/CAPE method does (as supported by our friend Big ERN).

Correct. Only the $ amounts are adjusted

I’d never adjust the % values.

I’m having trouble reconciling the Monte Carlo success probabilities with the final chart – which would you recommend using as the ultimate “success metric”? Given the magnitude of the decision that this data can be used for, I think it’s a pretty big question.

The Monte Carlo results indicate that over a 60-year retirement, even with a reduction in SWR to 3.25%, “success” probabilities are only 53% – slightly better than a coin flip. I wouldn’t bet my retirement on that.

The chart at the end, though, indicates that a 60-year retirement window and 3.25% withdrawal rate, 75/25 allocation, would get you to 100% – quite a difference! Even if one got more aggressive with a 4.25%, the odds would still be very favorable – 85%.

Can you help me reconcile the disparity? If you were using these two methodologies to make decisions on retirement, which would you use?

Thanks!

Monte Carlo has trouble simulating the real-world asset reutn patterns: For example a strong recovery after a big drop.

It’s the #1 reason why I prefer my method with historical returns.