Category: Safe Withdrawal Rates

Can we increase the Safe Withdrawal Rate with Momentum/Trend-Following? – SWR Series Part 63

November 12, 2025 – Hello, readers! Welcome to another installment of the Safe Withdrawal Rate Series. Please see this landing page for an introduction to the Series and a summary of all the other parts so far. After a long hiatus from writing due to my busy travel schedule during the summer and lots of other commitments, I’ve found my groove again and put together something that has been on my mind for many years: Is there an asset allocation strategy that could have improved historical safe withdrawal rates? Specifically, could we devise an asset allocation strategy that shifts weights between different asset classes in a way to improve investment results? Of course, that’s easier said than done, but there are some interesting ideas out there. One such approach is to tactically shift asset class weights based on asset return momentum. Some people also refer to this flavor as “Trend-Following.” If you want to sound really techy and fancy, you’d also call this “Tactical Asset Allocation” (TAA), “Managed Futures,” or “Commodity Trading Advisers” (CTA) strategies; however, these three terms often encompass many other dynamic asset allocation strategies, not just momentum.

In any case, maybe a momentum strategy can help us avoid some of the worst historical asset market disasters if we could sell equities early enough during a bear market. How much Sequence Risk could we eliminate? By how much can we raise our safe withdrawal rate if we could have reliably avoided some of the worst historical asset market disasters? Let’s take a look..

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Can we increase the Safe Withdrawal Rate with Small-Cap Value Stocks? – SWR Series Part 62

June 2, 2025 – Welcome to another installment in my Safe Withdrawal Series, please check the landing page for all posts so far. Today’s topic is about Small-Cap Value (SCV) stocks and whether they should have a prominent role in retirement portfolios. Some financial experts recommend adding Small-Cap Value to your retirement portfolio, which will miraculously and automatically increase your safe withdrawal rate from 4% to 5% or even 5.5%.

In today’s post, I first would like to present some simulations using historical data. Those simulation results look pretty impressive. Thus, investors in 1926 who had somehow been aware of the Fama-French research, published almost 70 years later (maybe through time travel!?), could have done remarkably well.

Of course, if you are familiar with my blog, you will know that I am skeptical of SCV. I’ve written two posts, one in 2019 and one last year, where I outline my main concern: the Small-Cap Value engine that generated extra returns worth several percentage points between 1926 and about 2006 started sputtering about twenty years ago, and it’s unlikely that now when everybody is aware of SCV, we will repeat those impressive investing results so easily. Thus, I also want to provide some simulations that factor in more realistic small stock and value premia going forward. Alas, once we scale back those factors’ return expectations, your retirement portfolio will have very little to gain from small-cap value stocks.

Let’s take a look…

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Safety First – SWR Series Part 61

May 16, 2024 – Welcome to another Safe Withdrawal Rate Series installment. Please see the landing page of the series for a guide to all parts so far. In Part 60, dealing with the “Die With Zero” idea, I mentioned working on an upcoming post about the “Safety First” approach, and I finally got around to writing that post. What is Safety First? It involves using asset allocations different from those in the Trinity Study or my SWR Toolbox (see Part 28). For example, we could use Treasury Inflation-Protected Securities (TIPS) as a default-free and CPI-hedged investment option. However, TIPS are no hedge against longevity risk. An annuity hedges against longevity risk; though the most common annuity option, a single premium immediate annuity (SPIA), is usually not CPI-adjusted. Also, for the longest time, low interest rates rendered the Safety First approach all but useless because neither TIPS ladders nor annuities generated enough income for a comfortable retirement. You would have been better off taking your chances with the volatility of a 60/40 portfolio.

In other words, there is no free lunch. You don’t get peace of mind for free. Rather, you likely pay a steep price for that safety by giving up most, if not all, of your portfolio upside and/or bequest potential. However, since interest rates started rising again in 2022, the entire fixed-income interest rate landscape looks more attractive now. Could this be the time to reconsider Safety First? Let’s take a look…

Continue reading “Safety First – SWR Series Part 61” →

How Crazy is Dave Ramsey’s 8% Withdrawal Rate Recommendation?

November 12, 2023 – If I wanted to comment on every piece of bad advice in the personal finance community, my quiet, relaxed early retirement would be busier than the corporate career I left in 2018. So, I usually stay out of the daily Twitter/X spats. Last week, though, an incident caught my attention, and it was egregious enough that I weighed in. In a recent Dave Ramsey show (original video here, starting at the 1:13:50 mark, Twitter discussion here), Dave doubled down on his recommendation of the 8% safe withdrawal rate in retirement, calculated as 12% expected equity returns minus 4% inflation (his numbers, not mine – more on that later). And several people pinged me and wanted me to comment. Safe Withdrawal Rates are my wheelhouse, given that I wrote a 60-part series looking at the topic from almost every angle I can think of. So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way. Let’s see why…

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How useful is the “Die With Zero” retirement approach? – SWR Series Part 60

October 6, 2023 – There’s been a lot of chatter about the Bill Perkins book “Die With Zero” and its approach to life and retirement planning. Most recently, just yesterday on the awesome Accidentally Retired blog. After several readers asked me about my views on the “Die With Zero” idea, I finally relented and decided to write a piece in my Safe Withdrawal Rate Series on the topic.

I’ll briefly describe the areas where I agree with Perkins. But then I also go through all of the fallacies in this approach. Let’s take a look…

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Social Security Timing – SWR Series Part 59

September 5, 2023 – Welcome back to a new blog post in the Safe Withdrawal Rate Series! It’s been a while! So long that some folks were wondering already if I’m all right. Nothing to worry about; we just had a busy travel schedule, spending most of our summer in Europe. First Italy, Switzerland, Austria, and Germany. Then, a cruise through the Baltic Sea from Sweden to Finland, Estonia, Latvia, Poland, Germany again, and Denmark. But I’m back in business now with a fascinating retirement topic dealing with Social Security timing: What are the pros and cons of deferring Social Security? If we set aside the ignorant drivel like “you get an 8% return by delaying benefits for a year” and look for more serious research, we can find a lot of exciting work studying this tradeoff. Earlier this year, in Part 56, I proposed my actuarial tool for measuring the pros and cons of different Social Security strategies, factoring in the NPV/time-value of money consideration and survival probabilities. A fellow blogger, Engineering Your FI, has done exciting work studying this tradeoff using net present value (NPV) calculations. And Open Social Security is a neat toolkit for optimizing joint benefits-claiming strategies.

But those calculations are all outside of a comprehensive Safe Withdrawal Rate analysis. How does Social Security timing interact with Sequence Risk? For example, can it be optimal to claim as early as possible to prevent withdrawing too much from your equity portfolio during a downturn early in retirement? In other words, if you’re interested in maximizing your failsafe withdrawal rate, you may feel tempted to pick a potentially suboptimal strategy from an NPV point of view. Sure, you underperform in an NPV sense on average if you claim early. But hedging against the worst-case scenarios may be worth that sacrifice.

Let’s take a look…

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Flexibility is Overrated – SWR Series Part 58

June 16, 2023 – I wonder if I’ll ever run out of material for the Safe Withdrawal Series. Fifty-eight parts now, and the new ideas come faster than I can write posts these days. This month, I initially planned to write about the effects of timing Social Security in the context of safe withdrawal simulations. But one issue keeps coming up. It’s almost like a personal finance “zombie” topic that, after I thought I put it to rest once and for all, always comes back when you least expect it. It’s flexibility. If we are flexible – so we are told – we don’t have to worry much about sequence risk. We can throw out the 4% Rule and make it the 5.5% Rule. Or the 7% Rule or whatever you like.

Only it’s not that easy. In today’s post, I like to accomplish three things:

  1. Provide a simple chart and a few back-of-the-envelope calculations to demonstrate the flexibility folly.
  2. Comment on a recent post by two fellow personal finance bloggers and showcase some of the weaknesses of their approach.
  3. Propose a better method for modeling flexibility and gauging its impact on safe withdrawal amounts. Hint: it uses my SWR Simulation tool!

Let’s take a look…

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Accounting for Homeownership in (Early) Retirement – SWR Series Part 57

April 14, 2023 – Welcome to a new installment of the Safe Withdrawal Rate Series. Please check out the SWR landing page for a summary of and a link to the other posts.

Today’s topic is homeownership. I’ve already made the case that not just rental properties but even homeownership can be a great tool in building assets (“See that house over there? It’s an investment!“). But what if you are already retired? What are some of the benefits of homeownership in the context of (early) retirement? Does homeownership reduce Sequence Risk? Do homeowners enjoy a lower inflation rate in retirement? If so, by how much can homeowners raise their safe withdrawal rate? How do we properly account for homeownership (with and without a mortgage) in the SWR simulation toolkit?

Lots of questions! Let’s take a look…

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The Basics of FIRE

March 10, 2023 – After seven years of blogging in the personal finance and FIRE community, I realize that there’s one type of post I’ve always avoided: How to explain FIRE to a complete newbie. Until now, I’ve outsourced that task and simply referred to the Links Page. But where’s a good overview, all in a simple and comprehensive post to give a one-stop overview of what FIRE is and how one can pull it off? I’ve come across a lot of good information, but it’s all in bits and pieces and here and there. I’m not going to dump a reading/listening list of 20 different posts/shows on 18 different blogs/podcasts on someone new to the community. And my Safe Withdrawal Rate Series? Great stuff. But it’s also the deep end of the pool, and I would likely scare away any new recruits. That series is targeted at folks already retired or nearing early retirement.

So how would I explain or even pitch FIRE to someone new to the community? Let’s take a look…

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Evaluating Annuities, Pensions, and Social Security – SWR Series Part 56

February 6, 2023 – Welcome to another installment of my Safe Withdrawal Rate Series. See the landing page of this series here for an intro and a summary of all the posts I’ve written so far. On the menu today is an issue that will impact most retirees: we all likely receive supplemental cash flows in retirement, such as corporate or government pensions, Social Security, etc. Some retirees opt for an annuity, i.e., transform part of their assets into a guaranteed, lifelong cash flow.

Of course, if you are a long-time reader of my blog and my SWR series you may wonder why I would write a new post about this. In my SWR simulation toolkit (see Part 28), there is a feature that allows you to model those supplemental cash flows and study how they would impact your safe withdrawal rate calculations. True, but there are still plenty of unanswered questions. For example, how do I evaluate and weigh the pros and cons of different options, like starting Social Security at age 62 vs. 67 vs. 70 or receiving a pension vs. a lump sum?

Also, you might want to perform those calculations separately from the safe withdrawal rate analysis, from a purely actuarial point of view. For example, we may want to calculate net present values (NPVs) and/or internal rates of returns (IRRs) of the different options before us. Clearly, NPV and IRR calculations are relatively simple, especially with the help of Excel and its built-in functions (NPV, PV, RATE, IRR, XIRR etc.). However, the uncertain lifespan over which you will receive benefits complicates the NPV and IRR calculations. How do we factor an uncertain lifespan into the NPV calculations? Should I just calculate the NPV of the cash flows up to an estimate of my life expectancy? Unfortunately, the actuarially correct way is more complicated. But Big ERN to the rescue, I have another Google Sheet to help with that, and I share that free tool with you.

Let’s take a look…

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