The Ultimate Guide to Safe Withdrawal Rates – Part 7: A Google Sheets Toolbox

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)

One commenter the other day had a good suggestion: Publish the Excel spreadsheet that we use in our safe withdrawal rate research. Great idea! There is only one problem: we didn’t use Excel to calculate any of the SWRs. We did use Excel to create some tables, but the computation and most charts were all done using GNU Octave, a free number-crunching programming language, similar to Matlab.

But we still liked the idea of creating a tool to run some quick SWR calculations. In Octave, we can calculate a large number of simulations and calculate safe withdrawal rates over a wide range of parameter value assumptions. Millions and millions of SWRs over many different combinations of parameter values (retirement horizons, final asset value target, equity shares, other withdrawal assumptions). That would have been cumbersome, probably even impossible to implement in Excel. But a quick snapshot on how one single set of SWR parameters would have performed over time? That’s actually quite easy to do, even though there are 1,700+ different retirement cohorts between 1871 and 2015.

Update 2/10/2016: I added the gold and cash returns.

  • Gold returns are only completely trustworthy after 1968 when I got the London Fixing time series via Quandl. Before that, I had to rely on annual data from If someone has a better (monthly) time series for 1871-1967 please let me know!
  • For cash returns I use:
    • 3-month T-bill interest rates from the Federal Reserve starting in 1934. Monthly data.
    • I have annual data for going back to 1928 from NYU-Stern. Data gathered via Quandl.
    • For 1871-1927 I use annual data on 1-year T-bill yields from Prof. Rober Shiller. It’s not exactly ideal to splice it this way but it’s the best I can right now. If someone has better data, please let me know!

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The Ultimate Guide to Safe Withdrawal Rates – Part 6: A 2000-2016 case study (or: Welcome to the Potemkin Retirement Village)

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)

If you’ve been following our series on withdrawal rates (part 1 here) you have noticed that we’re quite skeptical about the 4% rule. That would be especially true for early retirees with a much longer horizon than the standard 30 years. Though, by reading through some of the research from the heavy hitters in the retirement research world, even the foundation of the 4% rule over 30 years seems to be crumbling a little bit:

  • Wade Pfau has been warning that due to high equity valuation and low bond yields the Trinity Study success rates are likely overrated. His argument is similar to ours in Part 3 of this series: we live in a low return world now and comparisons with past average returns could overstate the success probability of the 4% rule. He uses a slightly different methodology (Monte Carlo simulations) but reaches similar results.
  • Even Michael Kitces, arguably one of the great defenders of the 4% rule, has (inadvertently?) demonstrated that the 4% rule over 30 years isn’t all that sound. In the discussion after the famous “ratcheting post,” some readers (including yours truly) pointed out that we can’t replicate the success of the 4% rule with 1965/66 starting dates. Nothing to worry about, Kitces replied, all you needed to do is to use a very short-term bond (1-year T-bills) for the bond allocation, and you sail smoothly during the 1970s. Who would put 40% of the portfolio into 1-year Treasury bills (essentially CD interest rate) rather than trying to harvest the term premium of longer-term bonds? Very easy: someone with 20/20 perfect hindsight who knew that longer duration 10Y bonds will get hammered in the 70s and sink the 4% rule even over a 30-year horizon.

And I just became a little bit more skeptical about the 4% rule even over a 30-year horizon! But there is (at least) one prominent 4% SWR firewall still standing. In countless blog posts, discussions, forums etc. I have heard this quote (or variations of it):

“The 4% rule worked just fine during the Tech Bubble and Global Financial Crisis”

Let’s shine some light on that claim.Read More »

The Ultimate Guide to Safe Withdrawal Rates – Part 5: Cost-of-Living Adjustments

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)

Welcome back to the Safe Withdrawal Rate Series. Last week we wrote about how Social Security can impact the SWR estimates. Even under the most optimistic assumption (no changes to the Social Security benefits formula), we didn’t think that the 4% withdrawal rate is safe.

But how about tinkering with the inflation adjustments, also called Cost-of-Living adjustments (COLA)? I often hear that one way to save the 4% rule in periods when the stock market doesn’t cooperate is to not do inflation adjustments for a few years. Or simply utilize the fact that we all potentially spend less (in real terms) as we age! How much can we push the initial withdrawal rate in that case?

With a declining real withdrawal rate, we can afford higher initial withdrawals!

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Guest Post on Budgets are Sexy: My Top 7 Disagreements With Personal Finance Experts

J. Money, the personal finance blogger who runs Budgets are Sexy and RockstarFinance asked yours truly to write a guest post! Wow, what an honor! And, it turns out, this is actually my first guest post ever (not counting the “Christopher Guest Post” on the Physician on FIRE blog two months ago because that’s actually an interview). What did I write about? Initially, I proposed to go on an all-expenses-paid trip to Tahiti to review some luxury resorts and report back, uhm, some time later this year. But J$ had another brilliant idea: write about my favorite finance pet peeves. And it got published today:

My Top 7 Disagreements With Personal Finance Experts

Of course, to read it all, you’ll have to head over to Budgets are Sexy. But please see below for supplemental material, i.e., some of our blog posts on the seven topics:

  1. Safe Withdrawal Rate:
  2. Robo-Advisers:
  3. Emergency Funds:
  4. Bonds to diversify equity risk:
  5. Bond vs. Stock Risk:
  6. Cash as bear market insurance:
  7. Tax loss harvesting:




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!

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Seven reasons in defense of debt and leverage: Yes, you CAN have too little of a bad thing!

We hope you had a great holiday weekend and a very Merry Christmas! If you are looking for the fourth installment of the Safe Withdrawal Rate series (see part 1, part 2, part 3), please come back next week. Who is in the mood for heavy-duty number-crunching when we’re still digesting the heavy meals and scores of eggnog from last weekend? Yup, every year around this time we reconfirm the concept known as “too much of a good thing.” Only those of you free of the sin of overconsumption can throw the first meatball, uhm, stone. I’m waiting… Still waiting… Nobody? See, we’ve all experienced overconsumption between Thanksgiving and Christmas. But is the opposite true as well?

Can there be too little of a bad thing?

The bad thing I’m talking about is debt. To many of us in the FIRE community, debt is a four-letter word – figuratively! An entire niche of the Personal Finance blogging world is dedicated to getting out of debt and that’s a really good cause especially for those with a low or negative net worth. Paying off credit card debt at 18-20% or student loan debt with high single-digit percent interest rates should be priority number one. But that doesn’t mean that all debt is bad. For us in the ERN household, we’re blessed to never have had any sizable debt, except for a 30-year mortgage that we plan to pay off not a day earlier than we have to. We enjoy the ultra-low interest rate (3.25%), the tax-deductibility and putting our money to work with higher expected returns elsewhere. We love leverage! Our blogging friend FinanciaLibre has written excellent pieces on the topic of leveraging your equity portfolio with the cheap borrowing costs of a mortgage, see hereRead More »

The Ultimate Guide to Safe Withdrawal Rates – Part 3: Equity Valuation

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)

Welcome back to our safe withdrawal rate series! Over the last two weeks, we already posted part 1 (intro and pitfalls of going beyond a 30-year horizon) and part 2 (capital preservation vs. capital depletion). Today’s post deals with yet another early retirement pet peeve: safe withdrawal rates are likely overestimated given today’s expensive equity valuations. We wrote a similar piece about this issue before, but that was based on cFIREsim external simulation data. We prefer to run our own simulations to be able to dig much deeper into this issue.

So, the point we like to make today is that looking at long-term average equity returns to compute safe withdrawal rates might overstate the success probabilities considering that today’s equity valuations are much less attractive than the average during the 1926-current period (Trinity Study) and/or the period going back to 1871 that we use in our SWR study.

Thus, following the Trinity Study too religiously and ignoring equity valuations is a little bit like traveling to Minneapolis, MN and dressing for the average annual temperature (55F high and 37F low, see source, which is 13 and 3 degrees Celius, respectively). That may work out just fine in April and October when the average temperature is indeed pretty close to that annual average. But if we already know that we’ll visit in January and wear only long sleeves and a light jacket we should be prepared to freeze our butt off because the average low is 8F =-13C! Likewise, be prepared to work with lower withdrawal rates considering that we’re now 7+ years into the post GFC-recovery with pretty lofty equity valuations.Read More »

The Ultimate Guide to Safe Withdrawal Rates – Part 2: Capital Preservation vs. Capital Depletion

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)

Welcome back! This is our 50th post, as I just learned from WordPress. Cheers to that and thanks to our readers for coming back every week! As promised in last week’s introductory post, we present some additional results about safe withdrawal rates for early retirees. Today’s post deals with an important issue that all retirees (whether retiring early or in their mid-60s) should ask themselves:

Do we want to deplete our savings or maintain a certain minimum real value of the principal to bequeath to our heirs?

We are amazed by how little discussion there is in the personal finance community about this. Hence, today’s topic:

Capital Preservation vs. Capital Depletion

  1. capital preservation: target a certain minimum asset level (as % of the initial value) at the end of the retirement horizon. Under full capital preservation we’d aim to keep the real, inflation-adjusted value constant, by consuming “only” the capital gains, dividends, and interest over time, while keeping the principal (plus inflation-adjustment!) in place.
  2. capital depletion: target a zero (or at least positive) final portfolio value, by consuming gains as well as principal over time

Read More »

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

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

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

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

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

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Grand Canyon Rim to Rim Hike

Mrs. ERN, little Ms. ERN and I recently headed out to visit the great American West. We visited Zion National Park, Bryce Canyon National Park, (upper) Antelope Canyon, and Grand Canyon National Park, both North and South Rim. We got a good deal on the airfare by booking way in advance, we did the Priceline name-your-own-price deals for the various hotels along the way and paid almost all hotel charges with the credit card reward points.

The trip was also a great opportunity to check off one item on my personal bucket list: Hike through the Grand Canyon from the North to South Rim. In one single day. Since I didn’t bring anybody else along for the hike (Mrs. ERN and little Ms. ERN took the rental car to the South Rim) I thought I will bring all of you ERN blog readers along for a digital ride. Not that any camera can really do the Grand Canyon justice, but I’ll try my best.Read More »