The Safe Withdrawal Rate Series – A Guide for First-Time Readers

As suggested by several readers now, here’s a new “landing page” for everyone interested in my Safe Withdrawal Rate Series, which has now grown to 30+ posts. What is a reader new to this topic supposed to do? Read from the beginning to the end, Part 1 through 31? Seems intimidating! It almost feels like there will be a quiz at the end of the series. No worries, there isn’t! 🙂

But seriously, just because I wrote this comprehensive series in this order doesn’t mean that one should read it in that order. Keep in mind that this whole series was a learning experience for me as well, so reading parts 1 through 30+ will seem a bit jumpy at times. In fact, a lot of the posts came about because readers suggested I check out certain sub-topics and all that came about in random order. If I were to write this series again today, from scratch, with everything I know today or if I were to write a book I would obviously structure this very differently. It would be unfair to new readers to make them go through the series from 1 to 31! Which convinced me to write this new page, so newcomers feel less intimidated starting their own thought process on Safe Withdrawal Rates!

How do I even get started with this series?

Great question! Well, I started with Part 1 – Introduction: This post sets the stage and explains the similarities and differences between my study and the Trinity Study. I replicate some of the Trinity Study results but also generalize the results to make them applicable to the FI/FIRE crowd; most importantly, I look at longer retirement horizons. If you have already read the Trinity Study, you are already skeptical about the simple naive 4% Rule and you like technical stuff, then sure, start with this one. But to make this series more accessible, palatable and enjoyable to a wider audience, I also wrote some high-level posts without much technical and math mumbo jumbo. To get folks interested in this topic! Maybe you read those first to get an appetite:

  • Without diving into any math, you might enjoy this as your first post: Part 26 – Ten Things the Makers of the 4% Rule Don’t Want you to Know. As the title suggests, this is a bit of a tongue-in-cheek post. Most of us in the FI/FIRE community have heard about the 4% Rule and sometimes I catch myself referring to it. But there are so many problems with the 4% Rule. Here are 10 myths and inconvenient facts about this “Rule.” And if you got an appetite for more details, check out the links to the more detailed posts!
  • If you attended the April 2018 CampFI in Virginia where I was one of the presenters, you’ll recognize a lot of the material in Part 27 – Why is Retirement Harder than Saving for Retirement?: Another more philosophical, not so technical post, perfectly suited for folks trying to get started. Probably you’ve heard about MMM’s Shockingly Simple Math and JL Collins’ Simple Path to Wealth. But the simplicity of accumulation assets can’t be so easily extrapolated into the withdrawal stage. That phase is much more complicated and the reason why I have written 30+ parts on this topic!
  • Part 32 – You are a Pension Fund of One (or Two). Compare and contrast our personal challenges to those of large corporate and public pension funds. It turns out that I found many aspects of running my own (early) retirement finances, essentially a pension fund with two beneficiaries, that are much more tricky than running a pension fund for thousands of beneficiaries!

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OK, after the intro, what else would you want to read? Maybe you found interesting sub-topics and the relevant links already when reading through Part 26. But I also present all the remaining posts as they fall into several major topics. And don’t worry, I also give a few suggestions on what to read when at what stage in your FIRE journey, later in the summary below…

Introduction to Sequence of Return Risk

Why are we even worried about running out of money in retirement at all? Over the long haul, stocks should return much more than 4%. And a retirement horizon of 30 years for a traditional retiree and 50+ years for an early retiree certainly qualifies as long-run, right? Well, not so fast! What I learned from my historical simulations is that you can still run out of money even if your 30-year or even 50+-year average return was way above your withdrawal rate. If returns were bad enough initially and you keep withdrawing through the bear market there is a chance you deplete your portfolio so severely that even the subsequent bull market and recovery will not save you. The sequence of returns matters. Low returns early on are poison to your retirement finances. It’s like the opposite of Dollar-Cost Averaging; you sell more shares when prices are down!

So, no series on Safe Withdrawal Rates would be complete without at least some treatment of Sequence of Return Risk (sometimes also called “Sequence Risk”). That’s what I do in Part 14 and Part 15. I go through some numerical examples, both with “made up” return data but also actual historical simulations to showcase how bad Sequence Risk can be. None of this is required reading for a successful (early) retirement but it’s a nice reference to have!

Also, you might check out my appearance on the ChooseFI podcast. It was my first podcast appearance ever and I talk with Brad and Jonathan about Sequence Risk and the pitfalls of the 4% Rule. All really low-tech with no math degree required! 🙂

The effect of Supplemental Cash Flows (Social Security, Pensions, etc.) on Safe Withdrawal Rates

This is one of the key reasons why Safe Withdrawal Rate Rules are really only Rules of Thumb! We each need a personalized financial analysis to determine our safe withdrawal rate. A 30-year-old early retiree with relatively modest expected Social Security benefits many decades in the future has a lower safe withdrawal rate than a 50-year old early retiree expecting generous Social Security benefits in only a little bit over a decade. How much of a difference does that all make? Well, I studied this in great detail, once in a really early post, Part 4, and then again in Part 17.

Why the Trinity Study success/failure probabilities don’t easily apply to you and me

My main “beef” with the Trinity Study? Even if your personal financial situation exactly fits the model assumptions of the Trinity Study – a 30-year horizon and no additional cash flows – I’d not take the Trinity Study success probabilities very seriously, for the following reasons:

  • Part 2 – Capital Preservation vs. Capital Depletion: Do you want to leave a bequest? Do you want to leave your entire principal intact instead of exhausting your nest egg? Then the 4% Rule may no longer be sustainable because it was designed with capital depletion in mind. This post looks into how much of a haircut does it take to make to the 4% Rule water-tight again when you have a more aggressive final net worth target than $0.00! This post is also relevant for everyone planning a longer horizon than 30 years. Remember, the Trinity Study would consider a final net worth of $0.01 after 30 years a success. Not very useful if you have a 50-year horizon!
  • Part 3: Equity Valuation: After a 10-year-long equity bull market and high equity valuations (and low bond yields), you will face a higher failure probability with the 4% Rule than the Trinity Study may suggest. But does that mean that I can’t retire at all? Do I have to wait until equity valuations “normalize” again? Not at all, I show that a withdrawal rate in the 3.25-3.50% range you would have survived even during the most catastrophic historical market conditions!
  • Part 6 – A 2000-2016 case study (Welcome to the Potemkin Retirement Village): Maybe you’ve heard/read that the year 2000 retirement cohort is doing just fine even in light of the deep bear markets in 2001-2003 and 2007-2009. That’s not exactly true and I got the numbers to prove it! 
  • Part 22 – Can the “Simple Math” make retirement more difficult?: This is a post very relevant to folks in the FIRE community. If we all pull the plug and (early-)retire the minute we reach a certain savings target, e.g., 25x annual expenses we could potentially face a much higher failure rate than what’s quoted in the Trinity Study. The Trinity Study calculates the unconditional probability of having randomly retired over the last century or so. But retiring conditional on reaching a savings target, often after a long bull market run, is a completely different ballgame. This is clearly related to Part 3, see above, but it’s still a new and unique angle!

Calculate your own personalized(!) Safe Withdrawal Rate with our free Google Sheet

What does all of this Safe Withdrawal research really mean for me personally? Nobody wants to read just a bunch of academic-style research on this topic. The problem I always had with the existing body of research, whether it’s from academics or practitioners, is that my personal financial situation looks completely different from their “model household.” I like to be able to make adjustments for my specific situation, for example…

  • A 50 or even 60-year horizon
  • I like to be able to account for additional, expected cash flows, both positive (Social Security, a small pension, even a little bit of blogging income) and negative (college expenses for our daughter, higher healthcare costs when older, etc.)
  • Leave a bequest for our daughter when we pass
  • Account for today’s expensive equity valuations
  • etc.

So, I decided to publish the exact same Google Sheet I use myself (though not with my precise personal data) to gauge my personal Safe Withdrawal Rate:

Link to the EarlyRetirementNow SWR Toolbox v2.0

The sheet may not be 100% self-explanatory, so please refer to Part 7 for the basic instructions. I also wrote Part 28 to go through all the enhancements added over the years!

For the mathematics geeks, I also provide a small mathematical appendix (Part 8). But again, this is the absolute last post you want to read unless you’re really into math and want to see where those formulas in the Google Sheet came from! 🙂

Flexibility to the rescue? Not so fast!

Why would I sit on my hands if I get unlucky in (early) retirement and my portfolio melts down year after year? If you stubbornly withdraw that same initial amount plus inflation adjustments, the way it’s modeled in the Trinity Study, it’s neither psychologically sustainable nor is it financially sound or mathematically optimal. Rather, at some point, everyone would change course: either try to generate some supplemental income or consume less for a while (or a combination of the two). Flexibility is often sold as the panacea against Sequence Risk. I’m certainly not recommending everyone to be inflexible but I’d argue that flexibility is often overrated:

  • Part 9 and Part 10: Under Guyton-Klinger Rules you’d systematically lower your withdrawal amounts in response to significant underperformance of your portfolio. And if your portfolio recovers again you ratchet up your withdrawals. Sounds very intuitive and in some places, Guyton-Klinger-style rules are sold as the solution against Sequence Risk. But what’s often ignored is that GK Rules can take years, even decades for your withdrawals (and your spending) to recover to the original level. So, while GK Rules are certainly a useful tool to prevent running out of money in retirement, there are some unpleasant and often unknown side effects!
  • Flexibility means that we’re using a dynamic and responsive withdrawal strategy. I might replace the risk of running out of money in the long-term with very unpleasant short- to medium-term spending levels (see the GK research above!). In Part 11, I study what criteria I’d use to weigh different dynamic rules. Rules that take into account both your portfolio level and economic fundamentals (e.g. the Shiller CAPE) seem to make the most sense, which brings us to the next post…
  • … on one really elegant implementation of flexibility: Part 18, where you base the withdrawal amount on the Shiller CAPE Ratio. The advantage: the fluctuations in withdrawal amounts are muted relative to Guyton-Klinger.
  • Part 23: A reader suggested an intuitive way of dealing with Sequence Risk: If your portfolio value falls below a certain threshold (e.g., 70% of initial), simply reduce your spending by, say, 30% (or work to make up the difference) until the portfolio recovers. I point out two serious concerns about this procedure: 1) in the really bad recessions that may imply 20+ years of reducing withdrawals and 2) even in a not-so-bad bear markets you would have experienced a “false alarm,” i.e., you would have cut withdrawals for years only to find out – in hindsight(!)- that the portfolio would have survived without flexibility.
  • The problem with “flexibility” is that it’s so ambiguous. It’s like playing whack-a-mole; you think you debunked one flexibility scheme and then people suggest another. So, in Part 24 I look at all the different “flexibility schemes” I could think of and test how they would have performed in historical bear markets. And just to be sure, I also solicited some additional reader suggestions in Part 25. Always with the same results: flexibility eliminates the risk of running out of money in 30 years, but raises the risk of long and painful cuts in withdrawals in the short-run and medium-term! It’s like squeezing a balloon!

Alleviate Sequence Risk through Dynamic Asset Allocation!

Part 13 – Prime Harvesting: Many readers suggested this: We can alleviate (never eliminate!!!) Sequence Risk through a smarter, non-passive asset allocation to prevent selling equities through the bear market. One such method was suggested by Michael McClung in his book Living Off Your Money. I looked at that method and actually liked it quite a bit. Again, you’re not going to prevent Sequence Risk, but this is a way to slightly alleviate it!

Though not identical, Prime Harvesting will likely look a lot like an equity glidepath in practice. The idea with a glidepath is that starting with a higher bond allocation initially gives you something of an insurance policy against Sequence Risk because you tend to mostly liquidate your bond holdings in the beginning, right when Sequence Risk is most prevalent. Then, over time, you shift more into stocks when Sequence Risk becomes less of an issue. I slightly prefer this approach over Prime Harvesting because it’s easier to keep track of. See Part 19 and Part 20!

Special Topics

How much of a difference would it make if you don’t have a perfectly flat withdrawal profile over time? Maybe skip the inflation adjustments? That’s what I look at Part 5 – Cost-of-Living Adjustments.

Mortgages and (early) retirement don’t mix! In Part 21 I go through my rationale for paying off the mortgage before retirement: Having a fixed, inflexible payment like a mortgage is poison from a Sequence Risk perspective!

Part 29, Part 30, and Part 31 all deal with the widely held misconception that we can easily save the 4% Rule if we were to increase the dividend yield to a level close enough to your 4% annual withdrawal rate. Simply live off your dividend income, avoid ever selling your principal at depressed valuations and you shield yourself from Sequence Risk, right? It certainly sounds intuitive and I was intrigued enough to research this option and absolutely hoped that this can indeed lower Sequence Risk. People in the FIRE community call it “Yield Shield” but, alas, that label is extremely deceptive because the whole thing doesn’t work very reliably. It would have backfired really badly during the 2007-2009 bear market. Instead of shielding you from the downturn you would have aggravated the Sequence Risk.

Summary and Suggestions

Withdrawing money from your nest egg is a lot more complicated than the “simple math” and “simple path” to accumulating assets. I can’t change that. But if you spend 10-15 years saving diligently to invest six-figure or even seven-figure sums, it may also be a wise “investment” to spend a few hours to familiarize yourself with the challenges of withdrawal strategies. Depending on where you are in your FIRE journey and your personal preferences I’d suggest proceeding as follows:

  • A new reader, not even close to early retirement, just looking around: Start with Part 26 and Part 27. Don’t even sweat any of the technical and more detailed posts linked there. But if something sparks your interest, sure, check that out, too!
  • For the math geeks: Sure, add Part 1 (simulation details) and all the nitty-gritty details on Sequence Risk (Part 14, Part 15). And the mathematical appendix with formulas (Part 8) for the math pros!
  • Getting closer to retirement: Now you probably want to start looking into performing your own personal safe withdrawal simulations. I’d suggest you familiarize yourself with the Google Sheet and the two posts that explain how to use it (Part 7 and Part 28). Probably also Part 4 and Part 17 on how to treat supplemental cash flows. And getting closer to retirement in this day and age, you can’t escape the reality of expensive equity valuations so you probably want to convince yourself that PE ratios (and CAPE ratios) have an impact on sustainable withdrawal rates: Part 3
  • I’d also urge every reader close to a “Lean-FIRE” retirement to check out some of the simulations in Part 23, Part 24 and/or Part 25Can you stomach a multi-year (maybe even 20-year!) drought period with lower withdrawals? If you don’t mind cutting your already optimized budget and/or doing a side hustle for that long then, sure, go ahead. But if you don’t, then maybe plan for a bit of a cushion and don’t pull the plug the minute you reach 25x annual expenses!
  • For more adventurous, hands-on and not 100% passive investors: Make sure you check out the dynamic asset allocation posts: Glidepaths (Part 19 and Part 20) and/or Prime Harvesting (Part 13). 

Just for your reference: all posts in chronological order

Comments or questions?

Feel free to leave comments and suggestions here or at one of the specific SWR posts. I will get a notification and will try to respond, usually within a week. Also, comments with up to two external links are allowed. More external links might cause your comment to land in the spam box! 🙂 Looking forward to your feedback!

37 thoughts on “The Safe Withdrawal Rate Series – A Guide for First-Time Readers

  1. Hey, Big ERN!

    I’ve been a long time reader of your blog, and so I just wanted to say a big “THANK YOU!” for sharing this series and your wealth of knowledge. This post is no exception–the categories and additional guidance are helpful for new readers!

    Keep up the great work!

    The Financial Bishop

  2. Mr. Finance aficionado aka Big ERN aka Karsten!

    Long-time reader since late 2016, the first time for writing a comment. I want to say a big thank you for all that you do. You helped my wife and I have the confidence to become FI at the age of 45/46. I made it a point to read something personal finance (PF) related since high school for at least 15 mins a day. I admit that some of your posts took a few re-reads to grasp the concepts but the time and effort has always been well worth it! Keep up the good work. I quickly added your site of in-depth PF analysis to my bookmarks as well as recommended reading to business colleagues and friends.

    Becoming a full-time scuba dive instructor sooner rather than later has helped my marriage, personal friendships, as well as my personal satisfaction meter, rise each month that goes by. Talk about a fun way to infuse a bit of $ into our glide path. Hit me up if you ever find yourself in SE Florida for a free discovery or guided dive on me.

    1. Oh wow! Thanks a lot! I don’t want to talk people OUT of early retirement. Quite the opposite: by providing a bit more structure and robustness I actually want to give folks the confidence to FIRE, i.e., I’m trying to talk people INTO early retirement! Thanks for confirming that! 🙂
      I will certainly contact you when I’m in the area. And if you’re visiting Portland. OR, give me shout, too!

    2. You have not talked me out of it at all but rather given the additional confidence to keep the following positions including 90% equity, 7% bond and 3% cash on hand. I hope that the rates stay low for Sept. to re-invest distributions!

      In the meantime we have anticipated the bear by already pulling 6-9 months backup expenses into a fixed FDIC insured high yield offering a 2.3% rate in a savings account for reassurance of slower tourism (scuba diving) season for the next 10-18 months. When the markets will go down, disposable income spending tightens. We will either use it in our budget (hope not) or purchase and redeploy a few thousand equity shares on sale once the S&P has dropped 10-12% for at least 7-8 months (March/ April 2020). Either way, in the meantime we can at least keep 95% of it’s value due to inflation while reading about the inexperienced pannic. Here’s to looking forward to that 3.57% withdrawal rate once I get tired of diving in the future.

      Hopefully we all can read a few articles with your point of view on tax efficiency strategies if changing basis points, 72T, RMD efficiency and order of drawdown or other areas that you have already personally explored that makes sense to incorporate into our personal plans. I would be interested in reading your thoughts.

      PS. A few of your readers might want to check against the SS recommendations of optimum claiming conditions at
      https://opensocialsecurity.com/

      1. Wow! You should be well-prepared. Almost over-prepared! Best luck and thanks for sharing!

        I’m thinking about some topics on tax-efficiency. It’s not my highest priority but it’s definitely something I have to cover in a comprehensive withdrawal research series! 🙂

  3. Hi Karsten,
    geile Sache! Habe zwar die ganze Serie gelesen, aber da ist soviel Gutes drin, dass man schon mal den Überblick verliert. Dafür ist diese Seite ein klasse Wegweiser. Vielen Dank für die ganze Arbeit!
    Den Plutus-Award hast du auf jeden Fall mehr als verdient.
    Hyp

  4. Big Ern, this is perfect! My fiancee and I often recommend your series both to friends and to readers of our blog, but in the past it’s been a bit difficult to know exactly what post we should direct them to. Now, we don’t have to decide — we’ll just send them to this one and then they can choose from there what to read next! Will link to this right away. And HUGE congrats on the Plutus nominations. They are much deserved.

  5. Thank you for posting such in depth information. I am planning to retire in 6 months or so at the age of 58 with a pension, and other investments. I am also looking at pulling social security at age 62. I have really been struggling with withdrawal rates and strategies, as my pension alone will not cover my expenses. I can see that I must study this series in depth over the next few months to get the answers I need.

    Thanks again

  6. Just wanted to point out that there is, in the “Flexibility” section, a sentence that breaks off prematurely: “… and 2) even in the not-so-bad bear markets”, the end. 🙂

  7. Thank you for a great series of articles, all of which I have read. I appreciate your thorough analysis and critique of the 4% Rule as it applies to 50-60 year retirements. As a recently “semi-retired” 58 yr. old, however, what I would greatly appreciate is your analysis and critique of the rule as it applies to a more traditional 30-35 year retirements. Not looking, of course, for a 30+ part series, just one article on how think you think the rule holds up for the many of us in my situation.

    1. Great point. It really depend on the timing of your Social Security and pensions (if applicable). You could view this two-stage problem:
      1: the first ~10 years from now until age 67 (or 70 if you want to max out SocSec): use a bond ladder
      2: once all your other cash flows start, use the 3.5 or 4% rule to fund the gap between SocSec and you needs.

      One way to simulate that is to use the Google SHeet (see part 28) where you can include those additional cash flows and simulate safe consumption rates, even in your personal case.

      Give it a try and let me know how it works. Maybe I can make a “case study” out of this?! 🙂

  8. Great timing. I was just telling myself I needed to read the SWR series again. I love that you are still thinking of ways to add to the SWR series – looking forward to SWR 32! Your blog is awesome – many thanks.

  9. Thanks for the series. Ive been thinking a lot about this, my biggest fear is not sequence of risk returns, but country failure. Effectively if you think its a sequence risk, but actually there is no recovery. My family has experienced it in Germany, and I have friends in Zimbabwe, Hungary and Argentina. I also watch the Venezuela, Turkey, Greece, South Africa and European hotspots unfolding. I feel the probability of country failure is potentially higher than any other risk, except for death, and as such the only offset is country diversification. The problem with this approach is then currency volatility between the countries completely messes with any useful analysis, as layered on top of valuations and economic returns, the currency just moves quite randomly. No one can tell me what the Argentine, Lira, Rand is going to do… And noone can predict that my Reichmarks are going to be worthless.. You might assume USD will live forever, but I can guarantee someone will be wrong one day =)

    1. Yeah, I agree! Some folks replicated the Trinity Study in other countries and – not surprisingly – withdrawal scenarios only work in countries that never get invaded/destroyed in a war or civil war. I still feel relatively safe in the U.S. from that scenario, though. 🙂

  10. How often in retirement should one re-evaluate their SWR? Most of your scenarios deal with the worst cases like the 70’s or 1929(which makes sense), but if the first 5 years of retirement see some nice 8-10% returns then, since the portfolio has grown, can’t the retiree change from their 3.25% of original portfolio + inflation to 3.25% of the new value?
    Basically: is there a reason why you shouldn’t always treat “next year” as the first year of retirement?

    BTW using your spreadsheet I am fairly solid at just about 3.65% which creates a pretty easy to remember fact that I call the 10k:1 rule
    “$10,000 is a dollar a day forever.”
    10,000 x 0.0365 / 365 =1

    This is nice because many travellers/bloggers give budgets as dollars per day and it lets you look at things from the other side. Even if someone’s SWR isn’t exactly 3.65% it’s still going to be pretty close to a buck a day on 10K.

    There are dangers with this though in that
    1. People are bad at predicting and then tracking big expenses making $/D stats inaccurate.
    2. “One More Year” of work becomes even more tempting when you think like “Another $100K savings and I could add 3 massages per week onto my retirement plan!”

    Thanks for the great blog!

    1. I would reevaluate my SWR plan about once a year and see if anything is amiss.
      But I’d also caution against walking up the withdrawal amounts one-for-one if the markets cooperate. You’d then walk up all the way to the stock market peak and exactly “grab” that peak and risk running out of money in the long-term.
      But cautiously moving up withdrawals, like under Guyton-Klinger rule or, even better, a CAPE-based Rule seems like a good idea!

      Yeah, 3.65% sounds like a great rule of thumb. But it’s potentially just as wrong as the 4% Rule. If you expect large pensions and both spouses expect large Social Security benefits, it’s best to do a more careful analysis! 🙂

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