Crackerjack Greenback Prudent Advice for a Prosperous Future

November 4, 2008

What Is a Safe Withdrawal Rate for Retirement?

Filed under: Retirement Planning — Paul Williams @ Crackerjack Greenback @ 6:00 am

       “How much money can I safely withdraw from my portfolio during retirement so I won’t go broke before I die?”

       This very important question was not answered up until the last decade or so. Prior to that, people went off assumptions and guesses without actually verifying the information. For example, Peter Lynch often said that people could safely withdraw 7% of their portfolio and increase it by inflation each year. This was based on the idea that stocks return 7% over inflation, so Mr. Lynch assumed you could withdraw that entire 7% because your principal would keep growing with inflation. However, Scott Burns, a columnist for the Dallas Morning News, challenged Peter Lynch’s assumptions and explained the error behind his thinking.

       Numerous studies have been completed since then with most of them agreeing that 4% is a “safe” withdrawal rate. You can find a short summary here at The Retire Early Homepage. My biggest issue with these studies is that they often look at a very simple portfolio consisting of just the S&P 500 and a Bond index. This leaves out international stocks, emerging markets, small U.S. companies, real estate, and a mix of short and intermediate term bonds. A well-diversified portfolio would have all of these, but they are not included in the portfolios used in these studies.

The Crackerjack Greenback Study

       I decided to do my own study of sorts using a combination of historical return information on Vanguard funds and supplementing it with appropriate index data all the way back to 1927. From that information, I compiled the returns of various portfolios and calculated the statistical data I would need to run Monte Carlo analyses so I could test these “safe” withdrawal rates.

       I won’t go into the details of all the math and data here, but you can contact me if that information interests you. I will tell you that my portfolio return and risk assumptions are based on historical data and inflation was assumed to be about 3.8%. Mutual fund expenses were accounted for but asset management fees were not included. (So if you pay an investment adviser to manage your assets you’ll have to take that out of the amount you can safely withdraw.) I also looked at scenarios that had a 90% success rate, which means 90% of the time you would not run out of money before you die. Attempting a higher success rate is almost foolish because of all the built-in assumptions in Monte Carlo models. My results mostly agree with the previous studies, though I would say their estimates for a “safe” withdrawal rate are a bit low. The chart below shows the results from my own study (click to enlarge).

Safe Withdrawal Rates

       Most people will be in retirement for 20-45 years depending on their life expectancy and when they retire. Most of us will be retired for 25 or 30 years (if we’ve saved up for it), so a safe withdrawal rate would be somewhere between 4.75% and 5.25%. We can say 5% is a good estimate.

Why Is This Important?

       Figuring out your safe withdrawal rate is important for retired people and those still saving for retirement. Those who are retired or nearing retirement need to know how much they can safely withdraw without running out of money before they die. For someone with a $500,000 portfolio, a safe withdrawal rate of 5% means they could safely withdraw $25,000 in the first year of retirement and increase that by inflation every year. You’d need to pay income taxes and any investment management fees from that amount in addition to your living expenses.

       Safe withdrawal rates are also important for those still saving for retirement because it lets us know how much we’ll need to have saved before we can retire. Assuming a safe withdrawal rate of 5%, your portfolio would need to be 20 times your required retirement income in the first year of retirement. For example, if you need $30,000/year in retirement then your portfolio would need to be $600,000 before you can safely retire. (This is assuming you’re trying to decide if you can retire today. If you’re talking about the future, you need to account for inflation.)

       We’ll discuss this in more depth later on and also explore the implications. We’ll also talk about what kind of portfolio allocation you need to have for these numbers to all work out. In the meantime, feel free to post your questions or comments below.


  1. Excellent post. It could be the fact that I’m an accountant by trade, but I love it when people actually back up their writing with some research/math. 🙂

    Comment by Oblivious Investor — November 4, 2008 @ 2:51 pm

  2. Thanks, Oblivious Investor! I really like the research and numbers side of it all, but I figure most people don’t so I try to get to the point. I could try explaining all the research behind but it would bore most people to tears. 🙂

    Comment by Crackerjack Greenback — November 4, 2008 @ 3:24 pm

  3. […] analysis tell us that in order to retire, you need to have saved 20-25 times your annual expenses. By investing exclusively in “no-risk” investments like CDs and savings accounts, you […]

    Pingback by A Meaningful Definition of “Risk” | The Oblivious Investor — November 5, 2008 @ 11:03 am

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