If you're increasing your safe withdrawal rate for retirement now, you're likely making a mistake. You might be inadvertently top-ticking the market as the Fed embarks on what is likely a multi-year rate cut cycle.
One of the main reasons the Fed is cutting rates is due to growing weakness in the labor market. Inflation has also slowed down, prompting the need to make rates less restrictive to prevent a recession. So, by raising your safe withdrawal rate, you're actually putting yourself at greater financial risk. Strangely enough, some retirement researchers are advocating for this exact strategy as you’ll read below.
Let's break down why this is happening and why I still stand by my dynamic safe withdrawal rate approach. For context, I left my 13-year career in finance in 2012 and haven’t had a day job since. My wife retired in 2015, and she hasn't returned to work either. I classify us as semi-retirees since I write consistently on Financial Samurai.
A Dynamic Safe Withdrawal Rate Is The Way To Go
I'm a strong advocate for adopting a dynamic safe withdrawal rate in retirement. Relying on the outdated 4% rule from the 1990s doesn't make sense in today's rapidly evolving world. Just like we no longer use corded dial-up phones, why would we stick with a safe withdrawal rate recommendation from 40 years ago?
In 2020, as the pandemic unfolded, I urged people to rethink their approach to safe withdrawal rates. Instead of adhering to a fixed rate, I introduced the concept of a dynamic safe withdrawal rate, which adjusts to 80% of the 10-year Treasury bond yield.
When the 10-year yield dropped to 0.62% during the flight to safety, this meant reducing the safe withdrawal rate to about 0.5%. Some people were outraged, claiming a 0.5% withdrawal rate was unreasonable. “That would require saving 200X your annual expenses to retire early!” they exclaimed.
While extreme, these were extreme times. In periods of great uncertainty, it makes sense to REDUCE capital drawdowns to preserve your financial health as investments lose value. Alternatively, by lowering your withdrawal rate to 0.5%, you could redirect your cash flow into discounted assets, positioning yourself for future positive returns.
Need to Do a Better Job Getting My Point Across
One issue I realized with some of the critics of my dynamic withdrawal strategy is that they don't think dynamically themselves. They're stuck in a static mindset, which doesn't work when the world around us is constantly changing. When you fail to adapt to shifting variables, you risk being left behind. Instead of bending, you more easily break.
Another problem is that many didn’t grasp the concept of the 10-year bond yield as the risk-free rate of return, which is fundamental to all investment decisions. As someone with a background in finance and an MBA, this seems obvious, but it’s irrelevant if readers don’t understand it.
I wasn’t suggesting investors go all-in on bonds, as some misinterpreted. Rather, I was urging people to consider the risk-free rate before making any investment decisions. If you're going to take on risk, you must demand a premium above the risk-free rate. Otherwise, why bother ever taking risk?
To Recap Risk Premium And Investing
Equity Risk Premium = Expected Market Return – Risk-Free Rate
Expected Market Return = Risk-Free Rate + β (Equity Risk Premium)
Where:
- β → Beta
Logic dictates you would not invest in a risk asset if it didn't provide a greater potential return than the risk-free rate. Therefore, as the risk-free rate rises and falls, so too does the expected market return and expected risk premium.
An Investment Bonanza Since Introducing a Dynamic Safe Withdrawal Rate
What frustrated me more than the insults was my failure to effectively educate the most vocal critics.
Now, over four years later, those who understood and applied the dynamic withdrawal strategy have done incredibly well. In contrast, those who clung to the rigid 4% rule like zombies may not have fared as well.
Imagine how much more wealth was accumulated by investing in stocks and real estate in 2020 and 2021, simply by reducing your withdrawal rate to 0.5% instead of sticking to 4%. That extra 3.5% was put to work. The gains in both the S&P 500 and the median home price index were substantial.
Those who approached posts like How to Predict a Stock Market Bottom Like Nostradamus and Real Estate Buying Strategies During COVID-19 with an open mind either took action or stayed the course while others veered in less optimal directions.
From a mental health perspective, those who were able to make financial adjustments were able to navigate a difficult time with more confidence. In turn, they felt more secure and happier.
Of course, investing in risk assets always carries uncertainty. I’ve lost money before and will continue to lose some in the future. But by following a retirement withdrawal framework grounded in math, logic, and real-world experience, you can reduce anxiety and build more wealth than those who just wing it in retirement.
Raising Your Safe Withdrawal Rate Now Is Top-of-the-Market Thinking
What’s fascinating is that just as the Fed embarks on a multi-year interest rate cut cycle, some retirement experts are raising their recommended safe withdrawal rate. Talk about top-ticking the market!
Here’s an article from Barron’s discussing this trend:
“It’s time to throw out the 4% rule and give your retirement paycheck a raise. New research indicates that a 5% withdrawal rate is ‘safe'—although how you invest and tap your portfolio is critical to keep the cash flowing.”
In a new research report, JP Morgan believes a 4% withdrawal rate is too conservative, and recommends 5% instead. David Blanchett, 42, Head of Retirement Solutions at PGIM DC, who argues that the 4% rule is too conservative and inflexible.
Blanchett, who has studied withdrawal rates for years, believes 5% is a safe rate for “moderate spending” through a 30-year retirement. “It’s a much better starting place, given today’s economic reality and people’s flexibility,” says Blanchett. I have never heard of PGIM DC.
The Inventor Of The 4% Rule Is Raising His Withdrawal Rate Too
Even more intriguing is that William Bengen, the creator of the 4% rule, is also revising his recommended safe withdrawal rate. He mentioned in Barron’s that in his upcoming book, he may endorse a rate “very close to 5%.”
As someone who has written traditional books, I know they take over two years to complete. Now, just as the Fed is preparing for rate cuts in the coming years, we see the idea of a nearly 5% withdrawal rate emerging. This is backwards thinking or at least thinking that is stuck when rates were higher.
A 5% withdrawal rate would have made sense back in October 2023, when the 10-year bond yield surpassed 5% and long-term Treasury bonds were yielding 5.5%. However, times have changed, and as rates—and potentially returns—trend lower, we must adapt accordingly.
The Potential for Lower Returns Going Forward
Vanguard has pointed out that the U.S. stock market is roughly 32% overvalued, based on the cyclically adjusted price-to-earnings (CAPE) ratio. Higher valuations typically signal lower expected returns. In Vanguard’s 10-year forecast, they expect U.S. equities to return only about 3.5% to 5% per year. You can see more details, including Vanguard's bond forecasts, by clicking the chart below.
Meanwhile, J.P. Morgan projects U.S. stocks to return around 7.8% annually over the next 20 years, with bonds expected to yield 5%. 7.8% is roughly a 2.2% decrease from the 10% compound annual return the S&P 500 has provided since 1926. Therefore, increasing your safe withdrawal rate by 25% (from 4% to 5%) seems illogical. Lower expected returns typically warrant a more conservative withdrawal rate to ensure your savings last throughout retirement.
J.P. Morgan's projected 5% annual bond return aligns with historical averages. Their assumption of a 2%–3% inflation rate suggests bondholders will likely receive a 2%–3% spread for taking on additional risk.
Goldman Sachs Predicting Just A 3% Annualized Return For Equites
If you thought Vanguard's equity forecasts were dismal at only 3.5% to 5% a year for the next 10 years, check out Goldman Sachs' predictions. Goldman is forecasting only a 3% annual return for the S&P 500! Their forecast range for 2024 – 2034E is between 1% to 7%.
Should you really be increasing your safe withdrawal rate much higher than 4% in such a scenario? Probably not. With such low returns in the stock market, raising your withdrawal rate puts you more at risk of running out of money before dying.
Different Investments For Different Risk Profiles
The truth is, no one knows what future returns will be, especially since most retirees don't have all their assets in stocks or bonds. Vanguard, J.P. Morgan, and others will likely change their forecasts every year.
You could go with a traditional 60/40 stock/bond portfolio or a more conservative 20/80 split. But if inflation spikes again, as it did from 2021 to 2023, you might underperform. Alternatively, you could go with a more aggressive stock portfolio and experience a significant drop, like the 20% decline in 2022.
Therefore, it’s smarter to use a dynamic safe withdrawal rate as a guide to make better spending decisions in retirement. If you're unsure or need a second opinion, consult a financial advisor. They see clients with diverse financial goals regularly and can provide valuable insights.
Unlike retirement researchers who are gainfully employed with benefits, you don't have that luxury to pontificate once you leave work for good. If you end up losing a ton of money right before you want to retire, you might not be able to. And if you end up losing a lot of money during retirement, then you might have to go back to work.
Big Difference Between Retirement Research and Practice
Bill Bengen and other retirement researchers do excellent work. They help us think about saving for retirement and spending down our wealth. The more research and discussion about retirement planning, the better!
However, there’s a big difference between being a retirement researcher with a steady paycheck and a retirement practitioner who doesn’t have those benefits. I'll take it a step further and say there’s an even bigger gap between a retirement researcher and an early retiree, who is too young to withdraw from tax-advantaged accounts and too young to collect Social Security or have a pension.
You can research and propose retirement strategies all you want, but you only truly grasp retirement when the steady paycheck and benefits are gone. Retiring is one of the most psychologically challenging transitions to face. As a result, being a little more conservative is better than being a little too aggressive.
After you retire, you'll likely be consumed by doubt and uncertainty for an unknown period. You might even force your spouse to work longer just to keep your worries at bay! You can do it honey! Just 10 more years.
Whether you want to die with nothing or leave a small fortune for your children is entirely up to you. Everybody’s retirement philosophy is different. But since there’s no rewind button in life, it's crucial to plan your retirement carefully.
Most people wing it when deciding how much to withdraw and spend. What I offer is a practical, adaptable approach that adjusts withdrawal rates based on shifting economic conditions. As a result, you'll have more confidence to navigate the complexities of retirement.
Retirement will be different from what you imagine. Stay flexible!
My Conversation With 4% Rule Creator Bill Bengen
Feel free to leave a comment if you have any questions for Bill and I'll make sure he sees them. Thanks for your reviews and shares of my podcast. Every episode takes hours to record, edit, and produce. Each review means a lot. You can subscribe to the Financial Samurai podcast on Apple or Spotify.
Diversify Your Retirement Investments
Stocks and bonds are classic staples for retirement investing. However, I also suggest diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential.
Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With over $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher. As the Federal Reserve embarks on a multi-year interest rate cut cycle, real estate demand is poised to grow in the coming years.
I’ve personally invested over $270,000 with Fundrise, and they’ve been a trusted partner and long-time sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier.
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am i missing something? doesnt a 4% (or whatever) withdrawal rate mean i live on less every year as the balance goes down, and assuming annual returns are flat or less and also after taxes and inflation?
Yes, that is correct if your investments don’t grow more than 4%, you will be decumulating wealth.
Since Bill Bengen himself has already commented on this article, I feel my defense of the 4% Rule may be superfluous, but I’ll respectfully give it a shot.
It seems to be a common misconception that the 4% Rule needs to be modified based on macroeconomic trends or current economic conditions. The Trinity Study was designed to be ultra-conservative – to find the withdrawal rate that would withstand the worst conditions in modern American history. During the period studied, the US went through two world wars, the Great Depression, the exit of the gold standard, and massive inflation/sky-high interest rates. The 4% Rule held up during these tumultuous times because that is precisely what it was designed to do – retroactively study what withdrawal rate would allow your retirement money to last 30 years. A side effect of its conservative design is that under “normal” circumstances, the Rule drastically underestimates what you can spend – meaning you may end up with a big pile of money when you die.
Sam wrote, “Relying on the outdated 4% rule from the 1990s doesn’t make sense in today’s rapidly evolving world. Just like we no longer use corded dial-up phones, why would we stick with a safe withdrawal rate recommendation from 40 years ago?” Yes, the original Trinity Study was published in the 1990s. However, follow-up research by Bengen and Michael Kitces showed that the Rule held up during the dot-com crash of the early 2000s and the Great Recession – new, “unprecedented” economic events in US history. Their recent research has indicated that, if anything, we could even increase the safe withdrawal rate. So, unless you believe the future will be fundamentally and catastrophically different than the past, the original 4% Rule is likely to hold up for traditional retirees.
Having said that, the Rule was not designed for early retirement. It focused on a traditional 30-year retirement period. So, caution may be needed if someone is extrapolating the findings into a 40 -50-year period. I agree with Sam that early retirees should remain flexible and be prepared to adjust down their spending based on market conditions during the early years, especially in an inflationary environment. However, dropping to 0.5%, as Sam’s dynamic, safe withdrawal rate suggested, seems a) not feasible for most early retirees and b) like shooting an ant with a cannon. However, once an early retiree hits the traditional retirement age, following the 4% Rule should be just fine.
Following Sam’s advice may allow you to “redirect your cash flow into discounted assets, positioning yourself for future positive returns,” but the intent of the 4% Rule was not to maximize your assets, it was to find the highest safe withdrawal rate that will still protect you during bad times.
“ However, dropping to 0.5%, as Sam’s dynamic, safe withdrawal rate suggested, seems a) not feasible for most early retirees and b) like shooting an ant with a cannon.”
I think you’re missing the point of my dynamic safe withdrawal rate. It recommended lowering it to 0.5% during a time of great crisis. And that 10 year bond yield and worst of the crisis latest for about 45 days until it started marching higher.
Practitioners don’t have to follow my dynamic shape with all right to the exact level. But it is a great indicator of the times and how long should adjust their spending accordingly.
I’m excited to interview Bill only my podcast.
I understand that the 0.5% withdrawal rate was a moment in time. However, look at the 14 years from 2009-2022, where the average 10-year treasury yield was 2.33%, indicating a 1.86% average withdrawal rate using your methodology. I used annualized data to gather those averages because it’s too hard to deal with monthly or even quarterly numbers – which correlates to how a retiree would probably have to use your method. It’s too hard to adjust real-world spending on a month-to-month basis.
My argument is that this is simply too conservative for the average retiree, especially when the 4% Rule is already conservative by its very nature. A 1.86% rate corresponds to needing 54X your average annual expenditures during a time when the average annual returns in the S&P 500 were 13.7%.
I disagree that the fundamentals of the 4% Rule are outdated, and I believe it already addresses what you are concerned about in today’s economy. However, I agree with you that early retirees or those in the first few years of retirement would do well to pay attention to their market returns and the broader economy and adjust accordingly . . . just not as drastically as your method suggests.
Thanks for the reply and I look forward to your discussion with Bill Bengen.
Sounds good to me. What withdrawal rate have you used in retirement?
And if you are not retired, definitely let me know what you end up doing when you do retire. The majority of retirees I know are unwilling to spend or withdraw at 4%.
Finally, your withdrawal rate will also depends on which retirement philosophy you want to follow. The vast majority of retirees also are unwilling to die with zero.
I still work part-time as an ER physician, about eight days per month. If I were to retire today, my withdrawal rate would be roughly 2% – and this is with my current expenses being inflated by three young children in private school. So, I admit I won’t have to worry about following the 4% rule when I finally retire.
The fear that someone following the 4% Rule will die with zero is unfounded. The 1998 Trinity Study research showed that using a 4% SWR, the 50% stocks/ 50% bonds and 75%/25% cohorts had a 5% and 2% respective chance of running out of money during a typical 30-year retirement. This 5% and 2% chance is why I agree with you that early retirees and those in the first years of retirement must pay attention to the sequence of return risks.
However, the median terminal portfolio values (the remaining portfolio value after the 30-year study period) were higher than the starting value. The median terminal values were 5.2x and 8.5x, respectively, meaning that 50% of retirees would end up with more than this number, and 50% would end up with less. In the vast majority of cases, a retiree taking 4% withdrawals per year ends the 30-year period with multiples of their starting balance.
I understand that many retirees are reluctant to spend 4% of their invested assets annually. However, that is an emotional issue, not a mathematical one. Having said that, I understand that behavioral finance is real, and humans sometimes act irrationally – I’m only looking at the data for this discussion. I enjoy your writing, Sam, and the discussions it sparks.
Nothing has changed, save all your money and shoot all your debt in the head ASAFP. $10MM is really the optimal amount to retire with. DO NOT TAKE A MORTGAGE INTO RETIREMENT. Then take your $10MM, divide by an assumed 40yrs more to live, and you get $250k/year to spend NOT adjusted for inflation and assuming a 0% growth rate. In reality there is always a Treasury paying your more than 0%, and it is actually not that easy to spend $20k/month, every month, forever….you will get tired, you will get sick, and you will die before the 40yrs and your money run out. Cheers.
Sam, How can your proposed SWR be used for retirement planning? You say it is a practical approach, but I don’t understand how to use it to determine when one has “enough” to safely retire.
Are you suggesting that everyone should have 200x expenses (or more?) in investments before retiring, given the potential for future .5% (or lower) 10-year bond rates? How else can one change one’s spending so dramatically to 80% or below that rate?
No, 0.5% SWR was a moment in time, as the world was falling apart. If you want to inverse it to get to 200X, yes, at that moment in time, it is signifying you need a much bigger net worth to withstand the bludgeoning.
By my SWR is dynamic and changes with the times. So pay attention to it monthly, quarterly, or at least yearly to help you make a decision.
Thanks Sam. I agree, this seems like top-ticking behavior. You may have found an interesting contrarian indicator
Thanks for mentioning me and my upcoming book. I’d like to clarify that my increase to nearly 5% is not in response to current market conditions, but increasing sophistication in my research. This would apply to a worst-case environment, as in late 1968, where investors faced multiple deep bear markets and high inflation. Things are not quite so bad today, so I suspect a withdrawal rate of 5.25% to 5.5% would probably work out, despite elevated valuations. I agree that a rigid rule is not the way to go, I have never recommended that. My research is deep and complex, and results in different withdrawal rates for different market valuations and inflation. I enjoy your columns.
Best regards,
Bill Bengen
Thanks Bill for sharing your thoughts. I look forward to reading your book.
I definitely do not think you raising your recommended withdrawal rate is in response to market conditions. Instead, I think it is peculiar timing that you are raising it as the Fed is cutting rates and investment houses are forecasting for lower returns Going forward.
So I’m curious now your opinion on how raising withdrawal rates in light of these two factors might put your risk.
Thanks,
Sam
Sam, in my research, the Fed plays little role. What I have discovered is that successful withdrawal rates in the past were closely correlated with two factors only: current stock market valuation and the inflation regime. Thus, the Fed can jump through hoops, but it wouldn’t affect my computations. Best, Bill Bengen
Hi Bill, I think that’s the point of contention. Valuation today is elevated, about 30% higher than historical average. As a result, we could see lower returns going forward unless there is productivity and faster earnings growth.
Sam, it must be empasized that a 5% withdrawal rate represents a “worst-case scenario”, including high market valuations. Historically, the safe withdrawal rate has averaged about 7%, with some lucky retirees able to withdraw at double-digit levels. I study almost four hundred retirees, each retiring on the first day of the quarter beginning Jan 1, 1926. Only one of the four hundred has a rate as low as 5%! The rest are all higher, most substantially higher. For example, the 7/1/2000 retiree, also retiring at a time of extremely high stock valuations, appears to have been successful with a 5.5% initial withdrawal rate. The 10/1/2007 retiree, who suffered through that monster bear market of 2007-2009, appears to be successful with a 5.25% initial withdrawal rate. We must be careful not to “double count” risks and assign a lower withdrawal rate than is justified. Best, Bill Bengen
Thanks Bill. Are you up for doing a podcast interview? It would be great to hear your insights explained and discuss some things me and others might be missing, as well as the assumptions you have for your SWR so we are all on the same page with minimal misunderstandings.
Here’s a sample interview on Apple.
Sam, it would be a pleasure. Bill
I think you’re absolutely right that the forward-looking market conditions make it a strange time to become more aggressive with your retirement. Another potential adjustment could be based on years into retirement – e.g. being more conservative in the first 5-7 years to minimize long-term impact of sequence of returns risk.
But I think this has a lot to do with the specifics of the withdrawal strategy which doesn’t seem to get discussed often. If I understand the original research correctly, the process is to withdraw the SWR in year one and then adjust that DOLLAR amount by inflation each year. So in subsequent years, SWR no longer defines withdrawal amount, just inflation. That inflation-adjusted withdrawal amount then defines your effective portfolio withdrawal rate.
If you do not get hit with meaningful down years early on and you only increase your withdrawal amount by inflation, your effective withdrawal rate will naturally decline over time from the starting SWR. Taking a very simple example (starting with $1M portfolio, 8% growth, 3% inflation) – your effective withdrawal rate is down to 3.6% by year 10.
I think the long-term inflation and returns have been better in the ~30 years after than during the ~70 years used in the study. So perhaps that’s where the increase is coming from.
I know this is super wonky stuff, but I think it’d be helpful for authors to mention a little bit about the details when discussing SWR.
It seems like you actually think of SWR as the ongoing effective withdrawal rate. Is that right?
Yes, their recommended safe withdrawal rates taken into an account of inflation, they are the rates of withdrawal whatever inflation is at the moment.
That’s one of the reasons why following the 10 year bond yielded is better, as the yield takes into account inflation expectations, and current inflation.
Hi Sam,
Actual history Wife 59 & Me 62 retired September 2015 with $2M & no debt by 2020 $3M. Lesson you just can not spend all the savings.
We traveled nine months each year until March 2020.
Social security Wife at 62, me spousal at 65 and now max at 70.
Monthly payments from pension and social security are $130k.
I spent DRIP LTCG to reduce taxes and spent IRAs to keep in 15% or 12% bracket.
I spent Roth IRA to assure enjoyment in early years of retirement.
I titrate MAGI to below IRMMA example 2024 $206k.
Savings spending last 9 years < 5%.
2021 & 2022 used $170k for many alternative cancer therapies not covered by all those insurances. Saving your life is the real reason for savings.
The RMD starts at 73 spending of IRA money will be spent down.
$3M/20 years = 150k per year not including appreciation of portfolio.
Again you just can not spend all the savings.
ENJOY YOUR LIFE NOW ! Our travels started again in fall 2022
We leave this week for 3 months in Waikoloa Beach Hawaii completing or goal or 6 months each year in Hawaii. All included in $130k above.
We are booked for 30 boat trips to incluse 60 scuba dives.
Keep SMiling
I’m all for a variable spending rate, but the word “simply” seems to be doing an outsize amount of work here:
I imagine that investing 3.5% of more one’s assets is likely to lead to substantial gains most any time. However, it seems to me that the the only retirees for whom reducing their withdrawal rate to 0.5% is “simple” are likely to be massively underspending under more favorable 10-year T-bill conditions. Or else they have an incredibly high disposable component to their budget. (?)
In practicality, can a retiree ever feel they have enough if they need to be able to adjust spending so dramatically? To follow this methodology, it would mean that a retiree with $10M in assets and expecting to withdraw a fairly conservative 3% rate ($300K per year) would have to adjust to living on only $50K. That seems incredibly tough.
Who wouldn’t want a dynamic withdraw rate?
Once a retiree’s basic expenses are covered, the rest of their spending is consumption, so I can see a scenario where a retiree doesn’t have the assets to reduce their withdraw rate below 4% (.04 of $1mm is only $40k), but to not at least consider adjusting their withdraw rate is foolish.
Also, spot-on when discussing only fully understanding retirement risk once the paychecks stop.
It’s like understanding risk much better when losing 20% of a portfolio means losing $20k versus $200.
I view the SWR different for older retirees versus younger FIRE. i think that is where some of the confusion lies. i’m 60 and entering retirement. say I have 5m in investments assets. say i decide that 150k (3% WR) is plenty of money i need each year. say the 10 year is 3.25 or higher. well then yes, i can just put all the 5m in bonds. that eliminates all risk, except perhaps inflation risk.
if you are 40 and want to FIRE with 5m, well then it gets more complicated because you probably need that 5m to continue to grow on some level.
Me the 60 year old is not interested in continued growth because the risk is not worth it.
So i think the SWR pundits you mention may be talking more to me. people who are past the big ticket items like saving for college and paying off houses. i don’t really care if i die with 5m, 7m or 2m…
Yes, you are absolutely right about the SWR depending on at what age and what stage of financial independence you are in. Certainly, you can withdraw more at an older age. However, life expectancy has also increased since the 1990s as well.
The thing is.. how could a 4% SWR be OK for the past 40 years, but now with the Fed cutting rates, they raise the SWR by 25% to 5%? It is nonsensical, especially if forecasts are for lower returns.
I think you SHOULD care with how much you die with. Dying with too much would be a big waste of time and energy from your younger days.
well maybe the don’t care how much i die with is a bit overstating. i have enough and don’t desire so much lavishness that i will be fine with a WR north of 5% and leaving it in fairly safe investments. i guess SWR somewhat is a mix of lifestyle and what you are starting with.
I agree with your SWR formula. It’s how I establish my base budget. When times are good (higher returns) I can spend or invest more. When times are tough (lower returns) I can tighten my spend. The SWF is a great way to ensure I’m not overspending, and therefore helping to ensure my retirement life is secure (barring any apocalyptic type scenarios, obviously). Thanks for developing the SWF, Sam!
Retirement researchers are upgrading their safe withdrawal rate assumptions because no one wants to hear that they don’t have enough money and will die broke. I’m still operating under the Financial Samurai DIRE plan.
Pretty bearish! But as we saw from the latest Consumer Finance Survey, the average American household is now a millionaire, Whoo hoo! And the median American household has a $192,000 net worth, as of two years ago.
I think we gotta be more positive on the average American now as a result.
Thank you for this, Sam! I retired early but have not started withdrawing yet (as I am trying to wait as long as possible). That said, I am one of those who would have blindly followed the 4% rule not fully understanding how it came to be. Appreciate the layman’s explanation — very informative and useful!
My dad has a slightly different issue. Due to his age, 89, his RMD is now up in the 8+% range even though he doesn’t need the money (his pension and SS are more than sufficient and he has long term care insurance). He is by no means rich or wealthy but, he has to take this RMD (at double the 4% rule), he gets taxed on the withdrawal, and then the 70% that remains (lives in CA) gets put in a taxable account. He loses 30% a year. I guess now that I understand how lowered interest rates affect withdrawal rates, the government’s RMD withdrawal table further increases his loss. I suppose we should be grateful he has this problem rather than not enough money to live on ;)
No problem Wendy. Glad you read the post and were able to learn something useful.
RMDs are a fact of life. Taxes will be paid sooner or later. I would tell him to not fret about paying taxes and to enjoy his wealth to the fullest, on himself or on his children. He can’t take it with him, so spend it and ENJOY!
Best, Sam
I’m planning on retiring in the next year. My plan, that I’ve already started is to set aside 5 years of projected spending in a CD ladder. After year 1 if my stock returns cover a year’s spending I replenish the ladder. If not I don’t. In the event of another Great Recession it allows me 5 years to recover before I have to take a withdrawal. Doing this allows me a high probability of only selling when the market is up. It’s a conservative approach but preservation is my top priority.
Overall, I catch your drift – lower expected forward returns, marginally higher inflation, rate cutting cycle beginning = raising your withdrawal rate now is definitely a bad idea, however…
I feel like a big missed opportunity when talking about withdrawal rates is budgeting and spending… because safe withdrawal rates are all theoretical / based on your fund’s expected real return (i.e. 4% is roughly the historical 6-7% nominal return on a balanced portfolio with 2-3% inflation), but in practice, a withdrawal rate is based on your expenses. Most people don’t have the 1m portfolio it would take to generate an after-SS shortfall of roughly 30k annually (probably around the national average) at 2.9% (80% of current 3.6% yield on 10Y)… much less if rates ever went back to 0. In the same vein, 4% still could be much less than you need… and in some cases it could be much more than your expenses, so now you have the opposite problem of missing out on additional compounding (not to mention the additional income tax)… So thinking about sustainable withdrawal rates to ensure you don’t run out of money is important, but its also backwards. you can’t necessarily eat a withdrawal rate. You need to manage your expenses and match them with the minimal portfolio risk it affords. The portfolio surviving only matter if you also put food on the table this week (or conversely not taking more than you need). Flexibility should be focused around your budget and lifestyle, which you 100% can predict, not future returns (or the 10Y yield), which you 100% cannot predict.
I also don’t follow how you say that you’re not advocating for a full bond portfolio and that the 10-year is just something to keep in mind as a risk free rate when investing… but then you go and peg your withdrawal rate to that yield, as if it were the hypothetical portfolio? I feel i am missing something there… apologies for this.
The key is to adjust with changing times. The masses may stick with 4%, but it is dangerous to be so stringent during times of great uncertainty. Yes, of course one must be cognizant of budgeting and spending.
“I also don’t follow how you say that you’re not advocating for a full bond portfolio and that the 10-year is just something to keep in mind as a risk free rate when investing… but then you go and peg your withdrawal rate to that yield, as if it were the hypothetical portfolio? I feel i am missing something there… apologies for this.”
People were confusing my SWR formula as suggesting to only invest in bonds. The 10-year bond yield is the risk-free rate by which all investments decisions should be compared to. For example, wouldn’t invest in stocks if you believed it only had a 4% return if the risk-free rate is 5%.
The 10-year bond yield incapsulates many assumptions, including inflation and expected returns. It is the single most powerful financial figure to follow and understand.
Where are you on your financial independence journey?
I get the point about the 10-year being a good marker for assessing risk premia. This is well taken. The 10-year has interest rate risk (premia) but is otherwise credit risk free, bakes in long-term inflation views, etc… so that’s all well and good.
But I think the thing I still don’t understand is the SWR formula being pegged to the 10-year… if you’re modeling after the 4% WR rule, you’re implying your portfolio is yielding roughly the 10-year (after all, the 4% is predicated on the safe rate that historically/simulated works for a balanced portfolio earning 6-7% annually with 2-3% inflation). The withdrawal rate rule is meant to reflect the portfolio yield and how the outflows balance the real return (inflows) over time… given potential bear market scenarios (and sequencing of them). if you decouple the withdrawal rate from the portfolio yield, you risk being mismatched, no? to say “invest however you want but withdrawal in this sort-of-flexible-but-still-fixed manner” even a conservative one doesn’t necessarily follow logic… which is why i feel like I’m missing something in your formula…
Personal finance journey, we are still sort of early phase: mid 30s, moderate dual income, two young kids, modest-sized, (fortunately-timed) low rate 30y mortgage, decent home equity, maxing 401ks, HSAs, anything else pre-tax we can manage, and basically all low-fee, passive after-tax (mostly equity) stuff. CD ladders for shorter-term savings. Spending within our means, by not at a low enough rate that would result in meaningfully early retirement (and we are ok with that, for now)… I would say fairly typical – responsible and uninteresting lol. Anything interesting here worth discussing?
As a side note, I enjoy your blog – I read it often, find it often insightful (and always thought-provoking) and have been reading it for a few years. I enjoy personal finance content. I was just caught up in the math you are reiterating in the flexible formula… still trying to understand what you’re saying.
My formula is a starting point for the first 1-2 years of retirement. And then can be used as one wishes as time goes on. What you will realize when you retire is that you will likely be way more conservative in your spending and withdrawal than planned.
80% of the 10-year is consistent with when the 4% rule was created in the mid 1990s when the 10-year bond yield was at 5% – 5.5%. 4% was 80% of the existing risk-free rate at the time.
Good luck on your journey! Thanks for sharing your background. Always good to know who I’m conversing with.
As the old saying goes, “those who can’t, teach.”
I agree with you that it makes no sense to recommending increasing your SWR when the risk-free rate is declining AND expectations for returns are also declining.
It’s backwards. Surprised nobody is saying anything except you.
My retirement philosophy aligns with your dynamic withdrawal rate. Staying flexible is so important imo. Because as you said, the financial markets, inflation rates, economic conditions, tech, etc are constantly changing and evolving. Staying static can be detrimental. That’s not to say one has to be wildly inconsistent or reckless, but I definitely see many benefits of being dynamic with ones retirement plans and withdrawal strategies. Thanks!