This is a 4% withdrawal rate, and should last you forever. If you want to go even safer (the Trinity Study suggests that 4% is plenty safe) go with 3% and multiple your expenses by 33.
According to The 4 Percent Rule is Not Safe in a Low-Yield World, the 4% withdraw rate was calculated to have a 6% failure probability over 30 years using historical data. Using today’s lower interest rates to recompute, the failure probability over 30 years is now 57%.
It is true that with a 50% stock, 50% bond diversification, there has been a small historical failure rate for the 4% withdrawal rate. If the first 30 years after my retirement are the worst seen since WWII, then I may be in trouble.
With this in mind, we may hedge against this. You may work for a bit longer and save enough to go with a 3.5% or even a 3% withdrawal rate, take on jobs or projects intermittently during your retirement to boost your savings, or receiving social security or some other another government social program once you are old enough to qualify. Other more random factors which may hedge in your favor will be your children growing up and moving out of the house (permanently lowering your expenses), downsizing your home or moving to a rental once your kids are grown, or receiving an inheritance.
Of course, the paper you cite anticipates a higher failure rate due to lower bond rates. These lower rates may be a historical aberration, as mentioned in the abstract. I have not invested in bonds because of the very low rates, and am holding a stock-only, albeit dividend paying, index fund. I view bonds as a hedge against deflation. Besides junk bonds, the ROI is much too low for my taste.
I am anticipating an eventual portfolio of 50% Stock, 30% REITs and 20% Bonds, unlike the study’s 50% stock, 50% bond. I also hope to have some rental property, but this is a long term idea. In the meantime, I should anticipate more volatility, but until I retire I will be comfortable with that. If you, on the other hand, prefer otherwise, you should go with bonds, save more and aim for a lower withdrawal rate.
However, the crux of this sequence is not investing, but extreme saving. Investing strategies differ due to anticipated needs and tolerance of risk. However, making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are.
Bond rates are correlated with stock returns, and the paper assumes a lower-than-historical stock return as well. I don’t know whether today’s low bond rates are an anomaly or whether the historically high rates/returns in the US were an anomaly, but it seems to me there’s a fairly high chance the latter is the case. As the paper points out, the 4% wouldn’t have worked in most other countries. If you assume the current rates will continue, then even a 2.5% withdraw rate will have a 10% failure probability over 30 years, and you’d have to go to 1.3% withdraw rate to get a 1% failure probability over 40 years. (And this is assuming optimal mix between stock and bonds so you wouldn’t be able to achieve greater withdraw rate at same failure probability by switching to more stocks for example.)
I myself am doing “”extreme saving”, but it’s a big decision and I think people should make the choice with an accurate picture of the likely benefits and risks. Saying “4% withdrawal rate should last you forever” seems to be overselling the benefits and underplaying the risks. “Making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are” seems like an even stronger statement, which I don’t see how you can defend.
According to The 4 Percent Rule is Not Safe in a Low-Yield World, the 4% withdraw rate was calculated to have a 6% failure probability over 30 years using historical data. Using today’s lower interest rates to recompute, the failure probability over 30 years is now 57%.
It is true that with a 50% stock, 50% bond diversification, there has been a small historical failure rate for the 4% withdrawal rate. If the first 30 years after my retirement are the worst seen since WWII, then I may be in trouble.
With this in mind, we may hedge against this. You may work for a bit longer and save enough to go with a 3.5% or even a 3% withdrawal rate, take on jobs or projects intermittently during your retirement to boost your savings, or receiving social security or some other another government social program once you are old enough to qualify. Other more random factors which may hedge in your favor will be your children growing up and moving out of the house (permanently lowering your expenses), downsizing your home or moving to a rental once your kids are grown, or receiving an inheritance.
Of course, the paper you cite anticipates a higher failure rate due to lower bond rates. These lower rates may be a historical aberration, as mentioned in the abstract. I have not invested in bonds because of the very low rates, and am holding a stock-only, albeit dividend paying, index fund. I view bonds as a hedge against deflation. Besides junk bonds, the ROI is much too low for my taste.
I am anticipating an eventual portfolio of 50% Stock, 30% REITs and 20% Bonds, unlike the study’s 50% stock, 50% bond. I also hope to have some rental property, but this is a long term idea. In the meantime, I should anticipate more volatility, but until I retire I will be comfortable with that. If you, on the other hand, prefer otherwise, you should go with bonds, save more and aim for a lower withdrawal rate.
However, the crux of this sequence is not investing, but extreme saving. Investing strategies differ due to anticipated needs and tolerance of risk. However, making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are.
Bond rates are correlated with stock returns, and the paper assumes a lower-than-historical stock return as well. I don’t know whether today’s low bond rates are an anomaly or whether the historically high rates/returns in the US were an anomaly, but it seems to me there’s a fairly high chance the latter is the case. As the paper points out, the 4% wouldn’t have worked in most other countries. If you assume the current rates will continue, then even a 2.5% withdraw rate will have a 10% failure probability over 30 years, and you’d have to go to 1.3% withdraw rate to get a 1% failure probability over 40 years. (And this is assuming optimal mix between stock and bonds so you wouldn’t be able to achieve greater withdraw rate at same failure probability by switching to more stocks for example.)
I myself am doing “”extreme saving”, but it’s a big decision and I think people should make the choice with an accurate picture of the likely benefits and risks. Saying “4% withdrawal rate should last you forever” seems to be overselling the benefits and underplaying the risks. “Making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are” seems like an even stronger statement, which I don’t see how you can defend.