This recent thread
discussed the 4% SWR in light of the current market, mostly interest rate, conditions. One concern repeatedly raised in that thread was the lack of independence of 30 years of market returns. That is, if one 30 year stretch of market returns resulted in a successful retirement funding, there is a good chance the 30 year stretch starting a year later will too.
Years ago, I wrote a comprehensive financial tracking and planning program, which I still use today. It tracks my investments (updating their value after the close of the market every day), expenses, allows for entry of social security, estimates taxes, and has a Monte Carlo retirement simulator built-into it whose simulated values are inflation, investment return, and interest rates. Since the programming language (Java) had a built-in normal distribution function, I used it as the shape of the returns of all three simulated values. This is a shortcoming of the model, but I don't think it is fatal and it does remove the "lack of independent observation" objection.
According to my current estimates, my withdrawal rate is 3.5%. The model maintains that level of inflation-adjusted spending all the way to the end. While the model doesn't explicitly address potential nursing home expenses, I am attempting to simulate it by not reducing spending as a function of age.
Attempting to simulate a low interest rate, low return, reasonably high inflation environment, I set the distributions to
Inflation mean: 3.5% variance 1.5% (note can't go below -2%)
Investment mean: 5% variance 10% (nominal returns)
Interest mean: 2% variance 1%
The results from 10,000 runs of this model show a 10% chance of running out of money in 30 years. However, in all of those "out of money" years, stock returns averaged 2.6% or less, inflation averaged no less than 3.5%, and interest rates were never higher than 2.2%.
If I raise the investment mean to 7%, the percentage of 30 year failures falls to 1.3% and in all the failures, the average investment return was 3.5% or less.
The model has shortcomings. Inflation, investment returns, and interest rates are not normally distributed. When interest rates rise, the value of the bond portion of the retirement savings doesn't go down (bond duration not part of the model). There is no way to predict income tax rates or changes 30 years hence. Do these problems invalidate the model's results? It is hard to know if these problems all skew the results in the same direction or cancel one another out.
A 10% chance of financial failure is nothing to feel safe about. But, between the model's limitations and the financial conditions necessary to cause failure, I am not too concerned about them and believe that I could adjust my expenses down, if necessary.
I just wanted to add another data point to the SWR debate.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.