Safe withdrawal rates

A safe withdrawal rate (SWR) is defined as the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of depletion to zero at any time within the specified period.

Usage: Typically, SWR is used as an approximation of the probability that a given portfolio can support a given annual spending component for a required period, with a reasonable confidence. To do this, variables such as the allocation of assets within a model portfolio, the beginning balance, and/or the number of years expected in retirement are varied, a model is applied, and results of these alterations in the variables are observed and compared, in order to optimize for the maximum.

Controversy: Unfortunately, the term "safe withdrawal rate" is necessarily an ambiguous term. This is because initial methods used historical data to statically determine what would have been safe given the actual results that past portfolios would have generated with the variables given. The next logical step, of course, was to use that information to predict future SWRs. Either use is technically correct, but one should always be sure to be clear whether the use is in reference to past or projected SWRs, so that unnecessary argument can be prevented.

Trinity study
Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz authored an early and influential paper, Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable. (AAII Journal February 1998, Volume XX, No. 2). Because the authors were professors at Trinity University in San Antonio, Texas, it is often referred to as "the Trinity study." The authors studied actual historical stock and bond returns from 1926 through 1995 to determine sustainable withdrawal rates. The study has gained renewed significance in light of recent turbulent economy.

Using all of the historical data, the professors looked at five possible portfolio compositions, from 100 percent stocks to 100 percent bonds - the three other portfolios had a stock/bond allocation of: 75/25, 50/50, and 25/75 - and evaluated the impact of fixed annual withdrawals ranging from three percent to twelve percent. Stocks were represented by the S&P 500, while long-term high grade domestic bonds were used for the bond portfolios.

Payout periods were in five-year intervals, from 15 to 30 years. In the study, the professors considered a portfolio successful if it ended a particular withdrawal period with a positive (non-zero, non-negative) value.

The study produced a number of conclusions, including:


 * Withdrawal periods longer than 15 years dramatically reduced the probability of success at withdrawal rates exceeding five percent.
 * Bonds increase the success rate for lower to mid level withdrawal rates, but most retirees would benefit with at least a 50 percent allocation to stocks.
 * Retirees who desire inflation-adjusted withdrawals must anticipate a substantially reduced withdrawal rate from the initial portfolio.
 * Stock-dominated portfolios using a 3 to 4 percent withdrawal rate may create rich heirs at the expense of the retiree's current standard of living.
 * For a payout of 15 years or less, a withdrawal rate of 8 to 9 percent from a stock-dominated portfolio appears sustainable.

The Trinity study numbers

 * Table 1 shows the success rate of various portfolios for different time periods measured against the full time span of the studied data, 1926-1995.
 * Table 2 shows the success rate of various portfolios for different time periods measured against the post-World War II markets, 1946-1995.
 * Table 3 shows the success rate of various portfolios for different time periods measured against the full time span of the studied data, 1926-1995. However, unlike Table 1 which covers the same time period, this data is adjusted for inflation and deflation.


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Table 1: 1926-1995 Table 2: 1946-1995 Table 3: 1926-1995, adjusted (Click on each table for a larger view with additional details)
 * +Trinity Study portfolio success rates
 * }

Limitations of the Trinity study
One scenario backtested in the Trinity study suggests that a retiree with a suitably allocated $1 million portfolio could withdraw $40,000 the first year, give herself a cost-of-living adjustment every year afterwards, and have a 98% chance of the portfolio lasting at least 30 years.

Taken literally, such a plan has been criticized as unrealistic. Even if the tests showed that the plan had a 98% success rate over all past time periods, would a prudent person blindly go on steadily increasing withdrawals in a prolonged bear market? It also leads to apparent absurdities. Say that retirees Alice and Bob have saved $1 million in 2008, and the market crash reduces their portfolios to $800,000 in 2009. Alice, however, retires in 2008 while Bob waits until 2009. The Trinity study bases withdrawals the dollar value of the portfolio at the start of retirement. The value fluctuates with the vagaries of the stock market. Thus, even though their situations are almost identical, in the Trinity scenario, Alice, by virtue of having retired in 2008, is allowed to withdraw $40,000 plus COLA in 2009; while Bob, despite being in an almost identical situation, would be allowed only $32,000.

The authors of the paper, however, did not mean for their scenarios to be applied rigidly or uncritically. The article makes this very important statement:

Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:

Professor Cooley's response:

Trinity study update, April 2011
The original Trinity Study authors have updated their results through 2009.

See Trinity study update for a comprehensive discussion on the implications of the Trinity study to investors.

Papers

 * October 1994
 * Determining Withdrawal Rates Using Historical Data by William P. Bengen


 * March 1998
 * What's the "safe" withdrawal rate in retirement ?, John Greaney
 * November 2000
 * Maximum Safe Withdrawal Rates - Making the Money Last, William P. Bengen
 * June 2000
 * The Retire Early study on safe withdrawal rates.
 * The Retire Early website recently conducted a similar study to Trinity using an alternative database spanning the years 1871 through 1998. It generally confirms the Trinity Study results.
 * 1998 - 2001, William J. Bernstein
 * The Retirement Calculator From Hell
 * The Retirement Calculator From Hell - Part II
 * The Retirement Calculator from Hell, Part III: Eat, Drink, and Be Merry
 * October 2006
 * William Reichenstein, Ph.D., Baylor University and TIAA-CREF Institute Fellow: Tax-Efficient Sequencing Of Accounts to Tap in Retirement
 * November 2006
 * Geoff Considine, Seeking Alpha - Safe Portfolio Withdrawal Rates: Beyond The 4% Solution
 * January 2007
 * Jonathan Clements, How to Survive Retirement -- Even if You Are Short on Savings


 * Aug 2007
 * Scott Burns, Will the real safe withdrawal rate please stand up?
 * Oct 2007
 * Scott Burns, Why We’re All Confused about “Safe” Withdrawal Rates
 * Oct 2007
 * John J. Spitzer, Ph.D., Jeffrey C. Strieter, Ph.D., and Sandeep Singh, Ph.D., CFA
 * An article in the October 2007 issue of the Journal of Financial Planning, published monthly by the Financial Planning Association® (FPA®)


 * April 2008
 * Jason S. Scott, William Sharpe, and John G.Watson: The 4% Rule—At What Price?


 * May 2008
 * David Aston, MoneySense, Retirement: A number you can live with


 * June 2008
 * Jonathan Guyton, Withdrawal Rules: Squeezing More From Your Retirement Portfolio


 * December 2010
 * Wade D. Pfau, An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?
 * April 2011
 * Philip L. Cooley,Carl M. Hubbard, Daniel T. Walz, Portfolio Success Rates: Where to Draw the Line
 * February 2017
 * Javier Estrada, Maximum Withdrawal Rates: An Empirical and Global Perspective

Additional papers

 * Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors by Colleen M. Jaconetti, CPA, CFP, Vanguard Investment Counseling & Research, (09/12/2007)
 * Savings: Choosing a Withdrawal Rate That Is Sustainable by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz
 * Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe? by Jonathan T. Guyton, October 2004
 * Decision Rules and Maximum Initial Withdrawal Rates by Jonathan T. Guyton, CFP?, and William J. Klinger, March 2006
 * International Diversification and Retirement Withdrawals by Danny M. Ervin, Larry H. Filer, and Joseph C. Smolira
 * Baking a Withdrawal Plan 'Layer Cake' for Your Retirement Clients FPA Journal (August 2006)
 * The 4% Rule—At What Price? by Jason S. Scott, William Sharpe, and John G.Watson (April 2008)
 * Optimal Retirement Asset Decumulation Strategies:The Impact of Housing Wealth by Wei Sun, Robert K. Triest, and Anthony Webb (January 20, 2007)
 * Selection and Moral Hazard in the Reverse Mortgage Market by Thomas Davidoff and Gerd Welke, (June 2007)
 * Sustainable Retirement Income for the Socialite, the Gardener and the Unhealthy by Robinson, Chris and Tahani, Nabil (May 16, 2007)
 * Efficient Retirement Financial Strategies by William F. Sharpe, Jason S. Scott, and John G. Watson - July 2007 (forthcoming in John Ameriks and Olivia Mitchell, Recalibrating Retirement Spending and Saving, Oxford University Press, 2008)

For further study

 * Research that inspired and influenced the flexibleRetirementPlanner:
 * Further Reading
 * Withdrawal Strategies: Articles and More by bob90245. Snapshot found at archive.org, archived on January 30, 2012.
 * Sensible Withdrawals by Peter Ponzo aka 'gummy'
 * (defunct link) Variable Withdrawals in Retirement by bob90245. Snapshot found at archive.org, archived on June 11, 2012.

Tools and calculators

 * FireCalc
 * T. Rowe Price Retirement Income Calculator
 * Motley Fool withdrawal calculator