Safe withdrawal rates
A safe withdrawal rate is defined as the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of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 utilized 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 utilized 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.
Studies and papers
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 & deflation.
Trinity Study portfolio success rates
(Click on each table for a larger view with additional details)
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 A and B have saved $1 million in 2008, and the market crash reduces their portfolios to $800,000 in 2009. A, however, retires in 2008 while B 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, retiree A, by virtue of having retired in 2008, is allowed to withdraw $40,000 plus COLA in 2009; while retiree B, 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:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.
Professor Cooley's response:
You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.
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.
- October 1994
The paper that started it all:
Determining Withdrawal Rates Using Historical Data by William P. Bengen
"At the onset of retirement, investment advisors make crucial recommendations to clients concerning asset allocation, as well as dollar amounts they can safely withdraw annually, so clients will not outlive their money.... It employs graphical interpretations of the data to determine the maximum safe withdrawal rate (as a percentage of initial portfolio value), and establishes a range of stock and bond asset allocations that is optimal for virtually all retirement portfolios."
- 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
- 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
(Quoting Bernstein:) "Two percent is bullet-proof, 3% is probably safe, 4% is pushing it and, at 5%, you're eating Alpo in your old age," reckons William Bernstein, an investment adviser in North Bend, Ore. "If you take out 5% and you live into your 90s, there's a 50% chance you will run out of money."
- (Clements said:) "[Using a two-act retirement plan] if you're short on savings... will give you a fair amount of income, your heirs will inherit a decent sum if you die before age 85 and, if you live longer than that, you should be comfortable enough."
- 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®)
provides a more robust calculation of “safe” withdrawal rates for retirement and provides a graphic method for better understanding the interrelationship among withdrawal strategies, risk tolerance, and asset allocation.
- April 2008
The 4% rule is the advice most often given to retirees for managing spending and investing. This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy. As a result, retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform. The previous work on this subject has focused on the probability of short falls and optimal portfolio mixes. We will focus on the rule’s inefficiencies—the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10%-20% of a retiree’s initial wealth to surpluses and an additional 2%-4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan often remains wasteful, since many retirees may actually prefer a different, cheaper spending plan.
- May 2008
- David Aston, MoneySense, Retirement: A number you can live with
If history is any guide, a 4% withdrawal rate means your portfolio will be able to withstand a market meltdown of the worst magnitude we’ve experienced in the last 80 years as well as support you for an exceptionally long life. William Bengen, a U.S. researcher, has back-tested a 4% withdrawal rate with a balanced portfolio of U.S. stocks and government bonds earning overall market returns and found that you would have been able to safely withdraw 4% of your portfolio over any 30-year period since 1926.
- June 2008
- Jonathan Guyton, Withdrawal Rules: Squeezing More From Your Retirement Portfolio
"...most [SWR] research has centered on withdrawal rules that are quite static... yet most retirees have the ability to modify their annual spending, at least to some degree. Would the ability to make small systematic modifications if investment performance is poor increase the safety of an investment portfolio and allow for slightly higher withdrawal rates?
- 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
- New York Life article: Key to Making Retirement Savings Last: The Withdrawal Rate
- The Retire Early study on safe withdrawal rates, from the Retire Early Home Page.
- What the Trinity Study authors meant
- Permission to quote given by Cooley. What the Trinity Study authors meant, direct link to post.
- Trinity Study Authors update their results, forum discussion
- See forum thread Trinity Study Authors update their results for additional discussion.
- Bogleheads® forum topic:
- Bogleheads® forum topic:
- Bogleheads® forum topic:
- Bogleheads® forum topic:
- Bogleheads® forum topic:
- Trinity Study Updates, by Wade D. Pfau (forum member wade)
- Trinity Study, Retirement Withdrawal Rates and the Chance for Success, Updated Through 2009, by Wade D. Pfau (forum member wade)
- finiki:Sustainable withdrawal
- 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
- (defunct link) 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