The Annual Returns chart sorts the frequency and distribution of every inflation-adjusted annual return for a given asset allocation. Use this to study just how often a portfolio actually makes the average return it advertises, to visualize the volatility of a portfolio, and to prepare yourself for how frequently even the best portfolio will post an annual loss.
The Annual Returns chart is a histogram that illustrates the distribution of real-world inflation-adjusted annual returns. Think of each column as a bucket, and picture going through the historical record and sorting each annual return in the appropriate bucket. Blue columns represent gains and red columns represent losses.
While most people think about annual returns in terms of an average, it is important to understand that you almost never receive that average in any given year. By dragging the gray line left and right, you can see how often the portfolio had a real annual return more or less than a certain amount. Visualizing returns this way is helpful for understanding the natural variability of any investment decision.
The Drawdowns chart maps every single portfolio loss from any high point along the way. Use this to study just how low a certain asset allocation has fallen, how long it has taken to recover, and generally how prepared you are both emotionally and financially to handle the downside risks with your own life savings.
In contrast to most portfolio explanations that generally seek to portray an investing idea in the most flattering possible light, the Drawdowns chart is designed to highlight the worst timeframes for any given portfolio. Each line represents the inflation-adjusted compound returns of a single start year, with every possible start year overlayed on the same chart.
Note that the color of the lines is sorted by start year. Darker lines are from older start years while lighter lines are from more recent start years.
The deepest drawdown is the largest compound loss for the portfolio since 1970 regardless of start date. Think of it as being the unluckiest investor in history who invested their money at the worst possible time. While it’s true that you may not be so unlucky, it’s important to realize that you are not special and this is the experience that real people before you have dealt with. If the deepest drawdown for a portfolio is larger than your own risk tolerance, then perhaps you should think twice about investing in this portfolio. But if it is something you can deal with, then you can sleep well knowing that you chose something you can be confident in even when times are tough.
One should note that the deepest drawdown number is based solely on year-end returns. It’s possible that a portfolio experienced something even worse than that in the middle of a year.
Longest Drawdown
The longest drawdown is the longest amount of time it took for a portfolio to fully recover to its initial value. Note that the numbers are adjusted for inflation, so while the nominal account value may have recovered sooner than reported, the charts track your actual purchasing power. The value of everyday goods can change quite a bit over a decade or more, so inflation-adjusted returns are critical for evaluating long-term portfolio losses.
Astute observers may note that some of the lines dive from positive to negative in later years on the chart. This is because the calculator does not simply declare the portfolio recovered when it temporarily turns positive only to return below the original value later. A loss briefly interrupted by a head fake is still a loss, and a drawdown is only declared resolved when the portfolio permanently recovers above its original value.
Ulcer Index
The Ulcer Index was first described in The Investor’s Guide to Fidelity Funds: Winning Strategies for Mutual Fund Investors, by Peter Martin and Byron McCann. The basic idea is to find a single number that can serve as a reference point for historical portfolio pain that 1) is far more informative than the standard deviation number most often quoted as a proxy for risk; and 2) accounts for the depth, length, and frequency of drawdowns. After all, a shallow drawdown that persists for a long time is not necessarily any less painful than a sharp one that recovers relatively quickly. You can read more about how it works here, but long story short the Ulcer Index is a pretty decent measure of the total white area above each of those red lines.
The Equalizer chart shows how chaotic asset noise mixes into a clear portfolio signal. Use this to study index correlations, understand the return extremes that real people experienced, and explore how modern portfolios use multiple volatile assets to create a final recipe far more desirable than any single ingredient.
The Equalizer chart shows every inflation-adjusted annual return since 1970 for a portfolio as a single line going from left to right. It also displays the annual returns for every individual asset included in the portfolio as gray lines to help visualize how they influence overall performance. You can think of it as a sound equalizer where individual years replace individual frequencies, and every asset is a single channel in the mix.
Generally speaking, portfolios with low intensity and high positive balance lead to satisfied and stress-free investors.
As you look at the gray asset lines, note how some of them track each other very closely while others swing wildly in different directions. This is a visual representation of asset correlations, and you can use this chart to help look for alternative assets to complement the ones you already own and smooth the ride for the portfolio as a whole.
The Equalizer chart automatically displays the highest and lowest returns of the portfolio as horizontal dotted lines.
Intensity
This represents the delta between the highest return and the lowest return. It is scaled to single digits to make it simpler to reference, but every unit of intensity represents a 10% spread in returns.
Balance
Not every type of volatility is equally unpleasant, as nobody complains about large positive spikes while most people fear large losses. Balance represents the proportion of the volatility extremes that are either positive or negative, and is on a scale of +/- 10. For example, a balance of 0 means that the best positive returns are the same scale as the worst negative returns. +2 means that the extremes are somewhat biased to positive returns. -8 means that the extremes are highly biased towards negative returns. And a theoretical portfolio with a +10 balance never experienced a single negative return.
The Financial Independence chart shows the full range of working years historically required to accumulate enough savings to never have to work again. Use this to study the effects of asset allocation on both sides of your retirement goal, to estimate your retirement date, or to learn just how important your savings rate is to your future financial security.
The Financial Independence chart is essentially a mashup of the Portfolio Growth and Withdrawal Rates calculators. It calculates the long-term withdrawal rate for the portfolio, maps every growth path for the same portfolio, and shows the range of working years required to fully fund your retirement account.
Perhaps the most important takeaway from the chart is that your absolute account value and spending level are irrelevant to the calculations. No matter whether you make $30k a year or $1mm a year, the only number that really matters is the percentage of your net income that you save. Try playing with that amount and you’ll quickly see the value of higher savings rates. Veteran investors with an established nest egg can also enter the years of expenses they’ve already saved up rather than starting from zero.
1) The withdrawal rates are calculated using the same methodology as the Withdrawal Rates calculator. /// More Info ///
2) The Financial Independence calculator uses the applicable long-term withdrawal rate for a given asset allocation.
3) The savings goal is calculated from the single lowest withdrawal rate on record for the specified portfolio. Accumulation paths then model the inflation-adjusted portfolio accumulation using every possible start year since 1970.
4) The asset allocation is constant (subject to normal annual rebalancing) across both accumulation and retirement.
5) The lowest number of working years is the one where at least one accumulation run met the final goal. The highest number of working years is the first one where all accumulation runs met the final goal.
6) The savings rate is assumed to be based on net income after taxes.
7) Returns include reinvested dividends.
8) Returns ignore taxes. Individual tax situations are far too complex for a tool like this to model.
Disclaimer
Note that the calculator does not look at full consecutive 60-year accumulation and retirement market sequences, and any single historic lifetime is impossible to accurately represent in the data set. That’s not the goal, however, as the chart displays the full range of accumulation paths using every possible start year to fund the all-time minimum withdrawal rate. The purpose of the calculator is to assume your own sequence of returns will be unknown and to paint the big picture rather than represent any single investing lifetime with precision.
That said, be careful not to fall in love with specific assets or portfolios that have done well since 1970 but may not perform as well over longer timeframes. A lot can change over an investing lifetime, and past performance is no guarantee of future returns. Diverse portfolios with several uncorrelated assets are generally recommended over concentrated portfolios even with great numbers, and a good investment plan requires more consideration than simply a desirable calculator result.
The numbers do not account for taxes. Taxes may vary significantly between individual investors, and careful tax planning is recommended when depending on money in tax-deferred accounts. Considering taxes, your personal withdrawal rate may be lower than the one shown, and your working years may be longer.
The Heat Map chart displays compound annual growth rates not over a single timeframe, but over all timeframes. It’s a great way to visually evaluate how a portfolio performs throughout a variety of economic conditions. Use this to compare how a hot or cold streak stacks up against history, or to see beyond recent returns and rosy averages that may hide a turbulent past.
The Heat Map shows the inflation-adjusted CAGR for every investing timeframe based on when you invested and how long you stayed in the market. Look for the start year in the left column and count the appropriate number of squares to the right for the years held. Hover over any cell, and you can see the value of the real CAGR for that start date and investing duration.
The Heat Map is probably best utilized to understand the good and bad times for a portfolio at a glance. Look for the red spots, and that’s a nice reference point for the rough patches often hidden by simple annual returns.
The Long Term Returns chart shows the changing uncertainty of compound annual growth rates over time. This demonstrates how long you may need to hold a portfolio to experience the long-term returns it advertises, and provides a visual guide to the range of investment paths you might personally travel along the way.
The Long Term Returns chart shows the full range of inflation-adjusted CAGRs based on how long you invested. But rather than showing each individual number, it reports the range of real-life returns. The blue line shows the maximum return, the red line shows the minimum return, and the gray line shows the median return.
In addition, the shaded areas help distinguish the most common results from what might be considered outliers. The red area represents the bottom 15% of outcomes while the blue area represents the top 15% of outcomes. The middle areas shows the 70% where the bulk of returns occurred. While math-savvy investors may recognize that as similar to one standard deviation, the calculations are not based on standard deviations at all and accurately filter the top and bottom 15% from each investing timeframe.
To help study a specific investing timeframe, try dragging the vertical line left and right.
Calculations
Baseline Return
The baseline return is the 15th percentile return that marks the border between the dark and light red areas on the chart. I personally use this number for my own financial planning as a conservative return excluding the worst outliers.
Median Return
This is the return for the “typical” historical investor. Half of investors received a higher return and half received a lower return.
Stretch Return
The stretch return is the 85th percentile return that marks the border between the dark and light blue areas on the chart. While the odds are against you personally earning that return, optimistic investors may find it helpful for setting a realistic upper bound on their projections.
The Portfolio Growth chart plots the full range of a meandering portfolio much like a weather map tracking potential storm paths. Think of it as beginning your portfolio in every historical year at once and watching how they all unfolded. Use this to track the growth not only of a static portfolio but also of an ongoing accumulation plan including regular contributions.
The Portfolio Growth chart is very similar to a traditional line-chart you may find elsewhere that charts the growth of a portfolio over time, but with one major difference. Instead of simply charting returns between a single start and end date, it calculates the performance of every historical start date simultaneously. Every start date is aligned at year zero on the chart, and the resulting spread of returns shows the full range of outcomes regardless of when you were lucky or unlucky enough to invest.
Note that the color of the lines is sorted by start year. Darker lines are from older start years while lighter lines are from more recent start years.
The Portfolio Growth chart also allows you to adjust the settings to model different personal investing scenarios. The starting value sets the leftmost portfolio origin at the desired point, while the annual contribution controls how much additional money from new savings that you invest every year along the way. Contributions are adjusted for inflation and represent the same amount of purchasing power each year.
Drag the gray line up and down to see how long it took to achieve a certain investing goal.
The Retirement Spending chart compares the effects of a variety of different withdrawal rules on both spending levels and account balances in retirement. Use this to identify a withdrawal method best suited for your portfolio, to understand the real-life failure points that have caused your plan to falter, and to explore financial strategies that will not only survive the worst case but also thrive in the good years.
There are two ways for a portfolio to fail you in retirement:
Your account can run out of money
The withdrawal strategy you are using may not support a withdrawal amount that meets your minimum expenses
To make sure a retirement strategy meets your personal needs, the Retirement Spending calculations track two different sets of data simultaneously — the ongoing account values for your investments and the annual withdrawals coming out of that account. To avoid any bias resulting from looking only at a single retirement timeframe that may look nothing like your own, it studies the real-world retirement results of every annual start date we have data for and displays the full range of outcomes on a single chart. So the best and worst outcomes on record are all represented. (Read this for more info on how the timeframe affects the numbers compared to other well-known studies.)
You can set your initial portfolio value and play with a variety of different withdrawal rules to study how various withdrawal strategies affect both the longevity of a portfolio in the worst retirement periods and also the upside of its withdrawal potential in the best retirement periods.
The initial withdrawal is equal to the current account value multiplied by the specified annual withdrawal rate, and all withdrawals are assumed to be set aside on January 1st into a separate account to fund expenses for the year. The withdrawals are modified by inflation each year before increasing or decreasing in proportion to the real gains and losses of the portfolio subject to a variety of withdrawal rules:
Change Limits
This specifies the maximum allowable increase or reduction (after accounting for inflation) from the last withdrawal. For example, if the increase change limit is set to 10% and the real portfolio value increased 5%, the withdrawal increase for the next year is 5%. But if the real portfolio value increased 15%, the withdrawal increase is capped at the 10% change limit. Increase and decrease change limits can be independently controlled.
Account Triggers
Triggers specify account thresholds that must be met before a withdrawal can be changed. They are marked on the Account Values chart as horizontal Allow Increase and Allow Decrease lines that you can click and drag to adjust.
If the trigger for an increase is set at 25%, then no increase will be allowed until the real account value reaches a level 25% over its initial starting point. And if the trigger for a reduction is set to 0%, then no reduction will be allowed until the real account value is below its initial starting point. Note that account triggers can be positive or negative regardless of whether they control an increase or a reduction, allowing you to create a middle band that either allows for no change or any change.
Withdrawal Limits
This specifies withdrawal thresholds that cannot be exceeded. The high and low limits are marked as “Ceiling” and “Floor” on the Withdrawal Amounts chart that you can click and drag to adjust.
The floor is particularly important in any analysis of retirement spending, as this sets a limit on how much the spending strategy is allowed to cut your withdrawals. Be sure to set this at level of your real-world barebones expenses. The upper spending limit is also valuable to put the resulting withdrawals in context of what you realistically think you’ll need to be happy, as tripling your expenses per the withdrawal strategy may sound fun but could be harder than you think.
Withdrawal Strategies
In addition to studying your own ideas, the Retirement Spending tool can also be used to model a variety of well-known spending strategies. Here are a few of my favorites along with their required settings.
Constant Dollar
This is the basic assumption used in the vast majority of retirement research including William Bengen’s original paper and the famous Trinity Study. Note that this is also the assumption used in the Withdrawal Rates and Financial Independence calculations. The most conservative of the options, it’s a great place to start for judging how well a retirement portfolio can maintain purchasing power over time.
To model the constant dollar method, simply use the chart defaults and set both change limits to 0%.
Constant Percentage
A popular alternative to the Constant Dollar method that allows for withdrawals to proportionally adjust to account values every year. Note that this disables every withdrawal rule and causes the account value to simply be multiplied by the withdrawal rate with no modifications. While it can technically never run out of money, keep an eye on withdrawals that may drop below your minimum required expenses.
To model the constant percentage method on the chart, set the change limits to infinity and drag the ceiling and floor to be outside the range of the withdrawal amounts.
Bengen Floor & Ceiling
Proposed by William Bengen as a balanced approach somewhere between the Constant Dollar and Constant Percentage methods, this allows for wide swings in withdrawals but places a floor and ceiling on withdrawal amounts.
To model the Bengen Floor & Ceiling method, change both change limits to infinity and adjust the floor and ceiling. He recommends setting the ceiling 20% above the initial withdrawal and the floor 15% below.
Clyatt 95% Rule
Described in Bob Clyatt’s book Work Less Live More, this allows the withdrawals to adjust up proportional to the account value but never reduces spending by more than 5% in any one year.
To model Clyatt’s 95% Rule, change the increase change limit to infinity but leave the decrease change limit at 5%. You may also need to tweak the ceiling to stop limiting increases.
Kitces Ratchet
A withdrawal method suggested by Michael Kitces to maintain the downside protection of the Constant Dollar method while intelligently increasing spending when possible. It ratchets up withdrawals by 10% when the account value exceeds 50% above its original level but allows for no withdrawal reductions.
To model the Kitces Ratchet, set the increase change limit to 10% and the decrease change limit to 0%. Then drag the Allow Increase line to 50% above the original account value.
Note that Kitces recommends adjusting a portfolio only every three years while the Retirement Spending calculator does this annually. Also note that this calculator considers the increase to be a cap rather than a fixed value.
Guyton-Klinger
Created by Jonathan Guyton and William Klinger, this uses withdrawal rate triggers to control increases and decreases in withdrawals while also limiting the rate of change. While they quantify the triggers in terms of +/- 20% of the original withdrawal rate, the same numbers can be directly translated to account values of +/- 25%.
To model the Cuyton-Klinger method, set both change limits to 10%. Then drag the allow increase line to 25% above the initial value and the allow decrease line to 25% below the initial value. This effectively creates a middle band where no change is allowed.
Note that while the the full Guyton-Klinger method uses four different “decision rules”, the calculations here focus on the capital preservation and prosperity rules. This tool always accounts for inflation and reinvests excess returns into a rebalanced portfolio.
Notes
All calculations are adjusted for inflation and are expressed in constant dollars. So the default assumption with no changes in withdrawals is that your spending will increase by inflation every year to maintain the same purchasing power. This also means that the account values displayed will be smaller than the nominal numbers you may experience in your personal investing account.
The calculations here do not account for taxes. When looking at the withdrawals, be sure to allocate a portion of that money to your personal tax bill.
The calculations assume that your annual withdrawal is taken out of your investment account at the beginning of the year. So the Withdrawal Amounts chart shows values at the beginning of the year indicated while the Account Values chart shows values at the end of the year indicated.
The withdrawal amounts shown are the spending levels supported by your investment account. Any other income such as social security, annuities, or part time work can be added to the withdrawal amount to determine your full budget.
The Rolling Returns chart displays every inflation-adjusted compound return of a specified investing timeframe. Use this to study how average returns vary depending on start year, to find a portfolio appropriate for the timeframe of your goals, and to explore trends that may influence your financial decisions.
The Rolling Returns chart calculates the inflation-adjusted CAGR for a specified investing timeframe looking at every start year on record. Drag the slider to adjust the timeframe length. Watching the returns smooth out the longer the timeframe is a nice visual reminder of the importance of patience when evaluating portfolio performance.
The Savings Rates chart displays the full range of savings percentages required to meet your financial goal no matter what happened in the markets. Use this to determine minimum savings requirements, identify the safe savings rate, and study the impact of your career and money choices on reaching your important milestones.
The purpose of the Savings Rates chart is to help you determine the amount of savings you should target in order to meet your financial goals. It does this by looking at every investing start date since 1970 and calculating the annual contribution required to meet the goal in each unique case. By displaying the full range of results on the same chart, it illustrates the varying savings experiences of different real-world investors and gives you a feel for realistic savings targets for your own financial situation.
Drag the vertical bar left and right to adjust the savings timeframe.
The Minimum Savings Rate (MSR) is the percentage of income saved that achieved the target financial goal in the single best historical timeframe to invest in that particular portfolio. So while it worked out for people lucky enough to start investing in that year, there’s a good chance it might not be enough to meet the goal on your own particular timeframe.
Safe Savings Rate
The Safe Savings Rate (SSR) is the percentage of income saved that achieved the target financial goal in the single worst historical timeframe to invest in that particular portfolio. While there’s no guarantee that the future won’t set a new low, this is a good measure of a savings rate that is highly likely to meet your goal.
Insufficient Income
If you see an “X” at the 100% line, that means that the required savings to meet the goal was higher than your annual income.
No Savings Needed
If you see a “+”, that means that the goal was reached using the natural growth of the portfolio with no additional savings at all.
Assumptions
All numbers are expressed in today’s currency values and are adjusted for inflation. So for example, a target of $1,000,000 in 30 years represents $1,000,000 in today’s dollars. The nominal future account value will be much higher than that after inflation.
2. The annual savings calculations work similarly to the default safe withdrawal rate methodology. So if the chart says that the safe savings rate was 25%, then that means that the contribution in year 1 is 25% of your stated income. Each year after that, the initial contribution is adjusted up by the annual inflation rate regardless of your changing income over time.
3. The calculations assume that the full annual contribution is made at the beginning of the year on January 1st. That’s a bit of an over-simplification for most people saving a percentage of each paycheck, but the numbers should be in the same ballpark.
4. All calculations are based on net income after taxes.
