The Start Date Sensitivity chart studies the past and future returns of a portfolio at various points in time to illustrate how actual returns varied from expectations. Use this to study the dependability of a portfolio over time, to find a stable asset allocation that reliably met its goals, and to serve as a reality check before trusting a tempting but potentially deceptive historic average with your life savings.
This compares how the last 10-year return compared to the next 10-year return at any point in time.
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Overview
For each year on the start date sensitivity chart, the calculator looks both backwards ten years and forward ten years and reports the inflation-adjusted CAGR for both numbers. The red line tracks the backward-looking return and the blue line tracks the forward-looking return. The vertical bars track the difference in those two numbers — blue bars mean that the next ten years were better than the previous ten years, and red bars mean the opposite.
Drag the vertical gray line to sample the data for different reference years.
Studying the variety of differences in those two numbers gives you a very good idea for the stability of returns over time. The closer the two lines, the less sensitive the portfolio is to backtesting start date bias.
The Luckiest datapoint is the best return difference between the forward-looking return and the backward-looking return.
Unluckiest
The Unluckiest datapoint is the worst return difference between the forward-looking return and the backward-looking return return. Imagine purchasing a fund based on a high previous 10-year return but personally receiving this amount less than that number per year for the next ten years after you bought it. Talk about disappointing!
Start Date Sensitivity
This is the difference between the luckiest and unluckiest datapoints. Think of it as the spread in happiness relative to expectations between all of the different investors that bought the portfolio over time. I see it as a simple quantitative way to help you compare the relative dependability of two portfolios. Smaller numbers have historically been better at meeting investor expectations than larger numbers, with less timing luck required to get the advertised return.
The Target Accuracy chart measures the spread of real-world growth of a portfolio over every possible start year compared to the simple long-term average. Use this to estimate the reasonable range of returns for a given asset allocation, to understand the accuracy of a portfolio for reaching an important goal, or to study the complex balance of investing returns and uncertainty.
This shows how investor account values strayed from the smooth growth path implied by the long-term average.
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Overview
The Target Accuracy chart studies the spread of real-world compound returns of a portfolio and maps them against the growth you might expect to see if you only looked at the long-term average. The dashed line represents how a portfolio that simply earned the average inflation-adjusted return since 1970 would have grown over time. Think of it like a laser pointer that an investor is using to hit a desired target. The red and blue areas illustrate the range of portfolio growth for every investing timeframe we have data for. Some portfolios have the precise aim of a sniper rifle while others have the wide spread of a shotgun, and by studying the range of results you can get a good feel for how suitable a portfolio might be for meeting your important life goals.
When playing with the chart, you have the ability to change the starting portfolio value and it will adjust the results accordingly. You can also drag the vertical gray line left and right to sample the data at different timeframes.
Note that the Y-axis is logarithmic. This represents percent changes as equal distances and helps visualize constant growth as a straight line rather than an exponential curve.
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.
Average Return
This is the return for the average historical investor. It uses the average return since 1970 and grows it over the specified timeframe at the same average amount per year.
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 Withdrawal Rates chart shows the safe, perpetual, and long-term withdrawal rates for any asset allocation over a variety of retirement durations based on real-life sequence of returns. Use it to find a dependable portfolio to fund a happy retirement.
This charts the withdrawal rates of every retiree simultaneously assuming constant real spending levels.
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Overview
The Withdrawal Rates calculator uses the same fundamental methodology as the original retirement paper “Determining Withdrawal Rates using Historical Data” by William Bengen but with an expanded data set. Bengen studied the historical data for the S&P 500 and 5-year US treasuries and simulated retirements using varying percentages of each asset and of the initial withdrawal rates. He determined the maximum withdrawal rate for basic stock & bond portfolios that would have still not completely run out of money even over the worst rolling 30-year retirement period. He called this the SAFEMAX withdrawal rate, and his study is the original basis for the famous 4% rule for retirement.
The Trinity study later built upon his research by expanding the bond analysis to long-term high grade corporate bonds and reached similar but slightly different results. They also used a different methodology and defined the Safe Withdrawal Rate as one that did not run out of money a certain percentage of the time. Any time you hear the term “success rate” discussing retirement, it’s likely a reference to the Trinity study or to a calculator based on it.
Wade Pfau later used the same methodology to study international markets and found that the results were very different. This should not be at all surprising as any educated investor knows that not all stocks and bonds are created equal. What many people don’t realize, however, is that even using a different US stock index can greatly affect the results. Also, there are many investments available today (gold, REITs, etc.) that the studies did not consider at all in their calculations. The Bengen and Trinity studies are tremendous resources for retirees, but there’s more to the story than the S&P500.
In the spirit of expanding upon their great work, I made this calculator to determine the safe withdrawal rate for any asset allocation using a wide variety of assets available to modern investors. And I also expanded the calculations to look at a few more metrics of value for people seeking early retirement or wishing to leave an inheritance for heirs.
Drag the vertical gray line left and right to sample the data at different retirement lengths.
Calculations
The Withdrawal Rates chart packs a lot of data and includes four types of withdrawal rates:
Individual WR
Each blue line represents the individual portfolio-depleting withdrawal rates for a single retirement start date beginning in every consecutive year since 1970. The vertical axis indicates the withdrawal rate that depleted the portfolio to zero over the retirement length on the horizontal axis. Solid lines are known withdrawal rates from real-world data, and dotted lines project future withdrawal rates from known endpoints based on the how they mathematically decay over time. For more on how that works, read this.
Safe WR
The orange line scans every blue line and tracks the worst-case withdrawal rates, also called the “Safe Withdrawal Rate”, of the entire dataset. This uses Bengen’s more conservative SAFEMAX method rather than the Trinity study’s preference for success probabilities, as I think statistics unnecessarily muddy the conversation.
Perpetual WR
Not satisfied with the real prospect of having only $1 in my account in 30-years (if I live longer than that it sure wouldn’t feel like “success” to me) I also calculated the maximum withdrawal rate that would have sustained the original inflation-adjusted principal even for the unlucky retiree starting at the worst possible time. The green line tracks this perpetual withdrawal rate that preserved the initial inflation-adjusted principal. While the chart does not display every individual perpetual line, note that this is similar to the Safe WR in that it reports the worst case for each retirement timeframe.
Long-Term WR
An interesting feature of both safe and perpetual withdrawal rates is that they both trend towards the same value over time. Think of it as a plane landing on a solid runway. This is what I call the long-term withdrawal rate. Technically speaking, it’s the halfway point between the 60-year SWR and PWR using our best projections to date. But in practical terms, it’s my favorite metric for investors wishing to safely retire early or build the equivalent of a family endowment meant to last forever.
1) The withdrawal rate is the percentage of the original portfolio value used for one year of retirement expenses. Each year, expenses are adjusted for inflation (not for portfolio size) to maintain constant purchasing power.
2) The calculations assume that annual expenses are set aside at the beginning of the year in a separate interest-free account.
3) Returns include reinvested dividends, and portfolios are rebalanced annually.
4) Returns also include a realistic portfolio expense ratio calculated from the weighted average of the cheapest ETF on record for each asset in the portfolio. All historical data assumes the same modern expense ratio that you have access to today.
5) The calculator looks at retirement scenarios starting in every rolling retirement period since 1970. The SWR finds the withdrawal rate that would have ended with exactly zero dollars at the end of the worst retirement period of a given duration. The PWR finds the withdrawal rate that would have ended with the original inflation-adjusted principal at the end of the worst retirement period of a given duration. And the LTWR finds the limit that both the SWR and PWR approach over time.
6) Returns ignore taxes. Individual tax situations are far too complex for a tool like this to model.
7) SWRs are projected to the 60-year mark utilizing the longest real CAGR that we have data for the portfolio as a whole. In order to prevent whiplash with limited data, 15 years of real-world returns are required before any projections are attempted. The projections are not set in stone, and may change when new data becomes available. /// More Info ///
Disclaimer
The tradeoff for having many more asset classes to model than the original studies is that there are fewer years of available historical data. The Bengen and Trinity studies looked at data back to 1926 while the data here only goes back to 1970. There may be times before 1970 when a portfolio would have failed when a more recent one did not, and the resulting withdrawal rate would be lower. For more information, the FAQ covers several topics related to the start date and its affect on the calculations.
The withdrawal rates shown do not account for taxes, and one should note that asset classes like gold and REITs also have different tax treatment than stocks and bonds. Considering taxes, your personal withdrawal rate may be lower than the one shown.
And as always, keep this in mind:
Past results are no indication of future performance
Use this tool as a comparative guide to the effects of asset allocation on withdrawal rates, not as a guarantee of success. Just because something did great in the past does not mean it will continue to do so on your own personal timeframe. I personally believe withdrawal rate research is a wonderful way to help set financial goals and guidelines, but one should never put their life savings in the hands of a single back-tested number. Flexibility, intelligence, and determination will beat mechanical withdrawal rates every time!
