Perhaps because of the proliferation of personal finance websites focusing on early retirement, I’ve noticed a lot of talk lately about safe withdrawal rates. I think this is absolutely terrific, as financial independence is one of the single most empowering life goals one can pursue! But greater exposure also has its downsides, as core assumptions such as the portfolio options, withdrawal method, and retirement length don’t always scale the way you might think and misconceptions can quickly propagate.
Withdrawal rates are an intellectual passion of mine, and I’m always looking for opportunities to contribute to the conversation. And with the recent boon in global portfolio data, I’m finally able to address one of the biggest questions that I’m starting to see more frequently these days.
Does the 4% rule apply outside of the United States?
I’m always on the lookout for ways to improve the tools on Portfolio Charts, and Siamond really came through with his latest update to the Simba spreadsheet. Buried in the heaps of interesting returns data is something really cool — direct calculations for safe and perpetual spending rates for a given investing period. Based on an equation from a Morningstar white paper, they are particularly elegant compared to my old method and allow me to significantly improve the speed and stability of the Withdrawal Rates calculator. And by doing so they open up a great deal of additional data that was previously too laborious to manage.
Well I’m a sucker for new data, and in the process of updating the calculator mechanics behind the scenes I took the opportunity to revisit an old question I’ve been wrestling with for a while.
How do you calculate a 40-year withdrawal rate when the worst start date for a particular portfolio was less than 40 years ago?
A fellow Boglehead asked a really good question recently, and I think it’s something we’ve all considered at some point:
Why shouldn’t my asset allocation be 100% stocks during the accumulation phase?
After all, the typical justification for a heavy stock portfolio sounds pretty darn compelling. They historically have a higher return than bonds in the long run, which means bonds are defensive assets that reduce volatility but do not necessarily increase returns. On top of that, interest rates are so low today that bonds look particularly unappealing. So if you can handle the bad years and pile as much money into stocks as possible you’ll be much better off and can feel free to be defensive with a larger pile of money once you retire.
Well you know what? If you’re the type of investor with a rock-solid stable job, few financial commitments, and the personality to ride out both short-term and prolonged market pain without sweating your account balances, then putting all of your money in stocks is just fine. The Total Stock Market portfolio is included on the site because I appreciate that it’s a good choice for many people.
But I’m going to go out on a limb and surmise that you’re reading a blog about portfolio theory because you believe that just maybe there’s another side to the story. You’ve come to the right place, as I’m a strong believer in the power of asset allocation in creating positive and pleasant investing outcomes. So for those interested in a different perspective, I’d like to try my hand at making the case for broad asset allocation in all phases of life.
Why consider diversifying away from stocks not just tomorrow but today?
Regular readers will know that I often mention a desire to accumulate good data to add to the collection here. Reliable old stock market history is notoriously difficult to come by, and the sources that do exist are either very limited in the indexes they track, heavily copyrighted, or insanely expensive and targeted to financial institutions. So everyday investors like you and me have very few resources available and we do the best with what we can find.
After looking far and wide, I eventually came to the realization that finding good long-term returns data for individual indices that predates modern index fund equivalents with no strings attached just isn’t going to happen. But being a naturally resourceful person, I wondered if that wasn’t a roadblock but an opportunity. What can I personally do to fill the glaring hole in historical market data?
After publishing a few tools and articles based on safe withdrawal rates, one of the most common questions I’ve seen so far is some iteration of this:
Obviously higher returns support higher withdrawal rates. That’s why I invest in 100% stocks! How can a lower-return portfolio possibly support higher withdrawal rates than a higher-return portfolio?
I admit the answer is fairly unintuitive, and explaining this without getting too deep into the weeds is a bit of a challenge. I’ve touched on it here and there around the site, but this is an important concept that deserves a thorough explanation.