Sail to a Good Life With the Richer Retirement Portfolio

Portfolio Talk, Retirement

As someone who has spent way more time than any normal person should researching the science and history of retirement math, I have always held a special place in my heart for the grandfather of safe withdrawal rates, the great Bill Bengen.

Back in the early 90’s when the state-of-the-art financial advice was to simply spend the average return of one’s portfolio in retirement, Bill had the foresight and technical know-how to test that assumption with actual data. As it turns out, the simple and seemingly reasonable advice which everyone took for granted was provably dangerous. But luckily, there was also a measurable spending amount which survived even the worst times in history.

And with that insight, the famous 4% retirement rule was born. If you have ever had an interest in retirement investing, I’m sure you’ve heard of it. Bill Bengen was that impactful.

What Global Withdrawal Rates Teach Us About Ideal Retirement Portfolios

Insights, Chart Talk, Featured, Retirement

Between my own independent research and the discussions of other investors I enjoy reading, it seems the topic of safe withdrawal rates has been bubbling to the top lately. One particular question recently captured my attention.

What portfolio has the best safe withdrawal rate in the worst case scenario around the world?

You see, the vast majority of withdrawal rate research focuses on the United States. However, most people consider the US to be an extremely positive outlier, which raises legitimate questions about the appropriateness of determining one’s retirement plan by myopically focusing on only the best case country. Start exploring this question in earnest, and it draws into question not only our biases about what “normal” returns look like but also our assumptions about proper portfolio construction.

While it may sound like a simple question, answering it with real numbers is no small task. The reason that most retirement studies focus on a small handful of countries and portfolio options is that understanding the big retirement picture takes a lot of data. And not just raw source data, but also a mountain of creative calculations to do the topic justice.

Well, it so happens that creative calculations are a strength of mine and I have a few tricks up my sleeve. So let’s roll up those sleeves and talk about truly global withdrawal rates that look well beyond US borders.

How to Harness the Flowing Nature of Withdrawal Rate Math

Advanced, Retirement, Updates

Withdrawal rates have always been a passion of mine. Beyond a natural desire to judiciously plan and manage my own early retirement, I’ve also been fascinated with withdrawal rate mechanics from a purely intellectual perspective. Not only is it an interesting topic, but I also like how there’s still lots of room for new development.

So rather than simply defaulting to the same methodologies of the classic Bengen or Trinity papers, I’ve always strived to build upon their solid intellectual foundations while bringing my own unique perspective to the table. By tweaking the default assumptions like the retirement length, home country, or available fund options, I believe people can gain a greater appreciation for investing options far more interesting than the old 4% rule of thumb implies.

That desire for deeper understanding is only matched by my persistence in seeking ways to improve my calculations, and one project I’ve been working on for a while now is the way I calculate safe and perpetual withdrawal rates. I just released an important new update to the Withdrawal Rates tool, and to best explain it I think it might help to step back and start from the beginning.

So if you’ve ever used Portfolio Charts to research your own retirement portfolio or just want to stay up to date with the latest in withdrawal rate calculation techniques, read on.

Why Dave Ramsey Is Dangerously Wrong About Withdrawal Rates

Retirement, Beginner

With a nationally syndicated radio show, best-selling books, and a popular financial advice service, Dave Ramsey is one of the most famous names in the personal finance space. He’s so trusted that he’s also a mainstay in many churches as a guest lecturer preaching his own inspiring message of financial freedom. I’ve long admired his ability to help people work their way out of debt, and he’s doubtlessly touched more lives and improved them for the better than I can ever dream of reaching.

So as a fan of Ramsey’s message of self empowerment and snowball approach to debt elimination, I found it particularly painful to watch a recent episode where he goes on an extended rant about safe withdrawal rates. Long story short, he’s not only dangerously wrong but also angrily dismissive of an entire field of research on the topic. The reaction among financial types on social media has been equally swift and negative, with both professional investors and educated amateurs alike taking their own shots back.

Personally, I find the bickering on both sides to be mostly unhelpful because it distracts from the core issue — the truth. So for the benefit of Dave’s audience who just wants to properly understand the topic, I wanted to do something a little more constructive.

If you’re a Dave Ramsey fan who would like to understand why his advice is not the right way to approach retirement and how you can create a much safer plan, this article is for you.

How to Replace Income in Retirement

Retirement, Beginner, Featured, Theory

I had the distinct pleasure of spending time with my wife’s family this week. Between catching up on life events and helping with a few household chores, my father-in-law (let’s call him John) took the opportunity to ask his financially-minded visitor a question directly pertinent to his own immediate goals.

“How can I use my investments to cover the bills in retirement?”

I knew that John is a CPA and a knowledgeable investor who has actively traded his family accounts for years. So as a well-educated student of retirement finance, I naturally jumped in to an explanation of safe withdrawal rates, retirement spending methods, and how portfolio theory can be used to tweak the numbers to safely spend a certain percentage of his portfolio every year without fear of running out of money over his expected lifetime. John listened intently and replied with a deceptively simple follow-up question:

How do you guarantee that level of investment income every year?

That’s a terrific question, and the simple answer is you don’t have to. But that’s the exact moment I recognized my own investing bubble. The internet these days contains more information than ever about every nuance of retirement finance, but the gap between the theory debated by eggheads and John’s completely rational income-driven paradigm is just as perfectly normal as it is surprisingly wide to bridge.

I was talking about systems theory, and he just wanted to directly replace income. Which makes perfect sense! And I imagine many of you may have the same question.

So rather than jumping into a painfully long series on every possible way to tweak the numbers, let’s start with the basics. If you’ve ever wanted to know how to safely move beyond depending on regular work income to pay the bills, this article is for you.

What Vanguard Gets Right (and Wrong) About the 4% Rule

Retirement

Vanguard has always been one of the most respected voices in the investing industry, and its values have defined a whole generation of DIY investors. Jack Bogle started the first index fund in 1976 and took a lot of heat for that decision among his contemporaries who felt that “Bogle’s Folly” was destined to fail. But he was a true visionary, and his dedication to low costs and customer-centric business practices helped build the company into the financial titan it is today. So when Vanguard speaks, people listen.

Smart Retirement Planning Is About More Than Just Avoiding Failure

Retirement

I’ve always been a big fan of road trips. Some of my fondest memories involve cruising through unknown roads soaking in beautiful scenes with the music turned up on the radio. Of course the best road adventures also involve a bit of concentration, as the most magnificent mountain vistas often come hand-in-hand with challenging hairpin turns. So even though road trips are a blast, you still have to be careful to avoid dangerous situations like taking a cliff-side turn with too much speed.

As a responsible driver acting in an abundance of caution, imagine for a moment planning your route ahead of time and deciding to set your cruise control for the entire trip to the minimum speed required to safely navigate the most dangerous turn. So even with miles of straight highways with no other cars in sight, you choose to never exceed 10mph. Sure, it will take you ages to get to your destination. And it might seem like not only an extremely inefficient way to travel but also a complete waste of the engine under the hood, but at least you won’t have to worry. Is it worth it?

I assume most people will find that idea completely silly and unrealistic, as dynamically adjusting your speed to the conditions of the road is a natural part of any intelligent driving experience. So why do so many people take this over-cautious approach with their retirement planning?

Your Home Country Is Inseparable From Your Withdrawal Rate

Advanced, Featured, Retirement, Theory

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?

How To Predict Withdrawal Rates Without A Crystal Ball

Theory, Advanced, Chart Talk, Retirement

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?

Perpetual Withdrawal Rates Are The Runway To A Long Retirement

Retirement

There’s a decent chance that anyone who has considered retirement with some amount of self funding has heard of the concept of the safe withdrawal rate — the amount of money that one can safely spend every year without prematurely running out of money.  First proposed by William Bengen in 1994, the math is pretty well established by now and many well-respected authors have written extensively on the subject dissecting it from different angles.

There’s also a pretty good chance that that the average person following a safe withdrawal rate does not actually understand how it works, and that lack of context can cause quite a bit of confusion.  You see, the various studies and calculators that determine SWRs do so based on a myriad of very narrow assumptions, and breaking from those assumptions also breaks the conclusions.  I’ve written quite a bit about the asset allocation assumption and the withdrawal method assumption, and I recently realized that I’m due for a discussion on another key assumption — how long do you plan to be retired?