One of the things I like about the safe withdrawal rate is that it’s a rare financial metric that accounts for the worst case. While everyone else was comparing withdrawals to average returns, William Bengen had the foresight to study every investing period he could find and determine the maximum amount of money that a retiree could have safely withdrawn over 30 years even in the worst possible timeframe to retire. By flipping the problem from an exercise in chasing ever-shifting averages to studying worst-case scenarios, Bengen’s safe withdrawal rate really did make life after accumulation a lot safer for retirees.
Look at the title image of a pair of grain silos and imagine your comfort level with them filled with just enough grain to barely make it through an average year. Now picture them with enough grain to survive the worst famine on record. That’s a huge difference, and Bengen’s new perspective completely changed the way people think about retirement.
As helpful as that is, however, not everybody is in the phase of career and life where retirement is an impending concern. But I still find the approach enlightening, so let’s expand our thinking. Have you ever wondered what a similar metric might look like for accumulators seeking to guarantee long-term success in uncertain markets? Put another way, what percentage of your crop must you save in those silos every year in order to fill them by a certain date? And if the stored grain grows and shrinks on its own like money invested in stocks and bonds, how would that affect the results?
If that type of question feels as interesting to you as it does to me, this article is for you.