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?

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?

 

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?