Why does your data only start in 1970? Isn’t that cherry picking?
Like other retirement studies, the timeframe covered is simply a matter of data availability.
The Trinity and Bengen studies used data going back to 1926 not because that was a magical date for safe withdrawal rates but because that’s what was readily available from Ibbotson Associates for the indices they studied. Wade Pfau and Michael Kitces used data since the early 1870’s because that’s what was freely available from Robert Shiller. And Pfau later did the same analysis for developed international markets since 1900 because that’s what was available from the DMS dataset. All three sources have limited information on diverse asset classes beyond large cap stocks, bonds, and T-bills.
Good data for different markets is very difficult to find. Most of the data here is from the Simba spreadsheet, which is the best data I’ve found to date for such a wide variety of assets. If you know where to find reliable older data, please contact me.
Also, note that when this calculator was first released it only had data to 1972. I have been able to extend it to 1970 based on new information, and will continue to add more years as they become available.
Of course portfolios sometimes have higher SWRs when they have high returns and outperform the overall stock market, but in the long run they will fall back in line. Isn’t that just a type of performance chasing?
Higher returns do help, but it’s more complicated than that. Safe Withdrawal Rates are highly influenced not only by average returns but also by annual volatility. All things being equal, higher volatility lowers the SWR. So two portfolios with equal average returns may have drastically different withdrawal rates based on the underlying volatility. And sometimes portfolios with lower average returns but lower volatility can still have higher SWRs. That’s how you get interesting results like this:
This plots the returns and calculated SWRs of a variety of different popular lazy portfolios. Note that the Total Stock Market (100-0) has one of the highest returns but the lowest SWR! Also note that four of the top five SWR portfolios have no more than 40% stocks. Diversification plays a larger role than many realize.
Basically, volatility and downside risk are just as important as long-term returns percentages in SWR calculations. One should look beyond returns numbers that mask the underlying volatility and consider the positive effects of diversification when studying withdrawal rates. /// More Info ///
The calculator says my SWR is way higher than 4%. Can I quit my job today?
Please don’t! All safe withdrawal rate calculators can only look backward, not forward. You should never put your faith solely in a SWR number from any source, here or elsewhere. The economic conditions of your personal retirement will be different than those used by any retirement study, and SWRs looking back any duration are no guarantee of future success. A good retirement plan has many features and contingencies in place other than a simple safe withdrawal rate.
Why should I trust the numbers here over the 4% rule for the Trinity and Bengen studies that used more years of data?
The most important takeaway is that different portfolios never considered by the various retirement studies may have different SWRs. So while the tools here can only look back as far as the data availability allows, the results may be more accurate for your own personal asset allocation.
Consider the withdrawal rates as a maximum starting point, and assume that there are times in the past and the future where they are lower than what you see here. Be smart about it, and plan conservatively. I do not promote planning your retirement solely based on faith in a safe withdrawal rate from any source — including this site.
Preferring other studies for their longer data histories (provided you also follow their investment assumptions) is perfectly reasonable. The one thing I would caution against is blindly following a SWR calculated for a very specific set of funds that you do not personally own. Not all stocks and bonds are created equal, and individual assets differ far more than you may realize.
There are only a small handful of continuous 40-year runs in a data set only starting in 1970. It’s certainly not statistically significant. Isn’t that misleading?
The chart does not simply display the results for the small handful of 40-year retirement periods. It calculates the lowest safe withdrawal rate over ever-growing timeframes, and is able to project 40-year withdrawal rates for investing periods originating less than 40-years ago. These projections are not based on estimated future market returns, but on the nature of how withdrawal rates decay over time. The end result is a best estimate that provides conservative figures based on known poor retirement start dates. /// More Info ///
Just how much of a difference does the 1970 start date make for a SWR calculated over longer timeframes?
It depends on the asset allocation, and most retirement studies are very limited in that regard. But we can certainly compare several portfolios apples-to-apples to get a feel for how the timeframe affects the numbers.
First, let’s compare the 30-year SWRs from the Withdrawal Rates calculator to those from three different retirement studies using more years of data.
William Bengen used data since 1926 for a 50/50 portfolio of large cap stocks and intermediate treasuries. He found that an initial WR of 4% lasted 33 years while 4.25% lasted about 28 years, and concluded that 4% was a good rule of thumb for 30 years. The tools here directly calculate that the 30-year SWR since 1970 was about 4.2% for the same portfolio. Let’s go with his rounding and say that the Portfolio Charts numbers are 0.2% higher.
Wade Pfau used the same Bengen methodology with large cap stocks and Tbills starting in every year since 1870. He found that the 30-year SWR was about 4%, while the tools here calculate that the 30-year SWR since 1970 was 4.3% for the same portfolio. So the Portfolio Charts numbers are 0.3% higher.
Michael Kitces used a 60/40 portfolio of large cap stocks and intermediate treasuries with data since 1871. Kitces concludes that the 30-year SWR for this portfolio was 4.5%. Interestingly, the SWR calculated here for the same portfolio since 1970 is 4.2%. So the Portfolio Charts number is actually 0.3% lower than his very long term number. The difference is likely a result of our different sources for the same asset data, a point that Kitces himself notes can affect SWRs by about half a percent. This is also why his numbers differ from Bengen’s by about half a percent for very similar portfolios.
Looking at the three studies, the Portfolio Charts numbers since 1970 vary from known SWRs calculated using much longer timeframes by about 0.3% for the same portfolios.
Next, let’s set the Portfolio Charts data aside and look directly at the data from the Pfau and Kitces studies.
The horizontal colored lines are my own addition to mark the SWRs calculated over different timeframes. The orange line marks the low-point since 1870, which is right at 4%. The blue line marks the low point since 1970 with a SWR of about 4.3%. So Pfau’s data also shows a 0.3% difference for a SWR calculated since 1870 and one calculated since 1970.
No colored lines this time, but you get the idea. Look at the lowest point, and compare it to the one starting in 1973. The difference is in the same 0.3% ballpark.
In summary, the numbers calculated here since 1970 vary by only about 0.3% from a variety of different reputable retirement studies with much longer data sets. Also, both the Pfau and Kitces charts independently demonstrate that the absolute lowest SWRs since the 1870’s were only about 0.3% lower than those since 1970 for the portfolios they studied. Finally, 0.3% is within the known margin of error caused by variation in data sources for the same index.
I believe that’s a reasonable amount of error for general research purposes, but I always recommend that people plan conservatively. For investors understandably concerned about the timeframe differential, note that simply using the more conservative 40-year results available on this site makes up the difference for the error between various studies. An investor using the Perpetual WR would be in even better shape.
Safe withdrawal rates are based on a very specific worst case retirement timeframe starting in 1966. How can you calculate withdrawal rates if you cannot cover that start year?
One should not assume the worst year will be the same for all portfolios. SWRs are calculated by studying every possible start year and identifying the single worst one for each individual portfolio. 1966 was the worst year for the old SWR studies that only looked at the S&P500 and a broad bond fund, but other more diverse asset allocations may have had very different worst years.
One can use similar methodologies to find the worst year for other portfolios. For example, compare the various 30-Year SWRs for the Classic 60-40 and Permanent Portfolio:
The worst retirement year for the Classic 60-40 (in the data we have available) was in 1973, at the start of a decade of extremely high inflation (that negated stock gains) and rapidly rising interest rates (that killed bonds). As you can see from the previous chart, this was only slightly better than retiring in 1966. The worst retirement year for the Permanent Portfolio was 1980, the peak of the gold spike that preceded an 80% drop in the gold price. Not all assets are created equal, and different portfolios may perform better or worse in different economic conditions.
What’s a perpetual withdrawal rate? And what happened to the Sustainable withdrawal rate you used to show?
Safe withdrawal rates all assume that only having $1 in your account at the end of the worst retirement timeframe still constitutes a success. Perpetual withdrawal rates are more conservative, and reflect the withdrawal that would have maintained the original inflation-adjusted principal even in the worst retirement timeframe. I generally recommend them for early retirees who plan to have a long, happy life. /// More Info ///
When the withdrawal rates tool was first released, I referred to these safer rates as the “Sustainable” rate. In order to avoid confusion with the terminology used on other websites, I later changed the term to “Perpetual”. The underlying math is exactly the same.