The Withdrawal Rates calculator uses the same fundamental methodology as the original retirement paper “Determining Withdrawal Rates using Historical Data” by William Bengen but with an expanded data set. Bengen studied the historical data for the S&P 500 and 5-year US treasuries and simulated retirements using varying percentages of each asset and of the initial withdrawal rates. He determined the maximum withdrawal rate for basic stock & bond portfolios that would have still not completely run out of money even over the worst rolling 30-year retirement period. He called this the SAFEMAX withdrawal rate, and his study is the original basis for the famous 4% rule for retirement.
The Trinity study later built upon his research by expanding the bond analysis to long-term high grade corporate bonds and reached similar but slightly different results. They also used a different methodology and defined the Safe Withdrawal Rate as one that did not run out of money a certain percentage of the time. Any time you hear the term “success rate” discussing retirement, it’s likely a reference to the Trinity study or to a calculator based on it.
Wade Pfau later used the same methodology to study international markets and found that the results were very different. This should not be at all surprising as any educated investor knows that not all stocks and bonds are created equal. What many people don’t realize, however, is that even using a different US stock index can greatly affect the results. Also, there are many investments available today (gold, REITs, TIPS) that the studies did not consider at all in their calculations. The Bengen and Trinity studies are tremendous resources for retirees, but there’s more to the story than the S&P500.
In the spirit of expanding upon their great work, I made this calculator to determine the safe withdrawal rate for any asset allocation using a wide variety of assets available to modern investors. I decided to use Bengen’s more conservative SAFEMAX method rather than the Trinity study’s preference for success probabilities, as I think statistics unnecessarily muddy the conversation.
In addition, I added a twist of my own. Not satisfied with the real prospect of having only $1 in my account in 30-years (if I live longer than that it sure wouldn’t feel like “success” to me) I also calculated the maximum withdrawal rate that would have sustained the original inflation-adjusted principal even for the unlucky retiree starting at the worst possible time. I call this the Perpetual Withdrawal Rate, and personally prefer it for early retirement or for seeking to leave an inheritance for heirs.
1) The withdrawal rate is the percentage of the original portfolio value used for one year of retirement expenses. Each year, expenses are adjusted for inflation (not for portfolio size) to maintain constant purchasing power.
2) The calculations assume that annual expenses are set aside at the beginning of the year in a separate interest-free account.
3) Returns include reinvested dividends, and portfolios are rebalanced annually.
4) The calculator looks at retirement scenarios starting in every rolling retirement period since 1970. The SWR finds the withdrawal rate that would have ended with exactly zero dollars at the end of the worst retirement period of a given duration. The PWR finds the withdrawal rate that would have ended with the original inflation-adjusted principal at the end of the worst retirement period of a given duration.
5) Returns ignore taxes. Individual tax situations are far too complex for a tool like this to model.
6) Rather than simply displaying the results for the bucket of returns of a given retirement duration, the chart shows the lowest safe withdrawal rate over ever-growing timeframes. Each subsequent retirement period (from smallest to largest) checks to see if the calculated SWR is higher or lower than the previous shorter retirement period. If it is higher, the result is discarded in favor of the smaller number. If it is lower, the new lower number is displayed. /// More Info ///
The tradeoff for having many more asset classes to model than the original studies is that there are fewer years of available historical data. The Bengen and Trinity studies looked at data back to 1926 while the data here only goes back to 1970. There may be times before 1970 when a portfolio would have failed when a more recent one did not, and the resulting withdrawal rate would be lower. For more information, the FAQ covers several topics related to the start date and its affect on the calculations.
The withdrawal rates shown do not account for taxes, and one should note that asset classes like gold and REITs also have different tax treatment than stocks and bonds. Considering taxes, your personal withdrawal rate may be lower than the one shown.
And as always, keep this in mind:
Past results are no indication of future performance
Use this tool as a comparative guide to the effects of asset allocation on withdrawal rates, not as a guarantee of success. Just because something did great in the past does not mean it will continue to do so on your own personal timeframe. I personally believe withdrawal rate research is a wonderful way to help set financial goals and guidelines, but one should never put their life savings in the hands of a single back-tested number. Flexibility, intelligence, and determination will beat mechanical withdrawal rates every time!