Safe Withdrawal Rates ... again
motivated by a discussion on the Retire Early forum

Here's an interesting observation concerning Safe Withdrawal Rates ...
>Not SWR again!
Pay attention.
The notion goes like this:

  • You look at the worst-case 30-year scenario in the past
  • You conclude that a 4.0% withdrawal rate is Safe
    meaning that your portfolio would survive 30 years if you started withdrawals at 4.0% and increased your withdrawals if inflation was positive
  • So you begin a 4.0% withdrawal today (feeling confident that it'll last for the next 30 years)
    assuming that the next 30 years won't be any worse than any past 30 years
  • You find that, after three years, your portfolio has dropped to 50% of what it was when you started
  • Your withdrawal rate is now about 8% (since it's based upon your initial portfolio not your current portfolio ... which is half as much)
  • Nevertheless, you still feel confident that you can continue with this 8% withdrawal rate (increasing with inflation) for the remaining 27 years
  • Then a friend (enemy?) tells you that your 8% rate over (the remaining) 27 years is NOT safe
    In fact, looking at worst-case 27-year scenarios, historically speaking, your friend says that a 4.2% would survive but 8% rate would not!
  • You are completely confused.
    First the 4% scenario was safe (based upon the worst-case 30 years).
    Now, continuing with that same 4% scenario (for the remaining 27 years) it's no longer safe
>So, do you cut back on your withdrawal rate ... from 8% to 4.2%?
Since that original 4.0% SWR was based upon historical precedent, let's look at a sample historical 30-year period.

>A bad 30-year period, right?
We'll consider starting in Jan, 1930 and continuing for 30 years to the end of 1959.
As indicated in Figure 1, a 4.08% withdrawal rate (increasing when inflation was positive) was "Safe" ... for 30 years.

But, after three terrible years (1930, 1931 and 1932) a $1M portfolio would have been reduced to under $300K ... the red dot.

During 1933, your withdrawal rate (as a percentage of your 1933 starting portfolio) would have been greater than 14% !!

Figure 1

>So what's your advice?
You'll notice that this lousy 30-year period (1930-1959) starts with three years of terrible returns but then has several great returns (and your portfolio doubles over the next four years which explains why the 8% is okay ... for this particular time period).

>Yeah, so what's your advice?
Advice? I don't give advice. However, I will say that one should be very careful when you're retired ... and withdrawing ... and ignoring market machinations but relying on some predetermined SWR.

>The next 27 years might be like the last 27 of 1930-1959 or maybe like the first 27, right?
Yes, and looking at the worst-case 27 you'd be looking at that first 27 years ...

>With those three lousy years?

>But could that happen? I mean, that'd be six lousy years!
Anything is possible ... wouldn't you say?

>And what about the next six years?
Wait'll I check ...