WTF – I got into my first blogging fight the other day. On twitter. Over optimal retirement withdrawal rates. Zzz 😴.
Background story: I saw a tweet from someone saying something in the likes of; “why you might need to save more then 25 years of net worth even if applying 4% withdrawal”.
Off course I quickly answered that you couldn’t really just convert the 4% withdrawal rate to cover 25 years of cost, as that was not really the result of the original investigation, and that it was more that if you only spent 4% then your capital would be preserved.
A couple of reply’s flew back and forth afterwards, which simply ended in me reading the original article from 1994 by William P. Bergen.
Afterwards I thought to myself, – “well if there ever were a topic for a FIRE blog post, then it has to be this one”. So I will just try to sum up the main conclusions from the article here for all the FIRE crowd out there. Luckily the article is only 10 pages long and has a lot of graphs that are irrelevant if we limit ourselves to discuss the 4% withdrawal scenario. All the other graphs are just really a sensitivity analysis on what happens if you withdraw 3, 5 or 6% instead, and how different stock/bond asset allocations would affect the end result. Let’s easily skip over that, as the economic insights from this is limited.
The original premises of the article was; assume a given withdrawal rate, an initial portfolio value (1M USD) and a given allocation of assets between stocks and bonds, – how long would your assets last? (Depending on the start year). The original article can be found in the link below.
The main result of the articles investigations can be found in the graph below which shows the number of years the portfolio would last, depending on the start year of withdrawal. The maximum length was set at 50 years.
As can be seen in the graph, in almost all cases from 1926 to 1976 would the investors assets last for the entire 50 years. Hence I assume this is the result that has given rise to the popular notion that with a 4% withdrawal rate assets would last “forever”. Only in ~10 of the investigated years would finds run dry, and in the most pessimistic case that would not happen until after 35 years.
A small technical note is that the dollar value of the 4% is set at the first withdrawal year, and is actually allowed to increase with inflation each year, in the calculations.
Another interesting thing that was investigated was whether or not the portfolio value was on a “path of depletion” or “path of accumulation”. The result of this can be seen in the chart below. (Same assumptions 4% withdrawal rate and 50/50 stock/bond allocation and result after 20 years.) A quick look at the graph shows that roughly half has a value less then the initial value of 1M USD, and the other half has increased in value. (despite 4% yearly withdrawal ! )
If that is not good enough for you, and you really want to be sure to also leave assets for your lineage, then the solution is simply to just increase the stock asset allocation to 75%, which will result in many more positive cases of portfolio values being on a path of accumulation.
Let us all celebrate the power of exponential growth and accrued interest.
Happy EARLY retirement to all of you out there.
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