1. Hi Todd, nice ‘summary’. If i have your permission can I make use of your skeleton to explore these considerations with respect to my country Singapore?

    I am not sure if you have come across the following which i find really good supplements:

    David Zolt writes about how a systematic withdrawal based on further sensing of market situations and varying your spending increases can mean a higher withdrawal rate >

    Micheal Kitces writes on some framing of wealth concept that inhibit wealth. in it it talks about the way we look at FAILURE in the withdrawal rate, and how we should frame our brain > 

    Wade Pfau contributes to an Australian contexted article on the different kind of retirement strategies >

    • kyith I don’t know what you mean by “have your permission can I make use of your skeleton to explore these considerations with respect to my country Singapore?” I would need more details to answer that question.

      • Financialmentor kyith hi Todd,. its more because you came up with a good set of sub headers to discuss on the topic of withdrawal rate, so i was interested in using them to write about based on the Singapore context. I just don’t want to come across as stealing your work so wanted to ask permission about it.

        • kyith Financialmentor I appreciate you asking. As long as you don’t violate copyright laws and link back to this post and site giving source credit then you should be on safe ground. For example, you can see how I gave credit and links to all my sources in the article. Would love to see it after you write it so just send me a link or trackback. Hope that helps, Todd

        • Financialmentor kyith hi Todd, thanks for the kind understanding. its going to take me a while since I don’t have the wealth of knowledge and quantitative data. and yes i will link and give credits back to you. 

          I find your materials so fascinating and if i were to share the reasons people can’t replicate is because they are so thorough and well researched that its hard to value add more than u!

  2. I retired at age 50 right after 9-11 and 6 months after my husband died. I agree with everything you have said. I was lucky enough to be able to take over my husband’s business and change to my own. Then I got part time jobs close to home to keep from using my IRA  until age 55. Then I found other ways to make money once I would retire again at age 61 without debt. Since then I have been withdrawing about 6% from the IRA to supplement my widows social security. It would have been a lesser amount if I had not paid off my house and lost money in 2008-9 with the crash. But I am planning to hold off taking my social security until I am 70 which will be in 6 years. Then I can lower my RMD withdrawals and, if I can live on the social security alone for a while,  re-invest my RMD less taxes. So far my health is excellent and I am working on keeping it that way. I have only 2 years until my full social security if I need it sooner. Basically, I am reviewing every year my investment withdrawal rate compared with my earnings. If I see I need to make adjustments I do.  I plan to live to 100 at least.

    • dlsako Thanks for sharing your experience. It is hard for workers to understand the perspectives I try to teach before they retire. Once you are living off your assets these lessons make more sense from the other side of the tracks. The goal is to help all readers fully understand the viewpoint from that side of the tracks before they retire so they aren’t caught by surprise. Wishing you the best with your journey!

  3. Mr. Tresidder,
       I really appreciate the information you’ve put
    together. I have a question though. I’m having a hard time understanding the
    number 2 concept at the beginning of your article under the banner,
    “Savings Required”. It states that you need 33 times your first year
    retirement spending in savings to use a 3% withdrawal rate, while a 4%
    withdrawal rate requires 25 times your first year spending in savings. This
    concept seems backwards to me. If you’re withdrawing less, you should need less
    saved. That is unless the actual dollar amount withdrawn is the same for both
    cases. Then to get that amount from a 3% withdrawal rate would require more
    savings. I read the article as if you would just cut your expenses in
    retirement by 1 percentage point. It was just a little confusing.
    I’m a self directed investor, I’m still trying to find something
    that works, I’ve been trading options since Feb, mostly selling  premium,
    I haven’t found the strategy to be profitable. It seems the small profits are
    wiped away by one loss. I find your valuation methods interesting and look
    forward to learning more about your investment style.

    • BrandonSnider You answered your own question in the first paragraph correctly. The assumption in this type of analysis is you have a given dollar amount you want to spend. That part is a constant.

      Your experience in your options strategy is accurate. The problem is it’s not honoring expectancy principles which are governed by the relationship of average win to average loss, and percent winning to percent losing. Your strategy probably has a good win/loss percentage but a poor average win/average loss relationship. You definitely don’t want to do that.

      I’m hoping to get my Expectancy Investing course live at the beginning of 2015 and will announce it in the newsletter on this site. I think you will find it helpful.

      Thanks for joining the conversation!

  4. Thanks for the great information on safe withdrawal rates. This brings up two questions:
    1. You can’t control the target date of your retirements economic situation. If someone wanted to retire in 2010 the rate of safe withdrawal stated is 1.8%. Is there some way to overcome that low number by moving out of the market and waiting for a better time to invest? That said the market has done well since 2010. We can’t predict the future, but we all need practical steps to take economically if we are facing that low a rate. 
    2. The opposite question is faced with high valuations is it better to sit and wait for a crash? In 2000 I moved out of the market and went back in 2003. The results were great. I didn’t see the bubble of 2008 and got hit hard. Of course someone who bought in in 2009 would be having a great time. How can we better spot a upcoming large swing in the market, or protect against it not knowing when it will happen? Also if markets are not going to provide long term returns like the past where else can we put cash to create reasonable returns without having to invest large amounts of time. I have real estate but that requires my time to manage.

    Thanks for all your work, your previous information has caused me to rethink what retirement will look like and I am creating new paths to a more fulfilling future.

    • Rocky L Let me take your questions by number…

      (1) The math is pretty “funny” when you think about it. The safe withdrawal rate is lower than just spending from savings if you ignore inflation. In other words, 1.8 times 30 years is only 54%. Even with inflation factored back in, that clearly implies very poor investment performance from periods of high market valuations and/or low interest rates, which of course is completely supported by historical data. So yes, considering alternatives to conventional asset allocation can make sense in these situations. Many retirees are looking seriously at SPIA’s (Single Premium Indexed Annuities) because of the higher yields plus no longevity risk. I teach alternative investment strategy and you can learn more here . Others choose real estate because it provides inflation adjusting income you can never outlive. Many choices available.

      In addition, per you point in (1) above, I want to point out that just because the market had a nice run from 2010 through 2014 doesn’t change anything. This research is not short-term timing. It is valid for 7-15 time frames. Give the market time to fulfill it’s expectancy.

      (2) Everyone wants to know the answer to these questions. Unfortunately, only liars and the self-deceived believe there is an answer. At the root of the problem is the assumption behind the question – you are focused on “product”, not “process”. See this post here for more   In addition, I will be teaching all about investment process and how it solves your question in a way you totally didn’t expect in this class here coming in early 2015  

      The course is not available now as you can tell when you hit the page but I will announce when it starts in the newsletter and the page provides the appropriate access.

  5. Thanks for putting together one of the most thoughtful and well written
    articles on the 4% issue.  I know behind the scenes there is a lot of math
    that would make most readers eyes glaze over, so its great you deliver the
    results without much noise.
    My main question for retirement planning is the issue of inflation vs.
    deflation.  You rightly point out that inflation risk is being
    underestimated  (or even ignored) by many financial planners/models.  That
    said, currently economists around the globe are quite worried about
    deflation risk over the next decade.  And like inflation, the medicine to
    get out of such a spiral is harsh, and not always effective, as Japan has
    shown us over the past decade.
    So I would welcome your advice as to how an investor nearing retirement
    would be need to think about deflation risk, and how to manage it.  Many

    • loderjim Thanks for the “simplification” acknowledgement. I didn’t used to realize that was my gift, but more and more, I hear from people how I’m simplifying complex financial topics in a way they can make sense out of. Your acknowledgment is appreciated.

      Regarding your investment question, as long as you think about investing in terms of product you will be stuck because an investment that profits from deflation (credit risk, fixed income, cash) will be hurt by inflation. Similarly, investment products good for inflation (real assets like commodities, gold, real estate) will be hurt by deflation.

      The key is to develop a dynamic investment process that can properly manage both risk exposures. I know it sounds like a pitch (because it is), but I will be teaching exactly that in a forthcoming class about Expectancy Investing. You can learn more about it here  and I will announce when it is ready for enrollment in this newsletter (SB early 2015).

      In fact, there is even more important stuff to realize about investing and safe withdrawal rates than is covered by your inflation/deflation question or is discussed here in this post. In short, the relationship between sequence of returns risk and investment strategy is profound. Alternative investment strategies provide a completely different solution to the sequence of returns risk and can transform your safe withdrawal rate. It is something almost nobody has explored, but it will be covered in this course.

      Hope that helps…

  6. Thanks for the article. Great stuff! I’m surprised you don’t at least make mention to the “3 bucket” approach…or segmenting a portfolio out by time horizon/risk tolerance. There is a mountain of research and evidence that has been put into this strategy to prove that by doing so can extend retirement/income compared to simply taking withdrawals out of an account being completely at the mercy of sequence of returns. We all know the market giveth and taketh away so setting up a portfolio in segments at least puts a buffer in between having to be fully reliant on sequence of returns.

    • jack44 Maybe you can link to two of the absolute best and most representative choices from the “mountain of research” you are citing so we can all benefit. I’ve done quite a bit of work with “buckets” and it always comes up as “tradeoffs” where it is doing little more than creating artificial barriers and constructs. But, of course, maybe I’m misunderstanding what you are communicating since the terms used are quite general. Thanks.

  7. Great article Todd. I just happened across your site. I’m 41 and just about ready to retire so this topic is of great interest to me. I am in Reno as well.

    • alexkram73 Glad it was helpful. Congrats on achieving an early retirement at 41. It is a grand adventure!

  8. I can relate to your emphasis on the longevity factor in planning.I can now run life insurance illustrations for my clients with guarantees to age 121!This means that actuarial data exists to require companies to budget their reserves through that age.The wonders of healthy living, the healing arts, and medical technology certainly present us with financial challenges!

  9. In the almost 5 years since Jan 2010, the S&P is up about 80%.  If someone had retired then, with a 60/40 mix, withdrawing 4%+inflation, they would be sitting at about 125-130% of their original principal (with low inflation the last 5 years), with only 25 years to go.  It sounds to me like 2010 was a pretty good year to retire.  Yet this article (based on Pfau) says the opposite.  Why am I wrong?

    • greg_tl Time will tell. Check back in 5-10 years and we’ll see what turned out to be true. A string of 5 good years resulting in record valuations (top 7-8%) and artificially low interest rates tells us there is much more to this story that has yet to be revealed. Give it time…

      • Financialmentor greg_tl As you have said, common sense and reevaluation of your strategy is necessary.  The 2010 retiree who was satisfied with their withdrawal amount now only needs to match the inflation rate in their investments each year.  They can switch to inflation adjusted bonds, and they’re set.  I would like to see a line on Pfau’s chart that shows the MWR that achieves a goal of reaching a point where a 100% inflation adjusted bond returns an amount at least as high as the inflation adjusted original withdrawal amount.

  10. This is a very thoughtful and insightful article.  However, your discussion of life expectancy seems pretty off to me.  You say life expectancy was about 65 in 1921 and imply that it will surpass 100 in the near future.  You also say longevity has improved by 30 years in the last century.  Well, I cannot find any data to support any of these claims.

    I assume your 1921 figure is based on life expectancy from birth, which is obviously artificially low since it includes the significant portion of the population that used to die before reaching adulthood.  Why include statistics about dying infants and children in a discussion about how long a 65-year-old should expect to live?  It’s completely misleading.

    Then there is the supposed 30-year improvement.  Where did you get that number?  From what I can tell, there has been a marginal improvement in the life expectancy an adult over the time period you are talking about.  We’re talking 5-10 years at the most – absolutely not 30.


    • MarredCheese If there is a weak point in the piece, you found it. In fact, if I were to write this article over again I would change this section and cite different resources (I leave the original intact for integrity and let the comments do the talking). I think the references you provided make a strong case for the extreme opposing side so I’ve left them in the comments for readers, but I also want to be clear there is data for the other extreme of the arguments as well. (Anyone can use statistics like a drunkard uses a light pole – for support instead of illumination.) My belief now is the truth lies somewhere in between these extremes. The truth (as you correctly point out) is most longevity data is deceptively skewed by changes in childhood mortality, and the other truth is that longevity is also increasing significantly for those who can afford the health care to pursue it. For a large portion of my readers (and particularly those interested enough in safe withdrawal rates to read this far) that would include them so the concept remains valid for this cohort (even if it is not valid for the population as a whole). With that said, that section of the article really should be explained more clearly. The bottom line is adult longevity is increasing for the population as a whole regardless, just not at the rate cited. Additionally, for those who can afford advanced health care, adult longevity is increasing at a significantly higher rate than the population as a whole lending credibility to the underlying arguments as stated here (even if they are explained poorly) Thanks for chiming in, sharing those thoughts, and adding value to the discussion.

      • Financialmentor MarredCheese Good points.  Do you have a source handy regarding the longevity difference of those with and without access to advanced healthcare?  I don’t doubt it; I just think it’d be interesting to read about.

      • greg_tl Financialmentor

        Cool, thanks for the links.  Based on those articles, it looks like the difference in life expectancy for American males created by discrepancy in socioeconomic status is between 1 and 5 years.  I thought it was interesting how they mentioned that healthcare is just part of the issue, and that inverse correlations between wealth and smoking/stress/obesity are likely contributors.  It seems like a complex issue.

        Financialmentor, I don’t really see a reason to think that just because someone is taking their finances seriously that their life expectancy would be significantly higher than average, as stated in your comment.  Nevertheless, I think we can both agree that it’s best to be conservative with retirement planning since there are so many unknowns.

  11. Very scary. Looks like so much uncertainty. I guess perhaps reviewing your investments each year and adjusting according to inflation or need might be the best way. But if inflation is too high it can sink your retirement. Living frugally and trying not to tap your savings but live on other or several income flows might also help. Quite a quagmire.

  12. This in an awesome article!  I particularly like the “safe withdrawal “rate based on Shillers PE, I have often wondered this myself.  I also wonder if value cost or dollar cost averaging lump sums into the market with high PE’s ends up working better than one time lump sum investment (like now). Anyway, that is just a side thought to my actual comment/concern. The whole idea of flexibility brought up in the end is the key to me.  I’m 39 (bday last week) and decided I’m going to retire very young, within ten years.  I am a nurse and enjoy working, but dont want to be tied to scheduled minimal time off, would like extended breaks.  In my profession there is a constant temp and Per Diem need.  I have yet to find a good way to calculate this into my extended retirement.  In years with horrible returns, I plan to grab a temp travel assignment for 3 or 6 months and I’ll have minimal or no need to withdraw at all for a year.  Plus have the added benefit of free travel to check out a new area. In years with great returns maybe I dont work at all.  I feel maintaining this flexibility is a small price to pay for freedom from mandatory work and calling it quits on the full time gig 20 years earlier than most. This considerable flexibility makes it VERY difficult for me to come up with a net worth number to shoot for.  I’ve tried running a boat load of senerios through firecalc, but having income that can vary from zero to full amount of expenses from year to year makes accurate planning nearly impossible.   Obviously, I probably wont have the energy/option to work at 70 like I will at 50.  Any advise from wise readers?  Given the option and ability to cover a pretty extravagant life style with half time or less work, how much money do I need to be safe from ever having to work a full time gig again?  or avoid coming up short when I physically don’t have what it takes to keep working?

  13. I just read your article and found it very enlightening(and sobering…). When stock valuations are high, as they are now with CAPE around 30, it would seem a retiree should make higher withdrawals from their stock portfolio and adjust downward as valuations ( and principal ) diminish. The article supports the opposite approach. Taking higher withdrawals after valuations have declined seems so counter-intuitive. What am I missing? Thanks again for all the great information!

    • I think you’re confusing/collapsing percentage rate calculations with nominal dollar amount withdrawals. In other words, a portfolio at low valuation will support a higher percentage rate withdrawal, but the actual dollar amount could possibly be lower because the assets are in a drawdown and have incurred losses in order to reach the point of favorable valuation. Conversely, a high valuation portfolio will have enjoyed outsized gains to reach that point, so even thought the percentage rate withdrawal would be lower, the nominal dollar amount might actually be higher. I hope that clarifies.

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