The Ideal Withdrawal Rate For Retirement Does Not Touch Principal

Resting Old Man Of SantoriniIf you have tremendous money strength, you will never have to draw down on your retirement principal. Your goal, if you choose to accept, is to create an estate that will provide for your loved ones long after you are gone. This is what endowments do. Why not consider doing the same if you are a magnanimous and financially savvy individual? You’re reading Financial Samurai after all!

I always scratch my head when I hear advisors talk about the “4% withdrawal rule” or any withdrawal rate that’s greater than a risk free rate of return for that matter. Times have changed folks. Interest rates are close to zero, the stock market isn’t a slam dunk, and we are living much longer now.

There are so many variables that it is impossible to calculate a bullet proof withdrawal rate rule unless that rate is 0%. Sure, there’s a 99% chance you will die before 110 and a 99.9% chance you’ll die before 150, but who really knows? We might be one with machines by the year 2030 and live forever!

Instead of thinking about how much you can withdraw to bleed your retirement funds down to $0 by the time you die, I highly encourage everyone to think about leaving a financial legacy for your loved ones that is so great you’ll never run out of money. Even if we fail to come up with a perpetual giving machine to leave for others, the end result will be much better than if we only focused on ourselves.


Let’s assume everybody retires at 65 with $1 million dollars. Becoming a millionaire is fast becoming a rule rather than the exception thanks to inflation, rising assets, improved financial advice, and personal finance blogs that give their knowledge away for free and ask nothing in return.

You’ve now got to calculate your life expectancy, health care costs, market returns, withdrawal rate, and living expenses. These are five variables that must be figured out. There are 120 different ways to arrange these variables to make them work if each is a stand alone permutation. Let’s say each of the variables has multiple permutations. There will literally be hundreds of thousands of combinations to choose from.

The point I’m trying to make is that even with the basic assumption of retiring by 65 with $1 million dollars and a 4% withdrawal rate yielding $40,000 a year, this might not be reasonable for many people. Everybody’s lifestyles are difference. The calculations therefore become simply academic gymnastics that help us feel better about our chances of living a comfortable retirement. The more conservative our assumptions (leaving money left over), the better we will feel and vice versa.


Memento film posterIt’s fun to run various scenarios for retirement as I did with my 401k especially since it’s free and easy to do nowadays. I ran a Conservative, Base, and Blue Sky Scenario with Personal Capital and I came up with inflation and tax adjusted amounts of $500,000, $1 million, and $2.5 million after 25 more years of saving and investing. A $2 million spread is huge and not something one can easily plan for.

With $500,000, $1,000,000 and $2.5 million inflation and tax adjusted, I will have $20,000, $40,000, and $100,000 a year to live off for another 25 years until I’m 90, assuming I retire at 65. And what do you know? The annual retirement money is based off a 4% withdrawal rate assuming zero growth.

Everybody can probably comfortably live off $40,000-$100,000 a year in retirement in today’s dollars. But again, what if we live until 100, or what if health care costs skyrocket further? What if we have an even more aggressive President who decides to raise tax rates on everyone and not just those making over a certain amount? All of these assumptions are based off other assumptions. If one assumption is wrong, the entire retirement foundation may be off.

If you’ve ever seen the cult movie Memento with Guy Pierce and Carrie-Ann Moss, you undertand exactly what I mean.


1) The 10-year government bond yield. The 10 year US Treasury yield changes every single day and is another metric for the risk free rate of return. For the past 30 years the 10 year bond yield has come down due to lower inflation and more efficient economic policies. We’re currently at around 2.4% in 2H2015 and I think we’ll remain under 3% for the next couple of years. I encourage everyone to adjust their annual withdrawal rate based on the average rate for the past 12 months. You can easily check where the latest rate is by checking on Yahoo Finance.

2) The S&P 500 dividend yield. The current S&P 500 dividend yield is roughly 2% in 2015. Dividend yields can rise when dividend payout ratios increase or the market tanks. If what you are mainly focused on is income, then withdrawing at the rate of the market’s entire dividend yield will mean that you will never touch your principal. Your principal might collapse, as many portfolios did between 2008-2010, but your portfolio will never be further reduced by your own doing. If you look at the historical chart, you can see how a 4% withdrawal rate made sense in the 1970s, 80s, and early 90s, but not now. Not even close. If you are a reader not from America, choose your own market’s dividend yield instead.

S&P 500 Dividend Yield Chart vs. 10 Year Treasury Yields

The two figures are at very similar levels as you can tell. When the stock market dividend yield yields more than a 10-year US treasury bond yield, it’s generally a good sign to invest in equities. Equities not only provides you a higher income, equities also gives you a greater chance of making more money on your principal. If you are an early retiree looking to tap your IRA penalty-free, I wrote about Rule 72(t) and creating a perpetual income stream.


Retirement Withdrawal Rate Table

Some of you might be thinking that it’s foolish to die with too much money. In many ways, you are right. But remember, we are talking about financial security and leaving money to those we care about. Our loved ones don’t have to be our daughters and sons. They can be a cause we care about such as fighting cancer, supporting the arts, helping an alma mater, or providing funding for foster children.

If you end up old and broke, there’s little hope of getting back on your financial feet for the remaining years of your life. Using the S&P 500 dividend yield or 10-year treasury yield as a safe withdrawal rate will ensure that you do not run out of money in retirement. When you are in retirement, only then will you truly know how much you will need to be happy. Just go about your adjustments in baby steps.

When we shift our retirement withdrawal rate to a level which does not touch principal, we suddenly start changing the way we view money. We save more because we’re not only thinking only about ourselves anymore. We invest more carefully because people are counting on us. We do our research more thoroughly because we want to help others.

Inflation is a perpetuity, so too can your retirement funds become through CDs, real estate, P2P lending, dividends, and royalties. The more income streams you can produce the better. When it’s time to start sleeping in because you no longer have to work, you just might not need to withdrawal any of your retirement funds at all!


I highly recommend signing up with Personal Capital, a free online wealth management tool that tracks your net worth, aggregates all your accounts so you know where your money is going, and provides useful analysis on your investment portfolios. I ran my 401(k) through their “401(k) Fee Analyzer” under the Investment tab to discover $1,700 a year in fees I had no idea I was paying!

You can also run very useful retirement scenarios based on various return assumptions in your retirement accounts through their amazing Retirement Planning Calculator. Unlike other calculators, Personal Capital uses your real data and Monte Carlo simulations to produce realistic financial results. There’s no better free online wealth management tool than Personal Capital.

Updated in 2H2015. Volatility is back in the market with Greece and Puerto Rico’s debt problems and interest rates going up. Now is more important than ever to stay on top of your finances and diversify!

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. David M says


    Great post – I can not argue with anything you have written. If possible, why not preserve principle and give the remainder to people and/or organizations? Tough to argue with that!

    Why do people use 4%? Because the VAST majority of Americans are not saving as much as Financial Samurai readers. These people desperately want to retire and they want to create a senerio where it seems like they can retire and have enought money for the rest of there lives – thus they are using a rate that is no longer realistic.

    I listen to financial podcasts and I hear people in retirement with mortgages – and these are NOT mortgages of choice – it is VERY sad.

    On these podcasts I also always here about people borrowing money from and/or making withdrawals from their IRA/401K to pay for this or that. Again so sad, retirement $ should only be used for retirement!

    What I have written about above, is why I absolutely believe we should not allow private/individual Social Security accounts. If we give people access to their retirement money – sadly – some fairly substantial percentage of Americans will find a way to spend it prior to retirement.

    I know, don’t let them access it! Don’t forget – the American Congress needs to get elected – if private/individual accounts are set up – Congress ABSOLUETLY will allow people to withdraw the $ prior to retirement!

    • says

      Hi David, I do wonder though whether people “desperately want to retire.” If you desperately want to retire, you would aggressively save and invest as much as you can no? Can’t spend everything you make and then ask, what’s up.

      I agree with you on not letting most folks be left up to their own devices when it comes to SS and touching their retirement accounts. The temptation to splurge and have emergency parties is great. Imagine if the Gov’t didn’t have a monthly income tax withholding system. Our country would go broke!

      • David M says

        I agree with your logic that if you wanted to retire you SHOULD save and inves as much as you can.

        However, I think you, me and the people that read and post on your blog, are the exception, not the rule.

  2. says

    I will definitely agree with you that erring on the conservative side is much better than using starry-eyed numbers with little chance of real success. But while never touching your principal is a nice ideal and certainly a reasonable goal for some, I’m not sure it’s a necessary goal for many.

    I won’t argue with you that the 4% withdrawal rule is just a starting point and that there are many other factors to be considered. But, that rule doesn’t assume that you will draw down to $0. In most cases, over 30 year periods it actually leaves you with MUCH more money than you started out with. I don’t think you can just ignore that point, just like you can’t ignore the very few cases where it brought you very close to $0. Again, I’m not arguing that 4% is right for everyone, but it’s certainly not a pie-in-the-sky number that leaves you destitute at 90.

    You are absolutely correct that current interest rates are lower than the norm, but that’s just the case now. What will they be 10 years from now? We have no idea. So to me, basing your withdrawal rate of off current interest rates is great if you can do it, for all of the reasons you mentioned. But I think it’s far from necessary and is unrealistic for many.

    Your point about income streams is a very good one. If you can build those up, the market and interest rate movements just don’t really have to affect you.

    • says

      This is the beauty of my method in following the 10-year treasury yield or S&P 500 yield. These figures don’t operate in a vacuum. If inflation shoots up, so will Treasury yields and then market dividend yields. Your withdrawal rate will always automatically account for inflation and economic health among many other factors.

  3. nbsdmp says

    Interesting topic…I struggle with this idea because like most people that I imagine read your blog, I earned the money…creating a legacy of family who does not have to provide for themselves goes against my core beliefs. I sort of equate it to thinning of the herd, you make people fat dumb and happy if they don’t have to work for it…why sacrifice that 3 week trip to Europe so your great grandchild can sit around the house at 27 smoking pot and going to the club. I will create a legacy and there will be a pile of cash left over but the vast majority will go to deserving charities…a nice headstart will go to my immediate family. My withdraw rate plan is the rule of 33, essentially multiply what your yearly burn rate will be by 33. That is number is how large your nut needs to be to have a 99.99% probability based on the last 100 years of data to be guaranteed to never run out of money no mater if you retired into the worst bear market in history. In the vast majority of simulations you end up with a crazy amount left over. People, enjoy life to the absolute fullest it will be over before you know it.

    • says

      Do you mind expanding on the Rule of 33? Is the Rule of 33 not more a target savings goal rather than a withdrawal rate goal giving you are multiplying your annual burn rate by 33?

      For Example:

      $100,000 annual burn X 33 = $3.3 million.

      Is the withdrawal rate you are using therefore 3.03%?

      • nbsdmp says

        Essentially yes, I left out one detail, that is based on a 50 year expected retirement. Reality is people don’t really consider that when they get to be 80 years old, they are probably not spending at the same burn rate…so a higher % could probably used and still get you there. I am so conservative that I’ll probably blow right past my goals and have that just be my liquid investment accounts and not any business holdings or rentals.

    • Jason says

      Interesting post

      I do see the point of not leaving a legacy to someone that didn’t really work for it. My sister recently had a daughter. If I left it to her, who knows what could happen? Bad spending habits, divorce, you-name-it, could blow the whole thing. Plus, I think it would make people a little spoiled and entitled. Reminds me of a good quote: “Leave them enough so they can do something, but not enough so they can do nothing.”

      I do like the idea of helping a foundation, scholarship, non-profit, whatever to benefit a worthy cause. That would certainly make me feel good. In fact, I can think of no better use of an early retirement to set up *your own* non-profit. It gives you something to do with your time and after you pass on, that’s your legacy.

      • nbsdmp says

        Having a left over pile of money at the end is a good problem to have, the reality is if everybody super responsible, there would be no debt in this country and everybody would be financially independent. (sometimes I really wonder what that type of economy would look like…would it even work???) That is never going to happen…so if I were to leave this earth today, each of my family would get enough to have zero debt including their mortgage pay for kids college and a trust that would help smooth out the bumps in life. I even told my parent who want to leave each of us kids a nice inheretance to spend it on themselves…I warnend them that I will just spend it on more fast cars and women (I’m half joking)…but really if you are at the level of creating a legacy, enjoy your life, don’t perpetuate a society that feels they are entitled, that is definitely not how this country became so great.

  4. says

    I can count on about $8,500 each year from government and my employer pension but the rest is up to me.

    I will not be able to leave anything for my sons but my goal is to have enough money so that I am never a burden on them.

    My goal is to have $200,000 saved before I retire but that will be a challenge. I own my own home (currently valued at $200,000) and I will be able to live on the procedes of that sale for quiet a few years.

    • says

      Jane, not being a burden is a great goal, and a topic I would like to discuss in the future b/c parents should never feel a burden either since they took care of us for 18+ years.

      • says

        My mom and my aunt had to help their mother, my grandma. She lived in a geared to income bedsit but she only had money for the basics and her daughters had to help with extras like prescription glasses and her bus pass.

        My retirement will be very simple but I want to be able to pay for everything myself.

  5. Larry says

    And I’m scratching my head at why you’re scratching your head. The 4% safe withdrawal rate (based on the so-called Trinity University study from 1998), is only one of several rough guidelines and has been widely criticized by other academics, as well as revisited by its original authors. Retirees (as you rightly point out) must take a variety of circumstances into account which may or may not support a 4% annual withdrawal rate. I also don’t know where you’re getting the notion that “becoming a millionaire is fast becoming a rule rather than the exception.” Maybe that’s true for you and some of your financially responsible readers, but it surely isn’t true for the vast numbers of Americans who have less than $50,000 put away for retirement. And this situation is becoming worse as pensions are rapidly becoming a thing of the past, life expectancies along with accompanying health care costs are increasing, and even social security is facing a crisis point.

    As for leaving money for your loved ones or various noble causes, that in my opinion has to be solely a matter of individual choice. What I have done is to structure my will so that it leaves percentages of my assets to certain family members as well as various cultural and educational institutions I wish to support. In this way, if I die five years past retirement and have exhausted 20% of my assets using the (again, very rough) 4% rule, the remaining 80% automatically gets distributed to my beneficiaries. If I die 20 years from now, my “heirs” get 20%. And if I die without a dime to my name, well, them’s the breaks.

    • says

      We’re not talking about “the vast numbers of Americans.” We’re talking about our own little community on the web of folks who want to create financial independence sooner, rather than later.

      I like your inheritance strategy.

      • Larry says

        Regarding paragraph 1: Perhaps it was only your own little community in your mind, but that distinction was not specified in the original post. And in any event, I would think a good theory of retirement should account for the more difficult cases as well, not only those that are probable to have a successful outcome.

  6. Jenny @ Frugal Guru Guide says

    You are misrepresenting the “4% rule.” The rule is about probability. Over half the time, withdrawing 4% per year historically would result in the principal never being touched, even when you account for inflation. 5% of the time, it would drain the account before you reached age 95. That’s because nothing in life is certain, investments among them. It’s not possible for retired people to simply not withdraw money when the stock market is down. The 4% figure gives people a guide of historical performance that sets–or at least set–a reasonable level that they could continue to use when their portfolio takes a dip. If you adjust for inflation, your dividend rule means that people shouldn’t be withdrawing ANYTHING right now. (There’s little point in merely preserving principal if it’s going to be eroded by inflation.) What most people want is a STEADY, predictable retirement income. Your advice doesn’t give them that, which is well and good if you’re cutting your income from $200k a year to $40k for a few years, not so practical if you’re cutting from $40k to $8k.

    And David, my SS already is being spent before I get it–on other people. Of course I want private SS. Then I have a prayer of getting some of what I pay in. My parent’s generation will get out right at what they paid in. My generation? We’ll get out $.50 on the $1, and that’s only if the rules aren’t changed. That’s not an “investment.” That’s a guaranteed loss.

    • says

      This is where you and I are different. I’m not willing to gamble that there’s a 50% chance using the 4% rule that my principal will be gone by the time I’m 95. I want as close to a 100% chance that 100% of my principal will still be there to pass on to others for as long as possible.

    • Larry says

      Good points from Jenny (though I’m not going to discuss the social security issue). If you look up the original Trinity Study (easily found online), you’ll find it nowhere recommends a 4% withdrawal rate as an absolute. Instead it uses historical data from 1926-95 to compute the probability of portolfio success given several variables (length of retirement, withdrawal rate, and stock/bond allocation).

      Examples: 100% stock allocation, 15-year period, 3% withdrawal rate: 100% probability of success. 100% bonds, 30 years, 4% withdrawal: 20% probability of success.

      What *is* true is that the authors posit that at a 3-4% withdrawal rate, *any* allocation has at worst a 95% chance of success for any period from 15-30 years, and most combinations have a 100% success rate (inflation-adjusted).

    • David M says

      If we give you your money in a private account – were do you propose that the government get the $$$ to pay for your parents?

      Only if Congress made it that you ABSOLUTELY could not get a penny of your private account prior to retirement do I think it makes any sense. Then, assuming that Congress set is up that way – are you OK with your income tax going up 5% points to pay for the people that are currently retired?

      I will admit that SS is a ponzi scheme or generational transfer program – and that this might be less than ideal. HOWEVER, it was created that way and thus there is no easy way to get out of it.

      BTW, you are 100% it is not an investment. It is Social Security!

  7. says

    Sam, these are great points, and something I think the “early retirement” community has long embraced. Build a big enough nut so that you have the freedom to do as you wish without actually cracking said nut.

    Additionally, I wholeheartedly agree that the 4% withdrawal rate is something that cannot be relied upon (much like social security for us younger folks). That being said, I think many people, myself not included, will question the altrusitic side of this. I can hear the ERP screaming about, “It’s my money, why should someone else get it after I die! I EARNED it!”

      • Rob says

        Depends. Do you have flexibility to spend less than 4% if you need to? If you can live off 2-3% for 5-10 years (or forever) *if you need to* then you probably less than 1% chance of running out of money by the time you are 95 (and most likely significantly less than 1%). I’m planning on using 4% at retirement in 22 years (55 years old) but the wife and I could live off 1.5-2% and 0 social security very comfortably so I’m not too worried about using 4% to start.

        I don’t think using the risk free rate is really a good bogey either. I certainly wouldn’t expect market returns (5% bonds, 8% stocks) but something north of 2% is likely over 10-15-20+ years. I’ll probably do 40% in government bonds, 25% corporate bonds, 25% S&P index and 10% in a dividend stock index and expect closer to 4-5% annual returns. If I have a few bad years early on, I’ll just drop to 2-3% withdrawal for a while or even pick up a part time job (which should help keep me occupied as well).

        Overall, good advice, though.

  8. says

    Withdrawing without drawing down the capital is my ultimate goal too. We are still adding to our saving because Mrs. RB40 is still working. Once she retire, we’ll see if we can really make it work. Of course, I think it’s ok to splurge once in a while and take a big trip or something like that.

  9. says

    The trick is that most people DO NOT need a ton of money to live on in retirement. The notion that you will need $80k or $100k is kind of ridiculous, and short-sighted. With proper planning, you should have no debt whatsoever, and only need to cover basic necessities, fun money, and healthcare. Given that health care DOES cost a LOT (Thousands per month in some cases), you should plan for the worst. But when you’re dropping $5k a month on healthcare facility, you probably won’t be around for 20 more years.

  10. says

    First off, I love “Memento”! It’s been a favorite of mine for a long time.

    I’m in complete agreement with you on this one. It’s long been my goal to save enough that I’ll be able to live off the dividends & other income my investments produce in retirement. I want to be able to go as long as possible in retirement without having to touch much of my investment principle because I want to be able to pass that along to family, charities, etc.. after I pass on.

    I never put much stock into “one size fits all” numbers from the financial industry such as the 4% rule. Everyone has to calculate their own specific needs and run though multiple scenarios as you’ve suggested often.

    • says

      Good stuff. There is never a one size fits all. However, it’s better to shoot for the ideal withdrawal rate that touches no principal and fail than be too aggressive as there is no reverse button!

  11. Retired Syd says

    Keep in mind that the 4% or 3% rule (mine is 3% because I have possibly 50 years to cover rather than 30), is on your investable assets only. Many of us also have homes that are or will be fully paid off by the time they die. I am perfectly happy counting on possibly exhausting my investable assets and leaving the home I live in to my heirs and charity. After all, I am the one responsible for saving the nest egg in the first place, shouldn’t I get first dibs on it? If I die with only my home left, that is still a tidy sum that will do my heirs and/or some charities a lot of good. And as a few of your readers pointed out, odds are there will still be something left from my investable assets as well, as they would only be exhausted, under the 3% rule, if my future is as bad as the worst 50-year period in history. And there will be plenty of time to make adjustments over the next 50 years if it’s looking like we’re headed in that direction . . .

    By all accounts, most Americans are having trouble accumulating anything near what they will need for retirement. Telling them they should also make sure they have something to leave heirs and/or charity, I think is more than most people need to worry about for an already difficult task.

    • says

      Good point on leaving the house as a great paid off asset for your heirs.

      Even if we fail to come up with a perpetual equities giving machine to leave for others, the end result will be much better than if we only focused on ourselves. This is a key mindset I want to convey in this post.

  12. says

    I don’t think probabilities really matter when you talk about big binary events. I don’t want to be in a position where having enough to live as long as I might is a 50-50 gamble. The 4% withdrawal rule is, IMO, way too lofty in this environment.

    If someone chooses to go the 4% route, they need to be really comfortable with the idea that they’ll die with $0. That’s not to say they’re certain to go broke and starve in retirement, but I think there’s a very good chance that, many years into retirement, virtually all of their remaining assets will need to go into an annuity to protect against longevity. And by that, I mean an annuity without any payments to beneficiaries…so goodbye, inheritance. A 70 year old male can get 7.2% per year on an immediate annuity. Beats 4% – and its relatively tax-friendly.

    Speaking of, the PF blogosphere needs more discussion on annuities. They’re misunderstood and underappreciated for the insurance they bring to the table.

    • says

      I agree. If you lose a binary event, you are screwed as there is no back button. Better to be safe than sorry. I have little edge on annuities, but perhaps someone with deep knowledge can write a post.

  13. Jason says

    These touchy withdrawl-rate calculations are exactly why I never thought that net-worth was a useful number. I only track it because of vanity. :)

    In simplest terms, you just have make sure your monthly passive income is higher than your monthly expenses. That’s been my investment “guiding light”.

  14. rorbus says

    Great post. I’ve been a long time reader and have been moved to make my first two comments within one week.
    I am in agreement with you; plan for the worst and be prepared. If all works out for the best then you have a nice ‘gift’ to leave to others to help them get ahead in the world. I am fortunate that my father also had this philosophy and it ‘rubbed off’ on me.
    But we are the fortune ones; we understood and planned. I know so many people who are not even able to retire at 65 because they didn’t save and plan ahead. They live pay check to pay check, when they should be preparing to retire. I’m not sure what the right answer is but in another 5-10 years there are going to be a lot of ‘seniors’ struggling struggle when they can no longer work. If they don’t have family to take care of them, the ‘government’ will have to step in??? How to change this now before the next generation does the same??

  15. says

    When I retire I expect to withdraw at 2-3% rate. I expect to live for 30 years in retirement, but I want to hedge a little. I don’t think I will “need” the money so a low withdrawal rate will be fine. I do expect to help educate my grandchildren with some of those funds. They are not born yet and no plans at the moment. Everything could change in the next few years so I want to remain flexible.

  16. says

    I use 4% as a rough estimate. Realistically, I’m thinking around 3-3.5% because that’s my average dividend yield. It’s higher than the S&P500 average dividend yield because I only buy dividend paying stocks and I only buy stocks with starting yields above 2.7%. Most of my buys are above 3%.

    To be entirely honest, I don’t really think in terms of withdrawal rate or net worth. When my dividend income exceeds my expenses, I can retire. It’s that simple. My dividends are growing at around 7% per year, which far outpaces inflation. The only real question is how much of a cushion do I want built up.

    • says

      As a retiree, I have to say it’s not that simple b/c things change all the time. Dividend payouts may decline, companies might go out of business, your life situation might change. But yes, to my Target Withdrawal rate #2, if you withdrawal no more than the market dividend yield, then one should be able to create a perpetual income machine.

  17. JayCeezy says

    CA Financial Planner William Bengen published a study in 1994, showing a portfolio with a 4% withdrawal rate could blah, blah, blah. A new study published by Morningstar shows the updated US stock market performance since then (which includes 50% decline in 2003 and 57% decline 2007-09) can now survive a 2.8% withdrawal rate over 30 years. Check it out here.

    The thing about Monte Carlo simulations is that they don’t cover outliers. Forgive me if you have read me say this before, but it bears repeating. I plugged my data into four commercial calculators, and built my own model. None of them predicted the financial devastation that occurred in 2007-09. Huge national banks shuttered, bankrupt, corporations that employed thousands wiped out, TBTF reinsurers bailed out with taxpayer money, amazingly flawed misallocation of resources financing pipedream “Green Energy” companies with no product, and no market even if they did have a product, etc. There is still a huge disconnect between Equity performance and the real economy, and it is all built on false money. At $85 billion a month in Fed subsidy, the party continues. But does anyone think that the last month’s $85 billion has nearly the same impact as the first month’s injection of $85 billion? For those who say “it has worked”, I have to ask; then why don’t we stop?

    In any event, savers have been crushed. The nut required to throw off $100,000 a year is almost $4 million. For those who say the 2.8% is the low-end probability, I am compelled to reply that for the past 15 years that is not a probability; it is a historical fact.

    Other than that, I’m pretty optimistic about the market, the government, the country and the future. Continued investing success, everyone!

    • David M says

      Great response JayCeezy.

      I noticed you are optimistic about the government, care to elaborate why? I think Congress has a 9% approval rating as people feel it can get almost nothing done. Is this gridlock what makes you optimistic about government or something else? I believe my question is relevant to Sam’s and your post as the government has a big impact on the economy – the economy has a big impact on interest, dividends and stocks – which have a big impact on how much you can withdraw from your savings.

      Regarding 20007-9, of course virtually no one predicted it, unfortunately. The vast majority of people will always believe the good or bad times will continue. We are in for many more cycles of boom and bust in the overall economy and individual parts of the economy like housing, stocks, etc – however, most people will not realize this, until another boom or bust occurs.

      I agree with you and other, Monte Carlo, not worth much here. We are talking about 1 person and a big decision – like being able to pay the electricity and buy bread – I know I do not want to HOPE that the prediction of my money lasting 50 years with an x percent withdrawal is accurate. Because if not accurate, I might starve.

      Better to follow Sam’s advice and try not to dip into principle! Again Sam thanks for this post, it might keep me from starving in the future and it will leave other people/organizations to have my $ after I’m gone!

      • says

        I’m surprised by the government optimism as well.

        However, the markets are on fire after Obama won and after Sequestration, so maybe all is good in DC after all!

        Even if we come up short in building the Perpetual Income Machine David, we will have gone farther than if we didn’t have such a goal in mind.

    • JayCeezy says

      @David and FS, my apologies! My last sentence was intended as a joke and should have indicated as such, along the lines of “other than that, Mrs. Lincoln, how did you like the play?” I’m not optimistic about any of those things (market, govt, country, future), but after my bummer of a post (about the Potemkin market, govt junkie-behavior, country’s amazing devastation to institutions, employers and citizens, and the dismal future) I wanted to end on a laugh. Hey, they can’t all be gems!:-)

  18. Jason S says

    The book “Risk Less and Prosper” has an idea to stratify your retirement goals and invest accordingly. For example, if SS plus $10k is a must-have scenario, then you should be allocating $10k a year per retirement year in TIPs or i-bonds. You then allocate the remainder of your savings to more and more risky assets commesurate with your willingless to not see the potential benefits in retirement. Although I think it’s a bit of overkill when you’re young, I will scale into this at 10 years pre-retirement. If the markets do collapse at exactly the wrong time, do you trust your future vulnerable non-income generating self to not panic and cut your losses at the bottom? Instead, knowing that the worst case scenario would at worst leave you living a simple, secure life would help you control your emotions in difficult market conditions. I think FS also thinks along these lines, as his expenses are paid for using mostly risk-free assets.

    Regarding leaving something to heirs, there are lots of comments here about the pros and cons. However, I haven’t seen the goal I want for my kids: leave them enough that they will not have to be worried about saving for a modest retirement, but that they will still have to work to live. Not much different than an old fashioned defined benefit pension, no?

    • says

      Perhaps we should move beyond the focus of kids, but of living something for humanity? For leaving the world better off than when we came. Imagine if everybody gave a little instead of took a little, would our future not be brighter?

      • Jason S says

        Agreed. Much better to give than to take. My thinking is that by setting the kids up with a backstop for their golden years, they wouldn’t have to prioritize saving the way I have been, and instead could take jobs they enjoy and (i hope) they think are useful in society. The rest (if any) can go to charity. To me, your “giving to humanity” falls below my “familial duty” but is above buying a convertible sports car at 50.

    • JayCeezy says

      @Jason S, how much money would be needed to for each kid to have a modest retirement? $1 million each? $2 million each? Just curious if you have put a number on this goal, and how the goal would be attained while your primary goal for your own retirement is met?

      • Jason S says

        @JC, I don’t have a hard number yet — rather than a hard pre-retirement goal, it’s more something that would inform my retirement consumption habits and would go into my will if I’m fortunate with the markets. In terms of standard of living, I think it would be something along the lines of the “must-have scenario” I mentioned above. Maybe SS + $20k, with the $20k assuming a 3% withdrawal rate. That’s a $670k annuity each, which would be $64k discounted back 60 years at 4% real return. I’m much more given to use these standard 3% and 4% numbers for nice-to-haves over 60 years than must-haves over 20 years.

  19. says

    I once read an article a decade or so ago, which stated that wealth builds up within a family and within 3 or 4 generations it is squandered away due to various reasons.
    I did find this one regarding Chinese:

    Now, perhaps that has changed but we will need at least another 100 years until I could come close to seeing that. While I’ve reached about 1/2 of my lifespan at this point, I don’t know that I want to live another 100 years since the human body wasn’t designed for such things. Even if you replaced everything but our brains, the brain has a limited lifespan as well.

    In all honesty, 500 years would be insanely long and I see no need to target it that far out. I believe somewhere in the 3%-4% rate indexed to inflation should work for 99.9% of the folks out there.

    As for donations of monies to charities, why wouldn’t a person just set up a trust fund that paid the charity for the next 100 years or so? That would seem to make more sense than to just say here’s $5M, do what you want with it.

    • says

      Good thing you don’t have to worry about living until 200!

      An endowment or trust is exactly what I discuss in the beginning paragraphs. Why not set up our retirement goals like an endowment that gives forever?

  20. says

    I’m usually on board with you, but this time I fully disagree. I think that, unless you have loved ones that require care (because of developmental or severe physical disability), you should do yourself the favor of not having to fund their lives, and do them the favor of finding their way through the sometimes delightful, sometimes excruciating experience of making a living. I have a niece with Down’s who will require care for the rest of her life, so I’ll make some provision for her. But for others, we are not doing them a favor by protecting them from the needs of working.

  21. says

    As far as I am concerned, a happy and healthy life is possible if you follow a few basic personal finance principals; such as

    -Live below your means and save as much as you can

    -Marry wisely

    -Be happy with what you have, NOT what you could have thus do not compete with Joneses

    Whenever you feel that your seven+ figure portfolio is not good enough, think about those you live a fraction of your portfolio!

    Life is not just accumulating money, worry about it all the time and then dying with stash of money.

  22. JayCeezy says

    This post will answer the question, after I got my ‘hand-wringing’ done previously. My only comment on the table is that it seems pretty severe. Not many people that pulled $1 million together are going to be happy pulling out $18,000/yr.

    My own strategy is to take the longest life-expectancy for me and my wonderful wife, add 5, and divide by our net worth (including home equity). i.e., one of us is expected to live another 35 years, plus 5 equals 40. The ’40’ equates to a withdrawal rate of 2.5%. This is our starting point. The 5 year margin, plus the ‘shadow asset’ of Social Security payments not counted against future spending, will give us flexibility if we need to make a serious deviation. A previous poster noted that spending is likely to decrease as we age. Like the FS example, our strategy assumes 0% appreciation (our very conservatively invested nut is in cash instruments, and we assume a wash with inflation) and 0 contributions going forward. Recalculating as needed, we live modestly, and this will work for us for now.

    Of course, this is quite conservative and assumes a bottom 1% performance. At one point in years past, we made plans for a charitable trust; it is kind of embarrassing now, and seems grandiose in hindsight. But at the time, we had the money to do it. Now, not so much and we are happy just to enjoy our time together. “The future’s uncertain, and the end is always near!” – Jim Morrison, ‘Road House Blues’

  23. says

    My thinking is along the same line. For example, if I retire with an investment portfolio of 1,000,000. I hope that I never have to touch that. My goal is to be able to generate all of my income through peer lending and rental properties. They are more stable and reliable. The portfolio would be there as a backup plan.

    What scares me the most is some crazy-ass event. For example, if someone ever lights off a nuke in a major city or the DPRK starts lobbing missiles at Seoul and Japan, the world will change instantly and not for the better.

  24. says

    Great post.

    I use 4% as an estimate, that’s it.

    My current dividend yield is around 4.5%. Will it always be that way? Maybe, maybe not.

    I figure a 3% withdrawal rate is what I need. I plan to have a $1 M portfolio in about 20 years, before my 60s. Once I hit that value, I will retire.

  25. Anton Ivanov | Dreams Cash True says

    I’ve been waiting for somebody to write about not touching your retirement principle for a while! This is the strategy I have always used when conducting my retirement planning and have never imagined myself drawing on my portfolio principle. A 3-5% yield (achieved through dividend stocks or, most likely, bonds) is the number I use to calculate my estimated yearly retirement income.

    I do agree with the other commenters that for those who don’t have enough saved to use this strategy, drawing on their principle is the only viable options. But that’s poor planning on their part, in my opinion.

  26. Arnold Reynolds says

    When it comes to retirement planning, the key question is how much the client can safely spend out of his or her portfolio during the golden years. The rule of thumb is that 4% is a safe withdrawal rate. However, given that many bond yields are well below 4% — and retirees tend to invest heavily in bonds — the appropriateness of this rule has been called into question.

  27. says

    We computed portfolio outcomes in a similar manner for each of the 100 scenarios. Although most scenarios resulted in portfolio success (the portfolio was able to sustain a 4 percent withdrawal rate over the 35-year period), we were surprised by the proportion of scenarios that resulted in portfolio failure—18 of the 100 scenarios. In order to be consistent with some of the other studies mentioned previously, we redefined portfolio success by shortening the retirement period to 30 years. The portfolio failure rate dropped to 14 percent, but is still higher than Milevsky and Robinson’s 9 percent (2005), Spitzer, Strieter, and Singh’s 6 percent (2007), and Scott, Sharpe, and Watson’s 5.7 percent (2009). We also computed the portfolio balance (in real dollars) at the end of the 35-year retirement period for successful scenarios. Finally, we inverted our model to calculate the sustainable withdrawal rate (the maximum rate at which a given portfolio may be drawn down without depleting the portfolio before the end of the 35-year retirement horizon) for each of the 100 scenarios. Portfolio outcomes for the six previously described retirement scenarios are presented in Table 3.

  28. says

    I prefer to look at retirement as needs based vs income (withdrawal based). Safety doesn’t matter when you have a non-discretionary monthly nut that equals 10% of the portfolio.

  29. John says

    Why not consider a SPIA? That would ensure you are always guaranteed a SAFE withdrwal rate and you dont need to save as much either

    • JayCeezy says

      The Single Premium Immediate Annuity (SPIA) is a tough one for me. It is sold as a product (Life Insurance), and the company has teams of actuaries and reams of historical data to make sure that the odds are in the company’s favor for making more money than it will pay out.

      If you have checked out Annuity payouts lately (I have, very discouraging returns just like every other investment class), they do not keep up with inflation. There are products that do incorporate an inflation factor, but the buyer pays dearly for this.

      In the meantime, the risk goes to the buyer for an early demise (in which the lump sum stays with the life insurance company), that the lump sum won’t ever be needed for anything else, and that the risk/return/inflation snapshot in which the SPIA is negotiated will always be sufficient to provide for the buyer’s future needs.

  30. Shobir | Find Some Money says

    I’d love to leave a financial legacy or at least try to leave one. This post has made me think about something after retirement. It would be great to leave the principal intact or have enough principal so I’m living off the interest that’s accrued from the interest, this means the principal with continue to rise. I really enjoyed this post, thanks for sharing.

  31. Charles says

    This is quite a thought provoking. I’ve never thought about leaving a legacy or endowment behind but I can clearly see the benefits it would give to the future generations especially if the money was not split too much. I have an only son and it would be great to leave him the entire principal so he could do the same. thanks for sharing, interesting piece

  32. Ricky says

    With a mixture of stocks and bonds, how is a withdrawal rate of 4-6% difficult to maintain whilst preserving capital? Seeing as how the stock market returns around 9% on average, why would it be so hard to maintain a 4-6% withdrawal rate? Sure, you would need to adjust with the market. If the market is doing bad, don’t take as much cash out (thats what your bonds and dividend paying stocks are for). But seeing as how the market is up ~22% this year, you could have withdrawn anywhere from 0-22% and still preserved your capital.

  33. Mark says

    Again, I LOVE this blog, just have to say that.
    There are many variable on how to draw down your portfolio in retirement. There are many drawdown models to consider:

    First, the draw rate does not have to be constant. I will semi-retire at age 56. My life expectancy is 96. So I need at least 40 years worth of income. But the income I need is not constant. My wife and I view retirement as phases (active, passive, and declining), based on what we have seen happen to the elderly in our own families (we all get old and die). Active is roughly age 56 – 70. Passive is roughly 70 – 80. Declining is 80+. During active years you will travel, spend money on your kids and the grandkids, and just have fun. In passive years you are hopefully still able to get around, but let’s fact it, things are going to get pretty slow. In the declining years. you will sit around and watch TV, hopefully healthy enough to stay out of assisted living. So your draw rates are going to vary quite a bit based on what your needs are during these phases of old age. I’ve done spreadsheets on my portfolio and can easily handle a 5% active, 4% passive, and 2% declining drawdown profile.

    Another drawdown model I like is to only draw what you actually need. So if you are taking a big vacation you draw just the money you need for that expense. No point in pulling a set amount if you are not going to spend it.

    Another model is to drawdown no more than 1% less than what you earned in the previous year. So if you made 5% in the previous year the most you would draw is 4%. This gives you a whole year to adjust your portfolio as the markets change.

    Assuming your house is paid for, another model is to use your house as a cash reserve at the end of the declining period. This is when you are 90 and in assisted living. Most people won’t be able to live in any house by yourself any longer at that point.

    In practice, I believe it is a combination of multiple drawdown approaches that will work the best. But you do need to be active in the management of your money, or get someone you trust to help you with it as you get older.

    As far as an inheritance goes. Well, we are planning on preserving our principal for out own safety net, not for our children’s. If we need to spend it up for fun or necessity, so be it. Our first order inheritance is to provide a college education and possibly beyond that. This is how the stealthy wealthy manage their money. If we happen to die prematurely and leave a bunch of money to our kids, well how lucky they will be. But it is total foolishness to purposely plan to leave money to your kids – especially if it will cause you to compromise your own retirement goals or lifestyle. Research shows that this practice is demeaning and demotivating to young adults. There are exceptions. For example, we may plan to gift money to help fund our daughter’s IRA and other retirement tools or to contribute to our grand children’s 429 plans, but not for spending money that she can use in her working years – that she will have to earn.

    Best to everyone. Work hard, play hard, and be balanced in all aspects of your life (health, wealth, and relationships).

  34. Ken Carlson says

    I find it interesting that no one brought up RMDs…..for those of us with almost all of our retirment in traditional 401ks our withdrawl rate is only for us to decide on the first few years of retirement assuming a person retires at full retirement age! In my case, I will only be able to decide this for 4 years before I am forced to wirthdrawl based onlife expectancy….I know I know I will hear that this can be reinvested or some may have Roth accounts but by and large the masses in the private sector won’t control the withdrawl rate for long.


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