To understand how much is ‘enough’ in retirement, we need to understand the amount that can be withdrawn annually from a portfolio (inflation adjusted) so we are reasonably certain the portfolio won’t go to zero before death. This concept is called the ‘Sustainable Withdrawal Rate (SWR)’.

The Sustainable Withdrawal Rate (“SWR”) will depend on the individual retiree’s situation, including:

The ‘4% withdrawal rule’, which is the ability to withdraw 4% of your portfolio each year without running out of money, used to be a reasonable rule of thumb for retirement planning. This rule was based on historical studies of 50% intermediate-term U.S. Treasury notes/50% common stock portfolios over 30-year investment periods. 

In a well-known 1994 study, William Bengen found a 4% SWR survived all historical scenarios starting from 1926 to 1976. In the later Trinity Study, done in 1998, a 4% SWR had 95% success rate. This lower success rate was affected by the use of corporate bonds instead of Treasury notes (in a period with some large corporate bond defaults). 

In 2013, a study by Finke, Pfau and Blanchett calculated the SWR based on Monte Carlo simulations*, assuming 2.6% real bond returns and 8.6% real stock returns. With this new analysis, they found a 4% withdrawal rate succeeds 94% of the time with a similar 50/50 stock/bond split over a 30-year investment period.

Past studies include very few low interest rate periods like the one we have today. We care about low interest rates because bond yields are an excellent predictor of 10-year bond total returns AND bonds are a large part of retirement portfolios. See chart below from the Finke, Pfau and Blanchett 2013 study.

Our current Treasury bond yields of 2% are far below the historical average of 5%.  If you retire today, you will likely have very low bond returns for the first 10 years of retirement. That implies lower than average returns on half of a 50/50stock/bond portfolio.  Further, returns during the first 10 years of retirement have a very large effect on future portfolio outcomes. (They explain 80% of outcomes.) Our current low yield problem means a 4% withdrawal rate has a higher risk of failure than in the past.

In 2018, Wayne Pfau updated the Trinity study, reflecting interest rates that started low at the beginning of the retirement period and increased over time to the historical average rate. He came up with the following results in the table below using corporate bonds (not Treasuries) in his Monte Carlo simulations. Under these circumstances, higher equity portfolios have higher success rates.  

You must determine the appropriate tradeoff between your standard of living in retirement versus the risk of running out of money or leaving too much behind. While the data in the cited studies are instructive, it’s important to evaluate both interest rates and the nature of the equity market at the beginning of your retirement. Your portfolio experience will be specific to your retirement timing, it is not an average.

Here’s to a successful retirement!