Safe Withdrawal Rate for Early Retirees & What It Means for Retirement

* The 4% rule is actually very safe for a 30-year retirement

* A withdrawal rate of 3.5% can be considered the floor, no matter how long the retirement time horizon

-“Safe Withdrawal Rate for Early Retirees“, MadFientist.com. October 19. 2015.

I thought this was interesting because it gives you a target for retirement. According to the American Community Survey, the median household income in the United States was $62,860 in 2019. Median earnings for a worker was $41,537 (Table A-6). Thresholds for poverty for a single person are $13,300 if they are below 65 years of age and $12,261 if they are older than 65 years old (Table B-1). Let’s calculate:

  • $12,261 / 0.035 = ~$350,315
  • $13,300 / 0.035 = ~$380,000
  • $41,537 / 0.035 = ~$1,186,772
  • $62,860 / 0.035 = ~$1,796,000

Now, let’s go the other direction. How long would it take you to reach these thresholds, if you managed to save 20% of your total income?

  • $350,315 / ($12,261 * 20%) = ~142 years
  • $380,000 / ($13,300 * 20%) = ~155 years
  • $1,186,772 / ($41,537 * 20%) = ~143 years
  • $1,796,000 / ($62,860 * 20%) = ~142 years

Since we are multiplying by 0.035, it is obvious these numbers would all be around the same. Equally obvious, you either need to quadruple the savings rate or the annual salary, or double both, in order to retire after 35 years of work.

Which really brings us to the point of this exercise, the only people that can look to be an early retiree are either a) using leverage to build equity, such as real estate and renting, b) investing in some kind of investment vehicle that returns at least a 7% rate of return (using the rule of 72, this gives us a doubling of savings roughly every 10 years), or c) radically increase your savings rate by living as frugally as possible, or d) have a much higher than median salary.

Doing the calculations over with a 7% interest rate, it takes about 35 years with a 20% savings rate for every income level mentioned above to get the necessary savings to do a safe withdrawal rate that replaces income. It’s rather sobering when you work through the numbers when someone starts talking about safe withdrawal rates and early retirement. Who is this advice for?

It can be done. If you are smart enough to do this kind of calculation before you go to work, you have a relatively high income, you pool your resources with a partner, you get a sizable inheritance, you get involved with index funds early or you do real estate. These are the options. Otherwise, you are working your whole life.

cFIREsim

“cFIREsim stands for Crowdsourced Financial Independence and Retire Early Simulator.

If the market does no worse than the great depression, 1970’s stagflation, or the dotcom bust, will my money last in retirement?

The math behind retirement: The simple question of “Will my money last in retirement?” is rife with complications. Do you have a good handle on what your expenses are? What sort of investments do you have? How long might you live? Do you have any large one-time expenses in the future? What happens if you retire during a major market downturn? What happens if you retire in the worst market downturn in history?

Retirement advisors and various financial websites will often give you the most overused “Rule of thumb” in the financial world. The “4% rule”, derived from the Trinity Study, states that if you have a retirement period of 30 years, you can safely withdraw 4% of your portfolio in year 1 of retirement and continually adjust that for inflation, without fear of running out of money. Critics of this study say that the financial world is a much different place than it was in the past, and that we should adjust our thinking on how much we should withdraw in retirement.

How do I know if my portfolio will last? At it’s most basic level, cFIREsim uses historical stock/bond/gold/inflation data from 1871 to present, and calculates how your portfolio would have fared throughout history. If you enter a 30 year simulation period, it will run your data for every 30yr period in history. Example: cFIREsim will figure out your portfolio value, if you would have theoretically retired for the period of 1871-1900, then for the period of 1872-1901, 1873-1902, etc. It will take all of your inputs and determine whether or not the portfolio “failed” (failure is defined as going below $0 at any given point). What does this tell me? If cFIREsim says that your portfolio survived 95% of the simulation cycles, it means that if the market does no worse than the worst years in recorded stock market history, your portfolio will survive.

What can cFIREsim do? At it’s core, you can enter information in the a few simple inputs and return the basic simulation. At it’s most complicated, it can determine your portfolio success based on 80 individual portfolio adjustments, multiple types of inflation, multiple types of market returns, and graphically show you the results. There are many options to choose from outside of the “Basic Inputs”. You can find information for each section within this FAQ.

cFIREsim