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.

Waiting for the Last Dance

“…it is highly probable that we are in a major bubble event in the U.S. market, of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain. I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible….

…Nothing in investing perfectly repeats. Certainly not investment bubbles. Each form of irrational exuberance is different; we are just looking for what you might call spiritual similarities. Even now, I know that this market can soar upwards for a few more weeks or even months – it feels like we could be anywhere between July 1999 and February 2000. Which is to say it is entitled to break any day, having checked all the boxes, but could keep roaring upwards for a few months longer. My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine. At that moment, the most pressing issue facing the world economy will have been solved. Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. “Buy the rumor, sell the news.” But remember that timing the bursting of bubbles has a long history of disappointment.”

-Jeremy Grantham, “Waiting for the Last Dance.” GMO.com. January 2021

I thought in March 2020 that COVID-19 was going to clobber markets, and I was dead wrong. Too early. But, at some point, markets have to reflect the economic reality, which should happen Real Soon Now.