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What’s the safe withdrawal rate (SWR) you’re working with in your retirement planning?  4%?  It’s always been 4%, right? 

Not anymore.

For over 25 years Bill Bengen’s “Safemax” rule has been every retirement planner’s reference.  If you withdraw 4% in the first year, then adjust your subsequent annual withdrawals for inflation in subsequent years your savings will last as long as you do.

That’s the rule of thumb you likely assumed when you googled ‘how much money do you need to retire?’

Now Bill has revised his rule to up to 5.5% factoring in low inflation.  To be fair to Bengen, he only advised 4.5% in 1994 as a guide in a worst-case scenario.  It was based on a 50/50 stock/bond investment portfolio and the financial climate back then was very different.  Back then you could get treasury yields of 7-8%, now it’s less than 1%. 

This might be music to some retirees’ ears until they find out that a few months ago Sam Dogen, the Financial Samurai, updated his own withdrawal rate recommendation to 0.5%.  At 0.5% can you even afford to retire? How can these two recommendations from famous financial advisors be an order of magnitude apart? If you’ve already retired you might now be worrying whether you have enough money to see you through your retirement after reading his article.

Dogen’s reasoning is that a 10 year bond yield is 0.7% and likely to stay that way for years.  At that rate $1 million will only generate $7,000 in pre-tax income.  To make things more confusing Bengen argues that, by looking at historical outcomes, your SWR would have fluctuated as high as 7-13% depending on when you retired.

So who is right? 

Neither, because you can’t assign one number for every person, every portfolio, forever. 

They’ve come up with a number that can’t possibly apply to every portfolio and situation.  They don’t know if you’ve paid off your mortgage, still have dependents, what your social security benefit is, what kind of lifestyle you need to fund or whether you have other sources of income. Most importantly one number probably shouldn’t be applied to all different portfolios. You certainly wouldn’t try to apply the same SWR to someone with a portfolio of 100% bonds as someone with 100% stocks, for example. A safe withdrawal rate is different for everyone.

The question to ask yourself is how much money do I need to retire?

To calculate your own SWR you can use Portfolio Visualizers free Monte Carlo Simulation.  It takes just a few minutes and it will reflect your own personal situation which is the only one that matters. It lets you adjust all of the important assumptions, like your starting amount, what cash inflows and outflows you expect (and when), how long you want the money to last for, and more. It also gives you statistical probabilities that the money will last for that long, given the assumptions you’ve input, so you can decide just how confident you want to be and how much risk you’re willing to live with.

Their Monte Carlo Simulation uses historical, statistical, forecasted and parameterized returns to give you the best and worst case scenarios to help you make the right choices for investing and retiring.

If you’re still looking for an easier rule of thumb, though, here’s mine:

1) Keep fixed, mandatory expenses to 1-2% of net worth per year. These are things like rent, food, and anything you’ve signed a contract to pay. If your SWR is higher than 1-2%, go ahead and use that extra amount to spend on things that make your life better. But, be ready to cut those ‘good life’ things out and go lean during recessions and downturns. The stock market corrects itself sharply from time to time, you don’t want to be selling your investments during one of these corrections if you can help it, when we’ve seen over and over that it usually comes back pretty quickly. So it’s better to put yourself in a position where you can wait it out.

2) Use other tools to build a financial fortress you can retreat to in tough times. For example we have a HELOC and SBLOC in place to borrow from, instead of needing to liquidate investments in a downturn.

3) Recalculate once per year to update and include what has changed about the world and your portfolio into your assumptions.

Time will tell whether Dogen or Bengen were right, in the meantime you can make sure your SWR is right for your own retirement.