Stocks — Part XIII: Withdrawal rates, how much can I spend anyway?

Posted: December 7, 2012 in Stock Investing Series

4%.  Maybe more.

So, you’ve followed the jlcollinsnh big three:

You’ve avoided debt

You’ve spent less than you’ve earned

You’ve invested the surplus



by Sergey Gusev

Now you’re sitting on your stash and wondering just how much you can spend each year and not run out.  This could be stressful, but it really should be fun. You might even be cheeky enough to ask, “What percent of his own stash does jlcollinsnh spend?”  We’ll get to that.

You don’t have to have read far in the retirement literature to have come across the “4% rule.”  Unlike most common advice, this one holds up to our beady-eyed scrutiny pretty well, even though it is really very little understood.

Back in 1998 three professors from Trinity University sat down and ran a bunch of numbers.  Basically they asked what would happen at various withdrawal percentage rates to various portfolios, each with a different mix of stocks and bonds, over 30 year periods depending on what year the withdrawals were started.  Oh, and both with adjusting withdrawals for inflation and with not adjusting withdrawals. Whew.  Then they updated it in 2009.

Out of the scores of options, the financial media seized on just one of these models:  The 4% withdrawal rate, 50/50 stock/bond portfolio, adjusted for inflation.  Turns out, 96% of the time, at the end of 30 years such a portfolio remained intact.  Put another way, there was just a 4% chance of this strategy failing and leaving you destitute in your old age.  In fact, it failed in only two of the 55 starting years measured:  1965 & 1966.  Other than those two years, not only did it work, many times the remaining money in the portfolio had grown to spectacular levels.

Think about that for a moment.

What that last line means is that in most cases the people owning these portfolios could have taken out 5, 6, 7% per year and done just fine. In fact, if you gave up the inflationary increases and took 7% each year you would have done just fine 85% of the time.  Most of the time taking only 4% meant at the end of your days you left buckets of money on the table for your (all too often ungrateful) heirs.  Great news were that your goal.  Also great news if you anticipate living on your portfolio for longer than 30 years.

But the financial media knows that most people don’t like to think too hard.  By reporting the results at 4% they could report on just about a sure thing.  Roll it down to 3% and we have as sure a thing as we’ll ever see short of death and taxes.  Oh, and that’s giving yourself annual inflation increases.

While 1965 & 1966 were the last and only two years where 4% failed, remember that more recent start years have not yet had their own 30 year measurable runs.  My guess is that if you began your own withdrawals in 2007 and the early part of 2008 just prior to the recent collapse, you will have hit upon two more years in which the 4% plan is destined to fail.  You’ll want to scale back.  On the other hand, if you started with 4% of your portfolio’s value as of the March 2009 bottom, you’re very likely golden.

Here’s the Trinity Study Update.  The prose is a bit dry, it is written by PhDs after all, but don’t feel you need to read it closely.  What you should take a close look at are the very cool charts showing how differing scenarios play out.  If you want a detailed answer to the question of what percent works for you and your own unique situation and attitudes, you can figure it out here.  Plus, you’ll need to refer to those charts to follow along in the rest of this post. So go ahead. Take a look. I’ll wait.

Here’s the Cliff Notes version:

    • 3% or less is a near sure bet as anything in this life can be.
    • Stray much further out than 7% and your future will include dining on dog food.
    • Stocks are critical to a portfolio’s survival rate.
    • If you absolutely, positively want a sure thing, and your yearly inflation raises, keep it under 4%.  Oh, and hold 75% stocks/25% bonds.
    • Give up those yearly inflation raises and you can push up towards 6% with a 50% stock/50% bond mix.
    • In fact, the authors of the study suggest you can withdraw up to 7% as long as you remain alert and flexible. That is, if the market takes a huge dive, cut back on your percent and spending until it recovers.

When you look at the article you’ll see it has four charts.  The first two look at how various portfolios performed over time and at various withdrawal rates.  The difference is the second one assumes you increase your dollar withdrawal amount each year to account for inflation.  So if you look at Chart #1 and at the 50/50 mix with a 4% withdrawal rate, you see you have a 100% chance of your portfolio surviving 30 years.  Chart #2 tells you that if you take those same parameters but give yourself inflation raises, your portfolio’s chance of survival drops to 96%.  Makes sense, no?

Charts 3 & 4 tell us how much money remains in the portfolios after the 30 years have passed and this, to me, is really compelling stuff.  Again, Chart 3 assumes a straight percentage withdrawal and Chart 4 assumes giving yourself inflation raises.  Let’s take a look at some examples.

Assume a 4% withdrawal rate on a portfolio with an initial value of $1,000,000.  Here’s what you’d have left (median ending value) after 30 years:

Chart 3:

  • 100% stocks = $15,610,000
  • 75% stocks/25% bonds =  $10,743,000
  • 50% stocks/50% bonds= $7,100,000

Chart 4:

  • 100% stocks = $10,075,000
  • 75% stocks/25% bonds =  $5,968,000
  • 50% stocks/50% bonds = $2,971,000

Very powerful stuff and it should give you a lot to feel warm and fuzzy about as you follow The Simple Path to Wealth.

As you look over these charts, one thing that should become very clear to you is just how powerful and necessary stocks are in building and preserving your wealth.  This is why they hold center stage in my Portfolio Ideas.

What is likely less obvious, but every bit as important, is the critical importance of using low-cost index funds to build your portfolio.  When you start paying 1-2% or more to active mutual fund managers and/or investment advisors all these cheerful assumptions wind up in the trash heap.  Blogger Wade Pfau in this article says it best:

“For an example of this, the 50-50 portfolio over 30 years with 4% inflation-adjusted withdrawals had a 96% success rate without fees, 84% success rate with 1% fees, and 65% success rate with 2% fees.”

In other words, using the Trinity Study projections with portfolios built from anything other than low-cost index funds is invalid.

So, now to answer that question:  What withdrawal percent do I personally use in my retirement?  I confess I pay so little attention it took a few moments to figure it out and even then it’s not exact.  But this year my best guess is it is running somewhere north of 5%.  If you are a regular reader, this casualness probably surprises you.  But there are mitigating circumstances:

1.  I have a kid in college.  That is a huge annual expense, but in 1.5 years it goes away.  The money for it is figured into my net worth, but it is also earmarked as “spent.”

2.  Since my retirement, my wife and I have accelerated our travels and the related spending has spiked sharply. Not to be morbid, but at my age I am more worried about running out of time than money.  If the market were to tank in a major way, this is an easy expense to adjust.

3.  Sometime in the next few years we will have two nice new income streams coming on-line in the form of Social Security.

4.  Most importantly, I know I’m well under the 6-7% level that requires close attention.

Within that 3-7% range, the key to choosing your own rate has less to do with the numbers than with your personal flexibility.  If as needed you can readily adjust your living expenses, find work to supplement your passive income and/or are willing and able to comfortably relocate to less expensive places, you will have a far more secure retirement no matter what rate you choose.  Happier too I’d guess.

If you are locked into certain income needs, unwilling or unable to ever work again and your roots go too deep to ever seek out greener pastures, you’ll need to be much more careful.  Personally, I’d work on adjusting those attitudes.  But that’s just me.

My pal, Mr. Money Mustache, did a fine piece on this a while back.  It is as good an explanation/defense of the 4% rule I’ve yet to read. Nothing, of course, is guaranteed. That why we all need to remain flexible, alert and, well, Mustachian.

Last Spring I dealt with a lengthy comment from reader “ddrem” describing the disastrous position the world is in today and calling into question my portfolio recommendations accordingly. (See:

No worries.

sea by Gusev


by Sergey Gusev

Not only will we muddle thru, it is my belief we are on the verge of another great bull market. For lots of reasons, not the least of which is simply these things go in cycles and the drumbeat of pessimism (always a bullish sign) seems unusually high.  People seem to believe the world will end on their watch. But it never does. It is the dark that sets the stage for the dawn.

If I’m wrong and the dawn is still a ways off, that’s OK too. There are lots of adjustments I can make and options to explore.

4% is only a guide. Sensible flexibility is what provides security.

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  1. […] Stocks — Part XIII: Withdrawal rates, how much can I spend anyway? […]

  2. […] For 4% – Mr. Money Mustache – For 4% – JLCollinsNH – Against 4% – Financial Mentor – Against 4% – Schof Image: […]

  3. I’ve written further about this here:

    There’s a number of factors that call into question the 4% rule, including lower returns in our current environment, estimates of a slower-growing GDP in the future, and, most convincingly for me, the different SAFEMAX rates in different countries, ranging from under 1 for war-ravaged Japan to 2 and 3 (fairly common). 4 seems like a pretty optimistic rate.

    As a sidenote, love the blog and the series on stocks. I’ve listed this site as essential reading, because I think it is.

    • jlcollinsnh says:

      Hi John…..

      Thanks for the kind words.

      There is always a pessimistic case to be made, but I confess I have little patience for it. Mostly it is based on the idea that the past 40+ years have been some sort of golden time not likely to be repeated.

      They were anything but golden. For my litany of challenges during that time, check out my reply to Darrow below. Could the next 40 years be worse? Sure. But it wouldn’t be all that hard for them to be better.

      As I try to show in the post, the data indicate that, if anything, 4% has proved to be too conservative in the vast majority of cases.

      Nobody can predict the future. Nobody, around here at least, is suggesting that 4% is an iron-clad set it and forget it guarantee. But as a reasonable guideline for planning, 4% is as good as it gets.

      Any sensible investor should keep a close eye on their stash, especially in retirement. Last year I spent 4.5% of my stash and by year end it was worth 11.4% more than when I started. This year I plan to do much the same, but should the market tank in some 2008 type fashion, of course I’ll cut back.

      4% is only a guide. Sensible flexibility is what provides security.

    • Cody says:

      Mr. Collins,

      I just wanted to thank you for doing the blog. I’ve been reading the jlcollinsnh blog and Mr. Money Mustache. You guys have truly shaped my life.

      I work in IT as a computer programmer. In 2007 at the ripe old age of 20 I started as an intern with my former company. I got promoted to full time status, the company gave me a 10% raise which only came out to be $1.20 an hour(What I thought was a fortune at the time). Later I discovered the other programmers on staff were making almost double what I was. After 4 years of being screwed over by my old employer I took an entry level position with another company here in town. They saw my work ethic and I quickly moved up the ladder. I got a promotion which doubled my pay. I didn’t adjust my lifestyle to live more lavishly. Actually I have paid off our car (4K), my student loans (6.8K) and my wife’s student loans(10K) will be done this month. My wife and I will save over 60% of our income each month!

      I am very excited to start putting money in to VTSAX! I’m 25 but close enough to 26 to read the welcome mat on the front doorstep. My goal for this coming year is to max out Roth IRA contributions for my wife and I(5,500 * 2 people = 11K) and I just upped my 403B contribution at work to 10% with a 4% employer match. Retirement at 35 seems possible, 40 seems very likely, and 45 seems like a certainty.

      I just wanted to thank you for your wisdom.

      • jlcollinsnh says:

        Hi Cody….

        That’s awesome! My guess is you’ll have F-you money closer to 35 than 45. These things tend to snowball.

        Your story is an inspiration and might help others on their paths. I wish I’d started as early and wisely as you.


  4. […] Stocks — Part XIII: Withdrawal rates, how much can I spend anyway? […]

  5. Thanks for tackling a tough subject with such clarity Jim. It’s a fascinating topic that I’ve read and written on quite a bit too.

    You got my attention with your point that using the Trinity Study projections with portfolios built from anything other than low-cost index funds is invalid. Technically speaking, high-cost funds just add to expenses in retirement, but the way you phrased it gets people to sit up and pay attention to investing expenses — which is what matters!

    I’m on board with most of your conclusions, except I’m a little less confident in the 4% rate itself. Research from Wade Pfau questions whether we can assume that past U.S. history is an accurate model of future returns, and has demonstrated that the safe withdrawal rate is a function of market valuations when you retire. Jim Otar says the sequence of returns in the early years of retirement are critical: it may not be possible to recover from a “lost decade” in a mostly-stock portfolio. Todd Tresidder doesn’t believe you can draw on principal at all for retirements much past 20-25 years.

    My view is that there is no definite answer to this question, since it requires predicting far into the future. The key for me, just as you say, is more about personal flexibility than the exact numbers. Monitoring your retirement portfolio, and responding to an extended downturn with either more income (via part-time work or passive streams), and/or ratcheting lifestyle spending down, is a powerful approach to handling those scenarios where the 4% rule won’t work.

    • jlcollinsnh says:

      Hi Darrow…..

      Great to see you here and glad you like the post.

      4%, and indeed all the scenarios in the Trinity study, are only guide posts as to what we can reasonably expect as we plan for our futures. But importantly, these guideposts indicate a much rosier future than most take into account, as indicated by the HUGE median balances left in most of these portfolios after 30 years.

      While I am unfamiliar with Mr. Otar, I absolutely agree with his idea that returns in the early years of retirement are critical. As I said in the post:

      “My guess is that if you began your own withdrawals in 2007 and the early part of 2008 just prior to the recent collapse, you will have hit upon two more years in which the 4% plan is destined to fail. You’ll want to scale back. On the other hand, if you started with 4% of your portfolio’s value as of the March 2009 bottom, you’re very likely golden.”

      It’s that flexibility thing. :)

      As to “whether we can assume that past U.S. history is an accurate model of future returns” I would say possibly not. But I cringe at the assumption they will be worse. They could be much better. Make no mistake, the past has not been some golden cakewalk. It has been a very rocky road. My guess is the future holds the same.

      Market crashes are to be expected. What happened in 2008 was not something unheard. It has happened before and it will happen again. And again. I’ve been investing for almost 40 years. In that time we’ve had:

      –The great recession of 1974-75.
      –The massive inflation of the late 1970s & early 1980.
      –Mortgage rates were pushing 20%. You could buy 10-year Treasuries paying 15%+.
      –The now infamous 1982 Business Week cover: ”The Death of Equities,” which, as it turned out marked the beginning of the greatest bull market of all time.
      –The Crash of 1987. Biggest one day drop in history. Brokers were, literally, on the window ledges and more than a couple took the leap.
      –The recession of the early ’90s.
      –The Tech Crash of the late ’90s.
      –And that little dust-up in 2008.

      Thru all those traumas the market returned an average of 12% per year. Those were many of the years the Trinity Study covers.

      The market always recovers. Always. And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway. Understanding this is the beginning of this series:

      I am also unfamiliar with Mr. Tresidder’s work. I would need to know what sort of portfolio he is thinking about if he “doesn’t believe you can draw on principal at all for retirements much past 20-25 years.” For a portfolio as described in the Trinity Study, I would suggest this is an unnecessarily conservative approach. In return for severely restricting your retirement income to only dividends and interest, you gain some security and the high likelihood of leaving a huge pile behind.

      Better, as you and I agree, to be a bit more optimistic while keeping your eyes open and being ready to adjust. :)

  6. […] Stocks — Part XIII: Withdrawal rates, how much can I spend anyway? […]

  7. I am a LTBH individual stock investor now, at some point in the future I’ll make a decision if I want to re-balance my portfolio to something like VTSMX/VTSAX, VGSTX/VTIAX, VBMFX/VBTLX, which is a simple and effective portfolio.

    I recently blogged about retirement calculators that some commenters mentioned ( The two I like the most are FIRECalc and RIP. The major difference between them are that FIRECalc uses actual market returns whereas RIP uses a Monte Carlo simulation model. Who’s output is right? Both. I think you’ll want to use a combination.

    The more I learn and gain experience with early retirement planning, and I’m about 9 years away, the harder the conviction that *none* of it is an exact science. But it also doesn’t have to be, as adjustments can be made to your lifestyle depending on market conditions, just as you mentioned Jim.

  8. Presumably, dividends are included in the 4% math?

  9. Thank you so much for sharing my paintings on your blog. My video master class:

  10. Acorn says:

    This was so useful, I always have had a bit of trouble understanding withdrawal rates. This post makes it so simple to understand.

  11. MMM-JLCNH fan says:

    Thanks for another great post. You mentioned MMM using FIREcalc to come to his conclusions. With FIREcalc, you can select various timelines as you mention. FIREcalc is set up to look at portfolio survival, just like the Trinity study. However, you can make it analyze the wealth accumulation phase by setting the annual portfolio spending as a negative number to reflect $ being added every year. Running it that way suggests that an all-stock portfolio (as you recommend in your Simple Path to Wealth post and elsewhere ) gives the best results during the accumulation phase and following the Trinity recommendations linked above (i.e. adding bonds to the mix) gives the best result during the retirement phase (as you have previously suggested here: ).

    • jlcollinsnh says:

      Thanks, Fan, for the clarification.

      As I mentioned, I’m unfamiliar with FIRECalc, but I gather it is a useful tool. And, since it seems to confirm my portfolio ideas, they must be doing something right! :)

  12. Really liked this and all your posts on stocks Jim! Glad your back and had a good trip.

    • jlcollinsnh says:

      Thanks Keichi….

      Already planning the next one. In a couple of weeks we’re headed to France to visit our Daughter who is there for the year. 5 days in Paris and 5 days in Valencia where I’ll get to abuse still more Spanish speakers with my broken and floundering attempts at their language.

  13. Prob8 says:

    Wow, any time I want to feel better about the crappy returns I’ve had over the last 7 years I just need to read this blog to realize that over the long run things will get better. Couple questions . . . it looks like the study focuses on large companies for the stock allocation and a certain type of bonds. No mention of real estate. Give that the main fund in the Simpler Path is a total market fund and a reit plays a significant role, does that have an impact on the results? Also, is rebalancing necessary? I suppose the key is to remain flexible and adjust the withdrawal rate based on market conditions.

    • jlcollinsnh says:

      great question.

      yep, my simple path calls for 50% VTSAX (total stock market), 25% bonds and 25% REITS. For reasons I discuss elsewhere on the blog I think this is the most powerful combo for wealth building and preservation.

      As such, my bet is it should do even better than the purely stock/bond portfolios in the study.

      Yes, rebalancing is important with this approach and, indeed, any approach that uses asset allocation. Once a year is fine and I suggest on your birthday. Too much other trading and dividend/capital gains payouts happen at year end by the big firms and I prefer to avoid that time.

      If the market were to have a huge tick up or down in a short time frame, as in late ’08 & early ’09, I’d also rebalance then too.

      • Prob8 says:

        Your rationale for holding the REIT fund makes sense to me – and I do hold some of that fund. Can you refer me to a study or other data that supports the concept that a REIT will react faster to inflation than VTSAX? It would be nice to have some filler reading between JLC posts. The Trinity Study was a nice review.

        Also, do you consider your home equity to be a part of your real estate allocation? In other words, if 15% of your net worth was in your house, would you only put 5-10% in the REIT? It seems to me that they are two very different types of assets. A house is a money sucker while the REIT pays me.

        • jlcollinsnh says:

          Hi Prob8…

          Off the top of my head I can’t think of any studies to point you to….

          I do consider the house equity in calculating my allocations. As you point out, a home and a REITS investment are very different animals. But in terms of an inflation hedge, they both serve the purpose.

          Once we sell the house, the full real estate allocation will be in the fund and my guess is that will provide better and certainly smoother performance over the years.

  14. Shilpan says:

    Just curious Jim as to why you decided to receive Social Security payment at age 62? It’s a nice post idea to explore different age vs monthly SS income… and, of course, tax implications.

    • jlcollinsnh says:

      Actually my wife and I were just discussing this over dinner (and a nice bottle of wine) this evening.

      I haven’t taken SS as yet and probably won’t until I’m 70. Mine will be larger than my wife’s. Since she is very likely to outlive me by a couple of decades, this will give her more security and a bigger check once I’m gone. We plan to have her begin with hers at age 66.

      So not yet for either of us. But for planning purposes, we know it’s coming and if needed we could always take it sooner.

      We are not the least bit concerned about it being there and, in my opinion, nobody 55 or over needs to be.

      It would be a very interesting post, but I’m not qualified to write it. I’m still trying to figure it out. If I ever get to the point where I feel I can, I’ll put one together.

      I try to write only about stuff I actually know about. Yes. I know. That’s not always apparent. :)

      • Shilpan says:

        You are a wise man, my friend!

      • chronicrants says:

        Do you have any opinion on planning for social security for those under 55? I’d like to think there will be at least some SS when I’m ready for it in about 30 years, but there are days when I think it’s unlikely. Ideally I’d like to plan as if there won’t be any SS and then if it’s there it’ll just be a nice extra, but I’m not sure that I’ll be able to manage that. Either way, I’m curious as to your perspective.

        • jlcollinsnh says:

          Hi CC….

          Do I have an opinion??? :)

          Actually, I’ve been meaning to write a post about SS and your comment might just be the motivation I need. For now:

          Your intention to plan as if it won’t be there is a good one. In fact this is what we did and surprise, it’s here for us.

          I think it will be there for you, too, but in a less generous form.

          I expect that retirement ages will be increased, payment reduced and the income ceiling (currently around 108k per year) that’s taxed will be raised. But it will be there.


          1. SS is backed by the most powerful lobby in history: AARP.
          2. Geezers are an increasing proportion of the population.
          3. Geezers vote.
          4. Politicians rarely try to take anything away from a large population that votes.
          5. This is why all the possible solutions being suggested will effect only those 55 and under.

          Hope this helps!

          • chronicrants says:

            Thanks for sharing your thoughts! I think you’re right about politicians being unwilling to take a benefit away from such a large voting block, but at the same time, that can’t change the math. I’m also thinking there will be something, but will be smaller. You make a good point about them raising the retirement age even more. I wonder how high they’d let it go? Longevity runs in my family, so I’m planning a long retirement anyway, but I wonder if they would be able to get away with starting it at 70+ or if they’d hit too much resistance. Oh, where’s that crystal ball when we need it?

  15. Naomi says:

    Wow, this is great information. I’m curious – have you ever seen studies that go beyond 30 years? With the increases in both life expectancy and “extreme” early retirements it seems that people will need their portfolios to last longer than 30 years.

    • jlcollinsnh says:

      Thanks Naomi…

      That’s a great question and I’ll probably edit the post to address it.

      The Mr. Money Mustache article I linked to talks about this and he claims that the math is much the same for periods beyond 30 years. That is, if it works for 30 it very likely works for 60. I believe he uses FIRECalc in arriving at this conclusion. Since I am unfamiliar with that tool I can’t vouch for it.

      Since 1989 I’ve “retired” several times for periods lasting from 3 months to 5 years. (See:
      Always got drawn back into work, but never because the money was running out. In fact, much as the Trinity Study would have predicted (although I had yet to hear of it at the time) my net worth actually increased during these periods.

      For those years I withdrew around 3-5% and paid close attention to my portfolio. Had it begun to drift down, I would have adjusted my lifestyle and spending. Problem solved.

      Were I about to embark on a 60+ year retirement (and even at my advanced age who’s to say I haven’t?) I’d do much the same. In fact, that’s exactly what I am doing. It is about the flexibility I discussed in the post.

      Trying to select a “set it and forget it” percentage, especially with annual inflation raises, that will last in every circumstance over multiple decades of time seems a fool’s errand. And unnecessary.

      The beauty of the Trinity Study is that it tells you exactly what has happened across multiple scenarios over multiple decades. Examining that data provides a great framework to assess your personal situation and what might work for you. It also points the way should the market move dramatically for or against you in the early years.

      Or just use 3% on a 75% stocks/25% bonds portfolio with no inflation adjustments. Very conservative and all your surprises will very likely be extremely pleasant.

  16. Another Investor says:

    My problem with the Trinity study and FIREcalc is they are based on returns in a rapidly growing economy. I’m not convinced these returns will be repeated in a more mature US economy with a lot of competition from outside. Current and future taxes are also an issue.

    I prefer a mix of dividend yielding stocks and real estate for the income portfolio. I limit myself to only considering the net income from my assets as my potential income – I do not decumulate and spend principal. I worry less about the vicissitudes of the market and keep less of a wary eye on inflation this way. Better tax treatment as well.

  17. Enjoyed this post Jim. It gives me a lot of confidence my wife and I are doing the right thing. Wife is a bigger spender than I am, but more conservative on the withdrawal end. She wants to draw 0% and live off of other monies.

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