Saving For Retirement

My daydreams about retirement have evolved over the years.  When I was younger I thought retirement meant spending most of the day on the fairways and the afternoons at the 19th hole. Or maybe trolling the waters of a big lake in a nice fishing boat sharing stories with an also-retired friend.  So saving for retirement was centered around these same activities.

Cantigny Golf Course, Wheaton, Illinois
Photo courtesy of

When I got a little older my dreams graduated to a grand retirement played out in an expensive condo on the beach, or a million-dollar cabin in the mountains.  After I got a job, got married, and had two kids I quickly realized this idea of a luxurious retirement was not very realistic. My early ideas were shaped more by the movies than the real world.

Now that I’m a “thirty-something” (and old enough to remember the television show by the same name), my dreams for retirement are more centered around spending time with family. I’d like to do a little traveling (nothing glamorous, and mostly domestic), and spend some time working with young people by either coaching or teaching, or some combination. While my retirement plans are still a little vague, I am certain that I do not want to still be working in the corporate world in my old age.

To make my dream of financial independence a reality, I need to put a number on it, and devise a plan to hit that number in a reasonable amount of time.  Lots of theories out there on how to calculate your “number,” and depending on the formula used there is some fluctuation in the amount required. However, this is a case where being in the same ballpark is close enough for me, so I don’t overly concern myself with the math.

The 4% Rule

To demonstrate the 4% rule I’ll use a fictitious 30 year-old worker named Dan.  Dan works as a software engineer by day, and builds decks and fences on the weekends.  He earns $80,000 a year for his combined efforts. Ideally, Dan would like to reach financial independence at 50 years-old and spend his time modifying homes for those with disabilities – things like building wheelchair ramps, widening doorways, and similar accessibility features.  The service would represent a combination of his love for carpentry and a call to service Dan has wanted to fulfill his entire life.  What kind of nest egg would Dan need to pull this off?

The rule of 4% uses a couple assumptions, some of which are hard to justify in our current market conditions. In a typical market, it is not unreasonable to expect a 10%-12% annual return on a portfolio of stock market investments. That means you can safely withdraw 4% of your portfolio each year and not reduce your principal balance, even after accounting for inflation.

Anything earned above the 4% withdrawal and the rate of inflation grows your balance even higher (with the idea that you may have to increase withdrawals later to cover increased medical costs, insurance premiums, etc. as you get older).

To figure out the number required to maintain your current style of living, divide your current income by a factor of 0.04. In Dan’s case, maintaining an $80,000 yearly income would require a $2 million nest egg. But Dan is a frugal guy, and he and his wife plan to pay off the mortgage early – in their early 40’s. They buy older, used cars and trucks with cash, and have managed to pay off credit cards they ran up in their twenties.  They could easily live on $50,000 a year.

Running the formula again reveals Dan would only need $1.25 million to become financially independent.  He could withdraw a guaranteed $50,000 a year, or in years where his new business earned money he may not have to touch the nest egg at all.

Is 4% Too Much To Expect?

As I mentioned, the 4% formula uses some long-held assumptions about investments that may or may not be true in the coming decade.  I personally look for things to turn around in the next two years, but that doesn’t mean we’ll see a repeat of the “irrational exuberance” of the last 90s in the market. I think going forward investors will slowly have their confidence restored, but because it will take some time we can probably expect lower rates of return than in previous periods.

I also expect inflation to rise at a faster pace in the next few years.  Actually, I expect currency deflation to occur, but the net result is the same – future dollars will be worth much less than they are today.  The rise in inflation, coupled with lower expected yields from the market, mean it might be asking too much to expect to withdraw 4% from your nest egg without lowering your principal.

So What’s My Number?

My lifestyle lines up pretty well with Dan in that I hope to be living completely debt free by 50 – no credit cards, no car loans, and no mortgage.  If I can get to that point, my lifestyle needs will be fairly basic, and we could live very comfortably on $40,000-$50,000 per year (in fact, we could probably live on much less, but I’m being conservative here).

Reducing my expected withdrawal rate to 2-3% means I would need between $1.5 million and $2 million to live comfortably on $40,000-$50,000 a year.  I’ll split the difference and make my goal for financial independence $1.75 million.  Looks like I’ll need a few more side hustles.


  1. I love this post. My finances are remarkably similar to Dan’s, so you saved me the trouble 🙂 I think that my husband and I could easily live on $50,000 a year when we retire. He wants to do occasional consulting, and I’ll want to keep writing, so we could do this for a while. We’ll also probably downsize. We like the idea of living in an active adult community with a small home and someone else to take care of the maintenance. We’re not even 30, and we’re planning it out.

  2. Not having a mortgage by 50 sounds like a pretty sweet plan. Honestly? I have no idea what I would do once I retire. Writing would be nice, but there has to be something else…otherwise I’ll probably go crazy

  3. As to the question of whether a 4% real return is reasonable or not:

    Long-term (like, very long-term) market returns are actually pretty easy to predict with a good degree of confidence. It essentially comes down to the sum of dividend yield plus earnings growth.

    With a current dividend yield of just over 3% (higher than it’s been in a long time), I’d say that a 4% real return doesn’t seem unlikely at all over the next 30-40 years.

    If that made no sense or doesn’t seem believable, it’s my fault. Not the fault of the numbers. John Bogle explains it much better in his Little Book of Common Sense Investing

  4. For my (temp/semi) retirement I want to hop on a motorbike and ride it around the planet. Spend at least a month living in every country with a population of a million or more (there are 153). And spend at least a year in some of my favorite countries such China, Ethiopia, Thailand, Colombia. How much would it cost to hook this up? I’m thinking around $200K-$300K. The trip will take around 15-20 years. After I’m done, go to whichever country has the best economy and take on some job to pay the living expenses (maybe teaching), then travel only during the summers, and move every year or two. That’s approximately my plan. Of course, if I had more money, I would do something more ambitious.

  5. That plan doesn’t seem to take into account SS, pensions, IRA’s, etc??? And then is that a cash amount or a net worth amount?

    I guess, with your plan as-is, I’m already At there 🙂 When you are used to living on under $18,000/year, (and save money at that) and you figure SS and a small pension will bring in that much, and you are debt free, it’s pretty well taken care of already.

    At 54, I’m living in my retirement house, surrounded by family, and pretty much living my retirement dream, except for working 3-4 days a week just to get that free health insurance until I’m old enough for medicare 🙂

    As I’m happy with life now, I don’t see it changing much except for quitting work and doing more camping and fishing and some hunting trips and volunteering at the grade schools or in 4-H instead of working those 3-4 days. And maybe an even bigger garden than now 🙂

  6. wait a second. if i wanted to live at a standard of 80k/year in today’s money, i’d need 2mil (or whatever) in today’s money.

    but in 30 years, 80k probably won’t go as far as 80k does now. so won’t my nest egg need to be larger as well?

  7. @marci: I am working with the assumption that social security will be bankrupt by the time I reach “retirement” age, and very few industries offer anything resembling a pension (and those that do have solvency issues). The nest egg I referred to could be inside an IRA, 401(k), etc.

    I was hoping you would comment here, because I thought of you when writing the post. I knew from past comments that you are the model of someone living within their means while enjoying an early semi-retired lifestyle. I hope to be just as content as you in twenty years or so.

  8. Just to add a little salt to the pot here… While it is true that one can look at the average over 20-30 years in the market and determine that their nest egg will be “up” over the span, it does not take into account a market downturn (such as this recent one) at exactly the moment when you planned to “retire”. There are going to be many thousands of nearly retired people who will need to continue working for the next 1, 2 maybe 3 years because their lump 401K amounts decreased by almost 50% in the last 10 months. They will have to wait until the market rebounds in order to actually retire. What is a potential solution to a situation like this? Would it be better to transfer the lump into a few savings accounts and pull 2-4% from there rather than leaving it in the market which could potentially lose you quite a bit of money?

  9. I mean no offense, but I think you have it exactly backwards re the 4 percent rule. The 4 percent rule was wildly off the mark from 1995 through the first part of 2008, when stocks were selling at insanely dangerous prices. Now that prices have returned to reasonable levels, a 4 percent withdrawal is more than safe.

    I have a calculator at my web site that adjusts the “4 percent rule” for the effect of valuations (the historical data shows that the single biggest factor that affects whether a retirement plan survives or not is the valuation level that applies on the date the retirement begins). The Retirement Risk Evaluator shows that back in 2000, when the “4 percent rule” was all the rage, the correct number for those with high stock allocations was 2 percent, not 4 percent. Today, though (the P/E10 level is 12 today), the number is a bit over 6 percent.

    The “4 percent rule” has caused millions of busted retirements (I am assuming here that stocks will continue to perform in the future at least somewhat as they always have in the past). The root error was the idea that valuations do not affect long-term returns (and that therefore the safe withdrawal rate is a constant number). I certainly don’t advocate overstating the number. But it’s not right to suggest that the number is 4 percent or even less today. The huge price crash was what we needed to make stops a strong long-term value proposition once again.

    Suggesting that the number is low today just adds to the doom and gloom, which is the last thing we should be doing today. The reason why we are inclined to overstate the bad news today is that we are reacting to the shock experienced in seeing stocks perform from insane price levels just as we would have expected them to had only the “experts” warned us of the dangers. Emotional extremes beget emotional extremes.


  10. I also hope to pay off our mortgage by 50. By that time our son will be almost college ready so I’d like to have all the extra money I can.

    For retirement, I hope to have my investments yield 4% or more so I can live off that and (hopefully) not have to touch the principal. That will be my “emergency fund” in retirement should some medical calamity or something else happen.

    Of course, the hard part about planning for semi- or early retirement is medical insurance/costs. My company currently pays my family’s insurance, but it’s unlikely that would happen even if I were to cut back to semi-retirement.

    I’m not sure what I want to do in retirement, but spending time traveling sounds pretty good. My “what if I won the lottery and could do anything” answer would be to rehab homes so maybe that would come into play as well.

  11. “The “4 percent rule” has caused millions of busted retirements…”

    I really don’t think so. If anyone could name at least 3 people with “busted retirements” simply because they drew 4%, I’d love to hear it.

    If someone saves up $1.75 million, even just taking out a straight $50,000 per year (not even 4%), the money will last for 35 years. That’s quite a while. It doesn’t even take into account the base amount of $1.75 million growing due to stock market increases. Now it could be a problem for those who live to be 110, but then there may also be Social Security and also cutting back on your draw based on what you actually need to make ends meet. If you saved 1.75M and took only 25K per year, it would last for 70 years!

  12. @Kevin: “Any reason your strategy is dependent on survival of the principal?”

    Good question. Not really, except that I don’t like the idea of killing the goose laying the golden eggs. That, and I would like to have something left to pass on to my children.

    You do have a good point though, were I not concerned with eating away principal I could get away with saving much less under the same assumptions.

  13. Excellent article. I think you are right on. It will take about $2 million to retire at 50, that is unless we have a massive run of inflation from of the money the government is creating. Then, you may need $4 million or a brick of gold.

  14. If someone saves up $1.75 million, even just taking out a straight $50,000 per year (not even 4%), the money will last for 35 years.

    If someone retires with $1 million and uses the 4 percent rule, he takes out $40,000 per year. If he retired on the day before the huge price crash with $1 million, he has only about $500,000 left today. If he takes $40,000 each year from a portfolio of $500,000, his withdrawal rate has gone from 4 percent to 8 percent. The odds are very poor of that retirement surviving. The 4 percent rule is killing people who retired from 2000 through the first part of 2008.

    The biggest risk is that you will retire just before a huge price crash. At the price levels that applied in recent years, a huge price crash was inevitable. We have been at those price levels four times in U.S. history; the average price drop in the years following has been 68 percent. There has never once been a price crash of similar magnitude from reasonable price levels. When you ignore valuations in your retirement planning, you are ignoring the single biggest factor that determines success or failure.

    I’ve talked to thousands of people (on the Retire Early and Indexing boards) who believed the claims that it was “safe” to take out 4 percent from a high-stock-allocation portfolio for a retirement beginning at the top of the bubble. The analytically valid studies show that the odds of these retirements surviving are less than 30 percent.

    A failed retirement is a serious life setback. I think we owe it to those seeking prudent retirement advice to let them know the numbers that apply in the real world There is a universal consensus that valuations affect long-term returns. So why not know the extent of the effect before they hand in their resignations?

    And look at the counter effect. Frugal Dad is warning people (with perfectly good intent, obviously) that 4 percent is not safe today. Does that help us get out of this economic crisis? He’s doing that because of the shock he experienced as a result of the huge price crash. Had we been telling people all along that a huge price crash was the inevitable consequence of the out-of-control bull, people would be celebrating today that stocks are safe to invest in again. People are going sour on stocks at precisely the worst time for that to happen and the cause is the bad advice (not to lower your stock allocation when prices go to insanely dangerous levels) that goes under the name “Passive Investing.”


  15. “If he takes $40,000 each year from a portfolio of $500,000, his withdrawal rate has gone from 4 percent to 8 percent.”

    Yes, 8% IS NOT 4%. A retiree should not go into retirement stating that they will take 4% of their current retirement fund of the first year and then make the fixed number the amount to withdraw for the rest of their life. If you do, then IT’S NOT 4 PERCENT!!!!

    The proper way to work with the drop from 1M to 500K is to take 4% of your current fund at the beginning of your fiscal year. Instead of drawing $40K, they would draw $20K until the market went bull again and brought their principal to the expected levels. It’s 4% of your current fund, not 4% of the fund when you first retired.

  16. I don’t like the idea of killing the goose laying the golden eggs.

    Another feature that is different with The Retirement Risk Evaluator is that it permits the user to see the numbers that apply if principal is brought down to zero at the end of 30 years, if principal stays at 100 percent of its retirement-day value or if principal is only partly eroded (the user can choose the percentage of erosion).

    I like this feature because it permits the user to see the cost of going with a desire not to see erosion of principal and decide whether the benefit obtained justifies the cost incurred in his mind. The conventional procedure is to report the numbers that apply with 100 percent erosion of principal. My personal view is that it is best to assume perhaps 50 percent erosion as that leaves you with a bit of slack in case something goes wrong.


  17. Retiring by 50 is a pipe dream right now, at least for me. I’m skeptical whether there will even be Social Security for our generation by the time we reach 67!

  18. Instead of drawing $40K, they would draw $20K until the market went bull again and brought their principal to the expected levels. It’s 4% of your current fund, not 4% of the fund when you first retired.

    That’s not the way the “4 percent rule” is described in the studies from which the phrase comes, DavidK. The “4 percent rule” says that you can take an inflation-adjusted 4 percent of the portfolio amount that applied on the day the retirement began.

    If you adjust your percentage take-out so that you are always taking 4 percent of the current-day portfolio amount, you can never run out of money. But you could be living very poor for a long time. I noted above that the usual price drop from the insane price levels that applied in recent years is 68 percent. If you adjust your take-out downward, you need to live on one-third of what you anticipated living on when you retired.

    I see that as an odd way to plan a retirement. My thought is that it is best to look at the odds of the various scenarios before you hand in the resignation. There’s no way to know the odds without taking valuations into account. Changes in valuations cause dramatic changes in the odds of various outcomes.

    It’s not my intent to get into an argument with you. If you don’t like the calculator, I of course understand. I am just trying to respond to your comments so that people listening in can hear both sides of the story.


  19. @Rob: “Frugal Dad is warning people (with perfectly good intent, obviously) that 4 percent is not safe today. Does that help us get out of this economic crisis? He’s doing that because of the shock he experienced as a result of the huge price crash.”

    I think it is perfectly fine to help people manage expectations on market performance going forward, particularly those who will soon need retirement funds to support their financial needs for some thirty plus years.

    Further, people within a year of retirement should have a broader mix of conservative investments including CDs, cash, bonds and balanced stock funds. This would lessen the chances of them watching half of their wealth disappear in a matter of months. In my opinion, that is not stifling economic growth, it is simply a sound, conservative strategy for protecting the capital people spent decades accumulating.

  20. I’ve been running on the 4% rule for some time and things are going great. I know of no one that has run into trouble running the 4% rule, but I do know people who have listened to financial advisers, magazines etc. and who were withdrawing 7-12%. Some of those folks are awfully nervous right now but I’m sleeping soundly. The 4% rule includes the case of retiring on the eve of the Great Depression. Of course no one can say if an even greater depression is coming, but the future is always uncertain no matter what you do.

    At 4%, so much of your income comes from dividends and bond interest that you can just turn off the TV if the financial news bugs you. The media likes to talk about scary stuff, because it keeps you watching but you need to keep some long term perspective and remember that the media’s interest in selling advertising time is not your interest.

  21. I think it is perfectly fine to help people manage expectations on market performance going forward

    Of course. The job is to help people manage their expectations going forward. That’s obviously what you are trying to do.

    What I am saying is that you are managing them in the wrong direction. You are suggesting that 4 percent was okay at earlier times but that it may not be okay today. The clear suggestion is that stocks offer a worse long-term value proposition today than they did in the days before the price crash.

    I am saying the precise opposite. I am saying that stocks were as dangerous as all get-out in the days before the price crash. A wipe-out was inevitable at those prices. But those days are now over. The most likely long-term annualized real return at the top of the bubble was a negative number. The most likely long-term annualized real return today is over 8 percent.

    The thing you want to avoid is buying stocks at high prices and selling them at low prices. The Passive Investing model encourages just that. It tells people not to worry about stocks when they should be scared to death. And then it tells them to pull back just when prices get attractive again.

    Compare how we buy stocks to how we buy cars. Say that you looked at Consumer Reports and saw that the car you liked is properly valued at $20,000. Would you recommend that someone buy it at $60,000? Obviously not. But most experts were urging us to buy stocks when stocks were priced at three times fair value. Now the stock car is selling at $15,000. We now can buy stocks at a discount. And we are telling people to be wary.

    I’m a believer in frugality like you, Frugal Dad. Given my desire to buy things at good prices, the conventional investment advice all seems 100 percent backwards to me.


  22. people within a year of retirement should have a broader mix of conservative investments including CDs, cash, bonds and balanced stock funds.

    I of course agree with this point, Frugal Dad.


  23. The 4% rule includes the case of retiring on the eve of the Great Depression.

    You are right that the 4 percent rule survived the Great Depression, Dave.

    Of course no one can say if an even greater depression is coming

    Let’s all hope not.

    It wouldn’t necessarily take a greater depression for the 4 percent rule to fail for those who retired at times of high prices. It’s not just the returns you see that determine whether your retirement survives or not. It is also the year-by-year sequence in which those returns play out. There are lucky sequences and there are unlucky sequences. We have no way of knowing in advance what will play out.

    If we get a very lucky sequence, all will be fine. That’s why I pointed out that even those who retired at the top of the bubble and used the 4 percent rule have a 30 percent chance of seeing their retirements survive. We obtained a lucky returns sequence in the Great Depression (we obtained horrible returns because of the huge overvaluation but the sequence in which those poor returns played out was on the lucky side). We don’t know whether today’s set of retirees is going to enjoy equal luck or not.


  24. Rob,

    I’ve seen your posts on many sites over the years. It seems that discussions with you never end until the other people go away, so I’m going save some time by ending my participation in this discussion now.

  25. It seems that discussions with you never end until the other people go away, so I’m going save some time by ending my participation in this discussion now.

    I of course respect your decision, Dave. I also feel a need to say that I regret that you feel this way.

    You are right that I make an effort to respond to as many questions and comments as possible. I work this real hard. It’s not that I am trying to “win” or get in the last word or whatever. It’s that I believe that these ideas have the potential to help millions of middle-class workers and It hurts me to see people suffering as much as they are today. I put my heart and soul into this stuff.

    I posted only on saving up until May 2002. I was the most popular poster at the entire Motley Fool site in those days. When I was posting about saving, people thought it was wonderful that I put my heart and soul into my posts.

    That changed in a big way when I began posting on investing topics. It hurts me that that is so. I hate to know that there are a good number of people out there who positively hate my investing stuff (it is a stone cold fact that this is so). There are also a good number of people who love my investing stuff, however. That reality of course makes me feel as good as the other reality makes me feel bad.

    My hope is that there will come a day when people who oppose Passive Investing will be able to be friends with people who like Passive Investing while still stating their investing views every bit as strongly as they feel them. I had a friend at work in the 1990s who disagreed with everything I said on investing. We would kid each other about it but we always joked around and were warm in our interactions. I wish it could be that way in my internet interactions with you and with many other Passive Investing enthusiasts.

    I obviously don’t share your thinking. I do respect your intelligence and value your contributions. I know that you can help me correct weaknesses in my own thinking by challenging me. It’s not my intent to “beat” you. But I want people to see my ideas in the best possible light. Asking me not to make my case to the best of my ability is like asking a dog not to bark. That’s what I do. That’s the gift that God gave me, for better or worse. I cannot be something that I cannot be.

    I do wish you luck in your investing endeavors, Dave. And I hope that perhaps some non-investing topics will come up from time to time re which we will be able to bounce things back and forth as friends. If you do ever care to comment on my investing stuff again, I can tell you that I will continue to value your input.

    We’re all in this mess together. None of us knows it all. We’re all trying our best to make sense of things from our various different perspectives and sets of life experiences.


  26. @FrugalDad: Thanks for the comment. My magic number is just $250,000. It’s just a number I feel comfortable with and I’m there. My plan tho is not to touch it except for emergencies. I am planning on $800 in SS and $400 in a state pension – those two alone ($1200) will be more than my takehome pay is now – so I should be ok on it as I am saving $$ every month on less than $1200 take home pay. (yes I realize there will be inflation)

    But, hedging my bets in case the SS fails and the state pension drowns, I also have IRA’s, dividends, interest, and property income, plus being debt free. And I started a new 401K at this parttime job and contribute the max that they will match. Basically, I’ll have way more coming in in retirement than I live on now – won’t that be weird 🙂

    I think being debt-free is the whole crux of the matter here – plus being able to live simply but comfortably on way less than “people say” I need to make to live on. Being an avid do-it-yourselfer saves me soooo much money!

  27. @jarebear, and now you understand why all those little old ladies have trouble living on a long-time fixed income. Yes, inflation doesn’t react well with a fixed withdraw rate which is why there is much gnashing of teeth when the basics like eggs, milk, and gasoline all go up in a single fell swoop.

    The trick is to figure out a draw rate that will allow your “nest egg” to also grow a little at the same time. If growth is 5%, you draw 4% and let it grow 1%. When the market takes a dive, you have to get by on less if you don’t want to take a bite out of the egg.

  28. No one can count on Social Security being there unless something major happens.

    I like the idea of the 4%. Plus, at a certain age (the one where you are retiring and are dependant on income from your investments) you should have a very low percentage of stocks in your portfolio.

    I am all about the side hustles Frugal dad. I hope to have enough passive income coming in by the time I retire to help out my investments.

  29. jarebear,

    The 4% rule says take 4% at the start and ratchet up every year by the CPI. This has been tested by taking the last century’s stock, bond and CPI data and testing what happened if you retired at each year in history. 4% is the worst case so if you don’t retire at a time worst that the worst time in history, you can withdraw 4% inflation adjusted each year and will likely have money left over. If you think we are headed for worst than the worst you can take less, but since any guess as to how much worse the future could be is as good as any other, there is no obvious number to pick. There are also worst than the worst scenarios like natural disasters where you might as well take more and live it up because we may not be around as long.

    While the future is always unknown, these historical computer simulations also don’t account for human creativity in response to unknown new events so even if really crazy stuff happens, if you’ve managed to save 25 times what you need per year to live, by age 65, I think you’ll find a way to do OK.

    Unfortunately most are not on target to have anything like that amount saved which is a bigger problem.

    On other hand, if you don’t plan to retire for 30 years, then, yes you must keep ratcheting up your $2 million target for inflation each year to make your goal of being able to withdraw $80K in current dollars.

    As for social security, it’s about 80% funded and since seniors will be an increasingly large block of the voting population, I think it’s highly likely to stay around at nearly 100%. For example, social security taxes stop after a certain income. Removing that limit will become politically easier as more and more voting baby boomers sign up for social security.

  30. If you think we are headed for worst than the worst you can take less, but since any guess as to how much worse the future could be is as good as any other, there is no obvious number to pick.

    This is the point re which Dave and I disagree. He describes what the studies do accurately. They look at each year in the historical record and see what is the highest inflation-adjusted withdrawal rate that would work in every single case. The answer is — 4 percent.

    The problem is that there are only two times in the historical record at which we have been at the insane price levels that applied from 1995 through the first part of 2008. On those two times, 4 percent barely worked. Those who started with $2 million at some point in their retirements saw their portfolios depleted close to zero.

    The record shows that if they didn’t sell a single share of stock despite their bone-crushing losses, the retirement survived 30 years (with at least one dollar remaining in the account). But if they sold any shares, all bets were off. And if the returns sequences had been slightly less lucky (both of the two returns sequences seen from extreme valuation levels have been slightly on the lucky side), again all bets were off.

    The analytical question is — Is this the right way to determine if a retirement plan is “safe.” I say “no.” I say that this is a good way to fool (not intentionally) millions of people into thinking that retirement plans that are as risky as all get-out are safe. I see this as a very bad business.

    Say that you were trying to determine whether driving drunk is safe. You have 100 people drive 20 miles. The first 98 are sober and have zero problems. The last 2 are drunk when they get in the car. They both have major accidents and are paralyzed for life. But they do not die. Do you conclude that it is “safe” to drive drunk?

    I would not. But that’s what we are doing with these studies. Taking withdrawal rates a good bit higher than 4 percent always works for retirements beginning at times of reasonable valuations. On the two occasions when prices were insanely high (when retirees were doing the equivalent of driving drunk to take a 4 percent withdrawal), those following the rule came within a whisker of being killed. This tells us that following the 4 percent rule in these circumstances is risky, not safe. The two words are antonyms, not synonyms.

    These studies are dangerous. The study authors did not intend for them to be dangerous, but that’s the reality. The methodology used is rooted in the Efficient Market Theory, the intellectual framework for the Passive Investing model of understanding how stock investing works. There is 28 years of academic research showing that the Efficient Market Theory does not stand up to scrutiny.

    You rarely heard about this research during the out-of-control bull. I’ve seen many more references to it since the hugh price crash. It was not politically correct to point out that this stuff doesn’t work for so long as prices were sky high.

    Investing is an intensely emotional endeavor. The “research” pointed to during wild bulls is always slanted heavily in favor of stocks. This is just another case of a phenomenon that has been bringing financial ruin to middle-class investors since the first stock market opened for business.


  31. anything tested over 4% led to disaster most of the time.

    I mean no offense, DivorcedDadFrugalDad, but this is not so.

    My calculator shows this is not so. But if you do not trust my calculator, you can use the FIRECalc calculator (there’s a link earlier in the comments) to show it as well. Enter a 5 percent withdrawal into FIRECalc and you will get retirement failures — but only for retirements beginning at times of insanely high valuation levels, not for any beginning at times of reasonable valuation levels. It is common for withdrawal rates far higher than 4 percent to work out just fine.

    The key thing that you need to focus on when trying to determine whether your retirement is safe or not is the valuation level that applies on the date of the retirement. The risk is far higher at times of high valuation. The reason is that prices always crash hard from times of high valuation. There is no way that a single withdrawal rate could be accurately viewed as safe for retirements beginning at a variety of valuation levels.

    FrugalDad in his comments above hinted at one way in which retirees could cope with the valuations problem: They could shift to non-stock investment classes. That does indeed solve the valuations problem. It was possible to construct a safe retirement at the height of the bubble that called for a withdrawal rate of near 6 percent — you could have put all your money in Treasury Inflation-Protected Securities (TIPS).

    TIPS were paying extraordinary returns at the top of the bubble. You cannot get that deal today. Today, the higher safe withdrawal rate comes from investing in stocks. I don’t tell people whether they should invest in stocks or not. i just try to provide the information needed to make an intelligent assessment. The historical data says that at today’s valuations a withdrawal rate of 6 percent is safe for those with a high stock allocation but that nothing higher than 2 percent was safe at the top of the bubble.

    The difficulty in communication comes from the fact that we have all been conditioned by decades of investing advice put forward under the Passive Investing model. This model ignores the effects of valuations. So we have come to believe that valuations don’t matter, even though common sense tells us that this cannot be so. To learn how stock investing works in the real world, we need to unlearn all of the “lessons” picked up during the wild bull years.

    Wild bulls always lead to wild bears. Investing advice slanted strongly in one direction always leads to investing advice slanted strongly in the other direction. Emotional extremes beget emotional extremes. It plays out this way over and over again all throughout the historical record.


  32. If you’re interested in this stuff, please carefully read the actual original studies such as Trinity. Second and third hand talk about these studies on the internet is often wildly inaccurate.

  33. If you’re interested in this stuff, please carefully read the actual original studies such as Trinity. Second and third hand talk about these studies on the internet is often wildly inaccurate.

    Thank you for saying that, Dave. Those are important words.

    I ain’t God. I have never studied investing in school. I have never managed any big funds. I have been known to make a dumb mistake or two or three hundred in the course of my days. If there is anyone giving thought to the idea of changing his or her investing strategy solely because of something they heard Rob Bennett say, I would like that person to understand that I think that he or she is an idiot for giving even tentative consideration to such an idea. No!

    If my words serve to inspire a few people to look to the actual studies and examine them with some care, my words will have served a good purpose. The studies were important studies. Bill Bernstein said that that Old School SWR studies were “breakthrough research” and I strongly agree. Read the studies and and think through what the studies say. It’s by doing that sort of thing that we all learn.

    We agree re this one, Dave! My strong hunch is that over time we will come to discover that we agree on a whole big bunch of other stuff as well.


  34. I guess I struck a nerve but the inaccuracies I mentioned are not exclusively Rob’s. If I had not already read the Trinity Study, I would have been confused about what Trinity said after reading this blog and the collected comments.

    If you’re still many years from retirement, I wouldn’t worry too much about it and just shoot for 25 times your annual expense needs to retire at 65 and more like 30-35 times if you want to retire significantly earlier.

    If you’re close to retirement you can probably get a copy of Trinity from any good CFP. I would suggest a fee-only Certified financial planner. There are a lot of other studies out there, especially on the internet where anyone can post anything and if you are a math and stat geek, you can tell the good ones from the bad ones. If you are not a math and stat geek, or you find this stuff boring, then find a CFP who keeps up with it.

  35. Any chance of you putting a cap either on total number of replies per thread per user, or total words per reply, or both?

    Some people seem to just want to see their name in print and so they go on and on without really saying anything, except looking for something to argue about.

  36. Yes frugaldad – in college we were taught to take big risks when we’re young and go conservative when we’re older and near retirement.

  37. From what I can tell Rob’s issue is that although 4% worked historically and in Monte Carlo it isn’t guaranteed to work in the future. He calls this an analytic flaw. I think only fortune tellers are confident about the future.

    Rob “hocus” Bennett is the #1 poster at a site called “Hocomania” where he explains this all in great detail. More than here believe it or not.

  38. A number of people in this comment thread have suggested that people near or in retirement have lost 50% of their assets. That may be the case, but anyone who is properly managing their portfolio should be down 25% AT MOST. If they were 100% vested in stocks, they I say they deserve what they get.

  39. I’m old enough to retire – and mine’s at only 8% down… and I was laughed at about how conservative I was! Not bothering me in the least – it will either come back or it won’t.

    I learned early on – never ‘gamble’ what you can’t afford to lose. Therefore, very very conservative ‘safe’ stuff.

  40. Excellent points, MITBeta and marci! I was down about 20% at the worst, and this latest bounce has (temporarily I fear) replenished my coffers a bit, but irrespective of these short term ups and downs, I have set my allocation to what seems sensible and appropriate to my own long term needs and risk tolerance, and so I plan to do what Bogle coaches — “set it and forget it.”

  41. If you are interested in alternatives to “normal” retirement, that my wife and I have experienced, without any investment advice you may find my site of interest.

    I am 63 and have been retired for 14 years by living frugally.

    Hopefully a reader will get some ideas about how they can still retire despite the mess we are in now.