The safe withdrawal rate (SWR) that I’ve discussed in several posts (here, here, here) is a great tool to use for retirement planning and once in retirement. I’ve presented a range of SWRs from the super conservative 4% that has worked 100% of the time to the slightly more aggressive 5.25% which takes a bit more risk and requires some flexibility in retirement.
However, I find the concept of the SWR too abstract to realize some of its implications. In order to better appreciate the SWR I like to think about portfolios of actual retirees looking back in history. So, I thought I’d do that today and look back at the absolute worst times to retire since 1871. This is instructive because the SWR is entirely determined by the worst periods in history to retire. If the SWR works for the worst periods then of course it will work for better times. Many investors fret about the future way too much. I find if they look back in time, they often say ‘if the SWR survived that time, then I feel much better about the SWR going forward’. Its much less abstract than the typical jargon used to discuss retirement spending. Before I reveal the worst times to retire, can you guess the 3 worst times in the past 138 years to retire?
Well, most people would guess immediately that the Great Depression was the single worst time to retire in history. And that would be correct for portfolios with stock allocations above 75%. The October 1, 1929 retiree bore the brunt of the Great Depression decline in the stock market. That retiree saw their portfolio decline 72 percent in their first 41 months of retirement! And still a safe withdrawal rate of 4% would have allowed them to enjoy a successful retirement for 30 years.
What I find even more enlightening is that for portfolios with stock allocations of less than 75%, which would be the majority of retirement portfolios, the Great Depression was not the worst time to retire. At least Great Depression retirees had the ameliorating effect of deflation to protect and even enhance their purchasing power. The worst times to retiree for the majority of history’s retirees were April 1965, October 1965, and January 1966. Those mid 60s retirees not only saw large stock market declines but also suffered through very high inflation which destroyed the purchasing power of their portfolios. And, again, a 4% SWR would have allowed those retirees to enjoy a successful retirement of 30 years.
When I look at the SWRs in the context of these historical experiences it gives me great confidence in their ability going forward. With all the negative outllook today, the punditry from the gloom and doomers to the perma bulls, its is very easy to be confused and overwhelmed, and worst scared out of retirement. The SWRs have surely been tried and tested in the past. While by no means a guarantee in the future, I do think they represent a high probability outcome in the future.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.