Living a better retirement: withdrawal rates higher than 4%

I’ve discussed the 4% withdrawal rule, the safe withdrawal rate (SWR), a couple of times already; in my post on how much does it take to retire and the one on how to actually use the 4% rule. Great, we’re all prepared for a safe and happy retirement.

But wouldn’t it be great to able to withdraw more than 4%, which would also mean needing less money to retire? Well, today I’m going to let you in on one of the secrets of the safe withdrawal rate.

As I’ve noted, the 4% SWR is safe. That means that going back to 1926 (when most of the retirement studies begin) you would have never run out of money through every market cycle had you stuck with the 4% rule. That includes someone who retired on the eve of the great depression, or the bear market and high inflation of the 70s. Actually, these two periods alone drive the 4% rule almost by themselves – after all we wanted a 100% success rate.  And that brings me to my point. The future is highly uncertain. There are many things that could derail our retirement plans, many non-financial things. So, does it make sense to have a retirement plan built  for a 100% success – to last us through another great depression, another period of high inflation? Maybe. That’s a highly personal decision. But one should know that it is possible to use a higher than 4% withdrawal rate but with success rates less than 100%.

Take a look at the chart below;

Source: William P. Bengen, CFP, ‘Conserving Client Portfolios in Retirement’

The chart maps various withdrawal rates, their success rates, and what was the shortest longevity of a portfolio using that rate. For example, for the 4.42% SWR (its 4.42% instead of 4% due to some asset allocation decisions which I’ll discuss in a later post), the success rate is 100% and the worst case longevity of the portfolio is 30 yrs, exactly what we wanted. Now, take a look at the 5.25% withdrawal rate. With that rate you have a 91% chance of the portfolio lasting you for 30 yrs but there is a 9% chance you’ll run out of money and in the worst case you’ll run out of money in 17 years. This was probably the case for 1929 retirees. Is a 91% chance of success worth the 19% higher standard of living (5.25% vs 4.42%) in retirement? Only you can answer that but at least you know you have the option.

Well, there you have it. One easy straight foward way to withdraw more than 4% of your retirement portfolio.