Do retirees need to rethink the Trinity 4% SWR rule?

Do retirees need to rethink the Trinity 4% SWR rule?

It is all the rage these days to attack the Trinity 4% rule as something based on flawed research or old data that resembles nothing of today's society. The common theme among these whining articles is by using a fixed 4% withdrawal rate, you're introducing far too much risk, and our retirement stash may very well dissolve into nothingness.

Do retirees need to rethink the Trinity 4% SWR rule?
    It is all the rage these days to attack the Trinity 4% rule as something based on flawed research or old data that resembles nothing of today's society. As the market continues its selloff into 2016, is there any validity to this pessimism?

    The common theme among these whining articles is by using a fixed 4% withdrawal rate, you're introducing far too much risk, and our retirement stash may very well dissolve into nothingness.  They are also quick to point out the circumstances where the 4% fails to maintain our stash.  It's true, the 4% does fail, but only for those who refuse to adjust.

    Is the Trinity 4% rule still a valid retirement guideline?

    For example, this week is "market correction" territory.  The Dow lost nearly 10% of its value last week.  This is one of those times where adjustments may be needed.  It happens.

    And naturally, each critic has their own counter proposal that they believe to be THE WAY to manage your income during retirement.

    Pardon me for jumping into this entirely pointless debate, but I believe these writers are completely missing the point, and in some ways, we're all pretty much saying the same damn thing in the end - BE FLEXIBLE.

    For example, Todd from wrote a piece that attacked the 4% rule, arguing that its one-size-fits-all approach is just flat wrong.

    How can a static, one-size-fits-all solution to a problem as varied and complex as knowing how much money you need to retire be correct?

    How could retirees in 1921, 1966, and 2010 share the same safe withdrawal rate when market valuations, interest rates, inflation expectations, and expected lifespans were completely different?

    It’s impossible. It’s wrong.

    Yet, that is the conventional wisdom in the financial planning profession. It is known as the “4% Rule,” and it is widely considered “the truth” in safe withdrawal rates for retirement.

    Towards the bottom, you'll find this:

    The key point is to use common sense.

    That means use the research and calculators as guidelines only. Don’t apply static models based on blind faith just because they have become conventional wisdom and everyone says they are true.

    Todd's closing advice is 100% sound and spot on, but the presumption that early retirees may adhere to the 4% rule like gospel may not be accurate. At least...I hope it isn't.

    A Barrons article published an interview with Wade Pfau, a now-well-known professor and blogger who is another outspoken critic of the 4% rule.

    [The 4% rule] not always appropriate. The rule suggests that if retirees withdraw 4% of their portfolio in their first year of retirement, and adjust that initial amount for inflation in subsequent years, they’ll have a low risk of depleting their portfolio in 30 years. In 1994, a 30-year retirement was a conservative assumption -- retiring at 65 or even 55 and living another 30 years was well beyond average life spans. But today, there is a 50% chance that one member of a higher-income, 65-year-old couple will live until 95.

    Pfau offers his own financial advice for retirees:

    The initial withdrawal rate [should be] between 4.8% and 6%, based on the stock/bond mix. At the end of each year, the retiree takes the preceding year’s withdrawal amount [in dollars] and adjusts it for inflation. But there are guardrails against big market swings: If that amount divided by the current portfolio balance equals a withdrawal rate of 20% more or less than the initial rate, the retiree adjusts the amount they withdraw that year. No annual withdrawal is more than 10% more or less than the year before.

    According to Time, Pfau also believes 3% is a better safe withdrawal rate.

    Jumping into the blogosphere, the Financial Samurai chimed in that the appropriate safe withdrawal rate should be based off of the 10-year government bond yield instead.

    I encourage everyone to adjust their annual withdrawal rate based on the average rate for the past 12 months. You can easily check where the latest rate is by checking on Yahoo Finance.

    Or the S&P 500 Dividend Yield:

    The current S&P 500 dividend yield is roughly 2% in 2015. Dividend yields can rise when dividend payout ratios increase or the market tanks. If what you are mainly focused on is income, then withdrawing at the rate of the market’s entire dividend yield will mean that you will never touch your principal.

    The opinions are nearly limitless, and that's cool. People have their own differing points of view about both the 4% "rule" and safe withdrawal rates in general.  What's the problem?  Quite honestly, there isn't one.  Opinions are wonderful and we are all entitled to hold and espouse them.  In fact, I believe the conclusions that both Pfau and the Financial Samurai have reached are entirely reasonable and quite sound.

    And to be perfectly truthful, I am not necessarily defending the 4% rule either.  I am, however, setting the record straight on how the typical retiree uses the 4% rule.

    Is the 4% SWR the gospel of early retirees?

    Though I retired at 35, do not know everybody within the early retirement community.  But, contrary to popular critique, the 4% safe withdrawal rate is not some one-size-fits-all approach that people - come hell or high water - must blindly and stubbornly adhere to for the duration of their retirements.

    Doing so would mean that we humans are purely robots, programmed to aimlessly march forward using the same infantile cognitive powers that we have always had, unable to think for ourselves, make our own choices and adjust to the changing times.

    Instead, a large majority of us are using the 4% rule as a guideline.

    Meaning, we choose a number that we believe to be a reasonably safe withdrawal rate and start into our retirements by withdrawing from our investments that amount of money.  But, as well-known personal finance and early retiree blogger Mr. Money Mustache writes (and one who happens to believe in the 4% principle), there are no guarantees in life and we should always adjust our expenditures based on economic conditions.

    From MMM: So there’s no need to debate. 4% is a perfectly good answer, which means 25 times your annual expenses is a perfectly good goal to save for. Along the way, you might find your annual expenses melting away, which makes things ever-more-attainable

    Another popular early retiree who believes in the 4% rule, Go Curry Cracker, offers the same advice, arguing "But to be reasonable, remember the 4% Rule is a Rule of Thumb based on experience, not a Law of Nature.  It is the base of a plan".

    This is even more true with early retirees, as they've managed their money throughout their working years and have a good enough grasp on personal finance to manage their money and make it last by living cheaply and, most importantly, adjusting to market conditions - especially after the dependable paycheck stops rolling in from full-time work.

    Mr. Money Mustache believes that the 4% number from the Trinity Study is a perfectly good answer, while Financial Samurai believes something in the neighborhood of 2 to 3% is a better answer (at the present time).  Pfau holds that starting out by withdrawing a larger percentage of investments and, each year, re-calculating your magical withdrawal number for the following year, is an even better answer.

    Whatever you happen to believe, most early retirees do not believe ANY of these withdrawal techniques to be "one-size-fits-all" - at least none of the retirees that I've met, read or converse with.

    Instead, most retirees are gumby-like humans, capable of moving, twisting and contorting to position themselves to accurately confront economic conditions.  If a retiree's portfolio losses 30% of its value - as many did during the housing market crash of 2008, most adjust their spending habits and lifestyle - like good little human beings capable of making sound adjustments.

    Picture this: you're standing in the middle of the road and there's a fully-loaded semi-tractor trailer barreling in your direction.  The tractor trailer, in this case, is analogous to a looming recession.  At first, you're enjoying your position in the middle of the road and stay put.  After all, it's entirely possible that the trailer will turn and instead head down one of the side roads before it hits you.

    It is also possible that the trailer will simply stop, stare you dead in the face but not actually approach your position.  Maybe it'll suffer a flat tire and be forced to the side of the road. Who knows - the trailer may not hit you.

    But eventually, that trailer gets closer to you.  250 yards.  150 yards.  50 yards.  Okay, this thing isn't stopping.

    What happens at this point?  Naturally, we move our asses off the road and let the trailer pass us by, suffering dust inhalation as it passes and maybe a thrown pebble or two.

    We don't, on the other hand, stand there like idiots and let this thing plow into us.

    We adjust like brain-powered human beings, and our financial situation is no different, especially after retirement when the paychecks stop floating in.  We take our initial position and enjoy it.  We notice an oncoming threat and we move if it gets close.  If we haven't seen a threat in 6 months, we might lay down and spread out a bit.

    You get the idea, and I hope the critics of the 4% safe withdrawal rate do too.

    I am not asking anyone to actually agree with the Trinity Study and the 4% withdrawal rate.  However, the assumption that the 4% withdrawal rate is nonsensical because people could fail by blindly adhering to it is, in and of itself, nonsensical.

    In the end, most retirees know that applying ANY financial plan is only as good as the economic conditions in which it exists.  If things change, so does your plan.


    Steve Adcock

    774 posts

    Steves a 38-year-old early retiree who writes about the intersection of happiness and financial independence.