One of the things I dislike about the 4% Rule / Trinity Study is the open-ended definition of success – if you have more than $0 after 30 years, great success!
Having $1 and $1 million both meet that criteria, but will have obviously different outcomes over the next 30 years.
Planning for a 60+ year retirement requires looking a little closer.
Planning for 60+ Year Retirements
Planning for a 30-year retirement is fairly straight forward. We can use a tool like cFIREsim or similar to explore different asset allocations and withdrawal strategies for our unique situation and temperament.
When we look at longer retirement periods failure rates typically rise – some of the portfolios that would last 30 years start to fail at 40, 50, or 60 years, and a reduced data set means a single failure carries more weight. This increased failure rate means many people choose to build a larger portfolio, meaning a longer career.
I think that is unfortunate.
A better way to plan for 60+ year retirements is to link two 30-year retirement periods end-to-end / consecutively. If the value after 30-years is equal to or greater than the starting value, then logically we could continue forward for another 30+ years.
Clarifying based on a trend in the comments: This means that the inflation-adjusted value after 30 years is equal to or greater than the starting value.
Linking Retirement Periods
To link two 30-year retirement periods, I looked at the withdrawal rate that would result in having the 30-year portfolio terminal value exactly equal to the starting value (inflation-adjusted), assuming constant inflation-adjusted annual withdrawals.
If we start with $1 million, in 30 years we also have $1 million. I previously explored this while planning the GCC Endowment Fund.
The following chart shows the distribution of withdrawal rates by starting year for a US-based 75/25 stock/bond portfolio. In 73% of cases, that value is greater than 4% (the thick black line segment.)
For the retirement periods that had a 30-year terminal value of less than parity, I also calculated the average final value that would have resulted had we taken a traditional 4% withdrawal rate approach, e.g. 45% of starting value for the 2nd column which includes 1973.
3 years are highlighted in yellow, 2 “failures” and one extreme success. These are years that I explored in-depth:
- 1929 – What if it all went to hell?
- 1965 – The Worst Retirement Ever
- 1982 – The Best Retirement Ever
As we increase the percentage of the stock allocation, the mean and standard deviation shift upwards – a greater withdrawal rate is supported. (This is what we did with our own portfolio.)
This is shown in the following chart for a 90/10 stock/bond allocation. Starting years that had an increase in sustainable withdrawal rate due to higher stock allocation are colored in green. 1 year had a lower withdrawal rate, highlighted in red.
I think this is a fascinating way of looking at the data, which makes it easy to reach some helpful insights:
- A traditional 4% approach is very solid – in ~75% of cases we have more money in 30-years then when we started
- The 1960s were terrible across the board. Studying that era would be helpful for building confidence.
- 99.9% of success is luck of the draw – it’s all about when you start
- so much for picking yourself up by the bootstraps
- Not so clear from the chart, but somewhere around 3.25% withdrawal rate results in a 30-year portfolio value worth at least 50% of starting value (90% of cases.)
- With SS providing 50% of the annual budget, a portfolio worth 50% of starting value with 4% wr is sustainable for another 30 years (See the Year 2000 study for details.)
Linking two 30-year retirement periods end-to-end, with a middle value equal to the starting value overcomes limitations of a traditional Trinity study style analysis. We benefit from the expanded data set and success is clearly defined.
With a 75/25 US-based stock/bond allocation, a 4% withdrawal rate achieves 30-year price parity (inflation-adjusted) in ~75% of cases. Increasing stock allocation generally increases possible withdrawal rates.
With a stock allocation greater than 75%, I would be comfortable targeting a 4% withdrawal rate.
For planning your own 60+ year retirement, consider giving this approach a try.