Fear of the unknown is powerful. We all know it is impossible to predict the future with absolute certainty, and the farther out you try and predict the less certain your conclusions.
If you retire at 35, how can you be certain you won’t be in poverty when you are 80? Luckily the academic world has come up with a benchmark that makes your predictions easier.
The Trinity Study
The idea is simple: Given a bucket of assets, how much can you withdraw each year and not run out of money? For the gory details, read the original paper.
For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At these rates, retirees who wish to bequeath large estates to their heirs will likely be successful. Ironically, even those retirees who adopt higher withdrawal rates and who have little or no desire to leave large estates may end up doing so if they act reasonably prudent in pro- tecting themselves from prematurely exhausting their portfolio.
The simple answer is 4% a year from a portfolio of 75% stocks and 25% bonds.
How did they come to this? The authors ran simulations on historical data from 1926 – 1995, looking at 30 year periods and following the results of pulling out 3% to 12% of funds annually.
Be flexible to increase your success
One of the often cited limitations to the trinity study is that the formula was applied in a rigid manner. If you slightly reduce your spending in down market years your odds of success are much higher.
A 4% Safe Withdrawal Rate (SWR) also doesn’t take into account any sort of side income. Again, being flexible could be key. Maybe after a down market year you hustle a bit, which means you don’t need to take as much from your savings. Small adjustments like this can make a major difference in the long term.
Do the math
Need $40K a year to live on? $40,000 / .04 = $1,000,000
Reduced your expenses to $30k? $30,000 / .04 = $750,000
Ninja like frugality run in your blood? Can you live on $20K a year? $20,000 * .04 = $500,000
Again, this is assuming **no other income** for the rest of your life.