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As he states, “once cash outflows are occurring, it’s not enough for returns to average out in the long run, if the portfolio could be completely depleted before the good returns finally show up.” So you need to survive the first part of retirement so that the inevitable gains that occur are meaningful enough to your portfolio to offset the down years.In Kitces’ research, he analyzed the historical data to see what metrics actually matter when it comes to the SWR and portfolio longevity. The 10-year return’s correlation is also low but that’s because the nominal return doesn’t factor in inflation.The Safe Withdrawal Rate is simply the rate that you can withdraw from your portfolio every year that ensures you have a high probability of never running out of money.The SWR of 4% per year (inflation-adjusted) is the rate that Trinity Study researchers recommended for 30-year retirements and is the rate you most often see quoted.
As you can see, it’s the sequence of returns that matter., Kitces explains that “the 2008 retiree – even having started with the global financial crisis out of the gate – is already doing far better than any [of the worst] historical scenarios!In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% rule.” It would only be appropriate to assume a safe withdrawal rate lower than the historical 4% – 4.5% rate if you believe that equities will fail to deliver even a 1% real return over the next 15 years, implying (given current dividend and inflation levels) that the S&P 500 price level will be lower in 2027 than it was in 2007 (which would also be lower than it was in 2000, resulting in no appreciation for 27 years! Do you think the stock market will remain flat for 27 years?If you are retiring in your 30s or 40s, you’ll hopefully have 50 or 60 years of life left so that’s a very long time for your portfolio to last.While withdrawal duration does factor into the equation, it’s not as big of a deal as you may think.
As the Mad Fientist, I take it upon myself to analyze common financial advice to determine how it applies to those of us retiring very early in life.