How to calculate safe withdrawal rate for early retirement

[NorthFire]

I've seen various articles suggesting a safe withdrawal rate of 3% to 4% but I presume this is on the basis you retire at 67 (or thereabouts).

How do I calculate a safe withdrawal rate for an earlier retirement. For example retiring at 50? I know the rate will reduce but not sure how to calculate what to.

Thanks in advance for any help.

 

[Midpack]

I've seen various articles suggesting a safe withdrawal rate of 3% to 4% but I presume this is on the basis you retire at 67 (or thereabouts).

4% was/is based on a 30 year retirement (not an age) and a 95% success rate using actual historical returns and inflation with an allocation of 50-75% stock market and the rest in bonds. Some people choose to believe historical returns won’t repeat in the future, and claim 3% is safer for the future...a separate debate. And some have calculated 3% to be the SWR for an indefinite number of years (much) greater than 30 years, you can play with the yourself using...

How do I calculate a safe withdrawal rate for an earlier retirement. For example retiring at 50? I know the rate will reduce but not sure how to calculate what to.

...FIRECALC. But you have to make your own longevity assumption, you don’t enter an age. If FIRECALC assumes a 65 yo should plan to live 30 years to be safe, you’d enter 45 years for a 50 yo - but it’s up to you.

• Enter your portfolio amount and number of years on the first tab labeled “Start Here.”
• Then go to the “Investigate” tab and click on the button near the bottom of the page labeled “Spending Level” under Given success rate, determine... and enter your desired success rate (defaults to 95%).
• Hit “Submit” at the bottom of the page.
• The “Results” page will show the initial spending level for your assumptions in $ and %SWR.

https://www.firecalc.com/

 

[RunningBum]

Some people [-]choose to believe[/-] plan just in case historical returns [-]won’t[/-] don't repeat in the future, and claim 3% or 3.5% is safer for the future...a separate debate.

Fixed it for you. And I don't feel bad changing your words because you are making a very questionable claim about what others are thinking. After all, "Past performance is no guarantee of future results." I don't buy homeowners insurance because I choose to believe I'm going to have a fire, I buy it just in case I do.

And of course 3% is safer than 4% if other factors are the same. How could it not be?

A stronger reason, IMO, to use a lower SWR when deciding when to retire is that one can't be certain they've estimated their expenses correctly. Higher medical expenses, more home repairs, an unexpected family situation, or high personal inflation are just some of the things that can cause the need for higher withdrawals. A planned 3-3.5% WR gives a lot more buffer than 4%.

 

[bobandsherry]

4% is the rule of thumb of the investment value when you FIRE. But you are in similar position as I am, I am not drawing SSI yet, but will in the future. So I am comfortable taking a slightly richer draw, allowing me to do some traveling while still young enough to enjoy it, knowing that once SSI kicks in my withdrawal rate will drop considerably. So I view the 4% rule, rightly or wrongly, as overall rate and over the 30 years I expect to be slightly below that.

Also, even with my slightly juicier withdrawal since FIRE 5 years ago my nest egg has continued to grow, now up around 75% from where I started. So interestingly if I were to FIRE today, based on my current balance, my withdrawal rate would be under 4%. So I guess I could go back to work, jokingly of course, and go back into FIRE so my base to use for my withdrawal rate is re-established. [emoji41]

 

[NorthFire]

Thanks for the replies. I'll look at the calculator

 

[Still Learning]

North Fire


We retired in 2019/2020 at 61 after using calculators such as FIRECALC plus I expanded our budget plan based on an Excel spreadsheet. We already had good information on complete annual expenses, savings and investment tracking, then added:


1. Cost to replace all medical, eye and dental coverage.
2. Assumed 3% annual inflation.
3. Created a 19 year projection out to age 80 including housing updates, vehicle replacement, travel, taxes, RMDs and other discretionary spending. At age 80 we confirmed we had funded long term care based on investments alone assuming 4% growth.

4. We spent well less than $1,000 with a financial planner and our CPA. In the end we decided to manage our own investments and felt more confident after reviewing with 3rd parties.


Think I insisted on developing my own spreadsheets because we had always managed our finances and felt uncomfortable relying solely on financial planners and internet calculators on this very important decision.



To answer your original question on withdrawal rate, need to have a good understanding of costs/income projected out to long term care and then WR becomes much easier which then answers the question if you ready to retire.


Good luck.

 

[foxcreek9]

This is an interesting take

• Allocate 75.20% to stocks. Each year, withdraw 3.54% of starting portfolio + 1.06% of current portfolio.

• Starting spending: 4.60%

• Average spending over 30-year retirement: 5.29% of starting portfolio

• Worst-case spending: 3.58% of starting portfolio

https://www.advisorperspectives.com...trategies-using-certainty-equivalent-spending

 

[Markola]

I ignored the 4% Rule and had Vanguard plug in everything into their calculator, such as SS, Medicare, part time & hobby income, changing health insurance premiums, our annual budget, travel goals, car replacements, home renovations, how much we wanted to leave to heirs ($0), etc, etc.. FIREd at 54 last year with a SWR significantly higher than 4%. YMMV.

 

[Out-to-Lunch]

I
How do I calculate a safe withdrawal rate for an earlier retirement. For example retiring at 50? I know the rate will reduce but not sure how to calculate what to.

For a very early retirement (and, hopefully, concomitantly long drawdown period), you could take a look at this series by Early Retirement Now:

https://earlyretirementnow.com/safe-withdrawal-rate-series/

They spend a lot of time thinking about long drawdown periods.

 

[MRG]

When I left at 56 I was using the 4% rule as a guide to the high water our spending. We had a large cash buffer that could account for 8 years if we were very conservative at 2.5%. It's been 8 years and that cash is spent, we stuck to a very conservative withdrawal for 6 years and we have more assets than when I left a paycheck behind.

At 64 I'm looking forward to a healthy SS check in a few more years and we're spending a little more than 4%, or trying to. To me the ability to adjust our spending brought a few more years of retirement and made it more financially secure. Good luck on whatever you decide.

 

[OldShooter]

... How do I calculate a safe withdrawal rate for an earlier retirement. For example retiring at 50? I know the rate will reduce but not sure how to calculate what to. ...

Well, in a nutshell: you can't. The absolute best you can do is to make an estimate. The future is not knowable and the longer future you are looking at, the more unknowable the end point.

IMO the right way to look at this is with mild paranoia. For my Adult-Ed investing class, I have light-hearted but pointed "pop quizzes." Here is one:

You’re 75 years old, healthy, and find that you have made a mistake in your financial planning. Which would you prefer?

A) You find that you’re running out of money.

B) You find that you’ve saved more money than you really need.
​

So, you're doing all the right stuff, but the ultimate answer will only become known on the day you die.

The good news here is that no one locks in a withdrawal rate and sticks rigorously to it. Retirement is more like driving a car cross county, making constant corrections to steering, maybe even course reversals due to errors, making decisions based on how much gas is in the tank and changing stops or even changing the destination as the trip develops.

Have a nice trip!

 

[TheWizard]

People are forgetting about the OP's planned start age for SS.
In my case, I withdrew an extra $3000/month from tax-deferred for seven years from age 63 to 70. (Not getting into specific withdrawal % for my case.)

But if OP retires at age 50, it could be 20 years before SS start, which seems too long a time to draw out extra funds...

 

[FANOFJESUS]

I am thinking about a 5% VWR with some bare bones cash for the bad years.

 

[Midpack]

Fixed it for you. And I don't feel bad changing your words because you are making a very questionable claim about what others are thinking. After all, "Past performance is no guarantee of future results." I don't buy homeowners insurance because I choose to believe I'm going to have a fire, I buy it just in case I do.

And of course 3% is safer than 4% if other factors are the same. How could it not be?

A stronger reason, IMO, to use a lower SWR when deciding when to retire is that one can't be certain they've estimated their expenses correctly. Higher medical expenses, more home repairs, an unexpected family situation, or high personal inflation are just some of the things that can cause the need for higher withdrawals. A planned 3-3.5% WR gives a lot more buffer than 4%.

Thanks for picking nits...

 

[RunningBum]

Well, in a nutshell: you can't. The absolute best you can do is to make an estimate. The future is not knowable and the longer future you are looking at, the more unknowable the end point.

...
The good news here is that no one locks in a withdrawal rate and sticks rigorously to it. Retirement is more like driving a car cross county, making constant corrections to steering, maybe even course reversals due to errors, making decisions based on how much gas is in the tank and changing stops or even changing the destination as the trip develops.

Have a nice trip!

Yes, this. Don't blindly follow a tool like FIRECALC, and don't lock yourself into a plan. Flexibility is key.

My advice is to either add some buffer to what FIRECALC says is safe, have some fat in your budget that you're ok to give up, or be willing to return to work, in case things start off badly for you.

I use a variable percentage withdrawal (VPW) plan. When things go well (good returns and/or lower expenses) it allows you to spend more in the years following. If things go badly, it cuts your allowed spending in future years. Those changes are spread out over your remaining years, so you don't have to make drastic cuts.

 

[bobandsherry]

People are forgetting about the OP's planned start age for SS.
In my case, I withdrew an extra $3000/month from tax-deferred for seven years from age 63 to 70. (Not getting into specific withdrawal % for my case.)

But if OP retires at age 50, it could be 20 years before SS start, which seems too long a time to draw out extra funds...

Didn't ignore it at all. I was 54, DW 52, when I decided to head to FIRE land. So in a similar position as OP. My WR has been higher than the 4% rule of thumb. I felt comfortable with that knowing that once I draw SS my WR will be lower. My assumption is OP would do likewise. I also knew that should I need to I could draw SS sooner. So I viewed 4% as an overall average.

My investments are 75% more than when I tip toed into FIRE 5 years ago. If I were to FIRE today my WR would be 4% or below. So it's all relative.

 

[ExFlyBoy5]

4% is the rule of thumb of the investment value when you FIRE. But you are in similar position as I am, I am not drawing SSI yet, but will in the future. So I am comfortable taking a slightly richer draw, allowing me to do some traveling while still young enough to enjoy it, knowing that once SSI kicks in my withdrawal rate will drop considerably. So I view the 4% rule, rightly or wrongly, as overall rate and over the 30 years I expect to be slightly below that.

Also, even with my slightly juicier withdrawal since FIRE 5 years ago my nest egg has continued to grow, now up around 75% from where I started. So interestingly if I were to FIRE today, based on my current balance, my withdrawal rate would be under 4%. So I guess I could go back to work, jokingly of course, and go back into FIRE so my base to use for my withdrawal rate is re-established. [emoji41]

I have taken a similar approach when trying to convince my DW to join me in this wonderful world of FIRE. While we are still contributing a LOT to our investments (almost 100% of her income), if we stopped that RIGHT NOW, FIREcalc gives us 100% success up to my assumed SS drawing age of 65. If I push that out to "NO SS" then it craters (slight sarcasm) to about 93% but that's with some pretty decent spending. Actually, I haven't run the numbers in the last number of months, so with our returns of late, it's probably inching closer to 100%.

Nonetheless, in conversations with the wife, I have adopted a 3.5% SWR in illustrations until SS and then...well, we might be joining RobbieB in his "BLOW THAT DOUGH" thread.

 

[Koolau]

Fixed it for you. And I don't feel bad changing your words because you are making a very questionable claim about what others are thinking. After all, "Past performance is no guarantee of future results." I don't buy homeowners insurance because I choose to believe I'm going to have a fire, I buy it just in case I do.

And of course 3% is safer than 4% if other factors are the same. How could it not be?

A stronger reason, IMO, to use a lower SWR when deciding when to retire is that one can't be certain they've estimated their expenses correctly. Higher medical expenses, more home repairs, an unexpected family situation, or high personal inflation are just some of the things that can cause the need for higher withdrawals. A planned 3-3.5% WR gives a lot more buffer than 4%.

I agree with your logic that 3% is better than 4% if the only goal is not to run out of money. That's certainly high on the list of goals. BUT I submit the other "danger" is ending the "game" with piles of money that someone ELSE will get to enjoy. FIRECalc was designed to help us PLAN how much to save so that we could spend about 4% (assuming 30 years in retirement) and 1) NOT run out of money and 2) not (usually) leave too much on the table at final exit.

Of course NO plan sees into the future. FIRECalc is strictly a statistical planning tool that accesses historical data over about a century. For ME, I used it to decide how much I needed to save and invest. From there on, I also employed my "gut" in deciding what was safe. If I had a reversal in the markets, I cut back spending. If I needed more (like for a reno or big vacation) I took a little more, knowing I might need to cut back later. By no means would I ever (or ever suggest) blindly following the 4% rule, etc.

Yes, this. Don't blindly follow a tool like FIRECALC, and don't lock yourself into a plan. Flexibility is key.

My advice is to either add some buffer to what FIRECALC says is safe, have some fat in your budget that you're ok to give up, or be willing to return to work, in case things start off badly for you.

I use a variable percentage withdrawal (VPW) plan. When things go well (good returns and/or lower expenses) it allows you to spend more in the years following. If things go badly, it cuts your allowed spending in future years. Those changes are spread out over your remaining years, so you don't have to make drastic cuts.

Yeah, 4% (or whatever FIRECalc says) is the starting point. From there, go with your gut though YMMV.

 

[braumeister]

I submit the other "danger" is ending the "game" with piles of money that someone ELSE will get to enjoy.

I have never understood this line of thought. As long as you're happy, what does it matter that you're not spending as much as you could?

 

[capjak]

I kind of like the VPW model which insures you do not ever run out of money but you may have some swings in amount you can spend each year.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

 

[walkinwood]

As the previous poster shows there are many different withdrawal schemes.

I use a fixed ~4% of portfolio on Jan 1 as my annual budget. While it will never run out of money, I could be living on breadcrumbs if the market keeps going down. But we have enough headroom in our budget that we don't need the whole 4%. In any case, it has worked for us for almost 13 years.

Bob Clyatt (Live More, Work Less) presents the 4/95 method in his book. Klinger has various rules to enable a higher initial withdrawal rate. Others use the RMD method (which iirc, is what vpw is based on), yet others use a floor/ceiling method to make sure you don't end up broke or super rich.

Reading about each of these methods is good so you know what the limitations of each is.

And, as others have pointed out - no one follows their method rigorously. You will make adjustments as unanticipated events crop up and as long as you keep track of your spending and portfolio value, you should be able to make adjustments early enough not to go broke.

Good luck.

 

[Koolau]

I have never understood this line of thought. As long as you're happy, what does it matter that you're not spending as much as you could?

Oh, in theory, I agree. I should have been clearer. It's NOT that you leave the piles of money, but that you might feel "deprived" by doing so. IF you're happy with your spending and that leads to piles of cash at your death, I have no problem with that. Right now, Lord willin' and the creek don't rise, that's MY situation. But SOME folks (not me) may feel "deprived" at only 3% (or whatever) and then "fall back" into profligate spending (sort of like ditching the diet!) I'm setting up my estate so any extra goes where I want it. So, if there's money left over, it's like I'm spending it - from the great beyond. Also, if I feel like it, I can splurge every once in a while. All is well.

I knew 2 guys from Meagacorp who were talked into taking 8% of their nut upon retirement (by a broker) - it was the only way they would go (leave Megacorp). They both ended up doing (almost) menial j*bs to supplement their retirement. They had REFUSED to listen to me talk about the 4% rule back when they were still empl*yed. I was (and remain) no expert, but they thought I was crazy. They thought 8% made sense and they NEEDED that much to be happy, so forget 3% or even 4%. End of (their) story.

I probably said it badly, but I guess my #2 point was NOT to be so constrictive (say, using 3% rather than 4%) that you chuck the whole thing because you MIGHT leave piles on the table AND feel deprived along the way.


Hope this is more clear because YMMV.

 

[RunningBum]

I kind of like the VPW model which insures you do not ever run out of money but you may have some swings in amount you can spend each year.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

Mathematically that's true, but really, you could be down to $100, and VPW will allow you to take slivers of that each year without ever going to zero. There's no magic here, VPW can fail, in practical terms. As I said earlier, I use VPW, but I don't believe it is bulletproof.

 

[Koolau]

Mathematically that's true, but really, you could be down to $100, and VPW will allow you to take slivers of that each year without ever going to zero. There's no magic here, VPW can fail, in practical terms. As I said earlier, I use VPW, but I don't believe it is bulletproof.

Yeah, the "bulletproof" retirement plan still hasn't been invented. A quick thought experiment proves it could never exist. There is always SOME (maybe off the wall) situation that would wipe out even a 100 million dollar portfolio. Giving up on the BP retirement plan, the old 4% rule (especially in it's FIRECalc iteration) gives you a pretty nice BP vest to wear. Not perfect, but adequate for most of us though YMMV.

 

[NorthFire]

Thanks for the replies everyone. I'm finding this really helpful.