Definition
The safe withdrawal rate (SWR) is the percentage of initial portfolio value that can be withdrawn annually (adjusted for inflation) while maintaining a target probability of portfolio survival over a specified time horizon.
Monte Carlo Context: Traditional SWR analysis uses historical backtesting. Chubby runs 100 forward-looking Monte Carlo paths with GARCH(1,1) volatility to generate probability distributions of outcomes.
Historical Analysis: Trinity Study
The "4% rule" originates from the 1998 Trinity Study, which backtested withdrawal rates against 1926-1995 US market data. A crucial but often missed insight: 4% is not the average safe rate — it's the historical worst case. In most historical periods, retirees could have safely withdrawn 5-6%.
The Dying Rich Problem: In the Trinity Study's 95% success scenarios, the median retiree died with more money than they started with. Extreme conservatism often means a worse life, not a safer one. The "safe" rate optimizes for avoiding the worst case, not for expected outcomes.
Historical success rates by withdrawal rate:
| Withdrawal Rate | Historical Success | Portfolio Multiple | Required Savings |
|---|---|---|---|
| 3.0% | ~100% | 33.3× | spending × 33.3 |
| 3.5% | ~98% | 28.6× | spending × 28.6 |
| 4.0% | ~95% | 25.0× | spending × 25.0 |
| 4.5% | ~85% | 22.2× | spending × 22.2 |
| 5.0% | ~75% | 20.0× | spending × 20.0 |
Limitations of Static Analysis
Data Constraints: Historical backtesting is limited to observed market conditions. The 4% rule was calibrated on US equity performance during America's economic expansion period (1926-1995).
- Time horizon: 30 years only — early retirees (age 40-50) face 40-50 year horizons
- Geographic bias: US-centric data; other developed markets showed ~3% sustainable rates
- Valuation blindness: High CAPE ratios correlate with lower subsequent returns
- Rigid spending: No adjustment for market conditions or spending flexibility
- Tax exclusion: Pre-tax withdrawals reduce effective rate
CAPE Reality Check: When CAPE (Shiller P/E) exceeds 30, historical 10-year real returns average ~2-3% annually — far below the 7% assumed in most planning. Starting retirement at high valuations means either accepting lower SWR or building in more flexibility.
Portfolio Allocation Impact
SWR varies non-linearly with stock/bond allocation. The relationship is counterintuitive: more stocks historically supported higher withdrawal rates, up to a point.
| Allocation | Max SWR | Why |
|---|---|---|
| 100% Bonds | ~2.5% | Insufficient growth to outpace inflation + withdrawals |
| 25/75 Stocks/Bonds | ~3.5% | Slightly better growth, still inflation-vulnerable |
| 50/50 | ~4.0% | Balanced growth and stability |
| 75/25 | ~4.2% | Historical sweet spot — growth compensates for volatility |
| 100% Stocks | ~3.8% | Higher returns but sequence risk drag in bad starts |
The Paradox: 100% stocks has the highest expected return but *not* the highest safe withdrawal rate. Why? Sequence of returns risk. A 50% crash in year 1 forces you to sell twice as many shares to meet withdrawals — and those shares never recover. The bond allocation acts as a buffer to sell from during equity drawdowns.
The practical insight: somewhere between 50/50 and 75/25 historically maximized sustainable withdrawals. Going more conservative than 50/50 *reduced* safety because the portfolio couldn't grow fast enough. Going more aggressive than 75/25 *also* reduced safety due to sequence risk.
Time Horizon Adjustments
Longer time horizons require lower withdrawal rates to maintain equivalent success probabilities:
Dynamic Withdrawal Strategies
Variable withdrawal rules can increase success rates or sustainable withdrawal amounts:
- Guardrails: Reduce withdrawals by 10% if portfolio drops 20%; increase if it rises 20%
- Percentage of portfolio: Withdraw fixed percentage of current value (income varies)
- Floor + ceiling: Fixed floor for essentials, variable amount for discretionary
- CAPE-adjusted: Lower rate when CAPE > 25, higher when CAPE < 15
Flexibility Premium: Willingness to reduce spending by 10-20% during downturns can increase sustainable withdrawal rate by 0.5-1.0 percentage points.