Retirement Planning; Investment Portfolio Safe Withdrawal Rates

Part of retirement planning is working out your safe withdrawal rate from your investment portfolio. This is the rate at which you can withdraw, without running out of money. So let’s break it down and find out how much you can draw down.


A safe FI withdrawal rate1 is the rate at which you can safely, and comfortably withdraw money from your investment portfolio during your retirement phase of living. Or otherwise, the rate at which you can spend your money without running out of money.

The most commonly accepted safe withdrawal rate is 4%. This means you can draw down your portfolio by 4% every year and never run out of money. If you’re trying to figure out when you can retire, you simply flip this number around, and by dividing 100% by 4%, you can see you would need a portfolio at least 25 times your annual spending rate.

“The safe withdrawal rate method is a conservative approach that tries to balance having enough money to live comfortably with not depleting retirement savings prematurely. It is based largely on the portfolio’s value at the beginning of retirement.”


It’s worth noting that nothing is guaranteed (other than death or income tax), so these withdrawal rates are just a guide to help you plan your retirement, and you’ll need to maintain a healthy buffer (Emergency Fund)2.

retirement planning, life buoy
Your portfolio is your safety buoy in retirement

Breaking it down

The three biggest factors at play when considering safe withdrawal rates are;

  1. Your cost of living
  2. The rate of return or performance of your investments
  3. Inflation

An ideal world

The basic math goes that as long as your cost of living, plus the cost of inflation is below the performance of your portfolio, you are good to go! In theory in an ideal world, as long as the stock market continued to rise at its average rate of 10%, and inflation eroded 3% of your ETF dividend returns and capital growth, you could comfortably spend up to 7% of your portfolio without ever running out of money. If you spent less than 7% on your cost of living, your portfolio would actually grow and you would be able to have a lower overall risk, be able to gradually increase your spending habits (called lifestyle inflation3) or a combination of the two.

The real world

However, we know we don’t live in an ideal world, and sometimes the stock market goes down, instead of up. If the stock market went really well and you sold some of your investments to live off, you’d be happy and have plenty of money. But if the stock market went down you would be selling your ETF stocks at a discount and crystallising your losses.

retirement planning, bear and bull markets
There will always be bear AND bull markets – however, the market usually recovers pretty quickly

If you just left your portfolio alone, and reinvested your dividends it would eventually recover and the rate of return would normalise. But this doesn’t help you if you have already reached FI and are retired, needing some form of retirement income to live – if you couldn’t sell other forms of assets like a house or pick up extra work, you would be forced to sell your assets (such as your ETF stocks) and start depleting your portfolio.

Bear markets4 don’t last forever. In fact, despite the damage and fear they instill, they are remarkably short and the market usually recovers quickly. So the losses you crystallised by having to sell during a downturn should be able to be replaced by growth experienced in subsequent good years.

So, how can you account for variations in market performance to make sure the losses you experience are countered by subsequent growth and safeguard your retirement? The answer is to live on less than the previously suggested 7%; this means either reducing your cost of living, or by having a larger nest egg portfolio for retirement.

Plucking numbers is always dangerous, but for arguments sake if you tried to live off the theoretical 7% withdrawal rate we calculated earlier, over a 40 year retirement (depending on your actual retirement age), you would only preserve your capital 36% of the time; that is, you will most likely end up eating into your investments just to live.

The Trinity study and Monte Carlo

The Trinity study5 was an economic study that looked at how much money you would need to retire. The study analysed the effect of market performance between 1926 and 2009 on a theoretical retirees portfolio. It found that with a portfolio of 50% stocks and 50% fixed interest (bonds and cash) over a 25-year retirement time frame, a 4% withdrawal rate would mean you would never lose your capital. It also found that over 30 years, the chance of success was still very high but diminished slightly to 96%. Only if you reduced your withdrawal rate to 3% could you assure that you would never lose your capital, over any time period.

“What we can generally observe is that success rates increase for lower withdrawal rates, shorter time horizons, and higher stock allocations. We can also see how sensitive results are to withdrawal rates, as for instance with thirty-year horizons and a 50/50 portfolio, the success rate is 100 percent with a 4 percent initial withdrawal rate, and it falls to 70 percent with a 5 percent withdrawal rate, and only 46 percent with a 6 percent withdrawal rate.”


Computer simulations based on statistical data can help predict what future returns might be like, but reconciling efficient market theory with the irrational and unpredictable human element means nothing is certain.

Monte-Carlo simulations are a form of statistical average analysis that can be used to analyse data and relationships. Using a Monte-Carlo simulation and world economic data it can be shown that with a portfolio of 100% stocks, at a 3% withdrawal rate should ensure a portfolio would always grow. Increasing the withdrawal rate lowers the chance of success, but increasing the time frame increases your chance of success.

A 4% withdrawal rate has nearly a 90% chance of success over a 40 year time frame, but factoring in your cash buffer (anywhere between 5-10% of your portfolio) improves your chance of success. The ability to continue or easily pick up part-time work is a real game changer here, and some people even advocate 5%+ safe withdrawal rates in this scenario.

FI RE – Financial Independence, Retire Early

FI RE retirees are not like traditional retirees. I planned to retire in my early thirties (achieving this at 29) to improve my quality of life, and despite my love of fast aeroplanes and motorcycles, I don’t have plans to die any time soon. That could mean 70 odd years of living off my portfolio.

So what relevance then is the Trinity study and their 25-year retirement timeframe? Can I just do it three times over and hit the magic ‘reset’ button between retirements? Unfortunately, that’s not how statistics work, but the good news is that FI RE retirees have a couple of major advantages and security blankets which can maintain their Financial Independence – Time, and the ability to work part-time.

retirement planning, data analysis
Computer simulations based on statistical data can help predict what future returns might be like, but reconciling efficient market theory with the irrational and unpredictable human element means nothing is certain

Who’s Securing your financial freedom?

These two factors mean that a FI/RE retiree can invest in a much more aggressive portfolio, geared more towards stocks held in low-fee ETF index funds, and less toward the low but stable returns fixed interest or bonds provide typical retirees.

A portfolio that holds a few year’s worth of living expenses and the rest in good quality global stock market index fund ETFs is a common strategy for FI/RE retirees. An example portfolio could be $60K retirement savings in cash which is around 2-3 years annual expenses, and anywhere from $500K to $1M in ETFs depending on your cost of living (how much of a tight arse you want to be!). This could mean a portfolio of 5-10% fixed interest/cash and 90-95% stocks.

During the accumulation phase whilst working, most people working towards FI should throw as much of their cash into ETFs as possible, and only maintain 6 months or so worth of living expenses (or whatever is reasonable for their personal circumstances). This means their money is working as hard as possible, and their income is their protection from market downturns. Actually, market downturns during the accumulation phase are fantastic, and most FI seekers will throw in their emergency savings and as much cash as possible into ETFs whilst they are on discount (I have even heard of people taking LOANS to buy on mass during these economic downturns).

retirement plan
What do you want your retirement to look like?

If you reach FI and retire at the absolute worst time and the stock market takes a dive; it’s not a problem. You have your cash buffer to keep you going, you can cut back on expenses and you have plenty of time to let the market correct itself and pick back up, to replenish your buffer. If you had to, you could even take on some part-time work to supplement your income. By not touching your portfolio and simply reinvesting the returns in a downturn, you can drastically improve your position.

Portfolio assets

We have mainly discussed portfolio assets as being cash and ETFs so far, but there are other income-producing assets that can benefit you in your pursuit of FI, and help to combat the effects of inflation.

ETF index funds (shares)

With long investment timelines that any FIRE retiree has, a good option would be a portfolio heavily weighted in ETF and LIC index fund shares (if not 100% shares) alongside a healthy cash Emergency savings. Initially, I thought I was doing something wrong because it’s such a simple strategy, but it works and many people have reached FIRE this way (some high-profile cases are Mr Money Mustache6 and the Mad FIentist7).

Cash – Emergency savings/buffer

I personally like to keep about two years worth of living costs ($30K) in cash. When I receive income, I make my fortnightly investments to top up my ETFs, in line with my investment strategy.

retirement planning, cash
A healthy cash buffer will give you security at ANY stage of life, particularly when planning for retirement

When I was in the accumulation or FIREstarter phase with good job security, I know I didn’t really need that much of a buffer. Having it made me feel secure though, and let me easily top up on ETFs if they ever went on discount during a market downturn. Now that I’ve reached FIRE, I’ve bumped up my cash buffer to about $40k.

Investment property

Property can also be a great inclusion in a FIRE portfolio if it is done right (think: positive cash flow). Many property investors fall short of the mark as careless property investing can be a huge source of income for the scabs of the property industry who all have their ‘hands in your Cookie Jar’. These people feed off the commissions and other high fees associated with holding properties.

retirement planning, property investment
Property investment can be a great inclusion in a FIRE portfolio if it is done right

I have been working on a development of a large block with an old house on it into three townhouses through a subdivision. When this is complete, I will be selling one of these (to partially fund the project) and then hold the remaining two with interest-only loans to provide a positive cash flow to help as part of my retirement plan. I will also be boosting my emergency savings to $60K once this project is complete, which will sit in an offset account against the loans.

Websites / Web properties

Websites are an increasingly attractive part of a modern portfolio. Websites can be monetised through affiliate links and advertising, as well as referrals or subscription-based services. Just like with ETFs, it’s slow progress at the start but it can build to generate a decent source of income.


Like anything in investing, you can really get yourself wrapped around the axles on the detail, but as long as you’ve done some planning around your financial future and what kind of retirement lifestyle you plan to have, you shouldn’t experience any financial hardship8 or stress related to your retirement goals.

Don’t stress – it’s actually really simple. The generally accepted safe withdrawal rate in the FIRE community is 4%, meaning you just need 25 times your annual living costs in investment assets. Simple as. If you want to be a bit more conservative, you can opt for a 3% withdrawal rate and aim for 33 times your annual living costs. 

What does your dream retirement look like? Do you plan to draw down the 4% or will you plan to take advantage of the government age pension9 (once you reach preservation age) in conjunction with your investments?

If you want some advice regarding your own financial situation and some financial planning that is personal to you and your goals, make sure you seek professional advice from a financial advisor.

Reference List:

  1. ‘Safe Withdrawal Rate (SWR) Method’, Adam Hayes, Investopedia. Published (updated): November 27, 2021. Accessed online at on October 26, 2022.
  2. ‘Save for an emergency fund’, Money Accessed online at on October 26, 2022.
  3. ‘Lifestyle Inflation: More Money, Same Problems’, Ramsey Solutions. Published: July 22, 2022. Accessed online at on Oct 26, 2022.
  4. ‘What Is a Bear Market and How Should I Invest During One?’, Alana Benson, Nerd Wallet. Published: Sep 22, 2022. Accessed online at on Oct 26, 2022.
  5. ‘The Trinity Study And Portfolio Success Rates’, Wade Pfau, Published: Jan 16, 2018. Accessed online at on Oct 26, 2022.
  8. ‘Financial Hardship’ Financial Rights Legal Centre. Accessed online at on Oct 26, 2022.
  9. ‘Age Pension’, Services Australia. Accessed online at on Oct 26, 2022.
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