Investment portfolio safe withdrawal rates in retirement

A safe FI withdrawal rate 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 that 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.

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Your portfolio is your Safety Buoy in Retirement

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

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 inflation) 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.

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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 income to live – if you couldn’t sell other forms of asset 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 markets don’t last forever, in fact despite the damage and fear they instil, they are remarkably short and the market 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 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 study 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.

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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 plan to retire in my early thirties to improve my quality of life, and despite my love of fast aeroplanes and motorcycles, don’t have any 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.

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Who’s Securing your financial freedom?

These two factors means 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 years 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 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).

If you reach FI and retire at the absolute worst time and the stock market takes a dive; its 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 which 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, you would be mad not to opt for 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 Mustache and the Mad FIentist).

Cash – Emergency savings / buffer

I personally like to keep about two years worth of living costs ($30K) in cash. As soon as I get paid I make my fortnightly investment decision to top up my LICs or ETFs, in line with my investment strategy.

In the accumulation or FIREstarter phase with good job security, I know I don’t strictly need this much of a buffer. Having it makes me feel secure though, and lets me easily top up on ETFs if they ever go on discount during a market downturn. When I reach FIRE, I will aim to keep three years worth of living costs ($45K) as a cash buffer.

Real estate

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.

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 in retirement. 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. 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, opt for a 3% withdrawal rate and aim for 33 times your annual living costs.


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