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OldOne sez:

<<One of the problems I have with the Trinity study is that it assumes an average market rate of return.>>

No, it does no such thing. The study compiled by three Trinity University professors, Philip Cooley, Carl Hubbard, and Daniel Walz, examined this issue by looking at historical annual returns for stocks and bonds from 1926 through 1995. Their results were published in the February 1998 issue of the AAII Journal in an article entitled Retirement Savings: Choosing a Withdrawal Rate That is Sustainable. Using historical data published by Ibbotson Associates, the study looks at the impact of withdrawal rates ranging from 3% to 12% on five portfolios ranging from 100% stocks to 100% bonds over all rolling withdrawal periods of 15, 20, 25 and 30 years from 1926 through 1995. A successful portfolio was one which ended a particular withdrawal period with a positive value. The probability of success was measured based on the ratio of positive-value ending portfolios for a specific withdrawal period to the number of possible rolling periods for that category in the years studied. As an example, there were 56 possible 15-year withdrawal periods between 1926 and 1995. If in 31 of those periods a portfolio had a positive value after a final withdrawal of 12%, then a portfolio using that withdrawal rate for 15 years had a success rate of 55% (31 divided by 56 rounded to the nearest whole percentage). The study looked at both a fixed annual withdrawal based on the rate applied to the initial portfolio and at an inflation-adjusted annual withdrawal of that initial amount.

Not surprisingly, the study revealed withdrawal periods longer than 15 years dramatically reduced the probability of success at withdrawal rates exceeding 5%. The authors reached five general conclusions:
a. Younger retires who anticipate longer payout periods should plan on lower withdrawal rates.
b. Bonds increase the success rate for lower to midlevel withdrawal rates, but most retirees would benefit with at least a 50% allocation to stocks.
c. Retirees who desire inflation-adjusted withdrawals must accept a substantially reduced withdrawal rate from the initial portfolio.
d. Stock-dominated portfolios using a 3% to 4% withdrawal rate may create rich heirs at the expense of the retiree's current consumption.
e. For 15-year or less payout periods, a withdrawal rate of 8% to 9% from a stock-dominated portfolio appears sustainable.

An excellent commentary on the study to include a link to paper itself was made by Frank Armstrong in his article Retirement Planning - Making It Last Forever. ( Both are well worth the interested reader's review. Additional commentary may be found in The Trinity Study ( by Scott Burns and The Retire Early website's article What's the "Safe" Withdrawal Rate in Retirement? [(] The Retire Early website recently conducted a similar study using an alternative data base spanning the years 1871 through 1998. Found in The Retire Early Study on Safe Withdrawal Rates, [] it generally confirms the Trinity Study results.

All of these references agree that a "safe" withdrawal rate ranges between 4% to 6% of a retiree's starting portfolio. Withdrawal rates above 5% increase the probability that a retiree will go broke in her lifetime. All also agree that the presence of bonds in the portfolio provides a measure of stability absent in an all stock portfolio. And all agree that inflation-adjusted withdrawals fare best at lower to midlevel withdrawal rates.

<< What happens if we instead put our money in the Foolish Four or RP4 or whatever we call it these days? It seems to me that if the average rate of return goes up, the acceptable withdrawal rate should also increase. I don't think it is the same percentage increase because the standard deviation of the FF is higher than the market, so the computation is complicated.>>

I did a study on that for the period 1961 through 1998. I looked at the FF and the S&P using the same premises as The Trinity Study except that I adjusted withdrawals for actual inflation. The results will be published on TMF soon, but they revealed that the FF enjoyed a 100% success rate for inflation-adjusted 6% withdrawals in all periods for a 100% or 75% FF portfolio. The S&P 500 did so only at a 3% rate.

Look for the results to be published in coming weeks.

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