Much has been written about determining safe withdrawal rates. From Bengen’s early studies to later ones from Evansky, Guyton(pdf) to Kitces.

Unfortunately, each one has a number of glaring weaknesses.

  • What if you are significantly older or younger than these studies used?  In other words what if your planning horizon isn’t 30 or 35 years?
  • What if you are not willing to invest in the aggressive stock allocation these studies all recommend?
  • How do fees affect the withdrawal rate (e.g., mutual fund expense ratios, advisor fees, etc.)?
  • How do market conditions affect the safe withdrawal rate (Kitces starts to address this).

I attempt to address these issues by taking the following approach

  • Assume bad things will happen at the beginning of retirement (.e.g, dividends drop by 25% and PE drops to 9,  interest rates go slightly higher than their historical average)
  • Assume we might live to age 100
  • Perform an amortization calculation to determine safe withdrawal amount

If you want to see how this works you can play with the safe withdrawal spreadsheet below.  It is by no means finished, but it should give you an idea of how things work.

All dollar amounts are in today’s dollars.

  • Green fields – must provide information
  • Yellow fields – can be changed to reflect different market environments and different assumptions. Likely want to change the fund expense ratios and the nominal bond yield and duration to match your preferred investment vehicle.
  • Percents – must be entered as decimals (i.e., 20% == 0.2)