The Trinity University study is one of the most widely-cited papers in retirement planning. Its key conclusion, that a fixed 4% withdrawal rate is safe in most traditional retirement scenarios, has helped answer the common question of “How much do I need to save for retirement?” Since a 4% withdrawal rate is considered safe under a wide range of historical market scenarios, you should aim to save 25 times expected annual retirement spending at retirement.
Background
Drawdown strategies in retirement is an incredibly complex topic. William Sharpe, Nobel laureate in economics, has called it “the, nastiest, hardest problem in finance” and has devoted considerable energy to the problem. With the maze of retirement accounts, Social Security payments, and pension plans, everyone’s drawdown strategy will be slightly different.
The Trinity University study (named after the university where the paper was written) aims to cut through all of that complexity and boil down drawdown strategies down to a single number. If an investor withdraws a fixed percentage of their assets annually for retirement expenses, what is the likelihood that they will outlive their savings?
Methods
The Trinity University researchers ran simulations of how retirement portfolios would perform under various market conditions. They used historical data from 1926-2009 and tested various rolling periods (i.e. for 30-year retirements, they tested 1926-1955, 1927-1958, 1928-1957,…,1980-2009).
The success rate of a withdrawal strategy was calculated by determining what percentage of these rolling periods enabled the retiree to not run out of money over his or her lifetime. They also tested various asset allocations, ranging from 100% stocks to 50% stocks / 50% bonds to 100% bonds.
The withdrawal rate is a fixed percentage of the initial portfolio value; note that it is not a fixed percentage of the current portfolio value as it rises and falls. They tested it with and without adjustments for inflation.
Results
Let’s look at the results when withdrawals increase over time with inflation, since that allows you to maintain your current lifestyle throughout retirement.
The portfolio success rates change with different withdrawal rates and different investment stock/bond asset allocations.
The 4% withdrawal rate and a 50/50 or 75/25 portfolio gives excellent portfolio success rates:
| Withdrawal Rate | 100/0 | 75/25 | 50/50 | 25/75 | 0/100 |
| 3% | 100% | 100% | 100% | 100% | 84% |
| 4% | 98% | 100% | 96% | 80% | 35% |
| 5% | 80% | 82% | 67% | 31% | 22% |
| 6% | 62% | 60% | 51% | 22% | 11% |
| 7% | 55% | 45% | 22% | 7% | 2% |
| 8% | 44% | 35% | 9% | 0% | 0% |
Using this same strategy, the researchers looked at how much money the average (median) retiree would have at the end of the 30-year holding period. This would represent how much money the average retiree would pass on to their heirs. Assuming a starting portfolio value of $1,000, the table below shows the median ending portfolio value after 30 years using various withdrawal rates and stock allocation strategies:
| Withdrawal Rate | 100/0 | 75/25 | 50/50 | 25/75 | 0/100 |
| 3% | $12,929 | $8,534 | $4,754 | $2,333 | $626 |
| 4% | $10,075 | $5,968 | $2,971 | $633 | $0 |
| 5% | $7,244 | $3,554 | $1,383 | $0 | $0 |
| 6% | $4,128 | $1,338 | $9 | $0 | $0 |
| 7% | $1,253 | $0 | $0 | $0 | $0 |
| 8% | $0 | $0 | $0 | $0 | $0 |
Using the standard 4% withdrawal rate, a retiree who uses a 50/50 asset allocation in retirement will end up with almost 3x their initial portfolio value after 30 years. If you are more aggressive and use a 75/25 asset allocation (which had a 100% portfolio success rate), you’d end up with almost 6x your initial portfolio value. Your kids will be very happy if you use a 4% withdrawal rate.
Takeaways
Understand the limitations of the Trinity University model
The beauty of this study is in its simplicity — it breaks down an incredibly complex problem into a simple, but applicable model. It boils down retirement planning to a single number — the safe withdrawal rate — and establishes 4% as a reasonable baseline to calculate how much you need to save for retirement. However, you need to understand the model’s limitations.
As the researchers readily admit, a fixed withdrawal rate on the initial portfolio value (adjusted for inflation) is not how most retirees typically spend their money. They may choose to spend more money during their early years of retirement to travel while they still have excellent health, and the end of retirement may be marked with significant medical bills at the end of life.
Also, they use historical models to calculate the portfolio success rate. Past performance is not indicative of future results, and when dealing with longer time periods (I.e. 30 years), 84 years of data (1926-2009) may not be enough to fully understand the implications of the 4% withdrawal rule. Unfortunately, historical data is much more sparse back in the 1800s.
The 4% safe withdrawal rate is a great rule of thumb for retirement planning, but it may be too high for early retirees
The maximum retirement period in the study was 30 years, assuming a retirement age of 65 and planning for the possibility of living to age 95. But with many people considering early retirement, retirement may be 50 years, 60 years, or longer. The safe withdrawal rate for these early retirees may be different than 4%.
An early retiree using a 4% withdrawal rate and a 75/25 asset allocation would have a 100% portfolio success rate and an average ending portfolio value of six times the original portfolio value after 30 years. It would seem that they would be safe for years 31-60 of retirement.
However, the excellent work by the blogger Early Retirement Now suggests that a safe withdrawal rate for an early retiree with a 60-year time horizon might be lower (around 3.25%). It certainly never hurts to be conservative, but I would consider a 4% withdrawal rate to be reasonable for retirement planning, especially if you are flexible with your withdrawal strategies.
You need to have significant stock exposure during retirement
Most investors assume that in retirement, you need to become extra conservative in your investments to avoid big market losses. It turns out that the opposite is true. According to the results of this study, a 50/50 portfolio would be the minimum stock allocation to maintain a high portfolio success rate using a 4% withdrawal rate. A 75/25 portfolio could potentially have a higher portfolio success rate and end of retirement portfolio value. A 100% bond portfolio fails more than half the time using the 4% withdrawal rule.
The target-date funds designed for investors currently in retirement reflect the results of this study. Vanguard’s 2015 Target Retirement portfolio, which is designed for investors currently in retirement, has an asset allocation of 45% stocks and 55% bonds. Similarly, Fidelity’s Freedom Index 2015 Fund has a similar asset allocation, currently holding 53% stocks and 47% fixed income assets.
A 4% withdrawal rate allows you leave a (potentially large) bequest
As was seen in the ending portfolio values, using a 4% withdrawal rate allows you to leave a bequest to your heirs. This makes sense, as a single-premium income annuity would offer you an annual income of approximately 6% of your retirement portfolio. Of course, by buying the annuity, you would leave nothing at the time of your death. Withdrawing your money at a more conservative 4% rate, with the risk of stock and bond market movements, should mean that you are able to leave a sizable portfolio to your heirs.
Conclusion
The Trinity University study established 4% as the standard safe withdrawal rate used in retirement planning. It is not without its limitations, particularly for people who want to retire early. In the average scenario, a 4% withdrawal rate will allow you to leave quite a bit of money to your heirs, so long as you invest somewhat aggressively.
What do you think? Have you ever read the Trinity University study before? Do you use a 4% safe withdrawal rate for retirement planning, or something lower?
Adding to the drawdown posts I see! The fact that most early retirees need good stock exposure is often overlooked. A 100% bond portfolio is not going to cut it if you are living on those proceeds/dividends for 60 years.
I am not sure where my risk ratio will fall. For now I am 100% stocks, but I suspect as I accumulate wealth I will slowly but surely push towards bonds, etc.
It’s a natural tendency to hold fewer stocks as you get older. But according to this study, the endpoint should be around 50-60% stocks, not 0% stocks.
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The 4% rule is a great starting point, but I personally prefer the 3% rule, especially for longer retirement lengths and when stocks are overpriced (high price to earnings ratio). I do think that one of the most important conclusions from the Trinity study is that you need to have at least 50% stocks to outpace inflation and have a good chance at portfolio success.
I agree. I think that aspect of the study (you need at least 50/50 stocks/bonds to get a reasonable portfolio success rate) is underreported.
Well, I didn’t understand a word of that. 4% of what, exactly?
This study aims to determine what percentage of your retirement nest egg you can safely withdraw each year and not run out of money with a high degree of confidence. Using historical data, they found this percentage to be 4%, assuming you held your retirement money in 50% stocks and 50% bonds.
-Wall Street Physician
If you have a nest egg, you can probably draw down 4% of that per year for 25 or 30 years without exhausting the account, provided that it is not too conservatively invested.
Of course, this says nothing about whether 4% of your nest egg will meet your needs for income in retirement. For many people, income from retirement savings will be combined with income from other sources and people may need to adjust how long they work or how they plan to live according to the resources available to them.
If you’re a younger person who has yet to do most of their saving for retirement, then the 4% rule can help you to calculate how much of nest egg you should try to accumulate.
So the 4% can be considered with respect to the savings you have or the savings you want, and those savings should be considered as one piece of the larger financial puzzle of your life.
As an employee of the Strategic Communications and Marketing team at Trinity University in San Antonio, I LOVE that you regularly cite this study. I am writing to request you to change the photo at the top of your blog, however. The picture is not our school. I have three photos I’d love to send for your use. Please contact me if that’s possible. I don’t want to clog up this response thread with photos. Thank you!
Great strategies and wonderful blog, thank you!
I’ve found little info on effective/optimum strategies for actually making withdrawals during retirement. A basic principle I presume is to first have liquid (i.e. money market) funds from which to actually pay monthly expenses, but how much should this account have in it, e.g. six month expenses? And then when/how should this liquid expenses account be funded, draw first from accounts above target allocation (back to target allocation, e.g. 70% for stock 30 Bond) and then prorata from them all to bring liquid account back up to target balance?
Are there any strategies that have been studied regarding efficacy to ride out market swings, like say only top up liquid account in months market is rising and hold during market declines (until liquid account is depleted) thus minimizing selling low?
Simplest of course is just to withdrawal what’s needed, or steady x% (4%), each month but is that the most effective? Timing the market while investing is bad, but is some timing during withdrawal effective do we know?
hi Wall Street Physician,
Although this is an old article, it is still very rewarding to read it again. Hope you can update more wonderful articles in the future.
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