Introduction

When planning a retirement, you have an important decision to make: how much money will you withdraw from your investments each year? Most people wish to withdraw as much as they can to maximize their quality of life, but not so much that they run out of money.

It's impossible to know with certainty how much we can safely withdraw each year, because we can't know how the market will perform during your retirement, nor how long we will live. But there are ways to make an informed decision.

Finding a Safe Withdrawal Rate

In the early 90's, a financial advisor named William Bengen came up with a novel idea to determine a safe withdrawal rate: simulating retirements using historical data. He took a retirement plan and calculated how it would have performed if an individual had started their retirement in 1926. After some number of years (he considered up to 50 years in his study), he determined if there was any money left in the portfolio. Then, he ran the simulation again, starting in the year 1927, and continued all the way through the present day.

After running all of the simulations, he determined that retirement plans survived about 95% of the time with a 4% initial withdrawal rate. After the first year, you adjust the withdrawal amount for inflation to ensure that your purchasing power remains about the same.

A few years after Bengen's study, a group of professors reconfirmed his results in a paper called The Trinity Study. This idea is now known as The 4% Rule, and it remains a foundational idea in retirement planning even today.

This method of determing a safe withdrawal strategy is powerful if you believe that the market during your retirement will perform no worse than the worst market in the available data set.

Other Withdrawal Strategies

In the time since the 4% Rule was originally conceived, new withdrawal strategies have been created that offer pros and cons compared to The 4% Rule.

What other strategies exist, and which one is most appropriate for you? You can use FI Calc to find these answers.

Using FI Calc

This calculator allows you to run your retirement simulations using historical data, just like Bengen. You can recreate his original results, or tweak the inputs to discover new results. Run retirements that are shorter or longer, or that withdraw less or more, and see how these changes impact success rates.

In addition to the withdrawal strategy used in The 4% Rule, FI Calc includes others that you can use, too, and those strategies are just as configurable. You can export your results as a CSV file and continue your calculations in your spreadsheet app of choice.

What Now?

You're ready to jump in and start running simulations, or you can continue reading these Guides to learn more about this calculator.

  • Backtesting - FI Calc is a calculator that works by using a strategy called "backtesting." Learn all about backtesting here.