In 1998, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, wrote a paper called “Retirement Savings: Choosing a Withdrawal Rate That is Sustainable,” This paper is commonly referred to as The Trinity Study as all three were at Trinity University when they published the paper.
The main thesis of the paper is that a 3-4% withdrawal rate would allow the average retiree enough money to live 30 years in retirement. Another way to put the 4% rule is to accumulate 25 times the assets you need for an annual income in retirement.
As an example, to live on $60,000 a year would require 60,000 X 25 = 1,500,000 or $1.5 million according to the study.
Since publications, the study has been referred to numerous times as a guideline for retirement. It has also been widely criticized as unsustainable in the long term, especially if you want to retire earlier than the typical 65, you might find you need more than 30 years worth of retirement savings.
The study referenced data from 1926 to 1995 and 1946 to 1995 and looked at the percent of years various withdrawal rates would support assuming certain portfolio mixes between stocks and bonds. Stock heavy portfolios fared better than those with higher mixes of bonds with the greater risk associated with a stock heavy portfolio.
Of course, one of the facts of retirement not accounted for directly in the study (but referenced in the Trinity discussion) is that retirees may modify their withdrawal rate to account for variations in the stock market, taking a smaller withdrawal in bad years and returning to the standard withdrawal in good years.
Another big assumption of the study is that you will have a good run at least the first few years of retirement, giving your investments a good opportunity to grow well at the beginning of your retirement. If you retired in 2008, that was not the case.
Lots of folks have written on the topic, Doug Nordman of the Military Retirement and Financial Independence blog has written extensively on the topic. Here is one of his articles. The Bogleheads (named after John C. Bogle the founder of the Vanguard Investment Group) also have extensive articles on the topic: here’s one.
So if you have a military pension, how do you account for that in your calculations? Just subtract the annual amount of your pension from your required (desired) income in retirement before multiplying that amount by 25 (good news if you are planning a military retirement and don’t have $1.5M sitting in the bank at the moment).
Next retirement focused article will be on the military pension and how it impacts your portfolio mix (does it make you heavy in bonds since it is backed by the federal government like a Treasury bond?).
This entry was posted in Retirement Stuff by Rich