Safe Withdrawal Rates for Aussies — Part 3: Initial Findings
Posted by Dan Montgomery on 25 November 2018 in Safe Withdrawal Rate Series
If you’ve spent any time in the financial independence community, then no doubt you’ve come across the 4% rule. The rule states that you can withdraw 4% of your retirement portfolio (adjusted for inflation) without running out of money. As such, 4% is known as the safe withdrawal rate.
If you play through the mathematics, the implication of the 4% rule is that you need 25x your annual expenses to retire. So many would-be early retirees structure their entire retirement plan around that 25x expenses number.
More recent studies have questioned the robustness of the 4% rule for U.S. markets. Amongst other things, they have found that 4% very quickly turns into 3.5% or below when you change equity/bond portfolio mix, retirement length and other factors.
But all of this work was done for Americans using U.S. markets data. The question for us Aussies is: Does any of this apply to us? If so, which parts?
In this article we begin to clarify some of the important — but still unanswered — questions about the 4% rule for Australians. We test whether the basic 4% rule applies to Australians and whether it needs to be adjusted for different portfolio mixes.
In future articles in this series we will elaborate on these findings and test follow-on questions, such as ‘what is the effect of retirement length of safe withdrawal rates?’, ‘can we improve safe withdrawal rates by mixing Australian and international investments?’, and more!
