Safe Withdrawal Rates for Aussies — Part 8: Summary (So Far)

Posted by on 11 February 2019 in Safe Withdrawal Rate Series

Many of us in the financial independence community like to consider ourselves non-conformists. While the masses are deep in consumer debt and locking themselves into years of work, the rest of us are being smarter with our money and setting ourselves up for a long life of leisure.

But at the same time, we all praise the 4% Rule like it’s gospel without questioning whether it applies to early retirees, particularly us way over here in Australia.

Over the last few months we’ve been deep in safe withdrawal rate analysis to test whether the 4% Rule actually works for us Aussies — or whether it’s not quite as ‘safe’ as we think.

This article stitches all that analysis together and introduces a simple tool for us to determine the exact safe withdrawal rate that applies to our individual circumstances and risk tolerance.

What is a safe withdrawal rate?

As we near retirement, we should have accumulated a healthy portfolio that we can live off. Unless you’re a pure dividend investor, this usually requires selling part of the portfolio to cover your living expenses.

But there’s a precarious balance between withdrawing enough money to really enjoy your retirement and withdrawing so much that your portfolio runs out of money (followed soon after by an undignified return to work).

The safe withdrawal rate tries to find the equilibrium between these two things. It is the proportion of your portfolio that you can safely withdraw without running out of money during retirement.

For example, a withdrawal rate of 4% means that you can withdraw 4% of your initial portfolio balance throughout retirement (adjusting for inflation). We call it a safe withdraw rate if our historical simulations suggest that we won’t run out of money during retirement. This is effectively the 4% Rule.

The chart below shows the safe withdrawal rate for a portfolio made up of 50% Aussie equities and 50% international equities over time.

The safe withdrawal rate isn’t just important because it helps us remain solvent during retirement, it also determines how much we need to save during the accumulation phase. So if you play through the maths, a safe withdrawal rate of 4% implies that you need 25x annual expenses to retire. If we drop this to 3.5%, then we need to save closer to 28.5x annual expenses to retire.

And once we’ve hit your annual expense savings number, we can consider ourselves financially independent.

What determines safe withdrawal rate?

There are two factors that determine safe withdrawal rate: average returns over retirement and the sequence of those returns (i.e. whether good returns occur at the beginning or end of retirement).

We conducted a couple of regressions to determine whether average returns or sequence of returns had a bigger influence on safe withdrawal rate. After running the numbers, we found that sequence of returns was the biggest determinant of safe withdrawal rates (by far!). The regression model also suggested that returns in the early years should be the biggest concern of recent retirees.

The risk that retirees experience poor returns at the wrong time is known as sequence of returns risk. Sequence of returns risk is highest immediately before and after retirement because this is when the portfolio balance is at its highest.

Good returns during this period gives the retiree a bit of extra cushion to survive poor returns later. Poor returns during this period can decimate a portfolio to the point of no return.

By this logic, in the worst case scenario we can be hit by sequence of returns risk twice. Poor returns just before retirement and then again just after retirement.

However, it’s more likely that we ride a bull market before retirement, which helps us eventually hit our retirement number. At some point after that, the market corrects and we experience a period of poor returns at the beginning of retirement. Well, at least we’re only stung once!

Optimal portfolio allocation

We can’t really control sequence of returns risk (stock market crashes don’t ask for permission!) but we can try to manage it through portfolio allocation.

So we dove into Modern Portfolio Theory to determine the optimal asset allocation for Aussie retirees. In particular, we looked at the best weighting of Aussie equities, international equities, Aussie bonds and international bonds for retirees. That is, the weighting that had the lowest chance of us running out of money during retirement.

After running the analysis, we uncovered that the optimal asset allocation follows a surprisingly elegant pattern. The equity component of our portfolio should be split 50/50 between Aussie and international equities. We don’t need bonds at all, but if we want some bonds to smooth the volatility, we should simply buy international bonds. There’s no need of Aussie bonds at all.

We found that the allocation above successfully minimised risk (i.e. volatility) whilst maximising return. And by minimising volatility, it reduced the effect of sequence of return risk, thus making this asset allocation the least likely to run out of money in retirement.

Note the ‘international’ component actually refers to U.S. equities. U.S. companies make up a large proportion of international indices. Plus U.S. markets also had the most robust data to test.

Adjusting retirement parameters

The analysis that we conducted to determine the optimal portfolio allocation assumed a relatively short retirement length (30 years) and defined portfolio ‘success’ as having more than $0 at the end of retirement.

But we then realised that those criteria aren’t necessarily applicable to early retirees. Not only do most of us financial independence enthusiasts plan on being retired for much more than 30 years, but we might also want to bequest money to our family.

So we decided to adjust retirement length and target a larger final portfolio balance to determine what effect they had on portfolio success rates.

We found that two things were needed for a portfolio to survive a long (60 year) retirement length: a high equity allocation and equities that were diversified across Aussie and international markets. In fact, compared to a 50/50 split of Aussie and international equities, a 100% Aussie equities portfolio was 10x more likely to fail!

And we found a similar thing for a higher final portfolio value. If we want to end retirement with the same amount of money as we started with, we also need both a high equity allocation and equities that were diversified across Aussie and international markets. In this case, a high equity weighting helps a portfolio lagging at 30 years ‘catch up’ and reach the initial balance again by 60 years.

Designing the perfect safe withdrawal rate table

The exact relationship between portfolio allocation, retirement length, final portfolio balance, and safe withdrawal rate is complex and difficult to get our heads around.

Normally we’d build a big table that shows the likelihood of a portfolio not running out of money during retirement for each combination of factors (safe withdrawal rate, equity allocation, retirement length, target portfolio balance). But that would be way too big and confusing to be useful.

But then we thought more practically. We’re all just trying to figure out what what safe withdrawal rate reflects our risk appetite and circumstances. In other words, we want to answer the question: how much can I take our of my retirement portfolio and still feel comfortable with any risk?

So in the tables below, we’ve approach things slightly differently.

Firstly, we defined two risk tolerances. We consider high risk to be somebody who is comfortable with a 5% chance of their portfolio running out of money during retirement. And we consider low risk to be somebody who is comfortable with a 1% chance of their portfolio running out of money.

Then we figured out the exact safe withdrawal rate that would result in a retirement portfolio running out of money 5% of the time and 1% of the time. And we did this for each combination of equity weighting, retirement length, and final portfolio balance.

It’s worth noting that equity weighting takes into account the optimal asset allocation described earlier. For example, an equity weighting of 80% implies 40% Aussie equities, 40% international equities, and 20% international bonds.

Determining your safe withdrawal rate

The high risk tolerance table is below. If you consider yourself to be comfortable with a high risk portfolio (i.e. you’re fine with a 5% chance of running out of money during retirement), then find the cell that corresponds to your personal portfolio equity weighting, retirement length, and final balance target. This is the maximum safe withdrawal rate that is acceptable for you.

You can see that with a high risk tolerance, in most cases you can withdrawal well above 4.0% of your retirement portfolio every year. Of course, you might run out of money. But let’s not think about that too much!

Now if you consider yourself to be low risk  (i.e. you’re only fine with a 1% chance of running out of money during retirement), then use the table below and find the cell that applies to you. This is the maximum safe withdrawal rate that is acceptable for you.

You can see that, when risk tolerance is reduced, safe withdrawal rates quickly revert below 4.0%. And when you’re an early retiree that targets a high final portfolio balance to leave for their family, you really do need to adjust down your withdrawal rate to be safe.

If you’re interested in looking at any other likelihood of success (e.g. you’re curious to know safe withdrawal rates with a 2.5% likelihood of failure) then leave a comment below. I’m happy to run the analysis and add to this article.


The purpose of this post was to summarise all our work on Aussie safe withdrawal rates to date. Hopefully we’ve been able to stitch all our analyses together into a useful tool to figure out the appropriate safe withdrawal rate.

If you have any questions or requests for safe withdrawal rate analysis, just drop a comment below and let’s discuss it. This is a very fruitful area of analysis and one that’s extremely important to early retirees.

All the best in your journey to early retirement!

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There are 12 comments on this article

  1. Avatar for Dan Montgomery


    I’ve enjoyed reading this series and seeing this from an Australian perspective.
    One thing to consider is that everyone has the ability, once retired, to review their performance and investment returns and make adjustments. So if the investment returns aren’t in your favour in the first few years you do have the option of reducing your drawings for a couple of years until things pick up again.
    It’s probably not the easiest thing to model, but I guess the point is that a couple of years of poor performance doesn’t necessarily mean that your retirement is doomed.
    Well done on the level of detail you’ve gone to in this series. I’ve seen so many similar articles from a US perspective, it’s great to see an Australian-centric article.

    • Avatar for Dan Montgomery

      Dan Montgomery

      Thanks mate, glad to hear you enjoyed it! You’re right, there’s always the option of managing your spending and potentially finding a source of income if investments don’t perform well in your early years.

      I think I’d rather retire with the comfort of knowing that even if investments perform poorly, I’m still most likely to be fine. I don’t want to have to change my behaviour at all, so I’d accumulate a larger portfolio size, retire, then use a lower safe withdrawal rate.

    • Avatar for Dan Montgomery

      Jacob Aldridge

      Well said Allan (and thanks again Dan for this brilliant series).

      I had the same thought, based on Kitces’ research about increasing the SWR if you were comfortable reducing spending if necessary. For example, our FIRE budget includes international travel of a certain standard for as long as we’re physically able; but that could readily be domestic travel or none at all if need be.

      So it would be great to know the impact of that flexibility, if your annual budget has a large discretionary component. If you’re able to drop your WR by 10% or 20% in a given year based on factors like a negative or below par market return, would that give you leeway to start at a higher rate?

      To your point Dan, yes it would be preferable not to change behaviour – but changing behaviour is preferable, to me, over working an extra 5 years.

  2. Avatar for Dan Montgomery

    The bludger

    Great article. The tables make it really clear.

    What’s interesting is how robust the 4% is over 30 to 60 years.

    Since your asking for more scenarios, what if we added in some withdrawal flexibility to the model? The static withdrawal doesn’t seem how I’d imagine people would live.

    Also, say I was already retired and I experience a few unfortunate market and personal events (additional expense) how would I know it’s time for me to go back to work or to radically reduce spending. Ie the portfolio is likely to not last.

    • Avatar for Dan Montgomery

      Dan Montgomery

      I’m actually thinking through how I might apply flexibility to the safe withdrawal rate calculations to test how someone might respond in the real world. That will be part of the next series of posts.

      And I really like your question regarding how to identify whether your portfolio is about to run out of money. I’d say that most people just use their gut, but I wonder whether there are any lead indicators? Definitely going to take a look at this one too!

  3. Avatar for Dan Montgomery


    Great analysis. Would very much appreciate adding a 20 year retirement period in please?

    Very relevant for an Australian planning for a 2 stage draw down- to retire early at 40 – with super etc kicking in at 60. So only the first 20 years really key. Thanks.

    • Avatar for Dan Montgomery

      Dan Montgomery

      Absolutely Mike, I’m travelling for work at the moment but I’ll have a crack when I’m back at home 🙂

  4. Avatar for Dan Montgomery

    James D.

    I think there’s another caveat to consider, moreso if you have a high withdrawal volume.
    Say you wanted 100k per year in your retirement phase.
    From my understanding, you’d have to sell down 100k worth stock.
    That stock was probably worth maybe 30k average on purchase date, which means you’ve made 70k in capital gains for that financial year.
    You’ve also probably held it for longer than a year, so you apply 50% CGT discount (might even be lower in future??)
    So in that year your taxable income is 35k, which means you’ll pay approx. 3300 in taxes.

    So you’re 100k is really 96.7k. Somewhat negligible is this scenario, but may change things for people with less conservative withdrawal rates, or people with really high withdrawal volumes.

  5. Avatar for Dan Montgomery

    Gemma Simpson

    Hi Dan
    Thank you so much for putting together such useful information on FIRE from an Aussie perspective. The simulations you have run are very insightful.

    I just wanted to ask you a question relating to the table on Article 8, specifically for Final Balance = 100% of Starting Balance. If you look at the withdrawal rates, it seems that the longer the retirement period, the higher the withdrawal rate, which is the same as saying that the more you withdraw, the longer the pool of money lasts. This does not seem logical. Interestingly, for Final Balance = 0% and Final Balance = 50%, the higher the withdrawal rate, the shorter the retirement horizon (as one would expect). I was wondering if there’s a reason for this strange effect at Final Balance = 100%. I suspect this has happened in your calculations because when you look at equity returns, the longer the period you consider, the higher the returns – but that’s not the same as saying that the higher the withdrawal, the longer the money will last. I’d be very interested and grateful for your views on this issue.
    Kind regards,

    • Avatar for Dan Montgomery

      Jared G

      Hi Gemma,
      This had been explained in Part 6 as I questioned it at first but it makes sense.
      Over the shorter period, there’s less time to recover your balance from a particularly bad downturn like during those dips in the graphs above. Because the rule is to have 100%, even having 99.9% of your balance after 30 years is still a fail in the data whereas then with an extra 30 years, you’ll have had plenty of time to buildup the balance again before the next major downturn.
      Don’t forget the 100% original balance means you have not wiped out your portfolio if its a fail so you still have that money there to recover after a market crash even if it $1 less than what you started with

  6. Avatar for Dan Montgomery


    Hi Dan. Great series! Very interesting how a 50:50 AUS:US equity split ended up being optimal.

    A couple of thoughts/questions:

    1. I wonder what the results would look like if US equities were swapped out with a broader set of international equities, e.g. the MSCI World ex-Australia index. Could the same (or better?) returns & SWR be achieved with a smaller amount of home bias, and therefore a lower level of country-specific risk?

    2. Following on from point #1, if we’re able to reduce the amount of home bias, would currency risk need more consideration? The 50:50 domestic:international allocation balances both upside and downside currency risk quite well, but if the domestic proportion were reduced to 20% (for example), would it be beneficial to currency-hedge a portion of the international equities?

    Personally, a 50% allocation to Australian equities makes me a bit uncomfortable because of how small, top-heavy, and undiversified the ASX is (relative to global markets).

    Would love to hear your thoughts on this. Thanks! 🙂

  7. Avatar for Dan Montgomery


    Hi Dan,
    I just discovered your work. I had studied Big Ern’s epic analysis and had wondered about applicability to the Australian environment. Big Ern’s analysis is a very good estimate for the general FIRE person.

    I was fantastic to see you had answered all my questions regarding the Australian nuance. Absolutely fantastic. I am forwarding this onto some friends who are in a similar situation as I. Thank you so much.

    Good luck with your journey.

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