# Safe Withdrawal Rates for Aussies — Part 9: The Ordinary Dollar SWR Calculator

Posted by on 2 July 2019 in Tools & Calculators

Astute observers of this website may have noticed that we’ve been promising an online safe withdrawal rate calculator for a while now. And it’s finally here!

The problem with safe withdrawal rate research is that it’s generally focused on calculating the safe withdrawal rate for a pre-defined set of criteria. For example, a portfolio of 80% stocks and 20% bonds over thirty year retirement length. This has made it difficult to determine what safe withdrawal rate applies specifically to an individual.

The calculator was designed to solve this problem. It allows anybody to input information that reflects their own circumstances, so they can calculate their own personal safe withdrawal rate.

You can access the safe withdrawal rate calculator here. And the calculator is still in beta testing, so please leave any feedback in the comments section of this post.

## 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 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.

## How does the calculator work?

### Inputs

There a number of inputs that can be used to personalise the safe withdrawal rate calculation. These include:

• Risk tolerance:  Some people are comfortable with a safe withdrawal rate that was successful in 90% of historical retirement starting points. Other people are comfortable with something closer to 95% or 99%. You can choose the risk tolerance that suits you. For example, a risk tolerance of 95% means that you are comfortable with a safe withdrawal rate that failed in 5% of historical starting points.
• Portfolio mix: You can input your exact retirement portfolio risk. Due to data limitations, this includes Australian stocks, Australian bonds, U.S. stocks and U.S. bonds. If you have access to data for other assets, please let me know.
• Target balance: Most safe withdrawal rate calculations simply assume that any ret
irement portfolio that doesn’t run out of money is ‘successful’. But that could mean ending retirement with a balance as low as 50c! The calculator allows you to select a target balance between 0% of the initial retirement balance (i.e. \$0) and 100% of the initial balance.
• Retirement horizon: This one should be relatively straightforward. You can input your estimated length of retirement from 30 to 60 years.

### Outputs

You’ll see a large blue box that illustrates that safe withdrawal rate calculated from your specific set of inputs. And for now, there are two very simple output charts:

• Safe withdrawal rate over time: This illustrates the change in safe withdrawal rate from 1871-2018. By changing the different inputs you can observe how this changes.
• Distribution: The percentile distribution of safe withdrawal rates, which gives insight into the relative probability of safe withdrawal rate levels (i.e. what does the tail look like?).

Below are some common questions that might help you understand the calculator and our goals in improving it. If you have any other questions, please leave them in the comments below and we will add them to this article.

#### How do I calculate exactly how much I need to save for retirement?

The simple calculation is Savings Multiple = 1 / Safe Withdrawal Rate. For example, for a safe withdrawal rate of 3.56%, you will get 1/0.0356 = 28.1  (i.e. you need to save 28.1x your annual expenses to retire).

#### I have [insert other asset] in my portfolio, why can’t I include that?

We need a full data set of monthly returns for any asset that we include in the calculator, preferably back to 1871. In an earlier article I showed how difficult it is to source this type of data! But if you have access to the data required, we’d absolutely want to include it in the calculator.

#### What is next for the calculator?

There’s still plenty that we’d like to do with the calculator. Of course, as we find more reliable data sources, we’d like to include additional asset classes. However, next on the list will be a portfolio efficient frontier chart like the one in our previous post. This will allow you to compare the performance of your portfolio with an optimised retirement portfolio (i.e. that minimises risk for any level of return).

The information in this website and the links provided are for general information only and should not be taken as constituting professional advice. Ordinary Dollar is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Ordinary Dollar does not guarantee the accuracy of any information on this website, and is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.

1. #### Aussie HIFIRE

Thanks for your hard work on creating the calculator Dan, I love the visual representation. I think it really highlights that much of the reason for having low SWRs is a bad sequence of returns, but it doesn’t actually come up that often. Depending on your asset allocation in a lot of scenarios you might easily be fine with higher withdrawal rates of 5% or more.

Also in the scenarios I’ve run on my situation the difference between being 98% safe and 100% safe is huge, from 4.3% to 3.7% which means going from needing 23 times income to 27 times income.

Really great work, thanks for this!

• #### Dan Montgomery

Thanks mate, appreciate the kind words!

2. #### PKFFW

Great work Dan.

It’s really eye opening how much or little difference each input makes depending on what your goals, asset mix and risk tolerance is. It’s got me thinking more closely about asset allocation and what sort of target balance I’d be happy with.

• #### Dan Montgomery

Glad you found is useful, PKFFW 🙂

3. #### Mark

What an insightful and easy to use calculator that ties up the Safe Withdrawal series with a nice little bow, thank you so much for sharing.

As easy as the calculation is to do manually, just a thought that it might also be worth automatically calculating the “annual expenses multiplier” based on the calculated safe withdrawal rate, and including this in the summary page if this is at all possible.

Cheers again!

• #### Dan Montgomery

Great idea Mark, that’s something that could be implemented quite easily. Thanks for the feedback!

4. #### Dunno

Nice work Dan.

Very clean interface for the calculator.

A couple of thoughts

Have you seen the latest research paper from the RBA? “A History of Australian Equities”
Makes a robust argument that the widely referred to historical Australian data sets probably overstate dividend yield by 2%.

Why do you include forecast returns with the historical returns? That’s mixing the known with the unknowable.

Any thoughts to incorporating valuation into the mix? Whilst valuation is not an exact science it is probably the biggest driver of SWR for a “current” decision on suitable SWR.

Are the US bonds unhedged? That’s not a common asset allocation. Differing correlation arising from the currency movements help the SWR calculations but most who buy bonds want volatility dampening and not currency risk. How does calculating US bond as hedged change SWR outcomes or even the preference for US bonds over Aus. Along the same thought line, Have you considered Hedged vs Unhedged US equity as two different allocations and modelled that diversification on SWR.

Thanks for sharing the calculator.

A link to the actual data points you are using and the assumptions/calculation used (especially those forecast return assumptions) would enable a ‘crowd’ beta test of the robustness of your work.

• #### Dan Montgomery

Thanks Dunno, glad you like it.

I hadn’t come across that research paper but looks like interesting reading! I see that the Lamberton data set does apparently overstate dividends, so I wonder whether we could get our hands on the RBA data set that they refer to…

I’d also like to include valuation into the mix, as I know that it’s a relevant indicator. Unfortunately I don’t have a high quality valuation data set back to 1871 for Australia (I do for the U.S. though).

U.S. equities and bonds are net of currency fluctuations. I think you’ve made two good suggestions for additional features: (1) The ability to select hedged vs unhedged asset classes where applicable, and (2) The ability to turn on/off safe withdrawal rate forecasting.

My plan is to refine the calculator with feedback and then share an Excel version, which will include the data sets in full. For now, you can check out some of the previous posts that outline where I sourced the data and what calculations I used (but you’ll have to assume I implemented it correctly until the Excel version is done 😉 )

• #### Dunno

Good work Dan

Withdrawal rates and sequence risk from an Australian perspective is an interesting area to be pushing the frontiers and gathering some unique Australian insights.

The quality of the historical data for Australia is probably the biggest hurdles to accurate outputs. But then the future won’t exactly match the past so general principle even if drawn from rough historical data should still be useful insights.

I suspect if you ask the RBA for the data with reference to this project, they may be forthcoming.

I look forward to watching the progress.

• #### Dan Montgomery

Thanks again mate, appreciate the constructive feedback

5. #### Rayz0r

Hi Dan, this was a great read and compliments your FIRE calculator well. I was playing with your original FIRE calculator again last night and noticed a bug. Specifically calculated tax payable at cell E16 has a bug where amounts over 180,000 earnings do not increase the tax paid. It caps out at 54,096 no matter the value you enter. 54,096 is the base calculated rate for that bracket. It seems any amount after that amount is not correctly added. Cheer Rayz0r.

• #### Dan Montgomery

Thanks for the heads up Rayz0r. I’ll implement a fix ASAP!

6. #### Craig

Thanks Dan,

I love your FIRE calc (the only one I have found that allows you to elect to spend more in retirement than in the accumulation phase, which is ur plan) and this SWR calc is also an awesome contribution to this space.

I can understand the reasoning for only having australian and US equity and bond data sets.

My portfolio is moving towards the following allocations:
VGS 40% (MSCI world equities index)
VAS 40% (ASX 300)
Direct aus stocks 5%
VAP 5% (Aust Property Reits)
DJRE 5% (Intnl Property Reits)
IFRA 5% (Van Eck Intnl infrastructure)

Based on this, I estimated 50% australian equities and 50% US equities (65%+ international holdings I have are US based) using your calc to estimate my SWR

Do you think that will yield a reasonable gestimate of SWR for me using your calc?

7. #### The Frugal Samurai

Great work Dan! Found this one late, but better than never. I like the risk tolerance piece… something different to all the calcs out there !