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.
Interested in safe withdrawal rates and want to dive into the detail? You can check out the entire series here:
- Part 1: Introduction to Safe Withdrawal Rates
- Part 2: Building and Validating a Data Set
- Part 3: Initial Findings (Domestic Equities and Bonds)
- Part 4: Portfolio Optimisation (International and Domestic Equities and Bonds)
- Part 5: Extending Retirement Length
- Part 6: Targeting a Larger Final Portfolio Balance
- Part 7: Sequence of Returns Risk and Safe Withdrawal Rates
- Part 8: Summary (So Far)
- Part 9: The Online SWR Calculator
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?
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.
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?).
Frequently asked questions
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).