5 min read
NOTE: This analysis has been modified to include inflation-adjusted results. Thank you to Physician on Fire, Early Retirement Now, Steveark, and Mr. Tako for suggesting this modification in the comment section, as well as Michael Kitces who provided feedback via Twitter.
Almost all retirement number calculations are based on the 4% Rule, which originated from the Trinity Study. This rule states that once you save up 25 times your annual expenses, you can retire and “safely” withdraw 4% of your portfolio each year with a high likelihood that you’ll never run out of money.
The study states,
“If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods … In those cases, portfolio success seems close to being assured.“
This study is like the bible of the early retirement community. Ask anyone in the community, “how much should I save for retirement?”
You’ll get the response, “25 times your annual expenses.”
The Trinity Study provides the research to support that answer. It’s a great study, but I have a couple gripes with it.
The Trinity Study only looks at 15 – 30 year retirement periods. It seems that more and more people are reaching early retirement between ages 30 – 45. A huge portion of these people can expect to be retired anywhere from 30 – 50 years.
The study assumes a portfolio is “successful” if it has at least 1 dollar left at the end of the 30-year time period. I’d like to see just how much the portfolio is worth at the end of the 30 years, not just whether or not it was “successful.”
The study only uses data from 1925 – 1995. I’d like to see more recent data included in the analysis.
I’d like to present my own modified analysis that addresses each of these points. Using data from 1928 to 2016, I analyze exactly how much a “25 times expenses” portfolio is worth at the end of every 10, 20, 30, 40, and 50-year retirement period.
Let’s have a look!
Unlike the Trinity Study, I don’t analyze different stock/bond portfolio mixes. Instead, I assume that all of one’s savings are invested in the S&P 500. I use historical S&P 500 returns from this page and yearly inflation rates from Rober Schiller’s historical data.
First, let’s see how the “25 times expenses” portfolio has done historically. For all of the following charts, I assume that the starting portfolio is 25 times the size of one’s yearly expenses, that one spends 4% of their starting portfolio value each year, and that spending increases with inflation each year.
For example, if you spend $40,000 per year, your starting portfolio value is $1 million. Each year you have your entire portfolio invested in the S&P 500. In year one you spend $40,000 and each year your spending increases based on the historical inflation rate.
The following chart shows the ending value of this type of portfolio during every 30-year retirement period from 1928 to 2016.
An example of how to interpret this chart: If you retired in 1932 with one million dollars, kept all of it invested in the S&P 500, spent $40k in year one and increased spending to keep up with inflation each year, thirty years later in 1961 that portfolio would be worth just over 10 times it’s original amount.
When I first saw this result, I stopped to double check my math. Could a portfolio really be worth ten times it’s original amount in 30 years, even when you’re using money from that portfolio to live on? It turns out that yes, my calculations were correct, and I simply underestimated how powerful compound interest could truly be.
Here’s the exact growth of that $1 million portfolio during this 1932 – 1961 time period:
That’s incredible. The original $1 million actually was worth over 10 times it’s original amount, even after using the portfolio to support one’s living expenses.
It turns out that this type of portfolio had a positive ending value in 59 out of the 60 30-year periods. Not only that, but 2/3rds of the time the portfolio ending value was more than double the starting value.
It also turns out that the median ending value for the portfolios that did survive was 4.2 times the size of the starting value. This means a $1 million portfolio was typically worth $4,200,000 thirty years later.
Side note: These calculations work for any level of spending. For example, for someone who retires with $500,000 and only spends $20k per year, their portfolio would also have been worth 4.2 times the size of it’s starting value thirty years later.
Next, I looked at how this type of portfolio did over different time periods. This portfolio did well over most 30-year periods, but how did it perform over every 10, 20, 40, and 50-year period from 1928 – 2016?
Here are the results:
Number of periods portfolio ended with positive value: 100% (80 out of 80)
Median ending portfolio value: 1.38 times bigger than starting value
Number of periods portfolio ended with positive value: 100% (70 out of 70)
Median ending portfolio value: 2.50 times bigger than starting value
Number of years portfolio ended with positive value: 94% (47 out of 50)
Median ending portfolio value: 4.62 times bigger than starting value
Number of years portfolio ended with positive value: 92% (37 out of 40)
Median ending portfolio value: 10.39 times bigger than starting value
Here are the aggregated results:
It turns out the “25 times expenses” portfolio has not only performed well over 30-year periods, but it has done incredibly well over 40-year and 50-year periods as well.
It’s pretty insane how large the portfolio can become if it does survive 40 and 50-year stretches. The average portfolio value at the end of 50 years is over 10 times bigger than the starting value. That means a $1 million portfolio has, on average, grown to $10 million over historical 50-year periods. This is good news for people looking to retire in their 30’s who will potentially face a 50 + year retirement.
Historical stock market returns are no guarantee of future returns, but they do provide a nice reference point.
It turns out that saving 25 times your annual expenses has historically provided a powerful portfolio that usually survived for decades. The only portfolios that didn’t survive in the past are the ones that experienced consecutive early years of awful returns. Specifically, the returns during the Great Depression from 1929 – 1931 were enough to wipe out “25 times expenses” portfolios.
There are two points of this analysis I want to explore even further in a different post:
1. The “25 times expenses” portfolio has done so well historically, it begs the question: how have smaller portfolios performed? How do “15 times expenses” or even “10 times expenses” portfolios perform? Do they survive over long periods of time?
2. This analysis assumes you earn zero dollars in income after your retire. How does part-time work during retirement impact these calculations? Specifically, how much sooner could you actually retire if you incorporate some part-time work into your post-retirement life?
Stay tuned for a future analysis where I explore these questions in-depth.
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
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