Flexibility is Overrated – SWR Series Part 58

June 16, 2023 – I wonder if I’ll ever run out of material for the Safe Withdrawal Series. Fifty-eight parts now, and the new ideas come faster than I can write posts these days. This month, I initially planned to write about the effects of timing Social Security in the context of safe withdrawal simulations. But one issue keeps coming up. It’s almost like a personal finance “zombie” topic that, after I thought I put it to rest once and for all, always comes back when you least expect it. It’s flexibility. If we are flexible – so we are told – we don’t have to worry much about sequence risk. We can throw out the 4% Rule and make it the 5.5% Rule. Or the 7% Rule or whatever you like.

Only it’s not that easy. In today’s post, I like to accomplish three things:

1. Provide a simple chart and a few back-of-the-envelope calculations to demonstrate the flexibility folly.
2. Comment on a recent post by two fellow personal finance bloggers and showcase some of the weaknesses of their approach.
3. Propose a better method for modeling flexibility and gauging its impact on safe withdrawal amounts. Hint: it uses my SWR Simulation tool!

Let’s take a look…

Why flexibility is overrated: One chart and a simple back-of-the-envelope calculation

Before I even get too far into the weeds, let me briefly demonstrate the intuition for why flexibility is overrated:

1: A simple chart to showcase the flexibility fallacy

Imagine we’ve determined that over a certain retirement horizon, a fixed 4% initial withdrawal rate is indeed the historical failsafe, i.e., for the historical worst-case retirement date, likely in 1929 or around 1964-1968, a 4% initial withdrawal amount would have exactly depleted the portfolio.

The flexibility crowd now tells us that we can start with, say, a 5.5% initial withdrawal rate and then subsequently just be flexible and make some small adjustments, like temporarily curbing consumption and/or getting a side hustle, etc. Of course, we already know that if 4% is the failsafe, then consuming 5.5% over the entire retirement horizon will not be safe (red line). And using the purple line withdrawal path, you still withdraw more than under the failsafe 4% figure every year. Thus, you will still fail. It’s a mathematical certainty – no simulations necessary. So, we know for sure that if we start above 4%, then the flexible withdrawal path must cross to below 4% at some point to make up for the initial excess withdrawals (see the green line).

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So, if you like to raise your withdrawals early on, you may face some very deep and potentially prolonged spending cuts later in retirement. It’s like squeezing a balloon!

Let’s look at an example with some concrete numbers…

2: A simple numerical example

Imagine we have a FIRE enthusiast couple with a 40-year horizon, an 80/20 portfolio, i.e., 80% stocks and 20% intermediate government bonds (10-year US Treasurys), and a zero final value target. The retirees have an $80k per year budget and saved $1,450,000 so far. Well, applying the 4% Rule, the portfolio target is $2,000,000, so they are still $550,000 short of reaching FIRE. But don’t let your hearts be troubled: flexibility to the rescue: Our retirees read on the interwebs that “if you’re flexible, you can raise your SWR to 5.5%.” $80k divided by 0.055 gives you a savings target of $1,454,545, and rounding that down to $1,450,000, our FIRE couple reached their savings target, potentially years before they’d ever imagined. What’s not to love about flexibility, then? Well, the math doesn’t add up.

First, the 4% Rule doesn’t even work over a 40-year horizon. The historical failsafe would have been 3.43% for the cohort that retired right before the September 1929 stock market crash. A 4% withdrawal rate would have had a 7% failure rate overall (6.94% post-1926) and a 25.07% failure rate conditional on the Shiller CAPE above 20. Today’s Shiller CAPE is just under 30, by the way.

So, 4% is not very safe. A 5.25% withdrawal rate would have had a two-thirds failure rate if the initial CAPE had been elevated, and a 5.5% initial rate would have failed 75% of the time (not displayed in the table, but take my word for it). Conditional on an elevated CAPE, not even accepting a modest failure probability gets you only slightly closer to 4%. At 1%, 2%, and 5% failure probability, we’re looking at 3.63%, 3.66%, and 3.73%, respectively.

So, retiring on an $80k p.a. budget with only $1.45m, you might need a whole lot of flexibility. How much flexibility? Well, there is a wide gap between reality and what is often advertised as the necessary degree and duration of flexibility. For example, flexibility is often marketed as a very short-term thing, where you curb your discretionary spending, but only during bear markets, which usually last only 1-2 years. Compare that to reality. At a 3.43% SWR and with a $1.45m portfolio, your actual safe consumption level would have been only about $49,800. That’s a whopping $30,200 a year below your $80k budget – every year for 40 years, not just during bear markets! So, if you have the flexibility to curb your consumption by about 38% every year during your entire retirement, then go ahead. But I would find that very unappealing.

Another way to gauge how much you need to curb your withdrawals is to compute the failsafe portfolio you’d need for that $80k-a-year lifestyle. It’s $80k divided by 0.0343, i.e., $2.332m, not $1.450m. We have a shortfall of about $882k. And we will not overcome that kind of a shortfall by simply eliminating our bar and restaurant budget and working as an occasional barista on the weekends. $882k looks like multiple years of full-time employment for most people. If you currently have a well-compensated job you don’t completely hate, then you might as well keep working for a few more years and avoid this flexibility trap.

Why 5.5% isn’t the new 4%: My opinion on the MadFientist & Nick Maggiulli flexibility approach

In a recent post on the MadFientist blog, together with Nick Maggiulli of the Dollars and Data blog, the two authors (let’s abbreviate them MF&NM) proposed a “discretionary” withdrawal rule where you change the withdrawal amounts based on equity drawdowns. The idea is that, in retirement, you should have the flexibility to vary your discretionary spending if needed. If you can occasionally reduce or even eliminate your discretionary spending, you can start with a higher initial withdrawal amount. Say, if the stock market is at or at least near an all-time high (i.e., within 10%), you withdraw your full retirement budget. If the stock market is in “correction territory,” i.e., between 10% and 20% off the recent high, you cut 50% of your discretionary budget. And if you’re in “bear market territory,” defined as 20% or more below the recent high, then you completely eliminate the discretionary budget.

Let’s take the following example: imagine 50% of your expenses are mandatory and the remaining 50% are discretionary. We use the same example as above: a 40-year horizon and an 80/20 portfolio. MF&NM now proclaim that a 5.5% initial withdrawal rate is feasible. Let’s put that to the test.

Let me first recreate their results. Since the post on the MadFientist blog provided only few details, I’ll have to make some assumptions, like:

• As always, I use the S&P500 (and predecessors) total return index for equities and the 10-year U.S. Treasury benchmark bond index for the diversifying asset.
• I adjust the equity index with CPI inflation to determine the real drawdowns. Notice that this is a conservative estimate on the drawdowns because if we base the all-time high on the month-end values only, we miss some much higher index values intra-month. So, my drawdowns might be shallower and shorter than what you find when you factor in daily closing index values or even intra-day values.
• I use monthly return data from 1871 to 2023. My results will differ slightly from the MF&NM results because their annual return data will likely miss some of the historical worst-case scenarios. For example, the annual return data won’t capture the August 31, 1929 retirement cohort, often one of the worst retirement cohorts on record.

Let’s look at the historical drawdowns time series; see the chart below. The top is the S&P 500 cumulative return, adjusted for CPI inflation. The usual disclaimers apply regarding the historical data in the pre-S&P 500 and pre-Composite index era. We see a nice steady drift of about 7% annualized. But it was a bumpy ride! The index has spent considerable time in the correction and bear market territories, see the chart on the bottom!

In fact, if I plot the percentage of months that each retirement cohort had spent in the three consumption scale buckets (100%=close to peak, 75%=correction, 50%=bear market), we notice some very unpleasant issues:

• The average retirement cohort since 1925 (about the time when MF&NM started their simulations) got to spend the full amount only 51% of the time. About 14% of the months, you were in a correction, and during the remaining 35%, you were in bear market territory.
• Thus, the 5.5% withdrawal rate applies only about half the time, the 4.125%(=5.5%*0.75) withdrawal rate applies 14% of the time, and 2.75%(=5.5%/2) applies 35% of the time. So, the weighted average withdrawal amount isn’t anywhere close to 5.5% but only about 5.5% * (0.51+0.75*0.14+0.5*0.35) = 4.35% of the initial portfolio; that’s a 21% haircut. It would have been nice if MF&NM had pointed this out in their post!
• The prevalence of deep and extended bear markets has increased since the 1920s, so by extending my study to that early period, all the way back to 1871, I may get slightly different overall results from MF&NM.
• Even though the 40-year distributions over the three buckets are roughly the same across cohorts, different cohorts have very different experiences over the first 15 years of retirement. If you were unlucky enough to retire close to the market peaks in 1929 or between 1964 and 1977, you would have spent the majority of your first 15 years in retirement with a zero discretionary budget. For example, in 1929, you’d have spent twelve out of the first fifteen years in retirement scraping by and spending only on mandatory categories without any discretionary budget. It would have been nice if MF&NM had pointed this out in their post! So, the narrative that flexibility is just a short-term inconvenience goes out the window. And good luck finding a job if we ever experience a repeat of the 1982 or even 1932 job market!
• The discretionary withdrawal rule doesn’t eliminate Sequence Risk. The “bad luck” cohorts in 1929, 1964-68 are all the “usual suspects,” i.e., the cohorts that retired right around their prominent market peaks.

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But it gets even worse. In the table below, I display the success probabilities of different baseline safe withdrawal rates, i.e., without discretionary spending cuts.

A 5.5% baseline WR had a 92.8% success probability in my simulations. Compared to 98% in the MF&NM table. Their success probabilities are much more aligned with my 30-year simulations. I’m not sure why. Three explanations:

1. They might have done a little switcharoo and accidentally shifted to a 30-year horizon.
2. They might have used a different spending rule with an even bigger average haircut than my 21% to push up the baseline consumption by a quarter point. For example, I use only monthly data for the equity returns, and the drawdowns are only relative to the monthly closes. If you pin the drawdown rule to the daily closes or intra-day highs, you will generate steeper drawdown stats. But also slightly higher baseline withdrawal values. It’s the squeeze-the-balloon effect again!
3. Because I use the pre-1925 data with cohorts that had less severe discretionary spending reductions, some of my SWRs are quite low. The failsafe withdrawal rate was 4.84.

But in any case, with a 4.84% failsafe, and after we apply the 21% haircut to account for all the months when we have to reduce consumption by 25% or even 50%, we’re left with only 3.82%. Sorry: not 4%, and certainly not 5.5%. We can’t miraculously take a sub-4% safe withdrawal rate and turn it into a 5.5% rate, either. You can put lipstick on a pig, but it’ll still be a pig.

Just a side note: there is a widespread myth in the FIRE community that the failsafe withdrawal rate no longer drops when extending the retirement horizon beyond 40 years. MF&NM allude to this, and Kitces also has an article making this whacky claim. Let me break the news for everybody: Say, if 1929 generated the lowest sustainable withdrawal rate over 40 years, as it often does, then that rate would have exactly exhausted the portfolio by 1969. If you tag on another 10 or 20 years of retirement, you must reduce the initial rate to have sufficient funds left in 1969 to fund the additional retirement years. It’s a mathematical certainty! It’s also an empirical reality: the failsafe further declines between 40 and 60 years, albeit slower (5.23 to 4.84% to 4.57% to 4.42%). This artifact is true for both the discretionary rule as well as the plain old fixed safe withdrawal rate analysis, Trinity-Study-style. For your enjoyment, I also enclose the same table for the fixed safe withdrawal rates over 30, 40, 50, and 60-year horizons. The failsafe drops from 3.64% to 3.43%, to 3.26%, and to 3.14% as we move from 30 years to 60 years. It’s indeed possible that SWRs don’t change much when targeting capital preservation and going from 40 to 60 years. But with capital depletion, you still see noticeable declines between 40 and 60 years!

But let’s move on! Next, I plot several case studies with actual withdrawal amounts in the chart below. The blue dots are the annualized monthly withdrawal rates generated by the MF&NM discretionary method—all rates as a percentage of the initial portfolio (adjusted for inflation). The red line is the 12-month moving average, and the black line is the fixed withdrawal rate. Both the fixed and the discretionary withdrawal rates are computed to deplete the portfolio over 40 years exactly. Notice the timing assumption: The September 1929 cohort would have started withdrawing on August 31 of that year.

A few observations:

• Notice how the discretionary method would not have succeeded using a 5.5% initial withdrawal in 1929, 1965, and 1968. Those three cohorts would have required a baseline withdrawal amount equal to 5.00-5.25% of the initial portfolio. In other words, 5.5% would have run out of money despite the discretionary spending pattern.
• When using a fixed SWR, 1929 is the worst retirement start date over a 40-year horizon; SWR=3.43%. Again, notice how the discretionary rule would have required most of the first retirement half to cut your discretionary spending completely or at least by 50%. I don’t call that flexibility. That’s either back to work or deprivation!
• Both cohorts in the 1960s would have generated a safe withdrawal rate just above 3.5%. The discretionary method would have started above 5% but dropped to 2.5% because of the steep real equity drawdowns in the 1970s.
• In 1972, right at the market peak, a 4% Rule would have indeed succeeded. And the discretionary method could have even pulled off a withdrawal rate North of 5.5%. But the MF&NM method would have withdrawn below 3% for almost the entire first decade. Not a very appealing strategy!

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Comparing variable withdrawal paths: a utility-based model

I noticed that the arithmetic average withdrawal amount over 40 years using the discretionary method is slightly above the fixed withdrawal rate. Thus, admittedly, the MF&NM method might offer a modest hedge against Sequence Risk. By definition, you withdraw less when stocks are down and more when stocks are rallying. But the mean withdrawals over a 40-year horizon are only a very poor measure of my personal preferences. Here are the two reasons:

1. Time preference: I don’t like the idea of withdrawing less during early retirement and then backloading the withdrawals later in retirement when I’m in my 80s. I prefer the other way around!
2. Risk aversion: I prefer a stable and predictable consumption path rather than a volatile one. In other words, the mean disguises the crazy fluctuations as I plotted in the case studies for the 1926, 1965, 1968, and 1972 cohorts.

Now, how do we compare withdrawal paths that are not fixed? We now have 480 moving parts, and it sounds impossible to compare two competing withdrawal paths. Well, it’s actually very simple; this is a well-known problem in economics and finance. We use a utility function to model time preference and risk aversion. The risk aversion comes in through a concave utility function and the time preference through discounting. Then, the utility of a path of T withdrawals w(0),…,w(T-1) is

As is customary in much of economics and finance, I use a simple Constant Relative Risk Aversion (CRRA) function of the form:

Notice that for gamma=1, this reduces to just a plain (natural) log-utility function, compliments of L’Hôpital’s rule. Since utility is just a unit-free, hard-to-interpret measure, we can also translate the utility of any volatile withdrawal path back into one fixed number equal to a “fixed-consumption-equivalent” number, i.e., calculate a fixed and level withdrawal amount w_bar that would have given you the same utility as the volatile one:

Now we can calculate this consumption equivalent utility for all the MF&NM discretionary spending rule paths as well as the fixed safe withdrawal rates. For the latter, the w_bar is obviously just the fixed rate itself. I also assume that beta=0.96 (p.a.), i.e., you care 4% less about next year’s utility than this year’s utility. I also consider four different gamma values.

• gamma=0 implies linear utility, thus, risk-neutrality. This will not apply to most folks except for maybe Sam Bankman-Fried. But it’s a good benchmark.
• gamma=2 implies a very high degree of risk tolerance. For example, when I optimize glidepaths, a gamma of 2 will often imply an optimal equity weight of 100% for the entire accumulation phase. Very few investors will have that kind of risk tolerance, so I view this as a good lower bound on gamma.
• gamma=3.5 implies a moderate risk aversion. Most actual glidepaths used in target date funds by Fidelity, Vanguard, T. Rowe Price, etc., look like they came out of dynamic programming code optimizing stock/bond glidepaths and using that sort of utility function. Thus, that’s likely a pretty decent assumption for the average U.S. investor.
• gamma=5.0 implies a very low risk tolerance. In my glidepath optimization research, I found that the shift out of equities and into bonds starts much earlier than in most industry target date funds. I use 5.0 as the upper bound for gamma and the lower bound for risk tolerance of most investors out there.

Let’s take a look at the time series of the relative consumption-equivalent utility numbers; see the chart below. The way to read this chart is to note that, for example, for the Jan 1925 cohort, a risk-neutral investor would have preferred the discretionary withdrawal path over the fixed path; by about 3%. But with a modest risk aversion (gamma=3.5), the discretionary spending pattern would have been equivalent to close to 14% under the fixed withdrawal rate rule every single month. Thus, looking at the chart, we find that assuming risk-neutrality, the discretionary spending rule improved your retirement utility by maybe 5% on average. But using a more realistic parameter for risk aversion, we find that folks with high risk tolerance are still worse off with the MF&NM rule by about 4% on average. Moderate risk-aversion investors lose about 10%, and very risk-averse investors lose about 15%. I would stay away from this discretionary rule!

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Here’s a better way of modeling flexibility

It’s one thing pointing out holes in other people’s analysis. But as a professor of mine always used to say, “It takes a model to beat a model.” So, instead of just dumping on other people’s work, let me propose how to account for flexibility properly. No shiny objects, no hiding skeletons in the closet. Just complete transparency and plain and easy-to-understand analysis.

Let’s stay with the numerical example but extend the horizon to 50 years. Most people who retire in their early-to-mid forties might want to plan for a retirement lasting that long, especially when accounting for joint survival probabilities.

The safe withdrawal rate is now down to 3.26%, which means the safe withdrawal amount out of a $1.45m portfolio is only $47,303.

How do we get to $80k/year with flexibility? It won’t be easy, and there isn’t one single solution that gets us there. But here would be six steps to accomplish our task:

Step 1: Account for Social Security.

First, let’s assume that both spouses are 45 years old when they retire. Assume spouse one claims benefits at age 62 (month 205 of retirement) and expects to receive $1,000 a month, while spouse two claims benefits at age 70 (month 301 of retirement) and expects to receive $2,500 per month. This could be the typical spousal lifetime benefits maximization outcome where the higher earner defers up to age 70, and the lower earner claims ASAP. See opensocialsecurity.com for a useful tool.

I enter those values in my Google Sheet (see Part 28 for the link and manual), specifically in the tab “Cash Flow Assist.” Accounting for those benefits, we can shift up the SWR as a percentage of the initial assets to 3.85%, or $55,845 a year. Still far away from $80k, but we are just getting started!

Step 2: Account for lower expenses later in retirement.

People often point out that many retirees don’t keep a level consumption profile. Most retirees slow down and spend less later in retirement. Assume that starting at age 75, the two retirees only spend 90 cents on the dollar and, at age 80, only 80 cents on the dollar relative to the initial baseline. The way I can model this in my worksheet is to change the scaling in column “S” in the “Cash Flow Assist” tab. Change that to 0.90 in months 361-420 and 0.80 in the subsequent months. The SWR as a percentage of the initial assets is now 3.92% or $56,855. I’m amazed at how little of a difference this makes. Another retirement myth is busted: If you’re in your 40s and you account for lower spending later in retirement due to slowing down and traveling less, it doesn’t make much of a difference in the SWR calculations! But also note that this result works both ways: higher medical and nursing home expenses later in retirement won’t make a big difference either!

Step 3: Account for the current equity drawdown.

Despite the recent recovery in the stock market, we’re still significantly below the Jan 2022 highs. Conditional on a 10-15% drawdown from the most recent peak, we can now raise the SWR to 4.50%, or $65,276 annually. A caveat: even with the drawdown, we’re still at a very elevated CAPE ratio. But it’s been pointed out that the CAPE ratio is difficult to compare across time, so probably the equity drawdown is the better valuation metric for our SWR purposes.

Notice how my approach operates very differently from the MF&NM methodology. Even with a 5.5% baseline withdrawal rate, you’d still have to curb the initial discretionary spending by 50% because we’re currently still in the “correction territory,” between 10% and 20% off the recent peaks (about 6% below the peak in nominal terms, but about 14% when adjusting for CPI inflation). Then, the MF&NM methodology only affords you a 4.125% initial withdrawal rate as of June 2023, much lower than what I would have recommended. So, don’t call me the conservative retirement planner! Actually, MadFientist and Nick Magiulli are currently recommending a lower initial withdrawal amount than even I would! You should also read Part 54, where I outline that with slightly depressed equity valuations, you can raise your initial SWR to well above 4%, even almost 5%. Significantly higher than the 4.125% current recommendation that the MF&NM model would currently recommend.

Step 4: You’re fine with a 2%-5% failure probability.

Nothing is certain these days, so why would you target an absolutely certain and safe retirement (at least if measured by historical return patterns)? If you’re fine with crossing your fingers and hoping that your following your retirement date the market doesn’t repeat the 2-5% worst historical retirement cohorts, then you can increase your withdrawal amount somewhat. I personally prefer to work off the failsafe probabilities, but maybe others are more comfortable with that kind of risk. At 2% and 5% failure probabilities, we’re now looking at $67,114 and $68,789, respectively or 4.63% and 4.74% of the initial portfolio. It’s not really much of a difference.

Step 5: Spending reductions and/or side hustles.

Instead of promising you 5.5% and hiding the gnarly spending reductions behind a big curtain, the more honest approach is to ask yourself: how much flexibility am I willing to offer to increase my baseline retirement budget? Well, let’s assume that our two retirees are OK with lowering their withdrawals by up to $2,000 per month for a maximum of five years. Say, half of that comes from a reduction in discretionary spending and the other half from a side hustle. Let’s input a $ 2,000-a-month inflow in the “Cash Flow Assist” tab. Reading off the safe withdrawal amounts from the table, using the 2% and 5% failure rates, and conditional on a 10-15% equity drawdown, I get $72,067 and 73,403, respectively. Not quite there at $80k, but considering that we started at $47,303, we’ve already closed 80% of the gap. And by the way, the $2,000 in spending reductions are not set in stone. You only keep that as an option. If the market performs well over the first year or so in retirement, you may rerun the safe withdrawal toolbox, and maybe at that time, the $80k per year becomes sustainable again without the side hustle!

Step 6: More sacrifices

Given that $80k is quite a big chunk of money, there will probably be some expenses that can be cut in the long run. If we can find $700/month in spending cuts starting in year six and going forward, we can push the safe withdrawal amounts for the 2% and 5% failure rates to $78,942 and $80,276 annually. Maybe forego a hobby later in retirement. Move to a cheaper area. $8,400 a year out of an $80,000 budget is not the end of the world. And again, this $700 spending reduction is only optional if the market moves against us. With a high probability, we can still plan to enjoy an $80k annual retirement budget without the side hustle or this sacrifice. But even in that worst-case scenario, we’ll still have a generous discretionary spending budget.

There we go; we reached the $80k target. Notice that the significant retirement budget increases came from sources that MF&NM completely ignore: Social security income later in retirement and more attractive equity valuations. Another valuable option not even mentioned here would be liquidating your primary residence later in retirement, either directly or through a reverse mortgage.

In contrast, throwing in some side gigs and spending reductions here and there didn’t make a huge difference. And it’s not for lack of trying: Step 5 lowered withdrawals by $120,000 and Step 6 by a total of $378,000. But even that doesn’t raise the safe withdrawal amount by 37.5% (=moving from 4% to 5.5%). Thus, if you want to rely on spending reductions only, then most retirees probably don’t have the patience to suffer through prolonged stretches of deep spending cuts inherent in the discretionary spending rule proposed by MF&NM!

It’s a much better and more honest approach to explicitly gauge how flexible you can be, i.e., how much spending reduction and/or side hustle income and for how long. Then put that all into the Big ERN Google Simulation sheet and see if your version of flexibility makes any noticeable difference in the baseline sustainable withdrawal amount. Maybe there are some folks out there who would be OK living without discretionary spending for 12 years. And then, go ahead and plug that into the SWR Sheet. But I suspect that it is unpalatable to most retirees.

Conclusions

Flexibility is overrated. Still. Again. I thought I had debunked it in Parts 9, 10, 23, 24, and 25. The proponents of flexibility – and this is true for all of them, not just MF&NM – do a really good job disguising the following skeletons in the closet:

1: They often won’t tell you explicitly how long you must be flexible. Every time we deviate from the fixed withdrawal amount, it’s no longer enough to show me a summary table like MF&NM or in the Guyton-Klinger research. I need to see the time series of withdrawals, especially in the worst-case historical cohorts, to gauge if I like the flexible and volatile path more than the fixed withdrawal path. Just one table won’t cut it, folks! I need to know the depth and length of drawdowns, not just the peak consumption! I suggest people also present the utility-based stats, not just some misleading initial withdrawal rates!

2: In defense of MF&NM, I admit they did a good job laying out how deep the spending cuts may be. In contrast, the Guyton-Klinger spending rule research paper is not very clear on the depth of the spending cuts if you start with an aggressive initial withdrawal rate. The casual reader may incorrectly infer that the GK rule only needs one or two 10% steps down. But I’ve demonstrated that GK with a 5-6% initial withdrawal rate would have required long and deep spending cuts. They look very similar to the MF&NM spending rule!

3: MF&NM advertise their safe withdrawal rate as 5.5% without telling you that right now, as of June 15, 2023 (and certainly as of late May when they published their article), with the S&P 500 still about 12% below its CPI-adjusted all-time high, you’d only withdraw 4.125%, not 5.5%. And during much of 2022, you would have only withdrawn 2.75%, forgoing your entire discretionary budget. That’s much less than a fixed withdrawal rate conditional on a modest market drawdown. See Part 54 for details!

4: While it’s commonly accepted that withdrawal amounts should ideally subside later in retirement, when retirees slow down in their 70s and 80s, some of the flexible and discretionary spending patterns go exactly against that. The 1929 cohort that retired right at the stock market peak would have withdrawn only 3.15% of the initial portfolio value annually in the first half of retirement. But 5.10% in the second half. The opposite of what most retirees aim for. The same is true, qualitatively, at least – for all the other worst-case historical cohorts.

Therefore, in light of all of the evidence, let’s put this flexibility nonsense to rest again.

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series; see here for a guide to the different parts so far!

All the usual disclaimers apply!

Picture Credit: wikimedia

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