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Making Plans and Achieving Goals

Why I Use 5% Withdrawal for Retirement

I wrote an earlier post about Why I’m Chasing FIRE (Financial Independence / Retire Early) and in it, I said that my definition of FIRE is when my investable assets are equal to 20 times my annual expenses.  20 times your annual expenses means you would have a 5% withdrawal rate in retirement.  This statement goes against conventional wisdom so I rightly got a few comments about being more conservative.  Most people recommend a withdrawal rate of 3-4% which is 25-33X expenses.  So why am I going against the flow on this one and going with a 5% withdrawal?

Where Does The Conventional 4% Come From

There is clearly a lot of speculation and controversy in the retirement community about the ideal Safe Withdrawal Rate (SWR).  The problem is everyone is just guessing because past performance doesn’t guarantee future performance.  The two biggest unknowns are inflation and market performance.  The 4% SWR came from the Trinity Study that was done to answer this very question.

The Trinity Study was a comprehensive research project into determining a safe withdrawal rate in retirement.  They looked at various stock/bond portfolios over different 30 year periods from 1925 to 2009.  They concluded that portfolio success was all but assured with a 4% withdrawal rate or less.  This means you should expect market returns of around 7% and inflation to be around 3% thus leaving you with 4% to withdrawal.

Here is a link to the Wikipedia page if you want some more info.

50/50 Is Pretty Good

Okay, there is the study why not follow the advice that was given?  Do you want to run out of money?  The thing is in the study they concluded that 4% withdrawal all but guaranteed success.  This means retiring at the worst possible moments in history you would have still been okay.  At most other times 5% or higher would have been okay.

So what would happen with a 5% withdrawal?  Actually, a 5% withdrawal gives you a roughly 50% chance of lasting through retirement.  That is retiring at 40 with a $1,000,000, $50,000 in annual expenses, and planning to live to 100.  FireCalc gives me a 47.1% chance of success.  Now 47.1% is pretty good but I would never leave my retirement up to a coin flip.

I Will Earn Something

The big underlying assumption in the Trinty Study and using FireCalc is that once you retire your only source of income is your portfolio.  That means no part time work, no side hustle, no rental income, no social security, no inheritance, no twenty bucks at Christmas.  This isn’t realistic for most people and especially not me.  I am chasing an early retirement but retiring to me is about being free to choose how I spend my time without worrying about money.

We expect to have at least one rental property and at least one side hustle that I am passionate about.  I love some engineering but I would much rather write for the blog or train clients out of my home gym.  If we earn a modest $1,000 a month in retirement our success rate goes to 75%.  My rental income afters taxes and insurance alone would exceed that number.  If I make another $1,000 a month from a side hustle my success rate goes to 98%.  But I’m retired so I don’t want to feel like I “have” to make any money.

Finally, there is an inheritance, social security, severance.  I’m planning on never seeing a penny from any of them but in reality, I probably will.  5% withdrawal isn’t looking so bad when you consider what a small amount of retirement income can do for you.

My Expenses Aren’t Fixed

The other big assumption with these calculators and the Trinity study is that your expenses are fixed.  They assume that you will just spend yourself out of every dollar and pay no attention to the market.  While $50,000 a year might be what we want our expenses to be we could certainly do a lot of trimming for a year or two if needed.  In fact, if we could adjust spending down to $40,000 during bad market times our success rate goes from 47.1% to 74%.

I also don’t know how much our expenses will be in retirement but most studies say you will need less.  Health insurance is the big question mark here but every other category I would say we would spend less in.  Only one car, less driving, no more business clothes, vacation offseason/midweek,  less/no daycare.  Like I said it is tough to know what the expenses are going to be like but the big thing is we are somewhat in control of them.

My House Isn’t Include

I am shooting for investable assets to be 20 times our annual expenses.  I do not include the value of our home because we need to live somewhere.  That said I think it is very likely that we would downsize dramatically once any kids have moved out.  The house would be paid off at that time so I could see netting a big profit from that kind of move.  Not counting on it but it is another big potential income source.

One More Year Syndrome

One more year syndrome is meeting your portfolio goals and then deciding you need “just one more year of work” to be sure.  I have heard and read of many people in the financial community falling victim to working just one more year.  For some people, this goes on for several years.  They end up building these massive portfolios and passive income streams that could support triple their annual expenses.

I acknowledge that I will probably not be immune to this.  I will fight it but I doubt the second our investments hit 20X we will both be putting in our two weeks notices the next day.  It is likely that we will transition out slowly.  If we spend a year or two transitioning we might end up at 21-22X expenses.  So I didn’t get out right at 20X but still much earlier than if I set my goal at 25-33X.

I Will Still Be A Licensed Engineer

Let us say that all hell breaks loose at the worst possible time.  We just retired and the market completely tanks.  Our net worth drops 50% overnight and is recovering at a snail’s pace.  We can’t cut expenses that low, I can’t find any tenants or clients, the blog is barely paying for itself, and healthcare costs have tripled.  So that is it for us, no other options but to wither up and die broke?  We should have had a bigger egg before we sat out to retire.

Except for the fact that I am still a licensed engineer.  While I wouldn’t want to, I could go back to work if I had to.  Even if the economy was total crap I could still get some kind of a job.  I would have the flexibility to offer my services for half of what others would be.  Once the market recovered and we got back to 20X expenses I would pull the plug again.

See I’m Not Crazy

I understand why some people might not feel comfortable with a 5% withdrawal rate but I am willing to take on a tiny bit of risk if it means escaping the rat race earlier.  You might read some of the above and say I am being too optimistic.  I honestly think I am still being conservative.  There are just too many levers you can pull if you need to.  If I run a conservative but realistic simulation of starting with a million, planning to withdraw 5%, being able to adjust income between $40,000 and $55,000, earning $12,000 per year from rental income/side hustle, getting $20,000 per year from social security at age 70 and either inheriting $100,000 or making $100,000 from our home sale I ended up with a 100% success rate using  With a median inflation-adjusted portfolio value of $4.5 million.

5% withdrawal rate, with spending adjusted and side income.  Taken from

So what do think?  Is 5% still too risky?  What is your goal number?





  1. Nope it’s not! I love this write up. I’m a lot like you – I’ll definitely suffer the one more year syndrome if it means I’m guaranteed X amount more. And I’ll be hustling in retirement too. My biggest concern is the cost of health care by the time we’re all gray. That would effect withdrawals because I’m determined to leave a monetary legacy.
    Lily @ The Frugal Gene recently posted…“I am a Bad Toilet Person.” Q&A: Hosting on AirBnB – Part 2/2My Profile

    • Okay glad I got at least one person on my side. Yeah health insurance is the big mystery. If we were to retire right now our family of three would owe $1500 a month with a $8,000 deductible. Just crazy. I am optimistic that in ten years it will be completely different and hopefully much improved.

  2. That’s an interesting simulator. I just ran it for myself and have a 96% success rate at a 4% withdraw rate. That’s about 5% higher than most monte carlo simulators report for the same data. Not sure why there is a difference there.

    Anything above 80% is generally considered pretty good by financial planners. 90%+ is thought to be solid – and that’s where we prefer to be.

    Any additional income will likely go toward an expansion of the budget – a few extra vacation trips each year perhaps.

    Our budget will actually drop a good bit next year when our daughter graduates from college. At that point the 4% will actually be a bit more than we need. And we’ve already discussed some travel to use it up. 🙂
    Financial Coach Brad recently posted…What are stock market rolling returns?My Profile

    • Those calculators assume a 75/25 stock bond split with fees below 0.18%. They also aren’t using any algorithm they are just starting at different points in time and pressing go. I’m not sure how the algorithm for the monte carlo simulation works but I believe it covers a wider range of possibilities across the bell curve.

      Having too much in the retirement account is a problem I would be okay with. Might as well travel a bit.

  3. I think people who tend to go with 4% SWR (or even more, like sub-3%), is because of the fear of potentially running out (i.e. black swan events, potential sequence of return risk at the early part of retirement, etc). But like you, I STRONGLY believe in people’s ability to adjust according to the environment. And especially among the FIRE cohort, people might be “retired” for 60+ years. So I just can’t imagine, someone not being able to earn even a little bit of income on the side, if it had to come down to it. And early sequence of return risk is mostly eliminated because if you’re in your 30’s or 40s, and retired early, you still have a ton of working capital at your disposal, if need be. And I’m bigger on VPW (variable percentage withdrawal). In good years, you should be able to take out more, and in the bad years, you should tighten your belt and withdraw only the bare minimum to cover expenses.

    • I agree and it is a perfectly logical fear. I am sure when the time comes I will have to run the numbers and re-read this post to convince myself that I’m going to be okay. Anyone that has the dedication to retire at age 40 clearly has the right work ethic to overcome a year of poor market returns.

  4. At 20x my expenses I could probably retire next year. However, if I work an extra two years I’d have 25x my expenses. So for me it seems worthwhile to work the extra two years and not have to worry ever again about working. But I definitely get why you would punch out of the work force early.
    Mustard Seed Money recently posted…Which Is the Best Retirement Account for You?My Profile

    • That is awesome that you guys are already that close to 20X. Like I said I totally understand why you would want the biggest egg possible before leaving. Perhaps I will feel differently once I am as close as you are. Thanks for commenting.

  5. I think it really all depends – which is unfortunately the answer to most of life’s questions. If you want to retire early and never work again, a more conservative rate is probably better. Like you, I also plan on doing some side hustles that I’d really love to do, but would be a little risky without some support capital, so I think a higher SWR is fine. With your plan, I think a 5% SWR is pretty logical. You want to have a pretty good chance of succeeding, but you also want to live your life!
    Matt @ Profitable Matters recently posted…My Side Hustle ChallengeMy Profile

    • Hey Matt, thanks for stopping by and sharing. Yes, as with all things it depends tends to always be the answer. Being conservative is always safer. I just don’t want to be too conservative and end up realizing I could have retired 5 years earlier and still been fine. I want to leave an inheritance but I have no desire to leave 10+ million.

  6. I’ve said for some time – PF is personal. The rules of thumb are great, but we all need to do what’s right for our own situation. The 4% rule is the result of some remarkable math. Montecarlo simulations that, by nature, are limited.

    We are at 5% or just over. We ‘retired’ in 2012, a few hours after my wife and I were both let go from 30yr positions at the same company. I was 50, my wife, 56.

    Just as you looked at the variables, there are 2 major ones for us – full Social Security, age 70 is now just 8.5 yrs away for my wife, and 15 away for me. The SS benefit the projection offers is not inflation adjusted. It’s in today’s dollars, but of course will rise with the SS COLA adjustments. When added together, the annual benefit is nearly 3% of our retirement savings. In other words, in about 15 years we are projected to spend at just a 2% rate, not 5%. And note, when I enter the numbers into the simulator you linked, I get a 100% success rate on this approach.

    If that weren’t enough, our daughter is off to college. It’s been funded separately, but it opens the strong potential of a future downsize. The downsize lowers house expenses, hopefully puts us in an area with lower cost of living, and also should provide a bit of a deposit to our savings. In the end, 4% is still a good rule of thumb, but real life needs to be viewed one case at a time.
    JoeTaxpayer recently posted…Stock Allocation in a Balanced PortfolioMy Profile

    • Thanks for sharing Joe! What a crazy day both getting let go in the same day. Huge congratulations being sound financially secure for when that day came. 99.9% of the population would have been destroyed if both spouses lost their long time job in the same day with a child at home.

      What is cool is that you guys probably wouldn’t have retired nearly as soon if that wouldn’t have happened.

      2012 until now is one of the best possible periods of time you could have retired. You could have an 8% withdrawal rate and still seen your portfolio grow.

      4% is a nice rule of thumb but if you are crafty enough to retire early when most people can’t save a penny the rule of thumb probably doesn’t apply to you.

  7. Nice work putting together your plan and testing it in cfiresim. I bet that felt pretty good to put in all of those factors and then see all of the results go above the $0 line.

    A few other tactics that help increase your SWR:
    -Sticking to 75/25 stocks/bonds even through FIRE
    -Retiring when the Shiller CAPE is low
    -Not adjusting for inflation every year
    -Not adjusting for the full inflation amount
    MyMoneyDesign recently posted…What is the Minimum Retirement Savings You Could Comfortably Live On?My Profile

    • Thanks for commenting. I had never heard of the Shiller CAPE. Based on that now would be a terrible time to retire. I know a lot of the FIRE bloggers out there retired around that 2012 area and have doubled their portfolios in retirement. That would be a good way to start.

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