How much really is the safe withdrawal rate from my retirement nest egg?

The burning question everyone wants to know in retirement planning:

How much can you withdraw from retirement savings each year without jeopardizing your financial security?

Before explaining the solution to this question, let me provide a little background information about retirement withdrawal rates so everyone is on the same page.

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There is this “rule of 25.” It’s an oversimplified, but useful guideline stating you need roughly 25 times your first year’s spending to have enough money to retire.

This rule has been stress-tested using a variety of assumptions and Monte Carlo theory, and it’s surprisingly robust; however, it’s not perfect.

It provides a high confidence interval under most simulations, but that doesn’t mean it can’t fail. Like all rules of thumb, it’s designed to provide a quick shortcut for people who don’t want to think too deeply about the subject.

However,  more financially savvy retirees will question this.

And rightfully so, because market volatility have that notorious capability to shrink your retirement nest egg.

Well, the way the logic works is pretty straightforward.

If market is bullish, you can afford to spend more from your retirement nest egg, enjoy the ride with a normal, passive investment portfolio.

But, nobody has a crystal ball, but the statistics point to a margin of safety that’s thinner than most retirees would like. This assumes, of course, a passive buy and hold investment strategy.

However, you’re should not be a victim to market valuations: you can do something about it.

For example, you must apply more active investment strategy in bear markets. You should not accept the unfavorable expected returns of a passive portfolio purchased during a period of excessive valuations and unfavorable trends.

Similarly, a retiree with a rental-income-generating real estate portfolio would be looking at the numbers very differently depending on how his portfolio is structured.

The point is the conventional investment wisdom about safe withdrawal rates is only applicable to a portfolio where the investment returns result from a passive buy and hold investment strategy using primarily equities asset class.

In other words, the concept of a safe withdrawal rate applies regardless of your investment strategy, but the Rule of 25 assumes your investment returns will be similar to a passive buy and hold investor in equities. The reality is you are likely to have a mixed asset class, with equities forming a minority portion in your retirement portfolio

So this Rule becomes useless.

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All this analysis begs another, possibly more important question:

“What investment strategy can realistically support the spending level I require?”

In other words, many people make the mistake of assuming buy and hold is the only game in town.


Buy and hold is an investment strategy that should only be used when valuations imply an acceptable risk to reward ratio, or undervalued.

It’s NOT the all-weather investment strategy that conventional wisdom claims.

There are other hedging strategy like global macro which must be integrated into your portfolio strategy.

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In summary, this analysis of safe withdrawal rate from retirement nest egg in flat or bull market and unfavorable trends should give you several options to consider…

  • Decrease your monthly withdrawal rate from retirement savings to balance the reduced investment return expectation.
  • Increase retirement surplus while maintaining the same nominal withdrawal rate.
  • Switch investment strategy from passive to some alternative investment offering a higher mathematical expectation or lower downside risk, that would support the higher withdrawal rate.

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