It is a common misconception that if you use a Safe Withdrawal Rate (SWR) approach to generating income from your investments, that you will die with zero money. But that is not the case.
The work on SWR generally suggests an SWR that did not fail in historical backtests and/or a large number of simulations of various rates of return and variation on that return.
As we show below, what happens when you pass with more than $0 is often a very large balance.
Balance at Death Based on Simulations
Simulations are a convenient way to analyze problems like this, and allow us to run a wide range of parameters like investment return and variation and generate a large number of outcomes.
The chart above is a simulation of the balance of a retirement account, that starts with $1M, over a 30 year retirement. There are 500 runs of the simulation, and thus 500 simulated balances, for a SWR of 4.5% assuming average returns of 5.8% at a 6.1% stdev. (This is the approximate return and stdev for a portfolio of 40% stock, 60% high yield bonds.)
In these simulated results, there was a single failure where the account balance reaches 0 before the 30 year retirement; that was at about 28 years. But there are times the balance is ~ $7M.
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So, what if I told you that for most
people, the biggest financial risk in
retirement isn't running out of money,
but actually having way too much. I know
it sounds like a pretty great problem to
have, right? But as we're about to see,
it comes with its own set of really
surprising challenges. You know, this is
the big fear that drives so much of our
financial planning, isn't it? That
nightmare scenario where you save your
entire life, you follow all the rules,
and then you watch your account balance
just hit zero, right when you need it
the most. Does playing it safe really
mean you're cutting it that close? Well,
the data tells a completely different
story. The answer is a huge emphatic no.
For most folks who follow a standard
safe retirement strategy, the most
likely outcome isn't dying broke at all.
It's leaving a substantial fortune
behind. We're talking a whole second
nest egg for your kids or maybe a big
donation to a cause you really care
about. So, what's going on here? Why is
there this massive disconnect between
our biggest fears and what the data
actually shows? Let's peel back the
layers on what we could call the great
retirement money myth. The key to
understanding all of this comes down to
one simple concept. The safe withdrawal
rate or S SWR. Now, this isn't just some
optimistic guess about how much you can
spend. No, no. This is a battle tested
strategy that's been designed to survive
the absolute worst financial storms you
can imagine. Think the Great Depression,
the.com bust, all of it. It's built on a
mountain of real history and computer
models to make sure your money lasts.
And because it's built to be so safe, it
has some really surprising side effects.
To see what I mean, let's start by
looking at what thousands of computer
simulations of retirement portfolios
actually show us. And honestly, the
results might just blow you away. Okay,
so what you're looking at here, yeah, it
kind of looks like a mess of spaghetti,
right? But each one of those gray lines
is a possible 30-year retirement journey
for a $1 million portfolio. This single
chart shows 500 different simulated
futures. Some of them shoot way up,
others take a scary dip, but it just
perfectly shows you the huge range of
what could happen. That spaghetti chart
is a little wild, I'll admit. So, let's
bring some order to that chaos. This
slide takes all 500 of those final
balances and sorts them into a nice,
simple histogram. This makes it so much
easier to see where most people are
actually likely to end up after 30
years. And boom, here's the core
takeaway. What's the chance you end your
30-year retirement with more than the $1
million you started with? A whopping
79.2%.
Just let that sink in for a second. In
nearly four out of every five
simulations, the portfolio didn't just
survive, it actually grew. So, what does
safe really mean here? Well, out of
those 500 different simulations, each
with its own crazy set of market twists
and turns, only one, just a single one,
ran out of money before the 30-year
mark. That one failure represents a
truly disastrous, historically rare
string of bad luck. That's just how
powerful that built-in safety buffer
really is. Okay. Okay. So, simulations
are one thing, but they aren't real
life. I get it. So, let's shift gears
and see what happens when we stop
simulating and start looking at what has
actually happened in real world market
history. Now, this chart might look a
lot like the first one, but it's totally
different. This is based on real life.
Each line here represents a 30-year
retirement that started in a different
month in actual US market history going
back decades. This is the ultimate
stress test, showing how the strategy
would have held up through actual wars,
recessions, and boom. And when we
organize all of this historical data,
just like we did with the simulations, a
very familiar pattern shows up. Now, the
outcomes aren't quite as wildly
optimistic as some of the simulations,
you know, reality tends to be a bit more
grounded, but the main message is
exactly the same. Success is the rule,
not the exception. So, how much extra
money are we talking about? Well, based
on real world history, you would have
had a 21.8% 8% chance. That's more than
one in five of passing away with over
$2.1 million from that initial $1
million portfolio. That's not just a
surplus. That's a massive surplus. And
this is where things get really, really
interesting because now we have to ask
an almost philosophical question. We've
proven these plans are incredibly
successful at not running out of money.
But is that the only way we measure
success? Or could this kind of success
actually be its own weird form of
failure? There's a pretty powerful
argument out there that goes something
like this. Dying with a huge bank
balance is a failure. That money could
have been used to live a richer life,
you know, to create more experiences, to
give more to your family, to just reduce
your stress. But instead, it just sat
there unused. And that's the central
puzzle of retirement planning. It's kind
of like packing for a trip to the
desert. You bring all this extra water,
a satellite phone, a flare gun just in
case. But if you have a perfectly
normal, boring trip, you end up just
carrying a lot of extra weight you never
needed. That's exactly what's happening
with our retirement money. So, if having
a big surplus is the most likely
outcome, what do you do about it? You
can't just ignore it. So, let's talk
about how to actually plan for this
problem. The source material suggests a
pretty straightforward two-step
approach. First, make a legacy plan and
do it early. Don't let that surplus be
an accident. Decide with intention where
you want that money to go to your
family, to causes you care about, and
then work with a pro to make it
official. And second, review your plan
every so often. Say every 8 to 10 years.
If the markets have been good and your
portfolio has grown a lot, it might be
time to sit down with an adviser and
re-evaluate things. The whole point is
to make sure your surplus has a purpose.
Now, before we wrap up, I have to give
you the single most important warning.
Please do not take this information as a
green light to just start spending more
every time you have a good year in the
market. That surplus, that buffer, that
is the very thing that makes the safe
withdrawal rate safe. If you start
chipping away at it, you undermine the
whole strategy. So, at the end of the
day, we plan so we don't run out of
money. It's the smart, responsible thing
to do. But all this data really begs a
deeper question, doesn't it? What if the
real goal of all this planning isn't
just to not run out of money, but to
make sure we don't run out of life?
Definitely something to think about.
Thanks for joining me.
