Understanding Safe Withdrawal Rate

Safe Withdrawal rate (SWR) is the key to answering “Am I (financially) ready to retire?”

AlgorithmicFIRE • 2025-12-05

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What is Safe Withdrawal Rate?

The Safe Withdrawal Rate (SWR) is the percentage of your retirement portfolio you can withdraw annually, adjusted for inflation, without depleting your savings over a typical 30-year retirement.

The 4% Rule

Financial planner William Bengen established the widely-cited 4% rule (SWR of 4%) through historical market analysis, providing a benchmark for sustainable retirement withdrawals.

More recently Mr. Bengen has suggested 4.5% is a better number…

Reference: Wikipedia - William Bengen

More information: The Retirement Spending Solution

Why Not a Higher SWR?

People frequently think a SWR of 4%-4.5% sounds low, since the S&P 500 has real returns around 7%. With constant (no variability) returns, the SWR could be significantly more than 4%.

Sequence of Returns Risk

When an appropriate standard deviation is applied to reflect real-world market volatility, higher SWRs frequently fail.

See our content on Sequence of Returns Risk for more information: Understanding Sequence of Returns Risk

Real vs. Nominal Returns

Nominal Return

The percentage change in your investment’s value before accounting for inflation, taxes, or fees. This is the “headline” number you’ll see reported.

Real Return

Your actual purchasing power gain, calculated as nominal return minus inflation. This is what truly matters for your retirement lifestyle.

Example:

S&P 500 starts at 1,000
Ends year at 1,100; Nominal return = 10%
Inflation was 4%; Real return = 6%

Important Note: Real Returns in This Analysis

Throughout this presentation, all financial figures and analyses, including withdrawal rates and portfolio values, are expressed in terms of real returns. This means all dollar amounts are adjusted for inflation and represent constant purchasing power, equivalent to today’s money.

This approach is crucial for retirement planning because it provides a clearer, more accurate picture of what your money can truly purchase in retirement. By accounting for inflation, we ensure our discussions reflect actual buying power, allowing for more realistic and actionable financial strategies.

Understanding Standard Deviation

Throughout this presentation, we will frequently refer to Standard Deviation (abbreviated stdev or STDEV) as a key measure of investment risk. It quantifies the amount of variation or dispersion of a set of values, giving us insight into how much an investment’s returns fluctuate from its average.

In simple terms, standard deviation tells you how spread out the numbers are in a data set. A low standard deviation indicates that data points are generally close to the mean, while a high standard deviation indicates that data points are spread out over a wider range of values.

For a normal distribution, understanding standard deviations helps predict the probability of outcomes:

68.2% of values fall within 1 STDEV
95.4% of values fall within 2 STDEV
99.7% of values fall within 3 STDEV

Mechanics of SWR Simulations

Generate data

Select an average real rate of return and return STDEV.
Generate 30 years of random data for that return and stdev.

Simulate account

Apply the 30 years of data to an account balance that has annual withdrawals at the given SWR.

Success/Failure

Success is the account balance is > 0 at the end of the simulation; failure is a zero or negative balance.

Repeat the above 500 times for every SWR/return/STDEV combination, recording the ratio of Success/Failure.

SWR Simulation - 4.5% SWR

Red points indicate the account ran out of money during a 30 year retirement at that return/STDEV.

I.E. at a real return of 5%, with a 5% stdev, the success rate is high; while the same return at 10% stdev (or more) has a low success rate.

Critical Insight: High returns don’t guarantee success.

SWR Simulation - 6.0% SWR

At this higher SWR, there is little space for success.

Where can you get 5% real return at near 0 stdev? Or 7% real return at 4% stdev or lower?

Question: How do investment options map into this space?

Historical Real Returns

High Quality Corporate bonds

2005-NOV 2025
Real mean return: 1.3%
stdev: 1.7
Ref: https://fred.stlouisfed.org/graph/?graph_id=1529418&rn=451

High Yield Corporate bonds

2005-NOV 2025
Real mean return: 5.4%
stdev: 2.7
Ref: https://fred.stlouisfed.org/graph/?graph_id=1533871&rn=671

S&P500

1991-NOV 2025
Real mean return: 7.6%
stdev: 17.2%
Real CAGR: 6.1%

Compound Annual Growth Rate (CAGR) is generally lower than the arithmetic mean (or average) return, especially in volatile markets, because CAGR accounts for compounding while the arithmetic mean does not. See our content on “Average Annual Return, It is Not What You Think”

Investment Options Overlayed On SWR 4.5% Map

Treasury and/or investment grade bonds don’t have enough return to be successful
100% stocks has too much volatility to be successful
A mix of investments is needed to reduce volatility in order to be successful

(Current yield spreads are lower than shown.)

Simulated Sequences of Returns with Mixed Portfolio

This plot shows the results of 500 simulated 30 year retirements using the mixed portfolio return and stdev.

Note: a single failure, but many cases where the portfolio grows, up to ~ $10M

Simulated Sequences of Returns with 100% Stocks

This plot shows the results of 500 simulated 30 year retirements using returns of the 100% stock portfolio.

Note: MANY failures.

Key Takeaways:

Diversification Over High Returns

Diversification and managing return variability are more crucial than solely chasing the highest returns, as demonstrated by the diversified portfolio’s superior position. A thoughtful asset allocation strategy, balancing risk and reward, is paramount.

The Value of Anti-Correlated Assets

Anti-correlated assets (like stocks and bonds) move in opposite directions during different market conditions, which reduces overall portfolio variability. This reduced variability is what creates the superior success rates we see in diversified portfolios - it’s not just about mixing assets, but specifically combining assets that don’t move together.

How to Use (and Not Use) This Information

Success Depends on Managing Return Variability

A successful retirement plan is highly sensitive to both investment returns AND the variability of those returns.

Diversify with anti-correlated assets to try to reduce return variability.

Understanding Model Limitations

The models used assume investment returns follow a “normal distribution” (a specific statistical pattern). In reality, market returns don’t always behave this way, even with portfolio diversification.

Real economies are cyclical, leading to periods of expansion and contraction. This means your personal results may be biased by market timing, but predicting these biases is impossible.

Practical Application Guidance

DO NOT: Rely on this analysis to pick exact Safe Withdrawal Rates (SWRs), precise return targets, or specific standard deviations for your personal financial plan.

DO: Focus on understanding the underlying principles of investment variability and its impact.

Use these insights to inform a flexible and adaptive retirement strategy that can adjust to evolving market conditions and personal circumstances.

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Disclaimer

**For Educational Purposes Only:** All content on this site, including articles, tools, and simulations, is for informational and educational purposes only. It should not be construed as financial, investment, legal, or tax advice. The information provided is general in nature and not tailored to any individual’s specific circumstances.

**Software Development Has Inherent Risks:** The software used to perform the analyses may have errors or inaccuracies. When we post updates to any material, errors or inaccuracies that are subsequently fixed may change the results.

**No Guarantees & Risk of Loss:** The analyses and simulations presented are based on historical data. Past performance is not an indicator or guarantee of future results. All investing involves risk, including the possible loss of principal. Market conditions are subject to change, and the future may not resemble the past.

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View Video Transcript

All right, let's talk about one of the absolute biggest puzzles in finance. You spend your whole life saving up for retirement, but then what? How do you actually make sure that money lasts as long as you do? It can feel super complicated, but today we're going to break down the key to solving it. And right out of the gate, we run into something that feels like a paradox. You always hear that the stock market after inflation gives you about a 7% return on average. So logically, you'd think, great, I can just take out 7% a year, right? But nope. The so-called safe number is way, way lower. Why? What is going on there? That gap is the mystery we're cracking today. So, first let's just make sure we're on the same page. We're talking about the safe withdrawal rate or SWR. Think of it as the magic number, the percentage you can pull from your investments each year, adjust for the rising cost of living, and have a really, really good shot at not running out of cash for a good 30 years. Now, you've probably heard of the 4% rule. This idea was made famous by a financial planner named William Benjen, and it basically became the industry standard for decades. What's really interesting though is that Benjen himself has updated his own research and now says, "You know what? 4.5% is actually a better starting point." Okay, so back to our puzzle. If the market returns are so good, why is the withdrawal rate so low? Well, the hidden danger, the villain in our retirement story isn't the average return you get over 30 years. It's the wild, unpredictable swings the market takes along the way. It's all about volatility. And volatility creates this very specific and dangerous threat for anyone in retirement. It's called sequence of returns risk. Basically, it's the risk of getting hit with a nasty bare market right when you start withdrawing your money. Bad returns early on can do permanent damage to your portfolio because you're selling low to fund your life. And it's incredibly hard to recover from that. So, to figure all this out, researchers don't just guess. They run thousands of computer simulations. They'll basically generate a random but realistic 30-year market history. Simulate taking money out every year and see if the money lasts. And they don't just do it once. They repeat this process hundreds of times for every scenario to see what the probability of success or failure really is. So what do those simulations show? Well, let's see what happens if we get a little aggressive and try to pull out 6% a year. And whoa, look at that. It's a sea of red. Each one of those red squares is a timeline where the retirement plan failed. The money ran out at 6%. You can see that failure is pretty much the default out. Okay, now let's try dialing that back to the 4.5% that Benjen suggested. And look at that. All of a sudden, this massive safe zone of green appears. These are all the scenarios where the retirement plan worked. So, the whole game changes. The question isn't if you can succeed anymore. It's how you build a portfolio that lands you in that beautiful green zone. So, as you look at this chart, you're probably wondering what the heck these axes are. What actually determines whether you're in a red failure square or a green success one. Well, it all boils down to the interplay between two crucial factors. The return you're getting and the risk you have to take to get it. Let's define those real quick. Okay. The bottom axis is real return. Now, it's easy to get excited by the headline number, the nominal return. Your account went up 10%. But if inflation was 4%, your actual purchasing power, your real return, only went up by 6%. When you're retired and living off your money, real return is the only thing that actually mattered. And that vertical axis, that's standard deviation. It sounds technical, but it's just a way to measure volatility or risk. It tells you how much your returns are bouncing around. A low number is a nice smooth ride. A high number, well, that's a stomach turnurning roller coaster with massive ups and downs. Okay, so now we understand the map. We have our zones of success and failure. So, here comes the million-doll question. Where do actual real life investments fall on this thing? Let's overlay some common portfolios onto our chart and see what happens. If we look at the extremes, you see the problem immediately. You can invest in super safe bonds. They have low volatility, which is great, but their returns are so low, they don't even make it into the green zone. On the flip side, you could go allin on the S&P 500. Amazing returns, but the volatility is just way too high. It lands you deep in the red. So, if 100% safe is too conservative, and 100% growth is too risky, what's the answer? Well, it's the mix. It's diversification. Look at those portfolios right in the middle, like a 60/40 stocks to bonds mix. They get enough of the stock market's growth, but the bonds help to tame that wild volatility. And where do they land? Smack dab in the middle of the green zone. That's the magic. And if you're still not convinced, this visual makes it crystal clear. Each one of these lines is one possible 30-year retirement journey out of hundreds of simulations. On the left, you've got a portfolio that's 100% stocks. On the right, a diversified one. The difference in the potential outcomes is, well, it's staggering. I mean, just look at the chaos on the left. So many of those lines just plummet to zero. That's a failed retirement, a disaster. But now look at the right. The diversified portfolio is so much more stable. The lines are packed together. Sure, a few don't do great, but the vast majority survive and many thrive. It's undeniable. All right, so we've waited through the theory, we've seen the charts, and we've found the key. Now, let's just boil this all down into some practical takeaways you can actually use. Here it is. The single most important lesson of this entire explainer. When you're in retirement, managing your risk is actually more important than chasing the highest possible return. Taming that volatility, that roller coaster ride, is what keeps your plan alive. And the way you do that is through diversification. The science behind it is this concept of anti-correlated assets. It's a fancy term for a simple idea. Own things that don't all go up and down at the same time. Historically, when stocks zigg, high-quality bonds often zag. That balance is what protects you from that terrifying sequence of returns risk. So, what do you do with all this? The big takeaway, the do is to focus on the principle. Managing risk through smart diversification is critical. The do not is just as important. Don't just grab the number 4.5% and assume it's perfect for you. This is a framework for thinking, not a magic number. And that leads to one final really important disclaimer. These models and simulations are fantastic tools, but they are not a crystal ball. They rely on historical data and statistical patterns, but the real world can be a lot messier. These models give us guiding principles, not perfect predictions. And that leaves us with one final question for you to think about. It's really easy to build a retirement plan that looks great on paper, one that works based on average returns. But after everything we've seen today, the real question is, is your plan ready for reality? Is it built to survive the ride?