Why "Safe" Isn't Simple and How to Stress-Test Your Retirement Plan

Have you spent hours running scenarios, analyzing safe withdrawal rates (SWRs), or trying to figure out if you should adopt a guardrail approach to your retirement investments, only to find yourself still searching for the simple answer: "Can I retire or not?"

Today, I want to take a deep dive into a powerful resource for DIY investors: the Safe Withdrawal Rate (SWR) spreadsheet published by Dr. Karsten Jeske, PhD, from the Early Retirement Now (ERN) blog. This resource contains dozens of blog posts and spreadsheets and is widely regarded as one of the best tools for stress-testing retirement plans.

Take a look at my video on this topic.

Understanding the Basics: Consumption vs. Withdrawal

Before diving into the numbers, it's important to understand a key concept highlighted in the spreadsheet: the difference between a Safe Withdrawal Rate and a Safe Consumption Rate.

• Withdrawal Rate: Focuses only on the money you take out of your investment portfolio.

• Consumption Rate: Accounts for added income (Social Security, pensions, rental property sales) or major expenses (buying an RV, vacation home) that supplement or strain your spending power in retirement.

For our analysis, we will focus on a simple scenario: a $2 million portfolio with no other income sources, using a default asset allocation of 75% S&P 500 equity and 25% U.S. 10-year bonds. We will use a 30-year (360-month) retirement horizon.

The Failure Rate: The Risk of Running Out of Money

The primary output of the spreadsheet is the failure rate—the percentage of historical periods where your portfolio would have been exhausted before the end of your retirement horizon.

The Safe Zone (30-Year Horizon):

• 3.25% Initial Consumption Rate: There has historically not been a single period in the data set (since 1926) that resulted in a failure (running out of money).

• 4.0% Initial Consumption Rate: You start to see some risk, with a 1.44% failure rate across all historical data. This rate climbs significantly higher (up to 12%) if you retire when the CAPE ratio is above 20 and the S&P 500 is at an all-time high.

• 5.0% Initial Consumption Rate: This withdrawal rate significantly impacts portfolio longevity, with failure rates reaching near 50% when the CAPE ratio is high and the market is at an all-time high.

The Risk Spectrum: Big Pile vs. Big Cut

The spreadsheet forces you to define your acceptable risk tolerance:

• 0% Failure Risk: The risk here is leaving a huge pile of money unspent at the end of your life (which is fine if your goal is leaving a large legacy).

• Higher Failure Risk (5-7% SWRs): The risk here is needing to re-enter the workforce or making significant lifestyle cuts later in retirement. The spreadsheet helps frame up how much of that risk you are truly taking.

The Timing Factor: When You Retire Matters Most

The ERN analysis clearly demonstrates that market conditions at the time of retirement are paramount.

Retiring in a Down Market

• The data shows that retiring in a severe bear market (greater than a 30% drawdown) is ironically beneficial. You can safely spend up to 5% per year with a 0% failure rate in the recorded history.

• The Trade-Off: While the percentage is higher, your portfolio is much smaller in dollar terms than it would have been at an all-time high. It is not necessarily worth waiting for a bear market to retire.

Retiring at an All-Time High

• If you retire when the market is at an all-time high, you must target a lower initial consumption rate than if you retire during a major drawdown to maintain the same low failure probability.

Fail-Safe Analysis and Historical Events

The spreadsheet also features a fascinating fail-safe analysis around prominent historical market events:

• Market Crashes (Tech Bubble & GFC): Due to the strong markets post those events, you could actually spend over 4% as an initial consumption rate and remain safe.

• The 1960s & 70s Stagflation: This period proved the most challenging due to high inflation and lower growth, where the safe withdrawal rate dropped under 4% in some scenarios.

• The Great Depression: Despite the severity of the event, the subsequent deflationary environment helped stabilize portfolios, resulting in a surprisingly sustainable withdrawal rate relative to other crises.

Next Steps for DIY Investors

The ERN spreadsheet is a tremendous piece of work that barely scratches the surface of what's possible with this data. There is also a web-based version available now if you don't use Google Sheets or Excel.

If you are using this tool and feel overwhelmed, or if the results are pushing you to one of the extremes (ecstatic or panicked), remember that a spreadsheet is only as good as the input and assumptions you provide.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you integrate specialized tools like the ERN SWR spreadsheet into your overall, comprehensive retirement strategy and see if we're a good fit.