from an investment portfolio is safe for retirees

safe withdrawal rates

estimate the percentage of a portfolio that

can be spent in the first year

and then adjusted for inflation thereafter

without a material risk of running out of money

Dave's logic

is that good mutual funds return around 12% per year

and inflation has averaged around 4%

for the last 80 years

this leaves 8% to be spent by the retiree

unfortunately

the logic is flawed

and retirement spending math does not work this way

good mutual funds are hard to find before the fact

so the idea that you can

easily pick a market beating fund

is a flimsy Assumption

the best performing funds

historically do not tend to go on to be

the best performing funds in the future

a similar comment can be made about country returns

Dave references the performance of the

S&P 500 as being a little below 12% but again

the phenomenal historical performance of the S&P 500

does not mean that future returns

for US stocks will be similarly high

it would be far more sensible

at least in my opinion

to use return experiences of countries around the world

to gain an understanding of possible return scenarios

in planning for retirement

when you do this

the safe withdrawal rate is closer to 3%

or even a little lower

even if we could find a fund that does return 12%

on average it

would not sustain an 8% withdrawal rate for

the simple reason that stock returns are not constant

that 12% average return will consist of lots of

big ups and downs

and inflation

also goes through higher and lower periods

constantly spending an inflation adjusted 8% of

the initial portfolio during consecutive down years

or having to keep up with years of higher inflation

without offsetting higher returns

can deplete a portfolio quickly

let's take a mutual fund that has returned about 12%

per year since 1935

The American Funds Investment Company of America

it returned

11.73% annualized from 1934 through October 2023

which is incredible

now as a side note

despite its incredible long term track record

this fund has trailed

the US market for more than 20 years

as of today

you can't buy past performance but anyway

using this fund's historical performance to test

an 8% withdrawal in the first year

followed by annual inflation adjustments

so a constant

real $80,000 in spending on a million dollar portfolio

over a 30 year period

yields a success rate of a little more than 50%

this means that in around 50% of simulated trials

you ran out of money before

the end of the 30 year withdrawal period

I don't know about you

but I would not call that safe

at a 5% failure rate

the safe withdrawal rate for this fund

which we know has a great historical track record

would be about 4.6%

come on Dave be better