I debated posting this in the "Stop worrying about the 4% rule" thread, but I suspect it may generate a lot of new conversations and I didn't want to derail the topic. I also really dislike self-promotion, so you'll have to forgive me for posting a link to my own website. But this is a topic that I know you'll find legitimately interesting and perhaps helpful, and hopefully I've contributed enough here to earn a pass. I'm FIRE myself, so this is a topic of very personal interest to me as well.
When discussing Safe Withdrawal Rates, I've found that there's a lot of confusion about the conclusions of the Trinity study. I truly believe the 4% rule is based on solid data and fully support the conclusions of the study. Where I believe a lot of people get mixed up is in the definition of "stocks" and "bonds", and how to apply the conclusions to their own portfolios that perhaps do not use the same stock and bond indices as the Trinity study. And when portfolios start using other assets like commodities and REITs it gets really confusing.
For example -- Do you personally invest only in a S&P500 index fund (the only stock option in the Trinity study), or do you also have a bit of Small Cap Value and Emerging Markets? Do you expect your custom portfolio to return the exact same amount of money as the S&P500 index alone? Of course not! Why else bother? Then should you also expect your SWR to be the exact same as a S&P500 fund alone simply because SCV and EM are classified as "stocks"? Absolutely not. Basically, it's not enough to say you have a certain percentage of "stocks" and "bonds". You must be specific. Which stocks? Which bonds?
Do you also have a Commodity fund? That's not a stock or a bond, and wasn't part of the Trinity study at all. How must that also affect the SWR?
The 4% rule is an excellent rule of thumb based on good data and a sound methodology, but it isn't based on
your portfolio. What's
your SWR?
I've thought about this problem for a while now, and finally feel like I came up with a coherent enough explanation to share it with others.
Why Your Safe Withdrawal Rate is Probably Wrong You'll also find a new calculator that will allow you to find the SWR for any asset allocation, and I wager the results will surprise you. Long story short -- there are definitely portfolios with higher historic SWRs than 4%, and others that even never drew down principal at 4%! There are also portfolios of "stocks" and "bonds" that are a lot riskier than you probably realize.
The topic is kinda complicated -- too much so to put every detail in one post. So if it interests you, I recommend starting at the link above and exploring the various places that takes you. I've done my best to be very open about the methodology and limitations of the analysis. All feedback and questions are welcome. We're in this early retirement journey together. :)