No. 01Paper1998
Retirement Savings: Choosing a Sustainable Withdrawal Rate
Philip L. Cooley, Carl M. Hubbard, Daniel T. Walz
Established the 4% Rule that underpins the entire modern FIRE movement. It's the scientific basis for calculating your financial independence number (annual expenses × 25).
Abstract
The Trinity Study is a seminal research that examined sustainable withdrawal rates for retirement portfolios using historical market data from 1926 to 1995. The professors analyzed different mixes of stocks and bonds (0% to 100% stocks in 25% increments) and tested withdrawal rates from 3% to 12% for periods of 15 to 30 years. The study found that inflation-adjusted withdrawal rates of 3-4% have an extremely high probability of success (95%+) when the portfolio contains at least 50% stocks. This paper established the famous "4% Rule" that became the industry standard. The results demonstrated that even with final portfolio values, conservative withdrawal rates allow not only sustaining expenses but also leaving significant inheritances.
Key Ideas
- 14% inflation-adjusted withdrawal rate has 95% historical success for 30 years
- 2Portfolios with 50-75% stocks optimally balance growth and security
- 3The order of returns matters more than average return (sequence risk)
- 4Longer retirement periods require more conservative rates (3-3.5%)
- 5Diversification between stocks and bonds reduces volatility without sacrificing much return
Withdrawal rates of 3% to 4% produce extremely high success rates for stock-dominated portfolios during all payment periods shown.
95%
Success rate for 4% withdrawals with 75% stocks / 25% bonds portfolio over 30 years