**3% SWR for 56 Years**

Many people have been dismayed at stock returns since 2000 and what they mean in terms of retirement portfolios. For the investments in the traditional studies, the safe withdrawal rate in 2000 was between 2.0% and 2.5%, not the 4% that had been claimed. We have been successful in restoring the safety at a

**4%**withdrawal rate. It requires us to use long-term TIPS and to switch portfolio allocations in accordance with P/E10. The idea is to coast along using TIPS for income until stocks become attractive once again. But what if someone remains unconvinced? Some people talk about reducing their withdrawals. Some people talk in terms of a 2% withdrawal rate.

That is entirely unnecessary. Even if you reject the idea of switching outright, you can still withdraw 3% of your initial balance (plus inflation) for 56 years in today's market. That sets a floor on safe withdrawal rates for most of us.

**Tables**

I have made three tables that show how much principal remains if your portfolio is made up of TIPS alone. I have listed the number of years N and the corresponding percentages for withdrawal rates of 3.0%, 3.5% and 4.0% at the TIPS interest rates of 2.2%, 2.5% and 2.8%. Since we are withdrawing more than the interest rate in every case, we must sell some securities along the way.

For purposes of analysis, I have treated the principal as remaining constant (after adjusting for inflation). In reality, there would be price fluctuations for those TIPS that are sold early. The fraction of your income subject to such fluctuations is very small until you come close to maturity. This is similar to the build up in principal on a mortgage.

For purposes of analysis I have acted as if 30-year TIPS were still available. That is not quite true, but there are some available on the secondary market that will last until 2032. For purposes of analysis, I do not include the effect of taxes. Before applying these results, you should look at taxes very carefully. Changes in the principal of TIPS (caused by inflation) are taxed immediately. It applies to the full change in the principal, which can be equal to or higher than your withdrawals.

**Percentage of principal remaining for a 3.0% withdrawal rate.**

Code: Select all

`TIPS N=10 N=15 N=20 N=25 N=30`

2.2% 91.2% 86.0% 80.2% 73.7% 66.5%

2.5% 94.4% 91.0% 87.3% 82.9% 78.1%

2.8% 97.7% 96.3% 94.7% 92.9% 90.8%

**Percentage of principal remaining for a 3.5% withdrawal rate.**

Code: Select all

`TIPS N=10 N=15 N=20 N=25 N=30`

2.2% 85.6% 77.2% 67.8% 57.3% 45.6%

2.5% 88.8% 82.1% 74.5% 65.8% 56.1%

2.8% 92.0% 87.2% 81.6% 75.1% 67.8%

**Percentage of principal remaining for a 4.0% withdrawal rate.**

Code: Select all

`TIPS N=10 N=15 N=20 N=25 N=30`

2.2% 80.1% 68.4% 55.4% 40.8% 24.7%

2.5% 83.2% 73.1% 61.7% 48.8% 34.2%

2.8% 86.4% 78.0% 68.4% 57.4% 44.7%

As you can see, we can coast along without buying any stocks for a long time.

**After 30 Years**

The remaining table tells you the number of years that you can continue to make your withdrawals after thirty years. For purposes of this analysis, I assume that your withdrawals remain the same (in terms of real dollars) and that your balance matches inflation exactly (i.e., zero percent real interest). Add thirty years to that number. That tells you how long you can make it even if you never buy stocks or any other growth vehicle.

Code: Select all

`TIPS 3.0% rate 3.5% rate 4.0% rate`

2.2% 22.2 years 13.0 years 6.2 years

2.5% 26.0 years 16.0 years 8.6 years

2.8% 30.3 years 19.4 years 11.2 years

We have seen long-term TIPS interest rates of 2.2% through 2.8% in the past few months. The last time that I checked, the rates were just above 2.6%.

If you are able to buy long-term TIPS at a 2.5% interest rate and you withdraw 3% of your initial balance (and make increases that match inflation), your total portfolio lifetime would be 56.0 years. That allows you a lot of time to sit on the sidelines. You have complete safely.

Have fun.

John R.