It’s important to note that we make a lot of simplifying assumptions in our analysis. Your unique financial situation is almost certainly different. These results should only be viewed as a broad guide, and should not be assumed to model your unique situation.
Min/Max/Average Results
An investor’s results would have varied widely depending on the point in the test that they began investing. The min/max/average results capture that uncertainty. We run our analysis multiple times, each time starting on a different year in our backtest (1970, 1971, 1972, etc.) The min/max/average results show how the worst, best and average investor performed in our test.
Accumulation: Years to Fund Retirement
The accumulation analysis shows how many years it would have taken an investor to fully fund their retirement, assuming a 4% annual withdrawal rate in retirement. 4% is a general rule of thumb used by financial planners to guide retiree withdrawal rates. Is the 4% rule actually sustainable for a given portfolio? See the “Distribution” stats below.
The user specifies two inputs:
- Pre-tax savings rate %
- Number of years of pre-tax expenses already saved
We then make two major simplifying assumptions:
- First, that living expenses are the same when working and in retirement, and are equal to the amount not being saved. So if an investor makes one dollar, and saves 20%, the investor’s living expenses are the remaining 80 cents. All taxes are paid out of that 80 cents.
- Second, that gains on investments grow tax-free (as in a Traditional IRA, 401k etc.)
Here’s a concrete example:
- An investor makes $100,000 a year pre-tax, and saves $20,000 a year. That’s a 20% savings rate.
- The investor’s living expenses plus taxes (when working and in retirement) are $80,000 a year.
- $20,000 is being invested in the portfolio in a lump sum at the end of each year.
- The “years of expenses already saved” would be based on the $80,000. So if our fictional investor had already saved $400,000, the answer would be 5 ($400k / $80k).
- The analysis then calculates how long it would have taken for the investor to accumulate enough capital that 4% of the total would cover annual living expenses in retirement ($80k)
- All results are adjusted for inflation of 2.5% annually, including the amount saved each year ($20,000) and the amount required in retirement ($80,000).
Because of the simplified approach we’ve taken, exact dollar amounts don’t matter. Whether an investor earned $1 a year or $1,000,000 a year, the math would be the same. Of course, your unique financial situation is almost certainly different. These results should only be viewed as a broad guide, and should not be assumed to model your unique situation.
Calculation note: When entering a value for “years of expenses already saved”, the chart can become very choppy. That’s not a bug, it’s just an odd artifact of the math. All portfolios have a lot of near-term uncertainty. Regardless of long-term performance, in any given year, results can vary widely. When running an analysis with zero starting capital, that near-term uncertainty has little effect on the big picture because so little capital has been invested. However, when we run our analysis with significant starting capital, that near-term uncertainty can have a big effect on the worst/best case scenarios because so much capital is already at risk.
Distribution: Safe Withdrawal Rate
The distribution analysis shows the percentage of the portfolio a retired investor could have withdrawn each year without running out of money (i.e. having zero dollars at the end of retirement). A 4% withdrawal rate is a general rule of thumb used by financial planners to guide retiree withdrawal rates, but it may not be appropriate for all portfolios.
The math behind this chart is pretty self-explanatory. Given the length of retirement (x-axis), what percentage of the portfolio could an investor have withdrawn in a lump sum at the beginning of each year, and ended retirement with zero dollars. The amount withdrawn each year increases with inflation. We assume an inflation rate of 2.5% annually.
We provide a min, max and average withdrawal rate for context, but the minimum value is termed the “Safe Withdrawal Rate”.