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March 26, 2012


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Retired Syd

@New: No, Bengen's rule doesn't say Guy 2 can't retire, it says that if he wants to be totally safe (in case the 50 years FROM HIS RETIREMENT DATE are the worst 50 years) he can only withdraw 3% of his assets (the lower number).

Guy #1 and Guy #2 can't both possibly have the worst 50 years (based on history) from their start dates because they didn't start at the same place. One of them has to do worse than the other when you look back over the 50 years. Since 49.5 of them are the same, it's likely Guy #1 had the worst 50 years, historically speaking. So he dies with nothing, Guy #2 dies with some left.

That's how they reconcile. Now if you are assuming Guy #2 had the worst 50 years, then Guy #1 had an even worse 50 years than history showed capable, and the rule doesn't cover that. It presumes you will do at least as well as the worst 50 year chunk.

The rule doesn't say that everyone that follows the 3% rule dies with nothing. Only the ones with the worst 50 years from their start date die with nothing. The others die with money left over (or could have taken out more than 3% like your Guy #2 above--in other words, he COULD have retired with a higher than 3% rate, just not if he wanted to feel totally safe at the front end of those 50 years. At the front end, you're not sure which guy you're going to be.

The rule also doesn't say that you can only retire if you have enough to meet the 3% rule. It just says if you want to bet on the fact that you will have the worst possible (historically speaking) luck, you shouldn't pull the trigger unless you have met that 3% rule.

With that, haven't we beaten this thing to death yet?

New at this

Your answer is akin to saying if I just flipped a coin and it came up heads, then if I flip it again it should come up tails. But as we all know, the events are completely independent of each other, just like guy1 and guy2 in our example. I really wish I could get you to understand this. But I'm willing t give up if u r.

Retired Syd

@New: Yes, if only you could get me to understand this. But alas, you cannot. I think I'm beyond help. It's time for you to give up on me. Sorry.

New at this

So the takeaway for anyone else following this thread is:

It wouldn't be advisable for Guy2 to retire using a 5% withdrawal rate. Therefore, since his assets are identical to Guy1's, Guy1 should be VERY nervous about continuing to withdraw at his originally calculated amount (which now represents 5% of his Assets).

Syd doesn't agree with the above statement, but if you're basing your own financial future on this, I'd advise putting some type of over-ride into your plan. Independent of where you started, you should always ask whether someone else starting out from scratch would agree to the plan, that you are already in the middle of.

Best of luck to all, and thanks for engaging Syd.

Mark j

Syd, Does the 3% rule assume a 50% stock, 50% bond/cash investment portfolio until you die?

Retired Syd

@New: You are correct, I do not agree. Guy #1 should not be nervous because Historical Guy #1 (who experienced the exact same scenario historically) turned out to be ok. Guy #1 should only worry if he thinks his 50 years are going to be worse than Historical Guy #1--in which case the 3% rule would not have worked anyway.

You might allow for the remote possibility that perhaps it is you that are misunderstanding the rule.

@Mark: Yes it does.

New at this

Syd- Its not a question of understanding the rule. (I think I could write an article on it at this point).

The issue is that I believe the rule, as written, has a (perhaps significant) deficiency.

It does not properly handle conditional probabilities as it relates to back-testing. The proof is in the above example if you would just take off your blinders and let your mind soak it in....I have a Masters degree in this topic, but until now haven't ever applied it to this area. And in an engineering context, this "science" would get laughed out of the room for its indefensible deficiencies.

And if people don't understand this, they are going to get hurt, I'm just trying to point that out, as a matter of helping my fellow wanna-be-retirees.

So what I was hoping to to evolve the discussion to was finding a "reason" why withdrawing 3% from a retirment portfolio might make inherent sense, beyond relying on this shallow research.

Retired Syd

@New: It's not science, it's financial modeling.

Let me try one more thing:

Over the 80 years studied 1 guy had the worst 50 years, another guy had the 2nd worst 50 years, another guy had the 3rd worst 50 years another guy had the 4th worst 50 years and someone had the absolute best 50 years.

You with me so far?

The guy that had the worst 50 years would have been ok at a 3% withdrawal rate, the guy with the 2nd worst period would have ultimately been ok with a little higher withdrawal rate, and so on and so on. The guy with the best 50 years would have done ok with a really high rate, maybe 5 or 6%, maybe higher (I didn't go back in the article to see what that would have been for the best years because no one really cares.)

Stay with me:

In your example above you are trying to give Guy #1 AND Guy #2 the absolute worst 50 years. But, in that new historical 80 year period which we are assuming the same as the 80 year historical period, they can't both have the worst 50 years if we already gave that award to one of them. So the other one could have taken out more. The 3% just applied to the guy that was the worst.

I know this didn't work, but I really am trying.

Retired Syd

@New: P.S. It ONLY makes sense to withdraw 3% if you happened to be the guy with the worst 50 years. For everyone else, they need to get in their time machines, go back to the beginning of their retirements, and take out a higher %.

New at this

Syd - pls quit reciting from the Bengen article and do some independent thinking.

Ask yourself, how is it that Bengen's own research gives guy1 and guy2 a diff. Prob of success despite having identical assets at the same point in time?


For some crazy reason....I completely understand what Syd is saying.....but I ALSO understand what New is getting at too. You guys both understand the concept.....however it is certainly revealing how engineer minds think differently than accountants:)......in any case retirement, as in life is not an exact science. Retirement and LIFE is about engaging flexibility in your decision making when needed.


"@New: It's not science, it's financial modeling." BINGO! These are tools in an ever changing world. Will history repeat? Are we in such a period of staggering debt that using the past as a reference is meaningless? Will personal circumstances be completely different than imagined? Who knows? Be flexible using all available tools, keep options open and most importantly - enjoy life!

New at this

So I thought about this a little more as I stared at a 100 year chart of the Dow...

I think all Bengen was trying to do, was provide a short-cut method for taking a first-cut at whether someone is in the ballpark of being able to retire. And to that end, think he did a great job....

But as pointed out with the above guy1/guy2 example, I don't think this gives the all-clear to declare your retirement date at "outlier" moments in time like March 2000, (when the Tech Boom was peaking)...(I know Syd disagrees, but I respectfully don't care)

A little judgement is warranted, and some type of over-ride should be implemented to make sure your not an anomoly....The problem is however, that you don't always know you're at an outlier moment in time until several years after-the-fact...

To that end, as I decide how to implement my own version of the 3% rule, I'm going to start by calculating 3% of the value of my assets, "nomalized" to what their value would be if the dow was between 10,000 and 11,000.

Then, going forward if my Current Withdrawal amount gets out of bounds with the 3% rate along the way, I'm going to think seriously about scaling back for the moment....

With this adjustment, I think I have found the answer I set out looking for...which is a retirement plan that allows me to sleep....

Thanks for engaging in my journey, and best of luck with yours, Syd, and all the rest on this forum....I cannot wait to make it official!!!

But alas, have decided to stick it out long enough to collect one last bonus in December....Then, I am joining the rest of you...!!!


Consuming 3% of a 50/50 equity/fixed portfolio in year one, then consuming that amount adjusted for inflation every subsequent year for 50 years will deplete that portfolio if equity returns, interest rates, and inflation are no worse than what they were in the worst 50 year period of the past 80 years. If conditions turn out better, one dies with an estate, if conditions turn out worse, well, that’s what some folks worry about.

Limiting present consumption to follow the rule treats future evils of the like of the Great Depression, World War II, and the Oil Shock as certainties. What does one expect, an alien invasion?


How did you compute the $34,500 in the original scenario? I understand the first year $30,00 but don't understand what/how to come up with the inflated base amount.

Retired Syd


No problem, here's the math. So you got the original 30k--3% of Dick's nest egg. That's year 1. But each year, inflation increases that 30k basket of goods by the inflation rate:

Year 2's expenses (and withdrawal) will then be 30,000*1.035 (increasing by the inflation rate)= $31,050.

Then Year 3's withdrawal will be 3.5% higher than that: 31,050*1.035 = 32,137 and so on:

Year 4: 32,137*1.035 = 33,261
Year 5: 33,621*1.035 = 34, 426 (I rounded up to 34.5 for the post)

That's how the rule works--a common misconception is that you simply take 3% of your ending nest egg out each year. You actually only take that % out the first year and then the percentage increases each year. For an illustration of how that would work, assuming a 4% withdrawal rate see this post: http://retiredsyd.typepad.com/retirement_a_fulltime_job/2012/03/see-average-joe-retire.html

Hope that helps!


It helped very much so! This is the first time I've ever read a good explanation of withdrawing retirement funds. I have a lot of research to do in the next five years and both enjoy, and are learning from, your blog.

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