![]() Not quite a Zimbabwe-style runaway inflation, but still pretty bad. Not doing inflation adjustments during the 1970s would have implied a massive erosion of purchasing power: Your initial $40,000 withdrawal in 1970 dollars would have been worth only around $8,000 in the year 2000. over 10, 20, 30, and 60 years when foregoing CPI-adjustments: How real value much is left over after 10/20/30/60 years when not adjusting an initial $40,000 withdrawal for CPI? Results vary wildly by cohort! Zimbabwe’s hyperinflation culminated in the largest denomination banknote ever printed (to my knowledge): 100 Trillion Zimbabwe Dollars! Don’t trust retirement studies that work in nominal space! See the chart below where we plot the purchasing power of an initial withdrawal of $40,000 p.a. That seems like an interesting exercise to do before jumping into the inflation-adjusted study, right? Wrong! To me, this is a pretty cringeworthy and nonsensical exercise for the following reason. The first table in the often cited Trinity Study, apparently the gold standard of retirement research, looks at the success rates of withdrawal strategies that don’t do the cost-of-living adjustments (i.e., keep nominal withdrawals constant): Or simply utilize the fact that we all potentially spend less (in real terms) as we age! How much can we push the initial withdrawal rate in that case? With a declining real withdrawal rate, we can afford higher initial withdrawals! Even under the most optimistic assumption (no changes to the Social Security benefits formula), we didn’t think that the 4% withdrawal rate is safe.īut how about tinkering with the inflation adjustments, also called Cost-of-Living adjustments (COLA)? I often hear that one way to save the 4% rule in periods when the stock market doesn’t cooperate is to not do inflation adjustments for a few years. Last week we wrote about how Social Security can impact the SWR estimates. Welcome back to the Safe Withdrawal Rate Series. Update: We posted the results from parts 1 through 8 as a Social Science Research Network (SSRN) working paper in pdf format: Safe Withdrawal Rates: A Guide for Early Retirees (SSRN WP#2920322)
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