12/7/2023 0 Comments Starmoney 5.0![]() 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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