4% Rule Failure Rate

I have been discussing retirement planning with my brother who is two years younger than me. As a result of these discussions, I have added stochastic investment returns to my projection model as well as the Australian Age Pension (which is means tested) and I increased the planning horizon to 2060 from 2050. Moominmama would be 85 in 2060. Previously, I stress tested the projection by using very low constant rates of return.

Running my baseline spending scenario–linear growth in real spending with stepdowns of 1/6 after each child finishes university–it is very rare to run out of money by 2060. This is defined as negative net worth beside our house. In 100 runs there are no failures.

But if we spend according to the 4% rule, we run out of money by 2060 about 10% of the time, though rarely by 2050. This is using the monthly returns distribution over the last 30 years of the benchmark target portfolio as investment returns. In many more cases, real (2026 dollars) net worth is below AUD 1 million by 2060 and falling fast. If I use our own historical returns–which were very bad before 2012–the failure rate is around 40%. With our returns and linear spending the failure rate is around 25%.  

This graph compares the target portfolio, our track record, Australian shares, the MSCI World Index, and gold:

Spending according to a 3% rule and the target portfolio returns has no failures in 100 runs, though a few near misses. 

So, we need to keep our spending well below 4% or increase returns if we don't want to run out of money.