Unsafe Withdrawal Rate

I was writing last week that I had been listening to the Dave Ramsey podcast which, I guess, would be an acquired taste for most UK listeners or a taste that they’d rather not acquire. But I like his straightforward bluntness and bluster that disguises an essentially decent bloke underneath.

Anyway, while listening to one show last week, a middle American called in wondering how he should figure out a Safe Withdrawal Rate on his pension.

“Where have you the money invested?”, barked Dave.

“Well, gee whiz, I guess mostly in mutual funds Dave…”

“And what have they returned since you’ve been invested”.


“You don’t know? You don’t know how your money has grown? I know how my funds have performed for the last twenty, thirty, forty years”, and Dave proceeded to quote the numbers.

Suitably chastised, the caller mumbled, “Well, I reckon maybe ten or twelve percent Dave’.

“Okay”, thundered Dave, “I doubt that. But let’s say it’s ten percent. And you’ve half a million invested. How much can you safely withdraw? Per year? How much? You’ve been returning 10 percent on five hundred thousand, how much can you withdraw without eroding that capital”?

“Reckon it should be fifty thousand a year Dave”.

“Exactly”, snapped Dave, and cut him off.

So there you have it. That’s how Dave calculates a Safe Withdrawal Rate – and I like it. Of course, this is full of holes even for those of us who aren’t mathematicians, but I’m sure Dave would take a sledgehammer to the naysayers. I’m sure he’d argue: “Right, your fund has returned 10%, on average, for the last twenty years. It’s a good bet that it will probably continue with this. Okay, some years it will return 1%, or lose money, and some years it will return 40% or 50% but who gives a damn about the detail? The 10%, over time, is what it’s returning. End of discussion.”

Dave often takes a sledgehammer to crack a nut. You know that he knows the devil is in the detail, but he’s little time for nit picking on it and likes the big sweeping statement that contains an essential truth. Keep It Simple Stupid, is his mantra.

Is he wrong, I wondered? Yes, of course, nobody can predict the future, and a fund that has returned 10% growth for twenty years could turn tomorrow to produce a loss for the next twenty. And tomorrow I could get run over by a bus, driven by Dave Ramsey. These things could happen. But what are the chances? That’s what you’ve got to try and figure out – and that’s the frustration, and possibly the attraction, of investing.

I’ve listened and read the endless discussions about timing the market, about the bloke who started saving his money in 1994 versus the bloke who put in the same amount but started three years later blah blah blah. The data is the data and you can manipulate it how you like. That’s manipulate it how YOU like. Not anyone else. Choose that stats and argument that suits YOU.

This is the core of investing. What type of person are you? What is your attitude to risk? Is the glass half full, or half empty? You can put your money wherever you like and every FI who ever drew breath will advise you while pointing out that in the end this is your decision and the market can go down as well as up. Really? So, what you’re saying is, Mr Financial Adviser, is that essentially you have not the slightest idea what will happen in future? You’re telling me that past performance isn’t necessarily a reliable indicator of future performance while advising me with data that’s based on past performance? Well, what am I to make of that?

And there you have it. Here is what investing boils down to. It’s a game of chance. So to quote another American icon, do you feel lucky? Well, do you? If you do, take out that ten percent, or more, each year from your half a million pension fund. If you don’t, then take out 2% and feel safe. Or put it all in cash and then fret about inflation. Whatever, make a decision that you’re comfortable with and then, much more importantly, go out and live your life.

16 thoughts on “Unsafe Withdrawal Rate

  1. Haha. As I’ve mused before, I believe a lot of the over analysis in this area is *precisely* because people aren’t sure how to go out and live their life.

    It’s a deferral mechanism or ‘spreadsheet-living’ to mint a newly coined phrase. I’ll go out and start living as soon as I’ve got this spreadsheet model right..


  2. Dave is a fool. When you’re drawing down on your wealth it’s not just about the annualised return you receive over the drawdown period but critically the sequence that those returns come in.

    It’s bad blog etiquette to self promote (SHMD please delete if inappropriate) but his ignorance is easily demonstrated with a fairly simple thought experiment. This post from a few years back shows the problem http://www.retirementinvestingtoday.com/2015/05/insuring-against-sequence-of-returns.html


    • Hi RIT, I think your article absolutely highlights the flaw in Dave’s argument, and thereby the flaw in mine – that I quite like his “big picture” approach because I fancy withdrawing 10% from my own pension fund and not worrying about it! The reality is, however, that I’m much too cautious to do that, and will remember your blog post more easily than Dave’s ranting.


  3. Dave Ramsay is there to sell you Dave Ramsay TM products not give you investment advice

    Is it really that hard to understand the difference?I

    The answers to any question are always simple and easy for a salesman looking to close a sale


    • You’re not wrong, eventually I do get so tired of his endless punting of his books, seminars, Youtube channel, classes and the rest that I give up on him. Not to mention his preaching that all he does is inspired by the Bible which, I feel, is just another sales technique.


    • I was too busy googling “Spreadsheet-living” to see if it was a “thing” to notice that. 😉
      Everybody wants a comfort blanket when it comes to drawdown. I’d sooner have my own spreadsheet(s) than a financial advisor any day….

      @SHMD, I’m feeling average. Pull the trigger. Have you read A Okusanya’s Beyond the 4% Rule? He makes an interesting point that you tend to spend less as you get older (“Busting the Myth of U-Shaped retirement spending”). When I see my parent’s loss of agility I certainly think that money is better spent sooner in retirement than later so I am planning to frontload my drawdown (nothing as crazy as 10% though).


      • Hi Aidan, how much you might need as you age isn’t something I see blogged a lot about on the financial blogs. It’s important though, because it could really influence how you enjoy your first years of retirement. The thing is, you don’t wan’t to tell people that in their eighties they’ll be too frail to spend money on anything – we’re all planning to be those globe trotting, skydiving eighty and ninety year olds that we have as our role models, don’t we?


  4. “Safe” is such a loaded word, isn’t it? I tend toward the 2% end of the spectrum myself, with my appetite for risk having reduced as I’ve got older.

    Aidan opens up an interesting area with his comments about probably needing less money as we age. It’s certainly true that big bucks travel may become less likely/possible with age, though frankly this is not borne out by some of our aged 70+ friends.

    And, for me, the desire to go to the theatre, cinema and concerts seems to grow – rather than reduce – with age. Similarly, the urge to entertain and have celebrations grows exponentially once you’re retired, I find! This came as a surprise to me 😉

    But there are also other more basic things that you end up spending much more on. For example, I’m only 61 but both my old man and I now have arthritis in our hands, which means we frequently have to get someone in to do jobs round the house (like replacing a kitchen tap) that we would previously have done ourselves without thinking anything of it.

    With age also comes the desire to spend more on health-related stuff like regular physiotherapy sessions to keep limber and deal with general aches and pains.The NHS will only pay for this if you actually have an injury or an acute condition that warrants it, and only for a limited number of sessions, but for optimal benefits you need to treat it as ongoing maintenance. We also like to keep our teeth strong, healthy and looking attractive – again, it costs money as this level of maintenance and ‘renovation’ is not covered under the NHS.

    Ok, so none of this stuff is actually essential, but it adds massively to quality of life – which is the important thing for most of us.

    And real old age often brings with it the need for lots of regular paid help with cleaning, gardening, and a host of other things. Many people think this will be provided free through social services. They need to think again (I speak from my own recent experience with my aged mother).

    So I guess what I’m saying is that it’s wisest not to assume that spending will reduce steadily with age – individual needs will differ, but old age can actually be quite spendy…



    • Hi Jane You raise a few things in your post that deserve a lot more airtime when considering retirement. I feel many of us, myself included, refuse to think hard about our health and needs as we age, and are blithely planning to have a similar income at 85 as we have at 65. And a similar lifestyle. Well, let’s hope we all do, but I think looking after your health is like looking after your pension – the sooner you start taking care of it, the better it will be.


      • Good blog post I enjoyed it. Jane has good points. You never know what is around the corner with your physical health. A few years ago at age 51 I thought I was in a good FI position for early retirement. Then I wrecked myself in a freak bicycle accident – that was 6 months off work with statutory sick pay practising spending the emergency fund part of my FI stash. That permanent health insurance stuff you get with some jobs to cover your pay…it doesn’t pay out very quickly because doctors are too overworked to fill out paperwork and well, insurance premiums get paid quicker than claim payouts is a fact of life. As I sat at home with my one thankfully working limb (left arm) doing the physiotherapy I revised my plans as to how much DIY work and general property maintenance I would be doing in my retirement and realised we would need to budget for that earlier than expected. Back on track now with recovery both health-wise and financially but I think I like this wasting asset retirement model idea on the JL Collins blog. I’ve come to realise I’m definitely a wasting asset and already somewhat wasted, but I’m feeling lucky 🙂 http://jlcollinsnh.com/2017/09/09/sleeping-soundly-thru-a-market-crash-the-wasting-asset-retirement-model/


      • Hi Bill, a similar thing happened to a bloke at our gym, a nasty fall off his bike. It really shook him up. Sorry to hear about yours, but it’s one of those things – we can’t plan our retirements on the basis of never leaving the house. Hope you’re not too wasted!


  5. Thanks for the article!
    KISS is great per se, but the withdrawal rate described in the blog post is not a smart choice! First, it banks on the assumption that past performance will occur, which it may not. Second, it does not take life expectancy into consideration – capital can be consumed over time if you do not plan on leaving a large inheritance to you beloved ones. Third, the simplistic formula ignores inflation and the development of future living expenses.
    I will take the article as an inspiration to think about withdrawal strategies and maybe write about them in the near future!


    • Hi MFF, in the end I always feel that Dave Ramsey is basically a showman trying to sell us something, as Neverland comments above. But his overall message and general advice is difficult to argue with, and I really wish that his money principles were more widespread than they are. I agree, however, that his view on withdrawal rates isn’t the best advice (but i still like it!) If only I was brave enough to take 10% out my pension every year…


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