Inflation, Market Return, and Safe Withdrawal

Today we’re going to take a good look at the three numbers most retirement calculators make you just guess. All three are very arbitrary and are based on future market and economic performance.

Inflation and Market Return

For ease of use, I like to combine inflation and market return. Often, when the market is high, so is inflation. But that’s not always true. So, luckily, some very nice people have combined the two metrics for us in an overview of historic market performance. All charts we discuss below are adjusted for inflation.

To start our discussion of interest you can expect from the market, or annual market returns, I want to have you look at a chart created by Political Calculations Blog.

worst market returns

Alright, so this chart was made in 2007, so it doesn’t include 2009, but it looks at the worst possible market returns based on how long you stay in the market. A few things we learn here:

  • The length of time in the market matters. Somewhere between 20 years and 21 years in the market, the WORST return is positive. That means no one lost any money staying in the market for more than 21 years.
  • 75% of the worst-case scenario market options end in two specific periods:
    • 1920-1921 – a period of the worst inflation rates in U.S. history – inflation rates near 20%!
    • 1932 – more specifically, June 1932 when the greatest crash in stock market history hit its lowest point.

Now, knowing that we need to stay in the market at least 20 years, lets look at historical market data for every 20-year rolling period in history thanks to awesome-sauce charts made by AllFinancialMatters.

SP 500 Market History S&P 500 Rolling Period Returns (Fun Facts 2010 Edition).xls

I want you to focus on the “Average Annual Net Compound Return” in the gray area titled “inflation-adjusted returns.” This column shows (adjusted for inflation, obviously), the average percentage at which the portfolio grew each year during that cycle. Now, you can see that market returns are all over the board. They go from just over zero to a crazy 13.05%. (If we could count on 13.05%, our $70,878 in investments would turn into over $950,000 in 20 years without us adding a penny more!) Now, here’s some helpful information based on this chart to help you decide what rate you would like to use for your calculations based on your risk level:

  • The average is around 8%
  • The median is around 7%
  • If you drop the 10 highest periods and the 5 lowest periods (to remove outliers, but still be on the conservative side), the average is 6.71%
  • Using only the bottom half of the periods – or the worst half of all the rolling periods, the average is 3.88% and the median is 4.66%

Based on this data, Mr. T and I are very comfortable planning an inflation-adjusted 4% annual market return. This means we can ignore inflation projections, plan for 4% in our compound interest calculations. In years where the market does much better, we can be pleasantly surprised.

Safe Withdrawal Rate

I had planned to examine this area much more in depth, but Justin over at Root of Good just last week posted an ultimate look at the 4 Percent Rule with links to all the other great blog posts on the topic at the bottom. Definitely check that out. What I do want to mention, briefly, are some graphs from a study published in 1994.* These graphs show how many years a portfolio would last, historically, if the person started withdrawing 3% or 4% of the funds the first year and then that same amount of money, adjusted for inflation, each year. They capped the chart out at 50 for the number of years the portfolio would last.

4 Percent Rule

My favorite line in the whole study: “Figure l(a) (three-percent withdrawal rate) is as exciting as a crewcut.” This crewcut-like excitement continues up until about 3.5%. So, 4% is probably safe, but if you want to make sure you’re going “crewcut” in your retirement planning, count on a 3.25-3.5% withdrawal rate.

On Friday, we’ll combine Monday’s look at our spending with the numbers we looked at today and draft a whole new early retirement plan for the Banks Family! And we’ll want your input!

*I’m aware this study is old, doesn’t include the recession, etc. But it basically leads to the same conclusions most studies looking at the historical data do.

Also, in case anyone actually thinks I know anything: No one should take this as investment advice. This whole blog is for entertainment and discussion.

Disclaimer: This post may contain affiliate links which, at no cost to you, helps support Northern Expenditure and keeps our heat on in the winter. Thanks!


How Much We Spend


Recalculating: A New Financial Plan


  1. Thanks for doing the work to confirm that we can all rely on the 4% rule. We plan to have rental-property income to rely on as well as investment withdrawls. We will semi-retire after all of our debt is paid off, so we only need to earn enough to cover our low living expenses. Once our investments reach the point that a 4% withdrawl will provide enough to supplement our rental property, then we will be able to fully retire (if we want to).

    • MaggieBanks

      Rental income is a nice buffer. Though I’m too chicken to be a landlord!

  2. There are a lot of people out there saying the 4% rule isn’t safe anymore. Media and people love talking about dooms day scenarios and futures not as rosy as the past. But then you look to people like Elon Musk, Peter Thiel, Warren Buffet, etc. who all recognize the power of the people and innovation. Will future equity returns lag the historical periods? Perhaps. But I’m not going to bet against American (and international) ingenuity 🙂

    • Reading that back now it seems as though I didn’t stress that a 3.5% withdrawal rate could be a great idea, and also give you peace of mind. But don’t be surprised if you die with millions then. $$$

      • MaggieBanks

        I’m with you. I totally agree the 4% rule is still a pretty good one to use, even in early retirement. We used 3.5% so that we could use the “buffer” money to help the kids with college, buy a house in a more expensive area if we need to, etc. Those are big expenses we don’t know how else to really plan for since we don’t plan to pay for all of college and we have no idea where we plan to eventually move.

  3. We’re also assuming 4% in our growth calculations, and planning on 3.25-3.5% withdrawal rate after we reach “real retirement age” and start drawing on our 401(k) funds. For those 18 years in between, though, we can’t rely on the 4% rule, and are still trying to figure out exactly what’s safe. Fortunately, the Obamacare caps give us a strong incentive to spend less than we could, so our money should last us long enough either way. 🙂

    • MaggieBanks

      As you’ll see, come Friday, we haven’t figured a whole lot out for certain. We’re just playing with numbers as I like to do. We have a 19 year gap in one of our potential plans without any income at all! 🙂

  4. It is always nice to see numbers with historical data like this!

    For planning purposes, I use a yearly growth rate of 3pct only. The main reason is the current too defensive composition of my portfolio. And we are aggressively turning that around. 100 pct of our investing goes into stock!

    • MaggieBanks

      Ours is very heavy stocks right now, so we feel pretty comfortable with the 4%

  5. Interesting, I’ve not seen the stat re only positive returns over that time frame. I’m going to go for 3.5% to cover core expenses and then following each year if the return is above it can be used to extra like travel. Look forward to the next post!

    • MaggieBanks

      Yeah, when you target for 3.5%, it seems there will most likely be an abundance left – that’s sort of what we’re hoping to cover college and possible future housing. 🙂

  6. Hmm, what do we assume…. I think we stay sort of conservative, but we still assume about 5% returns in the stock market. Also I think we run different scenarios and are essentially banking on the 4% withdrawal rate. We’ve looked at lower withdrawal rate, but then we would just need to sock more away, for our current anticipated FFLC budget. I figure some years may be flush, others may be tight, but it will be exciting either way! With all of the fire sim scenarios and our multiple realizations and scenarios we realized that it’s a lot of stuff that’s out of our hands. At some point we just picked our number that fit our risk profile and that’s what we settled on. Sure working 5 more years and we could retire and not have to worry about ever having tight years, most likely, but is it worth 5 more years of working this schedule and missing that time with the kids? Not for us currently. 😀

    • MaggieBanks

      You’ll see, come tomorrow, that I’m using your FFLC as inspiration for one of our potential plans! With all of this so far in the future, there’s a lot of things that could happen between now and then!

  7. Thanks for sharing my own 4% rule article. 🙂

    I agree with your assertion toward the end – 3.25-3.5% withdrawals will usually get the job done for almost everyone over periods longer than 30 years even.

    • MaggieBanks

      Well, Justin, thanks for writing the best overall resource on the topic I’ve seen. And it’s an honor to have you stop by!

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