Military retirement: how much can I really spend?

The last post described the Trinity Study and explained the idea of a “safe withdrawal rate” to maximize the success of a retirement portfolio. A 4% SWR is a starting point, one put forward over a decade ago and appearing in print most frequently. It’s straightforward, it has a high success rate, and it adjusts for inflation.

Researchers have proposed a number of alternatives. Some have pointed out that a high-equity portfolio can last for a longer time or survive a higher withdrawal rate. (High-equity portfolios can be very volatile but are a good counterbalance to a military pension.) Others have shown that a retiree’s SWR can be higher if they’re willing to risk a slightly higher (yet still remote) possibility of failure. One noted researcher, William Bernstein, even claims that planning for a higher success rate than 80% is unrealistic because history is full of unexpected events. For example, a higher standard of success would never have predicted the wars and recessions of the 20^th century and it won’t predict the events of the 21^st.

Conservative portfolios (high in bonds and low in equities) can generally only support a lower SWR. Conservative retirement calculators (especially Monte Carlo) recommend a lower SWR. Some researchers note that retiring into a declining stock market (like 2001-2002 or 2008-09) leads to more failures than waiting until the market is recovering. Others have developed variable-spending systems of incredible complexity that permit higher initial SWRs but do not always adjust for inflation.

Bob Clyatt, author of “Work Less, Live More”, proposes a simple variable spending system. Instead of the “4% plus inflation” of the Trinity study, Bob’s system withdraws 4% every year. If the portfolio had a bad year and next year’s 4% withdrawal is smaller than 95% of the previous year’s 4% withdrawal, then the retiree can take 95% of last year’s withdrawal. The idea is that spending varies with portfolio performance and may have to be cut back during bad years. The safety net in Bob’s system is that a retiree may also contemplate part-time work in bad years if spending can’t be cut.

As always, military retirees have the benefits of a COLA-adjusted pension and much cheaper healthcare expenses. When coupled with a bridge career, part-time work, or a high-equity portfolio, these advantages will greatly improve portfolio survival through history’s worst periods. The same benefits should provide a higher success rate in the future and may even allow a higher withdrawal rate. While the debate continues on several different Internet discussion boards, the consensus is that 4% is a starting point with many options for higher withdrawal rates.