Military retirement: how much can I really spend?

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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 20th century and it won’t predict the events of the 21st.

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.

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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