The remaining portfolios generally returned less than $26,000 for the first few. In that regard, the 4% withdrawal rate failed, with only 15% of simulations returning $26,000 or more each year. The goal of these simulations was to see whether or not the initial investment of $650,000 could generate a consistent return of $26,000 or more each year. That’s because the average return of these indices is higher than 4%. What you can see from the simulations is that when using the 4% rule your portfolio tends to continue to grow. I mean, just look at the following two graphs and see what I mean. The portfolio size varies massively, and hence so to does the amount withdrawn each year. And multiply the rest by the annualized market return. Here’s how the simulation works- Start with $650,000. Now let us assume that you have achieved the savings goal of investing $650,000 and see if the 4% withdraw rate works. Using the savings rate calculations there is a likely chance that you will achieve your goals in the time specified. Stations would probably call this a likely chance, not certain, but not impossible either. Overall, 71% of the simulations reached the target investment portfolio size of $650,000 in 17 years. But 38 out of the 51 portfolios did reach the goal of $650,000. So you wouldn’t be able to retire with an income of $26,000 using the 4% rule on the minimum simulated portfolio. The largest portfolio was $2,052,000 and the minimum was $474,000 Yes, the average is exactly the same as the NZX50. Results S&P500: If you had invested $26,000 each year in the S&P500 for 17 years you could expect an average portfolio size of $954,000. But 34 out of the 51 portfolios did reach the goal of $650,000. The largest portfolio was $3,324,000, and the minimum was $458,000 Results NZX50: If you had invested $26,000 each year in the NZX50 for 17 years you could expect an average portfolio size of $954,000. So how does that stack up? Below is the graph for all 17 year investment periods between 19 for the NZX50Īnd below is the graph for all 17 year periods between 19 for the S&P500 Hopefully, this makes the numbers more achievable and realistic, although I can appreciate that you would have to make sacrifices to save 50% of your income. Assuming the mortgage is paid off by retirement. I choose an investment rate of $26,000 because it is 50% it is halfway between 50% of the median personal income in New Zealand, at $49,000, and how much we spend each year if we exclude the mortgage, at $27,000. For the savings rate rule to hold true after 17 years, you should have $650k to start drawing down on in retirement. Here’s the scenario, you have an income of $50K and invest $26k each year into a passive index fund that tracks just the NZX50 in scenario 1 and the S&P500 in scenario 2. You look at the savings rate and retirement table and work out that you should have enough to retire on in 17 years. Let’s say that you are ambitious and want to save 50% of your income.
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