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Safe Withdrawal Rates and Budgeting

I was reading on Kitces.com and really enjoyed his post on Adjusting Safe Withdrawal Rates To The Retiree’s Time Horizon. Just before we dig into this article, remember that this comes from the assumption that a 4% withdrawal rate per year will not deplete your capital and can sustain you with a very high rate of success (see Trinity Study). I suggest you play around yourself with cFIREsim or FIREcalc or Personal Capital’s free tools and test out scenarios. This article from Kitces.com argues that there is no set safe withdrawal rate for everyone and that the time horizon is the most important factor when choosing a withdrawal rate.


Most planners are familiar with the 4% safe withdrawal rate research, first established by Bill Bengen in 1994 and based upon a 30-year time horizon. However, a common criticism of the research is that many clients don’t necessarily have a 30-year time horizon – it may be longer or shorter, depending on the client’s individual planning needs and circumstances. – Michael Kitces


I think that the most important metric is flexibility. If you can adapt your lifestyle to your portfolio, you can go a long way! Unless you are ready to accumulate a very large nest egg worth many millions, you will need to be frugal in certain areas of your life. It is not a huge sacrifice, nor a huge life-change, but cutting down your budget will not only help you get financially independent sooner but also diminishes your nest egg needs.


Increasing a time horizon from 30 years out to 45 years reduced the safe withdrawal rate from 4.1% down to 3.5% – Michael Kitces


Here, research showed that a longer time horizon requires a lower withdrawal rate to maintain a reasonable rate of success over that period. I agree with this point but again, flexibility can play a big role here. Withdrawing less when the markets are down will maximize your portfolio and stretch its survival rate.


Both Bengen and Blanchett’s research suggests the optimal equity exposure for a 30-year time horizon is approximately 50%-60%, a time horizon stretched to 40+ years merits a slightly more aggressive 60%-65% equity exposure – Michael Kitces


Another big assumption the research is making here is that the portfolio consists of almost half equities and half bonds whereas I plan my retirement portfolio to hold upwards of 80% equities. A larger allocation to equities will allow further growth and a slightly higher withdrawal rate. You can see my exact portfolio allocation here and read my reasoning behind a 100% equity portfolio.


budgeting tricks


However, before getting to the withdrawal phase, you need to save and accumulate your wealth. Budgeting and reserve funds can greatly help you attain your goals.


Since stuff doesn’t last forever, you can’t budget as if it will. For example, I know my computer won’t last forever, neither will my mattress, or my car. These are just a few of the dozens of similar expenses I’ll repeatedly face throughout my life. – Dylan


The un-recurring expenses are the hardest to budget. Of course, Netflix is super easy to budget since it is the same rate, month after month, billed on the same day. However, house maintenance can be trickier to plan for. Other things like furniture and TVs are also tricky even if they do not need any maintenance.

The general rule of thumb for depreciating assets is to divide the total cost by a number of years you think it will last. For example, if you think you will use your couch for about 5 years before replacing it and a new couch will cost you $500 to purchase, then you should put aside $100 a year in your new couch budget.


Icebergs can sink ships, and irregular expenses can sink spending plans. The visible portion is deceptively small, and the danger lies below the surface. – Dylan


The icebergs of budgeting are the unknowns like cars or house maintenance. These large costs can happen at any time and can run into the thousands. I try the think ahead and plan future expenses with the best guess I can make. I know we will need to replace our deck next year and our roof shingles the next and those are all planned into our savings plan.


It’s necessary to reserve income for irregular expense, but it’s not necessary to predict the actual amounts. You can’t nail it. Life is too uncertain. The goal should be to get close, so you can minimize the impact to your spending plan. – Dylan


Having a good spending plan is great but what about a good saving plan? If you are like me and save more than half your income, a budget might not be optimal and you might want to plan things differently to maximize your savings rate. I use reverse budgeting to plan my savings.

Every paycheck, I automatically put aside a large chunk of my income into tax-efficient investment accounts and into my savings account, then spend whatever is left.  I found that automating my investments was the easiest way to stay on course and constant with my savings goals.


Reserving money for irregular expenses means you’re not allocating those same dollars to something else. But the nature of irregular expenditures means that you won’t spend it all every month. Continue to reserve it. – Dylan


Having a healthy emergency fund in a high-yield savings account will allow you to successfully reverse budget without running out of money when something unexpected comes up. I suggest having anywhere from 3 months to 6 months of expenses saved up in the case of emergency.

To resume, stay safe by planning ahead and saving enough to live happily, Xyz.








  1. great budget tricks, it’s really good to track and to be aware of the ins and outs of your money. I use personal capital too, like it so far.

  2. The 4% rule sounds easy but there are some caveats. Thanks for linking Kitces research and elucidating the concept!

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