The takeaway: The landmark Trinity Study shows the odds your retirement nest-egg will last as long as you do. Developed by finance faculty at Trinity University, the results of this landmark work apply to nest-eggs with lots of stocks–or lots of bonds. Take note ye readers fearful of stocks! The Trinity Study builds on the 4% Rule, which is the nickname of the landmark study that produced it. With death and taxes the only certainty, educated odds may be life’s next best thing.
Before the Trinity Study, there were sounds!
Hey, Halloween Boomer! This Halloween, let me warn you about “the sounds.” You might have heard them. They began last month right after I published the post on the 4% Rule. The 4% Rule is the nickname for the landmark study that developed it.1 It tells you:
- how big your nest-egg needs to be to cover your retirement income needs and
- the percentage you can tap from your retirement nest-egg each year without it running dry — hint: it’s not necessarily 4%.
Seriously Boomer, what’s not to love? 🙂
Well, for some–and for starters–the requirements of the 4% Rule.
To reap the benefits of knowing how big your nest-egg needs to be and how much you can withdraw, you must meet two 4% Rule requirements:
- you must have between 50% and 75% of your nest-egg invested in stocks from the S&P 500; (long-time readers know I’m partial to unmanaged stock index funds, and here’s why) and
- the remaining portion of your portfolio must be in Treasury bonds.
OMG! There they are again.
Boomer, those sounds are the screams and gnashing of Boomer teeth howling through the blogosphere.
It seems that plenty of Boomers are plenty uncomfortable with a nest-egg holding such a large percentage of stocks.
- I predicted this.
- I promised relief.
- I ate lots of chocolate to drown out the sounds.
Boomer, I bring tidings of comfort and joy–and a few extra pounds
Can I get a witness, y’all?2
Enter the landmark Trinity Study.
For you who can’t stomach having such a big percentage of stocks in your nest-egg, along comes the Trinity Study. Finance faculty at Trinity University generally replicated the 4% Rule Study–but added an interesting twist.3 They added probabilities for how long your nest-egg would last
- under different withdrawal percentages and
- different asset allocations.
Recall that asset allocation is the relative percentages of stocks and bonds in your nest-egg.
Source: Cooley, P., Hubbard, C., and Walz, D. “Sustainable Withdrawal Rates from Your Portfolio. Journal of the American Association of Individual Investors, Table 2, pg. 44. 1998. See additional reading at end for more!
How do I read the Trinity Study table?
Looking at the table, in short-order you can see the odds of your money lasting. On the left side of the table, the rows headings are the different asset allocations and payout periods you might choose. The column headings are the withdrawal percentages you might take out.
The intersection of the two, i.e., the numbers in the middle, represent the probability of your portfolio seeing you through until you exit stage left.
What comfort (and joy) does the Trinity Study bring to those uncomfortable with stocks?
For those uncomfortable with stocks, the table makes this point.
With a low enough withdrawal percentage, like 3%–or even lower with today’s low interest rates–it almost doesn’t matter if you don’t have any stocks in your portfolio.”
Your nest-egg stands a good chance of lasting 25 years. (See the last four rows of the table.)
Is it me, or is the gnashing of Boomer teeth is getting quieter?
The Trinity Study: do what works.
Boomer, in the asset allocation series (side bar right), we’ve discussed:
why at least some established stocks from the S&P 500 are important to the well-being of your nest-egg.
In the long-term, like 10 years or more, the higher the percentage of (S&P 500) stocks in your nest-egg;
- the longer it tends to last;
- the faster it tends to grow; and
- the more money you can withdraw from it.
But stocks may not work for your emotional make-up. It’s important you do what works. Hence, this discussion of the landmark Trinity Study.
Forbes recently published an update to the Trinity Study. Forbes is no peer-reviewed academic journal. But the author is generally respected in finance circles. You just might want to give it a gander and note the even more conservative withdrawal rates.
Boomer, as in life, no method of managing your nest-egg is perfect. In a forthcoming post we’ll discuss another method of managing your nest-egg. We’ll build on the gold standard of the 4% Rule and throw in the Trinity Study for good measure..
And why do I keep harping on how to manage your nest-egg?
- So you won’t outlive your money.
- So you can ride the waves of financial markets with a certain level of equanimity;
- So when you lay your head on the pillow each night, and drift off to sleep, you can softly say to yourself: I got this.
Because you do.
1Bengen, William P. “Determining withdrawal rates using historical data.”Journal of financial Planning, vol. 7(1), pgs. 171-180, 1994.
2International readers: apologies in advance if YouTube didn’t play the video in your country. (I don’t know why they do this!) It was the song, “Can I Get a Witness,” by Marvin Gaye. 🙁
3Cooley, P., Hubbard, C., and Walz, D. “Sustainable Withdrawal Rates from Your Portfolio. Journal of the American Association of Individual Investors, Table 2, pg. 44. 1998.
Cooley, Philip L., Hubbard, Carl M., and Walz, Daniel T. “Sustainable withdrawal rates from your retirement portfolio” [scroll down page] Journal of Financial Counseling and Planning, vol. 10(1), pgs 39-51, 1999.Cooley, Philip L., Hubbard, Carl M., and Walz, Daniel T. “Portfolio success rates: where to draw the line.” Journal of Financial Planning, vol. 24 (4), pgs. 48-60, 2010.