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The “Trinity Study” was a retirement study published in 1998 by three professors from Trinity University in Texas. This study analyzed how various retirement portfolios held up over every 30-year period from 1926 to 1995 based on different withdrawal rates and portfolio allocations.
The main finding: A retirement portfolio of 50% large-cap stocks and 50% long-term high-grade corporate bonds survived 95% of all 30-year periods from 1926 to 1995 assuming 4% (inflation-adjusted) of the total portfolio was withdrawn at the start of each year.
This is where the famous “4% Rule” comes from. Many people use this metric to determine how large their portfolio needs to be before retiring.
For example:
If you plan on spending $40k each year in retirement, your portfolio needs to be worth $1 million so you can withdraw 4% of it ($40k) each year.
If you only plan on spending $30k each year in retirement, your portfolio only needs to be worth $750k so you can withdraw 4% of it ($30k) each year.
Retirement researcher Wade Pfau recently updated this study to analyze how portfolios held up based on various withdrawal rates, stock/bond allocations, and retirement lengths from 1926 to 2017.
Nerd Note: Instead of using long-term high-grade corporate bonds for the bond portion of the portfolio, Pfau used the slightly less volatile intermediate-term government bonds.
His findings are neatly summarized in the tables below, which show the percentage of time periods that a portfolio survived based on retirement length, portfolio allocation, and withdrawal rate:
Here is how to interpret these tables:
How Well Does the 4% Rule Hold Up?
Assuming a 4% yearly withdrawal rate, here is the percentage of periods that a portfolio survived any 25-year retirement from 1926 to 2017 based on different portfolio allocations:
And survival rates for 30-year retirements:
And survival rates for 35-year retirements:
Lastly, survival rates for 40-year retirements:
Some observations from these charts:
You needed at least a 75% stock allocation to have a 90% chance of portfolio survival for any retirement length of 25 years or more.
Portfolios with 100% stock allocations had a lower survival rate than portfolios with 75% or 50% stock allocations for 30 – 35-year retirement periods. This implies that there were a few periods where 100% stock portfolios were so volatile that they didn’t survive market downturns.
A 50/50 stock/bond portfolio survived every 30-year period from 1926 to 2017.
Some observations from the tables:
A 50/50 stock/bond portfolio with a 3% withdrawal rate survived every 40-year period from 1926 to 2017.
Although 4% is the holy withdrawal number in the retirement space, 5% withdrawals held up surprisingly well. A 75% stock portfolio survived 78% of all 30-year periods assuming a 5% annual withdrawal rate. Another way to think about this: If you only saved 20 times your annual expenses (i.e. 5% withdrawal rate) before retiring, your portfolio would have survived a 30-year retirement about 8 times out of 10 assuming a 75% stock allocation.
Caveat
Keep in mind that this study is based solely on historical data. Market returns could vary substantially in the future, which means the results of this analysis only show how successful various portfolios will be if the future resembles the past.
If market returns are lower in the future than they have been in the past, it’s possible that the 4% Rule will not hold up as well as it has historically.
Related:
Here’s How Income During Retirement Blows the 4% Rule Out of the Water
Mixing Active and Passive Income for Maximum Happiness
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
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Wow, awesome to get an update on the Trinity study! Thanks!
I’ve gone through Jim Collins’s book The Simple Path to Wealth and he mentioned the Trinity study as well. He proposed a 100% stock portfolio during the accumulation phase, but DID mention that holding a 90/10 stock/bond did seem to outperform the 100/0 portfolio somewhat. It seems that with more recent data available, the split to a more bond-heavy porfolio (like 75/25) seems to be the more optimal route to take, something to keep in mind going forward!
Cheers,
Hamster
Hamster, you are right that it “seems” that way… But Bonds have been paying terribly (compared to long term averages) for over a decade now. IIRC, bonds paid 5% on average in the original Trinity Study. No wonder the 4% rule worked, if you were able to get a steady 5% return from the “safe” part of your investments.
Oh wow I hadn’t heard the study had been updated! Thank you for sharing and for doing your usual awesome and thorough analysis. I thought reading the findings would make me want to edit my plan to be more conservative (currently planning to retire and pull 4% with a 100% stock portfolio). This was a pleasant surprise! Though the past can’t predict the future I feel more comfortable with my plan now. Thank you!
Glad you found this useful! As you said, the results are pretty encouraging for 4% withdrawal rates but there’s no guarantee that the future will resemble the past.
My eye went immediately to the 92% value / cell in the 75% stock allocation table in the 4% column. That seems like a sweet spot. Of course, your time horizon etc. will come into play.
Ideally, everyone would never have to touch their actual holdings and just live off the income!
Thanks for the post – good stuff as usual. – Mike
The 92% survival rates for 40-year periods for 75% stock allocations and 4% withdrawal rates is definitely an encouraging number, especially with retirements potentially lasting much longer than historically. Also earning some active income in retirement would make these numbers even more assuring. Thanks for the feedback as always, Mike!
One minor correction: The Trinity Study is not the source of the 4% rule. It’s my understanding that the 4% rule was first articulated by William Bengen.
Thanks for the heads up J.D., I believe you are correct. Pfau did mention that the 4% rule first arose from Bengen’s work. Good call!