The case for variable SWR (Safe Withdrawal Rate)
TLDR: Market returns and your expenses are not linear, why should your SWR be linear?
Most of you would have heard about the 4% SWR (Safe Withdrawal Rate) from the trinity study that retirees can adopt. You can withdraw 4% of your retirement portfolio and you will be good through your retirement.
This might be a fair assumption for those of us retiring at 65, but for FIRE retirees 4% rule would not really work. I have covered the arguments for that in my previous posts here and here.
I have also made the argument in the posts for a SWR of 2.75% to be better suited for someone retiring at 40. But this needs to be a little more nuanced than that. Here is why
Market returns
The stock market never really provides a constant rate of return.There are always constant ups and downs, but on an average 10% returns can be safely assumed for NIFTY based on historical figures. But how much is the variation year on year?
There is a huge amount of variation month to month and year to year on performance of NIFTY. But we tend to average out to make projections easier.
Your expenses
Post retirement, your expenses will also vary. They are not going to linear with the slope being equal to inflation. It is going to vary month to month and year on year. You might need to replace a car one year, you might want to do some home renovation work in another etc. etc. So the expenses also vary every year.
Marry the two
Given the variability of income (derived from the market) and the expenses that you will incur, why not adopt a variable withdrawal rate with an average trending towards the 2.75% percent that I recommend?
So work out a formula based your expenses and market performance that works for you. You could consider reducing your SWR to 2 to 2.5% when the market is in correction territory and increasing further back to higher values when the market improves.
What would also help is to breakdown your expenses into essentials (needs) and non-essentials (wants). This way you can cut down on wants during times of recession and focus on needs to make your money go further.
Conclusion
There is no magic bullet or one size fits all scenario. Every person has different demands on their portfolio and different expectations on the outcomes. So it is a balancing act in enjoying the freedom FIRE provides without running out of money in your old age. Err on the conservative side so that you can enjoy your retirement without guilt.
Happy Investing.
