Let’s take a look at the data presented in the latest Trinity Study update verses the data presented by FireCalc. If you’re not familiar with FireCalc, you can learn about it from my previous post where I calculated my first FI number. I will provide a quick overview of the Trinity Study below.
What is the Trinity Study?
If you have been in the world of retirement planning or the FIRE community for any amount of time, it’s likely that you’ve heard of the research study dubbed the “Trinity Study”. Three professors at Trinity University (hence the nickname) conducted a research study that examined which withdrawal rates would be successful when invested in the market for rolling periods of 15 to 30 years covering a total period from 1925 to 1995. Another variable they added was examining various stock to bond ratios.
Was that a little confusing? Take a look at the table below and it will make more sense. If you need more help, Four Pillar Freedom has a good post describing the same topic, with more emphasis on deciphering the table.
The authors summarized their finding by stating, “If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured.”
This is where the “4% Rule” comes from, which is yet another moniker referencing this research. Looking at the table below, you’ll see that a withdrawal rate of 4%, invested in mostly stocks, has a high probability of surviving 30+ years. The Trinity Study has since been updated to 2008 by the authors, and by other financial planners through 2018. As you can see, the 4% rule still withstands the test of time even with 23 years of added market history.
Trinity Study through 2018
While calculating my FI Number, I used a tool called FireCalc. This calculator uses the same idea as the Trinity Study when doing the math. The main differences are that you get to specify your own numbers AND that it uses market history all the way back to 1871. FireCalc also provides a good number of variables that can be tweaked. (The engineer inside of me likes that.) They do a good job setting the default values of those variables.
The option to adjust variables really got the gears turning in my head, thinking of a number of experiments I could do. At this point, I’ll stick with only a few questions so that I can find, and provide, the answers. Can I match the Trinity Studies variables? How does the 4% rule hold up to 50+ years of market history in addition to the Trinity Study?
Trinity Study vs FireCalc
I’ll start by doing as direct of a comparison as I can by matching the Trinity Study. One of the variables that can be adjusted in FireCalc is the starting year. I will adjust this to match the starting year of the Trinity Study. To reduce clutter, I’ve condensed the FireCalc results into a table similar to the one from the Trinity Study. FireCalc defaults to 75% Stocks/ 25% Bonds, so that is the only ratio I will compare.
Trinity Study verses FireCalc…Who is the winner?
And the winner is…. Neither. It’s a tie! That might seem anticlimactic, but I view it as good news. The data matches, which adds credibility and reliability. The results are very similar to each other. FireCalc seems to lag the Trinity Study by a few percentage points, but if follows the same curve overall. There are a few factors I can think of that caused the difference in percentages. 1. FireCalc uses CPI (Consumer Price Index) to adjust for inflation whereas the Trinity Study uses Ibbotson’s Stocks, Bonds, Bills, and Inflation Data. 2.FireCalc adds a 0.18% fund fee. 3. FireCalc includes the year 2018, which was a down year for the markets, whereas the updated Trinity numbers only go through 2017.These are variables that FireCalc does not allow me to adjust enough to match the Trinity Study.
4% Rule Test
Does the 4% rule withstand the test of time? How does looking at market data all the way back to 1871 effect the results? Let’s take a look.
I was a little surprised by the results here. The percentages actually improved by a couple percentage points. This means that the markets between 1871 and 1926 performed a little better than in all the time after 1926. If I knew more about that time frame, perhaps I would not be so surprised. It also reminded me that the great depression started in 1929.
In doing the analysis, I found that a 3% rate never fails over any given time frame. Let’s look at a quick example. If I have a nest egg of $1 million, then 3% would be $30,000. That means I could live off of $30,000 inflation adjusted dollars into perpetuity. To me, that seems like an excellent target to aim for. If a 3% withdrawal rate can survive both the Great Depression and the Great Recession, that’s good enough for me. My FI number goal is $1 million with a target 2.85% withdrawal rate. I should be good to go.