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Negative Real Bond Yields Impact on the 4% Safe Withdrawal Rate

A couple of years ago, I played with this Software-as-a-service called Timeline.

It allows an adviser to put their client’s case throught the system and give an idea whether the client’s resources is enough for them to have a conservative retirement.

They allow the adviser to model based on both Monte Carlo and Historical Withdrawal Rates.

You can read Making a Portfolio of $500,000 last 60 years on a 5% Initial Withdrawal Rate and The Permanent Portfolio Might Do Worse in Retirement than the Traditional Equity Bond Portfolio to see Timeline in action.

The CEO of Timeline, Abraham Okusanya, from time to time writes well written research articles on retirement planning.

This week he published a post called No , QE didn’t break the 4% rule.

One of the fears that we have is that with very low bond yields, many smart folks commented that the 4% rate is no longer safe.

Perhaps the reason Abraham took an interest in this narrative now is that the Glit is currently having a negative real yield.

The withdrawal rate study is figuring out the highest you can spend, in the worst-case scenario.

Abraham’s point is that for the UK, 4% is not the worst-case, to begin with. He replicated a 30-year retirement through 1915 to now with a 50% equity 50% bond portfolio, factoring 1% in advisory + total expense ratio fees and this is what he has gotten:

Initial withdrawal rates for various 30-year periods from 1915 to today

Abraham did not mention this, but I think this is a 1 million pound portfolio.

Every bar on this chart shows the highest withdrawal rate that a retiree can spend on.

For example, in 1915, the highest a retiree can spend in the initial year so that he or she can have inflation-adjusted income that last for 30 years is close to 26,000 pounds a year. That is like 2.6%.

Another example is that if the retiree decide to retire in 1922, he or she could start with a 124,000 pounds a year spending instead. That is like 12.4%.

With this table you can see in the past 106 years which are the tough periods in the UK.

Abraham’s point is that in the worst year, which is the 30-year starting in 1948, the highest safe rate that you can spend is closer to 25,000 a year or 2.5%.

The past 106 years in the UK contains periods of Negative Interest Rates

The important point is that, during this 106 years, there were already many periods of negative interest rates.

This is not new.

Abraham layered the US and UK government bond yields out.

This chart is a gem because… if you tried looking for these yield data and you could not find it, it means this is just that valuable.

There are a lot of periods of negative yields and you realize that they occured during the World War 1 and Spanish flu period, the World War 2 period, the 1970s oil embargo high-inflation period, the European crisis after the GFC.

The 2.5% safe rate factored in these periods of negative bond yields, but also the periods where bond yields hit 45% a year in 1922.

Abraham also published some of the worst calendar year real returns for UK bonds in history:

We can be worried about negative bond returns, but UK have like 100 years of history and they have had some really challenging years of negative bond yields.

This is not something new.


My suspect is that many still don’t understand how withdrawal rate study really work and the significance of its study.

Morgan Housel mentioned that we learn the wrong things from history. The lesson may not be “don’t buy internet stocks”, or “don’t buy Tulip bulbs”.

The lesson here to me is that in the body of history that we have, there were many adversities such as wars, high inflation, negative bond yields, low returns. These are not new.

The link to the safe withdrawal rate is that, it is a historical study that factors in all these evidence of history.

With that, hopefully, you understand what does that 2.5% withdrawal rate signifies.

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