The Trinity Study

The Trinity Study, 4% Rule and 25x Rule

An important aspect of FIRE is planning for retirement. How much money do you need (investment portfolio) and how do you make sure it’ll last you? The Trinity Study, 4% Rule and 25x Rule will help you to answer these 2 questions.

The Trinity Study was not specifically directed at early retirement or the FIRE movement but the traditional retirement age. There are alterations that can be made to the rules when planning for early retirement and we will discuss these below.

What is the Trinity Study?

The Trinity Study was a research paper completed in 1998 by 3 professors from Trinity University. The paper looked at historical market data from 1926 to 1997 for investment portfolios made up of a combination of stocks and bonds over a 15 – 30 year time period. Withdrawal rates (the owner “paying” themselves) ranged from 3% to 12%.

The goal of the study was to determine safe withdrawal rates (SWR) for retirement and the likelihood of an investment portfolio having money left over at the end of the retirement timeline. Riveting stuff, right? Absolutely.

The Study examined investment portfolios by looking at success rates. A portfolio was deemed a “success” if it completed the specified payout period (e.g. 15-30 years) with a portfolio value greater than $0.

The study determined that a retiree could withdraw 4% for the first year of retirement and then adjust that withdrawal rate each year for inflation and not run out of money in 95% of the historical periods the study looked at, over a 30 year retirement period. This was based on a portfolio combination of 50% stocks and 50% bonds.

This is where the 4% rule comes from. It is a safe withdrawal figure based on historical data given certain circumstances.

Some drawbacks of the study:

  • The Trinity Study was based on 30 years of retirement and needs adjustment for early retirees of FIRE
  • Varying allocations of portfolios will perform differently, you need to consider your portfolios bonds to share ratio
  • The Trinity Study only used US data instead of whole world data
  • If you want to leave an estate for your family then adjustments will need to be made

There are alterations that can be made to the rules derived from the study (4% and 25x Rules) when planning for early retirement and FIRE. We will discuss those a bit later.

Is the Trinity Study still relevant in 2021?

As mentioned previously, the Trinity Study was published in 1998 and investigated data from 1926 to 1997. Some would argue that the data is old and not relevant to the current markets. That was actually my first thought too.

Since the original Trinity Study was published, there has been further analysis completed to update and check the original data. One of these studies was done by Wade Pfau, a Professor of Retirement Income. This updated study looked at data from 1926 to 2017 and actually shows a more optimistic view than the original study.

The table below shows the success rates for varying withdrawal rates (x-axis) against investment stock allocations (y-axis) over different periods of time. Wade shows that with withdrawal rates of 3% for high stock allocations the success rate is 100% and still very high for 4% over most time frames.

Trinity Study

Another analysis by The Poor Swiss looked at historic data from 1871 to 2020 and even longer retirement time frames of 40 and 50 years. Just like Wade, the data confirmed that over a 30 year period the 4% rule still shows high success rates.

In summary, the 4% rule is still relevant and further analysis has shown that the original data still holds true to 2020. The 4% rule is still used by a vast majority of the FIRE community for retirement planning.

How do the 4% and 25x Rules work?

As talked about above, the 4% rule comes from the trinity study as a safe withdrawal rate to live off in retirement. It is the amount that you withdraw (pay yourself) from your investment portfolio every single year to live off in retirement safely, for a given period of time. Remember, you still need to adjust for inflation after the first year.

So we now know how much we can safely withdraw from our portfolio, but how much do we actually need in our portfolio to start with? This is where the Multiply by 25 (25x) Rule comes in.

Get ready, we’re about to do some maths. Sorry…

The 25x Rule is derived from the 4% rule.

  • If you divide 100 by 4 you get 25.
  • If you multiply 4% of a number by 25 you will get the original number. For example. (4% x 70,000) x 25 = 70,000.

The 25x rule calculates the investment portfolio size required to retire by multiplying your annual expenses, or how much you want to “pay” yourself in retirement, by 25.

For example, if you want to pay yourself $70,000 per year to live off in retirement then $70,000 x 25 = $1,750,000. This is the target portfolio number you need to aim for to reach your retirement goals.

What’s the best withdrawal rate and portfolio size for me?

The 4% Rule and the 25x Rule may not be the best choice for everyone. There’s a lot to consider:

  • How much do you need to retire?
    • What type of FIRE applies to you?
    • What are your current expenses?
    • What are your future expenses?
  • Do you want to leave an inheritance for your children?
  • What level of risk are you willing to accept?
  • When are you planning on retiring? What is your FIRE date? How long is that period?

Some of these considerations will mean you’ll need a larger investment portfolio, while others will lead you to a lower withdrawal rate (or both!).

The 4% and 25x Rules can easily be altered to suit different scenarios, such as early retirement.

The analysis performed by The Poor Swiss and Wade Pfau shows that you may need to adjust the 4% rule if you plan on an earlier FIRE style retirement. With a more conservative 3% or even 3.5% withdrawal rate you have a higher probability that your portfolio will last longer in retirement.

Let’s use the same example as above. We want $70,000 a year in retirement but also want to retire early and ensure our portfolio lasts longer than 30 years. For this, we decide on an initial withdrawal rate of 3% for the first year, adjusted with inflation after year 1. Let’s do some maths!

For this example we will alter the 4% and 25x rule.

100 / 3 = 33.33 (Let’s call this 33). The 25x Rule now becomes the 33x Rule.

A 3% withdrawal rate would need a portfolio size of $2,310,000 (33 x $70,000).

This larger portfolio size (33x your annual expenses), coupled with a reduced withdrawal rate is more conservative and should allow for a longer and safer retirement period. As the saying goes, “Hope for the best, prepare for the worst”. The larger portfolio size will most likely take longer to accrue.

The other alternative is to stick with 25x your annual expenses (25x rule) and use a lower withdrawal rate (e.g. 3%). This option is not as conservative or safe as altering the 25x rule. The table above from Wade shows a 100% success rate for 40 years with high allocations of stocks but if your portfolio needs to last longer (beyond 40 years) the success rates will drop slightly.

So when can you actually retire?

Good question. There are a few online resources available to calculate when (what age) you can retire. An example is this calculator from Engaging Data. Plug in your personal information, such as your desired withdrawal rate, income, spending and current investments and the calculator will tell you when you can retire based on those inputs.

If you don’t like what you see you can try and alter some of the information you calculated earlier – but please be careful. We purposely chose to calculate the age last. You want to make sure you have the required nest egg for your chosen lifestyle.    

Final Thoughts

The Trinity Study is an excellent resource for anyone planning for either a typical 65-year-old retirement or the younger, FIRE style retirement. It provides some very simple and easy to follow rules to assist with retirement planning and even though the study was done in 1998, it is still very relevant in 2021.

Some key takeaways:

  • Ensure the asset allocation of your retirement investment portfolio contains at least 50% stocks.
  • Remember the 4% and 25x Rules. These are flexible and can be used for each individual circumstance.
  • If you plan on an early FIRE style retirement you will likely need to consider using a lower withdrawal rate than 4%.

Retiring is exciting and planning for it is an important step on the journey towards FIRE. By understanding a few guiding principles, it can be a very simple process to follow and adaptable to most people’s circumstances and goals.

Where are you on your FIRE journey? Are you already retired and living the high life, just starting your working career or somewhere in the middle? I would love to hear from you so send me an email or put a comment below.

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