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How to sustain your capital in retirement?

Baptiste Wicht | Updated: |

(Disclosure: Some of the links below may be affiliate links)

I have made many retirement simulations on this blog. Until now, all these simulations were successful if the capital was not entirely depleted. However, many people would like to sustain their capital in retirement.

So, is it possible to sustain our capital in retirement? And how much more careful do we need to be?

We will find out by running simulations where sustaining the capital becomes the success criteria!

Sustaining Capital

First, what does it mean to sustain capital? It means that during the period, our capital does not diminish.

We could have a strict rule that says the capital cannot fall below 100% of the initial value. But we can also be more flexible by having a rule allowing us to fall to a certain percentage. I would say that sustaining 90% of the capital is already great, especially if it lets us retire faster.

The Trinity Study defines success as having more than zero at the end of the retirement period. This means we can use significantly more money than if we try to sustain our capital.

Therefore, we can expect that sustaining capital results in a lower success rate. As such, it will likely need a lower withdrawal rate to compensate.

So, we will use simulations to see the difference it makes.

Simulations

Over time, I have made many simulations on this blog. These are historical simulations based on historical data from the stock market. For instance, I have updated the results of the Trinity Study to include recent years and longer retirement periods.

I have developed a tool that can quickly calculate many withdrawal simulations. This tool is available freely on GitHub with the data.

I will use historical data for the US stock market in this article, with the S&P 500 and the 10Y treasury bonds, from 1871 to 2022. This is the longest historical data available and is generally the reference for most Trinity Study simulations.

30 Year Retirements

We start with a classical 30-year retirement period. First, we try with the strictest rule where the portfolio can never go down its initial value.

Always sustain your capital in retirement for 30 years
Always sustain your capital in retirement for 30 years

In this case, the results are poor since the rule is too strict. It is challenging to sustain 100% of the capital during the simulation. It puts a lot of stress on the early years that need positive returns.

One would need a tiny withdrawal rate to sustain this rule with a high success rate. Therefore, we should adapt our rule. It is more interesting to have a success rate depending on sustaining the portfolio at the end of the period.

So, we will see how it works. This time, the portfolio must be 100% of the initial value at the end of the retirement period.

Sustain your capital in retirement for 30 years
Sustain your capital in retirement for 30 years

This time, the results are much better. Even at a 4% withdrawal rate, we get better than 85% success rates. We can remove the 100% and 80% bonds portfolios failing this test to see better.

Sustain your capital in retirement for 30 years - Better selection
Sustain your capital in retirement for 30 years – Better selection

The success rates are lower than with the standard retirement criteria. However, we can still observe relatively good results with a portfolio with at least 60% in stocks. However, the success rate decreases quickly once we go higher than a 4% withdrawal rate.

We can also see how a 100% stocks portfolio compares with different targets (0% is the standard Trinity Study criteria):

100% Stocks and different capital sustaining objective
100% Stocks and different capital sustaining objective

As should be expected, a higher capital-sustaining objective has a lower success rate. This is logical since we need to end up with more money.

Interestingly, the gap between the different objectives widens as the withdrawal rate increases. Indeed, with a 3.5% withdrawal rate, the difference between 0% and 100% is a 2% lower success rate. However, the gap is almost 8%, with a 4.0% withdrawal rate.

If you want to sustain your capital in retirement, you may want to plan for 80% capital sustaining instead of 100%. That way, you can gain a few percent of success rate.

Thirty years of retirement is relatively short if we consider early retirement. So, we will see what would happen with a longer retirement.

40 Year Retirements

We run the same simulation for 40-year periods.

Sustain your capital in retirement for 40 years
Sustain your capital in retirement for 40 years

When we increase the retirement period, bonds suffer more than stocks. The impact on portfolios with a high allocation to bonds is very significant, but the impact on portfolios with a high allocation to stocks is not too bad.

Again, we should remove some portfolios to see better what is happening.

Sustain your capital in retirement for 40 years - Better selection
Sustain your capital in retirement for 40 years – Better selection

Only three portfolios are generating decent results. And even among these portfolios, only two have more than an 80% chance of success with a 4% withdrawal rate. This means somebody wanting to sustain his capital in retirement would need a withdrawal rate below 4%, ideally around 3.5%.

Again, we can see how it compares with different objectives for a 100% stock portfolio.

100% Stocks and different capital sustaining objective over 40 years
100% Stocks and different capital sustaining objectives over 40 years

This result is very interesting. We can observe that the gaps between 0% and 100% have become narrower. In this case, the average gap is about 4%, with withdrawal rates higher than 3.50%. It means that over long retirement periods, sustaining your capital and not running out of money become closer.

Finally, we can also increase the retirement period to 50 years, which is good for most people.

50 Year Retirements

Now, we run the same simulation for 50-year periods. I have directly removed the portfolio that would fail in this scenario.

Sustain your capital in retirement for 50 years
Sustain your capital in retirement for 50 years

As expected, the results are slightly worse than for 40 years. However, the three portfolios still do relatively well. If you have a 90% success rate criteria, you will need to use the following withdrawal rates:

  • 3.80% for 100% of stocks
  • 3.70% for 80% of stocks
  • 3.50% for 60% of stocks

These withdrawal rates are still reasonable. This shows that sustaining your capital in retirement is possible and reasonable.

If we think about it a little more, it makes sense. Indeed, over a very long period, you need high returns to withdraw money consistently. And these returns will be significantly higher than your withdrawals in good times. And in bad times, you will have accumulated enough not to fall too low.

So, over a long period, sustaining your capital is not much more demanding than simply sustaining your withdrawals.

Finally, we can conclude with the final comparison of different objectives.

100% Stocks and different capital sustaining objective over 50 years
100% Stocks and different capital sustaining objectives over 50 years

This picture is extremely interesting. It shows that over 50 years of retirement, we have almost the same chances of sustaining our capital as simply sustaining our withdrawals. The difference between 0% and 100% objectives is tiny unless you go for more than a 4.5% withdrawal rate. But such withdrawal rates are not reasonable with 50 years of retirement.

This means we have a high chance of significantly increasing our capital over 50 years. This is excellent news for people wanting to sustain their capital.

Sustain the real value of your capital

Until now, we have considered the initial value as the target. Inflation was considered for the withdrawals but not for the target value. So, if you start with a million, you will end up with a million in the case of success.

However, a million in 50 years is different from a million today. So, we can also take inflation into account for the target value. So, we would adjust our target every month with the monthly inflation.

We can see what would happen if we change this criterion:

Sustain the real value of your capital in retirement for 50 years
Sustain the real value of your capital in retirement for 50 years

As expected, the results are significantly worse. It makes sense since the target can increase considerably over time.

Just for comparison, we can put them into the same graph.

Sustain the real value or nominal value in retirement for 50 years
Sustain the real value or nominal value in retirement for 50 years

We can see the scale of the differences. And as the withdrawal rate increases, the differences between sustaining the nominal and real value also increase.

If you want to sustain the real value of your portfolio, you will have to use a withdrawal rate lower than 3.50%. Therefore, this criteria requires to be very conservative.

For fun: Can we increase our capital?

Since I had the tool ready, I figured it would be interesting to see whether we could double our money. Instead of aiming for 100% of the initial capital, we strive for 200%. It is simply a different objective.

Chances to double your capital in retirement in 50 years
Chances to double your capital in retirement in 50 years

We can observe two things in these results:

  1. Bonds are unlikely to double your money.
  2. Stocks are very likely to double your money.

I was surprised by these results. But this shows that over 50 years, in most cases, you have an excellent chance to double your money. It is not much more difficult to double your capital than to sustain it.

Here is what happens when trying to quintuple (5x) your capital.

Chances to 5x your capital in retirement in 50 years
Chances to 5x your capital in retirement in 50 years

This time, the success rates have taken a sizeable hit. Nevertheless, some of the results are not bad. At a 3.5% withdrawal rate, you still have over a 90% chance of multiplying your capital by 5.

Finally, here is what it takes to multiply your money by 10.

Chances to 10x your capital in retirement in 50 years
Chances to 10x your capital in retirement in 50 years

Chances are now significantly lower. However, you still have an excellent chance to multiply your capital by 10 with a 100% stock portfolio. These impressive results show that these simulations’ average terminal values are incredibly high.

Why sustain capital?

Since sustaining capital rather than simply planning to have enough to live is harder, why would one want to do that?

There are several reasons for that. The first reason is that people often want to leave a legacy for their heirs. The goal is to create generational wealth. It is not a bad idea if you do not have many heirs, but if you have many, your wealth will be divided quickly and often lost after only a few generations. But if you want generational wealth, planning to sustain your capital is great.

Another reason is that planning to sustain your capital is safer than planning to sustain your withdrawals. With that strategy, you get significantly more margin of safety.

I do not think it is worth planning to sustain my capital. I do not believe my heirs will profit from this money, and I believe it is safe enough to play to sustain my withdrawals.

Conclusion

If you want to sustain your capital in retirement, there are a few essential points to know:

  1. Sustaining your capital in retirement is more challenging than not falling to zero. Nevertheless, achieving this with a slightly lower withdrawal rate is possible.
  2. If you want a reasonable success rate, you will need a consequent allocation to stocks.
  3. With a very low withdrawal rate, you will likely sustain your capital in retirement.
  4. With a low withdrawal rate, the chances that you will increase your capital are high.

Overall, if you plan for a long retirement (50 years, for instance) with a reasonable withdrawal rate, your chances of sustaining your capital are almost as high as those of only sustaining your withdrawals. This is good news for people wanting to sustain their capital.

What do you think about these results? Do you want to sustain your capital in retirement?

Recommended reading

Photo of Baptiste Wicht
Baptiste Wicht started The Poor Swiss in 2017. He realized that he was falling into the trap of lifestyle inflation. He decided to cut his expenses and increase his income. Since 2019, he has been saving more than 50% of his income every year. He made it a goal to reach Financial Independence and help Swiss people with their finances.
Discover Swiss Financial Secrets That Maximize Your Money!

Learn easy ways to optimize your finances and save thousands in Switzerland with our exclusive e-book. Learn about the most cost-effective financial services tailored for savvy residents and expats!

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14 thoughts on “How to sustain your capital in retirement?”

    1. Hi John,

      I tought about that, but I don’t think people want to pay a subscription and I don’t want to hide some of my content behind a paywall like too many content creators.
      I may add a system to do a donation, because many readers asked me about that, but I did not find a good system for CHF.

  1. Hi! What is the compound annual growth rate of the S&P 500 used for this model? Online I’m seeing a CAGR for the SP 500 at 9.74% and for the 10y bond at 3.31%, with inflation of around 3% in the US.

    Do you not think that using the historically extremely strong US stock market in your assumptions cause a distortion and way too optimistic model? A lot of academics consider the US outperformance to be mostly luck and survivorship bias and thus unlikely to repeat.

    1. I am not using any compound value, but actual monthly from the S&P500 from the last 150 years.

      It may be not be the same in the future, that’s definitely true. But we have no way of knowing that. And we have no better historical data.

  2. Great post. Have you considered to include inflation into the mix?

    You could buy a lot more with 1 million dollars 2 years ago than today. I imagine the compound impact of 20 years of inflation.

    1. Hi ILS,

      Inflation is taken into account. Each month, the withdrawal amout is adjusted for inflation.
      But I could also take into account inflation for the final value, if that is what you mean. That would be interesting, but that would also make it significantly harder to sustain.

      1. That is exactly what I meant. Trying to sustain the final value after inflation.

        I assume that the main point of trying to sustain the capital during the retirment is to leave one heirs the gift of high financial independence ratio. For this, sustaining the capital value after inflation is the only meaningful way to look at it, in my personal opinion.

      2. Yeah, that’s a good point. I will try to update the article later with the computations, but since that means updating the code as well, it may take a while before I get the time.

      3. That’s a really great point. I would be also very interested to see trying to sustain the final value after inflation.

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