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You probably have heard of the 4% rule if you are interested in Financial Independence. But do you know where it comes from? If you have read a lot about it, you probably heard about the Trinity Study. It is **where it all started**.

But do you know what the Trinity Study is? Probably not. A lot of things said about the Trinity Study are not correct. I am feeling like a lot of people talking about this study have not even read the original paper.

There is nothing mystical about this study. It is merely a research paper by three professors of The Trinity University. Hence the name.

And do you know that it has nothing to do with early retirement? So, why is it the cornerstone of most Early Retirement articles?

Today, I want to go into details about this paper and what it exactly is! We are going to see what is inside the Trinity Study. And also what this data is showing us. And finally, we are going to see what people get wrong when they talk about the study.

**Contents**show

## The Trinity Study

As I said, the Trinity Study is a research paper from 1998. Three professors of the Trinity University wrote it, Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz. The real name of the article is “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable”.

It was only nicknamed The Trinity Study based on the university it came from. And also probably because the name of the paper is too long!

This research studies the success rates of different investment portfolios for various periods with different withdrawal rates.

They have researched five different portfolios:

- 100% Stocks
- 75% Stocks and 25% Bonds
- 50% Stocks and 50% Bonds
- 25% Stocks and 75% Bonds
- 100% Bonds

They have researched four different periods:

- 15 years
- 20 years
- 25 years
- 30 years

They have tested withdrawal rates from 3% to 12%. The withdrawal rate is how much of your portfolio you withdraw every year.

It is essential to base the withdrawals on the initial value of your portfolio. If your portfolio grows 10% in the first year, you still withdraw the same amount as the first year. You do not increase your withdrawal amount with your portfolio. The only thing you adapt is that you index your expenses on inflation. Inflation is the only increase accounted for in the study!

This is very important to mention because it would completely change the results of the study!

## The Results – Success Rates

There are several interesting results in the research paper. They first researched the success rates over 50 years and over 70 years. We have to remember that it is an old paper, from 1998. Indeed, the period that was studied was 1926 to 1995. It has not been updated in more than 20 years now.

The most exciting results for me is that inflation-adjusted success rates over the entire period. They computed the success rate for each possible inside period in the 70 years. Success is defined as still having money after the duration. For instance, if you still have 10% of your portfolio at the end, it is considered a success.

### Portfolio of 100% Stocks

For reference, here are the results for 100% stocks:

100% Stocks | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% | 11% | 12% |
---|---|---|---|---|---|---|---|---|---|---|

15 years | 100 | 100 | 100 | 91 | 79 | 70 | 63 | 55 | 43 | 34 |

20 years | 100 | 100 | 88 | 75 | 63 | 53 | 43 | 33 | 29 | 24 |

25 years | 100 | 100 | 87 | 70 | 59 | 46 | 35 | 30 | 26 | 20 |

30 years | 100 | 95 | 85 | 68 | 59 | 41 | 34 | 34 | 27 | 15 |

Or if you prefer something more visual:

As we can expect, the higher the withdrawal rate, the lower the success rate. The 4% rule comes from the fact that even after 30 years withdrawing 4% of your initial portfolio, the success rate is still 95%.

We can also see that after 6%, the success rates are going downhill quite quickly. At 8%, the probability of still having money after 30 years is less than 50%. I think nobody will gamble its retirement on such a high withdrawal rate.

On the other hand, in a short-term case of 15 years, 8% still has a 70% chance of success. It is honestly more than I thought.

### Portfolio of 100% Bonds

Let’s also see what happens when we only have bonds:

100% Bonds | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
---|---|---|---|---|---|---|---|---|---|---|

15 years | 100 | 100 | 100 | 71 | 39 | 21 | 18 | 16 | 14 | 9 |

20 years | 100 | 90 | 47 | 20 | 14 | 12 | 10 | 2 | 0 | 0 |

25 years | 100 | 46 | 17 | 15 | 11 | 2 | 0 | 0 | 0 | 0 |

30 years | 80 | 20 | 17 | 12 | 0 | 0 | 0 | 0 | 0 | 0 |

And once again in a nice graph:

As we can see, it is much worse than a 100% stocks portfolio. Even if with a 4% withdrawal rate, your chance of success is less than 25%. It is because the returns on bonds are meager. So you are going to withdraw more money than you are getting every year.

Moreover, while a lot of people think that bonds are much safer than stocks, it is not always the case. Bonds can be quite volatile in some situations. The reason is that bonds are more complicated than stocks. And a lot of people overlook this complexity.

I am not going to show all the results. But they are all available in the paper. Feel free to read the article to get the details.

### Comparing portfolios

I thought it would also be interesting to compare all the different portfolios directly. This is not something that the study directly does, but the data is available.

What we are interested in is the 30 years success rate. It is the minimum we should be planning for. I wish the study did the test with at least 40 years.

Here are the results for each portfolio:

Portfolio | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
---|---|---|---|---|---|---|---|---|---|---|

100% Stocks | 100 | 95 | 85 | 68 | 59 | 41 | 34 | 34 | 27 | 15 |

75% Stocks | 100 | 98 | 83 | 68 | 49 | 34 | 22 | 7 | 2 | 0 |

50% Stocks | 100 | 95 | 76 | 51 | 17 | 5 | 0 | 0 | 0 | 0 |

25% Stocks | 100 | 71 | 27 | 20 | 5 | 0 | 0 | 0 | 0 | 0 |

100% Bonds | 80 | 20 | 17 | 12 | 0 | 0 | 0 | 0 | 0 | 0 |

And here are the results in a graph:

I think it is a fascinating graph! We can see several important points.

First of all, you need stocks! You need a significant allocation to stocks if you want to sustain your lifestyle. Unless you plan a Withdrawal Rate of less than 3%, you will need at least 50% stocks in your portfolio.

We can see that the two best portfolios are the 100% stock portfolio and the 75% stock portfolio. With a low withdrawal rate, there is an advantage to having 25% bonds. But if you want a higher withdrawal rate (starting from 6%), you will need to opt for the 100% stocks.

If your goal is a success rate of at least 75%, you can afford a 5% withdrawal rate. If you are more conservative and aim for a 90% success rate, you will go with a 4% withdrawal rate. Hence the 4% rule!

## The Results – Terminal Values

There is another exciting thing in the research. Indeed, they checked how much was the value of the portfolio after each period. These are called terminal values. I think this gives a really good idea of **how safe a withdrawal rate is**.

The terminal value is how much money remains on the portfolio after the entire period. All portfolios start with a with 1000$. And they tried different withdrawal rates.

Unfortunately, the study only shares the terminal values of three portfolios:

- 75% of Stocks
- 50% of Stocks
- 25% of Stocks

I would have liked the results with the 100% Stocks Portfolio. But it is already interesting.

### Portfolio of 75% Stocks

Let’s see what the terminal values for a portfolio of 75% Stocks. I think this is the most interesting of the portfolio.

75% Stocks | 4 | 5 | 6 | 7 |
---|---|---|---|---|

Average | 9031 | 7367 | 5779 | 4262 |

Minimum | 1497 | 0 | 0 | 0 |

Median | 8515 | 6868 | 5586 | 3745 |

Maximum | 16893 | 14980 | 13067 | 11245 |

And the same data in a more graphic form:

As expected, as your withdrawal rate increases, your terminal values are decreasing. This makes a lot of sense and should be obvious.

What is interesting is that with this portfolio and the 4% withdrawal rate, the minimum terminal value is still higher than the initial value. That means that in the worst case, you will have made 40% over 30 years while not investing anything! I think that is already pretty nice.

And the maximum terminal values are really impressive. In the best case, with a 4% withdrawal, you will end with almost 19’000. This is incredible considering that you are living out of your portfolio.

And even with a high withdrawal rate of 7%, the average is still about 4000$. This is four times the initial value. A great result already. On the hand, the minimum can be zero! In the case of zero, you end up in a bad situation where you cannot sustain your lifestyle anymore.

On average, even after 30 years, you still end up with a lot of money. It means you can probably sustain this forever in the right conditions.

## The Conclusions

The paper finishes with several interesting conclusions, as every good article ought to finish!

First, and it should be evident, if your portfolio needs to sustain your lifestyle **for a long time, you need a lower withdrawal rate**. This will increase your success rate. You are not going to be able to sustain a 10% withdrawal rate for more than 20 years.

Second, **bonds can help increase the certainty of success for low to average withdrawal rates**. But they are significantly reducing the returns of your portfolio. This means they are not helping for higher withdrawal rates. But of course, they will likely decrease the volatility of your portfolio. This means they could help against sequences of returns risk.

Then, **inflation makes it much more challenging to sustain your spending**. If you know your lifestyle is not subject to inflation, you can use a much higher withdrawal rate. The problem with inflation is that your real withdrawal rate will increase every year since your expenses will be inflated.

Finally, if you have **a significant allocation to stocks in your portfolio, you can afford higher withdrawal rates**. Indeed, you are even likely to end up with much more than what you started with. This is interesting if you plan on giving away a lot of money to your heirs (or to charity) at your passing.

Once you know you target withdrawal rate, you can compute your Financial Independence (FI) Ratio.

## What people get wrong

Several things I have read about the Trinity Study are quite wrong. I want to dispell some of them.

First of all, The Trinity Study **has nothing to do with early retirement**! It was made with standard retirement in mind. It is why they have not studied any success rates after more than 30 years. So, if you plan to retire in your 30s, you need to plan for much more than 30 years!

A lot of people believe that the 4% rule from the study means that they can sustain their net worth forever. But this is not what the study is about.

The Trinity Study did not study the success rate of sustaining your lifestyle forever. They only tested that there is something left after some duration of time. If you have 1000 USD out of one million after 30 years, it still counts as a success from the study point of view. Moreover, it is just a success rate.

Also, a lot of people seem to ignore the fact that the **Trinity study is already more than 20 years old**! This does not mean it is wrong, of course. But this needs to be taken into account.

One thing we also need to consider is that the Trinity is only based on the S&P 500 index. It does not apply to any stock market index. It will work very well in a broad U.S. index. But this also means we cannot extrapolate the results for any country.

Nobody is talking about the terminal values of the portfolios. People say they can sustain it for 30 years. But after 30 years, you are likely to have much more money than when you started. This is a significant result. Because this goes to show that you could sustain it longer, and this also goes to show that you could have used a higher withdrawal rate than you thought.

Finally, a lot of people cite the 4% rule regardless of the portfolio they are planning to use. Indeed, the study only shows success rates higher than 90% for a portfolio with at least 50% stocks. For instance, a portfolio with 100% bonds has a 20% chance of success only!

If you have another portfolio, you will have to run the simulations yourself. If you are interested in that, I plan to do the simulation for a few portfolios soon. Let me know if that is something of value for you!

## Conclusion

The Trinity Study is **an excellent**** research work with a lot of great results**. But a lot of people take it out of context. And a lot of people consider this study as the holy grail or the bible. But it is just a research paper!

As we saw, there are many things that people get wrong about this paper. And I think it is essential to put it back in perspective.

Most important of all, the study was never about early retirement. It was about standard retirement with up to 30 years to sustain your expenses.

Also, it is not about sustaining money forever. It is about the success rates (probabilities only!) of sustaining during a set amount of time.

Now, this does not mean it is not a great study! It is really interesting. And the 4% rule can indeed be derived as a very good withdrawal rate that can sustain your portfolio for at least 30 years and probably longer. And we can get inspiration from this study for early retirement!

If you want to learn more about this study, I invite you to read the paper. It is really interesting.

I have already talked a lot about Financial Independence on this blog. If you want to learn more, you can read about compelling reasons to become Financially Independent.

Did you know about the Trinity Study? What do you think about this study?

Neat.

Thanks!

Nice! Even today i’ve written about this. In my case i’m planning to reach FI along my 30s and considering that the State pension to arrive at around 65 which will give me around 30y needed. I still have to factor the loss on the state pension value since i will not be doing much contributions afterwords!

Hi Mr. Firecracker,

Yes, it’s a bit difficult to account for the state pension in this case. I am also wondering exactly how to account for this correctly. I will probably run a few simulations.

I will definitely not be able to retire in my 30s though :)

Good luck to reach FI!

Hi,

take also a look at the SWR series of BigERN.

He computes almost every possibilities for the last century:

https://earlyretirementnow.com/safe-withdrawal-rate-series/

Hi Gdodo,

I know this series. It is really great! It’s impressive how much work he put into this!

Thanks for sharing!

Great write up TPS! Also like the content from BIGERN, from memory 3.2-3.5% is the sweet spot

Hi InvestingHero,

Thanks :)

Yes, he has amazing content! 3.25% is a very safe bet. But it’s probably too safe. I am more aiming at 3.5% and maybe slightly higher. If you have additional protections, it could work very well.

Thanks for stopping by!