The 4% rule for retirement withdrawls in the US vs Australia

The Trinity Study and the 4% rule it advocates have indeed been influential in shaping retirement planning strategies, primarily based on historical data from the US markets. This rule suggests that retirees can withdraw 4% of their retirement portfolio annually with a reasonable expectation that their funds will last for 30 years. However, applying this rule directly to Australian conditions requires careful consideration due to differences in market dynamics, economic conditions, and other factors such as inflation rates and types of available investment products.

In Australia, specific studies analogous to the Trinity Study have been less prominent in the public domain. However, Australian financial researchers and retirement planning experts often conduct similar analyses tailored to the local market. These studies might not always be as widely publicized as the Trinity Study but are considered within professional financial planning circles.

Australian financial advisors often adapt the 4% rule by considering local factors such as higher dividend yield on Australian stocks, different tax treatments, and the presence of superannuation which plays a critical role in retirement planning. For instance, the Australian equity market historically has had higher dividend yields compared to the US market, which could potentially allow for a higher withdrawal rate. However, this must be balanced against other factors like market volatility and economic conditions.

Moreover, the role of superannuation in Australia provides a unique dimension to retirement planning not present in the US context. Superannuation funds offer various investment options and are subject to regulatory changes that can impact retirement outcomes. This necessitates a more nuanced approach to determining a safe withdrawal rate that accounts for these variables.

For those interested in a more tailored approach to understanding how such strategies might work in Australia, it’s beneficial to consult with financial

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I believe there has been done on Australian-only stocks in a similar study and the safe withdrawal rate was slightly lower, something like 3.5% from memory. A bit of googling will be able to find the study.

It’s worth remembering a few things with these sorts of calculations, which most people seem to forget…

— The future may look different than the past, and there’s no 100% certain scenario

— Combining Aus/Global stocks together reduces volatility and therefore will increase retirement success rates

— Spending flexibility is massively important (having 25% flexibility in spending, or ability to earn a bit of income, has resulted in 100% success over all historical scenarios).

— Superannuation is an additional income stream we can tap into later in life. Many younger investors don’t even factor this into their planning, or underestimate the level of income achievable in future decades from super.

— In Australia we also have the ultimate backup plan in a decent pension system, which could be valued at $500k for a single and $1m for a couple based on its income stream, meaning the fear of running out of money is basically a non-event.

The following content gives a few further thoughts on this discussion if you’re interested…

Article: https://strongmoneyaustralia.com/your-flex-ra...
Podcast: https://strongmoneyaustralia.com/podcast-how-...

Dave

And to add to this, in the Australian context, we also have the benefit of franking credits.

From memory, the study didn’t include these, as they’ve only been refundable since the year 2000. So all the backtests couldn’t have factored these in.

But these are valuable and can add something like 1.5% to the income portion of returns.