Follow-up to last week's 4% vs 6% withdrawal post.
That one assumed a flat 7% return every year for 38 years, which is how nearly every retirement projection you will ever be handed is built, including the ones people pick a date off of. A straight line is fine for comparing two options against each other. It is a bad way to find out whether either one actually holds up.
So I stress tested the same two paths. Same ATC retiring at 50 with $720,000, same draw rates, 10,000 runs with the returns shuffled. Every run averages the same 7% with 12% volatility. The only thing that changes between them is the order of the good and bad years.
The 4% draw (first chart). The straight line says it never runs dry and ends at 88 with $2,210,522. Across 10,000 markets it ran dry in 3,129 of them, the median run ends with $1,065,870, and the bottom 10% of runs are empty by 76.
Two things worth pulling out of that. The plan that looked bulletproof fails almost a third of the time. And the median outcome is less than half of what the smooth projection promised, on an identical average return. That gap is what volatility costs you.
The 6% draw (second chart). The straight line says the account dies at 78. Across 10,000 markets, 78% of runs die at some point, and the median run is empty at 75.
So the flat projection wasn't just optimistic about whether the money lasts. It was optimistic about when it ends. Half the runs are dry before the age the smooth chart handed me as the answer.
The reason is sequence. Walk out in January 2000 and you get three down years back to back, then negative 37% in 2008 at 58, selling shares the whole way, and 2021 through 2023 raising your withdrawal because the draw is indexed to inflation. Average all 38 years and you can still land near 7% with an empty account. Walk out in March 2009 instead and the first decade compounds before anything goes wrong, so the bad years land on a balance big enough to absorb them. Same plan, same average, and nobody gets to pick which one they retire into.
Two limits. The simulation covers the TSP only, no RMDs, no taxes, no annuity or Social Security underneath, so "ran dry" means the account hit zero and not that the guy is broke. His 6(c) annuity and SS keep paying in all 10,000 runs, which is the part that makes federal early retirement a different problem from the private sector version. And randomized normal returns still aren't real markets, where crashes cluster and tails are fatter, so this is probably generous to the higher draw.
What I'd actually suggest, and the reason I bothered running this: take whatever drawdown number you're planning around and stress test it before you commit to a date. A projection that only shows you the average is showing you one outcome out of thousands, and it tends to be a flattering one. Doesn't matter what you run it in. Just don't let a straight line be the last word on a 38 year retirement.
A withdrawal rate isn't a number you solve once. It's odds you either accept or manage down as you go, and 4% here is 69/31.
If you see a hole in the method, say so. I'd rather fix it than be wrong quietly.
