{"id":9491,"date":"2023-02-12T16:45:57","date_gmt":"2023-02-12T15:45:57","guid":{"rendered":"https:\/\/schweizerfinanzblog.ch\/withdrawal-plans-how-to-take-early-retirement-in-a-relaxed-manner\/"},"modified":"2026-08-26T00:00:00","modified_gmt":"2026-08-25T22:00:00","slug":"bester-entnahmeplan-fuer-deine-fruehrente","status":"publish","type":"post","link":"https:\/\/schweizerfinanzblog.ch\/en\/bester-entnahmeplan-fuer-deine-fruehrente\/","title":{"rendered":"Withdrawal plans: how to ease into early retirement"},"content":{"rendered":"\n<p><strong>Building wealth is relatively simple, for example by investing regularly in an equity ETF. What\u2019s more complex is drawing down the wealth you\u2019ve built up so that it secures your standard of living for many years and lasts until the end of your life. To ease into early retirement, you need a smart withdrawal plan as the key to your financial freedom \u2013 the happy ending of your financial planning, so to speak! In this article, we introduce three withdrawal plans, show you which one is our favourite and explain why we think the popular \u201c4% rule\u201d is unfit for purpose.&nbsp;&nbsp;&nbsp; <\/strong><\/p>\n\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/post-info-component\/post-info-component.css?v=4\">\n<div class=\"post-info-component sfb-post-info-autoren\">\n\t\t<span class=\"sfb-post-info-bilder\">\n\t\t<img decoding=\"async\" class=\"sfb-autor-bild\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2026\/07\/stefan_bw_round-autor-240.webp\" alt=\"Stefan Huser\" width=\"40\" height=\"40\" loading=\"lazy\"><img decoding=\"async\" class=\"sfb-autor-bild\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2026\/07\/toni_bw_round-1-autor-240.webp\" alt=\"Antun Brcina\" width=\"40\" height=\"40\" loading=\"lazy\">\t<\/span>\n\t\t<div class=\"sfb-post-info-text\">\n\t\t<div class=\"von-and-comments sfb-post-info-namen\">\n\t\tBy <a href=\"https:\/\/schweizerfinanzblog.ch\/en\/author\/stefan-huser\/\">Stefan Huser<\/a> and <a href=\"https:\/\/schweizerfinanzblog.ch\/en\/author\/antun-brcina\/\">Antun Brcina<\/a>\t<\/div>\n\t\t\t<div class=\"post-dates\">Updated on <time class=\"entry-date updated\" datetime=\"2026-08-10T00:00:00+02:00\">10.8.2026<\/time><\/div>\t\t<\/div>\n\t\t<a class=\"sfb-post-info-kommentare\" href=\"#comments\">21 Comments<\/a>\n\t<\/div>\n\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/kurz-bundig-component\/kurz-bundig-component.css?v=2\">\n\n<div  id=\"XBzaZDJ\" class=\"kurz-bunding mb-3\" style='background-color:#f9f9fa'>\n\t<div class=\"d-flex kurz-bunding-title\">\n\t\t<div>\n\t\t\t<img decoding=\"async\" class=\"kurz-bunding-icon\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/01\/lifghtbulb2.png\">\n\t\t<\/div>\n\t\t<p class=''>\n\t\t\tIn a nutshell\t\t<\/p>\n\t<\/div>\n\n\t<div class=\"kurz-bunding-content\">\n\t\t<ul>\n<li>With a smart withdrawal plan, your wealth will last from the start of your early retirement until your death while allowing you to spend as much as possible.<\/li>\n<li>To draw money from your portfolio, you can sell parts of your holdings, \u201cspend\u201d the dividends and interest paid out, or combine the two.<\/li>\n<li>For a withdrawal plan, you need to know how much wealth you have available at the start, its average return, your annual living expenses and your life expectancy.<\/li>\n<li>We looked at three withdrawal plans that differ in terms of withdrawal amount and\/or market risk.<\/li>\n<li>We prefer a flexible withdrawal plan. It is based on the annuity rule and rules out running out of money too early.<\/li>\n<li>However, such a withdrawal plan comes with market-driven swings in spending, which can be very severe depending on how the stock market performs.<\/li>\n<li>These swings in spending are largely caused by the sequence of returns. Poor stock market years at the start of the withdrawal phase are particularly problematic.<\/li>\n<li>With a cash reserve that you tap into after poor stock market years and a withdrawal cap that kicks in after good stock market years, you can effectively smooth out swings in spending.<\/li>\n<\/ul>\n\t<\/div>\n\t\t\t\n\t<\/div>\n\n<style>\n\t#XBzaZDJ .kurz-bunding-content li::marker{\n\t\tcolor: #37c392;\n\t}\n\t#XBzaZDJ .kurz-bunding-call-to-action a{\n\t\tbackground-color: #1bab78;\n\t\tcolor: #FFFFFF;\n\t}\n\n<\/style>\n<div id=\"toc_container\" class=\"no_bullets\"><p class=\"toc_title\">Contents<\/p><ul class=\"toc_list\"><li><a href=\"#Some_questions_you_should_ask_yourself_before_retiring_early\">Some questions you should ask yourself before retiring early<\/a><ul><li><a href=\"#What_is_a_withdrawal_plan\">What is a withdrawal plan?<\/a><\/li><li><a href=\"#Who_does_or_doesnt_need_a_withdrawal_plan\">Who does (or doesn\u2019t) need a withdrawal plan?<\/a><\/li><li><a href=\"#What_are_the_risks_of_early_retirement\">What are the risks of early retirement?<\/a><\/li><li><a href=\"#How_should_I_draw_money_from_my_wealth\">How should I draw money from my wealth?<\/a><\/li><\/ul><\/li><li><a href=\"#What_withdrawal_plans_are_there\">What withdrawal plans are there?<\/a><ul><li><a href=\"#Early_retirement_withdrawal_plan_option_1_fixed_withdrawals_without_market_risk\">Early retirement withdrawal plan, option 1: fixed withdrawals without market risk<\/a><\/li><li><a href=\"#Early_retirement_withdrawal_plan_option_2_fixed_withdrawals_with_market_risk\">Early retirement withdrawal plan, option 2: fixed withdrawals with market risk<\/a><ul><li><a href=\"#The_4_rule\">The \u201c4% rule\u201d<\/a><\/li><li><a href=\"#The_Mannheim_study\">The Mannheim study<\/a><\/li><\/ul><\/li><li><a href=\"#Early_retirement_withdrawal_plan_option_3_flexible_withdrawals_with_market_risk\">Early retirement withdrawal plan, option 3: flexible withdrawals with market risk<\/a><ul><li><a href=\"#How_to_implement_a_flexible_withdrawal_plan_with_market_risk\">How to implement a flexible withdrawal plan with market risk<\/a><\/li><li><a href=\"#Rule-of-thumb_method_with_a_constant_percentage\">Rule-of-thumb method with a constant percentage<\/a><\/li><li><a href=\"#Annuity_rule_with_and_without_a_cap\">Annuity rule with and without a cap<\/a><\/li><\/ul><\/li><\/ul><\/li><li><a href=\"#Conclusion_take_the_best_of_both_worlds_for_early_retirement\">Conclusion: take the best of both worlds for early retirement<\/a><ul><li><a href=\"#Final_remarks\">Final remarks<\/a><\/li><\/ul><\/li><li><a href=\"#You_might_also_be_interested_in\">You might also be interested in<\/a><\/li><li><a href=\"#Updates\">Updates<\/a><\/li><li><a href=\"#Disclaimer\">Disclaimer<\/a><\/li><\/ul><\/div>\n<h2 class=\"wp-block-heading\"><span id=\"Some_questions_you_should_ask_yourself_before_retiring_early\">Some questions you should ask yourself before retiring early<\/span><\/h2>\n\n<h3 class=\"wp-block-heading\"><span id=\"What_is_a_withdrawal_plan\">What is a withdrawal plan?<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">A withdrawal plan, also called a withdrawal strategy or decumulation plan, is about <strong>turning the wealth you have saved into spending according to a predefined approach<\/strong>. The withdrawal plan is therefore used during the <strong>withdrawal phase<\/strong>, which is the counterpart to the wealth-building phase.<\/p>\n\n<p class=\"wp-block-paragraph\">Building wealth is relatively easy to put into practice. Our basic rules can be summed up in just a few words: invest in one or more equity ETFs for the long term, regularly, globally diversified and at low cost.<\/p>\n\n<p class=\"wp-block-paragraph\">Drawing down wealth that has (hopefully) grown substantially over several decades is a lot more complex, however. <strong>Ideally, a smart withdrawal plan should meet the following three needs:<\/strong><\/p>\n\n<ul class=\"wp-block-list\">\n<li>Spending as much as possible (\u201cI don\u2019t want to die a millionaire.\u201d)<\/li>\n\n\n\n<li>Spending for long enough (\u201cI don\u2019t want to go broke before I die.\u201d)<\/li>\n\n\n\n<li>Spending evenly (\u201cI want to enjoy a steady standard of living.\u201d)<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">As we\u2019ll see later, unfortunately there is no withdrawal plan that can meet all of these needs without compromise.<\/p>\n\n<p class=\"wp-block-paragraph\">Based on these three needs, you should ask yourself the following <strong>four questions<\/strong>, which we have sorted by how complex they are to answer, starting with the simplest:<\/p>\n\n<ul class=\"wp-block-list\">\n<li><strong>How much money do I want to leave behind?<\/strong><br\/>If you want to leave part of your wealth to your children or a charity, for example, define the amount. This amount will then not go towards spending but will be set aside for the lucky heirs you have chosen.\u00a0\u00a0<\/li>\n<\/ul>\n\n<ul class=\"wp-block-list\">\n<li><strong>How much money do I need to live on?<\/strong><br\/>This question isn\u2019t quite as easy to answer as the first one. But with a bit of research into your own finances, you\u2019ll be able to answer it fairly precisely. That\u2019s because you can draw on a wealth of experience and a reliable data set: your past expenses. Ideally, you should work out not only your average living expenses (standard-case scenario) but also your essential basic needs (worst-case scenario) and what a higher standard of living would mean for you (best-case scenario).<\/li>\n<\/ul>\n\n<ul class=\"wp-block-list\">\n<li><strong>How much return will my wealth generate?<\/strong><br\/>If, at the start of the withdrawal phase, you put part of your wealth into low-risk government bonds or keep it as cash in a savings account, you can probably expect only a small amount of interest in line with inflation, if that. Nevertheless, we think it\u2019s a good idea to keep an emergency fund for the unexpected. With riskier equity investments, average annual gains of 8 percent including dividends are entirely realistic. Some uncertainty remains, though: as we all know, past returns are no guarantee of future returns.<\/li>\n<\/ul>\n\n<ul class=\"wp-block-list\">\n<li><strong>For how many years do I want to draw money from my wealth?<\/strong><br\/>Now things definitely get complex. To answer this, you would need to know your exact life expectancy, i.e. when you will die. As a first rough guide, you can use average life expectancy, for example. According to the <a href=\"https:\/\/www.bfs.admin.ch\/bfs\/de\/home\/statistiken\/bevoelkerung\/geburten-todesfaelle\/lebenserwartung.html\" target=\"_blank\" rel=\"noopener\">Federal Statistical Office<\/a>, life expectancy in Switzerland is among the highest in the world. In 2021, life expectancy at birth was <strong>81.6 years for men<\/strong> and <strong>85.6 years for women<\/strong>. At the age of 65, men can still expect to live another 19.9 years and women another 22.7 years, which puts the average age at death at 84.9 (men) and 87.7 (women). If needed, you can refine these figures with <strong>individual factors<\/strong> such as your state of health, lifestyle or genes. But even if you have been too pessimistic about how long you will live, or if you live longer than your money lasts, there\u2019s no reason to panic \u2013 at least not in Switzerland. We have well-run public retirement and nursing homes that even seniors without any means are entitled to.\u00a0<\/li>\n<\/ul>\n\n<h3 class=\"wp-block-heading\"><span id=\"Who_does_or_doesnt_need_a_withdrawal_plan\">Who does (or doesn\u2019t) need a withdrawal plan?<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">Even though we use the term \u201cearly retirement\u201d in this article, we actually want to address everyone who wants to <strong>retire with a pot of wealth<\/strong>. So it basically doesn\u2019t matter whether you are planning to retire conventionally in your mid-60s, not until 70 or \u2013 as is very much the trend at the moment \u2013 earlier, for example at 50 or even as early as 40 (see also our article <a href=\"https:\/\/schweizerfinanzblog.ch\/en\/financial-freedom-hype-or-a-goal-worth-striving-for\/\" target=\"_blank\" rel=\"noreferrer noopener\">\u201cFinancial freedom: hype or a goal worth pursuing?\u201d<\/a>). <\/p>\n\n<p class=\"wp-block-paragraph\">It\u2019s obvious, however, that a reliable withdrawal plan is even more important for early retirement, since there are no state-guaranteed pension payments until the regular retirement age, which means spending is covered entirely by drawing down your wealth.     <\/p>\n\n<p class=\"wp-block-paragraph\">What\u2019s more, our target audience wants to spend their available capital over the long term, i.e. until they die, in order to secure and optimise the standard of living they are used to.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\">The topic of \u201cearly retirement with a withdrawal plan\u201d is likely to be of less interest to people who will have saved little or no wealth by the time they retire. They simply don\u2019t need a withdrawal plan. In Switzerland, their pension is regulated by the state, based on <strong>OASI<\/strong> (AHV, 1st pillar), the <strong>pension fund <\/strong>(2nd pillar) and, if needed, <strong>supplementary benefits<\/strong>.<\/p>\n\n<p class=\"wp-block-paragraph\">These people enjoy a high degree of certainty that their state pension will be paid reliably until they die. On the other hand, they have to accept a more or less significant cut in their standard of living, because our state pension benefits are primarily geared towards basic needs such as food, housing and health. Another drawback is that people without savings of their own cannot choose their retirement age freely, i.e. they cannot voluntarily retire early. \u00a0\u00a0<\/p>\n\n<h3 class=\"wp-block-heading\"><span id=\"What_are_the_risks_of_early_retirement\">What are the risks of early retirement?<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">Risks always go hand in hand with uncertainty. And there is plenty of that when it comes to early retirement and the withdrawal plans that go with it. However, the more carefully you work through your own withdrawal plan (including answering the questions in the previous sections), the better you will be able to keep the following risks under control:\u00a0<\/p>\n\n<ul class=\"wp-block-list\">\n<li>\u00a0<strong>Risk of ruin: <\/strong>The risk that your wealth runs out before the end of the planned withdrawal period. This risk is influenced by sequence-of-returns risk and longevity risk.<\/li>\n\n\n\n<li><strong>Standard-of-living risk: <\/strong>The risk that you will be forced to cut back your standard of living because of swings in spending.\u00a0<\/li>\n\n\n\n<li><strong>Unplanned inheritance:<\/strong> The risk that the wealth set aside for spending will not be fully used up by the end of the planned withdrawal period.<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\"><strong>For our traditionally safety-conscious compatriots, the risk of ruin is likely to be seen as the most serious risk.<\/strong> That\u2019s why a large share of retirees will probably plan too cautiously.<\/p>\n\n<p class=\"wp-block-paragraph\">In Switzerland, however, a guaranteed state pension and \u2013 if all else fails \u2013 supplementary benefits cushion this risk. Of course, this state retirement provision only applies to people who have reached the regular retirement age in their mid-60s. Anyone who wants to retire early cannot rely on it. They depend all the more on a well-thought-out withdrawal plan.<\/p>\n\n<p class=\"wp-block-paragraph\">That\u2019s why we believe \u2013 and the market simulations later on suggest \u2013 that the far more likely risk is the \u201cunplanned inheritance\u201d. This risk may seem harmless, but it can have a major impact. In concrete terms: out of fear of the risk of ruin, the average Swiss restricts their spending too much during the withdrawal period, which usually lasts several decades. Their own quality of life suffers as a result \u2013 to the benefit of the lucky heirs!<\/p>\n\n<h3 class=\"wp-block-heading\"><span id=\"How_should_I_draw_money_from_my_wealth\">How should I draw money from my wealth?<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">Before we examine and assess the most important withdrawal plans, let\u2019s tackle this last question, <strong>which won\u2019t make or break your plan<\/strong>. It concerns the <strong>withdrawal technique<\/strong>. Basically, you can choose between the following three options:<\/p>\n\n<ul class=\"wp-block-list\">\n<li>Withdrawing dividends and interest<\/li>\n\n\n\n<li>Selling parts of your holdings<\/li>\n\n\n\n<li>A combination of both<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">Using dividends and interest is likely to be slightly cheaper, because brokers generally don\u2019t charge any fees for this. With partial sales, on the other hand, you usually pay not only brokerage fees but also \u2013 if you use a Swiss broker such as <strong>Swissquote<\/strong> (<a href=\"https:\/\/schweizerfinanzblog.ch\/en\/our-swissquote-experience\/\" target=\"_blank\" data-type=\"post\" data-id=\"3822\" rel=\"noreferrer noopener\">review<\/a>) \u2013 stamp duty. Two foreign brokers established on the Swiss market with low fees and no stamp duty are <strong>DEGIRO<\/strong> (<a href=\"https:\/\/schweizerfinanzblog.ch\/degiro-review-etf-sparplan-schweiz\/\">review<\/a>) and <strong>Interactive Brokers<\/strong> (<a href=\"https:\/\/schweizerfinanzblog.ch\/en\/interactive-brokers-switzerland-experience\/\">review<\/a>).<\/p>\n\n<p class=\"wp-block-paragraph\">Distributions are also more convenient, as they happen automatically, whereas partial sales usually have to be \u201ctriggered\u201d manually.<\/p>\n\n<p class=\"wp-block-paragraph\">By the way, as far as income tax is concerned, it makes no difference whether you tap into the cash flows or sell parts of your holdings. That\u2019s because dividends are taxed as income for both distributing and accumulating securities. You\u2019ll find more detailed information on taxes in the article <a href=\"https:\/\/schweizerfinanzblog.ch\/etf-steuern-schweiz-mit-4-steuerspartipps\/\">\u201cETF taxes in Switzerland: optimise your portfolio with these 4 tax-saving tips\u201d<\/a>.<\/p>\n\n<p class=\"wp-block-paragraph\">Realistically, the first choice for most investors will be a withdrawal technique that combines dividends and interest on the one hand and \u2013 more significant in terms of amount \u2013 sales of holdings on the other. After all, if you want to live off dividends and interest alone, you need a very large pot of wealth. Besides, only touching the fruits without ever tapping into the wealth itself runs counter to the very purpose of a withdrawal strategy.\u00a0\u00a0<\/p>\n\n<p class=\"has-text-align-center wp-block-paragraph\"><span style=\"color: #37c392;\"><strong><em>&#8211; P a r t n e r   o f f e r<\/em><\/strong> <strong><em>\u2013<\/em><\/strong><\/span><\/p>\n\n<figure class=\"wp-block-image size-full is-resized\"><a href=\"https:\/\/www.degiro.ch\/?tap_a=55321-c5c085&amp;tap_s=1016265-b529be&amp;utm_source=schweizerfinanzblog&amp;utm_campaign=DEGIRO+Switzerland&amp;utm_medium=a&amp;utm_content=shares_lp\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2024\/07\/DEGIRO_Banner_EN.png\" alt=\"\" class=\"wp-image-6721\"\/><\/a><\/figure>\n\n<p class=\"has-text-align-center\"><span style=\"color: #37c392;\">&#8211; &#8211; &#8211; &#8211; &#8211;<\/span><\/p>\n\n<h2 class=\"wp-block-heading\"><span id=\"What_withdrawal_plans_are_there\">What withdrawal plans are there?<\/span><\/h2>\n\n<p class=\"wp-block-paragraph\">There are probably countless withdrawal plans out there. We focus on the following <strong>three withdrawal plans<\/strong>, each based on a <strong>different<\/strong> <strong>underlying strategy<\/strong>:<\/p>\n\n<ul class=\"wp-block-list\">\n<li>Early retirement withdrawal plan, option 1: fixed withdrawals without market risk<\/li>\n\n\n\n<li>Early retirement withdrawal plan, option 2: fixed withdrawals with market risk<\/li>\n\n\n\n<li>Early retirement withdrawal plan, option 3: flexible withdrawals with market risk<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">These three options can be both <strong>combined<\/strong> and <strong>adapted individually. <\/strong>They differ in terms of two factors: withdrawal amounts (fixed vs. flexible) and market risk (without vs. with). Below, we take a closer look at these three withdrawal plans and some sub-variants and assess them.<\/p>\n\n<h3 class=\"wp-block-heading\" id=\"Fruehrente-Entnahmeplan_Variante_1_Fixe_Entnahmebetraege_ohne_Marktrisiko\"><span id=\"Early_retirement_withdrawal_plan_option_1_fixed_withdrawals_without_market_risk\">Early retirement withdrawal plan, option 1: fixed withdrawals without market risk<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">With this first option, your wealth is not invested in the stock market during the withdrawal phase, which means it is <strong>not exposed to market fluctuations<\/strong>.<\/p>\n\n<p class=\"wp-block-paragraph\">So let\u2019s assume that your available wealth sits safely in your bank account, earning interest that exactly matches inflation each year. You can\u2019t expect any more return than that.<\/p>\n\n<p class=\"wp-block-paragraph\">The advantages of this option are obvious: predictability, constant spending and no (premature) ruin. Important: the latter refers to your defined withdrawal period. If you outlive it, you also run a risk of going broke.<\/p>\n\n<p class=\"wp-block-paragraph\">This option is therefore particularly suitable for <strong>very wealthy people<\/strong> who can afford to forgo real growth in their wealth and the market risk that comes with it. For example, if at the start of the withdrawal phase you have saved up liquid assets of CHF 3 million sitting in your bank account, you can spend CHF 100,000 a year in real terms for 30 years. That\u2019s enough for a retirement free of financial worries \u2013 all the more so since your state pensions come on top.<\/p>\n\n<p class=\"wp-block-paragraph\">This option is also suitable for <strong>risk-averse people<\/strong> who need only a little money to live on. For example, if at the start of the withdrawal phase you have \u201conly\u201d CHF 1 million in your savings account, you can spend CHF 33,333 a year in real terms for 30 years. That won\u2019t let you splash out in high-priced Switzerland. But if you factor in your state pensions, you should still get by quite comfortably.<\/p>\n\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/advantages-and-disadvantages.css\">\n\n<div id=\"KQRYBua\" class=\"advantages-and-disadvantages grey-advantages\">\n\t<p class='advantages-title'>\n\t\tPros and cons of early retirement withdrawal plan, option 1: fixed withdrawals without market risk\t<\/p>\n\t\n\t<div class=''>\t\n\t\t<div class=\"row\">\n\n\t\t\t\t\t\t<div class=\"col-12 mb-3\">\n\t\t\t\t<div class=\"advantages\" style=\"background: #f9f9fa; border:1px solid #f0f0f2;\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> No premature ruin\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> Constant spending\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> No unplanned inheritance: wealth is fully used up\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<div class=\"col-12\">\n\t\t\t\t<div class=\"disadvantages\" style=\"background: #f9f9fa; border:1px solid #f0f0f2;\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"disadvantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/disadvantage.svg\"> Limited spending because you forgo higher returns (no risk premium)\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"disadvantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/disadvantage.svg\"> High standard of living only possible with substantial wealth\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t\n<\/div>\n\n<p class=\"wp-block-paragraph\"><span style=\"color:#ffffff\" class=\"tadv-color\">Line spacing<\/span><\/p>\n\n<h3 class=\"wp-block-heading\"><span id=\"Early_retirement_withdrawal_plan_option_2_fixed_withdrawals_with_market_risk\">Early retirement withdrawal plan, option 2: fixed withdrawals with market risk<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">With this second option, you also withdraw a <strong>fixed amount<\/strong> plus an adjustment for inflation. This means your total withdrawal stays constant in real terms. Unlike option 1, however, your available wealth is exposed to <strong>market fluctuations<\/strong>.<\/p>\n\n<p class=\"wp-block-paragraph\">Like option 1, this option guarantees you a <strong>steady standard of living<\/strong> thanks to the fixed withdrawal amount. Unlike option 1, you benefit from the <strong>risk premium<\/strong> in the form of gains on your equity investments.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\">However, you take on <strong>two risks<\/strong>: <strong>unplanned inheritance<\/strong> and the <strong>risk of ruin<\/strong>. Since these two risks are mutually exclusive, only one of them can occur. As we\u2019ll see later, the probability of an \u201cunplanned inheritance\u201d is significantly higher than that of running out of money early, even with generous withdrawal rates of 5%. As a general rule, the lower the withdrawal rate, the greater the risk of an \u201cunplanned inheritance\u201d, and the higher the withdrawal rate, the more likely you are to run out of money early.<\/p>\n\n<h4 class=\"wp-block-heading\"><span id=\"The_4_rule\">The \u201c4% rule\u201d<\/span><\/h4>\n\n<p class=\"wp-block-paragraph\">For a long time, this static withdrawal option was given a concrete framework by the so-called <strong>\u201c4% rule\u201d<\/strong>, which <a href=\"https:\/\/en.wikipedia.org\/wiki\/William_Bengen\" target=\"_blank\" rel=\"noreferrer noopener\">Bill Bengen<\/a> developed back in 1994. This rule states that from the start of the decumulation phase you withdraw <strong>4% of your starting wealth<\/strong> each year \u2013 and thanks to the risk premium you shouldn\u2019t go broke before you die. In other words, the amount withdrawn from your wealth stays the same. To maintain purchasing power, however, it makes sense to calculate with <strong>real withdrawal amounts<\/strong>, i.e. to take inflation into account every year.\u00a0<\/p>\n\n<h4 class=\"wp-block-heading\"><span id=\"The_Mannheim_study\">The Mannheim study<\/span><\/h4>\n\n<p class=\"wp-block-paragraph\">In the course of our research, we came across the study \u201cEntsparen im Alter \u2013 Portfolioentnahmestrategien in der Rentenphase\u201d (Decumulating in old age \u2013 portfolio withdrawal strategies in the retirement phase), which was first published in 2017 by the two professors Philipp Schreiber and Martin Weber of the University of Mannheim and last updated in 2020. (After this article was published, the <a href=\"https:\/\/www.behavioral-finance.de\/forschung\/entspar-simulation\/\" target=\"_blank\" rel=\"noreferrer noopener\">decumulation simulator was updated<\/a>.) Weber is best known to the wider public as the creator of the <a href=\"https:\/\/www.arero.de\/\" target=\"_blank\" rel=\"noreferrer noopener\">ARERO investment fund<\/a>. What makes this mixed global fund special is that it covers the asset classes equities, bonds and commodities via indices in a single product, based on a scientific concept.<\/p>\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n<p class=\"wp-block-paragraph\">Now let\u2019s take a closer look at the Mannheim study. At our request, Jan Mertes, a doctoral student at the University of Mannheim, explained the study in a bit more detail with regard to the portfolio composition and the return simulation:<\/p>\n\n<ul class=\"wp-block-list\">\n<li><strong>The portfolio<\/strong><br\/>The global portfolio used for the simulation is constructed as follows: a broadly diversified equity and bond portfolio with 60% equities and 40% bonds. Specifically, the portfolio is based on the MSCI All Country World Index (equities) and the Bloomberg Barclays Global Aggregate Bond Index (bonds). Dividends and interest income were taken into account. According to Mertes, the core idea behind this portfolio is to replicate the market as closely as possible and thus achieve maximum diversification (i.e. minimal unsystematic risk). In doing so, you deliberately accept a lower return than with a pure equity portfolio in order to be exposed to smaller fluctuations.<\/li>\n<\/ul>\n\n<ul class=\"wp-block-list\">\n<li><strong>The return simulation<\/strong><br\/>The monthly returns of the portfolio described above were determined for the period from January 1990 to November 2018. From these returns, 360 returns are drawn at random (with replacement) to simulate how the portfolio develops over 30 years (for a different planning horizon, the planning horizon in years multiplied by 12). This process is then repeated 10,000 times to map different capital market scenarios.<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\"><strong>Surprising results on returns<\/strong><br\/>Based on this huge pool of data, we took a closer look at the historical returns and came to the following, partly astonishing, results:<\/p>\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Average return<\/td><td class=\"has-text-align-right\" data-align=\"right\">7,2%<\/td><\/tr><tr><td>Share of negative returns<\/td><td class=\"has-text-align-right\" data-align=\"right\">27%<\/td><\/tr><tr><td>Share of positive returns<\/td><td class=\"has-text-align-right\" data-align=\"right\">73%<\/td><\/tr><tr><td>Share of positive returns 0\u201310%<\/td><td class=\"has-text-align-right\" data-align=\"right\">35%<\/td><\/tr><tr><td>Share of positive returns &gt;10%<\/td><td class=\"has-text-align-right\" data-align=\"right\">39%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n<p class=\"wp-block-paragraph\">What surprised us most positively was that returns of more than 10% were achieved in roughly four out of ten stock market years. And what about the \u201c4% rule\u201d? According to the Mannheim study, it seems to work quite well (see Fig. 1)<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2893\" height=\"1660\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-4ProzentRegel_Screenshot-2023-02-03-150646.png\" alt=\"\" class=\"wp-image-4206\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-4ProzentRegel_Screenshot-2023-02-03-150646.png 2893w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-4ProzentRegel_Screenshot-2023-02-03-150646-1080x620.png 1080w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-4ProzentRegel_Screenshot-2023-02-03-150646-768x441.png 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-4ProzentRegel_Screenshot-2023-02-03-150646-1536x881.png 1536w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-4ProzentRegel_Screenshot-2023-02-03-150646-2048x1175.png 2048w\" sizes=\"auto, (max-width: 2893px) 100vw, 2893px\" \/><figcaption class=\"wp-element-caption\">Fig. 1: Putting the \u201c4% rule\u201d to the test with the University of Mannheim\u2019s withdrawal simulator.<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">Explanation of Fig. 1: With a fixed withdrawal of 4% of the starting wealth of CHF 1 million (i.e. CHF 40,000 p.a.), including inflation of 1% p.a., over a withdrawal period of 30 years, the probability of running out of money early is 4.68%. Your inflation-adjusted (real) average final wealth is more than 2.5 times your starting wealth, namely CHF 2,527,974.<\/p>\n\n<p class=\"wp-block-paragraph\">Based on the historical data of the Mannheim study, the \u201c4% rule\u201d therefore often leads to an unplanned inheritance and relatively rarely to running out of money early.<\/p>\n\n<p class=\"wp-block-paragraph\">With regard to the risk of ruin, there is one more important aspect we need to consider: <strong>the risk of ruin increases if returns develop unfavourably. <\/strong>In other words, if poor stock market years come at the start of the withdrawal phase. This is known as <strong>sequence-of-returns risk<\/strong>.<\/p>\n\n<p class=\"wp-block-paragraph\">In this study, <strong>simulation 9<\/strong> is a good example of increased sequence-of-returns risk. Below, we have the withdrawal amounts calculated for the following parameters: \u00a0<\/p>\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Starting wealth<\/td><td class=\"has-text-align-right\" data-align=\"right\">CHF 1 million<\/td><\/tr><tr><td>Withdrawal period<\/td><td class=\"has-text-align-right\" data-align=\"right\">30 years<\/td><\/tr><tr><td>Withdrawal p.a.<\/td><td class=\"has-text-align-right\" data-align=\"right\">5%<\/td><\/tr><tr><td>Expected inflation p.a.<\/td><td class=\"has-text-align-right\" data-align=\"right\">1%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n<p class=\"wp-block-paragraph\">The sequence of the 30 returns in simulation 9 is shown in the table below.<\/p>\n\n<figure class=\"wp-block-table\"><table><thead><tr><th class=\"has-text-align-right\" data-align=\"right\">Year<\/th><th class=\"has-text-align-right\" data-align=\"right\">Historical returns from simulation 9 of the Mannheim study<\/th><\/tr><\/thead><tbody><tr><td class=\"has-text-align-right\" data-align=\"right\">1<\/td><td class=\"has-text-align-right\" data-align=\"right\">-12,30%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">2<\/td><td class=\"has-text-align-right\" data-align=\"right\">-4,50%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">3<\/td><td class=\"has-text-align-right\" data-align=\"right\">5,04%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">4<\/td><td class=\"has-text-align-right\" data-align=\"right\">-2,26%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">5<\/td><td class=\"has-text-align-right\" data-align=\"right\">13,42%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">6<\/td><td class=\"has-text-align-right\" data-align=\"right\">-2,08%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">7<\/td><td class=\"has-text-align-right\" data-align=\"right\">31,19%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">8<\/td><td class=\"has-text-align-right\" data-align=\"right\">-0,63%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">9<\/td><td class=\"has-text-align-right\" data-align=\"right\">-8,87%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">10<\/td><td class=\"has-text-align-right\" data-align=\"right\">-11,53%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">11<\/td><td class=\"has-text-align-right\" data-align=\"right\">26,27%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">12<\/td><td class=\"has-text-align-right\" data-align=\"right\">7,83%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">13<\/td><td class=\"has-text-align-right\" data-align=\"right\">27,02%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">14<\/td><td class=\"has-text-align-right\" data-align=\"right\">29,77%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">15<\/td><td class=\"has-text-align-right\" data-align=\"right\">-8,23%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">16<\/td><td class=\"has-text-align-right\" data-align=\"right\">4,13%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">17<\/td><td class=\"has-text-align-right\" data-align=\"right\">-12,33%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">18<\/td><td class=\"has-text-align-right\" data-align=\"right\">3,90%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">19<\/td><td class=\"has-text-align-right\" data-align=\"right\">8,77%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">20<\/td><td class=\"has-text-align-right\" data-align=\"right\">-7,12%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">21<\/td><td class=\"has-text-align-right\" data-align=\"right\">25,07%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">22<\/td><td class=\"has-text-align-right\" data-align=\"right\">12,40%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">23<\/td><td class=\"has-text-align-right\" data-align=\"right\">13,56%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">24<\/td><td class=\"has-text-align-right\" data-align=\"right\">12,87%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">25<\/td><td class=\"has-text-align-right\" data-align=\"right\">17,60%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">26<\/td><td class=\"has-text-align-right\" data-align=\"right\">-0,05%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">27<\/td><td class=\"has-text-align-right\" data-align=\"right\">4,67%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">28<\/td><td class=\"has-text-align-right\" data-align=\"right\">5,38%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">29<\/td><td class=\"has-text-align-right\" data-align=\"right\">-6,79%<\/td><\/tr><tr><td class=\"has-text-align-right\" data-align=\"right\">30<\/td><td class=\"has-text-align-right\" data-align=\"right\">11,99%<\/td><\/tr><\/tbody><\/table><figcaption class=\"wp-element-caption\">Table 1: Return simulation 9 from the Mannheim study with an unfavourable sequence of returns.<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">Because there were a few stock market slumps at the start of the withdrawal period, the money ran out early, in the course of the 25th year of withdrawals (see Fig. 2).<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1538\" height=\"982\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb2_Pleitegrafik.jpg\" alt=\"Early retirement\" class=\"wp-image-4223\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb2_Pleitegrafik.jpg 1538w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb2_Pleitegrafik-768x490.jpg 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb2_Pleitegrafik-1536x981.jpg 1536w\" sizes=\"auto, (max-width: 1538px) 100vw, 1538px\" \/><figcaption class=\"wp-element-caption\">Fig. 2: In this example, an unfavourable sequence of returns leads to ruin in the course of the 25th year of withdrawals.<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">The chart below shows just how incredibly strong this sequence-of-returns effect is. All we did was swap the return in year 1 (-12.30%) with that of year 30 (+11.99%).<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1846\" height=\"1183\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_PleiteVSguterRenditeverlauf.png\" alt=\"Early retirement\" class=\"wp-image-4224\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_PleiteVSguterRenditeverlauf.png 1846w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_PleiteVSguterRenditeverlauf-768x492.png 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_PleiteVSguterRenditeverlauf-1536x984.png 1536w\" sizes=\"auto, (max-width: 1846px) 100vw, 1846px\" \/><figcaption class=\"wp-element-caption\">Fig. 3: No ruin thanks to swapping returns, but an unplanned inheritance remains after the withdrawal phase (grey = simulation 9 of the Mannheim study).<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">Instead of running out of money early, after 30 years we still have a handsome CHF 868,088 in real terms!<\/p>\n\n<p class=\"wp-block-paragraph\">Since we can\u2019t bend the stock market to our will, we have to find other ways to get sequence-of-returns risk under control.<\/p>\n\n<p class=\"wp-block-paragraph\">But let\u2019s leave the individual examples aside for now and return to the averages based on the entire historical data set of the Mannheim study. <\/p>\n\n<p class=\"wp-block-paragraph\">In the table below, starting from initial wealth of CHF 1 million and inflation of 1% per year, we have compiled the results of <strong>nine simulations<\/strong> <strong>with three different withdrawal rates and withdrawal periods each<\/strong>.<\/p>\n\n<figure class=\"wp-block-table is-style-regular\"><table><thead><tr><th>Withdrawal period<\/th><th class=\"has-text-align-center\" data-align=\"center\">\u00d8 real final wealth with withdrawals of CHF 30k p.a. (3%)<\/th><th>RR<\/th><th class=\"has-text-align-center\" data-align=\"center\">\u00d8 real final wealth with withdrawals of CHF 40k p.a. (4%)<\/th><th>RR<\/th><th class=\"has-text-align-center\" data-align=\"center\">\u00d8 real final wealth with withdrawals of CHF 50k p.a. (5%)<\/th><th>RR<\/th><\/tr><\/thead><tbody><tr><td>20 years<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 2,099,002 <\/td><td>0,04%<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 1,697,248<\/td><td>0,32%<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 1,298,931<\/td><td>3,30%<\/td><\/tr><tr><td>25 years<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 2,646,426<\/td><td>0,12%<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 2,047,091<\/td><td>1,98%<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 1,467,316<\/td><td>10,20%<\/td><\/tr><tr><td>30 years<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 3,391,069<\/td><td>0,45%<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 2,527,974<\/td><td>4,68%<\/td><td class=\"has-text-align-center\" data-align=\"center\">CHF 1,718,889<\/td><td>17,95%<\/td><\/tr><\/tbody><\/table><figcaption class=\"wp-element-caption\">Table 2: Development of starting wealth of CHF 1 million with different withdrawal periods and withdrawal rates according to the University of Mannheim\u2019s withdrawal simulator (RR = risk of ruin).<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">These results from Table 2 amazed us and lead us to the following four conclusions:<\/p>\n\n<ul class=\"wp-block-list\">\n<li>The risk of ruin does increase as the withdrawal rate and withdrawal period increase.<\/li>\n\n\n\n<li>Thanks to the risk premium and the compound interest effect, however, average final wealth increases the longer the withdrawal period. In other words, in all nine simulations it is higher than the starting wealth, even after adjusting for inflation. (Incidentally, the same applies to median final wealth, albeit to a somewhat lesser extent.)<\/li>\n\n\n\n<li>The risk of an \u201cunplanned inheritance\u201d is far more likely to materialise than the risk of ruin. Based on our sample returns and periods, you run out of money in \u201conly\u201d between 0.04% and 17.95% of cases. Conversely, this means that at the end of the planned decumulation phase there is still wealth left over in between 82.05% and 99.96% of cases, i.e. the \u201cunplanned inheritance\u201d risk materialises.<\/li>\n\n\n\n<li>A fixed withdrawal strategy may be easy to implement, but it is unfit for purpose in practice (see point above).<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">The <strong>withdrawal strategy tool <\/strong>(Excel) provided free of charge by the University of Mannheim with the<strong> global portfolio simulation <\/strong>described above is no longer available in this form. You can download the updated version via <a href=\"https:\/\/www.behavioral-finance.de\/forschung\/entspar-simulation\/\" target=\"_blank\" rel=\"noreferrer noopener\">this link<\/a>.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Criticism of the \u201c4% rule\u201d <\/strong><\/p>\n\n<p class=\"wp-block-paragraph\">Recently, the \u201c4% rule\u201d has increasingly been called into question. The criticism is directed less at the static withdrawal (which is our focus) and more at the \u201c4 percent\u201d itself, which is being questioned or considered too optimistic.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\">For example, the US study <a href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=4227132#:~:text=The%202.26%25%20withdrawal%20rate%20for,to%201.95%25%20for%202085%20retirees.&amp;text=We%20study%20withdrawal%20rules%20for,asset%20classes%20in%20developed%20countries.\" target=\"_blank\" rel=\"noreferrer noopener\">\u201cThe Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets\u201d<\/a> of 22 September 2022 concludes that the popular \u201c4% rule\u201d is based on an unsuitable data set: no international focus (home bias) and an observation period (1926\u20131991) that is no longer representative of today. As a result, it is not safe enough, i.e. the risk of ruin is too high. Statistically speaking, according to the study, a US couple aged 65 should withdraw no more than 2.26% of their starting wealth to keep their risk of ruin from exceeding 5%.<\/p>\n\n<p class=\"wp-block-paragraph\">This is of course <strong>depressing news<\/strong>, because the lower the withdrawal rate, the less money there is available for spending. You would therefore have to settle for a more modest standard of living, retire later, or a combination of both.<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>But we don\u2019t share this alarmist mood.<\/strong> Apart from the very real drawbacks that an ever-lower withdrawal rate brings with it, we don\u2019t consider the static concept behind it to be effective. So let\u2019s look at some examples of flexible withdrawal plans in the next section.<\/p>\n\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/advantages-and-disadvantages.css\">\n\n<div id=\"SLmKajy\" class=\"advantages-and-disadvantages grey-advantages\">\n\t<p class='advantages-title'>\n\t\tPros and cons of early retirement withdrawal plan, option 2: fixed withdrawals with market risk\t<\/p>\n\t\n\t<div class=''>\t\n\t\t<div class=\"row\">\n\n\t\t\t\t\t\t<div class=\"col-12 mb-3\">\n\t\t\t\t<div class=\"advantages\" style=\"background: #f9f9fa; border:1px solid #f0f0f2;\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> Constant spending\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> Higher spending thanks to the risk premium\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<div class=\"col-12\">\n\t\t\t\t<div class=\"disadvantages\" style=\"background: #f9f9fa; border:1px solid #f0f0f2;\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"disadvantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/disadvantage.svg\"> Risk of ruin\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"disadvantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/disadvantage.svg\"> Unplanned inheritance\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t\n<\/div>\n\n<p class=\"has-white-color has-text-color wp-block-paragraph\">Line spacing<\/p>\n\n<h3 class=\"wp-block-heading\"><span id=\"Early_retirement_withdrawal_plan_option_3_flexible_withdrawals_with_market_risk\">Early retirement withdrawal plan, option 3: flexible withdrawals with market risk<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">Unlike options 1 and 2, the same inflation-adjusted amount is not withdrawn every year. Instead, a flexible withdrawal rate <strong>takes market fluctuations into account<\/strong>.<\/p>\n\n<p class=\"wp-block-paragraph\">This means you redefine your withdrawal amount every single year. There will be years in which you can really push the boat out financially. Other years, on the other hand, will force you to cut back on spending.<\/p>\n\n<p class=\"wp-block-paragraph\">In concrete terms, this means two things: first, your standard of living depends to some extent on how the stock market performs. And second, all expenses that aren\u2019t (vitally) necessary for you are room for manoeuvre.<\/p>\n\n<p class=\"wp-block-paragraph\">We clearly prefer a flexible withdrawal plan, because in our view it offers the best balance of pros and cons. We accept the <strong>fluctuating spending<\/strong>, which we see as its only drawback, as long as it stays within a range that is acceptable to us.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\">But we do need to get this risk under control. What matters is that<strong> <\/strong>the funding of your essential expenses, i.e. your basic needs, is secured <strong>at all times<\/strong>. These include, for example, the following cost items:<\/p>\n\n<ul class=\"wp-block-list\">\n<li>Housing<\/li>\n\n\n\n<li>Food &amp; household<\/li>\n\n\n\n<li>Health (health insurance)<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">What is up for grabs, i.e. your room for manoeuvre, is <strong>non-essential spending.<\/strong> We call it <strong>lifestyle spending. <\/strong>This includes, for example, the following cost items:<\/p>\n\n<ul class=\"wp-block-list\">\n<li>Holidays in upmarket hotels<\/li>\n\n\n\n<li>Eating out regularly<\/li>\n\n\n\n<li>Expensive jewellery<\/li>\n<\/ul>\n\n<p class=\"wp-block-paragraph\">So after a \u201cstock market crash year\u201d, for example, it would be a staycation on the balcony instead of a holiday in Hawaii.<\/p>\n\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/advantages-and-disadvantages.css\">\n\n<div id=\"ONeEnPl\" class=\"advantages-and-disadvantages grey-advantages\">\n\t<p class='advantages-title'>\n\t\tPros and cons of early retirement withdrawal plan, option 3: flexible withdrawals with market risk\t<\/p>\n\t\n\t<div class=''>\t\n\t\t<div class=\"row\">\n\n\t\t\t\t\t\t<div class=\"col-12 mb-3\">\n\t\t\t\t<div class=\"advantages\" style=\"background: #f9f9fa; border:1px solid #f0f0f2;\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> Higher spending possible thanks to the risk premium\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> No premature ruin\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"advantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/advantages.svg\"> No unplanned inheritance: wealth is fully used up (only guaranteed with the annuity rule without a range)\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<div class=\"col-12\">\n\t\t\t\t<div class=\"disadvantages\" style=\"background: #f9f9fa; border:1px solid #f0f0f2;\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"disadvantage d-flex\">\n\t\t\t\t\t\t<img decoding=\"async\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/advantages-and-disadvantages\/assets\/disadvantage.svg\"> Fluctuating spending\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t\n<\/div>\n\n<p class=\"has-white-color has-text-color wp-block-paragraph\">Line spacing<\/p>\n\n<h4 class=\"wp-block-heading\"><span id=\"How_to_implement_a_flexible_withdrawal_plan_with_market_risk\">How to implement a flexible withdrawal plan with market risk<\/span><\/h4>\n\n<p class=\"wp-block-paragraph\">Let\u2019s now take a closer look at some flexible withdrawal plans and how to implement them. As different as the following sub-variants are, they all share one feature: a variable withdrawal amount.\u00a0\u00a0<\/p>\n\n<h4 class=\"wp-block-heading\"><span id=\"Rule-of-thumb_method_with_a_constant_percentage\"><strong>Rule-of-thumb method with a constant percentage<\/strong><\/span><\/h4>\n\n<p class=\"wp-block-paragraph\">We start with the simplest option: at the start of each year, you withdraw a <strong>fixed percentage<\/strong> of your available (remaining) wealth. Again, we refer to the historical returns from the Mannheim study, i.e. simulation 9 with its unfavourable sequence of returns.<\/p>\n\n<p class=\"wp-block-paragraph\">For the calculation, we made the following assumptions for the three required parameters:<\/p>\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Starting wealth<\/td><td class=\"has-text-align-right\" data-align=\"right\">CHF 1 million<\/td><\/tr><tr><td>Withdrawal period<\/td><td class=\"has-text-align-right\" data-align=\"right\">30 years<\/td><\/tr><tr><td>Withdrawal p.a.<\/td><td class=\"has-text-align-right\" data-align=\"right\">5%<\/td><\/tr><tr><td>Expected inflation p.a.<\/td><td class=\"has-text-align-right\" data-align=\"right\">1%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1529\" height=\"985\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_gleichbleibender-Zinssatz.jpg\" alt=\"Early retirement\" class=\"wp-image-4239\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_gleichbleibender-Zinssatz.jpg 1529w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb3_gleichbleibender-Zinssatz-768x495.jpg 768w\" sizes=\"auto, (max-width: 1529px) 100vw, 1529px\" \/><figcaption class=\"wp-element-caption\">Fig. 4: With a fixed percentage withdrawal, there is always some wealth left over.<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">Because wealth is left over after 30 years, the \u201cunplanned inheritance\u201d risk has materialised. This rule-of-thumb method may be easy to implement, but with a constant percentage withdrawal it is mathematically impossible to use up all your wealth by the end of the withdrawal phase. As a result, too little wealth is withdrawn overall, and your standard of living during the decumulation phase is lower than it could have been.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\">That\u2019s why we can\u2019t recommend this withdrawal plan option.<\/p>\n\n<h4 class=\"wp-block-heading\" id=\"Annuitaetenregel_mit_und_ohne_Obergrenze\"><span id=\"Annuity_rule_with_and_without_a_cap\"><strong>Annuity rule with and without a cap<\/strong><\/span><\/h4>\n\n<p class=\"wp-block-paragraph\">Let\u2019s now turn to the <strong>original form of flexible withdrawal plans.<\/strong> With the annuity rule, you calculate in each period how much you can spend, taking into account the expected return on the remaining wealth, so that your wealth is used up at the end of the planning horizon. Depending on how the stock market performs, both the amount withdrawn and the percentage withdrawn can fluctuate (sharply) under this rule.<\/p>\n\n<p class=\"wp-block-paragraph\">The annuity rule, i.e. the withdrawal amount per year, is based on the following formula (excluding taxes and inflation):<\/p>\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1320\" height=\"420\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/annuitaetenformel-korrigiert.png\" alt=\"\" class=\"wp-image-17902\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/annuitaetenformel-korrigiert.png 1320w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/annuitaetenformel-korrigiert-768x244.png 768w\" sizes=\"auto, (max-width: 1320px) 100vw, 1320px\" \/><\/figure>\n<\/div>\n<p class=\"wp-block-paragraph\">E = withdrawal amount at the start of the year according to the annuity rule<\/p>\n\n<p class=\"wp-block-paragraph\">V = (remaining) wealth at the start of the year<\/p>\n\n<p class=\"wp-block-paragraph\">R = expected return (e.g. 0.08 for an expected return of 8%)<\/p>\n\n<p class=\"wp-block-paragraph\">T = remaining years (including the current year)<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Worked example:<\/strong> With starting wealth of CHF 750,000, a remaining term of 25 years and an expected return of 8%, the withdrawal amount is CHF 65,054. The withdrawal amount has to be recalculated every year.<\/p>\n\n<p class=\"wp-block-paragraph\">CHF 65,054 = CHF 750,000 * 1.08<sup>24<\/sup><em> * <\/em>0.08 \/ (1.08<sup>25<\/sup> \u2013 1)<\/p>\n\n<p class=\"wp-block-paragraph\">In the last year of the defined planning period, the percentage withdrawn is always 100%. This means your wealth is used up completely and the \u201cunplanned inheritance\u201d risk is eliminated.<\/p>\n\n<p class=\"wp-block-paragraph\">To calculate the annuity rule, we made the following assumptions for the four required parameters:<\/p>\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Starting wealth<\/td><td class=\"has-text-align-right\" data-align=\"right\">CHF 1 million<\/td><\/tr><tr><td>Withdrawal period<\/td><td class=\"has-text-align-right\" data-align=\"right\">30 years<\/td><\/tr><tr><td>Expected return p.a.<\/td><td class=\"has-text-align-right\" data-align=\"right\">8%<\/td><\/tr><tr><td>Expected inflation p.a.<\/td><td class=\"has-text-align-right\" data-align=\"right\">1%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n<p class=\"wp-block-paragraph\">The annuity rule and the underlying formula are also included in the University of Mannheim\u2019s <a href=\"https:\/\/www.behavioral-finance.de\/forschung\/entspar-simulation\/\" target=\"_blank\" rel=\"noreferrer noopener\">withdrawal strategy tool<\/a> (see the \u201cDynamische Entnahme\u201d [dynamic withdrawal] option in the newly linked, updated tool). Again, we refer to the historical returns from simulation 9. As a reminder: this is an unfavourable sequence of returns that, with the static withdrawal plan earlier, would have left us broke early, in year 25.<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2500\" height=\"1079\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-ohne-Bandbreite-2023-02-03-150646.jpg\" alt=\"\" class=\"wp-image-4241\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-ohne-Bandbreite-2023-02-03-150646.jpg 2500w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-ohne-Bandbreite-2023-02-03-150646-768x331.jpg 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-ohne-Bandbreite-2023-02-03-150646-1536x663.jpg 1536w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-ohne-Bandbreite-2023-02-03-150646-2048x884.jpg 2048w\" sizes=\"auto, (max-width: 2500px) 100vw, 2500px\" \/><figcaption class=\"wp-element-caption\">Fig. 5: Putting the annuity rule without a range to the test with the University of Mannheim\u2019s withdrawal simulator.<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">Explanation of Fig. 5: With starting wealth of CHF 1 million and a flexible withdrawal rate without ranges, including 1% inflation, spending fluctuates by an average of 44.06%. At the end of the defined 30-year planning period, your <strong>wealth will be completely used up<\/strong>. So there is neither a risk of running out of money early nor an \u201cunplanned inheritance\u201d risk. We assumed an expected return of 8%.<\/p>\n\n<p class=\"wp-block-paragraph\">Great that the annuity rule without ranges has wiped out both the risk of ruin and the \u201cunplanned inheritance\u201d risk! But one problem remains: the withdrawal amounts fluctuate (too) much, as the chart below clearly shows.<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1538\" height=\"980\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb6_Entnahmeraten-ohne-Bandbreiten.jpg\" alt=\"Early retirement\" class=\"wp-image-4242\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb6_Entnahmeraten-ohne-Bandbreiten.jpg 1538w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb6_Entnahmeraten-ohne-Bandbreiten-768x489.jpg 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb6_Entnahmeraten-ohne-Bandbreiten-1536x979.jpg 1536w\" sizes=\"auto, (max-width: 1538px) 100vw, 1538px\" \/><figcaption class=\"wp-element-caption\">Fig. 6: Annuity rule without ranges: sharp fluctuations in the annual withdrawal amount (raw data: University of Mannheim).<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">In our example, the annual withdrawal amount swings between a generous CHF 88,827 and a modest CHF 18,251.<\/p>\n\n<p class=\"wp-block-paragraph\">With a <strong>cap <\/strong>we can reduce these market-driven fluctuations. So in addition to the previous parameters, we set a cap of CHF 50,000 on the annual withdrawal amount (see Fig. 7).<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2500\" height=\"1128\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-mit-Obdergrenze.jpg\" alt=\"\" class=\"wp-image-4243\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-mit-Obdergrenze.jpg 2500w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-mit-Obdergrenze-768x347.jpg 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-mit-Obdergrenze-1536x693.jpg 1536w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Challenge-der-Annuitaetenregel-mit-Obdergrenze-2048x924.jpg 2048w\" sizes=\"auto, (max-width: 2500px) 100vw, 2500px\" \/><figcaption class=\"wp-element-caption\">Fig. 7: Putting the annuity rule with a cap to the test with the University of Mannheim\u2019s withdrawal simulator.<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">Explanation of Fig. 7: With a flexible withdrawal with a cap of CHF 50,000 p.a., including 1% inflation, spending fluctuates by an average of 11.37%. There is no risk of ruin within the defined 30-year planning period. However, the \u201cunplanned inheritance\u201d risk is highly likely to materialise. We assumed an expected return of 8%.<\/p>\n\n<p class=\"wp-block-paragraph\">Figure 8 shows that with our returns from simulation 9 and a cap of CHF 50,000, the fluctuations can be significantly reduced. Even so, the withdrawal amount still swings quite a lot, between CHF 24,695 and CHF 50,000, i.e. by 50%.<\/p>\n\n<p class=\"wp-block-paragraph\">In this example, we used up our wealth completely by the end of the 30-year withdrawal phase, i.e. the \u201cunplanned inheritance\u201d risk did not materialise. But as mentioned above, this risk cannot be ruled out with the annuity rule with a cap.<\/p>\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1540\" height=\"978\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb8_Annuitaeten-mit-Obergrenze.jpg\" alt=\"Early retirement\" class=\"wp-image-4244\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb8_Annuitaeten-mit-Obergrenze.jpg 1540w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb8_Annuitaeten-mit-Obergrenze-768x488.jpg 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2023\/02\/Abb8_Annuitaeten-mit-Obergrenze-1536x975.jpg 1536w\" sizes=\"auto, (max-width: 1540px) 100vw, 1540px\" \/><figcaption class=\"wp-element-caption\">Fig. 8: Annuity rule with a cap (green): smaller fluctuations in the annual withdrawal amount compared with the annuity rule without ranges (grey; raw data: University of Mannheim).<\/figcaption><\/figure>\n\n<p class=\"wp-block-paragraph\">To smooth out the fluctuations even further, you would need to set a <strong>floor<\/strong> as well as a cap. We think a floor on the withdrawal amount makes sense especially if your <strong>essential expenses can\u2019t be covered by state pensions<\/strong>. But with an additional floor, the annuity rule would carry the risk of running out of money early, which would defeat the main purpose of this rule.<\/p>\n\n<p class=\"wp-block-paragraph\">That\u2019s why a bit of <strong>creativity <\/strong>is called for, which brings us to our conclusion.\u00a0\u00a0\u00a0<\/p>\n\n<h2 class=\"wp-block-heading\"><span id=\"Conclusion_take_the_best_of_both_worlds_for_early_retirement\">Conclusion: take the best of both worlds for early retirement<\/span><\/h2>\n\n<p class=\"wp-block-paragraph\">What we\u2019ve discussed and analysed so far has shown one thing above all: <strong>all three withdrawal plans and their sub-variants can have serious drawbacks<\/strong>. To sum up briefly: fixed withdrawals without market risk lead to a lower standard of living on average; with fixed withdrawals with market risk, you face either ruin or an unplanned inheritance; and with flexible withdrawals with market risk, you are at the mercy of the stock market\u2019s moods, which can lead to a sharply fluctuating standard of living.<\/p>\n\n<p class=\"wp-block-paragraph\">That\u2019s why, to wrap up, we\u2019d like to present a <strong>home-made rule-of-thumb method<\/strong> that combines the flexible and the static \u201cwithdrawal worlds\u201d, at least in places.\u00a0\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Our reference point is the <a href=\"#Annuitaetenregel_mit_und_ohne_Obergrenze\">annuity rule<\/a> described above, on which the flexible withdrawal strategy is based.<\/strong><\/p>\n\n<p class=\"wp-block-paragraph\">As we saw so strikingly earlier, market fluctuations can be a problem with the flexible withdrawal strategy, depending on how returns develop. In extreme cases, i.e. after heavy price losses, the reduced withdrawal amounts may not even cover your essential spending any more. And that\u2019s exactly where we need to step in. Without throwing the whole concept of the flexible withdrawal strategy overboard, you can get excessively fluctuating withdrawal amounts under control with the following <strong>two corrective measures<\/strong>.<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Measure 1: set a cap for the \u201cbest-case scenario\u201d<\/strong><\/p>\n\n<p class=\"wp-block-paragraph\">This cap kicks in after very good stock market years. The maximum withdrawal amount should be set neither too low nor too high. If you set it too low, you run the risk that your wealth won\u2019t be used up (\u201cunplanned inheritance\u201d risk). If you set it too high, on the other hand, you will hardly be able to smooth out the fluctuations. In our simulation above, with starting wealth of CHF 1 million, we capped the maximum withdrawal amount at CHF 50,000. That\u2019s 25% above the \u201c4% rule\u201d (CHF 50,000 vs. CHF 40,000). If you like, the cap can be a bit more generous. You only live once\ud83d\ude0a.<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Measure 2: keep a cash reserve as an emergency fund<\/strong><\/p>\n\n<p class=\"wp-block-paragraph\">For this second measure, we fall back on the <a href=\"#Fruehrente-Entnahmeplan_Variante_1_Fixe_Entnahmebetraege_ohne_Marktrisiko\">fixed withdrawal strategy without market risk<\/a>. In concrete terms, this means your withdrawal strategy consists of <strong>two withdrawal pots<\/strong>: equity ETFs and cash. For loss-making stock market years, keep cash worth at least two annual withdrawal amounts in your bank account. With starting wealth of CHF 1 million and average living expenses of CHF 45,000, that would be around CHF 90,000. You play this <strong>cash joker<\/strong> in the <strong>first poor stock market years that come along<\/strong> (e.g. with price losses of 10% or more p.a.). 2022, for example, would have been one such joker year, as the broad-market MSCI World Index slumped by around 17%. <\/p>\n\n<p class=\"wp-block-paragraph\">The timing is crucial because of <strong>sequence-of-returns risk<\/strong>. So if, for example, the stock market corrects by 10% in the third year of withdrawals, you should play this joker straight away, because its positive effect on the following withdrawal amounts and their fluctuations is greatest at the beginning. Later on, i.e. if you play the joker in year 23 instead of year 3, the smoothing effect on the fluctuations is much smaller.\u00a0<\/p>\n\n<p class=\"wp-block-paragraph\">Taboo for many investors, but possibly an alternative for cool-headed number crunchers: if you don\u2019t want to hoard cash earning no interest for an \u201cemergency\u201d, you can instead finance your spending for the withdrawal year after a stock market slump with a <a href=\"https:\/\/de.wikipedia.org\/wiki\/Lombardkredit\" target=\"_blank\" rel=\"noopener\">Lombard loan<\/a>. In such a case, your wealth, invested entirely with market risk, would serve as collateral for the lender. The loan would only be repaid once share prices have recovered, by selling parts of your holdings as usual in the withdrawal plan. Of course, it\u2019s important that the loan is financed at the lowest possible interest rate. In our experience, <a href=\"https:\/\/www.interactivebrokers.co.uk\/mkt\/?src=schweiz13&amp;url=%2Fde%2Findex.php%3Ff%3D46996%0A\" target=\"_blank\" rel=\"noreferrer noopener\">Interactive Brokers<\/a> offers comparatively attractive interest rates for Lombard loans.<\/p>\n\n<h3 class=\"wp-block-heading\"><span id=\"Final_remarks\">Final remarks<\/span><\/h3>\n\n<p class=\"wp-block-paragraph\">As we have seen, a few precautions are needed to ease into early retirement. It\u2019s particularly important that you can rely on a well-thought-out withdrawal plan. Flexibility when drawing down your wealth is key. As a basic rule, after poor stock market years you should sell none or only a limited amount of your equity holdings.<\/p>\n\n<h2 class=\"wp-block-heading\"><span id=\"You_might_also_be_interested_in\">You might also be interested in<\/span><\/h2>\n\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/post-list-component\/post-list-component.css\">\n\n<div class=\"post-list-componenet pt-2 pb-4\">\n\t<div class=\"row\">\n\t\t\t\t\t\t\n\t\t <div class=\"col-xl-6\">\n\t\t\t <a class=\"text-decoration-none\" href=\"https:\/\/schweizerfinanzblog.ch\/en\/financial-freedom-hype-or-a-goal-worth-striving-for\/\">\n\t\t\t\t<div class=\"d-flex post-list-card\">\n\t\t\t\t\t<div class=\"post-list-image \">\n\t\t\t\t\t\t<div class=\"image-wrapper\">\n\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1200\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2019\/07\/paragliding-1245837.jpg\" class=\"attachment-1920x1297 size-1920x1297 wp-post-image\" alt=\"Financial freedom\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2019\/07\/paragliding-1245837.jpg 2048w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2019\/07\/paragliding-1245837-768x480.jpg 768w\" sizes=\"auto, (max-width: 1920px) 100vw, 1920px\" \/>\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div class=\"post-list-title px-2 d-flex align-items-center\">\n\t\t\t\t\t\t<p class=\"\">Financial freedom: hype or a goal worth pursuing?<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<\/a>\n\t\t<\/div>\n\t\t\t\t\n\t\t <div class=\"col-xl-6\">\n\t\t\t <a class=\"text-decoration-none\" href=\"https:\/\/schweizerfinanzblog.ch\/en\/minimalism-experiences-less-is-more\/\">\n\t\t\t\t<div class=\"d-flex post-list-card\">\n\t\t\t\t\t<div class=\"post-list-image \">\n\t\t\t\t\t\t<div class=\"image-wrapper\">\n\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"1852\" height=\"1297\" src=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2024\/12\/Titelbild_Minimalismus_klein.jpg\" class=\"attachment-1920x1297 size-1920x1297 wp-post-image\" alt=\"Minimalism\" srcset=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2024\/12\/Titelbild_Minimalismus_klein.jpg 2372w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2024\/12\/Titelbild_Minimalismus_klein-768x538.jpg 768w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2024\/12\/Titelbild_Minimalismus_klein-1536x1076.jpg 1536w, https:\/\/schweizerfinanzblog.ch\/wp-content\/uploads\/2024\/12\/Titelbild_Minimalismus_klein-2048x1434.jpg 2048w\" sizes=\"auto, (max-width: 1852px) 100vw, 1852px\" \/>\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div class=\"post-list-title px-2 d-flex align-items-center\">\n\t\t\t\t\t\t<p class=\"\">Minimalism experience: less clutter, personal &#038; financial freedom<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<\/a>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n<\/div>\n<link rel=\"stylesheet\" href=\"https:\/\/schweizerfinanzblog.ch\/wp-content\/themes\/schweizerfinanzblog\/components\/post-list-component\/post-list-component.css\">\n\n<div class=\"post-list-componenet pt-2 pb-4\">\n\t<div class=\"row\">\n\t\t\t<\/div>\n<\/div>\n<h2 class=\"wp-block-heading\"><span id=\"Updates\">Updates<\/span><\/h2>\n\n<p>10 August 2026: Corrected the annuity formula (exponent in the numerator) and the related worked example. <\/p>\n\n<p class=\"wp-block-paragraph\">11 September 2023: Replaced the link to the University of Mannheim\u2019s decumulation simulator with the new version.<\/p>\n\n<h2 class=\"wp-block-heading\"><span id=\"Disclaimer\">Disclaimer<\/span><\/h2>\n\n<p class=\"wp-block-paragraph\"><strong>Disclaimer: <\/strong>Investing involves the risk of losses. You have to decide for yourself whether or not you want to bear these risks.<\/p>\n\n<p class=\"wp-block-paragraph\"><strong>Errors excepted:<\/strong> We have written this article to the best of our knowledge and belief. Our aim is to provide you as a private investor with the most objective and meaningful information possible on all things finance. If we have nevertheless made mistakes, or if important aspects have been forgotten and\/or are no longer up to date, we would be grateful if you let us know.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Building wealth is relatively simple, for example by investing regularly in an equity ETF. What\u2019s more complex is drawing down the wealth you\u2019ve built up so that it secures your standard of living for many years and lasts until the end of your life. To ease into early retirement, you need a smart withdrawal plan [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":10152,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[181,180],"tags":[],"class_list":["post-9491","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-freedom","category-investment-strategy"],"acf":[],"_links":{"self":[{"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/posts\/9491","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/comments?post=9491"}],"version-history":[{"count":14,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/posts\/9491\/revisions"}],"predecessor-version":[{"id":18774,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/posts\/9491\/revisions\/18774"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/media\/10152"}],"wp:attachment":[{"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/media?parent=9491"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/categories?post=9491"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/schweizerfinanzblog.ch\/en\/wp-json\/wp\/v2\/tags?post=9491"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}