The 4% Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)

The 4% Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)

The 4% Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)


Retirement, this is what we are all striving for in the personal finance community.  And early retirement at that.

I was inspired by a recent post from Liquid Independence’s blog about Revisiting the 4% Safe Withdrawal Rate.  I think that although the 4% Safe Withdrawal Rate (SWR) has been tested and it works, with the assumption of a 30 year time horizon, I would rather not opt for this strategy and instead am gunning for the Never Touch Your Principal (NYTP) method.

what is the 4% Safe withdrawal rate?

As Liquid Independence mentioned, it was coined in 1994 by a financial advisor by the name of Bill Benger (who is now retired), who calculated that retirees could safely withdraw a maximum of 4% (well, according to him now, 4.5%) from their tax advantaged retirement investment portfolio starting in the first year of retirement and ending 30 years later, with the assumption that starting in retirement, there is a 50% stocks and 50% bonds asset allocation.

So someone retiring at the age of 65 with a $850,000 portfolio can safely withdraw $34,000 annually (4% safe withdrawal rate) from their investments to last them until the age of 95.  This is with the assumption that inflation isn’t too crazy over this time span.

First of all, I was quite surprised that the Safe Withdrawal Rate rule which is so ubiquitous in the personal finance community is only a little over 20 years old.  That’s not even tested as 30 years haven’t elapsed since it was coined by Bill Benger.

I don’t know about you, but if I am 95 and still alive I would be worried about running out of money (because at that age with the Safe Withdrawal Rate, he will be running out of money).  If this aforementioned retiree had amassed a $850,000 investment portfolio and had owned a house in Vancouver (you know, now worth over $1.5 million, or even $6 million if they lived on a big street near the Canada line) then that’s okay because this retiree can always do a reverse mortgage or sell the home and downsize.  But if it was $850,000 30 years ago and at the age of 95 it is less than $50,000 I would be worried.  WORRIED.  With that amount you can’t even pay for a fancy schmancy retirement home in Vancouver where you get fresh flowers in the lobby and fresh flowers on your dining table and an aperitif prior to your meal, which according to Seniors Zen can cost over $5000 a month.

Of course, there is the consideration of government assistance like the pension plan and other retirement funds.  Again though, who knows if in 30 years time this will still be a benefit provided by the government?

what is never touch your principal?

It doesn’t mean not physically and literally touching your school principal or your child’s school principal, which is likely not recommended in any case, but never touching you principal means never spending what you have accumulated.  It means using what you have accumulated to your advantage and just living off that.  Without drawing it down.

Financial Samurai wrote a post about the Ideal Withdrawal Rate For Retirement Does Not Touch Principal.  Instead he recommends using the S&P 500 dividend yield which is 2.2%.  This ensures that you won’t be touching your principal.  I’m a little impatient and it will take me quite some time to reach a portfolio that sustain myself on a 2.2% dividend yield.  Probably take another 5 years compared to using a higher dividend yield.


I am opting for the strategy of Never Touching Your Principal with my retirement savings because:

  1.  I don’t want to run out of money in retirement, especially in the latter years of retirement.
  2. I would like to make sure there’s some money leftover as inheritance for my children (if I decide at that point to gift an inheritance), you know, analogous to dangling a carrot for them to pay some attention to me in my old age (I am kidding!!)…or I can always have the option to spend my portfolio in haste in the very last few years of life.  Who knows what the future will hold, but I do know that I would like that option especially when I am vulnerable and older.
  3. I want to retire earlier than age 65 and therefore the 30 year time horizon will not be applicable for me, it will be much longer than 30 years (hopefully I will live longer than 75!).  I am hoping for early retirement at age 45 (but open to working part-time or other gigs to supplement, I would like to keep my brain working).  That being said there are plenty of early retirement/ financial independence folks who have retired at the age of 35 with $1,000,000 in capital who are planning to use the SWR option.  I think a lot of them are supplementing with other streams of passive investing or income, such as starting an online business/ monetizing their blog.

People in the FIRE (Financial Independence Retire Early) camp so emphasize, financial independence provides freedom.  In my option, never touching your principal provides freedom.

my never touch your principal target

The 4% Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)

With the aim for NTYP in mind, I would like to create a dividend portfolio that would generate at least $40,000 in dividend income for myself.  Dividends are like ocean waves, they are soothing and are consistent.  With a 3.5 % dividend yield (my current yield is about 3.2% from my dividend portfolio) that would mean amassing a portfolio of $1,143,000.  My long term goal is to reach $1,000,000 net worth by age 40, and hopefully I can have a seven figure investment portfolio at that time, at the latest by age 45.  By the age of 45, my parents and in laws will be in their 80’s which is usually when health care needs are more.  As mentioned in My Reason for FIRE I would like to have the option of taking care of them if needed, taking them to appointments so that I am not sandwiched between full-time work, school age children, and aging parents.


Readers, what do you think about the safe withdrawal rate?  Am I being too conservative by not wanting to touch my principal?

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About genymoney

GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, investing, and living a minimalist lifestyle.

16 comments on “The 4% Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)

  1. I have never thought about stuff like this when it comes to retirement. Gosh, I definitely need to keep with these kinds of things. But I also do worry about not having enough money when it comes to retirement. Due to inflation and the cost of living, not having enough money worries me a lot.

    • @Melanie- If you have a portfolio that provides dividend income (consistently and reliably over time) it really helps keep up with inflation. My husband worries about not having enough too! Also having a large enough portfolio helps, $800,000 invested is enough for a lot of people but in Vancouver (and likely Hawaii, since there’s a high cost of living there too) it’s not enough.

  2. I am also in the NTYP camp. My goal is to generate about $80k to $100k of dividend income per year. If I split that between my wife and I, we will pay no income tax. I think that this income amount will be able to prevent us from withdrawing from our principal.

    If I don’t need to withdraw from my principal or the withdrawal rat is less than 2% then I am fine. One big factor is my principal home. If it increases by 2-3% a year. That will more than make up for the withdrawal rate. Houses around Toronto is definitely doing better than a 2% increase per year.
    Leo T. Ly recently posted…What Are You Thankful For This Thanksgiving?My Profile

    • @Leo- Yes that’s true, houses in Toronto are definitely more than 2% increase, more like 20% increase! I guess factoring the home helps if you plan to sell the house later to downsize and cash in on the home equity.

  3. That would be nice to NTYP and have enough dividend income to cover for retirement. But withdrawing less than 3% yearly from my principal amount will be fine by me. Withdrawing 1% would be even better. Now I gonna start implementing my dividend income into my personal income statement I do every month.

  4. I’ve always targeted the Never Touch Principle. I feel it’s a lot safer. I don’t like the ideal of touching the principle. Anyhow, it doesn’t matter at this point for me, as my 4-plex covers my living expenses and more. Then I got the commercial property that can also cover 260% of my living expenses. I guess, I have layers of “insurance” of sort. And I’m still working. We’ll see what happen when we decide to call it quit. But independence status is what we’ve already achieved.

    • @Vivianne- Wow, you’re set! You definitely have layers of insurance and the 4% SWR would likely work well for you since you won’t just be relying on your investment portfolio. Congratulations! When do you think you will call it quits?

  5. Thanks for the insightful post. I don’t know what the future has in store for me, so I oscillate from time to time about being comfortable with the SWR. I might decide to buy a business, move to a country with a lower cost of living, or do both – there are too many variables. I’m a mix between trying to have enough to be sustainable versus retiring and finding out what will happen. I tend to be riskier because I can find just about any job pretty easily if I really needed the extra money.

    • @HP- Thanks for the visit! Yes indeed, the world is our oyster! Moving to a country with a lower cost of living would be my dream if I were single and had no kids (e.g. Eat Pray Love style) but I’m staying put in Canada for a while. My sister is a CPA and she just got a new job recently so you’re right about the flexibility! 🙂

    • @MrSLM- I had to look up the word fungible, thanks, learned a new word today! Good point that NTYP is a moving SWR dressed up a bit, it’s a much lower SWR 🙂 better looking and more cautious but harder to achieve.

  6. Since I plan to retire before 65, and hopefully live in my early 300s, I can’t do the 4%. Im investing to grow my money as much as I can, including in investment properties, and ill take what I need to be comfortable. Whatever is left over, goes to my kids to give them something to fight about when I’m gone.

    Regardless the point is to grow as much as I can now!
    Gabe at The Shiny Dollar recently posted…Basic Step 4: How To Cut ExpensesMy Profile

    • @gabe- haha “give them something to fight about” yes that would be nice, or if they piss you off too much you could always threaten to donate it all to charity. Whatver the case having oodles of money saved up is a great situation to be in!

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