Retirement investing is tough because there are so many unknowns. How long will I be invested? How should I invest now so that my money lasts a lifetime? How much can I take out of my account so I don’t run out of money?
The Trinity study gives you a way to start answering these questions. This study is one of the most well-respected and rigorously tested works on withdrawal rates in retirement. The original study was done by three professors—Cooley, Hubbard and Walz—at Trinity University in Texas.
The professors calculated the probability of not running out of money over rolling 15- to 30-year periods using actual historical returns for stocks, bonds, and inflation from 1926 to 1995. (The study was updated in 2009 by these same academics and updated again in 2014 by Professor Wade Pfau of The American College of Financial Services.) The results give useful guidelines on how to allocate your assets based on your initial withdrawal rate and time horizon.
The Trinity study confirmed what’s known as the 4% Rule: investors who invested their retirement portfolio 50% in stocks and 50% in bonds could withdraw an initial 4%, adjusted annually for inflation, and be confident they would not run out of money over 30 years. The study found that a 4% withdrawal rate was successful 100% of the time over every 30-year period tested. (Interestingly, the study didn’t look at the classic retirement allocation of 60% stocks and 40% bonds.)
Chances of success for five portfolio allocations
The Trinity study considered the probability of success (not running out of money) for four other portfolio allocations ranging from 100% bonds to 100% stocks, shown below.
Investing in a portfolio of 50% bonds and 50% stocks had the highest success rate. There was a 100% probability that you’d have enough money to last 30 years. Getting too conservative, however, really hurt your chances of success. If you’d invested entirely in bonds, however, your success rate dropped to just 41%.
If you owned more stocks, you still had a very good chance of having enough money to last 30 years. It may surprise you to see that owning more stocks didn’t increase your chances of success.
Putting the pieces together
The Trinity study can help you bring together your time horizon, initial withdrawal rate, and your portfolio allocation—three key elements of successful retirement investing that affect your chances of success.
There’s another variable you should consider, and that’s what is an acceptable chance of success for you? Will you feel comfortable selecting a withdrawal rate and an allocation that has historically succeeded 87% of the time? Or do you need a 100% probability to feel confident? That’s a question only you can answer.
Simplify Your Retirement Investing with Upgrader Funds
The Upgrader Funds can simplify your stock and bond investing. With one fund, you’ll get exposure to a full portfolio of stock or bond funds.
If you were looking for a portfolio with risk comparable to that shown in the Trinity study, you could use the Upgrader Fund (FUNDX) for stocks and the Flexible Income Fund (INCMX) for bonds, as shown below.
Or you could invest in the Conservative Upgrader Fund (RELAX). With RELAX, you get a portfolio of 60% stock funds and 40% in our Flexible Income approach, and this portfolio is balanced and rebalanced for you.
How to Invest
You can invest in the FundX Funds at most major brokers or directly with our shareholder services. Call 1-866-455-3863 or click here to get started.