The Rule of 25

The Rule of 25 tells us to save 25 times as much as we need annually during retirement. This was an important, early finding from research into Safe Withdrawal Rates.

The methodology from that time was flawed. Researchers made the plausible assumption that the lowest 30-year Historical Surviving Withdrawal Rate (HSWR) from the historical record was also the Safe Withdrawal Rate. The highest of these rates for a portfolio consisting of stocks (the S&P500 index) and commercial paper was very close to 4.0% as allocations were varied. The best allocations included a high percentage of stocks.

Now that we have placed the problem into a proper statistical setting and introduced the effect of valuations, we know that those previously reported rates never were safe. They were typical. They were very close to what we would expect at their valuations.

In the meantime, we have not been content just to report bad news. We have worked hard to restore the Rule of 25 and we have succeeded.


One of our successes has been to establish a very tough-to-beat baseline portfolio. It is a 100% TIPS portfolio with a specified interest rate.

First, we need to understand what the Rule of 25 claimed to be able to do. It identified an initial portfolio balance from which you could withdraw the largest, fixed amount of money (in terms of buying power, after adjusting for inflation) for 30 years and never deplete your account. If you were to withdraw more, you would be in danger of going bankrupt before the end of 30 years.

Obviously, there needs to be an adjustment for those planning for more than 30 years. In addition, because of the stock holdings, there is a good chance of ending up with a very large portfolio balance at the end of 30 years during times of normal valuations.

We identify the Rule of 25 as a rule of thumb. Not only are we interested in time periods longer than 30 years, we need a better rationale. The holdings that originally supported the Rule of 25 never were safe. Nor are they safe today. Today's valuations are slightly above the pre-bubble historical range.

TIPS interest rates have fallen considerably. As recent as last year, we could purchase long-term TIPS at a 2.5% interest rate. Today, we cannot even get 2.0%.

For current interest rate, visit the bond area of the Bloomberg site:
Bloomberg Interest Rates

In terms of actually implementing TIPS baselines, TIPS Ladders are attractive inside of tax sheltered accounts. I Bonds are an attractive alternative in taxable accounts. [With TIPS, you are taxed immediately on the inflation adjustments to your principal. I Bonds are not taxed before being redeemed unless you elect to do so.]

An advantage of a TIPS Ladder is that you hold all of your bonds to maturity, which avoids the expenses and the possibility of loss when selling on the secondary market. Another advantage is that you can redeploy your funds elsewhere if opportunities arise.


We have a baseline that is very tough to beat.

Remember that the best that you could get with stocks was a 4% (plus inflation) withdrawal rate over 30 years and it wasn’t really safe. You can withdraw 4% (plus inflation) for 30 years with complete safety from TIPS at 1.2%. It turns out that even 5-year TIPS yield 1.3%. I Bonds, with their favorable tax treatment, purchased today yield 1.2%.

Most likely, you will want to do something different with your money. But as a baseline, a 100% TIPS portfolio is hard to beat.

Of course, you end up depleting your principal if you withdraw the full 4.0% (plus inflation) from 1.2% TIPS for 30 years. But you do make it through year 30, something that the traditional, high stock portfolio only has about a 50%-50% chance of accomplishing.

Here are the interest rates that you need for a 100% TIPS portfolio to supply 4.0% of your initial balance (plus inflation):

To last 30 years, you need to get 1.2%.
To last 35 years, you need to get 2.0%.
To last 40 years, you need to get 2.5%.
To last 45 years, you need to get 2.9%.
To last 50 years, you need to get 3.2%.

Here are the interest rates that you need for a 100% TIPS portfolio to supply 3.5% of your initial balance (plus inflation):

To last 30 years, you need to get 0.3%.
To last 35 years, you need to get 1.2%.
To last 40 years, you need to get 1.8%.
To last 45 years, you need to get 2.2%.
To last 50 years, you need to get 2.5%.

Here are the interest rates that you need for a 100% TIPS portfolio to supply 3.0% of your initial balance (plus inflation):

[Zero percent interest will produce 3.3% for 30 years.]
To last 35 years, you need to get 0.3%.
To last 40 years, you need to get 0.9%.
To last 45 years, you need to get 1.4%.
To last 50 years, you need to get 1.7%.


What if you are planning for more than 30 years? Can you still take advantage of the Rule of 25?


For purposes of discussion, we shall ignore the possibility that TIPS interest rates will rise in the future.

It is highly likely that stocks will become attractive once again in the future. If so, they can extend your portfolio’s timeframe.

If we could get TIPS at a 2% interest rate, our 30-year Safe Withdrawal Rate by varying allocations with valuations (i.e., switching) would be 4.4%. (The Safe Withdrawal Rates with a fixed allocation of stocks and 2% TIPS is 3.6% or less. The traditional claim of 4.0% associated with a fixed allocation of stocks and commercial paper corresponds most closely to a Calculated Rate, not a Safe Withdrawal Rate. Our Calculated rate with switching is 5.12%, a dramatic improvement.)

Clearly, this puts us into the ballpark.

There are a few high dividend stocks that I would trust to deliver 4.0%+ even today. It is plausible, if not certain, that you can construct a dividend-based portfolio that will deliver 4.0% (plus inflation) from dividends far into the future.

For example, Merck currently yields 4.75%. It has a P/E ratio of 12.8. Its price was beaten down by the Vioxx controversy. Many see risk. I see opportunity. Your decisions have to be your own.

Even if you decide not to buy any stocks today, you may choose to do so in the future. The odds strongly favor a decrease in overall stock valuations in the intermediate-term (of 5 to 20 years or approximately 10 years). If so, there will be many more stocks with attractive dividend yields.


The original rationale behind the Rule of 25 failed. We have been able to restore the Rule of 25 once again. It is on a solid foundation.

We have shown how to do even better without much risk.

Even the youngest, most conservative individual can take heart at our findings. Our TIPS-only baseline portfolio is powerful enough for you to withdraw 3.0% (plus inflation) of your initial balance for 45 to 50 years and it is truly safe. All that we need are TIPS interest rates of 1.4% to 1.7%.

Have fun.

John Walter Russell
I wrote this on June 6, 2005.