If you want to build above-average wealth, you need to be dynamic in thought and in action. The world is ever-changing, which is why you should stay flexible.

Those who remain rigid will suffer the consequences: less money, fewer friends, less meaning, and lower levels of happiness. If you don’t believe me, identify the unhappiest person you know. Chances are high they are set in their ways.

Being able to see the other side of an argument is a beautiful thing! It is absurd not to acknowledge another person’s point of view. Maybe if more of us did, there would be no more wars. That would be nice.

In finance, everything is yin yang. A negative is often counterbalanced by a positive. In this current environment with high inflation and rising interest rates, your dynamic safe withdrawal rate in retirement can now increase.

Let me explain why.

The Importance Of A Dynamic Safe Withdrawal Rate In Retirement

The dynamic safe withdrawal rate formula is the Financial Samurai Safe Withdrawal Rate formula. It is a guide that changes with the times.

Safe withdrawal rate = 10-year bond yield X 80%

When the 10-year bond yield declined to 0.59% at the start of the pandemic in 2020, the dynamic safe withdrawal rate formula implied a 0.48% withdrawal rate. In my proper safe withdrawal rate post, I rounded it to 0.5% to make the math easier.

With a lower safe withdrawal rate, an individual could invest more or accumulate more cash during times of great uncertainty. Seems logical as the stock market was plummeting. Unfortunately, many readers who worship the 4% rule went apoplectic at the suggestion of being dynamic.

With the 10-year bond yield now rising to ~2.8%, your dynamic safe withdrawal rate now rises to 2.24%. Hooray! You are free to withdraw at a higher rate if you wish because bond yields, dividend yields, real estate yields, savings rates, and other types of income-producing assets will likely also be rising.

Risk Asset Returns Are Tied To The Risk-Free Rate

Some people misunderstood my formula and thought that retirees must only own a 100% bond portfolio in retirement because of my use of the 10-year Treasury bond yield as a key variable. This is incorrect and my safe withdrawal rate post explains why.

But to summarize here, the 10-year Treasury bond yield is the risk-free rate of return. And risk assets can be priced based off the risk-free rate plus a risk premium.

Equity Risk Premium = Expected Market Return – Risk-Free Rate

Expected Market Return = Risk-Free Rate + β (Equity Risk Premium)


Logic dictates you would not invest in a risk asset if it didn’t provide a greater potential return than the risk-free rate. Therefore, as the the risk-free rate rises and falls, so too does the expected market return and expected risk premium.

Examples Of Why The Risk-Free Rate Is Important When Investing

To understand new things, it’s helpful to go through formulas and talk out scenarios. With these two examples, let me try to explain one more time why the risk-free rate is important when investing.

1) Real Estate Investing And the Risk-Free Rate

With the risk-free rate currently at ~2.8%, you would not buy a property with an expected market return of 2.8% or less. Why? Because you could lose money. Further, it takes time to manage a physical rental property. Therefore, you look for the highest expected market return above the risk-free rate of return, which equals the equity risk premium.

Some real estate investors, especially in big coastal cities, will purchase real estate with cap rates (similar to net rental yields) at less than the risk-free rate of return. This usually means they are cash flow negative. They invest this way because they are banking on capital appreciation to more than compensate for their negative cash flow.

This strategy works great in a bull market, but puts the real estate investor at greater risk of foreclosure during a bear market compared to a cash flow positive investor.

As the risk-free rate goes higher real estate investors will refuse low cap rate properties, leading to market softness. Investors will look for higher cap rate properties and properties they think will return a higher percentage to maintain their equity risk premium. As a result, more capital should flow to the Sunbelt region where cap rates are higher.

But of course, the variables are dynamic. The equity risk premium could certainly compress as well as investors accept lower expected market returns. Personally, the less I have to do, the lower the return I’m willing to accept. As a result, I’m fine with earning 7% in a private real estate fund that requires no work versus 10% with managing a physical rental property.

The point of these formulas is to help you think more rationally as situations change.

2) Investing In Corporate Bonds And The Risk-Free Rate

Corporations issue bonds to raise capital for operations and acquisitions. When interest rates are low, corporations tend to issue more bonds because the cost of capital is lower and vice versa.

With the risk-free rate at ~2.8%, a corporation would need to issue bonds with a coupon rate higher than 2.8%. Otherwise, it may have a hard time attracting capital since investing in corporate bonds has risk. Corporations could default on their bond payments or go bankrupt.

If you are a retiree, you start getting excited at investing in all types of bonds because coupon rates are going up. Whether the bond issuer is a corporation or a municipality, it must raise its coupon rate to stay competitive with Treasury bonds.

If you believe inflation and interest rates will decline and the market hasn’t yet priced in this likelihood, then you are even more excited to buy bonds. The corporate bond you purchase yielding 5% today will look much more attractive if the risk-free rate drops to 1.5% in one year versus 2.8% today. Therefore, the corporate bond will appreciate in value.

Proper Safe Withdrawal Rates In Retirement Chart

To make things easier to understand, here is my proper safe withdrawal rates in retirement chart. It is based off my dynamic safe withdrawal rate formula of 10-year bond yield X 80%. With the 10-year yield close to 3%, if you are retired, withdrawing around 2.4% is reasonable.

Of course, depending on your situation and retirement philosophy, you are free to withdraw at a much higher or lower rate if you wish. In general, I’ve found guides to be helpful. Then it’s up to us to tailor our decisions.

Dynamic safe withdrawal rate guide with different interest rates

Raising Your Withdrawal Rate With High Inflation And Negative Returns

Does it make sense to raise your safe withdrawal rate in retirement if risk assets are declining, inflation remains elevated, and a recession may be on the horizon? After all, raising your safe withdrawal rate reduces your wealth quicker.

The answer depends on your timing, risk tolerance, your ability to generate supplemental retirement income, and what is more important to you. Conventional wisdom says to be more conservative and lower your safe withdrawal rate in retirement. But that is if you’ve started with a high withdrawal rate in the first place.

If you are willing to invest more when we know times are bad (e.g. lower withdrawal rate and buying stocks and real estate in 2020), then logically, you should be willing to spend more when times are good or not yet that bad (e.g. after a 60%+ increase from a recent stock market bottom, only a 10% – 15% correction, real market still steady).

To me, it is better to enjoy your money rather than see it disappears in a bear market. If you don’t spend your money when things are still good, then you most likely won’t spend your money when things are bad. As a result, you will more than likely die with too much money.

Retirees Should Care More About Income Than Net Worth

As a retiree, your main focus is on generating enough income to live your life without having to work. Therefore, you like it when interest rates rise because it increases your risk-free and at-risk investment income.

Of course, you still care about your net worth. However, what you should care about more is how much income your net worth is generating.

Even if your net worth temporarily declines by 25% in a bear market, so long as your net worth is generating a similar amount of income, you are OK. But if your income declines by 25%, you may have to reduce your lifestyle. And living your best lifestyle is the end goal.

The risk to your investment income is during a protracted bear market. If a bear market lasts for much longer than a year, chances increase dividend payout ratios may be cut, property rental yields may decline, and bond yields may also decline. The double whammy of declining principal values and declining investment income hurt retirees the most.

In such a worst-case scenario, the recommendation is to be dynamic by lowering your safe withdrawal rate and/or generating some type of extra income. But the beauty of the FS Safe Withdrawal Rate formula is that it will automatically generate a lower recommended safe withdrawal rate in such a scenario!

Therefore, you don’t have to overthink things. My dynamic safe withdrawal rate formula reflects economic conditions as they change.

Why I’m Increasing My Safe Withdrawal Rate

Personally, I’ve decided to increase my safe withdrawal rate which has been 0% since 2012 to 1% for the next 12 months. If all goes well, I’ll increase my safe withdrawal rate to 2% the following year and then reassess.

Let’s say I have a $10 million retirement investment portfolio, the ideal net worth amount for retirement based on a massive survey. I would withdraw $100,000 to spend and donate over the next 12 months. So long as the 10-year bond yield is at 2.5% or greater, starting in month 13, I will withdraw $200,000 a year ($10 million X (2.5% X 80%). The withdrawal plan is regardless of whether we are in a bear market or bull market.

The first reason why I’m increasing my safe withdrawal rate is because I’ll soon be 45 and entering decumulation mode. I’m determined not to die with too much money. Otherwise, I’ll feel like an idiot who improperly allocated his time and energy.

The second reason why I’m increasing my safe withdrawal rate is because reported inflation is running at ~8.5%. Instead of letting my cash sit there, depreciating in value, I’d rather spend it on some goods or services today. For if I wait too long, such goods and services will cost even more money.

The final reason for spending more is because I’m curious to see what a sudden 40% increase in annual spending feels like. I want to experiment to see if it makes our family happier or not. Further, I want to see if I can actually overcome my frugality. Then I’ll write an interesting post to help those are considering spending more themselves.

So far, I’ve just reinvested the majority of my passive and active income to generate more passive income. But we’ve hit our ideal passive income goal for three years in a row. So there’s no point in reinvesting more.

Be Dynamic In More Parts Of Your Life

Following a dynamic safe withdrawal rate will help you live a more peaceful retirement under ever-changing conditions. It’s similar to my dynamic pay down debt or invest formula. The formulas help keep you in check when you may be sure what to do.

Blindly following a fixed withdrawal rate percentage, especially the 4% Rule from the 1990s is not the best choice in today’s environment. There’s a reason why you’re texting and no longer writing letters to friends and family.

In addition to retirement withdrawal strategies, you may also consider being more dynamic in other areas of your life. Here are some examples:

Get good at a sport, musical instrument, or type of artMeet new friends outside of your socioeconomic levelMeet new friends who are different in sex, race, culture, beliefsLearn another language Read all types of historyTake up a new hobbyInterview someone outside your circle

Personally, I’m practicing Mandarin and strumming my old Martin acoustic guitar again. Further, I plan to get on podcasts with people outside of the personal-finance community this year. It would be nice to talk to people who don’t all think index fund investing and budgeting are the best and only ways to get rich.

A Dynamic Safe Withdrawal Rate Is The Way To Go

I hope this post has better explained why I believe my dynamic safe withdrawal rate formula is superior to sticking to a fixed withdrawal rate in retirement over time.

If you haven’t let go of a steady paycheck yet, then do a test drive by living off various withdrawal rates. You might discover you’re fine with a much higher withdrawal rate. Or you might feel that drawing down principal feels too terrible. As a result, you will find fun ways to generate supplemental retirement income to keep your withdrawal rate low.

The truth is, you won’t know how you will really feel about drawing down capital until you no longer have a job. Therefore, expect the unexpected!

I’m hopeful all of you will see the wisdom in being dynamic. And if not, that’s perfectly fine too.

Related posts:

The Negatives Of Early Retirement Nobody Likes Talking About

Your Withdrawal Rate Will Go Down In A Bear Market

Retirees, are you excited that interest rates are going up so you can receive more retirement income? Are you following a dynamic safe withdrawal rate? If not, how are you spending your money during this rising interest rate period?

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