Sustainable withdrawal rate

[KevinW]

What rate of distribution can a permanent portfolio support indefinitely?

My wife and I are interested in early retirement, which means we need investment income that can be sustained indefinitely.  Due to the stability of the permanent portfolio and the flexibility of our spending habits, I think we would be OK taking out a fixed percentage of a Permanent Portfolio every year.  This is different from the typical retirement scenario, where you calculate a number of dollars to withdraw the first year, apply a cost-of-living adjustment every year regardless of market performance, and are OK drawing down the whole portfolio after only 30 years or so.

What percentage withdraw rate can a PP support forever?  I believe Harry Browne was asked this and said something to the effect of 4-4.5%.  Simba's spreadsheet shows that over 1972-2009 the PP had an after-inflation CAGR of 4.85%, which would support a 4.5% withdraw rate above expenses and a very small margin for error.

Is there any way of arriving at a withdraw rate figure other than backtesting and extrapolating into the future?  After all I've read by Bogle, Browne, etc. I am uncomfortable making critical investing decisions this way.

[craigr]

Conservative is always better. You can spend more later if it is too low. I'm early retired and try to keep things around 3% to be safe. Although some years it has been more like 4%. But going over 4% would get me nervous with any portfolio.

[KevinW]

Conservative is always better. You can spend more later if it is too low. I'm early retired and try to keep things around 3% to be safe. Although some years it has been more like 4%. But going over 4% would get me nervous with any portfolio.

Thanks.

History indicates that investing - as in stocks, bonds etc., generally provides around a 4% real gain.  That however is a long term mathematical average.  In practice a large number of investors never achieve that average.  A critical element in practice is the relative price at which you buy-in at. 

Thanks for typing out this detailed analysis.  Where did you get the 4% figure?  Usually I see the long-term real return on stocks quoted around 8%.