Trinity study

In finance, investment advising, and retirement planning, the Trinity study is an informal name used to refer to an influential 1998 paper by three professors of finance at Trinity University.Cooley, Philip L., Carl M. Hubbard, and Daniel T. Walz. 1998. "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable." AAII Journal 10, 3: 16–21] It is one of a category of studies that attempt to determine "safe withdrawal rates" from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time.

Its conclusions are often encapsulated in a "4% safe withdrawal rate rule-of-thumb." It refers to one of the scenarios examined by the authors. The context is one of annual withdrawals from a retirement portfolio containing a mix of stocks and bonds. The 4% refers to the portion of the portfolio withdrawn during the first year; it's assumed that the portion withdrawn in subsequent years will increase with the CPI index to keep pace with the cost of living. The withdrawals may exceed the income earned by the portfolio, and the total value of the portfolio may well shrink during periods when the stock market performs poorly. It's assumed that the portfolio needs to last thirty years. The withdrawal regime is deemed to have failed if the portfolio is exhausted in less than thirty years and to have succeeded if there is are unspent assets at the end of the period.

The authors backtested a number of stock/bond mixes and withdrawal rates against market data compiled by Ibbotson Associates covering the period from 1925 to 1995. They examined payout periods from 15 to 30 years, and withdrawals that stayed level or increased with inflation. For level payouts, they stated that "If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured." For payouts increasing to keep pace with inflation, they stated that "withdrawal rates of 3% to 4% continue to produce high portfolio success rates for stock-dominated portfolios."

Other authors have made similar studies using backtested and simulated market data, and other withdrawal systems and strategies.

The Trinity study and others of its kind have been sharply criticized, e.g. by Scott et. al (2008) [Scott, Jason S., William F. Sharpe, and John G. Watson: " [http://www.stanford.edu/~wfsharpe/retecon/4percent.pdf The 4% Rule: At What Price?] "] , not on their data or conclusions, but on what they see as an irrational and economically inefficient withdrawal strategy: "This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy. As a result, retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform."

Laurence Kotlikoff, advocate of the consumption smoothing theory of retirement planning, is even less kind to the 4% rule, saying that it "has no connection to economics.... economic theory says you need to adjust your spending based on the portfolio of assets you're holding. If you invest aggressively, you need to spend defensively. Notice that the 4 percent rule has no connection to the other rule—to target 85 percent of your preretirement income. The whole thing is made up out of the blue." [Fonda, Daren (2008), "The Savings Sweet Spot," SmartMoney, April, 2008, pp. 62-3 (interview with Ben Stein and Laurence Kotlikoff)]

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