Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)

4% Safe Withdrawal Rate vs Never Touch Your Principal is the perfect early retirement strategy because you don't have to worry about not having enough money in retirement

Retirement, this is what most are striving for in the personal finance community.  More specifically, early retirement at that with the help of something called the Safe Withdrawal Rate.

I was inspired by a post from Liquid Independence’s blog about Revisiting the 4% Safe Withdrawal Rate.  I think that although the 4% Safe Withdrawal Rate (SWR) has been tested and it works, with the assumption of a 30 year time horizon, I would rather not opt for this strategy and instead am gunning for the Never Touch Your Principal (NYTP) method.

Safe Withdrawal Rate vs Never Touch Your Principal

what is the 4% Safe withdrawal rate?

As Liquid Independence mentioned, it was coined in 1994 by a financial advisor by the name of Bill Benger (who is now retired).

Bill Benger calculated that retirees could safely withdraw a maximum of 4% (well, according to him now, 4.5%) from their tax advantaged retirement investment portfolio starting in the first year of retirement and ending 30 years later, with the assumption that starting in retirement, there is a 50% stocks and 50% bonds asset allocation.

What does this mean in real numbers? 

So someone retiring at the age of 65 with a $850,000 portfolio can safely withdraw $34,000 annually (4% safe withdrawal rate) from their investments to last them until the age of 95.  This is with the assumption that inflation isn’t ridiculously high over this time period of 30 years.

I had a few thoughts when I read this.

First of all, I was quite surprised that the Safe Withdrawal Rate rule which is so ubiquitous in the personal finance community is only a little over 20 years old.  Simply put, 30 years haven’t elapsed since it was coined by Bill Benger.

I don’t know about you, but if I am 95 and still alive I would be worried about running out of money (because at that age with the Safe Withdrawal Rate at the end of 30 years, he will be running out of money during a period of time where lifestyle expenses can be very high).

If this aforementioned retiree had amassed a $850,000 investment portfolio and had owned a house in Vancouver (you know, now worth over $1.5 million, or even $6 million if they lived on a big street near the Canada line and condo developers want to buy it from them) then I suppose it’s not that bad because this retiree can always do a reverse mortgage or sell the home and downsize.

However, if it was $850,000 30 years ago and at the age of 95, I had less than $50,000 to my name, I would be worried (if I was still cognitively intact enough to be worried).

With that amount ($50,000) you can’t even pay for more than half a year of a fancy retirement home in Vancouver where you get fresh flowers in the lobby and fresh flowers on your dining table and an aperitif prior to your meal.

A retirement home in Vancouver, from what I have heard, can be $10,000 a month or more.  That’s five months of retirement home for $50,000 at 95.

Of course, there is the consideration of government assistance like the pension plan, defined benefit pensions, and other retirement funds.  And there are publicly funded long term care homes as well which do not cost $10,000 a month. 

Again though, who knows if in 30 years time CPP will still be a benefit provided by the government, especially given the situation where we are in billions of dollars deficit from pandemic spending.

Now that we know what the safe withdrawal rate is all about, what is Never Touch Your Principal?

what is never touch your principal?

Never touch you principal means never spending what you have accumulated and never using your original capital investment.  

It means using what you have accumulated to your advantage and just living off the cash flow of dividends and distributions generated from your investment portfolio.  Without drawing it down year by year.

So if you had the $850,000 investment portfolio and you had a 3.5% dividend yield, that would be $29,750 in annual dividends received.  You would not draw down and withdraw money from your original $850,000 but just use the dividends taken from the money tree (your investment portfolio).  As you can imagine, doing the never touch your principal method would take more time and money to accumulate compared to the safe withdrawal rate method.

At that point, obviously $29,750 in dividend income would only cover 3 months of fancy retirement home living, but I suppose it would be prudent to start selling the portfolio at that time to pay for added expenses.  The $850,000 portfolio would have grown to something much larger at this point with decades of capital appreciation and not drawing it down.


I am opting for the strategy of Never Touching Your Principal instead of the 4% Safe Withdrawal Rate with my retirement savings because:

  1.  I don’t want to run out of money in retirement, especially in the latter years of retirement.  This is when there are expensive things to pay for, should be be a live-in caregiver, or a retirement home, or extra support in the form of meals, or a part time caregiver.
  2. I would like to make sure there’s some money leftover as inheritance for my children or grandchildren at that point.  That being said, I might want to spend like crazy in my later years in life.  Who knows what the future will hold, but I do know that I would like to at least have that option especially when I am vulnerable and older.
  3. I want to retire earlier than age 65 and therefore the 30 year time horizon will not be applicable for me, it will be much longer than 30 years (hopefully I will live longer than 75 if I stop working at 45!).  I am hoping for early retirement at age 45 (but am open to working part-time or other gigs to supplement, I would like to keep my brain working in semi-retirement).

That being said there are plenty of early retirement/ financial independence folks who have retired at the age of 35 with $1,000,000 in capital who are planning to use the safe withdrawal rate option.  I think a lot of them are supplementing with other streams of passive investing or income, such as starting an online business/ monetizing their blog.

People in the FIRE (Financial Independence Retire Early) movement emphasize financial independence because it provides freedom.  In my option, never touching your principal provides freedom as well from the burden of not having enough money in retirement.

my never touch your principal target

The 4% Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)

With the aim for NTYP in mind, I would like to create a dividend portfolio that would generate at least $35,000 to $40,000 in dividend income for myself.  Dividends are like ocean waves, they are soothing and are consistent (except when they are cut, ha).

With a 3.5 % dividend yield (my current yield is about 3.2% from my dividend portfolio) that would mean amassing a portfolio of $1,143,000.

My long term goal is to reach $1,000,000 net worth by age 40, and hopefully I can have a seven figure investment portfolio at that time, at the latest by age 45.

By the age of 45, my parents and in laws will be in their 80’s which is usually when health care needs are more.  

As mentioned in My Reason for FIRE I would like to have the option of taking care of them if needed, taking them to appointments so that I am not sandwiched between full-time work, school age children, and aging parents.

For a more in-depth look at retirement projections, check out this post.

What do you think about the safe withdrawal rate?  

Am I being too conservative by not wanting to touch my principal?

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30 thoughts on “Safe Withdrawal Rate (SWR) vs Never Touch Your Principal (NTYP)”

  1. I have never thought about stuff like this when it comes to retirement. Gosh, I definitely need to keep with these kinds of things. But I also do worry about not having enough money when it comes to retirement. Due to inflation and the cost of living, not having enough money worries me a lot.

    • @Melanie- If you have a portfolio that provides dividend income (consistently and reliably over time) it really helps keep up with inflation. My husband worries about not having enough too! Also having a large enough portfolio helps, $800,000 invested is enough for a lot of people but in Vancouver (and likely Hawaii, since there’s a high cost of living there too) it’s not enough.

  2. I am also in the NTYP camp. My goal is to generate about $80k to $100k of dividend income per year. If I split that between my wife and I, we will pay no income tax. I think that this income amount will be able to prevent us from withdrawing from our principal.

    If I don’t need to withdraw from my principal or the withdrawal rat is less than 2% then I am fine. One big factor is my principal home. If it increases by 2-3% a year. That will more than make up for the withdrawal rate. Houses around Toronto is definitely doing better than a 2% increase per year.

    • @Leo- Yes that’s true, houses in Toronto are definitely more than 2% increase, more like 20% increase! I guess factoring the home helps if you plan to sell the house later to downsize and cash in on the home equity.

  3. That would be nice to NTYP and have enough dividend income to cover for retirement. But withdrawing less than 3% yearly from my principal amount will be fine by me. Withdrawing 1% would be even better. Now I gonna start implementing my dividend income into my personal income statement I do every month.

  4. I’ve always targeted the Never Touch Principle. I feel it’s a lot safer. I don’t like the ideal of touching the principle. Anyhow, it doesn’t matter at this point for me, as my 4-plex covers my living expenses and more. Then I got the commercial property that can also cover 260% of my living expenses. I guess, I have layers of “insurance” of sort. And I’m still working. We’ll see what happen when we decide to call it quit. But independence status is what we’ve already achieved.

    • @Vivianne- Wow, you’re set! You definitely have layers of insurance and the 4% SWR would likely work well for you since you won’t just be relying on your investment portfolio. Congratulations! When do you think you will call it quits?

  5. Thanks for the insightful post. I don’t know what the future has in store for me, so I oscillate from time to time about being comfortable with the SWR. I might decide to buy a business, move to a country with a lower cost of living, or do both – there are too many variables. I’m a mix between trying to have enough to be sustainable versus retiring and finding out what will happen. I tend to be riskier because I can find just about any job pretty easily if I really needed the extra money.

    • @HP- Thanks for the visit! Yes indeed, the world is our oyster! Moving to a country with a lower cost of living would be my dream if I were single and had no kids (e.g. Eat Pray Love style) but I’m staying put in Canada for a while. My sister is a CPA and she just got a new job recently so you’re right about the flexibility! 🙂

    • @MrSLM- I had to look up the word fungible, thanks, learned a new word today! Good point that NTYP is a moving SWR dressed up a bit, it’s a much lower SWR 🙂 better looking and more cautious but harder to achieve.

  6. Since I plan to retire before 65, and hopefully live in my early 300s, I can’t do the 4%. Im investing to grow my money as much as I can, including in investment properties, and ill take what I need to be comfortable. Whatever is left over, goes to my kids to give them something to fight about when I’m gone.

    Regardless the point is to grow as much as I can now!

    • @gabe- haha “give them something to fight about” yes that would be nice, or if they piss you off too much you could always threaten to donate it all to charity. Whatver the case having oodles of money saved up is a great situation to be in!

  7. Pingback: The 4% Rule vs. vs Never Touch Your Principal ⋆ Camp FIRE Finance
  8. I like the Don’t Touch the Principal approach. It is probably mostly for psychological reasons though. I don’t want to slay the goose that is laying the golden eggs.
    You may want to consider real estate and bonds in addition to dividend-paying stocks. My income stream from part-time work, bond interest, stock dividends, and rent continue to really pile up. I could see it getting to a point where I could live off the passive income streams without selling anything. I also like the diversification that real estate provides. With a stock market decline, I will still have rental income.

    • @Wealthy Doc- Thanks for visiting! yeah, I’ve been thinking the same thing with the recent stock market decline- this is why people like real estate! 🙂

  9. I’m in the NTYP camp as well. I remember thinking early in my career how amazing it would be to generate bank interest (this is before I learned about dividends) to cover my income at the time. I didn’t think it was achievable. What FIRE has taught me is that I only need to cover my expenses and then some, which is achievable. I also worry about running out of money.

    • @Dreaming of Dividends- Yeah, it’s amazing how FIRE has been life changing for many people. Great that you discovered dividends as opposed to just using bank interest- you’ll need much less capital now! 🙂

  10. I’m in the NTYP camp at least for the initial 5 to 10 years. After that we may touch our principal, we’ll have to wait and see. We also plan to pass down our portfolio so the NTYP makes sense.

  11. I really like the NTYP idea, this is something we have often thought of. I have no ambition to be worried about money (or running out of it) as I get older. We are currently considering using our “cash” investments to pay down our real estate – let the number-crunching begin.

  12. Hi, really impressed by this post about how to save retirement amount without crossing principal and the most important thing for me is my father is going to retire next month so, this information is really helpful for me.


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