Endless Income System

Make your money last forever with the Endless Income System. By focusing on both safety and growth, this is considered the best safe withdrawal rate strategy for creating a long lasting income stream.

Risk Profile

What is the Endless Income System?

The Endless Income System is aptly named due to the fact that its aim is to provide you with an endless stream of passive income, making it the best overall choice for withdrawal strategies.

It does this by employing a set of rules on top of the traditional Four Percent Rule which not only gives this system a more defensive posture, but also a higher propensity for portfolio and withdrawal growth over time.

It creates an endless income stream by minimizing the downside and slowly capturing the upside after healthy portfolio growth.

The design of the Endless Income System is to allow you to live off of your savings in essential perpetuity.

You could think of it as a personal endowment fund.

This makes it the best withdrawal strategy, especially for people with a really long time horizon, such as those interested in a very early retirement.

Not only will this system provide a passive income stream throughout your lifetime, but you could even use this as a core building block of your estate plan as you prepare the financial future of your family and loved ones after you move on to the next life.

Endless Income Stream Rules

Withdrawal Rate

The first difference with the Endless Income System from the Four Percent Rule, is that we drop the withdrawal rate from 4% to a more conservative 3.5%.

You can still raise it back up to 4% for your own plan, but you will sacrifice future growth at the expense of short term spending. Due to the fact that this system is set up to provide income for many decades, and maybe even centuries, into the future, we have decided to go with the rate that provides for a more healthy future. If you want to defer your gratification even more, to set up an even healthier future, then a lower withdrawal rate will be a great option for you.

Withdrawal Amount

The defensive nature of the system is found in the way the rules govern your withdrawal amount.

In short, the core rule is that your withdrawals are determined by a trailing average of your portfolio balance.

In detail, your withdrawals in any given year are determined by taking a set percent (your 3.5% withdrawal rate) from the lesser of your portfolio's 8 year trailing average balance and your current balance.

Withdrawal Amount  =  Min( 8yr Trailing Average Balance & Current Balance)

What you would do is take the past 8 years of your portfolio's balance (the balance at the start of each year) and get the average of those eight years. You would then compare that average balance with your current balance and take whichever value is lower. Once you have that amount, you would then take your withdrawal rate (3.5%) of that amount to determine the withdrawal amount for that year.

To put it another way, the rules of this system ensure that you will never be able to withdraw more than 3.5% of your portfolio in a given year. This protects your downside risk, but may lead to years where your withdrawal amount is lower than the previous year due to a sudden large market downturn.

If you ever forget how many years to include in the trailing average, just remember that if you put 8 sideways, then you have the infinity sign, and just like infinity, this system is endless. So, if you want your money to last for infinity, use an 8 year trailing average for the Endless Income System.

The trailing average function allows your portfolio to grow for a period of years without eating away too big of a chunk from it in the case of a future down turn. It essentially absorbs future market dips while allowing you to grow both your portfolio and your withdrawal amounts.

Unless there are multiple years of negative market growth, or a large market downturn, then it usually results in your withdrawal amount line being a smooth, consistent curve that will eventually grow into a healthy upward curve over time.

Portfolio Allocation

One last rule is that we tilt the our portfolio slightly from the balanced 50% stock, 50% bond allocation to the classic 60% Stock, 40% bond allocation.

This slight tilt to the riskier side can be afforded because of the defensive nature of the rules and the long term investment time horizon that will allow you to recover, in the long run, from stock market dips.

Many long term investors, who are comfortable with more volatile yearly withdrawal amounts, may want to tilt the portfolio even heavier into stocks in order to give their strategy the potential to have even higher compounding returns and higher compounding withdrawal amounts. But, we have set the 60/40 split as the more conservative default option.

Rules Summary

Withdrawal Rate: 3.5%
Portfolio: Classic 60% Stocks and 40% Bonds
Withdrawal Amounts: Determined by an 8 year trailing average calculation
Withdrawal Amount Calculation: The lesser of the 8 year trailing average and the current portfolio balance

When compared to the famous Four Percent Rule, not only does your portfolio survive much, much longer, but you actually end up taking out higher withdrawals, on average, throughout the lifetime of the plan.

Endless Income System Example

Let's say you are preparing to generate an endless passive income stream from your portfolio of $2,000,000.

You would first ensure that you have a proper diversified investment portfolio allocation with 60% in a diversified stock market fund such as SPTM or VTI and 40% in a diversified bond fund such as VGIT or BND.

First Year

Your first year would see you withdraw 3.5% of your portfolio for a $70,000 withdrawal.

If your portfolio had a 7% total return gain, then your remaining balance of $1,930,000 ($2,000,000-$70,000) would have grown to $2,065,100 at the end of the year.

Second Year

Now, to determine your second year's withdrawal amount, you take the lesser of your 8 year trailing balance and the current balance.

You only have a two year history, so the trailing average is determined by the average of $2,000,000 and $2,065,100 which is $2,032,550. You then take the lesser of the trailing average ($2,032,550) and the current balance ($2,065,100) which is the trailing average of $2,032,550.

We then take our the withdrawal rate from that amount to get a $71,139 withdrawal amount for this year. This is almost a 2% growth in your withdrawal amount.

Future Years

You would continues this pattern for each year to determine your withdrawal amount.

The only figure you have to keep for your records is your portfolio balance at the beginning of each year so that you can get the average of the 8 most recent year's balance in order to help calculate your new withdrawal amount.

Example Chart

The following chart shows what your withdrawals would have looked like using this strategy if you had started on January 1, 1970 and continued for 52 years to the year 2022

Endless Income System Withdrawal Amounts (1960-2022)

How long will my money last?

Essentially forever.

Short of a global armageddon  or complete economic catastrophe, it is mathematically impossible for this system to take your savings to zero. Every single stock and bond would have to go bankrupt for your portfolio to get to zero, due to the fact that you will never withdraw more than a set percent (default 3.5% of your portfolio) in any given year.

The whole purpose of the Endless Income System is to create a defensive mechanism that retains your portfolio value, while also growing your yearly withdrawals only when it is safe to do so after a solid foundation has been built.

This system is designed to be defensive and automatically adjust to market downturns in order to protect your portfolio balance from large decreases. Therefore, there may be times in which your withdrawals would decrease from the year before, but patient investors who can have some flexibility in their budget will be in a very healthy position to eventually let their withdrawals increase and have their savings compound over time.

Deferred Gratification: Do you want higher withdrawals now or in the future?

Higher Withdrawals Now

You will certainly be able to get higher initial withdrawals if you increase the withdrawal rate to the traditional 4% or even higher. Not only will you get higher initial withdrawals, but your portfolio will still be able to last forever due to the rules of the system, so you are not even taking on any real risk of your portfolio getting depleted.

There is a tradeoff, however. It increases the chances of your withdrawal amount taking a hit due to the fact that you can never withdraw more than the set percentage of your portfolio in a given year. Additionally, a higher rate will limit the increase in your withdrawals over time.

A lower rate will actually see a higher growth rate in your withdrawals over time due to the fact that more money is left in your portfolio to increase its balance and therefore give you more room for higher withdrawals in the future.

In summary, if you need higher withdrawals now, then you can easily increase your withdrawal rate to get those higher withdrawals in the short term. If you can afford to have lower withdrawals in the short term, then a lower withdrawal rate will give you much larger withdrawals in the long term.

Higher Withdrawals Later

When set with the default 3.5% withdrawal rate or lower, this system is all about deferred gratification.

Not only does it set you up for an endless stream of passive income, but the defensive posture will actually give you larger withdrawals in the future for patient investors.

This is due to the fact of compounding returns. Over the long term, time is the best friend of a healthy investment portfolio. As your portfolio increases, your withdrawals will increase along with it.

Our Safe Withdrawal Rate Calculator demonstrates this exponential compounding curve. When you select the Endless Income System in the Calculator and set a long time horizon, you will see that more often than not, the withdrawal amount line will have an exponential return that grows along with your growing portfolio.

If you have the stomach for even more deferred gratification, or simply have an appetite for compounding your withdrawals even more, then consider taking an even lower withdrawal rate (and/or a longer trailing return) to really see an exponential growth in your withdrawal amounts.

Endless Income System FAQs

Does this strategy take inflation into account?

Not directly. Many strategies grow your withdrawal amounts in accordance with inflation. This is a nice concept, but if inflation grows too fast, you could quickly deplete your savings.

This system grows yours withdrawal amounts in a way that also allow you to safely grow your portfolio balance. In many cases, due to the growth of your portfolio, you will actually be able to grow your withdrawals at a rate higher than inflation.

Is it possible to have less volatility with your withdrawal amounts?

Yes! There is a very easy method to create less volatility with your withdrawal amounts and make your withdrawal amount growth curve be even smoother.

To decrease the volatility, simply increase the amount of years in the trailing average calculation.

By default, you are doing the trailing average over the course of 8 years, but by increasing it to a decade, a dozen years, or even more, you will make the growth of your withdrawals even smoother.

A larger average allows you to absorb market downturns without it immediately effecting your withdrawal amounts due to the math of the withdrawal calculation.

This will not only give you even more stable withdrawal amounts, but will also increase how fast your portfolio is able to compound returns because it delays how quickly you eat into your portfolio.

Over time, a longer trailing average will actually allow you to see a higher growth in your withdrawal amounts in the long run.

Is there a way to project what my next year's withdrawal amount will be for budget planning purposes?

Yes! Due to the fact that the withdrawal calculation is based upon an 8 year trailing average, you can get a really accurate picture of your next year's withdrawal ahead of time.

Simply do the same calculation you would do at the start of next year, but put in a temporary placeholder value for what your portfolio balance will be at the end of the year.

This will give you a pretty clear picture of what your withdrawal amount will look like barring a nose dive in the stock market before the year's end.