Safe withdrawal rate in Brazil: Failure points

Using the Portfolio Withdrawal Calculator, for Brazil I ran some scenarios on the 4% rule over different time periods. I changed time periods and the mix of Ibovespa and Selic to see where the safe withdrawal rate in Brazil breaks down. Let’s take a look.

[This is not investing advice. Don’t make financial plans based on a blog post from some random guy on the internet.]

Starting with a base settings as follows:

I’m assuming a R$1M portfolio and withdrawing R$40,000 per year. No pension or later income. In all scenarios I run 500 simulations using 25% Ibovespa and 75% Selic.

The results look like this:

100% change of success! But as you may recall, in our last post on A new era of economic data? Pre verses Post 2007 in Brazil. we explore the possibility that the early years following the Real Plan may represent a different set of economic circumstances, which may not repeat. After 2007 the investment results look a lot different.

Lets see how the 2007-2023 time frame plays out:

Not bad. 95.6% chance of success.

I have been thinking about “what happens only with more recent years?”. So I ran 2013-2023, to represent a 10 year (technically 11 year) period of only the most recent years.

So the interesting observation here is we have a 100% chance of success again, by avoiding 2007-2012.

What about 5% “safe” withdrawal rate?

Same setup. All values used are the same but instead of withdrawing R$40,000 we’re withdrawing R$50,000 per year:

Below you can see the results of 1995-2023 (99.6% change of success), followed by 2007-2023 (52.8% change of success), and finally 2013-2023 (75.6% change of success).

We can see 5% definitely introduces more risk of failure. We can also see 2013-2023 performs better than 2007-2023.

Charting additional “safe withdrawal rate ” scenarios

I ran some more simulations in the charts below with different levels of Ibovespa and Selic in the portfolio over different years:

4% appears mostly safe, excepts in our worst timeframe when using 50% or great allocation to Ibovespa.

5% is much more risky. The only times it works is with the 1995-2023 time frame and a very low stock allocation, or possibly the most recent dataset, 2013-2023 and a moderate to high stock allocation.

These scenarios assume a portfolio invested in Brazilian assets. As we saw recently, the Brazilian investor may be better off with cash in Brazil, and risk assets in the US, or broadly diversified. In my opinion I think the US market is a bit expensive at the moment but who knows what the future holds..

Are you looking for more on this topic? Check out AA40’s study Uma simulação Monte Carlo para o IBOV.

-Sirsandals