Withdrawing 5% of the Current Balance

Research on Safe Withdrawal Rates

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JWR1945
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Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Withdrawing 5% of the Current Balance

Post by JWR1945 »

Withdrawing 5% of the Current Balance
or
How 5% turns out to be less than 2.5%!
or
What Scott Burns should have said.

By withdrawing a constant percentage of his portfolio's current balance (instead of automatically adjusting withdrawals to match inflation), a retiree avoids the possibility that he will run out of money.

However, the amount that he withdraws can fall to a very low level.

The Data

Here are the amounts withdrawn when one removes 5% of his portfolio's current balance after adjusting for inflation (i.e., using real dollars). These are based upon an initial balance of $100000. Expenses were set at zero.

These data were taken using the latest version of my Deluxe Calculator 1.1V08, which is a modified version of the Retire Early Safe Withdrawal Calculator, Version 1.61 dated November 7, 2002. The calculator was set up with an initial withdrawal amount equal to zero and expenses (which is the sum of the withdrawal percentage of the current balance and the actual portfolio maintenance expenses) set at 5.0%. I used TIPS with a 2% real interest rate for allocations other than stocks.

[Note: dummy values are used for stock returns after 2002. They are set for heavy losses. Thirty-year historical sequences starting in 1973-1980 include dummy data values at the end of their sequences.]

[Note: You can do a similar calculation on FIRECalc. However, all balances in FIRECalc are in nominal dollars. You have to adjust for inflation manually.]

With 50% stocks and 50% TIPS at 2% interest, these are the 5-year rolling averages of the amounts withdrawn at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    5200    6958    6451    4989
1922   15.87    5660    7359    6341    5264
1923   12.20    5623    6789    5624    5153
1924   12.35    6089    6435    5399    5314
1925   10.31    6290    5814    4997    5295
1926    8.85    5913    5018    4450    5033
1927    7.58    5892    5070    4417    5220
1928    5.32    5062    4642    3881    4730
1929    3.69    4100    4048    3280    4192
1930    4.48    3900    4145    3269    4374
1931    5.99    4080    4457    3447    4776
1932   10.75    5176    5183    4303    5959
1933   11.49    6280    5674    5198    7066
1934    7.69    5399    4588    4516    6000
1935    8.70    5911    4780    5065    6505
1936    5.85    4930    4002    4525    5528
1937    4.63    4151    3612    4268    4942
1938    7.41    4640    4294    5233    5844
1939    6.41    4322    4121    5267    5632
1940    6.10    4349    4241    5674    5704
1941    7.19    5184    4939    6843    6533
1942    9.90    5732    5470    7575    6927
1943    9.80    5417    5363    7290    6392
1944    9.01    5063    5227    6944    5779
1945    8.33    4823    5241    6731    5234
1946    6.41    4826    5728    6997    5093
1947    8.70    5382    6664    7717    5358
1948    9.62    5503    6774    7564    4937
1949    9.80    5485    6791    7262    4480
1950    9.35    5985    7370    7409    4557
1951    8.40    5746    6707    6403    4007
1952    8.00    5637    6305    5765    3577
1953    7.69    5712    6308    5531    3421
1954    8.33    6000    6439    5359    3448
1955    6.25    5336    5566    4328    2981
1956    5.46    5059    5294    3853    2828
1957    5.99    5246    5432    3771    3007
1958    7.25    5669    5733    3741    3296
1959    5.56    5020    5002    3085    2942
1960    5.46    5124    4938    3038    3046
1961    5.41    5223    4766    2982    3108
1962    4.72    5016    4430    2748    2994
1963    5.18    5299    4595    2842    3208
1964    4.63    4985    4163    2679    3072
1965    4.29    4752    3834    2641    3015
1966    4.15    4596    3667    2691    3079
1967    4.90    4849    3812    3040    3442
1968    4.65    4686    3527    3108    3532
1969    4.72    4617    3410    3251    3835
1970    5.85    4792    3653    3663    4527
1971    6.06    4595    3604    3757    4823
1972    5.78    4354    3436    3744    4884
1973    5.35    4190    3444    3888    4925
1974    7.41    4712    4106    4707    5525
1975   11.24    5270    4761    5435    5732
1976    8.93    4611    4315    4937    4515
1977    8.77    4539    4586    5193    4009
1978   10.87    5038    5402    6139    3943
1979   10.75    5290    5788    6829    3580
1980   11.24    5377    5967    7375    3116
1981   10.71    5178    5768    7404    
1982   13.48    5709    6155    8030    
Here are the linear curve fit equations as a function of the percentage earnings yield 100E10/P. These are presented in terms of Professor Shiller's P/E10. The value of y is the 5-year rolling average of the amount withdrawn in real dollars. Today's P/E10 is close to 28. For 50% stocks:
At year 5: y = (16064/[P/E10] ) + 3923.9 and R-squared is 0.4117.
At year 10: y = (30366/[P/E10] ) + 2733.4 and R-squared is 0.4701.
At year 20: y = (47737/[P/E10] ) + 1307.6 and R-squared is 0.5244.
At year 30: y = (27716/[P/E10] ) + 2862.5 and R-squared is 0.2057.

With 80% stocks and 20% TIPS at 2% interest, these are the 5-year rolling averages of the amounts withdrawn at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    5881   10004    9772    7634
1922   15.87    6342   10125    8926    7745
1923   12.20    6171    8664    7260    7329
1924   12.35    7111    8043    6928    7812
1925   10.31    7325    6668    6027    7632
1926    8.85    6770    5441    5198    7256
1927    7.58    6596    5512    5103    7618
1928    5.32    5166    4815    4170    6548
1929    3.69    3700    3846    3197    5408
1930    4.48    3538    4127    3303    6019
1931    5.99    3873    4707    3677    7078
1932   10.75    5770    6087    5281   10214
1933   11.49    7255    6523    6585   12376
1934    7.69    5688    4713    5314    9633
1935    8.70    6566    5087    6442   11075
1936    5.85    4942    3884    5422    8650
1937    4.63    3811    3345    4993    7344
1938    7.41    4682    4510    7081    9866
1939    6.41    4174    4187    7083    9277
1940    6.10    4161    4298    7833    9363
1941    7.19    5221    5189    9988   11030
1942    9.90    6280    6210   12010   12407
1943    9.80    5864    6146   11551   11205
1944    9.01    5267    5919   10729    9610
1945    8.33    4850    5946   10222    8231
1946    6.41    4488    6304   10056    7278
1947    8.70    5578    8422   12388    8275
1948    9.62    6050    9063   12628    7597
1949    9.80    6125    9218   12073    6582
1950    9.35    6642    9873   11803    6373
1951    8.40    6341    8689    9596    5325
1952    8.00    6278    8042    8308    4555
1953    7.69    6363    7983    7744    4216
1954    8.33    6907    8319    7451    4301
1955    6.25    5743    6643    5349    3414
1956    5.46    5211    6067    4390    3090
1957    5.99    5485    6298    4207    3380
1958    7.25    6267    6960    4187    3959
1959    5.56    5210    5666    3089    3332
1960    5.46    5359    5539    2991    3502
1961    5.41    5556    5270    2925    3630
1962    4.72    5199    4678    2565    3410
1963    5.18    5664    4947    2694    3796
1964    4.63    5169    4258    2458    3552
1965    4.29    4777    3722    2375    3422
1966    4.15    4495    3429    2414    3497
1967    4.90    4894    3634    2920    4176
1968    4.65    4615    3179    3006    4334
1969    4.72    4466    2956    3189    4891
1970    5.85    4785    3316    3883    6400
1971    6.06    4518    3286    4079    7109
1972    5.78    4119    3042    4045    7187
1973    5.35    3732    2950    4157    7040
1974    7.41    4445    3876    5603    8434
1975   11.24    5523    5086    7326    9339
1976    8.93    4533    4386    6355    6454
1977    8.77    4383    4768    6821    5263
1978   10.87    5111    6114    8813    5034
1979   10.75    5369    6642   10187    4177
1980   11.24    5533    7036   11598    3357
1981   10.71    5282    6776   11809    
1982   13.48    6328    7735   13743    
Here are the linear curve fit equations as a function of the percentage earnings yield 100E10/P. These are presented in terms of Professor Shiller's P/E10. The value of y is the 5-year rolling average of the amount withdrawn in real dollars. The current value of P/E10 is close to 28. For 80% stocks:
At year 5: y = (26132/[P/E10] ) + 3397.2 and R-squared is 0.4056.
At year 10: y = (50640/[P/E10] ) + 1813.4 and R-squared is 0.4329.
At year 20: y = (92196/[P/E10] ) + 490.71 and R-squared is 0.4847.
At year 30: y = (49066/[P/E10] ) + 2950.1 and R-squared is 0.1962.

Remarks

Withdrawing a constant percentage of the current balance never causes a portfolio balance to fall to zero. The buying power of the amounts withdrawn drops quite a bit.

All initial balances were $100000 in this study.

The mid-1960s, especially 1965 and 1966, were the worst case. With 50% stocks, the buying power dropped between $2600 and $2700 at year 20 before rising later on. With 80% stocks, there was a lot of variation. But the 5-year average withdrawal amount at year 20 fell all of the way down to $2375 during the worst case (1965) sequence.

There are many examples of higher returns at year 20, but not when starting with stocks at high valuations.

If we apply the formulas directly at year 20, the amounts withdrawn are calculated to be $3012 with 50% stocks and $3783 with 80% stocks when P/E10 equals 28. The spread in the data (i.e., the amount of randomness or uncertainty) is much greater with 80% stocks than with 50% stocks. The odds are better than 50-50 that the (80%) high stock portfolio will do better than the (50%) balanced portfolio, but the Safe Withdrawal Rate of the balanced portfolio is higher. Visual projections suggest that today's Safe Withdrawal Rate is close to 1.6% to 1.7% with 80% stocks and 2.5% with 50% stocks.

The cause and effect relationship to the traditional withdrawal method is straightforward. Withdrawing 5% of the current balance at times of high valuation means higher withdrawals in the earlier years and lower withdrawals later on.

Have fun.

John R.
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ben
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Post by ben »

But what if one does not adjust for inflation as in the long run the value of the nest egg (of which take a flat 5%) should anyway manage to increase with inflation. - I.e the 5% should (with a lack) already correspond to more $ wne inflation increases. Cheers!
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Here are the same numbers in NOMINAL dollars. That is, these are before making adjustments for inflation.

With 50% stocks and 50% TIPS at 2% interest, these are the 5-year rolling averages of the amounts withdrawn at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance. These are in NOMINAL dollars. That is, before inflation.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    5309    6981     5368     6968
1922   15.87    5854    7178     5407     7729
1923   12.20    5675    6141     4811     7525
1924   12.35    6124    5539     4828     7936
1925   10.31    6096    4576     4556     7822
1926    8.85    5729    3895     4384     7680
1927    7.58    5581    3972     4692     8128
1928    5.32    4633    3748     4453     7562
1929    3.69    3570    3303     4003     6804
1930    4.48    3456    3651     4529     7775
1931    5.99    3875    4383     5690     9642
1932   10.75    5438    5756     8227    13561
1933   11.49    6570    6361     9950    15902
1934    7.69    5539    5219     8578    13269
1935    8.70    5999    5653     9705    14359
1936    5.85    4917    4892     8571    12101
1937    4.63    4189    4675     8098    10943
1938    7.41    4905    6018    10220    13423
1939    6.41    4810    6188    10516    13398
1940    6.10    5034    6626    11375    13890
1941    7.19    5692    7426    12583    14935
1942    9.90    6234    7983    13158    15380
1943    9.80    6108    7787    12446    14422
1944    9.01    5937    7586    11734    13457
1945    8.33    5838    7615    11266    12657
1946    6.41    5298    7115    10045    11113
1947    8.70    5601    7576    10238    11400
1948    9.62    5793    7717    10135    11245
1949    9.80    6030    8021    10219    11279
1950    9.35    6231    8201    10015    11494
1951    8.40    5790    7307     8672    10609
1952    8.00    5710    6958     8133    10412
1953    7.69    5806    6966     8073    10781
1954    8.33    6237    7253     8319    11849
1955    6.25    5628    6327     7108    10831
1956    5.46    5291    5920     6549    10449
1957    5.99    5385    5972     6650    11086
1958    7.25    5807    6356     7052    12388
1959    5.56    5153    5645     6231    11320
1960    5.46    5238    5690     6530    11967
1961    5.41    5375    5701     6974    12634
1962    4.72    5188    5468     7001    12548
1963    5.18    5514    5838     7796    13797
1964    4.63    5283    5531     7878    13574
1965    4.29    5131    5306     8086    13500
1966    4.15    5014    5228     8341    13696
1967    4.90    5335    5637     9397    15207
1968    4.65    5168    5416     9514    15344
1969    4.72    5063    5338     9697    16076
1970    5.85    5299    5880    10776    18440
1971    6.06    5245    6153    11146    19463
1972    5.78    5154    6246    11195    19393
1973    5.35    4916    6264    11086    18265
1974    7.41    5352    7229    12457    18774
1975   11.24    6071    8337    13920    18729
1976    8.93    5530    7521    12350    14387
1977    8.77    5624    7736    12519    12315
1978   10.87    6253    8619    13901    11415
1979   10.75    6238    8389    13907     9372
1980   11.24    6018    8031    13743     7514
1981   10.71    5599    7458    13023    
1982   13.48    6154    8017    13888    
With 80% stocks and 20% TIPS at 2% interest, these are the 5-year rolling averages of the amounts withdrawn at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance. These are in NOMINAL dollars. That is, before inflation.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    6012   10027     8132    10662
1922   15.87    6564    9890     7605    11396
1923   12.20    6228    7889     6196    10733
1924   12.35    7146    6975     6181    11692
1925   10.31    7088    5268     5493    11283
1926    8.85    6553    4227     5130    11075
1927    7.58    6257    4329     5438    11872
1928    5.32    4759    3894     4788    10479
1929    3.69    3246    3140     3894     8787
1930    4.48    3146    3636     4563    10708
1931    5.99    3682    4630     6070    14298
1932   10.75    6076    6754    10121    23259
1933   11.49    7600    7296    12638    27865
1934    7.69    5839    5348    10117    21312
1935    8.70    6666    6014    12354    24462
1936    5.85    4929    4758    10272    18951
1937    4.63    3842    4342     9479    16273
1938    7.41    4938    6324    13842    22672
1939    6.41    4634    6274    14158    22075
1940    6.10    4815    6696    15715    22798
1941    7.19    5743    7802    18378    25198
1942    9.90    6851    9083    20875    27526
1943    9.80    6616    8948    19730    25270
1944    9.01    6162    8610    18137    22377
1945    8.33    5853    8645    17119    19851
1946    6.41    4927    7831    14448    15786
1947    8.70    5818    9580    16446    17499
1948    9.62    6386   10335    16927    17246
1949    9.80    6748   10899    16993    16565
1950    9.35    6920   10996    15952    16060
1951    8.40    6391    9472    12988    14085
1952    8.00    6363    8880    11710    13260
1953    7.69    6474    8820    11297    13294
1954    8.33    7187    9375    11566    14795
1955    6.25    6062    7554     8760    12419
1956    5.46    5455    6790     7418    11439
1957    5.99    5633    6929     7372    12487
1958    7.25    6423    7721     7866    14909
1959    5.56    5350    6396     6235    12847
1960    5.46    5481    6381     6424    13784
1961    5.41    5720    6301     6833    14778
1962    4.72    5381    5769     6533    14313
1963    5.18    5897    6283     7393    16351
1964    4.63    5480    5656     7235    15719
1965    4.29    5158    5138     7283    15340
1966    4.15    4901    4861     7496    15571
1967    4.90    5381    5341     9046    18480
1968    4.65    5088    4865     9221    18868
1969    4.72    4897    4625     9530    20550
1970    5.85    5277    5333    11444    26133
1971    6.06    5126    5604    12121    28742
1972    5.78    4846    5529    12114    28561
1973    5.35    4363    5369    11876    26091
1974    7.41    5045    6833    14845    28594
1975   11.24    6358    8918    18783    30407
1976    8.93    5431    7660    15912    20480
1977    8.77    5430    8061    16467    16095
1978   10.87    6346    9774    20001    14509
1979   10.75    6338    9644    20795    10885
1980   11.24    6201    9486    21663     8058
1981   10.71    5723    8775    20809    
1982   13.48    6837   10091    23789    
Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Here are the portfolio balances in NOMINAL dollars. That is, before adjusting for inflation. The initial balance is $100000 in all cases.

With 50% stocks and 50% TIPS at 2% interest, these are the portfolio balances at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance. These are in NOMINAL dollars. That is, before adjusting for inflation.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    121848    122462     93840    161609
1922   15.87    128613     93941     96817    183091
1923   12.20    132556     75631     96635    172647
1924   12.35    155139     92516    104616    169240
1925   10.31    132417     80597    102725    182922
1926    8.85    100504     89600    107938    183142
1927    7.58     73041    100373    107294    183939
1928    5.32     57056     73992     97996    156249
1929    3.69     59634     64701     84829    153553
1930    4.48     60866     68353     94801    166867
1931    5.99     89150     76627    131966    200733
1932   10.75    137420    103062    194900    289866
1933   11.49    129684    127772    228276    315677
1934    7.69    108497    113079    182931    275145
1935    8.70    112300    127455    226958    304014
1936    5.85     85953    120467    204400    256047
1937    4.63     74998    106895    183255    216189
1938    7.41     98525    132440    211169    274955
1939    6.41    104223    131109    237327    277048
1940    6.10    113495    138693    244126    271103
1941    7.19    140154    172218    261960    296940
1942    9.90    142532    189110    281254    315240
1943    9.80    134422    178658    247062    307482
1944    9.01    125796    161773    243320    265139
1945    8.33    122202    178069    238527    231336
1946    6.41    122877    169673    212544    235715
1947    8.70    132680    171434    202244    245658
1948    9.62    132908    159445    207607    229158
1949    9.80    128599    181015    211312    244269
1950    9.35    145717    176018    195469    262276
1951    8.40    138083    152109    172421    257680
1952    8.00    129209    148725    166697    232770
1953    7.69    119966    138288    172106    251711
1954    8.33    140759    150409    163896    275828
1955    6.25    120794    133952    129914    239557
1956    5.46    110158    125267    138923    240519
1957    5.99    115104    117972    143295    265395
1958    7.25    115272    130206    143722    270456
1959    5.56    106855    116737    134944    250644
1960    5.46    110892    111050    149005    273374
1961    5.41    113716    113353    169405    269874
1962    4.72    102492    112084    156510    287132
1963    5.18    112956    124455    182020    304202
1964    4.63    109248    108967    183385    292982
1965    4.29    100142     96985    178838    276220
1966    4.15     99681    110901    192005    306822
1967    4.90    109359    121466    224964    356559
1968    4.65    110181    110381    207714    372028
1969    4.72     99743    115597    214708    402577
1970    5.85     96847    134178    246171    442199
1971    6.06    111256    149449    238082    412998
1972    5.78    111071    139637    256177    359709
1973    5.35    100181    146254    244427    300728
1974    7.41    115894    168294    268872    285640
1975   11.24    138546    184397    284806    273763
1976    8.93    134328    173131    276662    207360
1977    8.77    125719    185208    293547    176990
1978   10.87    145989    188180    337041    164053
1979   10.75    145214    185739    348260    134696
1980   11.24    133095    183466    329561    107989
1981   10.71    128887    159307    276348    
1982   13.48    147319    183459    257604    
With 80% stocks and 20% TIPS at 2% interest, these are the portfolio balances at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance. These are in NOMINAL dollars. That is, before adjusting for inflation.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    153014    175659    136668    265153
1922   15.87    158062    112603    125463    294915
1923   12.20    165752     84926    119945    268303
1924   12.35    214893    115567    135798    262722
1925   10.31    167426     91335    130510    295746
1926    8.85    114799    107818    141419    300931
1927    7.58     71239    125237    123917    294130
1928    5.32     51237     75702    101396    222299
1929    3.69     53779     62065     80627    214213
1930    4.48     54552     68142     97383    243456
1931    5.99     93919     77803    150947    311147
1932   10.75    175797    111421    261908    531633
1933   11.49    147748    141234    315924    568078
1934    7.69    115408    117506    227334    464883
1935    8.70    124911    142892    323806    552128
1936    5.85     82840    131164    279109    425939
1937    4.63     63380     98946    234859    324194
1938    7.41     95591    133942    293652    474803
1939    6.41    101818    129908    345143    465276
1940    6.10    114395    142912    357278    430348
1941    7.19    158334    194013    399918    487584
1942    9.90    156115    235062    477139    563732
1943    9.80    140119    223689    402225    553821
1944    9.01    127589    193466    395625    418903
1945    8.33    124928    226608    386394    315564
1946    6.41    122534    212794    324738    317790
1947    8.70    150569    237360    327646    367695
1948    9.62    159642    219239    354485    334410
1949    9.80    151632    265683    358159    353940
1950    9.35    181391    249999    301128    363263
1951    8.40    173661    206130    251315    347125
1952    8.00    157641    202985    239823    287925
1953    7.69    137332    179815    247585    319004
1954    8.33    175216    204494    216526    362123
1955    6.25    137823    170512    139255    286181
1956    5.46    118697    152607    149342    282894
1957    5.99    128763    138038    154910    331967
1958    7.25    130935    161689    152532    341550
1959    5.56    116710    134806    133219    299517
1960    5.46    123718    120452    145306    335263
1961    5.41    128569    121921    168401    320784
1962    4.72    107202    118148    141846    348968
1963    5.18    123489    137689    177407    378588
1964    4.63    115506    105884    177083    355469
1965    4.29     97360     81669    167836    320487
1966    4.15     94829     97861    185375    374721
1967    4.90    110211    112223    240491    476422
1968    4.65    111500     94337    211239    513954
1969    4.72     91670     98822    222183    588598
1970    5.85     83883    120634    278338    699269
1971    6.06    103197    138123    263108    633875
1972    5.78    101826    120057    295364    511020
1973    5.35     84607    128846    274958    382766
1974    7.41    107802    167243    335716    365904
1975   11.24    143811    205508    392422    361357
1976    8.93    133845    189427    382914    236457
1977    8.77    117904    214297    424531    184524
1978   10.87    152287    223920    544808    166341
1979   10.75    155138    224831    595614    124800
1980   11.24    142901    230730    579662     92388
1981   10.71    141527    190488    458919    
1982   13.48    181755    246019    425646    
Notice how deceptive the mid-1960s are.

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Here are the portfolio balances in REAL dollars. That is, after adjusting for inflation. The initial balance is $100000 in all cases.

With 50% stocks and 50% TIPS at 2% interest, these are the portfolio balances at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance. These are in REAL dollars. That is, after adjusting for inflation.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    129336    146339    126451    120889
1922   15.87    124204    111021    104217    116764
1923   12.20    128725     98496     96063    109040
1924   12.35    156954    121252    104015    108842
1925   10.31    133965    102525     99840    118523
1926    8.85    113146    116220    106159    122323
1927    7.58     89386    124577     87333    116628
1928    5.32     76517     90146     71533     94514
1929    3.69     77253     79028     60440     90543
1930    4.48     76531     84089     68983     97387
1931    5.99    102716     86410     82609    107102
1932   10.75    139370     93872    105173    138169
1933   11.49    117812     97530    110705    133955
1934    7.69    102297     85784     89765    117537
1935    8.70    109876     97381    115604    132519
1936    5.85     84125     91343    105251    111115
1937    4.63     67354     70103     93619     92653
1938    7.41     82785     79352    104846    114498
1939    6.41     83858     76480    114572    108952
1940    6.10     88628     82036    115814     99691
1941    7.19    108581     95601    123947    105197
1942    9.90    104081    112039    147190    120420
1943    9.80     95854    113508    137347    121982
1944    9.01     91202    104641    137015     99000
1945    8.33     92561    118713    136083     79036
1946    6.41     88046    115226    121645     77158
1947    8.70    107646    133545    132166     90285
1948    9.62    118418    132127    144290     86897
1949    9.80    114735    149806    142458     85834
1950    9.35    128253    141175    121522     79222
1951    8.40    130870    129650    110037     75231
1952    8.00    124060    131374    107481     65412
1953    7.69    111577    121002    107465     68461
1954    8.33    130566    130938     94610     72814
1955    6.25    110076    114632     66578     60627
1956    5.46     99068    105571     66963     58813
1957    5.99    105896     98967     67606     65871
1958    7.25    108447    109205     65767     66854
1959    5.56    100285     95095     57297     60022
1960    5.46    104139     86079     56116     62872
1961    5.41    106564     84873     58026     59749
1962    4.72     93457     81813     49791     62375
1963    5.18    100699     88813     56579     64851
1964    4.63     94825     72255     55610     61923
1965    4.29     82657     58080     52889     57339
1966    4.15     79645     63429     55709     63193
1967    4.90     87540     68312     66559     73732
1968    4.65     88196     60224     61219     78503
1969    4.72     76199     60252     63118     87229
1970    5.85     70265     65192     73040     99082
1971    6.06     79640     68368     70399     94467
1972    5.78     78034     60860     76241     83479
1973    5.35     68284     63706     73020     70231
1974    7.41     79073     76963     85701     70845
1975   11.24     92779     91062     98725     73702
1976    8.93     85847     87829     99627     57840
1977    8.77     77991     97434    107935     50431
1978   10.87     93295    101653    130353     48487
1979   10.75     97332    104756     75703     42237
1980   11.24     98149    112038    151985     37449
1981   10.71    102310    102969    138174    
1982   13.48    124930    125273    137166    
With 80% stocks and 20% TIPS at 2% interest, these are the portfolio balances at years 5, 10, 20 and 30. Each year's withdrawal is 5% of the current balance. These are in REAL dollars. That is, after adjusting for inflation.

Year, 100E10/P, at year 5, at year 10, at year 20, at year 30

Code: Select all

1921   19.61    162417    209907    184162    198343
1922   15.87    152643    133076    135052    188078
1923   12.20    160961    110602    119235    169454
1924   12.35    217406    151462    135017    168962
1925   10.31    169384    116183    126844    191626
1926    8.85    129239    139851    139088    200995
1927    7.58     87181    155436    100863    186495
1928    5.32     68713     92228     74015    134468
1929    3.69     69668     75808     57447    126312
1930    4.48     68591     83829     70861    142085
1931    5.99    108211     87735     94491    166015
1932   10.75    178291    101485    141331    253412
1933   11.49    134222    107806    153211    241060
1934    7.69    108814     89142    111554    198591
1935    8.70    122215    109176    164935    240671
1936    5.85     81078     99454    143720    184842
1937    4.63     56921     64890    119982    138940
1938    7.41     80319     80252    145799    197719
1939    6.41     81922     75780    166621    182974
1940    6.10     89331     84531    169494    158250
1941    7.19    122665    107700    189223    172737
1942    9.90    114000    139263    249703    215343
1943    9.80     99916    142118    223605    219708
1944    9.01     92502    125141    222779    156415
1945    8.33     94626    151072    220443    107813
1946    6.41     87800    144509    185856    104025
1947    8.70    122160    184900    214115    135136
1948    9.62    142237    181677    246372    126808
1949    9.80    135285    219876    241455    124371
1950    9.35    159651    200511    187209    109726
1951    8.40    164589    175694    160387    101345
1952    8.00    151359    179303    154630     80912
1953    7.69    127728    157338    154596     86764
1954    8.33    162528    178022    124990     95595
1955    6.25    125593    145919     71365     72427
1956    5.46    106747    128612     71985     69175
1957    5.99    118462    115800     73086     82395
1958    7.25    123182    135610     69799     84428
1959    5.56    109533    109814     56564     71726
1960    5.46    116184     93366     54723     77105
1961    5.41    120483     91288     57682     71020
1962    4.72     97753     86240     45126     75808
1963    5.18    110090     98257     55145     80709
1964    4.63    100256     70211     53698     75130
1965    4.29     80361     48907     49635     66528
1966    4.15     75768     55971     53786     77177
1967    4.90     88222     63114     71152     98519
1968    4.65     89252     51470     62258    108452
1969    4.72     70031     51509     65316    127536
1970    5.85     60860     58611     82584    156683
1971    6.06     73871     63188     77799    144990
1972    5.78     71540     52326     87903    118594
1973    5.35     57668     56123     82140     89390
1974    7.41     73552     76482    107006     90753
1975   11.24     96306    101488    136029     97285
1976    8.93     85538     96096    137889     65957
1977    8.77     73143    112737    156097     52578
1978   10.87     97320    120959    210708     49163
1979   10.75    103984    126804     75703     39134
1980   11.24    105381    140901    267325     32039
1981   10.71    112344    123123    229460    
1982   13.48    154132    167991    226643    
Compare these real balances with the nominal balances, especially those of the mid-1960s.

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

The mid-1960s, especially 1965 and 1966, were the worst case. With 50% stocks, the buying power dropped between $2600 and $2700 at year 20 before rising later on. With 80% stocks, there was a lot of variation. But the 5-year average withdrawal amount at year 20 fell all of the way down to $2375 during the worst case (1965) sequence.
My original thinking was that 1) the traditional withdrawal method based on only the initial balance results in a 4% (30-year) calculated rate under stressful conditions and 2) withdrawing 5% of the current balance starts higher, which means that withdrawals must eventually fall below that amount (4% of the initial balance) under the same, stressful conditions.

Another way of looking at this was to think in terms of traditionally recommended withdrawal rates: 4% of the initial balance (plus inflation) and 5% of the current balance (with no specific inflation adjustment).

I have run some numbers to look at these relationships. The first way of looking at this suggests that a calculated withdrawal rate higher than 5% would be needed using the traditional (percentage of the initial balance) approach in order to guarantee a 20-year withdrawal amount above 5% of the initial balance. The second way of looking at this suggests that the difference (i.e., the extra cushion needed to make a guarantee) should be in the neighborhood of 1%.

The actual numbers come out in the neighborhood of 0.6% to 1.0%.

Have fun.

John R.
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