http://nofeeboards.com/boards/viewtopic.php?t=1891

He withdraws 2% of his portfolio's current balance plus one-half of his portfolio's growth compared to six years earlier.

I have examined his approach with three alternatives, which are similar but different.

**Method of Comparison**

I used my latest version of the modified Retire Early Safe Withdrawal [Rate] Calculator. I call it the Deluxe V1.0A version of the JanSz-Chips Calculator.

I selected four especially difficult years for retirement finances. They were 1929, 1937, 1965 and 1966. I looked at stock allocations of 50% and 80%. In this case, I selected commercial paper for the allocations other than stocks. I looked at portfolio balances at 10, 20, 30 and 40 years (when applicable). I determined the minimum balances as well.

I did not look for the traditional Historical Database Rates that ended with a zero balance. JanSz's approach is based upon current balances. It never falls to zero.

**Conditions Examined**

I have examined four conditions.

Condition A is JanSz's basic approach. Withdrawals are 2% of the portfolio's current balance plus 50% of the increase in the account balance as compared to six years earlier.

Condition B replaces the fixed 2% withdrawal by stripping away all dividends. It still removes 50% of the increase in the account balance.

Condition C changes from taking 2% of the current balance to taking 2% of the initial balance plus increases (and decreases) to match inflation. It still removes 50% of the increase in the account balance.

Condition D still withdraws 2% of the current balance. But it removes 75% of the increase in the account balance.

Condition B helps us understand the effects of today's low dividend yields. Condition C is the kind of approach one would have if he were to set an absolute floor (in this case 2% of the initial balance) to meet his minimal income needs. An income to satisfy one's minimal needs must necessarily match inflation. (More precisely, it must match the inflation associated with those specific needs, not with purchases in general.) Condition D is an alternative to conditions B and C, both of which reduce portfolio balances. This is obvious for condition B because dividends have been well above 2% until the recent past. It is also true for condition C for those historical sequences that place the greatest stress on retirement portfolios.

There is an important caveat associated with condition B. In condition B, all dividends are withdrawn but not the interest from the commercial paper. This makes the 50% stock allocation look better. The amount withdrawn is higher when stocks make up 80% of the portfolio as opposed to 50%. In addition, in some years withdrawals fall below 2% of the portfolio's current balance for the 50% stock portfolio. In the 1960s there were several years with dividend yields close to 3%. Stripping these dividends from a 50%-stock portfolio amounts to a withdrawal rate of 1.5%.

**Details**

The initial balances were all $100000. Expenses were 0.20% of the current balance.

To withdraw 2% of the current balance one increases the total expenses to 2.20%.

To withdraw 2% of the initial balance, the number 2% was put into the calculator in the normal way and expenses are kept at 0.20%. In all other cases, the normal withdrawal rate input to the calculator was set to zero.

The capital gains percentage is applied to any increase in the portfolio balance compared to six years earlier. In other studies, this would have been 0%. In this case, we looked at removing 50% or 75% of any increase. Nothing was removed when there was a decrease.

The dividend input is the percentage of dividends that are reinvested (or made available for reinvestment). In other studies, this would have been 100% with rare exceptions.

This table summarizes the conditions examined.

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`Portfolio A50 B50 C50 D50 A80 B80 C80 D80`

stock allocation 50% 50% 50% 50% 80% 80% 80% 80%

total expenses 2.2% 0.2% 0.2% 2.2% 2.2% 0.2% 0.2% 2.2%

withdrawal rate 0% 0% 2% 0% 0% 0% 2% 0%

capital gains 50% 50% 50% 75% 50% 50% 50% 75%

dividend input 100% 0% 100% 100% 100% 0% 100% 100%

**Results**

The following table shows the portfolio balances at 10, 20, 30 and 40 years. There are no 40-year values for 1965 and 1966 since that would extend beyond the data available. (The calculator has dummy numbers for returns from 2002 to 2010. It still provides its outputs even though they are meaningless.)

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`Year Condition 10YRS 20YRS 30YRS 40YRS`

1929 A50 93561 51521 59534 52788

1937 A50 58941 54896 51204 32956

1965 A50 61685 43195 36240 N/A

1966 A50 66590 44163 38976 N/A

1929 B50 87808 46205 53094 48116

1937 B50 56886 51544 48799 31741

1965 B50 62527 44070 37716 N/A

1966 B50 67656 44909 40524 N/A

1929 C50 93446 49216 52993 44722

1937 C50 57378 50066 43791 22655

1965 C50 60705 39888 29970 N/A

1966 C50 65170 40222 31653 N/A

1929 D50 88316 47195 52324 42914

1937 D50 56680 50151 45190 27549

1965 D50 58468 39708 30226 N/A

1966 D50 64360 41161 32569 N/A

1929 A80 76439 42120 58156 52004

1937 A80 56625 58821 55992 35082

1965 A80 52392 40421 35559 N/A

1966 A80 61269 42311 39381 N/A

1929 B80 62630 30371 39703 35674

1937 B80 49887 47522 44697 27309

1965 B80 49836 36753 32174 N/A

1966 B80 58197 38505 36001 N/A

1929 C80 74740 37901 47425 39663

1937 C80 54698 53192 48130 23713

1965 C80 51285 35856 27885 N/A

1966 C80 59128 37338 30702 N/A

1929 D80 69644 36355 46591 37766

1937 D80 69644 50666 46154 27214

1965 D80 49335 35828 28129 N/A

1966 D80 57763 38734 30850 N/A

The following table shows the minimal balances within 40 years for 1929 and 1937 and within 30 years for 1965 and 1966. It also shows when those minimums occurred.

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`Start Years 1929 1937 1965 1966`

A50 51521 31714 51204 32956

years after start 20 38 30 29

B50 45887 30312 37716 36986

years after start 29 38 30 20

C50 44722 22655 29970 29235

years after start 40 40 30 29

D50 42914 27090 30226 30140

years after start 40 38 30 29

A80 42120 30274 35559 34367

years after start 20 38 30 29

B80 30371 23246 32174 31251

years after start 20 38 30 29

C80 37901 22067 27885 27031

years after start 20 38 30 29

D80 36017 23662 28129 27464

years after start 19 38 30 29

These are the 30-year Historical Database Rates HDBR50 and HDBR80 for portfolios with 50% stocks and 80% stocks, respectively. In all cases withdrawal rates were based on the initial balance and adjusted to match inflation. Expenses were 0.20% of the portfolio's current balance.

HDBR50

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`1929 4.5%`

1937 3.9%

1965 4.2%

1966 4.1%

HDBR80

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`1929 4.4%`

1937 4.5%

1965 4.0%

1966 3.9%

These tables establish that 1929, 1937, 1965 and 1966 were exceedingly stressful on retirement finances. Notice that 1929 was not the worst case. Notice that the worst case depends upon the stock allocation.

These results depend somewhat on the withdrawal algorithm. With the Retire Early Safe Withdrawal [Rate] Calculator with its default values, withdrawals are split into two equal portions and applied on January 1st and December 31st. The amount to be withdrawn is calculated based upon the portfolio's balance on January 1st. As a result Historical Database Rates from the Retire Early Safe Withdrawal Calculator (including versions incorporating my modifications) can be expected to differ slightly from other calculators that use the historical sequence method.

This detail about the timing of withdrawals is not unique to the Retire Early Safe Withdrawal Calculator. For example, the FIRECalc has a box available for one to choose between making the first withdrawal just before the first year or just after.

**Observations**

In a very broad sense, conditions B, C and D produced similar results. All produced lower balances than condition A. For those years that placed portfolios under the most stress, the portfolio balances are remarkably similar.

As mentioned earlier, condition B, which strips off all dividends, is biased toward a 50% allocation since a smaller stock allocation means that less is withdrawn. As expected, balances for condition B with a 50% stock allocation are higher than for an 80% stock allocation.

It is instructive to look at the minimum balances. There is no single condition that is always best all of the time. But JanSz's original approach looks very attractive. It is an excellent choice from a balanced perspective. It is not overly sensitive to the stock allocation.

When looking at minimum balances, it is important to remember that portfolios begun in 1929 and 1937 were examined over 40 years while those of 1965 and 1966 were only over 30 years.

The overlap in historical sequences can mislead you when looking at the 10, 20, 30 and 40 balances. Typically, the patterns of results are similar, but offset. The 1965 balances at 30 years are similar to those of 1966 at 29 years.

Roughly speaking, these approaches maintain 30% to 50% of the original portfolio's buying power after 30 years under stressful conditions. Under the most stressful conditions examined, the real balances still remained above 20%.

Have fun.

John R.