5.5% with Corporate Bonds?

If you use corporate bonds instead of TIPS, you can withdraw 5.5% of your original balance (plus inflation) for 30 years most of the time, but not always, provided that you vary allocations according to market valuations. If you rebalance, you are assured of bankruptcy.

Modeling Corporate Bonds

I modeled corporate bonds as TIPS at a 3% interest rate. This is consistent with the 1%+ spread between corporate bonds and treasury bonds. It assumes intelligent bond market investing as opposed to the single year trading usually assumed when modeling stock and bond portfolios.

Scenario Surfer Runs

I ran 5 runs on the Scenario Surfer to see what happens at a 5.5% withdrawal rate.

I looked at a traditional liquidation approach, where withdrawals increased to match inflation.

I invested entirely in stocks and TIPS. I started with a $100000 balance. P/E10=26 Bear Market initially. I withdrew $5500 (plus inflation) each year. I set the TIPS interest rate to 3.0%. Here are the Year 30 balances. I have included fixed allocation results for comparison.

Run 1. 89,020.
20% rebalanced: bankrupt in year 27.
50% rebalanced: bankrupt in year 28.
80% rebalanced: bankrupt in year 24.

Run 2. 19,325.
20% rebalanced: bankrupt in year 27.
50% rebalanced: bankrupt in year 27.
80% rebalanced: bankrupt in year 25.

Run 3. 88,385.
20% rebalanced: bankrupt in year 27.
50% rebalanced: bankrupt in year 28.
80% rebalanced: bankrupt in year 27.

Run 4. bankrupt in year 24.
20% rebalanced: bankrupt in year 26.
50% rebalanced: bankrupt in year 25.
80% rebalanced: bankrupt in year 23.

Run 5. 152,104.
20% rebalanced: bankrupt in year 26.
50% rebalanced: bankrupt in year 21.
80% rebalanced: bankrupt in year 15.

Conclusions

Careful use of corporate bonds allow you to reach a 5.5% (plus inflation) withdrawal rate most of the time. In this instance, it was successful in 4 out of 5 runs. The key is to vary allocations with market valuations (in this case, with P/E10).

For purposes of comparison, 3% TIPS by themselves allow you to withdraw 5.1% (plus inflation) for 30 years.

Shun rebalancing. It is a horrible idea. It leads directly to bankruptcy.

Have fun.

John Walter Russell
May 12, 2008