Almost 5%

I made another attempt to reach a 30-year safe withdrawal rate of 5% of the original balance (plus inflation) using a liquidation strategy. I waited until P/E10 fell to 15 before buying stocks. It did not work. It came close.

What I Did Differently

I waited until P/E10 fell to 15 (rounded) before allocating anything to stocks. Then, I varied stock allocations with P/E10 in a normal manner. I used allocations of 0%-20%-50%-80%-100%.

What to Expect

I brought up the Year 30 SWR Retirement Risk Evaluator. Starting from P/E10=26, the best approaches were Switch Option A and Switch Option B. Here are the results.

Year 30 SWR

P/E10=26.
TIPS=1%.
Final Balance=0%.

Switch Option A.
Safe: 3.80%.
Likely Success: 4.60%.
Almost Certain Failure: 5.80%.

Switch Option B.
Safe: 3.98%.
Likely Success: 4.78%.
Almost Certain Failure: 5.78%.

Scenario Surfer Results

I invested entirely in stocks and TIPS. I started with a $100000 balance. I selected the P/E10=26 Bear Market. I withdrew $5000 (plus inflation) each year. I set the TIPS interest rate to 1.0%. Listed are the first year in which P/E10=15 (rounded) and the Year 30 balances. I have included fixed allocation results for comparison.

Run 1. Year 10 and 77,990.
20% rebalanced: 14,004.
50% rebalanced: 22,954.
80% rebalanced: 24,648.

Run 2. Year 4 and 116,019.
20% rebalanced: 72,460.
50% rebalanced: 72,525.
80% rebalanced: 69,408.

Run 3. Year 7 and 17,587.
20% rebalanced: bankrupt in year 23.
50% rebalanced: bankrupt in year 23.
80% rebalanced: bankrupt in year 21.

Run 4. Year 9 and 11,786.
20% rebalanced: bankrupt in year 24.
50% rebalanced: bankrupt in year 25.
80% rebalanced: bankrupt in year 26.

Run 5. Year 10 and 2,809.
20% rebalanced: bankrupt in year 25.
50% rebalanced: bankrupt in year 30.
80% rebalanced: 20,988.

Run 6. Year 3 and 164,078.
20% rebalanced: bankrupt in year 23.
50% rebalanced: bankrupt in year 23.
80% rebalanced: bankrupt in year 21.

Run 7. Year 6 and 32,565.
20% rebalanced: bankrupt in year 22.
50% rebalanced: bankrupt in year 21.
80% rebalanced: bankrupt in year 18.

Run 8. Year 6 and 44,157.
20% rebalanced: bankrupt in year 23.
50% rebalanced: bankrupt in year 24.
80% rebalanced: bankrupt in year 22.

Run 9. Year 4 and 58,541.
20% rebalanced: bankrupt in year 22.
50% rebalanced: bankrupt in year 21.
80% rebalanced: bankrupt in year 18.

Run 10. Year 12 and bankrupt in year 25.
20% rebalanced: bankrupt in year 24.
50% rebalanced: bankrupt in year 29.
80% rebalanced: 3,813.

Observations

With training, I have learned how to withdraw 4.5% (plus inflation) consistently. It took more than 10 runs to establish this. With the delayed approach, I came close to 5.0% of the original balance (plus inflation), but I did not make it. Ten runs were sufficient to reach this conclusion. I had one failure and one low balance at Year 30.

Training lifts the Safe Withdrawal Rate well above that of both Switch Option A and Switch Option B.

The worst case conditions were associated with a late fall in P/E10. A late fall in P/E10 did not always mean failure. Still, a persistently high P/E10 suggests that reducing the withdrawal rate makes sense.

All of this is in contrast to the Dividend Blend. It easily provides a continuing withdrawal rate above 5% of the original balance (plus inflation).

Have fun.

John Walter Russell
February 20, 2008