Botched Early Retirement

Suppose that you retire early. Suppose that you botch your withdrawals. What does it take to get back on track?

I ran some conditions on my Simplified Retirement Trainer (2 Dec 2006) to find out.

Conditions

I used “Simp Ret Trainer A w Div” (2 Dec 2006, Simplified Retirement Trainer with Dividends A), downloaded from the “Retirement Trainers” folder of my Yahoo Briefcase.

Yahoo Briefcase

I set the TIPS interest rate at 2%. I examined BEAR MARKET conditions a1 through a8.

I started with $1 million. I withdrew $60000 (plus inflation) every year.

I proceeded rapidly, normally transferring $200000 into stocks as soon as P/E10 fell below 20. I withdrew $60000 or $0 from stocks or transferred money to or from TIPS.

Warning Signal, Response

My warning signal was an account balance that fell below 70% of the initial balance (plus inflation) within the first decade.

My response was to make zero withdrawals until the portfolio balance reached 70% or until the portfolio succeeded.

Results

a1..Zero withdrawals in Years 11 and 12.
a2..Zero withdrawals in Years 6 and 7.
a3..Zero withdrawals in Years 9 and 10.
a4..Zero withdrawals in Year 8.
a5..Zero withdrawals in Years 9, 10, 11 and 12.
a6..Always successful.
a7..Zero withdrawals in Year 10.
a8..Always successful.

Conclusion

Typically, under these conditions, an early retiree was able to restore the safety of his account within a couple of years, four years at the outside. Not only that, he was able to return to his excessive withdrawal rate (6% of the original balance plus inflation).

With care, an actual retiree is likely to do better. I did little to optimize withdrawals.

Have fun.

John Walter Russell
February 13, 2007