Current Research Q: Period Certain Withdrawal Rates
Updated: July 17, 2009.
Period Certain Examples
The TIPS Table offers an example of a withdrawal approach with a finite period that is certain. It is similar to having a mortgage as a lender. The income lasts for a specified number of years and then drops to zero. With TIPS, the income is in terms of inflation adjusted (real) dollars.
TIPS Table
Dividend and income strategies produce continuing income streams. These are period certain approaches that last indefinitely. Here are the continuing withdrawal rates of a variety of approaches.
Continuing Withdrawal Rates (July 2009)
Finite Period Certain
I built a new calculator based on the Deluxe1.1A08a. I modified the expenses to remove 1/N, 1/(N-1),..,1 times the current balance, where N is the number of years in the finite period certain.
I looked at smoothed, total withdrawals at Years 10 and 20. I used four years of smoothing. I found that the real withdrawal amount increased considerably with time.
I also examined what happens when I added a fixed withdrawal amount (plus adjustments to match inflation). The behavior was similar.
Here are the results. The coding translates as follows:
a) 30Y80S2T0p0 smoothed means 30 years, 80% stocks, 2% TIPS interest rate and 0.0% withdrawal rate entry to the calculator.
b) 30Y80S2T1p0W smoothed means 30 years, 80% stocks, 2% TIPS interest rate and 1.0% withdrawal rate entry.
c) 30Y80S2T2p0W smoothed means 30 years, 80% stocks, 2% TIPS interest rate and 2.0% withdrawal rate entry.
At high valuations (high P/E10 and low 100E10/P) and a 2% withdrawal rate entry, there were a few instances which did not make it to year 30. That is, too high a standard withdrawal amount leads to early bankruptcy.
Withdrawal amounts increased consistently with time. They reached a peak at the end of the period.
Period Certain Indefinite
I brought up the Deluxe1.1A08a calculator. I examined what happens when I removed a fixed percentage of the CURRENT BALANCE.I looked at smoothed withdrawals at Years 10, 20 and 30. I used four years of smoothing.
Here are the results. The coding translates as follows:
a) Ind80S2T4.0W smoothed means indefinite period with 80% stocks, 2% TIPS interest rate and 4.0% of CURRENT BALANCE withdrawals.
b) Ind80S2T5.0W smoothed means indefinite period with 80% stocks, 2% TIPS interest rate and 5.0% of CURRENT BALANCE withdrawals.
c) Ind80S2T6.0W smoothed means indefinite period with 80% stocks, 2% TIPS interest rate and 6.0% of CURRENT BALANCE withdrawals.
Notice that the results are similar at Years 10 and 30, but considerably different at Year 20. This is why I focus on balances at Year 20.
Balances can be very low at Year 20 when valuations are high (high P/E10 and low 100E10/P).
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