Easing into 5%

This time, I examined the conventional withdrawal strategy, one that includes selling shares.

I used the Scenario Surfer to determine whether I could lift the 30-Year withdrawal rate to 5% of the original balance (plus inflation) after a five year delay at 4%. I found that I could, but only if I adjusted withdrawals in accordance with valuations.

Conditions

I started with a $100000. I withdrew $4000 (plus inflation) from Year 0 through Year 4. I withdrew $5000 (plus inflation) from Year 5 through Year 30.

I used TIPS with a 2% interest rate. The stock holding in the Scenario Surfer is based on the S&P500 index.

I varied allocations in accordance with P/E10. My minimum stock allocation was 20%. My maximum stock allocation was 100%.

Results

Withdrawals: 4% of the original balance (plus inflation) for Years 0 through 4, then 5.0%.

Run 1:
Final balance: 91,299
With 50% rebalancing: 2,884
Both 20% and 80% rebalancing portfolios went bankrupt.

Run 2:
Final balance: 95,546
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 3:
Final balance: 111,595
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 4:
Final balance: 84,573
The 20% rebalancing portfolio went bankrupt.
With 50% rebalancing: 6,391
With 80% rebalancing: 11,423

Run 5:
Final balance: 213,238
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 6:
Final balance: 172,823
The 20% rebalancing portfolio went bankrupt.
With 50% rebalancing: 24,405
With 80% rebalancing: 32,275

Run 7:
Final balance: 72,983
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 8:
Final balance: 53,449
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 9:
Final balance: 103,300
With 50% rebalancing: 2,933
Both 20% and 80% rebalancing portfolios went bankrupt.

Run 10:
Final balance: 82,931
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Summary

In all cases, my Year 30 balance was above 50% when I adjusted the stock allocation. Portfolios that maintained a fixed allocation usually went bankrupt by Year 30.

The portfolio with a 20% fixed stock allocation always went bankrupt. The portfolio with a 50% fixed stock allocation succeeded three times out of ten. The portfolio with an 80% fixed stock allocation succeeded two times out of ten.

Have fun.

John Walter Russell
December 10, 2007