Edited: Building On a 45-Year Retirement

Previously, I showed how to reach Year 45 with a traditional approach using my calculators. You could withdraw 4.5% of your original balance (plus inflation).

This time, I paid closer attention to the human element. I introduced Benjamin Graham’s constraint. I kept both stock and bond allocations between 25% and 75%. You can withdraw 4.2% (plus inflation).

From Designing a 45-Year Retirement

In Designing a 45-Year Retirement, I showed how you can use my 15-Year and 30-Year calculators back-to-back. Those calculators were in my Yahoo Briefcase. Now you can access them easily by pressing buttons on the left side of your screen. You can also access the TIPS Table, which shows what happens with 100% TIPS.

Designing a 45-Year Retirement

Switching A

The Switching A algorithm adjusts valuations in accordance with P/E10 while satisfying Benjamin Graham’s constraint.

To continue withdrawing 4.5% of the original balance (plus inflation), I need to plan on withdrawing 4.5%/0.40 = 11.25% of my Year 15 balance.

Bargain Prices

Now see what happens when P/E10 falls to bargain prices, P/E10=8 or less.

To reach the desired 11.25% withdrawal rate in terms of the Year 15 balance, we must switch entirely into stocks.

Interim Findings

To withdraw 4.5% of the original balance (plus inflation) for the entire 45 years, I was not able to stay with Benjamin Graham’s constraint. I needed to invest entirely in stocks when P/E10=8.

Reduced Withdrawal Rate of 4.2%

I examined several withdrawal rates less than 4.5%.

This is what happens with a withdrawal rate of 4.2% of the original balance, starting with Switching A and ending with 80% stocks-20% TIPS.

With 80% confidence, the final balance at Year 45 is a little bit more than 50% of the original balance (plus inflation).

Conclusions

Reducing the withdrawal rate to 4.2% of the original balance (plus inflation) allows us to incorporate Benjamin Graham’s constraint. This minimizes regret.

The numbers would tell us to do otherwise, but trusting the numbers by themselves is not always a good idea. We should anticipate surprises. Not everything is found in the historical record. The bubble that peaked in the Year 2000 was more extreme than previously seen in the United States.

Additional Remarks

This study involved the traditional liquidation approach. I believe that we can do better.

It makes sense to consider many different investment strategies because of uncertainty. Even the best analysis can fail because of a hidden flaw or a blind spot. Diversification among strategies makes sense. But it comes at a cost.

Have fun.

John Walter Russell
May 27, 2007