Great Fun with the Improved Retirement Trainer

I have finished building the Type 2 Bull Bear Retirement Trainer. It is fun. It is realistic. Now it is time to learn from it.

Improving the Retirement Trainer

Runs 4, 5 and 6

I looked at Runs 1, 2 and 3 with my earlier Retirement Trainers.

For Runs 4, 5 and 6, I started at today’s valuations, P/E10=27.3, and today’s TIPS interest rate, 2.2%. I assumed that we are in a long lasting (secular) Bear Market.

Run 4 was plausible. It is useful for training. It never fell to the lowest valuations of the past. P/E10 remained at 11.9 or higher throughout. There was a follow on Bull Market. P/E10 reached 27.0 at the beginning of Year 25. Since Run 4 starts at today’s valuations, the peak would occur in 2031.

Run 5 sequence was plausible. It is useful for training. It never fell to the lowest valuations of the past. P/E10 bottomed at 11.2. There was a follow on Bull Market. P/E10 reached 23.4, which is almost identical to the January 1966 peak at 24.0, in the beginning of Year 26. Since Run 5 starts at today’s valuations, the peak would occur in 2032.

Run 6 was unusual. It is useful for training. It includes a future Super Bubble. P/E10 peaked at 44.8 in Year 5. Since Run 6 starts from today’s valuations, this peak would occur in 2011.

Following the Super Bubble, valuations fell quickly. P/E10 fell below 10 at Year 12 or 2018, 7 years after the peak. The bottom occurred in Year 19 or 2025, 14 years after the Super Bubble. P/E10 fell to 6.4, which is consistent with historically typical lows.

The market was rising in Year 30. P/E10 was 20.6.

Standards for Comparison

I brought up Super SVTVR Calculator L. I set P/E10=27.3. I set the TIPS interest rate at 2.2%. I set the final balance at 0%.

With Switching A, which constraints allocations between 20% and 80%, the Safe Withdrawal Rate was 4.20%. The Reasonably Safe rate was 4.55%. The Likely Success rate was 4.90%. The Likely Failure rate was 5.46%. The Almost Certain Failure rate was 6.01%.

With Switching B, which allows allocations to vary between 0% and 100%, the Safe Withdrawal Rate was 4.35%. The Reasonably Safe rate was 4.77%. The Likely Success rate was 5.18%. The Likely Failure rate was 5.68%. The Almost Certain Failure rate was 6.18%.

With a 50% stock allocation, the Safe Withdrawal Rate was 3.64%. The Reasonably Safe rate was 4.03%. The Likely Success rate was 4.43%. The Likely Failure rate was 5.03%. The Almost Certain Failure rate was 5.62%.

With an 80% stock allocation, the Safe Withdrawal Rate was 2.97%. The Reasonably Safe rate was 3.59%. The Likely Success rate was 4.21%. The Likely Failure rate was 5.10%. The Almost Certain Failure rate was 5.99%.

Based on these numbers, withdrawing 4.5% is no better than a coin toss (50%-50% odds) with fixed stock allocations (50% and 80%). You are Reasonably Likely to succeed if you allow yourself to vary allocations.

Based on these numbers, you would have to be lucky to withdraw 5.0% successfully with a fixed stock allocation (50% and 80%). Your likelihood of success is only 20%. By varying allocations, you can increase your chance of success to 80%.

Looking at P/E10 histories, we might expect Runs 4 and 5 to be unusually challenging since P/E10 never falls below 11.2. Balanced against this, P/E10 falls to attractive levels very early, around Years 5 and 6.

Looking at Run 6, we find that P/E10 falls all of the way down to 6.4 in Year 19. P/E10 is already down to 13.0 at Year 10. Balanced against this is a Super Bubble. P/E10 peaks at 44.8 in Year 5.

Individual Runs

Run 4

I started with $1.0 million. I withdrew $45000 each year.

My first time through, I allowed myself to vary allocations, but I tried to keep them between 20% and 80%, at least, initially. I ended up with a final balance of $870320.

My second time through, I allowed myself to vary allocations. But this time, I allowed them to vary between 0% and 100%. I ended up with a final balance of $1132989.

My third time through, I tried to maintain a 50% stock allocation. I ended up with a final balance of $400306.

My fourth time through, I tried to maintain an 80% stock allocation. I ended up with a final balance of $437794.

Run 5

I started with $1.0 million. I withdrew $45000 each year.

My first time through, I allowed myself to vary allocations. But this time, I allowed them to vary between 0% and 100%. I ended up with a final balance of $789730.

My second time through, I allowed myself to vary allocations between 0% and 100%. But this time, I withdrew $50000 each year. I ended up with a final balance of $616075.

My third time through, I tried to maintain a 50% stock allocation. I tried to withdraw $50000 each year. I ended up with $45516 after 27 years (that is, at the beginning of Year 27 since sequences begin in Year 0).

My fourth time through, I tried to maintain a 50% stock allocation. This time, I withdrew $45000 each year. I ended up with a final balance of $161181.

Run 6

I started with $1.0 million. I withdrew $45000 each year.

My first time through, I allowed myself to vary allocations between 0% and 100%. I ended up with a final balance of $277695.

My second time through, I allowed myself to vary allocations. I tried to keep them between 20% and 80%, at least, initially. I ended up with a final balance of $815041.

My third time through, I tried to maintain a 50% stock allocation. I ended up with a final balance of $239665.

My fourth time through, I allowed myself to vary allocations. Once again, I tried to keep them between 20% and 80%. I withdrew $50000 each year. I ended up with $45883 after 28 years (that is, at the beginning of Year 28 since sequences begin in Year 0).

Success and Failure

I succeeded every time that I withdrew $45000. This was 4.5% of the original balance.

I did better when I varied allocations.

In Run 4, 50% and 80% fixed stock allocations behaved similarly.

In Run 4, varying allocations between 0% and 100% did better than constraining allocations to 20% to 80%. In Run 6, constraining allocations did better. Because of its small 20% stock allocation in Run 6, the constrained portfolio benefited from the Super Bubble.

New Behavior

I found myself withdrawing all or nothing from stocks. That is, when the total withdrawal amount was $45000, I either withdrew $0 or $45000 from stocks. If anything, this helps.

Previously, I had found myself engaged in hyperactive trading to maintain a fixed 50% stock allocation. Often, rebalancing required selling more than the total amount withdrawn. Doing so increases cost.

I made occasional withdrawals of plus or minus $100000 or $200000 from stocks. Occasionally, early on, I withdrew $145000 from stocks, which added $100000 directly into TIPS.

As a general rule, I have done better by withdrawing plus or minus $100000 over several years as opposed to withdrawing (plus or minus) a larger amount. Only when an imbalance is especially large, in terms of the current P/E10 level, does it make sense to transfer larger amounts. Such transfers extend over several years.

Downloading Details

I have placed this calculator (Type 2 Bull Bear Retirement Trainer) into my Yahoo Briefcase. I made a new Retirement Trainer folder. It is available for downloading by Everyone. My Yahoo Username is jwr19452000.

Yahoo Briefcase

Perspective

You can learn a lot from the Type 2 Bull Bear Retirement Trainer. It’s fun.

We have only scratched the surface. So far, I have looked only at today’s Bear Market. The Type 2 Bull Bear Retirement Trainer works with Bull Markets as well.

Even better, the Type 2 Bull Bear Retirement Trainer works during accumulation. A deposit is a negative withdrawal. This opens up new areas of research.

Have fun.

John Walter Russell
September 6, 2006