Twice Income

This characterizes another variable withdrawal strategy: withdrawing twice the income (dividends plus interest) produced by the portfolio.

Conditions

I made a run on the Scenario Surfer where I withdrew twice the portfolio’s income each year. I started with a $100000 balance. I varied allocations in accordance with P/E10. I selected a P/E10=26 Bear Market, which corresponds to today. The stock holding was the S&P500. The fixed income portfolio holding was TIPS at a 2% (real) interest rate. I withdrew $3500 in Year 0.

I did not try to optimize the withdrawal algorithm. Rather, I sought to gain an insight as to what happens.

Results

All of the Scenario Surfer portfolios survived. Here are the final balances:

20% stocks: 5,555.

50% stocks: 34,660.

80% stocks: 66,517.

Variable: 86,831.

Here is the range of balances of the main portfolio throughout the 30 years:

Year 0: 100,000.

Years 1-10: 84,634 to 102,421.

Years 11-20: 60,427 to 88,172.

Years 21-30: 74,491 to 90,455.

Here is the range of the amount withdrawn throughout the 30 years:

Year 0: 3500.

Years 1-10: 3,868 to 4,474.

Years 11-20: 3,934 to 7,792.

Years 21-30: 3,446 to 5,636.

Here is what happened from Year 0 through Year 5:

0 3,500.

1 4,170.

2 4,148.

3 4,190.

4 4,142.

5 4,000.

Observations

I made no attempt to optimize the algorithm.

The algorithm shifts withdrawals into the middle years. The first few years were very similar to “Easing into 5%,” where I withdrew 4% for each of the first four years followed by withdrawals of 5% (plus inflation).

Withdrawals during the middle years were excessive. This reduced the amount available during the third decade.

Conclusions

I decided not to pursue this algorithm further. In real life, investors would not stop at this point. They would improve the algorithm. I believe that the alternatives are substantially better.

I believe that withdrawing 4% (plus inflation) during Years 0 through 4 and 5% (plus inflation) later is a better choice. Another excellent choice is to withdraw 4.5% (plus inflation) each year.

In all circumstances, it makes sense to vary allocations with P/E10.

Have fun.

John Walter Russell
December 17, 2007