When P/E10=8

If the stock market follows its normal course, P/E10 will fall to 8 at some time within the next 10 to 15 years. Those who have preserved their capital will face a glorious future.

Year 30 Safe Withdrawal Rates

Putting P/E10=8 into the Year 30 SWR Risk Evaluator (see button on left) with 2% TIPS and a zero dollar final balance, I found:

With 20% stocks (rebalanced): the Safe Withdrawal Rate will be 5.30%.
With 50% stocks (rebalanced): the Safe Withdrawal Rate will be 7.27%.
With 80% stocks (rebalanced): the Safe Withdrawal Rate will be 9.13%.
With 100% stocks: the Safe Withdrawal Rate will be 9.98%.

With 20% stocks (rebalanced): the Likely Success Rate will be 5.80%.
With 50% stocks (rebalanced): the Likely Success Rate will be 8.07%.
With 80% stocks (rebalanced): the Likely Success Rate will be 10.33%.
With 100% stocks: the Likely Success Rate will be 11.78%.

With 20% stocks (rebalanced): the Almost Certain Failure Rate will be 6.40%.
With 50% stocks (rebalanced): the Almost Certain Failure Rate will be 9.27%.
With 80% stocks (rebalanced): the Almost Certain Failure Rate will be 12.13%.
With 100% stocks: the Almost Certain Failure Rate will be 13.78%.

You will be able to withdraw 10% of your original balance (plus inflation) safely if you invest entirely in stocks. That will be very good news.

Scenario Surfer Results

I invested entirely in stocks. I started with a $100000 balance. P/E10=8 initially. I withdrew $10000 (plus inflation) each year. Here are the Year 30 balances. I have included fixed allocation results for comparison.

Run 1. 188,708
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: 24,511

Run 2. 117,396
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

Run 3. 24,878
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

Run 4. bankrupt
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

Run 5. 136,562
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

Run 6. bankrupt
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

Run 7. 321,151
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: 29,517

Run 8. 244,792
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

Run 9. 211,175
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: 14,328

Run 10. bankrupt
20% rebalanced: bankrupt
50% rebalanced: bankrupt
80% rebalanced: bankrupt

These results are not quite as optimistic as those with the Year 30 SWR Risk Evaluator. They confirm that the 20% and 50% stock allocations fail at a 10% withdrawal rate. They confirm that the 100% stock allocation is better than the 80% stock allocation.

The Year 30 SWR Risk Evaluator equations are closer to the historical data than the Scenario Surfer. I expect its results to be more accurate. Still, with a Safe Withdrawal Rate close to 10%, it should be easy to be a little bit cautious.

Variable Allocations

I took a brief excursion on the Scenario Surfer. I sought to find out what would happen if I cut the stock allocation to 20% whenever P/E10=20 and higher. I found that my threshold was too high to make much of a difference.

Conclusion

Those who enter retirement 10 to 15 years from now will enjoy very favorable Safe Withdrawal Rates. Those retiring earlier will do well if they are able to preserve their capital until then.

Have fun.

John Walter Russell
January 2, 2008

January 3 2008 Letters to the Editor