Sustainable Withdrawals and Leaving Principal Untouched
Sustainable Withdrawals and Leaving Principal Untouched
I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
Thanks for the info.
Larry
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
Thanks for the info.
Larry
I do not think that there is any study showing success in withdrawals over 4%. Just review the Trinity study. Hopefully the below webside address will lead you there.
http://6aa7f5c4a9901a3e1a1682793cd11f5a ... ol1014.pdf
http://6aa7f5c4a9901a3e1a1682793cd11f5a ... ol1014.pdf
Erwin
No, because of the sequence of returns. The portfolio may average 7% over the period of time, but it's not a steady 7% every year. You may/will have several years in a row of negative returns, during which the losses combined with the large withdrawals may deplete the portfolio to a point that even when the market does turn around, the portfolio has dwindled too far to both recover and continue to sustain the withdrawals.
Bob
Bob
Re: Sustainable Withdrawals and Leaving Principal Untouched
The answer to your question depends on what you mean by "very high probability of not running out of cash." The trinity study looked at the historical data and came up with 4% as the highest withdrawal rate where no failures occurred throughout the entire historical period studied. In other words, that rate was 100% successful using past data.LMK5 wrote:I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
If you're looking for a withdrawal rate that worked "most of the time," you could surely go with a higher rate. Of course, if you're choosing a rate that's known to have failed in the past, you're taking a pretty big risk with your retirement security. After all, even choosing a more conservative rate that would have succeeded in all historical trials is no guarantee that you won't run out of money during retirement.
I guess it comes down whether you're feeling lucky and how much you want your retirement security to depend on luck.
Jim
Edited to add: I missed the part about you wanting to leave the principal untouched. That's a mighty tall order, IMO. The withdrawal studies we're talking about in this thread (like trinity) assume that you'll deplete the portfolio over the course of the withdrawal period.
Last edited by magellan on Thu Oct 28, 2010 10:32 am, edited 1 time in total.
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Re: Sustainable Withdrawals and Leaving Principal Untouched
The whole "preserve principal" concept doesn't work when the portfolio is invested in assets which have fluctuating values.LMK5 wrote:I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
Thanks for the info.
Larry
You also have to define your strategy more clearly. What does a 6% withdrawal rate mean to you? Does it mean take 6% of the previous year's ending balance this year? Does it mean take 6% of the initial value, and take the same amount each year forever? Does it mean take 6% of the initial value, then adjust each year for inflation?
Also, the answer is highly dependent on the period under consideration. If, for example, you began withdrawing money in 1982, the results would be a lot different than if you had began withdrawals in 1965.
- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
Are your numbers real or nominal?
The studies that say you can withdraw 4% a year without running out are talking about 4% real, that is, you start at 4% of your initial amount and increase the withdrawal by the amount of inflation each year. When your nominal withdrawal is 100% of your current nominal balance, you run out. You, however, are interested in keeping your nominal balance (not real balance) constant. That is, if you start with $1 million, you want to reach the end of 30 years with $1 million nominal, even if it is worth only $308,318.67 real (4% inflation for 30 years).
Or are you asking another question?
The studies that say you can withdraw 4% a year without running out are talking about 4% real, that is, you start at 4% of your initial amount and increase the withdrawal by the amount of inflation each year. When your nominal withdrawal is 100% of your current nominal balance, you run out. You, however, are interested in keeping your nominal balance (not real balance) constant. That is, if you start with $1 million, you want to reach the end of 30 years with $1 million nominal, even if it is worth only $308,318.67 real (4% inflation for 30 years).
Or are you asking another question?
I'm not sure the title of your post is what you really mean to ask. Are you thinking about generating interest and dividends and withdrawing those and not touching principle? Obviously in an environment like this you can't generate that kind of income. And if you are pulling dividends, you're still withdrawing from total return. There is no free lunch using divys and interest as income.
There are two different ways withdrawals can be made. The first is to start with 5% and increase the withdrawal by an inflation rate every year after. Then there is the constant withdrawal rate of 5% based on the value of the assets each year. You don't need 60% equity to make a portfolio last 30 years. The higher the stock allocation the bigger dispersion in returns over 30 years.
Here is some data from Paul Merriman on both withdrawal strategies. None of the withdrawal strategies factors in some good 'ol common sense, which can significantly lessen the odds of actually running out of money.
http://www.fundadvice.com/articles/reti ... ment-.html
Paul
There are two different ways withdrawals can be made. The first is to start with 5% and increase the withdrawal by an inflation rate every year after. Then there is the constant withdrawal rate of 5% based on the value of the assets each year. You don't need 60% equity to make a portfolio last 30 years. The higher the stock allocation the bigger dispersion in returns over 30 years.
Here is some data from Paul Merriman on both withdrawal strategies. None of the withdrawal strategies factors in some good 'ol common sense, which can significantly lessen the odds of actually running out of money.
http://www.fundadvice.com/articles/reti ... ment-.html
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Almost. If you know for certain that the 30-year annualized return of your portfolio will be, say, 7% then at the end of each year you can withdraw 6.54% of the year-end balance of the portfolio. It takes a 7% gain to recover from a 6.54% withdrawal.LMK5 wrote:If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
(1+.07)*(1-.0654)=1
This is different from how most studies calculate withdrawal rates. Studies typically assume that withdrawals will be a constant dollar amount that is some percentage of the initial value of the portfolio. And studies look at the worst 30-year period, not just the average.
Ron
Money is fungible |
Abbreviations and Acronyms
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Oicuryy - Thanks for the calculation. But as you point out, the trick is achieving the certainty that the 30-year annualized return of the portfolio will be, say, 7%
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Don't the periods of performance above the mean make up for the years of under-performance?CyberBob wrote:No, because of the sequence of returns. The portfolio may average 7% over the period of time, but it's not a steady 7% every year. You may/will have several years in a row of negative returns, during which the losses combined with the large withdrawals may deplete the portfolio to a point that even when the market does turn around, the portfolio has dwindled too far to both recover and continue to sustain the withdrawals.
Bob
Not always. Making withdrawals when returns are poor in the early years amounts to "selling low". The damage to the portfolio is very difficult to surmount and requires a high degree of later outperformance to prevent early depletion.LMK5 wrote:Don't the periods of performance above the mean make up for the years of under-performance?CyberBob wrote:No, because of the sequence of returns. The portfolio may average 7% over the period of time, but it's not a steady 7% every year. You may/will have several years in a row of negative returns, during which the losses combined with the large withdrawals may deplete the portfolio to a point that even when the market does turn around, the portfolio has dwindled too far to both recover and continue to sustain the withdrawals.
Bob
Some examples:
Source: http://www.bobsfinancialwebsite.com/SaferPlan1.html
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
- Peter Foley
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In a recent thread there was a link a spreadsheet/chart which illustrated how the SWR varies depending on the mix of investments and the year in which one starts. The SWR range was from about 8% for an individual starting withdrawals in the late 1940's to just above 4% for someone beginning in the late 1960's. It is a good graphical representation of the probabilities seen in the Trinity Study.
I will look for the link and repost it if I can find it.
I thought it was Bob's, but was not sure. Here is the link:
http://bobsfinancialwebsite.com/SaferPlan1.html
Edited once to add link.
I will look for the link and repost it if I can find it.
I thought it was Bob's, but was not sure. Here is the link:
http://bobsfinancialwebsite.com/SaferPlan1.html
Edited once to add link.
Re: Sustainable Withdrawals and Leaving Principal Untouched
I mean take 6% of the initial value, then adjust each year for inflation.ddb wrote:The whole "preserve principal" concept doesn't work when the portfolio is invested in assets which have fluctuating values.LMK5 wrote:I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
Thanks for the info.
Larry
You also have to define your strategy more clearly. What does a 6% withdrawal rate mean to you? Does it mean take 6% of the previous year's ending balance this year? Does it mean take 6% of the initial value, and take the same amount each year forever? Does it mean take 6% of the initial value, then adjust each year for inflation?
Also, the answer is highly dependent on the period under consideration. If, for example, you began withdrawing money in 1982, the results would be a lot different than if you had began withdrawals in 1965.
- DDB
Correct. At the end of 30 years I want to have the nominal value intact.sscritic wrote:Are your numbers real or nominal?
The studies that say you can withdraw 4% a year without running out are talking about 4% real, that is, you start at 4% of your initial amount and increase the withdrawal by the amount of inflation each year. When your nominal withdrawal is 100% of your current nominal balance, you run out. You, however, are interested in keeping your nominal balance (not real balance) constant. That is, if you start with $1 million, you want to reach the end of 30 years with $1 million nominal, even if it is worth only $308,318.67 real (4% inflation for 30 years).
Or are you asking another question?
Re: Sustainable Withdrawals and Leaving Principal Untouched
One of the things you have to realize is that when the annualized return over some period like 30 years is reported as one number, say 7%, that it is just a useful fiction.LMK5 wrote:I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
Thanks for the info.
Larry
What?!? Annualized return is a fictitious number? I'll expalin.
There is a lot of volatility in the sequence of annual returns of as you can see in this chart for a 50/50 portfolio.
from http://bobsfinancialwebsite.com/SaferPlan1.html
One year you get +30% and another you get -20% and anything in between. Annualized return answers the question: if I got the same return every year for 30 years what annual return would I have needed to get the same result as the actual variable sequence of returns. It's kind of a shorthand for the whole sequence of returns. You'll also see it called the Compound Annual Growth Rate (CAGR). Obviously it's fictitious, you didn't get the same return every year. But it's a lot easier to use 7% than 0, 25, 26, -1, -12, ...
Unfortunately, reducing the sequence of returns to a single number, the annualized return, is only correct if you put in a lump sump at the beginning of the period and make no contributions or withdrawals. In that case, your Internal Rate of Return (IRR) will equal the annualized return, say 7%.
But if you are putting in or taking out of your portfolio, your IRR will be probably not be the same as the annualized return. It depends on the whole 30 year sequence of return, in the exact order, and when you made the contributions and withdrawals. Your IRR can be greater or less than the annualized return. (And yes, even if two investors hold that exact same portfolio mix, they will have different IRRs unless they put in and take out the same amount at the same time.)
Getting an IRR greater or less than the annualized return is not that hard to understand. If you are depleting a portfolio, you have a big balance at the beginning and a little balance at the end. The returns when you have a big balance matter more than the returns when you have a little balance. So if the big returns come at the beginning and small returns at the end, this will boost your IRR. A bad sequence is when the small returns come at the beginning when it matters most.
The same thing holds when accumulating, only in reverse.
So what matters is the exact sequence of returns, in exact order. In fact, knowing the sequence of returns and the sequence of inflation rates for 30 years, you can calculate the exact Maximum Withdrawal Rate (MWR), similar to the way your bank can calculate your mortage payment so that you pay off the house in 30 years.
- MekongTrader
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Check this out from today's WSJ, by Brett Arends titled 'Retirement disaster ahead'
http://online.wsj.com/article/SB1000142 ... LeadSecond
(sorry, I don't know how to format (overwrite) an url...)
The article is about what investors can really expect from future stocks and bonds returns. And that all pension funds' estimates and expectations are way too high.
I for my part just calculate with 2% per year (50/50 stocks/bonds). I'll try and save more and then just see what happens over the next 25yrs.
MT
http://online.wsj.com/article/SB1000142 ... LeadSecond
(sorry, I don't know how to format (overwrite) an url...)
The article is about what investors can really expect from future stocks and bonds returns. And that all pension funds' estimates and expectations are way too high.
I for my part just calculate with 2% per year (50/50 stocks/bonds). I'll try and save more and then just see what happens over the next 25yrs.
MT
Bill Bernstein showed us an example of this in one of his books (forget which). He essentially made the point that the order of over/under annual returns on the mean target certainly has an impact on your overall portfolio.CyberBob wrote:No, because of the sequence of returns. The portfolio may average 7% over the period of time, but it's not a steady 7% every year. You may/will have several years in a row of negative returns, during which the losses combined with the large withdrawals may deplete the portfolio to a point that even when the market does turn around, the portfolio has dwindled too far to both recover and continue to sustain the withdrawals.
Bob
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Suggest you play with Vanguard's nest egg Monte Carlo calculator here:LMK5 wrote: I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
It addresses your question and it's trivial to use. You can read the description of what this calculator actually does on the same page and decide for yourself if it is a reasonable way to look at the problem.
Incidentally, it says a 60/40 nest egg with a 5% initial draw over 30 years yields a 75% success rate, where success is defined as not running totally out of money. I wouldn't call 75% a "very high probability." Moreover, if you want to define success as still having your original nominal amount of dollars after 30 years, then the success probability would be a good deal less. If you up the draw to 7% the calculator gets only a 36% success rate.
Note I think this is drawing a fixed dollar amount from your nest egg, not an inflation adjusted amount.
JW
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Re: Sustainable Withdrawals and Leaving Principal Untouched
Assuming your figures are correct, then in the context of sustainable withdrawals there are two gotchas.LMK5 wrote:I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
The first is that there was about tenfold inflation over 1926-2000. In general, any thinking that does not allow for inflation is dangerously optimistic. Assuming a 30-year retirement, I think the Great Depression is probably the only period in that range over which a retiree would have been comfortable with level income and no cost-of-living increases.
The second, and this is the key and important insight that seems to have been sort of discovered circa the late 1990s, is the order-of-returns problem. A fluctuating investment with an average annual return of X% will not sustain anything even close to an equal annual withdrawal of X%, because a string of bad years that happen to occur early causes damage that can't be reversed by a subsequent string of good years. During a series of bad years, in which the investment earns less than X%, continuing to withdraw at X% draws down the principal. If you now have a series of good years, which would mathematically balance out the bad years if the portfolio had no withdrawals, they will not make up for in the presence of withdrawals, because the good percentages are percentages of a much lower number.
To see this in a simple way, suppose you have $90,000, there is no inflation, and you invest it in something with 0% average return, with the intention of drawing $3,000 a year from it. If the investment is cash under the mattress, your investment will last exactly 30 years.
But suppose it is some strange investment that halves at the start of year #2, then doubles at the start of year #16. Assume the moves happen just before you make your annual withdrawal of $3000.
If you put $90,000 into that account and leave it there, in year #2 it halves to $45,000 and in year #16 it doubles, back to $90,000. Yes, the average return of the investment was exactly 0%, the same as cash.
But the order of returns is unfavorable to withdrawal, because it halved first and doubled later. If you are withdrawing $3,000 a year, in year #2 you are down to $84,000. Now it halves to become $42,000. You keep drawing your $3,000 a year. In year 15 you are down to $3,000 after you make your withdrawal. But, wait, there's good luck ahead! In year 16, your money doubles!
To $6,000.
And in two more years you're broke.
In fact, in year #15 your money could quintuple, and you'd still run out--in year #28. In this case, over 30 years your investment has actually earned 150%, or over 3% per year annualized--yet a withdrawal rate that would have succeeded with money in the mattress fails with a portfolio that earns 3% per year--average.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
The math for that is different from what I posted above.LMK5 wrote:I mean take 6% of the initial value, then adjust each year for inflation.
The maximum withdrawal rate for constant annual real withdrawals is equal to 1 divided by the gummy Magic Sum (gMS) of the annual real returns. The gummy Magic Sum is given by the formula
where r1, r2, r3 etc. are the annual real returns.
You don't need to know what each annual return will be in order to calculate the withdrawal rate. You just need to know what the gMS will be.
Note that gMS depends on the order of the returns. The first return, r1, is in all the terms. The second return, r2, is in all but one term. The last return, r30, is in only one term. This is why it is not enough to know the annualized return. The same returns in a different order will produce the same annualized return but different gMS. This is also why returns in the early years of retirement have a bigger impact on portfolio survivability than later returns do.
That complicates the calculation a little more. In addition to the gMS, you also need to know what the cumulative (or annualized) real return will be and what the cumulative inflation will be. For example, if the gMS will be 21 and the annualized real return will be 7.7% and the cumulative inflation will be 344% then the withdrawal rate will beLMK5 wrote:At the end of 30 years I want to have the nominal value intact.
((1+0.077)^30-(1/(1+3.44)))/(((1+0.077)^30)*21)=4.6%
Ron
Last edited by Oicuryy on Tue Mar 10, 2020 12:28 pm, edited 1 time in total.
Money is fungible |
Abbreviations and Acronyms
I am glad you posted that Magic Sum formula from Gummy's webpages.Oicuryy wrote:The math for that is different from what I posted above.LMK5 wrote:I mean take 6% of the initial value, then adjust each year for inflation.
The maximum withdrawal rate for constant annual real withdrawals is equal to 1 divided by the gummy Magic Sum (gMS) of the annual real returns. The gummy Magic Sum is given by the formula
where r1, r2, r3 etc. are the annual real returns.
You don't need to know what each annual return will be in order to calculate the withdrawal rate. You just need to know what the gMS will be.
Note that gMS depends on the order of the returns. The first return, r1, is in all the terms. The second return, r2, is in all but one term. The last return, r30, is in only one term. This is why it is not enough to know the annualized return. The same returns in a different order will produce the same annualized return but different gMS. This is also why returns in the early years of retirement have a bigger impact on portfolio survivability than later returns do.
I have probably seen hundreds of discussions on the internet about "safe" withdrawal rates and how much could have been drawn from some portfolio. And now there are even books devoted to retirement withdrawal. Yet here is this exact formula to calculate the maximum withdrawal rate given the sequence of returns, and it seems to go largely unnoticed and is rarely mentioned.
As you point out, it shows exactly why the early years are more important than the later years.
Suppose r1,r2,r3,..,r30 = 0, then gMS=30, MWR=1/30= 3.3333333...
Suppose r1,r2,r3,...r29 = 0, r30=1 gMS=29.5 MWR = 3.338983
Suppose r1=1 r2,r3,...r30 =0 gMS=15 MWR=7.5%
So if you get zero real return, you still can withdraw 3.33%
If you get 100% return in first year it can more than double your MWR.
But if you get 100% in year 30, the effect is insignificant.
I also like to think of it as since you want 1/gMS to be large, then you want gMS to be small, so you want each term on the right-hand side to be small, which means you want each denominator to be large, ...
Another thing I have learned from this formula is that the total real returns r1, r2, r3, ... determine how much you can withdraw. Nothing else. You don't have to break down by how much of the return came from interest, how much from dividends, capital gains, etc. This formula applies to any portfolio no matter what the mix of assets.
Why is this significant? Because there is a myth out there that if you are an "income investor", then total return doesn't matter. This equation busts that myth.
Re: Sustainable Withdrawals and Leaving Principal Untouched
Excellent illustration. The collective wisdom on this forum is downright scary.nisiprius wrote:Assuming your figures are correct, then in the context of sustainable withdrawals there are two gotchas.LMK5 wrote:I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
The first is that there was about tenfold inflation over 1926-2000. In general, any thinking that does not allow for inflation is dangerously optimistic. Assuming a 30-year retirement, I think the Great Depression is probably the only period in that range over which a retiree would have been comfortable with level income and no cost-of-living increases.
The second, and this is the key and important insight that seems to have been sort of discovered circa the late 1990s, is the order-of-returns problem. A fluctuating investment with an average annual return of X% will not sustain anything even close to an equal annual withdrawal of X%, because a string of bad years that happen to occur early causes damage that can't be reversed by a subsequent string of good years. During a series of bad years, in which the investment earns less than X%, continuing to withdraw at X% draws down the principal. If you now have a series of good years, which would mathematically balance out the bad years if the portfolio had no withdrawals, they will not make up for in the presence of withdrawals, because the good percentages are percentages of a much lower number.
To see this in a simple way, suppose you have $90,000, there is no inflation, and you invest it in something with 0% average return, with the intention of drawing $3,000 a year from it. If the investment is cash under the mattress, your investment will last exactly 30 years.
But suppose it is some strange investment that halves at the start of year #2, then doubles at the start of year #16. Assume the moves happen just before you make your annual withdrawal of $3000.
If you put $90,000 into that account and leave it there, in year #2 it halves to $45,000 and in year #16 it doubles, back to $90,000. Yes, the average return of the investment was exactly 0%, the same as cash.
But the order of returns is unfavorable to withdrawal, because it halved first and doubled later. If you are withdrawing $3,000 a year, in year #2 you are down to $84,000. Now it halves to become $42,000. You keep drawing your $3,000 a year. In year 15 you are down to $3,000 after you make your withdrawal. But, wait, there's good luck ahead! In year 16, your money doubles!
To $6,000.
And in two more years you're broke.
In fact, in year #15 your money could quintuple, and you'd still run out--in year #28. In this case, over 30 years your investment has actually earned 150%, or over 3% per year annualized--yet a withdrawal rate that would have succeeded with money in the mattress fails with a portfolio that earns 3% per year--average.
I tried the Vanguard tool. Excellent suggestion.JW Nearly Retired wrote:Suggest you play with Vanguard's nest egg Monte Carlo calculator here:LMK5 wrote: I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
It addresses your question and it's trivial to use. You can read the description of what this calculator actually does on the same page and decide for yourself if it is a reasonable way to look at the problem.
Incidentally, it says a 60/40 nest egg with a 5% initial draw over 30 years yields a 75% success rate, where success is defined as not running totally out of money. I wouldn't call 75% a "very high probability." Moreover, if you want to define success as still having your original nominal amount of dollars after 30 years, then the success probability would be a good deal less. If you up the draw to 7% the calculator gets only a 36% success rate.
Note I think this is drawing a fixed dollar amount from your nest egg, not an inflation adjusted amount.
JW
Sustainable Withdrawals and Leaving Principal Untouched
It depends on what 'earned, means. If you take equity dividends and bond interest out and don't sell shares, that is OK.
drigooch
drigooch
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Anywhere to find a similar calculator that inflation-indexes the withdrawls?JW Nearly Retired wrote:Suggest you play with Vanguard's nest egg Monte Carlo calculator here:LMK5 wrote: I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
It addresses your question and it's trivial to use. You can read the description of what this calculator actually does on the same page and decide for yourself if it is a reasonable way to look at the problem.
Incidentally, it says a 60/40 nest egg with a 5% initial draw over 30 years yields a 75% success rate, where success is defined as not running totally out of money. I wouldn't call 75% a "very high probability." Moreover, if you want to define success as still having your original nominal amount of dollars after 30 years, then the success probability would be a good deal less. If you up the draw to 7% the calculator gets only a 36% success rate.
Note I think this is drawing a fixed dollar amount from your nest egg, not an inflation adjusted amount.
JW
You don't think the Vanguard calculator doesn't index the withdrawals to inflation? Reading the notes on that page, I find this:snowman9000 wrote:Anywhere to find a similar calculator that inflation-indexes the withdrawls?JW Nearly Retired wrote:Suggest you play with Vanguard's nest egg Monte Carlo calculator here:LMK5 wrote: I'm hoping someone could set me straight on this: Studies I've seen for the 1926-2000 period show that for, let's say, a 60/40 stock/bond portfolio, you can withdraw about 5% per year and have a very high probability of not running out of cash over a period of 30 years. From what I could see, this 60/40 portfolio earned in the neighborhood of 6.5%-7.5% per annum over this period.
If this is the case, could a person have withdrawn 6.5%-7.5% of the portfolio each year and be left with the initial portfolio value at the end of the 30 year period? If not, why not?
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
It addresses your question and it's trivial to use. You can read the description of what this calculator actually does on the same page and decide for yourself if it is a reasonable way to look at the problem.
Incidentally, it says a 60/40 nest egg with a 5% initial draw over 30 years yields a 75% success rate, where success is defined as not running totally out of money. I wouldn't call 75% a "very high probability." Moreover, if you want to define success as still having your original nominal amount of dollars after 30 years, then the success probability would be a good deal less. If you up the draw to 7% the calculator gets only a 36% success rate.
Note I think this is drawing a fixed dollar amount from your nest egg, not an inflation adjusted amount.
JW
Note, if withdrawals were not adjusted for inflation, the calculator's success rates would be so much higher.To account for the effects of inflation, the calculator uses the annual changes to the Consumer Price Index, from 1926 through last year. The results displayed in the chart are nominal dollars.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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- Dan Moroboshi
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<threadjack>
You don't have to put spaces between the TEXT and the tags; I used them for clarity.
You can use the URL button in the selection of formatting tools above the text box when you compose a post, or type the tags manually.
So this is what you would type when writing your post:
(Again, I put spaces between the tags and the "Retirement Disaster Ahead", for clarity. They are not needed.)
You can do this by clicking the URL button, which will generate the opening and closing tags. Type an 'equality sign' ( = ) after the url in the opening tag, and then copy/paste the URL into the opening tag. Type the text you desire between the tags.
This is what it looks like when your post is displayed:
Retirement Disaster Ahead
Using "Preview" is helpful, to ensure that you haven't forgotten to close a tag.
</threadjack>
You do it like this:MekongTrader wrote:Check this out from today's WSJ, by Brett Arends titled 'Retirement disaster ahead'
http://online.wsj.com/article/SB1000142 ... LeadSecond
(sorry, I don't know how to format (overwrite) an url...)
Code: Select all
[url=URL] TEXT [/url]
You can use the URL button in the selection of formatting tools above the text box when you compose a post, or type the tags manually.
So this is what you would type when writing your post:
Code: Select all
[url=http://online.wsj.com/article/SB10001424052702303341904575576482831038318.html?mod=WSJ_PersonalFinance_LeadSecond] Retirement Disaster Ahead [/url]
You can do this by clicking the URL button, which will generate the opening and closing tags. Type an 'equality sign' ( = ) after the url in the opening tag, and then copy/paste the URL into the opening tag. Type the text you desire between the tags.
This is what it looks like when your post is displayed:
Retirement Disaster Ahead
Using "Preview" is helpful, to ensure that you haven't forgotten to close a tag.
</threadjack>