These are the inputs from Professor Robert Shiller's database. I copied these numbers today. I have limited my own precision to two decimal places for dividend yields when making my hand calculations.
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Date Price Dividend CPI
2000 1425.59 16.57333333 168.8
2001 1335.63 16.17 175.1
2002 1140.21 15.73666667 177.1
2003 895.84 16.12 181.7
2004 1132.52 [?] 185.2
Here are some approximate numbers for January 2005. The original source is the cbs.marketwatch.com website. I have used today's dividend yield of 1.65% for 2004.
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I have used an index value of 1185.00 for January 2005.
I have used a dividend yield of 1.65% for 2004.
January 2000.
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Start with $1000000 in January 2000.
To be as favorable as possible, we withdraw at the end of the year.
Dividend yield is 16.57 divided by 1425.59. This equals 1.16%.
Dividend amount in 2000 is the initial balance times yield or $11600.
Price change equals 2001 index value divided by 2000 index value.
Price adjustment equals 1335.63/1425.59 or 0.9369.
Price at the end of 2000 equals $936900.
Add the dividend amount.
Balance before withdrawals: $948500.
Withdraw $40000.
Balance after withdrawals: $908500.
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Start with $908500 in January 2001.
To be as favorable as possible, we withdraw at the end of the year.
Dividend yield is 16.17 divided by 1335.63. This equals 1.21%.
Dividend amount in 2001 is the initial balance times yield or $10993.
Price change equals 2002 index value divided by 2001 index value.
Price adjustment equals 1140.21/1335.63 or 0.8537.
Price at the end of 2001 equals $775586.
Add the dividend amount.
Balance before withdrawals: $786579.
Withdraw $40000.
Balance after withdrawals: $746579.
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Start with $746579 in January 2002.
To be as favorable as possible, we withdraw at the end of the year.
Dividend yield is 15.74 divided by 1140.21. This equals 1.38%.
Dividend amount in 2002 is the initial balance times yield or $10303.
Price change equals 2003 index value divided by 2002 index value.
Price adjustment equals 895.84/1140.21 or 0.7857.
Price at the end of 2002 equals $586587.
Add the dividend amount.
Balance before withdrawals: $596890.
Withdraw $40000.
Balance after withdrawals: $556890.
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Start with $556890 in January 2003.
To be as favorable as possible, we withdraw at the end of the year.
Dividend yield is 16.12 divided by 895.84. This equals 1.80%.
Dividend amount in 2003 is the initial balance times yield or $10024.
Price change equals 2004 index value divided by 2003 index value.
Price adjustment equals 1132.52/895.84 or 1.2642.
Price at the end of 2003 equals $707020.
Add the dividend amount.
Balance before withdrawals: $717044.
Withdraw $40000.
Balance after withdrawals: $677044.
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Start with $677044 in January 2004.
To be as favorable as possible, we withdraw at the end of the year.
Dividend yield is unknown. We shall use today's value of 1.65%.
Dividend amount in 2004 is the initial balance times yield or $11171.
Price change equals 2005 index value divided by 2004 index value.
Price adjustment equals 1185.00/1132.52 or 1.0463.
Price at the end of 2004 equals $708391.
Add the dividend amount.
Balance before withdrawals: $719562.
Withdraw $40000.
Balance after withdrawals: $679562.
Here are the inflation adjustment calculations.
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Inflation adjustment for 2000 through 2004:
Starting index value: 168.8
Ending index value: 185.2
Ratio: 0.9114 or 91.14%
Assume 3%.
Multiplier equals 97% or 0.9114.
Estimated inflation adjustment for 2000 to 2005:
Multiply 0.9114 by 0.97.
Adjustment for inflation equals 0.8841 or 88.41%.
SUMMARY:
We started with $1 000 000 in January 2000.
I have examined a portfolio with 100% stocks. [Please don't ask for anything more complicated. These hand calculations are difficult enough as is.]
We have made four withdrawals of $40000 with no adjustments for inflation.
The balance in January 2005 is $679562 (nominal) before adjusting for inflation.
The balance in January 2005 is $600801 (real) after adjusting for inflation.
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A retiree who started with $1.0 million in January 2000
and
who withdrew $40000 at the end of each year (without increasing his withdraws to match inflation)
would now have
$679562 (nominal).
His withdrawals have remained at $40000 (nominal). His withdrawal in January 2005 has a buying power of $35364 (real) in year 2000 dollars.
This may help to put things into perspective. If our retiree had placed all of his money ($1000000) in cash at zero percent interest, he would have $840000 (nominal) in January 2005. His buying power in January 2005 would now be $742644 (real) in year 2000 dollars.
Even though our retiree has cut back since 2000 (because the stock market has done poorly), he has suffered a major loss of capital. If he has maintained a high exposure to stocks, his portfolio could be down by as much as 40% of its original buying power. Even cash without interest would have been limited to a loss of 26% of its original buying power.
Have fun.
John R.