**Safe Withdrawal Rate**along with their links and supporting rationale.

Number 1

http://nofeeboards.com/boards/viewtopic.php?t=943

http://nofeeboards.com/boards/viewtopic ... 6859#p6859

From

**JWR 1945**:

**Alternative Definition A.**This is a brand new definition.

The

**Safe Withdrawal Rate**is the best estimate of the maximum withdrawal amount for a retirement portfolio based on both a well-defined procedure and a set of well-defined constraints. It is stated as a percentage of the initial portfolio balance. It

**must**be a mathematical calculation that is based primarily on existing, historical information. The sense in which it is the

**best**estimate

**must**be identified. The algorithm or procedure

**must**be stated clearly. The constraints

**must**be stated clearly. There

**must**be an assessment of the degree of safety. This may be stated in terms of probabilities.

The phrase

**Safe Withdrawal Rate**should always be placed in context. It should be defined in terms of those factors that are covered by the calculation, those factors that are not covered and those that are only partially covered. The context of a

**Safe Withdrawal Rate**calculation

**must**always address the reliability of the estimate. This should include known sensitivities to the

**assumptions**that are inherent in making any projection. It is desirable to include general comments about the applicability of the estimate.

The

**Safe Withdrawal Rate**

**must**be described in terms independent of any methodology. The

**Safe Withdrawal Rate**

**must**be based on calculations that are independent of the actual occurrence of future events. The

**Safe Withdrawal Rate**

**must**be described in terms that acknowledge our inability to conduct carefully controlled experiments.

An example of a

**Safe Withdrawal Rate**that does not depend on existing, historical information involves the use of mathematical formulas and theorems. If you started out with $1.0 million, you could withdraw $50K annually for 20 years. You would simply keep the money in cash at zero interest (such as stuffing dollars into a mattress). Another example is the introduction of a new asset class on a theoretical basis instead of a historical basis such as including Treasury Inflation Protected Securities (TIPS). Even though they have existed only recently, it is possible to define a meaningful

**Safe Withdrawal Rate**calculation that includes TIPS. Another example would be to include the effects of a new law.

Several example of well-defined procedures include:

1) Withdrawing a fixed dollar amount every year of the portfolio's lifetime.

2) Withdrawing an initial amount and then increasing (or decreasing) that amount to adjust for inflation (or deflation).

3) Withdrawing a fixed percentage of the current balance of the retirement portfolio every year.

4) Withdrawing a minimal amount every year and taking out an additional amount that depends upon how much the portfolio size has increased. If the balance has decreased, the additional amount is zero. If the balance has increased greater than a specified amount (or percentage), take a specified percentage of the increase up to a maximum (amount or percentage).

5) Withdrawing an initial amount based on a specified percentage of the initial balance of the retirement portfolio. At the end of each year two amounts are calculated. One is to increase (or decrease) that amount to adjust for inflation (or deflation). The other is to use the originally specified percentage, but this time to apply it to the current portfolio balance. Withdraw whichever amount is larger.

Several examples of well-defined constraints include:

1) The portfolio balance must remain above zero for a specified number of years.

2) The portfolio balance must be greater than or equal to the original balance after a specified number of years.

3) The portfolio balance must be greater than or equal to the original balance as adjusted for inflation after a specified number of years.

4) The portfolio balance must remain between a minimum amount and a maximum amount for a specified number of years. All amounts are adjusted for inflation.

Have fun.

John R.