Switching Survey (Extended)

Research on Safe Withdrawal Rates

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JWR1945
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Switching Survey (Extended)

Post by JWR1945 » Mon Feb 02, 2004 10:34 am

This extends my previous survey of two-threshold three-allocation switching.

The 30-year Historical Database Rate is now 5.1% for a portfolio of stocks and commercial paper. The original survey had raised it from 3.9% to 5.0%.

Details

I collected this data using my full-up modified version of the Retire Early Safe Withdrawal Calculator (version 1.61). I refer to it as the JanSz-Chips Deluxe V1.0A version. This could have been done on any of my modified versions that include two-levels of P/E10 switching thresholds with three-allocations of stocks and commercial paper.

I also made extensive use of some of my early data summary improvements.

I limited my examination to retirement portfolios begun from 1921 to 1980.

I set the initial balance at $100000 to minimize the effects of round-off errors. I set the expenses to 0.20% of the portfolio balance. I did not use my special JanSz-Chips modifications. That is, I set the capital gains percentage at 0% and the dividend reinvestments at 100%. I examined portfolio life times of 30 years. Withdrawal amounts were adjusted to match inflation (CPI-U). Withdrawal rates were based upon the initial portfolio balance.

I started with my allocations from my previous investigation. The low threshold allocation was 100% stocks. The middle allocation was 50% stocks and 50% commercial paper. The high threshold allocation was 0% stocks. In that investigation, I had used an 80% stock / 20% commercial paper allocation to establish a baseline without switching.

Survey A

The lower P/E10 threshold was 11. The higher P/E10 threshold was 21.

The stock allocation when P/E10 was below the lower threshold was 100%. The stock allocation when P/E10 was between thresholds was 50%. The stock allocation when P/E10 was above the higher threshold was 0%.

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Withdrawal Rate   Failures
5.0%   0
5.1%   1
5.2%   2
5.3%   5


Survey B

The lower P/E10 threshold was 11. The higher P/E10 threshold was 21. The withdrawal rate was 5.3%.

The stock allocation when P/E10 was the lowest was 100% stocks. The stock allocations for intermediate P/E10 valuations were varied, as shown in the table. The stock allocation when P/E10 was the highest was 0% stocks.

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Allocations (middle)   Failures
0%     27
10%    22
20%    17
30%     9
40%     3
50%     5
60%     7
70%    11
80%    11
90%    11
100%   11


When the middle level stock allocation was 0%, there was one failure at 20 years or less.

At the 30% middle level stock allocation, failures occurred for retirement portfolios that began in 1937-1940, 1956, 1959, 1962 and 1964-1965.

At the 40% middle level stock allocation, failures occurred for retirement portfolios that began in 1962 and 1964-1965.

At the 50% middle level stock allocation, failures occurred for retirement portfolios that began in 1962, 1964-1966 and 1968.

At the 60% middle level stock allocation, failures occurred for retirement portfolios that began in 1962, 1964-1966, 1968-1969 and 1972.

At the 70% middle level stock allocation, failures occurred for retirement portfolios that began in 1962 and 1964-1973.

Survey C

The lower P/E10 threshold was 11. The higher P/E10 threshold was 21. The withdrawal rate was 5.3%.

The stock allocation when P/E10 was the lowest was 100% stocks. The stock allocation for intermediate P/E10 valuations was 40%. The stock allocations when P/E10 was the highest were varied, as shown in the table.

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Allocations (highest)   Failures
0%      3
10%     5
20%     6
30%    10
40%    13
50%    15
60%    17
70%    17
80%    19
90%    21
100%   21


When the stock allocation (for the highest P/E10 levels) was 60% or less, there were no failures at year 20. When the stock allocation (for the highest P/E10 levels) was 70% and 80%, there was one failure that occurred at year 20 or less. When the stock allocation (for the highest P/E10 levels) was 90%, there were three failures that occurred at year 20 or less. When the stock allocation (for the highest P/E10 levels) was 100%, there were four failures that occurred at year 20 or less.

At the 30% stock allocation for the highest P/E10 levels, failures occurred for retirement portfolios that began in 1937, 1959-1960, 1962 and 1964-1969.

At the 20% stock allocation for the highest P/E10 levels, failures occurred for retirement portfolios that began in 1937, 1962, 1964-1966 and 1968.

At the 10% stock allocation for the highest P/E10 levels, failures occurred for retirement portfolios that began in 1937, 1962 and 1964-1966.

At the 0% stock allocation for the highest P/E10 levels, failures occurred for retirement portfolios that began in 1962 and 1964-1965.

Survey D

The lower P/E10 threshold was 11. The higher P/E10 threshold was 21. The withdrawal rate was 5.3%.

The stock allocations when P/E10 was the lowest were varied, as shown in the table. The stock allocation for intermediate P/E10 valuations was 40%. The stock allocation when P/E10 was the highest was 0%.

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Allocations (lowest)   Failures
0%    39
10%   36
20%   36
30%   36
40%   29
50%   24
60%   22
70%   20
80%   15
90%    9
100%   3


When the stock allocation (for the lowest P/E10 levels) was 60% or more, there were no failures at year 20. When the stock allocation (for the lowest P/E10 levels) was 50%, there was one failure that occurred at year 20 or less. When the stock allocation (for the lowest P/E10 levels) was 40% and 30%, there were four failures that occurred at year 20 or less. When the stock allocation (for the lowest P/E10 levels) was 20%, there were five failures that occurred at year 20 or less. When the stock allocation (for the lowest P/E10 levels) was 10%, there were nine failures that occurred at year 20 or less. When the stock allocation (for the lowest P/E10 levels) was 0%, there were fifteen failures that occurred at year 20 or less.

When the stock allocation (for the lowest P/E10 levels) was 80%, failures occurred for retirement portfolios that began in 1937-1940, 1959-1960 and 1962-1970.

When the stock allocation (for the lowest P/E10 levels) was 90%, failures occurred for retirement portfolios that began in 1937-1940, 1962, 1964-1966 and 1968.

When the stock allocation (for the lowest P/E10 levels) was 100%, failures occurred for retirement portfolios that began in 1962 and 1964-1965.

Looking at an extreme case, when the stock allocation (for the lowest P/E10 levels) was 0%, failures occurred for retirement portfolios that began in 1928-1946, 1956-1957 and 1959-1976. In addition, there were failures at year 20 or less for retirement portfolios that began in 1931-1932, 1936-1942 and 1968-1973.

Survey E

The lower P/E10 threshold was 11. The higher P/E10 threshold was 21.

The stock allocation when P/E10 was the lowest was 100% stocks. The stock allocation for intermediate P/E10 was 40%. The stock allocation when P/E10 was the highest was 0% stocks.

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Withdrawal Rate   Failures
5.0%   0
5.1%   0
5.2%   1
5.3%   3


The failure with a withdrawal rate of 5.2% was in 1964. The failures with a 5.3% withdrawal rate were in 1962, 1964 and 1965.

Remarks

The Historical Database Rate has been increased an additional 0.1%. It was 3.9% without switching. It is now 5.1%.

Failure mechanisms appear to be well balanced. They are split between the Great Depression and the Stagflation Years except at the very highest survivability levels.

There is quite a bit left to do. We need to look very carefully for sensitivities around these levels. Having a single point optimization is never enough. We must know its reliability.

There is still a tremendous opportunity for further improvement by using TIPS and/or ibonds instead of commercial paper.

Have fun.

John R.

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