or
Withdrawing 4% of the Current Balance
or
How 4% turns out to be less than 2.5%!
I duplicated a previous study except that I withdrew 4% of the portfolio's current balance instead of 5%. I had anticipated steadier income streams during times of portfolio stress. Instead, I found that the income stream fell just as far, actually farther, as with 5%.
Portfolios were safer at a 4% withdrawal rate. Their minimum balances stayed higher.
The previous study was Withdrawing 5% of the Current Balance dated Fri Dec 03, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=3152
Here are the conditions.
I have tabulated the amounts withdrawn when one removes 4% of his portfolio's current balance after adjusting for inflation (i.e., using real dollars). These are based upon an initial balance of $100000. Expenses were set at zero.
These data were taken using the latest version of my Deluxe Calculator 1.1V08, which is a modified version of the Retire Early Safe Withdrawal Calculator, Version 1.61 dated November 7, 2002. The calculator was set up with an initial withdrawal amount equal to zero and expenses (which is the sum of the withdrawal percentage of the current balance and the actual portfolio maintenance expenses) set at 4.0%. I used TIPS with a 2% real interest rate for allocations other than stocks.
[Note: dummy values are used for stock returns after 2002. They are set for heavy losses. Thirty-year historical sequences starting in 1973-1980 include dummy data values at the end of their sequences.]
Here are the new tables.
With 50% stocks and 50% TIPS at 2% interest, these are the 5-year rolling averages of the amounts withdrawn at years 5, 10, 20 and 30. Each year's withdrawal is 4% of the current balance.
Code: Select all
Year, 100E10/P year 5 year 10 year 20 year 30
1921 19.61 4260 6003 6152 5276
1922 15.87 4638 6341 6044 5570
1923 12.20 4609 5840 5361 5453
1924 12.35 4994 5534 5147 5623
1925 10.31 5160 5003 4768 5604
1926 8.85 4847 4324 4252 5328
1927 7.58 4823 4374 4219 5526
1928 5.32 4138 4005 3703 5005
1929 3.69 3350 3490 3129 4434
1930 4.48 3189 3572 3118 4625
1931 5.99 3340 3838 3291 5052
1932 10.75 4243 4460 4110 6304
1933 11.49 5148 4882 4967 7473
1934 7.69 4422 3948 4314 6343
1935 8.70 4839 4117 4839 6879
1936 5.85 4033 3452 4325 5846
1937 4.63 3394 3115 4080 5226
1938 7.41 3794 3699 5000 6178
1939 6.41 3534 3548 5029 5952
1940 6.10 3559 3652 5417 6027
1941 7.19 4248 4256 6534 6902
1942 9.90 4696 4717 7234 7318
1943 9.80 4434 4626 6960 6754
1944 9.01 4142 4507 6628 6107
1945 8.33 3946 4520 6426 5527
1946 6.41 3951 4942 6680 5376
1947 8.70 4409 5750 7367 5657
1948 9.62 4510 5842 7219 5215
1949 9.80 4494 5855 6929 4734
1950 9.35 4905 6352 7067 4815
1951 8.40 4710 5781 6107 4233
1952 8.00 4622 5435 5499 3779
1953 7.69 4681 5437 5276 3616
1954 8.33 4915 5548 5112 3647
1955 6.25 4370 4797 4126 3153
1956 5.46 4143 4563 3672 2992
1957 5.99 4297 4681 3595 3182
1958 7.25 4642 4939 3568 3488
1959 5.56 4110 4309 2944 3112
1960 5.46 4196 4252 2897 3221
1961 5.41 4278 4103 2844 3286
1962 4.72 4107 3814 2622 3166
1963 5.18 4338 3957 2712 3394
1964 4.63 4079 3585 2558 3249
1965 4.29 3888 3300 2522 3188
1966 4.15 3760 3154 2570 3256
1967 4.90 3966 3280 2904 3641
1968 4.65 3834 3037 2969 3738
1969 4.72 3778 2937 3105 4062
1970 5.85 3918 3146 3498 4795
1971 6.06 3756 3103 3586 5105
1972 5.78 3560 2959 3574 5165
1973 5.35 3428 2967 3712 5202
1974 7.41 3856 3538 4495 5829
1975 11.24 4311 4104 5188 6044
1976 8.93 3772 3720 4713 4759
1977 8.77 3714 3955 4959 4225
1978 10.87 4124 4658 5865 4155
1979 10.75 4332 4990 6529 3773
1980 11.24 4404 5144 7051 3284
1981 10.71 4241 4970 7075
1982 13.48 4678 5304 7665
Code: Select all
Year, 100E10/P year 5 year 10 year 20 year 30
1921 19.61 4823 8637 9317 8073
1922 15.87 5202 8723 8506 8201
1923 12.20 5064 7447 6917 7763
1924 12.35 5841 6911 6602 8272
1925 10.31 6016 5736 5751 8083
1926 8.85 5554 4690 4969 7689
1927 7.58 5400 4762 4878 8074
1928 5.32 4219 4158 3981 6935
1929 3.69 3020 3317 3049 5724
1930 4.48 2892 3556 3149 6368
1931 5.99 3172 4052 3511 7489
1932 10.75 4735 5236 5048 10811
1933 11.49 5951 5610 6296 13095
1934 7.69 4661 4054 5080 10188
1935 8.70 5375 4382 6159 11718
1936 5.85 4041 3352 5187 9154
1937 4.63 3115 2886 4777 7770
1938 7.41 3827 3887 6771 10433
1939 6.41 3412 3605 6768 9805
1940 6.10 3406 3700 7482 9893
1941 7.19 4281 4472 9541 11651
1942 9.90 5149 5359 11476 13106
1943 9.80 4801 5305 11033 11839
1944 9.01 4308 5108 10244 10155
1945 8.33 3967 5132 9763 8690
1946 6.41 3675 5444 9606 7677
1947 8.70 4574 7275 11831 8730
1948 9.62 4962 7823 12054 8021
1949 9.80 5022 7951 11520 6956
1950 9.35 5447 8513 11257 6733
1951 8.40 5203 7493 9151 5625
1952 8.00 5152 6937 7922 4813
1953 7.69 5219 6884 7387 4457
1954 8.33 5661 7170 7108 4549
1955 6.25 4705 5727 5098 3612
1956 5.46 4270 5232 4181 3271
1957 5.99 4495 5430 4007 3580
1958 7.25 5134 5998 3991 4193
1959 5.56 4267 4880 2947 3527
1960 5.46 4390 4769 2853 3706
1961 5.41 4552 4537 2789 3839
1962 4.72 4259 4027 2446 3608
1963 5.18 4637 4260 2571 4017
1964 4.63 4231 3667 2347 3759
1965 4.29 3909 3203 2269 3620
1966 4.15 3677 2948 2306 3700
1967 4.90 4003 3124 2791 4420
1968 4.65 3776 2735 2874 4591
1969 4.72 3654 2546 3048 5186
1970 5.85 3912 2855 3710 6787
1971 6.06 3690 2829 3895 7532
1972 5.78 3365 2620 3863 7603
1973 5.35 3051 2542 3971 7433
1974 7.41 3637 3341 5352 8890
1975 11.24 4518 4385 6996 9833
1976 8.93 3707 3783 6069 6792
1977 8.77 3586 4115 6517 5538
1978 10.87 4184 5276 8429 5297
1979 10.75 4398 5730 9751 4395
1980 11.24 4533 6068 11102 3532
1981 10.71 4329 5841 11294
1982 13.48 5189 6668 13124
Withdrawing a constant percentage of the current balance prevents a portfolio's balance from falling to zero. The buying power of the amounts withdrawn drops quite a bit.
All initial balances were $100000 in this study.
The mid-1960s, especially 1964-1966, were the worst case.
Previously, with 50% stocks, the buying power dropped between $2600 and $2700 at year 20 before rising later. With 80% stocks, there was a lot of variation. Previously, the 5-year average withdrawal amount at year 20 fell to $2375 during the worst case (1965) sequence.
This time, when withdrawing 4% of the portfolio's current balance, the buying power of a 50% stock portfolio fell between $2500 and $2600 at year 20. The worst case sequence with 80% stocks was still in 1965. The 5-year average withdrawal amount at year 20 was $2269.
There are many examples of higher returns at year 20, but not when starting with stocks at high valuations.
Withdrawing a percentage of a portfolio's current balance instead of its initial balance extends its lifetime indefinitely, but only at a cost. The buying power drops substantially by year 20. We are talking about drops of 40%.
The old adage, which I am guilty of repeating, that withdrawing 5% of a portfolio's current balance is roughly equivalent to withdrawing 4% of its initial balance is false. Even withdrawing 4% of a portfolio's current balance reduces one's buying power in later years. It gives the illusion of being a safer, simpler method. It doesn't work out that way. This approach may reduce one's buying power so much that he abandons his original plan. He may withdraw more out of necessity.
Have fun.
John R.
NOTE: Tables with balances follow.