6% and Safety

A 60-year Safe Withdrawal Rate of 6% (plus inflation) using a liquidation strategy is too much to ask for at today’s prices (P/E10=13). Valuation Informed Indexing comes close. It is reasonably safe, even over a 60-year time period. Current Research N: Turning Points investigations show this. About 20% of the possible outcomes end in disaster.

The upper limit at the highest level of safety seems to be 5.0% to 5.5% of the original balance (plus inflation).

If you look at 30-year Historical Surviving Withdrawal Rates, you will find that adding a decade requires dropping the withdrawal rate by only 0.1% to 0.2% of the original balance. By Year 30 your portfolio has either grown spectacularly or it is close to bankruptcy. Lowering the withdrawal rate need only affect two or three sequences. The slightest nudge does spectacularly well.

Then there is a gap. This gap allows you to jump to 6% (plus inflation) with Valuation Informed Indexing. But it does not allow you to gain as much with a fixed allocation.

This assumes an S&P500/TIPS portfolio.

The secret to success is in the knowing turning points. We only have a limited ability to do this. I believe that demographics can bridge the gap in the immediate future. Later, we may need to take advantage of other outside predictors. The baby boom has had a tremendous impact, but not for forever.

Have fun.

John Walter Russell
February 20, 2009