6% for 60 Years

I used the Scenario Surfer to see if I could withdraw 6% for 60 years.

The Scenario Surfer

The Scenario Surfer is an advanced Monte Carlo simulator for training purposes. It can be used for accumulation and withdrawal stages alike. It has two forms of Mean Reversion. It allows you to vary your allocation in accordance with valuations (i.e., Professor Robert Shiller’s P/E10).

The Scenario Surfer uses a traditional S&P500/TIPS investment mix.

Approach

I followed the approach found in Long Retirements and the Scenario Surfer. I started with a P/E10=26 Bear Market. I started with an initial balance of $1. I waited until P/E10 fell below 16.0 before investing $100000. To do this, I made a negative withdrawal. I withdrew $6000. That is, I entered the net amount of ($94000). I withdrew $6000 in all of the years that followed.

I alternated between P/E10=26 Bear Market and P/E10=8 Normal Market conditions according to the instructions in Long Retirements and the Scenario Surfer.

I continued until I went bankrupt or reached Year 60.

My general approach relied heavily on my past learning with the Scenario Surfer. It depended on my experience with Latch and Hold.

Long Retirements and the Scenario Surfer

Data

Run 1.

Year with the deposit: 9
P/E10 at deposit year: 10.8
Year at bottom turning point: 12
Balance at turning point: 93,842
Number of years: 3

Year at next turning point (peak): 26
P/E10 at turning point: 21.4
Balance at turning point: 414,029
Cumulative number of years: 29

Year at next turning point (valley): 23
P/E10 at turning point: 9.0
Balance at turning point: 585,984
Cumulative number of years: 52

Final Year (rising): 8
P/E10: 13.2
Final balance: 1,580,825
Cumulative number of years: 60

Run 2.

Year with the deposit: 11
P/E10 at deposit year: 13.9
Year at bottom turning point: 19
Balance at turning point: 85,211
Number of years: 8

Year at next turning point (peak): 23
P/E10 at turning point: 31.0
Balance at turning point: 275,336
Cumulative number of years: 31

Year at next turning point (valley): 5
P/E10 at turning point: 8.9
Balance at turning point: 234,581
Cumulative number of years: 36

Year at next turning point (peak): 20
P/E10 at turning point: 22.7
Balance at turning point: 1,312,150
Cumulative number of years: 56

Final Year (falling): 4
P/E10: 13.0
Final balance: 1,312,150
Cumulative number of years: 60

Run 3.

Year with the deposit: 4
P/E10 at deposit year: 14.4
Year at bottom turning point: 16
Balance at turning point: 62,576
Number of years: 12

Year at next turning point (peak): 12
P/E10 at turning point: 19.1
Balance at turning point: 110,194
Cumulative number of years: 24

Year at next turning point (valley): 12
P/E10 at turning point: 6.3
Balance at turning point: 45,014
Cumulative number of years: 36

Year at next turning point (peak): 14
P/E10 at turning point: 34.1
Balance at turning point: 28,156
Cumulative number of years: 50

Final Year (falling): 6
P/E10: 31.4
Final balance: bankrupt
Cumulative number of years: 56

Run 4.

Intermediate balance: 73,929
Intermediate balance: 162,161
Intermediate balance: 140,135
Intermediate balance: 808,662
Intermediate balance: 911,256
Final balance: 1,720,327
Cumulative number of years: 60

Run 5.

Intermediate balance: 63,552
Intermediate balance: 78,091
Final balance: bankrupt
Cumulative number of years: 47

Discussion

These results are comparable to the 30 Year Reasonably Safe Withdrawal Rate (see Year 30 SWR button on the left) with a high stock allocation. However, they last longer and they begin with a long lasting (secular) Bear Market, not a Normal Market.

In no circumstance did I adjust withdrawals as a response to unfavorable market conditions. An early retiree could reasonable start with a withdrawal rate of 6% with the intent of making adjustments later, as needed. Alternatively, he could withdraw 5% or 5.5% for a few years, increasing his withdrawals later as his nest egg grows.

The long term withdrawal rate is higher than we would calculate using independent 30 year segments. This happens because there are bull markets between the bear markets.

Have fun.

John Walter Russell
February 14, 2009