Conventional Portfolios at 4%

Traditional studies suggested that a 4% withdrawal rate (plus inflation) would be safe. Our research shows otherwise. This is what is likely to happen at today’s valuations.

Year 30 SWR Estimates

With P/E10=26, which is close to today’s valuations, the Year 30 SWR Retirement Risk Evaluator displays these results for conventional portfolios consisting of the S&P500 and 2% TIPS.

Safe Withdrawal Rates
20% stocks: 3.92
50% stocks: 3.65
80% stocks: 3.12
100% stocks: 2.28

Reasonably Safe Rates
20% stocks: 4.17
50% stocks: 4.05
80% stocks: 3.72
100% stocks: 3.18

Scenario Surfer Runs

Here are 20 runs on the Scenario Surfer using a 4% withdrawal rate, fixed stock allocations and an initial balance of $100000. These are the final balances after 30 years.

Run 1:
20% stocks: 41,699
50% stocks: 80,076
80% stocks: 101,737
100% stocks: 96,659

Run 2:
20% stocks: 23,825
50% stocks: 33,855
80% stocks: 36,029
100% stocks: 29,645

Run 3:
20% stocks: 27,772
50% stocks: 44,676
80% stocks: 55,149
100% stocks: 55,636

Run 4:
20% stocks: 26,321
50% stocks: 32,626
80% stocks: 14,664
100% stocks: bankrupt

Run 5:
20% stocks: 34,344
50% stocks: 66,180
80% stocks: 96,191
100% stocks: 109,918

Run 6:
20% stocks: 31,528
50% stocks: 54,781
80% stocks: 66,401
100% stocks: 60,765

Run 7:
20% stocks: 36,250
50% stocks: 69,560
80% stocks: 93,408
100% stocks: 93,807

Run 8:
20% stocks: 28,606
50% stocks: 42,095
80% stocks: 45,083
100% stocks: 40,196

Run 9:
20% stocks: 35,084
50% stocks: 68,526
80% stocks: 101,781
100% stocks: 119,962

Run 10:
20% stocks: 28,055
50% stocks: 41,090
80% stocks: 41,338
100% stocks: 32,101

Run 11:
20% stocks: 20,693
50% stocks: 19,070
80% stocks: bankrupt
100% stocks: bankrupt

Run 12:
20% stocks: 36,209
50% stocks: 51,169
80% stocks: bankrupt
100% stocks: bankrupt

Run 13:
20% stocks: 34,323
50% stocks: 63,547
80% stocks: 73,083
100% stocks: 49,699

Run 14:
20% stocks: 22,763
50% stocks: 25,456
80% stocks: 16,158
100% stocks: 3,220

Run 15:
20% stocks: 25,306
50% stocks: 30,645
80% stocks: 15,514
100% stocks: bankrupt

Run 16:
20% stocks: 31,914
50% stocks: 61,348
80% stocks 93,038
100% stocks: 112,147

Run 17:
20% stocks: 36,428
50% stocks: 69,085
80% stocks: 96,914
100% stocks: 108,383

Run 18:
Super Bubble in Year 2 with P/E10=52.5
20% stocks: 43,899
50% stocks: 87,090
80% stocks: 111,997
100% stocks: 107,069

Run 19:
20% stocks: 33,262
50% stocks: 58,543
80% stocks: 69,573
100% stocks: 60,092

Run 20:
20% stocks: 37,359
50% stocks: 81,323
80% stocks: 136,401
100% stocks: 175,724

Scenario Surfer Final Balance Summary

Minimum
20% stocks: 20,693
50% stocks: 19,070
80% stocks: bankrupt (2/20 times)
100% stocks: bankrupt (4/20 times)

Maximum
20% stocks: 43,899
50% stocks: 87,090
80% stocks: 136,401
100% stocks: 175,724

Above 50000
20% stocks: 0/20 times
50% stocks: 12/20 times
80% stocks: 12/20 times
100% stocks: 11/20 times

Observations

The Scenario Surfer runs help us understand the numbers in the Year 30 SWR Retirement Risk Evaluator.

The Scenario Surfer runs were a little bit lucky. There were no failures with either a 20% or a 50% fixed stock allocation. There could have been. In contrast, an all-TIPS portfolio at 2% interest has a 100% chance of success over 30 years.

Both 80% stocks and 100% stocks had failures.

Dreams of fabulous wealth did not come true when starting from today’s valuations. Fabulous wealth comes to those who start at favorable valuations, not today’s sky high valuations.

Have fun.

John Walter Russell
December 15, 2007