Calculated Rates of the Last Decade

I have applied the equations from my From Earnings Yield thread.

With the 50% stock portfolio, the Historical Surviving Withdrawal Rate (HSWR50) equation is HSWR50 = 0.3979x+2.6434%, where x = 100*(E10/P) or 100/[P/E10] = the earnings yield in percent and R squared equals 0.6975. When using this equation, the standard deviation of HSWR50 is 0.6178. The 90% confidence limits are plus and minus 1.01% of the calculated value.

With the 80% stock portfolio, the Historical Surviving Withdrawal Rate (HSWR80) equation is HSWR80 = 0.6685x+1.6424%, where x = 100*(E10/P) or 100/[P/E10] = the earnings yield in percent and R squared equals 0.7274. The standard deviation of HSWR80 using this formula is 0.9649. The 90% confidence limits are plus and minus 1.58%.

I have listed below the last decade’s January values of P/E10 taken from Professor Robert Shiller’s website.
Professor Shiller's web site

Here are the values of P/E10 in January.

1995 20.219819
1996 24.763281
1997 28.333753
1998 32.860928
1999 40.578255
2000 43.774387
2001 36.980560
2002 30.277409
2003 22.894158


The last entry in Professor Shiller's list is for November 2003. The S&P500 index was at 1054.87 and P/E10 was 25.898702. [To help with scaling: today, the S&P500 index started at 1134.41. If ten-year earnings were the same as in November 2003, today's P/E10 would be 25.898702*(1134.41/1054.87) = 27.851533.]

Safe, Calculated and High Risk Rates with 50% stocks

Year Safe Calculated High Risk
1995 3.60 4.61 5.62
1996 3.24 4.25 5.26<
1997 3.04 4.05 5.06
1998 2.84 3.85 4.86
1999 2.61 3.62 4.63
2000 2.54 3.55 4.56
2001 2.71 3.72 4.73
2002 2.95 3.96 4.97
2003 3.37 4.38 5.39
Nov03 3.17 4.18 5.19
Today 3.06 4.07 5.08

Safe, Calculated and High Risk Rates with 80% stocks

Year Safe Calculated High Risk
1995 3.37 4.95 6.53
1996 2.76 4.34 5.92
1997 2.42 4.00 5.58
1998 2.10 3.68 5.26
1999 1.71 3.29 4.87
2000 1.59 3.17 4.75
2001 1.87 3.45 5.03
2002 2.27 3.85 5.43
2003 2.98 4.56 6.14
Nov03 2.64 4.22 5.80
Today 2.46 4.04 5.62

Remarks

For those who are invested 50% in stocks, the Safe Withdrawal Rate bottomed out near 2.54%. The odds in favor of success (i.e., having the portfolio last 30 years) are at least 50-50 in all cases with a withdrawal rate of 3.55% and lower. Except for 1998-2002, the odds in favor of success have been at least 50-50 at a withdrawal rate of 4.00%. Those who started withdrawing 5.00% in 1998-2002 are almost certain to run out of money within 30 years.

For those who are invested 80% in stocks, the Safe Withdrawal Rate bottomed out near 1.59%. It was below 2.00% from 1999-2001. It was below 3.00% from 1996 until today. The odds in favor of success are at least 50-50 in all cases with a withdrawal rate of 3.17% and lower. Except for 1998-2002, the odds in favor of success have been at least 50-50 at a withdrawal rate of 4.00%. Those who started withdrawing 5.00% in 1999-2000 are almost certain to run out of money within 30 years.

Have fun.

John Walter Russell
I wrote this on 6-23-04.