Rock Bottom Withdrawal RateWhat is the worst case continuing withdrawal rate? The rock bottom is 2.77% per year using the S&P500 index and 2% TIPS. The Income StreamI limited my selection to the S&P500 and TIPS at a 2% (real, inflation adjusted) interest rate. I limited stock withdrawals to dividends alone. I withdrew a steady amount (after adjusting for inflation). I used the TIPS account to make up any shortfall from dividends. I assumed a 3% inflation rate.The S&P500 currently has a dividend yield close to 1.7%. The S&P500 (nominal) dividend has grown at a remarkably stable 5% per year since the 1940s. I varied allocations on a spreadsheet (my Expanded Allocator). I looked at the annual income through Year 50. The income increases as the TIPS allocation increases. But the TIPS account eventually runs out of money. To find a continuing withdrawal rate, I insisted that the dividend amount at Year 50 be enough to cover all withdrawals. With an initial allocation of 60% stocks and 40% TIPS, the dividend income was inadequate at Year 50. With an initial allocation of 70% stocks and 30% TIPS, the withdrawal rate was 2.77% and growing at Year 50. Dividends paid 2.84% of the original balance (plus inflation). Have fun. John Walter Russell June 2, 2007 |