Seeking 5%

I used the Scenario Surfer to examine a conventional strategy with variable withdrawals. I tried to lift the 30-Year withdrawal rate to 5% of the original balance (plus inflation) except for brief periods at 4%.

It is better to ease into a 5% withdrawal rate with the first five years at 4%. Refer to my earlier study.

Easing into 5%

Conditions

I started with a $100000. I withdrew $5000 (plus inflation) unless the portfolio balance fell by $10000 or more. If so, I withdrew $4000 (plus inflation) for two years.

I used TIPS with a 2% interest rate. The stock holding in the Scenario Surfer is based on the S&P500 index.

I varied allocations in accordance with P/E10. My minimum stock allocation was 20%. My maximum stock allocation was 100%.

Results

Withdraw 4% for two years after each $10000 drop. Otherwise, withdraw 5.0%.

Run 1:
Two years with 4% withdrawals.
Final balance: 28,992
The 20% rebalancing portfolio went bankrupt.
With 50% rebalancing: 26,720
With 80% rebalancing: 61,613

Run 2:
Four years with 4% withdrawals.
Final balance: 65,915
The 20% rebalancing portfolio went bankrupt.
With 50% rebalancing: 238
With 80% rebalancing: 1,255

Run 3:
Two years with 4% withdrawals.
Final balance: 94,770
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 4:
Four years with 4% withdrawals.
Final balance: bankrupt.
The 20%, 50% and 80% rebalancing portfolios went bankrupt.

Run 5:
Four years with 4% withdrawals.
Final balance: 79,179
The 20% rebalancing portfolio went bankrupt.
With 50% rebalancing: 26,564
With 80% rebalancing: 48,603

Summary

Run 4 took away the glamour. All portfolios went bankrupt by Year 30.

The portfolio with a 20% fixed stock allocation always went bankrupt. The portfolio with a 50% fixed stock allocation succeeded three times out of five. The portfolio with an 80% fixed stock allocation succeeded three times out of five.

This approach favors higher stock allocations. With only one exception, however, varying allocations with valuations was best.

Have fun.

John Walter Russell
December 11, 2007