Short Posts starting from February 26, 2007

Updated: April 17, 2007.

Simple Path to 5%

Even in today’s market, it is simple and straightforward to obtain a 5% withdrawal rate that keeps up with inflation. Here are the requirements.

Simple Path to 5%

Why It Works

Smoothing the Income Stream increases today’s Safe Withdrawal Rate to 5%, well above the 4% that is claimed traditionally. We can do even better. It doesn’t stop there.

This is why it works.

Why It Works

Flaws in the Traditional Theory

The traditional theory is hopelessly flawed. It leads to unnecessary and costly mistakes. It can lead to busted retirements.

Flaws in the Traditional Theory

Dividend Baseline: Expanded

Here are variations around my Dividend Baseline.

Dividend Baseline: Expanded

Fluctuating Dividends

I examined the income stream with wildly fluctuating dividends. It is higher than expected.

Fluctuating Dividends

Fluctuating Dividends with a Growth Kicker

I added a growth kicker to an investment with wildly fluctuating dividends. This increases the income stream.

Fluctuating Dividends with a Growth Kicker

Income Stream Insights

I have used the Income Stream Allocator to look at a variety of conditions. Here are the key insights.

Income Stream Insights

TIPS Table

Here are TIPS Safe Withdrawal Rates and percentage balances for interest rates of 1%, 2%, 2.5%, 3%, 3.5% and 4%.

TIPS Table

Everyone CAN Be Above Average!

Here is how.

Everyone CAN Be Above Average!

The Cost of Capital Appreciation

Retirees give up very little income in the hope of capital gains.

The Cost of Capital Appreciation

Gentle Failure Mechanisms

Our TIPS baselines and dividend strategies share one thing in common. They have gentle failure mechanisms. At worst, they could result in your cutting back to 70% of your original buying power.

Gentle Failure Mechanisms

What Do I Really Think About Long-Term Timing?

Long-term timing raises today’s traditional Year 30 Safe Withdrawal Rate to 5.4% (plus inflation) of your original balance. It raises today’s traditional continuing Safe Withdrawal Rate to 4.9% (plus inflation).

Dividend strategies do better.

What Do I Really Think About Long-Term Timing?

Expanded Allocator

I have built an expanded version of the Income Stream Allocator. It includes 5 income streams and a cash management account.

Expanded Allocator

Using Weighted Averages

I examined using weighted averages on the Expanded Allocator. They almost always work well for the first 15 years. Sometimes, weighted averages work well for more than 30 years.

Using Weighted Averages

Expanded Allocator Insights A

In this initial investigation, I find that I can increase the Income Stream substantially. The reason? My Expanded Allocator is much easier to use than my Income Stream Allocators.

Expanded Allocator Insights A

Expanded Allocator Insights B

I tried a variety of allocations to determine the value of fine grain optimization. It is not much.

Expanded Allocator Insights B

Expanded Allocator Insights C

This time, I examined mortgages.

Once again, the BEST combination consisted of the extremes: one investment with a high initial income and the other with the fastest growth rate at a lower initial yield.

Expanded Allocator Insights C