Ten Years to Retirement

I used the Scenario Surfer to examine the period just before and after retirement.

Investment Sequence

I started with a balance of $100000. I invested $10000 each year for ten years (Years 0 through 9). I withdrew $10000 each year for the next twenty years.

I put in P/E10=26 Bear Market. I used a 1% interest rate for the TIPS. The deposits are negative withdrawals of $10000 each. The total invested is $200000. The $10000 annual withdrawals are 5% of the total investment amount.

Results

Run 1. 171,694.
20% rebalanced: 104,280.
50% rebalanced: 228,954.
80% rebalanced: 383,334.

Run 2. 1,846,973.
20% rebalanced: 142,079.
50% rebalanced: 407,359.
80% rebalanced: 813,754.

Run 3. 649,268.
20% rebalanced: 86,227.
50% rebalanced: 175,589.
80% rebalanced: 289,229.

Run 4. 299,719.
20% rebalanced: 112,177.
50% rebalanced: 284,418.
80% rebalanced: 552,663.

Run 5. 425,835.
20% rebalanced: 99,217.
50% rebalanced: 215,471.
80% rebalanced: 348,238.

Run 6. 554,984.
20% rebalanced: 93,866.
50% rebalanced: 190,004.
80% rebalanced: 298,991.

Run 7. 687,529.
20% rebalanced: 85,153.
50% rebalanced: 151,455.
80% rebalanced: 203,336.

Run 8. 540,065.
20% rebalanced: 80,109.
50% rebalanced: 141,380.
80% rebalanced: 189,032.

Run 9. 704,362.
20% rebalanced: 104,942.
50% rebalanced: 230,837.
80% rebalanced: 380,866.

Run 10. 354,971.
20% rebalanced: 69,497.
50% rebalanced: 98,496.
80% rebalanced: 92,782.

Observations

The best fixed allocation was 80% stocks, followed by 50% stocks, followed by 20% stocks.

In 8 out of 10 runs, varying allocations did better than maintaining a fixed allocation. In 2 out of 10 runs, the 80% stock allocation was better than varying allocations. In 1 out of 10 runs, the 50% stock allocation was better than varying allocations. In 0 out of 10 runs was the 20% stock allocation better than varying allocations.

Roughly speaking, varying allocations allows for 40 years of withdrawals equal to 5% of the original investment amount (plus inflation).

Roughly speaking, maintaining a fixed 80% stock allocation allows for 30 years of withdrawals equal to 5% of the original investment amount (plus inflation).

Excursion

Because of the earlier fixed allocation findings, I looked at a fixed allocation of 100% stocks:

Run 1. 81,457.
20% rebalanced: 64,954.
50% rebalanced: 94,589.
80% rebalanced: 101,084.

Run 2. 173,797.
20% rebalanced: 77,857.
50% rebalanced: 132,977.
80% rebalanced: 170,359.

Run 3. 268,294.
20% rebalanced: 91,498.
50% rebalanced: 176,771.
80% rebalanced: 248,494.

Run 4. 1,087,126.
20% rebalanced: 133,831.
50% rebalanced: 369,194.
80% rebalanced: 749,362.

Run 5. 563,008.
20% rebalanced: 120,386.
50% rebalanced: 280,117.
80% rebalanced: 348,238.

Excursion Results

A fixed allocation of 100% stocks is often better than a fixed allocation of 80% stocks. In one out of five runs, it was worse.

Summary

Varying allocations in accordance with P/E10 did the best overall.

An investor who is ten years from retirement today has a bright outlook, especially if he varies allocation with valuations. He will be able to withdraw 5% of his total investment (plus adjustments to match inflation) for 40 years. Even if he does not vary allocations, if he maintains a high stock allocation, he will be able to withdraw 5% of his total investment (plus adjustments to match inflation) for 30 years in retirement.

The investor who is not yet retired is in a favorable position. He is able to weather the worse of current secular (long lasting) bear market before retirement.

Have fun.

John Walter Russell
April 7, 2008