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).

The traditional approach uses the S&P500 and 2% (real interest rate) TIPS.

Dividend strategies do better. Dividends raise today’s continuing Safe Withdrawal Rate to 5.4% (plus inflation).

What I Expect to Happen

I expect stock prices to fall to bargain levels within the next 15 years.

I expect P/E10=8 by Year 15.

New Data

I invested everything into a 2% TIPS ladder for the first fifteen years. This leaves 41% of your original balance (plus inflation) at Year 15 if you withdraw 5.4% (plus inflation). It leaves 50% of your original balance (plus inflation) at Year 15 if you withdraw 4.9% of your original balance (plus inflation).

Equations for Design

I used my Year 15 Calc A. You can download a copy from my Yahoo Briefcase. I developed it as part of The Big Project.

Yahoo Briefcase

I assumed that P/E10=8 at Year 15 (worst case). I invested entirely into stocks (i.e., the S&P500) at that time. The Year 15 Safe Withdrawal Rate with a final balance of zero was 13% (actually, 12.97%). The Year 15 Safe Withdrawal Rate with a final balance equal to the original balance (plus inflation), which is 100%, was 10% (actually, 10.08%).

Calculations

Zero Balance at Year 30

If we withdraw 5.4% of the original balance (plus inflation) from an all-TIPS portfolio for 15 years, we end up with 41% of our original principal (plus inflation). Multiplying this [0.41] by 13%, we can continue to withdraw 5.33% for the remaining 15 years.

We can withdraw between 5.3% and 5.4% over the entire 30 year time period. The probability of running out of money before Year 30 is (approximately) 5%. This is the traditional Year 30 Safe Withdrawal Rate.

Continuing Withdrawal Rate

If we withdraw 4.9% of the original balance (plus inflation) from an all-TIPS portfolio for 15 years, we end up with 50% of our original balance (plus inflation). Multiplying this [0.50] by 10%, we end up with a 5.0% withdrawal rate for the remaining 15 years.

We can withdraw between 4.9% and 5.0% over the entire 30 years without reducing our balance. The probability of having a lower balance at Year 30 is (approximately) 5%. This is the traditional continuing Safe Withdrawal Rate.

Comparisons

I reported the continuing withdrawal rate for dividend strategies in “What Do I Really Think About Dividends?” It was 5.4%.

What Do I Really Think About Dividends?

Have fun.

John Walter Russell
April 3, 2007