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Drawing down portfolio for retirement income. Part 4 of 4

In this series of four articles, I show the results of

drawing down an initial portfolio of $1000. The examined results were

for every 20-year period from 1961 to 1997 (17 such intervals).

Part 4 -- Entire period, and Summary

So much for rolling 20-year periods. What about looking at the entire

35 year period from 1962 through 1996? (We'll skip 1961, which was a

very good year, and start with 1962, which began a very bad decade.)

With a 10% draw, you would have run out of money using S&P500,

Beat The Dow 5, or Foolish Four. Only UV2 and UV4+ worked.

UV2 UV4+

Withdrew $ 8296 $ 7713

Shortfall $ 311 $ 894

Grows to $60391 $ 9215

Low point $ 750 $ 638

Hit 10% cap 11 25

Hit 75% Floor 5 13

With an 8% draw, S&P500 and Foolish Four failed. Again only UV2 and

UV4+ worked out.

MF4 UV2 UV4+

Withdrew $3367 $ 6790 $ 6677

Shortfall $3518 $ 96 $ 209

Grows to $ 0 $147836 $67498

Low point $ 0 $ 912 $ 856

Hit 8% cap 34 6 11

Hit 75% Floor 30 1 2


Summary and Conclusions

Jim O'Shaughnessey has said that a strategy which has proved out over

a 25-year period has a 95% chance of being valid, rather than being

just a fluke. My study indicates that an Unemotional Value strategy

works very well as a post-retirement portfolio. You would be able to

start with an initial drawdown of 10% a year, increasing by 5% a year,

and even in the worst 20-year interval would have not run out of

money. (In 11 of those 20 years you would have had to reduce your

draw somewhat, however.) My study assumed that you took one annual

draw, at the beginning of the year. Realistically, though, you'd be

more likely to take draws every month, with better results.

By far, the worst periods were those which included the early 60's.

In all intervals starting after 1965, even the lowest was excellent.

Contrary to Wise opinion, you are better off leaving all your

portfolio in stocks, rather than keeping several years worth of living

expenses in cash or bonds to "ride out" a bear market. This counts

only your investment money, of course; you still need to keep a bit

of cash readily available for living expenses and contingencies.

UV2 was the hands-down winner. There was no 15, 20, or 25 year period

where UV2 wasn't far better (in terms of ending balance) than UV4+.

Even with a 10% draw (within the ceiling and floor), both UV2 and UV4+

always ended up with net growth for every 15, 20, and 25 year periods,

even the absolute worst such period.

You are more diversified with a UV4+, or UV5/6+, or S&P500 portfolio.

But this diversification comes with a very high price. Actually, with

UV2 you are well diversified, but in "time" not "breadth". The UV2

stocks almost always change from year to year, so in a 5 year period

you will own probably 6-10 different stocks. Two at a time.

Based on this study, I would recommend a retirement portfolio of 90%

in UV2, and 10% in a growth strategy (such as UG5), rebalanced every

12 or 18 months. I think you could safely begin with a 10% drawdown,

and increase this at about 5% each year. To include a margin of

safety, reduce any annual draw that would be more than 10% of the

portfolio value. In any year, you can draw out up to 10% of the

total portfolio. On the average, the UV2 portfolio will grow much

faster than the 5% increase in your withdrawal, so (over the long

haul) your portfolio will continue to grow handsomely.

The biggest danger is that the market has a downturn just after you

retire, so that you begin withdrawing from your portfolio before it

has a chance to grow. So watch those early years very carefully.

For the 1962-1981 period, the portfolio value stayed within

plus-or-minus $100 of the initial $1000 value until 1972, when it

began to grow rapidly. Limiting yourself to a flat 10% withdrawal

would have substantially improved the final outcome.

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