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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76421  
Subject: Re: After Retirement?? Date: 9/1/1999 10:37 PM
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"This is true, but I think it's misleading. It could
be a wild ride. If the 15 years of "history repeats" 
includes repeating 1974, you will see a year where 
your 10.9% is a LOT fewer dollars than the year 
before. If 10.9% of today represents the life-style 
you intend to support, there is a very strong 
possibility that you will not be able to afford it in 
many years. Most plans include some mechanism to 
smooth out this ride. "

I think you missed the point I was attempting to make
about using a 5% for the cashout rule of thumb. 

I did a bit more investigating to see what various
cashout % and inflation rates would do using different
rates of returns based on historic values.

Your comment about 1974 piqued my curiosity.

I went back to one of my old investment textbook
and I found S&P yearly returns from 1926 through
1993.

Using $100 as a starting value at the beginng of 1926,
I extrapolated this based on each years return to get 
a new value for the initial $100 investment.

The table below takes the last value of the Start year 
and uses the value for the end year.  My table can be checked
for rate of return calculation using any financial calculator.
Subtract the Start Year from the End Year and enter this 
as the number of years.  Negate the start value and enter it
as the present value.  Enter the end value as teh FV and compute
the yearly interest.  it should match the rate of return
in the table.

Start	End	Start		End	
31-Dec	31-Dec	Value		Value		Return
				
1954	1974	 $1,670.12 	 $6,252.75 	6.82%
1964	1974	 $5,528.13 	 $6,252.75 	1.24%
1963	1973	 $4,745.99 	 $8,503.68 	6.01%
1964	1984	 $5,528.13 	 $24,771.12 	7.79%
1974	1984	 $6,252.75 	 $24,771.12 	14.76%
1973	1993	 $8,503.68 	 $93,842.82 	12.76%
1969	1979	 $7,044.02 	 $12,445.73 	5.86%
1981	1989	 $15,671.44 	 $62,685.39 	18.92%
1959	1989	 $3,352.89 	 $62,685.39 	10.25%
1930	1945	 $179.45 	 $469.35 	6.62%
1940	1955	 $214.46 	 $2,197.21 	16.78%
1950	1965	 $752.88 	 $6,216.38 	15.11%
1960	1975	 $3,337.13 	 $8,578.78 	6.50%
1970	1985	 $7,326.49 	 $32,737.51 	10.50%
1980	1993	 $16,480.64 	 $93,842.82 	14.32%
1926	1993	 $111.62 	 $93,842.82 	10.57%

As indicated, 1974 impacted the rate of return.

Notice that the 10 year from 1964 to 1974 had a rate of return
of 1.24% which is drastically less than 5%.  Notice also the 20
year span from 1973 - 1993 and the 10 year span from 1974 - 1984
has returns of 12.76% and 14.76% respectively.

My original point was that 5% cashout as a rule of thunb may
not always work.  So I took the returns from the various
spans and developed a table showing what various cashout
and inflation rates do.  I figure someone somewhere has developed
a formula for this but I used a spreadsheet.

One thing I did determine was that if the cashout rate and the
inflation rate was less than the return rate, the investment
only grows.  The yearly withdrawal never exceeds the investment
returns and the portfolio continues to grow.  This tells me that 
the secret to capital preservation is keep the withdrawal + inflation
below a conservative estimated rate of return.

From the Table below notice that the closer the rate of return is
to the added cashout and inflation, the longer it takes to
reach the point when the amount being withdrawn exceeds the amount
the investment produces.

Also anytime the withdrawal rate is more than the expected rate of
return, obviously the withdrawal begin greater than the amount
generate by the investment so the years to match and years to
original value is 0.

Start	End			Cash	Yrs to	Yrs to	Yrs to
31-Dec	31-Dec	Return	Inf	out	match 	St Val	Neg
1954	1974	6.8%	3.0%	5.0%	14	23	36
1964	1974	1.2%	3.0%	5.0%	0	0	16
1963	1973	6.0%	3.0%	5.0%	7	11	29
1964	1984	7.8%	4.0%	6.0%	7	13	25
1973	1993	12.8%	5.0%	8.0%	23	32	35
1969	1979	5.9%	3.0%	5.0%	5	9	29
1959	1989	10.3%	4.0%	8.0%	8	13	22
1930	1945	6.6%	3.0%	6.0%	2	4	25
1960	1975	6.5%	3.0%	5.5%	5	10	28
1970	1985	10.5%	3.0%	8.0%	16	25	34
1926	1993	10.6%	3.0%	8.5%	10	17	28

It is interesting to note that a 5% cashout with 3% inflation
for 1954 - 1974 has an almost identical lifespan as using
an 8% cashout with 5% inflation for the return rate generated
from 1973 through 1993.  Also note that the lifespan of
a portfolio with a 5% cashout and 3% inflation for the return 
between 1964 - 1974 is the shortest at 16 years.

Of course, my calculations assume a constant return and constant
inflation.  I am working on a more complex model which uses
year to year return and the CPI for inflation.  I don't
expect the 5% withdrawal rule of thumb to be any more valid but 
the numbers may be more convincing.

BGP
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