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Author: BillEuclid Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: Re: Near Retirement--Best Investment Advise Date: 12/6/1998 2:12 AM
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Roger D says:
The answer I come up with is that I'll do better with 100% in stocks and drawing out 7% per year of whatever the starting balance happens to be.


True, a 7%-of-balance draw will never run out of money.  
But it MAY leave you with too little to live on.  

Example:  You start with $500,000 at the end of 1965, so your first year draw is $35,000.  
By the end of 1974, your balance has dropped to $160,666, so your draw is $11,246 (all in inflation-adjusted terms).  
In other words, the draw does NOT keep up with inflation each year, and can be severely less in some years, 
although the general trend over DECADES is to approximate inflation.

Robert Sheard's article suggests a 5% draw adjusting for inflation each year, independent of your balance.  
This will keep up with inflation each year, except that it MAY make you go broke.  
Note that he started his example in 1971, saying that was just before the worst bear market.  
But if he had started with say $500,000 at the end of 1965, then the lesser bear markets in 1966-1970 would have reduced the balance to $388,337 by the end of 1972, 
so that the greater bear market of 1973-74 would have been so disastrous that you would have run out of money in the middle of 1984. 

But don't believe me or anyone else just because we say so.  
Check out the book "Stocks, Bonds, Bills, and Inflation" in the reference section of your public library.  
Find the table giving the the inflation-adjusted return from common stocks (S&P500) for various years.  
Verify that the "tot return" column in the following spreadsheet is correct.  
Then you will know who is right (the last 4 columns are calculations from simple formulas).

yr   TotReturn 7% draw 25K draw 20K draw 22K on TIPs
1965		500,000	500,000	500,000	500,000
1966	-12.98%	404,643	413,345	417,696	494,730
1967	20.31%	452,748	467,218	478,468	489,276
1968	6.05%	446,530	468,972	486,205	483,630
1969	-13.77%	358,090	382,837	402,009	477,787
1970	-1.41%	328,328	352,792	376,623	471,740
1971	10.60%	337,711	362,538	394,425	465,481
1972	15.05%	361,339	388,337	430,775	459,003
1973	-21.56%	263,594	285,001	322,212	452,298
1974	-34.46%	160,666	170,405	198,070	445,358
1975	28.21%	191,571	186,424	228,303	438,176
1976	18.16%	210,515	190,738	246,131	430,742
1977	-13.07%	170,191	144,076	196,576	423,048
1978	-2.26%	154,700	116,385	172,585	415,084
1979	4.53%	150,389	95,525	159,497	406,842
1980	17.81%	164,771	83,085	164,342	398,312
1981	-12.71%	133,760	50,703	125,996	389,483
1982	16.88%	145,395	30,041	123,888	380,345
1983	18.03%	159,598	5,950	122,619	370,887
1984	2.22%	151,721	-19,473	104,897	361,098


Note that even the 4% draw ($20,000 on an initial $500,000) will be running out of money after about 30 years.  
But the last column shows what happens if you buy inflation-protected U.S. treasuries; 
TIPs GUARANTEE you will not run out of money for over 40 years with a 4.4% draw adjusted for inflation ($22,000 on an initial $500,000).


If 4.4% for over 40 years is enough for you, maybe you should just buy 100% TIPs and forget stocks entirely.


Bill

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