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TMFPixy,


This post will compare two strategies on how to best draw down on your retirement money.

1)GG Model 70% equities/30% annuities purchased in 5 year increments.
2)100% in equities and draw off the income you need


I'm strictly an amateur and had to do this all by hand although I think the math is right. Starting assumptions:

1)Start with $100,000 to invest
2)Need to generate $6000 of income in the first year
3)Income needs to keep pace with inflation
4)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -6) for salary needs
5)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -9) for S&P500 returns


GG model
--------

*Use 30% of principle to buy an annuity every 5 years
*Invest 70% of principle in the S&P500

*A 70 year old retiree can buy a 12% annuity
*A 75 year old retiree can buy a 13% annuity
*A 80 year old retiree can buy a 14% annuity
*A 85 year old retiree can buy a 15% annuity


For example, in the first year I start with $100,000 and use $30,000 to buy an annuity at 12%. The annuity will pay me $3,600 a year so I need to cash out an additional $2,400 from the principle. This leaves me $67,600 to put into the S&P 500. As the S&P tanked that year -10.06% my principle shrunk over the next year to $60,840. Since I now need 2790 from the principle to generate the 6201 in salary I only have $58,239 in principle to start the year 1967.


In table A I put GG to the test.

--------------TABLE A------------------------

Price of Income
Year Income Prin Annuity Annuity

66* 6000 67600 30000 3600
67 6201 58239 3600
68 6390 69414 3600
69 6692 73999 3600
70 7101 64208 3600
71* 7491 45505 20052 6207
72 7743 50481 6207
73 8007 58262 6207
74 8711 47211 6207
75 9774 31148 6207
76* 10460 27457 12820 8002
77 10693 31042 8002
78 11705 25110 8002
79 12762 21997 8002
80 14460 19595 8002
81* 16253 11081 7784 9170
82 17706 2001 9170
83 18392 0 9170
84 19090 0 9170
85 19845 0 9170
86* 20593 0 9170

Ouch! I'm bankrupt in 1983 so this strategy is certainly no cure-all, but at least I have an income of $9,170 for life. Let's see how it compares to a 100% equities strategy.


Table B data is from one of the MF Pixy post in the "Retiree Portfolio" thread. This model assume you are 100% invested in equities and will draw on the principle to generate the income in column 2.



--------------TABLE B------------------------
Yr Income Principle S&P 500
66 6,000 100,000 - 10.06
67 6,201 83,736 23.98
68 6,390 97,422 11.06
69 6,692 101,506 - 8.50
70 7,101 85,772 4.01
71 7,491 81,718 14.31
72 7,743 85,671 18.98
73 8,007 93,921 - 14.66
74 8,711 71,440 - 26.47
75 9,774 42,757 37.20
76 10,460 48,204 23.84
77 10,963 48,734 - 7.18
78 11,705 33,528 6.56
79 12,762 22,965 18.44
80 14,460 12,740 32.42
81 16,253 0 - 4.91
82 17,706 0 21.41
83 18,392 0 22.51
84 19,090 0 6.27
85 19,845 0 32.16
86 20,593 0 18.47


In this case, we see that the 100% equities position went bankrupt (1981) BEFORE the GG (1983) portfolio. More importantly you still have $9170/year for the rest of your life. It is not much better than the 100% equities position, but I'll take what I can get.


Any comments??

cheers,
John Power
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