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Subject: 5% Retirement Rule of Thumb Calculations  Date: 9/1/1999 5:19 PM  
Author: BGPenhollo  Number: 13595 of 97871  
Calculation of Cashout starting at 5% with a 4% CoLA  (CoLA  Cost of Living Adjustment) The long term historic rate of return for equities has been about 11%. The cashout rate of 5% has been bandied about as a rule of thumb for retirement income. The calculation below assumes that invesment value does not change. In other words, the withdrawal made each year is covered by the investment's return  An unrealistic expectation. Holding this to be true, the withdrawal rate of 5% in 1999 will increase to 10.96% in the year 2019. 1999 5.00% 2000 5.20% 2001 5.41% 2002 5.62% 2003 5.85% 2004 6.08% 2005 6.33% 2006 6.58% 2007 6.84% 2008 7.12% 2009 7.40% 2010 7.70% 2011 8.01% 2012 8.33% 2013 8.66% 2014 9.00% 2015 9.36% 2016 9.74% 2017 10.13% 2018 10.53% 2019 10.96% If the withdrawal rates match the investment returns, the investment will not change. If the return on investment is assumed to stop at 11%, then the withdrawal amount can not increase with an inflation rate of 3% after 20 years. To do so will decrease the value of the investment. The numbers below use an 8% withdrawal rate and a 3% inflation rate. 1999 8.00% 2000 8.24% 2001 8.49% 2002 8.74% 2003 9.00% 2004 9.27% 2005 9.55% 2006 9.84% 2007 10.13% 2008 10.44% 2009 10.75% 2010 11.07% In this case, the withdrawal rate reaches 11% in just over 10 years. If this calculation is expanded such that the rate of return is the expected 11% historical value, then in the early years the investment will grow so that it will take much longer for the withdrawal amount to match the 11% return because the investment value has grown. I used $100,000 as a starting point but the number of years will be the same no matter what the starting amount is. These calculations are based on an 8% withdrawal rate, an 11% return on investment, and 3% inflation. Withdrawals Investment Return Start $8,000 $100,000 $11,000 1999 $8,240 $102,760 $11,304 2000 $8,487 $105,576 $11,613 2001 $8,742 $108,448 $11,929 2002 $9,004 $111,373 $12,251 2003 $9,274 $114,350 $12,579 2004 $9,552 $117,376 $12,911 2005 $9,839 $120,449 $13,249 2006 $10,134 $123,564 $13,592 2007 $10,438 $126,718 $13,939 2008 $10,751 $129,905 $14,290 2009 $11,074 $133,121 $14,643 2010 $11,406 $136,358 $14,999 2011 $11,748 $139,609 $15,357 2012 $12,101 $142,865 $15,715 2013 $12,464 $146,117 $16,073 2014 $12,838 $149,352 $16,429 2015 $13,223 $152,558 $16,781 2016 $13,619 $155,720 $17,129 2017 $14,028 $158,821 $17,470 2018 $14,449 $161,843 $17,803 2019 $14,882 $164,763 $18,124 2020 $15,329 $167,558 $18,431 2021 $15,789 $170,201 $18,722 2022 $16,262 $172,660 $18,993 2023 $16,750 $174,903 $19,239 2024 $17,253 $176,889 $19,458 2025 $17,770 $178,577 $19,643 2026 $18,303 $179,917 $19,791 2027 $18,853 $180,855 $19,894 2028 $19,418 $181,331 $19,946 2029 $20,001 $181,277 $19,940 Note that it takes almost 30 years for the withdrawal amount ($20,001) to exceed the amount of investment return ($19,940). The value of the investment increases from $100,000 to a peak of $181,331 in 2028. The value of the investment, if the withdrawal amount continues to increase at the rate of inflation begins to decrease in 2029. In fact, if the withdrawal amount continues to grow at 3%, the investment will drop to $100,000 in 2041 and go negative in 2046. Thus for those expecting to retire at 65, they can, if they feel comfortable that their portfolio will sustain an 11% long term rate of return,withdraw 8% annually with a 3% CoLA until the age of 95 with their portfolio value continuing to grow. If they continue to survive to 107, their investment will then be worth what it was when they began at 65. The 5% rule of thumb for cashout in retirement is a conservative value that should work in almost all instances. Understanding what the cashout number means helps to understand when even 5% may not work. (If anyone would like the Excel sheets to play with, send me an email, and I'll email you a copy.) BGP 

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