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Subject: Re: After Retirement??  Date: 9/1/1999 10:37 PM  
Author: BGPenhollo  Number: 13606 of 102423  
"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 lifestyle 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 31Dec 31Dec 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 31Dec 31Dec 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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