No. of Recommendations: 4
Author: sportfool     Date: 10/16/01 11:57 PM    Number: 53436  
I given some look at retirement calcuators and how much could be 
withdrawn for life. It seems that 3 to 4% is what's recommended. My 
question is, if stocks can reasonably be expected to appreciate 10% per 
year and inflation is roughly 3% or less why couldn't I withdraw say 
7.5% per year and still have some appreciation and a margin of safety?

I agree with Intercst that volatility is the main reason you 
can't withdraw a higher amount, and I thought I would add a couple of 

The problem is that if the market declines the first year or two you 
withdraw your living expenses, your withdrawal becomes a much bigger 
percentage than you originally planned.  If the market happens to 
increase the first year, then your yearly withdrawal percentage becomes 
smaller, and you can take a bigger withdrawal and still survive.

Here is an actual historical example of what can happen if you retired 
at the beginning of 1973 with a $500,000 portfolio and used a 7.5% 
withdrawal rate (increased annually by 3% for inflation):

                         Port Value    Withdrawal    S*P500 Growth
                      	 $500,000 	 $37,500
End of year 1973	 $394,698 	 $38,625 	-14.66%
            1974	 $261,820 	 $39,784 	-26.47%
            1975	 $304,634 	 $40,977 	37.20%
            1976	 $326,512 	 $42,207 	23.84%
            1977	 $263,893 	 $43,473 	-7.18%
            1978	 $234,879 	 $44,777 	6.56%
            1979	 $225,157 	 $46,120 	18.44%
            1980	 $237,081 	 $47,504 	32.42%
            1981	 $180,269 	 $48,929 	-4.91%
            1982	 $159,460 	 $50,397 	21.41%
            1983	 $133,613 	 $51,909 	22.51%
            1984	 $86,827 	 $53,466 	6.27%
            1985	 $44,090 	 $55,070 	32.16%
            1986	 $(13,008)	 $56,722 	18.47%

In this example, the arithmetic average growth of the market over the 
period from 1973 - 1986, as measured by the S&P500, was 11.9%.  Yet the 
portfolio was exhausted after only 14 years by taking a 7.5% yearly 
withdrawal (adjusted by 3% per year for inflation).

If the above example is repeated starting in 1975 instead of 1973, the 
portfolio would have survived.  But, there is no way to tell what will 
happen in the future, so the best we can do is to use worst case 
historical examples to guide us.

The historical maximum safe withdrawal rate for long-term portfolio 
survival is approximately 4% (adjusted for inflation).

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