question concerning safe withdraw rate

[FIREd]

Inflation-protected treasury bonds pay a slightly positive real return at the moment (except for the shortest maturities). So, even with none of your money invested in the stock market, your portfolio could be able to safely sustain a 35-year retirement at 3%. By investing part of your portfolio in the stock market you should be able to enjoy a slightly higher withdrawal rate. So I'd feel comfortable with a WR in the 3-3.5% range depending on how much risk you are willing to take and how flexible your spending is.

[medved]

Quote:

Originally Posted by FIREd Inflation-protected treasury bonds pay a slightly positive real return at the moment (except for the shortest maturities). So, even with none of your money invested in the stock market, your portfolio could be able to safely sustain a 35-year retirement at 3%. By investing part of your portfolio in the stock market you should be able to enjoy a slightly higher withdrawal rate. So I'd feel comfortable with a WR in the 3-3.5% range depending on how much risk you are willing to take and how flexible your spending is.

Can you explain how the current return on TIPS suggests that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years? I am not questioning that conclusion, but would like to understand it. Thanks!

[Totoro]

Quote:

Originally Posted by medved Can you explain how the current return on TIPS suggests that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years? I am not questioning that conclusion, but would like to understand it. Thanks!

0% return on TIPS means a 0% real return. a 0% real return means one can spend 100%/35 = 2.85% per annum to arrive exactly at 0 after 35 years.

Since TIPS are slightly positive it is actually a bit more.

[FIREd]

Quote:

Originally Posted by Totoro 0% return on TIPS means a 0% real return. a 0% real return means one can spend 100%/35 = 2.85% per annum to arrive exactly at 0 after 35 years. Since TIPS are slightly positive it is actually a bit more.

Exactly.

Quote:

Originally Posted by medved Can you explain how the current return on TIPS suggests that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years? I am not questioning that conclusion, but would like to understand it. Thanks!

I did not say that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years, but it could. With TIPS, you are taking (arguably) no credit risk and no inflation risk. But that is not the case with most fixed income investments. If you park all your money in a savings account, the outcome may not be nearly as favorable.