Warning: Fairly long post.
I've been lurking at this board and its predecessor for several years and have gotten more ideas and answers than I would have believed possible. (I ERed two+ years ago thanks in part to you all.) As a rule, I have gotten the answers before I knew enough to ask the question. Now I have a heretofore unanswered question: The Yahoo finance site(
http://finance.yahoo.com/) has a daily (or so) "Finance Quiz" which usually relates to trivia. Yesterday and today there is a question with an answer on it that sounds wrong to me and I wonder if anyone can demonstrate that it is, or should we worry . . .?
Here is the text of the Q&A:
"Q.Bob and Jim retired in 1972 with $1 million each, 100% invested in the S&P 500. Each year thereafter, Bob withdrew $10,000 and Jim withdrew $30,000; withdrawals were adjusted for inflation. By 2001, how did their portfolios compare?
Bob has 1 million USD, Jim has 300,000 USD
Bob has 2 million USD, Jim has 750,000 USD
Bob has 3 million USD, Jim has 1 million USD
Bob has 6 million USD, Jim has zero
The correct answer is:
Bob had 6 million USD, Jim had zero
[Get it right? Or wrong? Save your score to your Quiz Tracker]
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Withdraw too little, and you risk creating hardship for yourself at the very time of life where you are supposed to be enjoying the fruits of your career. Withdraw too much and you risk outliving your funds. This tradeoff is made difficult because two important factors--the return on your portfolio, and the inflation rate--are generally uncertain.
In this example, Bob and Jim begin with exactly the same portfolio and experience the same market return (some very poor returns in the bear market of the 1970s, somewhat higher returns in the 1980s, and exceptional returns in the 1990s). But Jim's need to live off 30,000 real (1972) dollars means that by 2001 he's requiring over 120,000 USD a year to live on, as inflation was particularly notable in this period. As with most things in long-term investing, the effects of this plan then compound over time. By 2001, Bob's portfolio has risen to over 6 million USD. Jim's portfolio, by contrast, runs to zero by the end of 1994.1
1 Market returns for the S&P 500 and consumer price index numbers taken from Global Financial Data. Withdrawals are taken at year-end of the year prior to when they are expended and earn no interest. Ending balance for Bob at 12/31/2001 is 6.1 million USD. By contrast, after 1994 Jim would have needed to borrow to finance his retirement. "
As I read it, Jim is using a withdrawal rate of 3% on a 100% stock investment portfolio, yet it fails miserably. I ran the numbers on FireCalc and according to that (as well as Intercst's and other analyses) the answer Yahoo gives is dead wrong.
Can anyone tell me if I'm missing something?
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