I've been running some simulations again. I read the following article (I think ESRBob posted the link) a few weeks ago: "A Choice of Risks When Spending in Retirement"
http://zunna.com/Research/ChoiceOfRisksInRetirement.pdf
The article uses historical simulations (like FIRECALC or SWR Calculator) and considers two types of withdrawal strategies: 1) spend at a pace to maintain standard of living, 2) spend a fixed percentage of the value of the account each year.
The first strategy (conventional historical analysis) maintains standard of living, but runs the risk of depleting the account. During most retirement periods throughout history this strategy would lead to either large final account values at the death of the retiree, or increased spending in later years.
The second strategy the retiree is guaranteed to never run out of money, but the established withdrawal percentage can become vanishingly small at the end of the withdrawal period. During most retirement periods throughout history this strategy would lead to decreasing standard of living in later years.
But a number of posters on this board have talked about two aspects of their retirement spending: 1) Basic required budget (that needs to be adjusted for inflation), and 2) Discretionary budget (that can be reduced or eliminated during times of poor portfolio performance). So based on some ideas that JWR1945 posted, I decided to try to simulate SWR based on the above division of budget.
Here are the basic inputs: 30 year retirement, CPI adjustment for inflation, commercial paper for bond investments, minimum expense ratio =0.18%, stock/bond ratio =50/50.
I used the Basic required budget to be the initial withdrawal rate, then assumed that withdrawals beyond that budget are taken as a percent of the portfolio value (This is done by increaseing the expense ratio until failure of the portfolio is observed). Here are the results with the maximum survivable initial withdrawal rates specified as a percent of the initial portfolio value.
Basic.............................
Required.........................Total..
Budget.....Discretionary.....Initial
SWR........Budget.............SWR....
2.0%.......4.92%.............6.92%
2.7%.......3.03%.............5.73%
3.0%.......2.22%.............5.22%
3.3%.......1.55%.............4.85%
3.6%.......0.82%.............4.42%
3.8%.......0.43%.............4.23%
4.0%.......0.00%.............4.00%
The Basic Required Budget of column 1 is adjusted to match inflation throughout the simulated retirement. The column 2 withdrawal fluctuates based on the overall value of the portfolio. This value can increase or decrease in real terms depending on portfolio performance.
So from the table, if your basic budget represents a 3% initial withdrawal rate, you could withdraw another 2.22% of your total portfolio value for a total initial withdrawal rate of 5.22% and achieve the same survival rate as a 4% basic budget adjusted for inflation for 30 years.
http://zunna.com/Research/ChoiceOfRisksInRetirement.pdf
The article uses historical simulations (like FIRECALC or SWR Calculator) and considers two types of withdrawal strategies: 1) spend at a pace to maintain standard of living, 2) spend a fixed percentage of the value of the account each year.
The first strategy (conventional historical analysis) maintains standard of living, but runs the risk of depleting the account. During most retirement periods throughout history this strategy would lead to either large final account values at the death of the retiree, or increased spending in later years.
The second strategy the retiree is guaranteed to never run out of money, but the established withdrawal percentage can become vanishingly small at the end of the withdrawal period. During most retirement periods throughout history this strategy would lead to decreasing standard of living in later years.
But a number of posters on this board have talked about two aspects of their retirement spending: 1) Basic required budget (that needs to be adjusted for inflation), and 2) Discretionary budget (that can be reduced or eliminated during times of poor portfolio performance). So based on some ideas that JWR1945 posted, I decided to try to simulate SWR based on the above division of budget.
Here are the basic inputs: 30 year retirement, CPI adjustment for inflation, commercial paper for bond investments, minimum expense ratio =0.18%, stock/bond ratio =50/50.
I used the Basic required budget to be the initial withdrawal rate, then assumed that withdrawals beyond that budget are taken as a percent of the portfolio value (This is done by increaseing the expense ratio until failure of the portfolio is observed). Here are the results with the maximum survivable initial withdrawal rates specified as a percent of the initial portfolio value.
Basic.............................
Required.........................Total..
Budget.....Discretionary.....Initial
SWR........Budget.............SWR....
2.0%.......4.92%.............6.92%
2.7%.......3.03%.............5.73%
3.0%.......2.22%.............5.22%
3.3%.......1.55%.............4.85%
3.6%.......0.82%.............4.42%
3.8%.......0.43%.............4.23%
4.0%.......0.00%.............4.00%
The Basic Required Budget of column 1 is adjusted to match inflation throughout the simulated retirement. The column 2 withdrawal fluctuates based on the overall value of the portfolio. This value can increase or decrease in real terms depending on portfolio performance.
So from the table, if your basic budget represents a 3% initial withdrawal rate, you could withdraw another 2.22% of your total portfolio value for a total initial withdrawal rate of 5.22% and achieve the same survival rate as a 4% basic budget adjusted for inflation for 30 years.