The result? Well, Person A assumed that their portfolio would grow 8% per year for 30 years given past performance. And given that growth rate, the calculated withdrawal was 6.1% per year adjusted for inflation each year from their nest egg. Had the market grown on average 8%, that portfolio, even after the withdrawals, would have been worth $107,617. Of course, the market fell some 30% from its peak and then rose 50% over the six years ended January 2006. And so, in reality, Person A using a 6.1% withdrawal rate would have had just $68,646 in the portfolio, some 30% less than when withdrawals started.
By contrast, Person B used a Monte Carlo simulation to determine a withdrawal rate with an 80% chance of success. The result was a withdrawal rate of 4.56%, a 1.5 percentage point difference. But the difference in the size of Person B's nest egg after six years of withdrawals and actual returns is huge. In fact, Person B's nest egg was $82,822, more than 20% larger than Person A's. Visit the T. Rowe Price Web site to use its Monte Carlo program.
