S&P Survives 7.22% Draw Down

I pulled the sheet, here are my remarks; The 20 years 87-07 were extraordinary. S&P rising from 242 to 1400. This is 9.2% without reinvested dividends, over 11% with. This in a unique period which contained 2 crashes. One can still debate that the nature of the 90's run-up may never be repeated. The point that Elle continues to make, which isn't lost on me, is that analyzing past data is one element of planning, but assumptions that are based on a continuation of that data going into the future is likely to fail. A number of studies suggest that we are at a point where future returns are likely to lower than past averages, I've seen 6-8% as the 15-20 year forecast.

I am real sorry here. How do you account for inflation? It appears you de-flated the mutual fund price instead of increasing withdrawals. That seems wrong. At best, it obfuscates the impact of inflation, and the true way we look at it. John never suggests a burger will continue to be $2.00, but his $2 million dollar portfolio will deflate to $500K. It's the cost of the burger that rises.

Lastly, I have great respect for a good spreadsheet. The best can bring a tear to my eye. I don't get the advantage of a 20 year spreadsheet with daily withdrawals. A point can be proven with one line per year. If the difference between success and failure is the missed compounding by having the years' expenses taken to cash in advance, well, maybe things were running a bit tight. In the end, you are correct, that time period could survive the withdrawal rate. Monte Carlo would tell you what would be if 2000-02 happened to occur prior to the 90's.

In the end, a 7% drawdown requires $570K for the first year to generate $40K as compared to the $1M I use (for 4% withdrawal). What ever strategy one uses at final retirement, I'd prefer to err on the side of caution. The misses believes that whatever number I figure, the Gods will conspire to crash the market the day we quit work. Therefore, I need 50% more than I even suggest. How's that for conservative? JOE

Indeed, this is what leapt out at me. I know Bill is pretty sharp, so I figure this was a bit of a post-on on his part. Or perhaps he figured the correction c. 2000-2001 (and that in October 1987?) made this realistic enough to ponder.

Bill, for S&P 500 data going way back, see Robert Shiller's downloadable data set at

One may also put in the symbol ^GSPC and extract S&P 500 data from Finance.Yahoo's historical site back to 1969.

You sentimental financial advising fool you. I love it. ;-)

Little aside: I continue to think the costs of health care throw such a wrench into things that "rules of thumb" like the 4% drawdown rate should be assigned a "high" margin of error indeed. Of course, the Kennedy-Shriver-Schwarzenegger coalition may be succesful sooner rather than later. Which means maybe I should ponder my taxes going up lots, rather than my health care costs. But don't touch my Roth IRA, Arnold!

Point taken. I'll try to redo this with the data Elle suggested. The availability of data is the only reason I restricted myself to this period.

Mathematically, it's the same as inflating the withdrawal. You either keep everything in constant (in this case, 1987) dollars or inflate everything with time. I found it a lot simpler to keep everything in constant dollars. I could reproduce the spreadsheet with inflating dollars, but the results would be the same.

You're absoultely correct. > One may also put in the symbol ^GSPC and extract S&P 500

I looked at this. I rejected it because it doesn't include dividends. Maybe I'm missing something?

Thank you both for your input.

--Bill

No, you're not. I see your point. The Shiller database is probably best by far for this effort. Though, guys, IMO the sort of "accuracy" you are pursuing is not very practical, and so it's not really accurate in a meaningful sense. It is a good exercise for newbies, of course, introducing a multitude of financial planning concepts, from how stocks beat inflation; how one can live off income from stocks (both dividends and by cashing in principal periodically); historical behavior of economies; etc. It's also a good exercise for the math-obsessed, something that serves engineers well in college, then one gets to real engineering post-college and largely post-academia, and realizes so much of accomplishing things is based on guesstimating, with a mind for margins of error. Otherwise, numerology will taunt and tease the unversed, and compel them to say things with little-to-no-or-possibly-negative value in actual financial planning. At least, from where I am sitting.

I copied data from;

My 'shares' method lets you view the distinction between the S&P index growth vs the reinvested dividends. You can see (if you write the sheet this way) that we are back to break even from before the crash (S&P

Later.

JOE JoeTaxpayer.com

There is nothing extraordinary to the 1987-2006 average returns of stocks or the S&P 500. The average return of stocks during 1928-2006 has been 11.77 percent per year, versus 3.9 percent for T-bills and 5.2% for T-bonds (downloadable data available here:

I didn't nessasarily mean it as 'hugely good', but as 'not common'.

The right way to find historical averages is to take a period as long enough as to have good and bad years (i.e., bull and bear market periods). On average, stocks yield about 7 percent in real terms over long periods (see Siegel). The standard deviation of these returns (the most commonly accepted measure of risk) is about 20.

On the other hand, if you take the smallest cap stocks and those with the lowest price-to-book value, you may get as much as an average return of 34.6 percent during 1927-2005, with a standard deviation of

Jose - I think we're agreeing here. But again, randomly picking any interval is meaningless. What Bill (woessner) posted first was the observation that 1987-2006 could sustain a 7+%/yr drawdown. I ran those years myself and found a starting withdrawal, and 3%/yr adder not only survives 8.8%, but leaves principal at a inflation adjusted equal level, i.e. $1M still leaves $1.8M after the 20 years.

As I look at the dividend adjusted S&P returns for the period, I first have to note that 87 was a great year to sleep through. The return was

I then go to the 60's-70's, because that's hoe far back my data set went, 1962-1981, those 20 years averaged 8.06%, but were sprinkled with bad years. That period's starting drawdown, again with an eye toward a break-even endpoint, is 3.4%. 4.75% will break even, but unadjusted for inflation, lastly, 6.55% initial draw will run the account to zero after

I think the question come down to this: is it better to underestimate the withdrawal number and find yourself with too much money at retirement, or overestimate, and when that day comes, realize you may need to work 5 years longer than you planned?

I am recalling Elizabeth's point that the flow isn't smooth, that Social security may kick in for her then the spouse. That's fine, because it's foreseeable and part of the planning. I plan to retire early enough to be motivated to ignore SS, so if it's there, it's a bonus. While many will have those income streams that start (SS, pension, inheritance, etc) or stop (mortgage, paying for college, alimony), I'd think that there's still that key number of first year withdrawal. Isn't that what "The Number" by Lee Eisenberg is all about? JOE

If you take the historical serie of stock market returns I posted above, the lowest 20-yr return period was 1929-1948 (the period that covers the Great Depression), and it was an average return of 5.63 percent. For periods that do not cover the Great Depression years -it is highly unlikely that such a market crash would be repeated ever again- the lowest 20-year return was 7.74% during 1969-1978.

This means that one can safely plan a withdrawal of about 6% without endangering to run out of money. Besides, if you own other assets like a house, you can always put a reverse mortgage on it and get extra money from your home.

By the way, if you do the same exercise -calculate the average 20-yr return- with a portfolio of microcap deep value stocks, the lowest yield was 18.2 percent per year (1955-1974), which is about the same as as the HIGHEST 20-yr period yield of the stock market as a whole.