Millennium Edition

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With the publication of Prof. Shiller's new book
This month The
The table below assumes a $1,000 initial portfolio value and shows the
The
The maximum "100% safe" withdrawal rate decreases as the pay out period increases. Using the PPI to index withdrawals, a 20-Year pay out period allows for a 4.78% first year, inflation adjusted withdrawal, while a 60-Year pay out period requires that the first year withdrawal be reduced to 3.24% to remain 100% safe. Using the CPI-U increases these "100% safe" withdrawal rates by about 50 basis points. The chart below illustrates these results.
The earlier version of the Retire Early Safe Withdrawal Calculator used the Producer Price Index (PPI) to adjust annual withdrawals for inflation. Prof. Shiller switched to the CPI-U (i.e., Consumer Price Index for All Urban Consumers) in his most recent monthly data series. Shiller explains, "In the past, there was not much difference between the PPI and the CPI, except for short-run oscillations, but since the mid-1980's the levels of the series have diverged substantially."
Confirming modern portfolio theory, our study shows that longer pay out periods favor portfolios with heavy concentrations of equities. Readers familiar with the concept of "efficient frontiers" will recognize that the optimal stock allocation for each pay out period closely matches the data from
While the
Here's a table comparing "100% safe" withdrawal rates for retirees using December 1928 vs. September 1929 portfolio values. Withdrawal rates were calculated using both the PPI and CPI as inflation measures.
Limiting your annual withdrawals in retirement to the "100% safe" level results in a significant portfolio at the end of all pay out periods. For a retiree starting with $1 million and a 50 year pay out period, there is a 50/50 chance of winding up with a portfolio of more than $16 million. That's $16 million after making annual inflation adjusted withdrawals for 50 years. Indeed, there is a 90% chance our retiree will have more than $9 million after 50 years. These surprising results appear in the following chart.
If you are willing to accept a little uncertainty, you can dramatically increase your annual retirement withdrawals -- especially if you have a 50 or 60 year pay out period. For example, for a 50 year pay out period moving from the "100% safe" withdrawal rate to the "90% safe" rate increases your annual withdrawal from 3.35% to 4.50% (using the PPI as the inflation measure.) That's a 34% increase in your retirement income. A chart of several "unsafe" withdrawal rates is shown below. For more details on retirement withdrawals, check out the 68 page report How much can you safely withdraw from your retirement portfolio? (2nd Edition) available in our Retirement Reports Center |

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