Along these lines I, thought it would be interesting to go back and look at a retiree who retired in 2000 and decided on a 5% withdrawal rate. Where would he stand today? I would also like to introduce another resource that is often used in this research - the Shiller Price/Earnings (P/E) ratio. This ratio is sometimes used to set the initial withdrawal rate. Simply, if the ratio is high (stocks potentially overvalued on an historical basis) then, other things being equal, the retiree should start with a lower withdrawal rate (for example 4%). If the P/E ratio is lower, then a higher initial withdrawal rate should be considered.
Here is a graph of the Shiller P/E ratio:
|Source: Online Data - Robert Shiller|
CLICK TO ENLARGE The graph shows that the market P/E in 2000 suggests it was not an especially good time for the retiree to have a high withdrawal rate. Instead of 5% or higher, the Shiller P/E suggests 4% as a more appropriate rate. Given this caveat, let us see where the retiree who, in fact, instead chose 5% would stand today if he achieved the BlackRock diversified portfolio returns. Again, we assume a $1.0 million portfolio starting value and a 2% inflation adjusted income taken on 1/1 of each year.
|YEAR||ASSETS (1/1)||INCOME||PORTFOLIO||RETURN||ASSETS (12/31)|
The table shows that the 77-year-old retiree would now have 65.2% of his nest egg left to draw on. The similar exercise using a 4% withdrawal rate would have 83.6% of the nest egg still available at the end of 2011.
Again, recognizing this is one path, it still yields some valuable insights into varying withdrawal experiences, the potential value of taking into account initial conditions (i.e. the p/e ratio), and the dynamic nature of the experience of drawing down the nest egg.
Looking back at the Shiller P/E suggests that today's retiree can consider a slightly higher withdrawal rate. For those interested in doing further research, you may want to consider redoing the results and starting with the 5% rate but not taking an inflation adjustment when markets are down, as suggested by Jon Guyton.
Also, those interested in this research may want to review the Shiller P/E. It is not, to say the least, your typical trailing 12 months p/e ratio.
Disclosure: This information is for educational purposes only. Individuals should do their own research or consult a professional before making investment decisions.