The *Efficient
Frontiers ***chapter discussed methodologies that would try to minimize
the variability in your income (risk) while maximizing the expected income from
your retirement savings. As was noted the withdrawal methodology of simply
withdrawing a fixed percentage of your assets each year showed up often on the
Efficient Frontier indicating that it is a relatively efficient withdrawal
methodology. It is also simple, understandable, and makes intuitive sense so I
have done some additional analysis of this methodology in this chapter. **

**Again I have used the same methodology as described
in the ***Methodology* chapter. Using the same
asset allocations as discussed previously I simply explored the results of
various fixed withdrawal percentages on the resulting income streams. I varied the
withdrawals from 4% to 8% of your initial $1M asset pool and simulated
that against the Ibbotson market data from 1926 through 1998. Again this is 54
different 30 year retirement simulations (retirement starting in 1926 and ending
in 1956, retirement starting in 1927 and ending in 1957, ..... etc.). I will be
presenting data taken from this analysis in both aggregate form as well as
individual year form.

**The first three charts deal with the average incomes
(adjusted for inflation) that were achieved for each of the 54 different 30 year
retirement periods. **

**1) The median (half more, half less) of the 54
different (inflation adjusted) average incomes.**

**2) The 75th percentile minimum taken from this same
set of numbers (75% of the average incomes were better).**

**3) The 95th percentile minimum taken from this same
set of numbers (95% of the average incomes were better).**

**These charts deal with average values across an
entire retirement scenario, but do not deal with the volatility within a
retirement scenario. The second set of charts deal with the individual year
volatility. I recorded the minimum income year (adjusted for inflation) that was
encountered in each of the 54 different retirement scenarios and present the
following data. **

**4) The minimum single year income encountered (the
lowest single year income encountered in the entire simulation of 54 different
30 year retirement scenarios).**

**5) The 95th percentile minimum single year income
encountered (95% of the 54 different 30 year retirement scenarios had a minimum
income that was higher).**

**6) The 75th percentile minimum single year income
encountered (75% of the 54 different 30 year retirement scenarios had a minimum
income that was higher).**

**Now for the data. We'll start with the average
income statistics defined in #1-3 above.. **

**As would be expected the higher equity allocations
achieved the higher average income values. This was true for both the median
case and for the 95th and 75th percentile minimum cases (recall that in these
cases we are looking at the average incomes achieved across 30 year retirement
scenarios, not individual years which will be studied next). It is also
interesting that, even when viewing the 95th and 75th percentile minimum incomes achieved,
lower percentage withdrawals (less than 5%) would not appear to be the optimum strategy if maximizing your total income is your goal. Note that I did not put
any constraints on the ending value of the portfolio (see***
Withdrawals Forever*), although this particular
withdrawal technique does guarantee that your portfolio will never be completely
exhausted.

**If you recall the beginning of this study we started
with the Trinity/Jarrett studies which supported an inflation adjusted
withdrawal of $44,000 from a beginning $1M portfolio. I found it fascinating
that the 95th percentile minimum average income was approximately that same
value. But the methodology that this data would suggest is an asset allocation
of 60 to 80% equities and a withdrawal percentage of 6 to 7%. The data also suggests
that the fixed withdrawal methodology combined with the 40% equities and 4.4%
withdrawal percentage is a much less efficient withdrawal methodology. Note that
this is NOT the withdrawal scenario suggested by the Trinity/Jarrett studies
which suggested withdrawals that were not a function of internediate portfolio
values. Of course
there is no guarantee that what is true in the past will be true in the future.
The lower withdrawal strategies will obviously leave a larger ending portfolio
which could be important if either the size of your estate or retirement
horizons longer than 30 years are important to you. **

**Next we'll take a look at annual income volatility.
We'll be looking at the data in #4-6 at the top of this page. Again we are
starting with the minimum (inflation adjusted) annual income in each of the 54
different 30 year retirement scenarios. **

It is important to remember that the data presented
here does not put any limitations on the ending portfolio value, other than the
fact that a fixed (less than 100%) withdrawal amount does assure that your
portfolio is never exhausted. But from the data in the previous charts it is
relatively simple to assess the minimum (inflation adjusted) portfolio values
encountered in these simulations.

Take (for example) the Worst Case Minimum Income
(Single Year) graph above for the case of 60% equities and a 6% withdrawal rate.
The minimum withdrawal of $25K and 60% equities leads directly to the fact that
the minimum portfolio value associated with this particular withdrawal
methodology was 25,000/.06 = $416,667. The minimum portfolio value associated
with the same asset allocation and 4% withdrawals is $19,000/.04 = $474,000.
This isn't a huge difference (ratio of 1.14) in minimum portfolio value given a
50% difference in withdrawal rates. If the absolute worst case historical event
is your primary focus then clearly market conditions, rather than withdrawal
rates, will dominate your portfolio/withdrawal results.

But if we look at the 75th percentile rather than the
worst case then we see the following.

60% equities/6% withdrawals implies a 75th
percentile portfolio minimum of $32,000/.06 = $533,000. 60% equities/4%
withdrawals implies a 75th percentile portfolio minimum of $27,500/.04 =
$687,000. The ratio is 1.29 rather than 1.14 as before.

But I am really struck by the relative effects of
market performance vs. withdrawal percentages that are exhibited here. This data
leads me to the conclusion that the most efficient withdrawal strategy is a
relatively aggressive withdrawal target (along with the recognition that you may
end up withdrawing a lot less). The market
conditions that you encounter are the dominant factor.

Of course reducing your withdrawals does ALWAYS
increase your minimum/ending portfolio value. The *Efficient
Frontiers* chapter was (an admittedly weak) attempt to try to find the
optimum trade-offs in this area. Once again I feel compelled to stress the fact
that intense and accurate analysis of historical data is not the same as
accurate prediction of future results.

I'm going to go ahead and post this data as is, even
though I feel that I need to think this through more. However the private emails
that I receive at ** DaveLeeMn@spinfinder.com
always open my eyes to factors that I might have otherwise ignored.**

*Next
Chapter*