**This chapter is intended to analyze the case of
withdrawals from a portfolio with the goal of having the portfolio support
inflation-indexed withdrawals forever (for the ***Market
Risk* scenario). This was my choice of analytical context for the case of a person retiring in
their early 50's who must face the reality of a 45 year (or even longer) remaining
lifetime (as if this is something to complain about). I was initially
uncomfortable with the results of this analysis. But I recently (re) discovered
analysis from another well-respected source that supports this analysis. It is
the *Retirement
Calculator From Hell* on the previously referenced *Efficient
Frontier* by William Bernstein (VERY highly recommended if you are
willing to put forth a bit of mental energy). So I'm now more comfortable with
this data.

**My first inclination was to simply extend the
analysis to cover more years. But the goal was to simulate 'forever', so I
decided to do this using the same 30 year scenarios as before with these additional
restrictions/changes from the ***Market Risk *chapter.

**1) After 30 years the (inflation adjusted) ending
portfolio value must be the same as (or larger than) the initial portfolio value. **

**2) The limiting withdrawal percentage is constant rather
than allowing it to rise in the later years.**

**In other words in all cases you were at least as
well off at the end of 30 years as you were at the beginning. **

**What we are looking at here is the
statistics of 54 different 30-year retirement scenarios (with the additional
constraint of requiring an ending portfolio be the same (after inflation) as the
initial portfolio). The data presented is:**

**1) The limiting withdrawal percentage that
guaranteed #1 above (no worse off after 30 years than when you started).
Remember that the withdrawals drop when your portfolio drops.**

**2) The 'average worst case drop' encountered across
all of the 54 different 30 year retirement simulations for each different equity
ratio. You take the worst case single year income drop in each 30 year retirement scenario and then
average those values.**

**3) The 'worst, worst case drop' encountered in each
of 54 different 30 year retirement scenarios. This is the largest single year
income drop that occurred in the entire simulation for the given asset
allocation. **

**4) The absolute minimum (inflation adjusted) single
year income
that you would have encountered for that asset allocation. Note that this can be
calculated directly from #3 above. **

**5) The worst average income across all the 54
different 30-year retirement scenarios.**

**6) The average of all the average incomes across the
54 different 30-year retirement scenarios. **

**The results are shown below - they are
not what I expected at the higher equity ratios.**

**First to be sure that the data is understood take
the 40% equity ratio row. 3% withdrawals/year guaranteed that at the end of 30
years you always had your initial (inflation adjusted) portfolio value available.
I simulated the same 54 different 30 year retirement scenarios and I took the
worst case income drop in each of these 54 different scenarios and averaged those values
(result was 13.2%). The worst single year income drop seen across all those 54
scenarios was 39.7% and the minimum (inflation adjusted) income across all 54
scenarios was $18,090. The lowest average income across each of the 54 different
scenarios was $29,338. The last column is simply the average of all the average
incomes ($29,929 in this case). **

**The results for the 20 and 40% equity ratios were
not surprising. But I did not expect the infinitely sustainable withdrawal rates
to be higher than the 4.4% that I started with (and most certainly NOT 5.9%!).
Note that 4.4% originally came from the Trinity/Jarrett withdrawal methodology (strictly
inflation adjusted withdrawals and a non-zero ending value being acceptable),
but I was not prepared for 5.9%. **

**In the case of Market Risk (4.4% scaled withdrawals)
and 80% equity ratios, the 'Avg. Worst Case Drop' was 18% rather than 27% so
this too is not a free lunch. Note also that in the worst retirement scenarios,
you did not achieve a higher average income by upping your equity ratio and your
withdrawal target. But I still find the concept of 5.9% withdrawals
... well ... not recommended for people looking at 40+ year retirement
possibilities. I'm publishing this but would be interested in comments from
readers by ***email* or in
conversation #382 in 'Investing During Retirement' at *MorningStar.com*.

*ADDITIONAL DISCUSSION *

**I have done some further analysis of this approach.
I started from the perspective of 'withdrawing forever' which sounds like a move
to a more conservative withdrawal strategy. I had assumed that 'conservative
withdrawal strategy' and 'reduced initial withdrawal' are synonymous, but this
is not necessarily the case. A better way to look at this is to consider
this from the perspective of the following goals. **

**1) Maximize total withdrawals **

**2) Minimize volatility (or at least to minimize the
'less income than planned' side of the equation - few would believe that sudden,
unexpected increases in income are a bad thing assuming no other negative
consequences)**

**3) Minimize your risk of 'going broke'**

**You have to trade off these three conflicting goals
and this chapter is ultimately about maximizing #1 and #3 and letting #2
(volatility) fall where it may. So if that is your goal some quick simulations
that I did last night reveal that withdrawing a constant percentage of your
portfolio (in the 4-5% range) is more effective in maximizing your total
withdrawals while maintaining your portfolio value over the long run than is
raising your withdrawal percentage target but limiting your withdrawals in years
that your portfolio is doing well. In retrospect this should have been
obvious. **

**When I get a chance I'll be re-working this chapter
and complete the analysis in referenced in the previous paragraph.**

*Next Chapter*