Combining It All

The next analysis that was done was to repeat the previous analysis but for the situation where 50% of your income is provided by a fixed annuity component and the remaining directly from your portfolio (at the beginning of retirement). I generated the same 12 graphs as I did in the Market Risk chapter, but the assumptions on initial assets and income requirements were:

A fixed annuity of $22,000/year

An inflation adjusted income requirement of $44,000

A starting portfolio of value $716,700 (22,000x9.85 + 22,000/.044). The 9.85 multiplier was chosen because that is the minimum value required to take the annuity case (Fixed Annuity Chapter) to zero failures.

I used the same algorithm as before for determining the withdrawal for expenses each year (maximum withdrawal of 4.4% of assets scaled upward each year to an ending maximum of 7% in the 30^th year).

The analysis data in this section is the same as the Market Risk section.

The number of times that the annual withdrawal had to be reduced by more 10% of the original withdrawal amount (after inflation adjustment). Click Here for Income Volatility.

The largest income drop encountered in each of the 30 year retirement scenarios. Click Here for Worst Year.

The average inflation adjusted withdrawal amount. Click Here for Average Income.  

The ending inflation adjusted portfolio value (note that this withdrawal methodology means that the ending value will never be zero). Click Here for Ending Value.

A few observations:

The fixed annuity does reduce the volatility of your annual income, as would be expected.  Note that the average volatility of this case vs. the Market Risk case was reduced more than the worst case value (compare the average values vs. worst case values for the two cases to see this).

The "optimum" asset allocation is moved toward the equities side as compared to the Market Risk study (due to the Bond-like characteristics of the fixed annuity).  

The withdrawal algorithm that was used is intended to reduce your withdrawals in years that your portfolio has dropped relative to your target (inflation adjusted) withdrawal. But there will be no adjustment in the earliest years since your initial withdrawal is only $22,000 (3% of assets) and I set the lower limit at 4.4% of total assets. I haven’t done any work to further optimize this algorithm. Quite frankly I’m not sure if further optimization has real practical value. But from a strictly mathematical optimization point of view, lowering the lower limit is probably ‘more correct’.