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Safe Withdrawal Rates -- The Pay Out Period Reset (POPR) method.

Safe Withdrawal Rates -- The Pay Out Period Reset (POPR) method.


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This article was posted on January 1, 2000.

Once people learn that low, "safe" withdrawal rates will likely result in a huge net worth when they're age 90 (see, "The Retire Early Study on Safe Withdrawal Rates") they often ask, "How can I spend more while I'm still young?" There are two strategies that one can employ to accomplish this.

Declare the "start" of a "new" pay out period.

If you started your withdrawals in 1997, and your portfolio grew by 20% in 1998, you could decide to use your December 31, 1998 portfolio balance to start a new pay out period. This would result in a higher inflation adjusted annual withdrawal. If your portfolio had lost value during the year, you would base your annual withdrawal on your "all-time high" December 31st portfolio value, plus an inflation adjustment. Adopting this practice greatly reduces the likelihood that you'll have a large net worth at the end of the pay out period.

This safe retirement withdrawal strategy is called the Pay Out Period Reset (POPR) method. It results in an increase in the "Sum of the Annual Withdrawals" and is accompanied by a decrease in the Terminal Value of the portfolio. The following table shows the results for the "100% safe inflation adjusted withdrawal rate" for pay out periods from 10 to 50 years invested at the "efficient frontier." Annual investment expenses were assumed to be 0.20% of assets. (About the cost of a Vanguard S&P500 index fund.)

Pay Out Period Reset (POPR) Method vs.
Ordinary Inflation Adjusted Withdrawals(OIAW)
Pay Out Period ...10 Years ...20 Years ...30 Years ...40 Years ...50 Years
Exp. Ratio 0.02% 0.02% 0.02% 0.02% 0.02%
% Stock 44% 66% 71% 77% 82%
"100% Safe"
Inflation-Adj.
Withdrawal
8.35% 4.75% 3.81% 3.54% 3.35%
----Percent Increase in Sum of Withdrawals-----
Max 47% 179% 271% 342% 362%
95% 20% 93% 147% 175% 218%
90% 17% 76% 128% 161% 200%
75% 5% 41% 82% 127% 151%
Median 0% 17% 34% 59% 103%
25% 0% 4% 14% 40% 75%
10% 0% 0% 2% 28% 49%
5% 0% 0% 0% 22% 26%
Min 0% 0% 0% 0% 0%
-------Percent Decrease in Terminal Values--------
Max 0% 0% 0% 0% 0%
95% 0% 0% 0% -32% -45%
90% 0% 0% -9% -39% -57%
75% 0% -6% -22% -45% -63%
Median 0% -18% -33% -56% -68%
25% -6% -31% -49% -63% -74%
10% -15% -52% -70% -80% -84%
5% -25% -58% -76% -84% -84%
Min -40% -86% -79% -87% -87%

There is much good news in the table above.

A retiree with a 50 year pay out period has a 50/50 chance of more than doubling (i.e., a 103% increase) his retirement withdrawals above an inflation adjusted annual withdrawal. There's a 90% probability his withdrawals over the 50 year pay out period will increase by at least 49% above the inflation adjusted withdrawal.

While the Pay Out Period Reset (POPR) method doesn't increase the initial "100% safe" inflation adjusted withdrawal, it does show that the retiree has a high probability of being able to take increasing retirement withdrawals over his lifetime. It's just that we can't tell exactly when or how much in advance. Many retirees will see "raises" in retirement that exceed what they enjoyed while employed.

Choose a shorter pay out period as you age

Another technique for reducing the terminal value of the portfolio is decreasing the length of your pay out period. This is called Pay Out Period Reduction A 30 year old retiree might choose a 50 year pay out period while a 70 year old might be happy with a 20 year time frame. Shorter pay out periods allow for higher "safe" withdrawal rates and result in smaller Terminal Values for the portfolio.

The Retire Early Pay Out Period Reset & Reduction (POPR&R) Withdrawal Calculator

Retire Early readers who want to explore this further are invited to download the Beta Version of the Retire Early Pay Out Period Reset & Reduction (POPR&R) Withdrawal Calculator. The Beta Version only covers Pay Out Period Reset. The combined Pay Out Period Reset and Reduction calculator should be available on February 1st.

Download POPR calculator
Filename=popr11.zip, filesize=1,153kb
expands to re50r3.xls
filesize=3.07Mb Excel spreadsheet

Perhaps the most interesting part of the spreadsheet begins in cell "AU7" where the "Sum of the Annual Withdrawals" and "Terminal Values for the portfolio" are compared for the Pay Out Period Reset (POPR) model vs. Ordinary Inflation Adjusted Withdrawals (OIAW), for each pay out period from 1871 to 1998. This allows the user to discover where the trouble spots were in the past.

(Note: Alert readers will notice that the "100% safe" withdrawal rate for a 10 year pay out period in the beta release of the POPR&R calculator is 8.35% vs. 7.56% in the Retire Early Study on Safe Withdrawal Rates published previously. I'm aware of the problem and trying to find the spreadsheet error. If any users find the source of the error before me, I'd appreciate hearing from you.)


filename = popr.html
Copyright 2000 John P. Greaney, All rights reserved.
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