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Optimizing the Fixed Income Portion of a Retirement Portfolio.


Optimizing the Fixed Income Portion of a Retirement Portfolio.

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This article was posted on March 1, 2003.

While the Retire Early Study on Safe withdrawal Rates used 3-month commercial paper for the fixed income portion of the portfolio and the Trinity Study used long-term US Treasury bonds, both arrived at 100% survivable withdrawal rates that were very similiar. Texas-based financial planner Jaye Jarrett, looked at other fixed income alternatives in an attempt to improve the maximum 100% survivable withdrawal in a September 2001 study, see link: http://jjarrett.home.texas.net/resFixedIncomePortion.pdf

Comparing the two studies reveals some important differences.

Comparison of Optimal Fixed Income Allocations
Retire Early vs. Jarrett Studies
. Retire Early Study Jarrett Study
Pay Out
100% Survivable
Withdrawal Rate
Asset Allocation Maximum
100% Survivable
Withdrawal Rate
Asset Allocation
20 Years 4.94% 66% Large Cap (S&P500)
34% Money Market
5.29% 8% Large Cap
25% Small Cap
67% 5-Yr Gov't Bonds
30 Years 4.03% 74% Large Cap (S&P500)
26% Money Market
4.44% 39% Small Cap
61% 5-Yr Gov't Bonds
40 Years 3.90% 77% Large Cap (S&P500)
23% Money Market
4.30% 74% Large Cap
26% Corporate Bonds
Note (1): The Jarrett study assumes that the full annual withdrawal is taken at the beginning of the year and ignores investment expenses. The FIRECalc calculator http://capn-bill.com/fire/ was used to calculate the results on the same basis for the Retire Early Study asset allocations.

The Jarrett Study used a shorter timeframe (the 1926-1999 Ibbotson data) than the 1871-2000 Shiller database used in the Retire Early study, but the results should give comfort to those looking for a basis for using a higher fixed income allocation. At least these asset allocations have been tested against both the Crash of 1929 and the Great Depression of the 1930's as well as the high inflation of the 1970's and early 80's.

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Copyright 2003 John P. Greaney, All rights reserved.

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