This article was posted on January 1, 2003.
With all the worry that the current bear market means they'll run out of cash, most folks have forgotten that there are many things that will actually improve your safe withdrawal rate -- and some of them are easily to calculate with a tremendous degree of accuracy.
For example, there is a large body of data on average life expectancy and how many people will likely live to be 100. If you choose a long pay out period, there is only a small chance you'll actually live long enough to be in a position to run out of money.
The table below is based on a 40-year pay out period and 79% stock, 21% fixed income. The "99% safe" withdrawal rate is 4.10%, "95% safe" rate is 4.23%, and "90% safe" rate is 4.57%.
Using the IRS 2003 Mortality Table we get the following:
A 65-year-old has a 1% chance (99th percentile) of living another 40 years to age 105.
A 60-year-old has a 5% chance (95th percentile) of living another 40 years to age 100.
A 57-year old has a 10% chance (90th percentile) of living another 40 years to age 91.
Combining the probabilities of the portfolio running dry and the odds that our retiree will actually live long enough to see his portfolio run dry yields the following table (see Note (1) below):
Pretty amazing, huh? A 5% chance that your portfolio runs dry in 40 years, combined with a 5% chance you'll die in less than 40 years, still keeps your overall financial picture solvent more than 99% of the time.
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Copyright © 2003 John P. Greaney, All rights reserved.