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Historical Performance Of Some Portfolios During The Withdrawal Phase

These are some results for the withdrawal phase for retirees who commenced their retirement in any year since 1987 thru 2014 with the following withdrawal schedule:

1. Withdraw 4% of the portfolio value on January 1 of the year of retirement.

2. In subsequent years, at the beginning of the year, prior to rebalancing the portfolio if necessary, withdraw the previous year's withdrawal amount incremented by the previous year's inflation rate.

The portfolios considered are:

1. SP500 with dividends (MUTF:VFINX).

2. Mid cap value (MUTF:FDVLX)

3. 30% VFINX, 30% FDVLX, 40% Aggregate Bond Fund (MUTF:VBMFX)

4. 30% VFINX, 30% FDVLX, 20% VBMFX, 20% Long Term Treasury Fund (MUTF:VUSTX)

5. 60% FDVLX 40% VUSTX

The first figure depicts the compound annual growth rate (Net CAGR) of the portfolio net of withdrawals computed for the period starting in the year of retirement thru 2014. Note that except for the VFINX, Net CAGR is always positive. Thus, although the VFINX portfolio would have sustained the withdrawal schedule, for retirement beginning in some of the years around 2000, the portfolio value at the end of 2014 would have been lower than its starting value. For every other portfolio, if the retirement commenced in any year starting in 1987-2014, at the end of 2014 the portfolio value would be higher than the starting value.

In the following figure are shown the maximum excess (beginning of the year) drawdowns for various portfolios. This quantity is defined to be the difference between the initial starting value of the portfolio and its lowest value at the time of withdrawal in any of the subsequent years, less 4%, as at best 4% will be the drawdown of the portfolio at the beginning of retirement. Clearly the excess drawdowns of the all equity portfolios will be unacceptable for most retirees. However, for the 60/40 portfolios, the excess drawdowns appear to be a good measure of what can be expected from well constructed portfolios. (For example, the portfolio of JNJ, MCD, CL, KO and PG with the same withdrawal schedule would have had the maximum excess drawdown of about 24%, similar to the 20% for the 60/40 portfolios.). .


Disclosure: The author is long FDVLX.

Additional disclosure: This is not investment advice but just a description of some results that might interest some readers.