- quote -

The 4% rule of thumb is supposed to address #2 assuming
the worst case #1 (that is, you live and spend forever).

The exposure is #3, but I think this can be addressed by
a further factor partly under your control :

#4 volatility of expenditure. Early in your retirement you
can answer unusually low returns with unusual frugality.
This is what I planned for and had to do to retire early.
Can't always be frugal and may even have unavoidable
huge bills such as for health, so failure always possible.
But nothing beats dulce far niente - sweetness of doing
nothing...

In article <1104191275.715942.258180[at]z14g2000cwz.googlegroups.com> ,
<gabe[at]brennerfinancial.com> wrote:
- quote -

Considering the history of the term "Monte Carlo", you are rolling the
dice even if you use that type of analysis.

There is no formula. Go to a fee-only Certified Financial Planner who
is an expert in Monte Carlo analysis. Otherwise you are rolling the
dice with your retirement.

beliavsky[at]aol.com wrote:
- quote -

There may not be a closed-form solution for this. Most references I've
found use a Monte Carlo simulation to estimate the probability of a
retiree's money lasting until a certain age given the constraints above.
The problem is that the terms in the equation are not commutative like
they are in the savings phase. Returns in the early years (and thus
early volatility) is much more important when withdrawing money than
returns in the later years (order matters). An early bad year may not
be recoverable given constant withdrawals, but an early good year can
make up for later bad years.

I think this is why it is often suggested that a retiree keep the next
few years of retirement income in low-volatility assets while keeping
the rest in high-return (but high volatility also) assets. That way if
the high-return assets do badly, the retiree can draw from the
low-volatility assets to give time for the high-return assets to
recover. When the high-return assets perform well, the low-volatility
assets can be replenished.

If you figure out a closed-form solution, be sure to share it!

-Will

- quote -

manner, has been found to be a rate that pretty much ensures that you will
never run out of funds. Not guaranteed, of course, but is highly unlikely to do
so.

That would only be an optimal rate if a person had enough funds that a
withdrawal rate of 4% would yield at least enough for their needs.

The formula for calculating is the equivalent to that used to caluclate
mortgage payments. But note, that assumes that at the end of the period chosen
for life expectancy (term of the mortgage) there is no money left.

So in choosing a life expectancy, one should choose one that most people don't
reach. A life expectancy of 100 might be reasonable for someone in their 60's
retiring today.

But someone, say in their 30's today, runnig calculations based on their
assumed retirement in their 60's, might very well have to use a longer life
expectancy.

- quote -

I think the problem in getting an accurate formula is that (1) and (2)
(particularly) require one to predict the future. What if your prediction
about life expectancy turns out to have been short-sighted (you live to 105
instead of 95)? What if your prediction about expected rate of real return
turns out to be greater than reality (you get only 2% instead of 4%)? In
either of those cases, you will run out of money. If your calculations err
in the other direction, you will have lived below your means - not a
disaster, but not your intention either.

I understand the 4% "rule" to take into account the longevity issue
especially, so that you never out live your money. It seems to me that the
greater problem is in accumulating enough so that a 4% withdrawal provides
sufficient income regardless of inflation, longevity, market returns, etc.

Elizabeth Richardson

beliavsky[at]aol.com wrote:

- quote -

You could look at the Single Life Expectancy table in IRS Pub
590. I have no idea what rate of return assumptions are built
into it, but it does reasonably assure that you will never run
out of money.

MTW

check out the trinity study. it is very scientific. they calculated
the probability of running out of money dependent upon market
returns,asset allocation,withdrawl rates over a number of scenarios.
the short answer is 4%. that gives you a reasonable probabilty of
passing away with money for the funeral

Does anyone know of a reasonable FORMULA with a mathematical basis for
a suggested withdrawal rate in retirement, as a function of

(1) life expectancy
(2) expected real return of investments after taxes
(3) volatility of returns

I see numbers like 4% mentioned as a rule of thumb, but the optimal
withdrawal rate ought to depend on items (1) and (2).