Apparently, this is the paper that is credited for the 4% withdrawal rate in retirement that everyone keeps referencing. This was written in the 1990s, by a guy whose photo matches my mental image of Greenman. History is so fun!
The 4 percent rule was created using historical data on stock and bond returnsover the 50-year period from 1926 to 1976. Before the early 1990s, experts generally considered 5 percent a safe amount for retirees to withdraw each year. Skeptical of whether this amount was sufficient, financial advisor William Bengen conducted an exhaustive study of historical returns in 1994, focusing heavily on the severe market downturns of the 1930s and early 1970s. Bengen concluded that even during untenable markets, no historical case existed in which a 4 percent annual withdrawal exhausted a retirement portfolio in less than 33 years."
I am just doing 2018 yearly financial check up, and this is one resource that I came across. Ohai household spending was 2.5% of liquid net worth last year. I don’t have any bebe or major health costs, that could change this picture, but so far so good!
Honestly, every time I think about spending some money I’m saving (I save a large percentage of my meager earnings) I think about your Ohai capital comment. It is very motivating
lol i love my monte carlo. i can literally find out throug 10k simulations. anywho. say you are a 30 yo who has a 50 year time horizon with a 100% equity allocation.
withdraw 3% of your initial portfolio. you’ll go bust 3% of the time.
4% withdrawal/ 8% bust rate
5%/16%
6%/24%
i can also play around with the allocation.
but in essence, if you are withdrawing a lot, you are better off going equity.
if you are withdrawing only a lil. less equity will reduce your blow up risk.
its kind of equivalent to hollering at kylie jenner. there’s a high chance you’re going to get rejected anyways, so you might as well do a risky approach.
why Monte Carlo - if you have 100% equity allocation the evolution of the wealth can be modeled as geometric brownian diffusion process with constant drift and volatility. The fixed withdrawal rate represents an absorption barrier linearly increasing with time. The likelihood of going bust is the probability of first passage time (hitting the barrier) within the 30-year window, for which there is an analytical approximation - see formula (27) below but make sure you are careful with the signs because the formula is for the probability of NOT hitting an upper linearly-decreasing barrier whereas you are calculating the probability of hitting a lower linearly-increasing barrier. All you need now is plug the formula in excel and no simulations.
