If the TIPS bounds have a flat yield curve and the coupon rate is 2%, we can get the present value of the investment as
PV = 1/(1+0.02) + 1/(1+0.02)2 + 1/(1+0.02)3 + ... + 1/(1+0.02)30
PV = ((1+0.02)30-1)/0.02/(1+0.02)30 ~ 22.4
So the withdraw rate is 1/22.4 ~ 4.464% ( assuming (1) the flat yield curve is fixed or (2) there is a TIPS bond existing for each calendar year).
Thursday, November 11, 2010
Sunday, November 7, 2010
Safe Withdrawal Rates for Retirees
What's the Safe Withdrawal Rate for a retirement portfolio? According to the information at bogleheads.org, it's about 4% for a 50/50 stock/bond portfolio after the inflation is taken into account. There is a 95% chance that it can last for at least 30 years.
An article at Vangard shows the similar results with updated data. Another study by Wade Pfau extended the research to other developed markets, only a couple of them ( Canada, Sweden, Denmark, United States) can give a result better than 4% with perfect foresight.
By the way, government provides a Thrift Savings Plan for government employees, there is a lifecycle fund for participants who are currently withdrawing their TSP accounts in monthly payments, it's called L income. The fund allocates 80% to fixed income and 20% to stock index funds.
According to a research by William Sharpe, actually you can get a 4.46% withdrawal rate for 30 years by simply buying the TIPS bonds with a 2% coupon rate and it's risk free (assuming the yield curve is flat at 2%). But unfortunately, the 2% coupon rate does not hold for all the periods of time. The current yield curve may not be able to give retirees the desired 2% coupon rate. Anyway, only 1.22% coupon rate is required to achieve th 4% target.
An article at Vangard shows the similar results with updated data. Another study by Wade Pfau extended the research to other developed markets, only a couple of them ( Canada, Sweden, Denmark, United States) can give a result better than 4% with perfect foresight.
By the way, government provides a Thrift Savings Plan for government employees, there is a lifecycle fund for participants who are currently withdrawing their TSP accounts in monthly payments, it's called L income. The fund allocates 80% to fixed income and 20% to stock index funds.
According to a research by William Sharpe, actually you can get a 4.46% withdrawal rate for 30 years by simply buying the TIPS bonds with a 2% coupon rate and it's risk free (assuming the yield curve is flat at 2%). But unfortunately, the 2% coupon rate does not hold for all the periods of time. The current yield curve may not be able to give retirees the desired 2% coupon rate. Anyway, only 1.22% coupon rate is required to achieve th 4% target.
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