I recently did a deep dive into withdrawal rates on my strategies. I see D1984 earlier in this thread talking about using Simba's annual numbers to test going back in time. One thing I would like to caution with this approach is that you do not see the extent of the drawdowns throughout the year, only if it is a pass/fail on meeting the returns for the year. As we all know, drawdowns are tough, I have to imagine it is doubly tough once you begin living off of your retirement nest egg without the ability to keep building it up with additions each month.
In the model I put together to test withdrawal rates, I used the same base methodology that Tyler from PortfolioCharts does, I have monthly returns for all of my strategies from 1980 forward, so I looked at 1980, 1981, 1982, etc. up through the year 2011 and ran them all forward looking at withdrawal rates. That gave a maximum time frame of 41 years and a minimum time frame of 10 years. Now because I have monthly and not annual data, this drawdown really stuck out like a sore thumb. Strategies like Permanent Portfolio, All Weather, Golden Butterfly, my Triad, etc all do exceptionally well supporting reasonably high withdrawal rates and only experiencing minimum drawdowns.
For example, if I have 100% in Triad, and assume a 1% slippage from tracked historical returns, it supports a 6.18% perpetual withdrawal rate with a maxDD of only 23.1%. Now when I saw it has a maxDD, I am speaking of the inflated original balance compared to the running balance of the account. So if the portfolio began with $2,000,000 and the inflation rate is 6% annual, then for the next month, the balance being compared to against actual is $2,000,000 + (1/12) * 6% = $2,010,000. Just want to be clear that I am not looking at a maxDD compared to the original balance, but an inflation adjusted target balance.
Here are my Perpetual Withdrawal Rates for some strategies:
Triad 6.18% with 23.1% drawdown from inflated target balance
All Weather 5.63% and 27.5%
Permanent Portfolio 4.25% and 26.9%
Total US Market 5.28% and 70.4%
60/40 4.2% and 51.7%
Not only do PP, All Weather, and Triad all support higher withdrawal rates than 60/40 and most are also higher than 100% in the Total US Market, they all do so with significantly lower maximum drawdowns.
These withdrawal rates are based on monthly withdrawals, I can also look at annual but that decreases your withdrawal rate. And I realized that I want to be able to reduce the inflation rate for those of us who own our homes (and I would argue it also holds if you still have a mortgage on your home because your mortgage payment is fixed and doesn't go up with rent.) So I have an option to reduce the CPI-U inflation rate by the amount that the index allocates to mortgage payments, it is about a 15% reduction in the inflation rate.
Other strategies, if I look at my The Russell OG strategy, it supports an 11% permanent withdrawal rate, however that goes along with a 50.4% max drawdown of actual balance compared to the inflated target balance. I also have the ability to get the withdrawal rate by limiting the maxDD to 33.3%, and with this filter enabled, The Russel OG supports 8.09%, significantly higher than the other All Weather type strategies mentioned above.
In running through a lot of data a few things, which may possibly sound obvious, stuck out to me:
- A person would be much safer to not maximize the withdrawal rate, take out a bit less than maximum and allow for the balance to build up, and or create a buffer for a negative sequence of returns.
- Having more money in your account than you think you may need also helps to create a buffer.
- Wise to have a safety buffer of money outside of investments to cover shortfalls if there is a negative sequence of returns.
- Taking higher risk with a small percentage of the allocation can really pay huge dividends.
- My model can also do fixed dollar withdrawals (inflated over time) instead of a percent, but it became quite apparent that this method creates major drawdowns with a bad sequence of returns, taking a percentage helps significantly.
To the first bullet about taking out a little less than the maximum supported withdrawal rate:
100% Triad supports a 6.18% Perpetual Withdrawal Rate, PWR, with 23.1% maxDD, the ending balance, for all years evaluated from 1980 to 2011 up through 2021 the average ending balance was 130% of the Inflated Target Balance, ITB, and on a $2,000,000 starting balance the average annual withdrawal (withdrawn monthly) was $137,936. NOTE: All annual withdrawal numbers have been deflated back to time 0 so that they are comparable apples to apples.
Now if I take 5.5% instead of 6.18%, the maxDD decreases to just 18.7%, the ending balance goes up to 158% of ITB, and the average annual withdrawal is $135,309; bigger buffers and larger balances without much change to the money withdrawn.
To the point about adding some more risk:
Instead of 100% Triad, I'll go 80% Triad, 10% The Russell OG, and 10% The Russell. The PWR goes up significantly to 8.13% with a maxDD of 31.8%, average annual withdrawals of $164,977.
Instead of 100% Triad, I'll go 80% Triad, 10% The Russell, and 10% MAX PAIN. The PWR goes up significantly to 10.00% with a maxDD of 38.7%, average annual withdrawals of $205,399.
If I filter that last allocation to a maxDD of 33.3%: it supports 8.95% PWR, 33.3% maxDD, annual withdrawals of S212,734. Note this is actually higher than the previous with higher PWR, this is because by limiting the maxDD by reducing the PWR, it allows or the balance to grow larger over time. The average ending balance of this allocation filtered to 33.3% maxDD is 167% of the ITB, but only 126% for the unfiltered run.
I've charts and annual data that I can view when looking at different scenarios which really helped me to get a grip on this, this exercise really helped get my head wrapped around all of this.
Cheers
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