In an earlier analysis I looked at what the payout and principle would be if capital were invested in the S&P500 in 1970, while withdrawing all dividends and some percentage of capital each year.

The benefit of this strategy is that capital doesn’t go to zero, since the amount withdrawn each year is a percentage of whatever capital is left. The downside of this strategy is that the yearly payout can fluctuate wildly based on market conditions (though the dividend-only withdrawal strategy had fairly stable annual payout, even in down markets).

Here I look at what happens to the principle balance if a constant amount of capital is withdrawn each year. For people who can’t tolerate a fluctuating amount of income each year this is a more realistic scenario.

Some notes about the analysis:

- It covers the time period from 1970 through 2016
- All values are inflation-adjusted with 2016 as the base year, so the initial deposit shown of $100K is in 2016 dollars, in 1970 it would have been about $16K.
- Four withdrawal rates are analyzed: 3%, 4%, 5%, and 6%. These withdrawal rates are relative to the initial investment amount. So a 3% withdrawal rate means $3K per year, per $100K of initial investment
- If the dividend was greater in a year than the target payout, I assumed the entire dividend was paid out (i.e., no dividend reinvestment). The reason is dividends are taxed based on income, so there is no single ‘correct’ answer as to how much of the excess dividend would actually be reinvested.
- All funds are invested in the S&P500 (SPY is a good proxy for this)

With that out of the way, let’s look at some numbers. First, the annual payout. The payout for each withdrawal rate is ideally constant for the entire period. It can be non-constant for two reasons, one good and one bad:

- The dividend alone is greater than the target payout
- The invested capital is completely depleted by withdrawing it to make annual payments

Here are the results:

We see that the 3% withdrawal rate paid at least its target amount each year, and eventually started paying more than the target amount as the principle grew (as we’ll see in the next graph).

The 4% withdrawal rate paid its target amount each year, but never more than that. So its principle held up for the entire 47 year period, but didn’t grow enough for dividends to cover the entire target amount.

The 5% and 6% withdrawal rates were not able to pay the target amount each year for the entire study period. The 5% withdrawal rate ran out of capital in 1997 (after 28 years), and the 6% withdrawal rate ran out of capital in 1987 (after only 18 years).

Below we see the principle balance each year:

The 3% withdrawal rate had an inflation-adjusted principle balance 3 times greater than the starting balance. The 4% withdrawal rate had an inflation-adjusted principle balance 1.5 times greater than the starting balance. But, as mentioned above, the 5% and 6% withdrawal rates reached a $0 principle balance before the end of the study period.

This is an analysis of past performance, but past performance is not a guarantee of future performance.

Comments / Questions: joseph AT StockMarketMovement.com