I decided to look at this as an alternative to annuities.

If a lump sum of money was invested in the S&P500 in 1970, I wanted to see how much income it would generate each year assuming the dividends were taken out rather than re-invested, and a percentage of the underlying stocks were liquidated. The percentages liquidated I tested were: 0%, 1%, 2%, and 3%. This would be an easy strategy to implement today, with the S&P500 ETF (SPY).

All values in the graphs below are inflation adjusted, such that they’re equivalent to 2016 dollars. E.g., the graphs assume $100k is invested in 1970. However, this is $100k 2016 dollars, the actual amount invested in 1970 would have been about $15.3k.

I started with 1970 specifically because most of the 1970’s were a terrible investment environment, as you can see from the fact that the inflation-adjusted principle value of the investment dropped about 50% from 1973 – 1975. That doesn’t mean this is a worst-case scenario – it can always be worse – but it is a pretty bad scenario.

Keep in mind the graphs below show a 47 year time period.

In the above graph, ‘payout’ is dividends plus the annual percentage of draw down. E.g., for the 1% draw, the payout each year would be the dividends plus 1% of the value of the portfolio.

The portfolio that took out only dividends started out generating significantly less income than the others. However, within 12 years all 4 portfolios had approximately the same payout.

When the dot com bubble took off in the late 1990s the payout from the 1%, 2%, and 3% draw down portfolios became significantly better, but by 2002, after the dot com collapse, the 0% draw down portfolio caught up again, and after another 10 years the 0% draw down portfolio opened a lead over the other portfolios.

The principle value graph shows that after 47 years, the 0% draw down portfolio increased in inflation-adjusted value by approximately 3.5x. The 1% draw down portfolio increased in value by about 2x. The 2% and 3% draw down portfolios were approximately the same inflation adjusted value as when this analysis was started in 1970 (the 2% portfolio a bit more than the start value, the 3% portfolio a bit less than the start value).

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

Comments / Questions: joseph AT StockMarketMovement.com