Discuss the pros and cons of retirement funding using savings invested in a combination of the market and a compounding account. |
Now that we've seen the different results with money invested in a market account, let's take a look at the results if your nest egg is rather in an annually compounding account with a fixed rate of return. As you can see, the down side risk of an unfavorable sequence of returns is eliminated and the outcome is far more predictable. However, the upside potential of a long term higher rate of return is also eliminated. If we were to choose a combination of these two accounts, and each year both accounts were used in proportion to fund retirement income, the results would be somewhere in the middle of an all market and an all compounding account strategy. An additional technique can be employed to buffer the results of a combined strategy. A simple rule can be added that if a market year is unfavorable, the market account is not used to provide retirement income and the compounding account is used to fund the entire year. |
Total Withdrawal = Initial Total Assets Assumption * Withdrawal % * (1 + Inflate @ Rate) ^ n where n=year number Values Subjected to Market ReturnsForward Market Balance = ([previous year] Forward Market Balance - Total Withdrawal) * (1 + Forward Market ROR) Forward Market ROR = Market return for selected year, ascending. Inverted Market Balance = ([previous year] Inverted Market Balance - Total Withdrawal) * (1 + Inverted Market ROR) Inverted Market ROR = Market return for selected year, descending. Average Market Balance = ([previous year] Average Market Balance - Total Withdrawal) * (1 + Average Market ROR) Average Market ROR = Sum of selected market return values / number of market returns selected. Values Protected via a Compounding AccountForward Risk Withdrawal ( >= Threshold %) Total Withdrawal * (1 - % Safe Assets) or ( < Threshold %) Total Withdrawal * (1 - % Safe Assets) * (1 - Market Reduction %) Forward Risk Balance = ([previous year] Forward Risk Balance - Forward Risk Withdrawal) * (1 + Forward Market ROR) Forward Safe Withdrawal ( >= Threshold %) Total Withdrawal * (% Safe Assets) or ( < Threshold %) Total Withdrawal * (% Safe Assets) * (Market Reduction %) Forward Safe Balance = ([previous year] Forward Safe Balance - Forward Safe Withdrawal) * (1 + Safe Return %) Forward Total Balance = Forward Risk Balance + Forward Safe Balance. Inverted Risk Withdrawal ( >= Threshold %) Total Withdrawal * (1 - % Safe Assets) or ( < Threshold %) Total Withdrawal * (1 - % Safe Assets) * (1 - Market Reduction %) Inverted Risk Balance = ([previous year] Inverted Risk Balance - Inverted Risk Withdrawal) * (1 + Inverted Market ROR) Inverted Safe Withdrawal ( >= Threshold %) Total Withdrawal * (% Safe Assets) or ( < Threshold %) Total Withdrawal * (% Safe Assets) * (Market Reduction %) Inverted Safe Balance = ([previous year] Inverted Safe Balance - Inverted Safe Withdrawal) * (1 + Safe Return %) Inverted Total Balance = Inverted Risk Balance + Inverted Safe Balance. Average Risk Withdrawal ( >= Threshold %) Total Withdrawal * (1 - % Safe Assets) or ( < Threshold %) Total Withdrawal * (1 - % Safe Assets) * (1 - Market Reduction %) Average Risk Balance = ([previous year] Average Risk Balance - Average Risk Withdrawal) * (1 + Average Market ROR) Average Safe Withdrawal ( >= Threshold %) Total Withdrawal * (% Safe Assets) or ( < Threshold %) Total Withdrawal * (% Safe Assets) * (Market Reduction %) Average Safe Balance = ([previous year] Average Safe Balance - Average Safe Withdrawal) * (1 + Safe Return %) Average Total Balance = Average Risk Balance + Average Safe Balance. Cumulative WithdrawalsMarket Total (average/forward/inverted) = Sum of withdraws plus remaining balance. Compounding Total (average/forward/inverted) = Sum of withdraws (using compounding protection) plus remaining balance.
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