Can Hoover dam’s Design Principles help us solve the retirement income problem?
by
Dale C. Maley
SMASHWORDS EDITION
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PUBLISHED BY:
Artephius Publishing on Smashwords
Can Hoover Dam’s Design Principles Help Us Solve the Retirement Income Problem?
Copyright © 2011 by Dale C. Maley
All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system. No part may be transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise). Exceptions to this must be with the prior written permission of both the copyright owner and the above publisher of this book.
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Table of Contents
The Retirement Income Problem
The Hoover Dam Design Problem
Constructing a Monte Carlo Model of the Hoover Dam
Conclusions
Summary
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Warning-Disclaimer
This book is designed to provide information in regard to the subject matter covered. It is sold with the understanding that the publisher and author are not engaged in rendering legal, accounting, insurance, or other professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.
It is not the purpose of this manual to reprint all the information that is otherwise available to the author and/or publisher. The purpose is to complement, amplify, and supplement other texts. You are urged to read all the available material, learn as much as possible about investing and to tailor the information to your individual needs.
Every effort has been made to make this book as complete and as accurate as possible. However, there may be mistakes both typographical and in content. Therefore, this text should be used only as a general guide and not as the ultimate of investing information. Furthermore, this book contains information on investing only up to the printing date.
The purpose of this book is to educate and entertain. The author and publisher shall have neither liability nor responsibility with respect to any loss or damage caused by the information contained in this book.
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Foreword
Sixty-Seven million Baby Boomers have now started to enter their retirement years. One of their biggest challenges is making a retirement portfolio last during retirement. This is a challenge because of the fluctuating nature of future stock market returns. Hoover Dam designers faced a similar issue. They want to maximize flow from the dam while keeping the reservoir full. The amount of river flow replenishing the reservoir is dependent on fluctuating levels of annual snowfall in the mountains. This short story compares Hoover Dam’s design to the retirement portfolio income problem. After reading this short story, you will gain a new appreciation for your own retirement income solution.
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The Retirement Income Problem
Maximum Annual Withdrawals
Before 1994, it was generally known the stock market’s average annual return was about 10%. It was therefore assumed that a retiree could withdraw a maximum of 10% of his nest egg each year in retirement. [1] If the stock market return was 10% and you withdraw 10%, the net change to the retirement nest egg was zero.
We can express this relationship mathematically:
Retirement Income from Retirement Portfolio = Retirement Portfolio x 10%
If you are planning on retirement, you want to know how big our retirement nest egg must be before we retire. If we re-arrange the equation above:
Retirement Portfolio = 10 x Retirement Income Needed from Retirement Portfolio
This means your retirement nest egg must be 10 times the annual income you need from the portfolio.
1994 Revelation
In 1994, William Bengen shattered the myth that you could withdraw 10% per year. Using an early personal computer, he developed a financial model of retirement using historical stock market returns. He found the maximum safe withdrawal rate was not 10%, but 4%. [2] His research found the 4% withdrawal rate can be increased by the rate of inflation each year in retirement.
The reason the maximum safe withdrawal rate is only 4% is the fluctuating nature of stock market returns. If the stock market has several bad years in your first few years of retirement, there is not enough time for the portfolio to recover. If this happens, you will outlive your retirement portfolio.
Before Bengen’s research, it was generally assumed you only needed to accumulate a retirement nest egg equal to 10 times your income. After Bengen’s research, it has become generally accepted that you need to accumulate a nest egg equal to 25 times the retirement income needed.