In another withdrawal test (B), using the same portfolio balance as we just discussed, T. Rowe Price assumed a withdrawal rate of 8.5 percent per year (with a 3 percent increase on the withdrawal rate for inflation) over the same period, from December 1968 to December 1998. The average return of each of the thirty years was 11.7 percent and is illustrated by the upper line in Figure 3.1. What happened to the portfolio affected by the higher and more common withdrawal rate is illustrated in the lower line of Figure 3.1. That is, $21,250 (8.5 percent of $250,000) was drawn the first year, $21,875
(8.75 percent of $250,000) the second year, and so on. Following the lower line in Figure 3.1, the $250,000 account would have been at the zero mark by the fourteenth year (in 1983). Hardly a nice picture to watch as the sixty-nine-year-old, retired at fifty-five, goes bust. What went wrong? T. Rowe Price calls this investment problem “the risk of relying on an average return.” We will name this problem the average return blunder. Assuming an advisor had accurately predicted the average annual return of 11.7 per-cent for the portfolio over the next thirty years (the upper line in the figure) and his or her bar chart had showed that at the 8.5 percent withdrawal rate the principal was safe, then why was the fund so quickly depleted? Why did the account go bust? Every retiree must ask, Can this happen to me?
