Falling Interest Rates and Falling Income

Yields on 10-year U.S. Treasury Bonds have been trending downward for the past 30 years (1983-2012). In 1983, $100,000 invested in 10-year Treasuries generated $11,100 of annual income. In 1997, $100,000 generated $6,350 in income; in 2012, $100,000 invested in 10-year Treasuries paid out just $1,800 in income each year.

 

All of this means a retirement plan to generate income may have to look beyond the short-term and consider adding U.S. and foreign stocks to the portfolio. The table below is based on Monte Carlo simulation using historical data. The table shows the probability of sustaining annual withdrawals over the next 30 years, assuming a 3% annual increase to offset the effects of inflation.

 

Probability of Sustaining Withdrawals Over 30 Years

 

Initial Withdrawal Rate + 3% Annual Increase*	100% U.S.      bonds	100% U.S. stocks	80% U.S. stocks     20% U.S. bonds	40% U.S. stocks      60% U.S. bonds	40% U.S. stocks      40% U.S. bonds        20% global stocks**
4%	91%	> 95%	> 95%	> 95%	> 95%
5%	66%	87%	81%	88%	90%
6%	35%	73%	50%	70%	72%

* For example, a $100,000 portfolio at 4% = $4,000 1^st year, $4,120 2^nd year, $4,244 3^rd year, etc.

** U.S. stocks = S&P 500, U.S. bonds = Ibbotson long-term corporate, global stocks = MSCI World Index