It wouldn't really matter how this 2% average return happened. It could result from a 1973-74-style debacle in years one and two, followed by eight years of recovery. It could come from alternating good and bad years, or just 10 consecutive years of pitiful 2% returns. Or it could surprise us by beginning with a couple great years and then correcting!

The reason we can say that it wouldn't matter how the 2% average return unfolded is that we designed this portfolio with enough fixed-income investments so that withdrawals could be maintained for 10 years without touching the stock portfolio. That means our clients could ride out an extended period of subnormal stock returns, even if it included a monstrous bear market, without having to change their lifestyle!

Since the end of 1930 (we think it is appropriate to leave out 1929 and 1930), overall stock appreciation has averaged 8.8% a year. Total returns (appreciation plus dividends) have compounded at a rate of 11.5% from 1931 to 1999. How did we decide on a decade of 2% average appreciation for a worst-case scenario?

Since 1931, there have been 60 running 10-year periods (1931-40, 1932-41 etc.). The very worst decade for total stock returns since 1930 was 1965-1974. The average annual total return for that awful period was 2.4%. The second worst 10-year period in the past 69 years was 1969-1978, when total returns averaged 4.7% a year.

In our model, we use 1.5% for cash dividends the first year, which gradually rises to 3% over 25 years. Adding to this the 2% annual stock price appreciation, our total return for our worst-case decade averages 3.7% a year. This is nearly midway between the worst and the second-worst of 60 ten-year periods going back to 1931. Since our clients do not want to base their retirement withdrawals on the expectation of another Great Depression, this seems an appropriately sober hurdle for worst-case analysis.

From our client's point of view, the really good news is that they can withdraw $90,000 (6% of their portfolio) the first year and expect with very high confidence to sustain their lifestyle at that level for the rest of their lives.

Models Need To Be Updated

In real life, it is highly unlikely that we would advise our clients to make all their withdrawals from the fixed-income portfolio and never buy or sell stocks for 10 years. This model is designed to see at what stock-allocation level they could have complete confidence in maintaining a certain lifestyle no matter what was going on in the market the first 10 years, which are the years when their lifestyle is at greatest risk.

The likelihood is that, if the decade ahead averages 2%-a-year appreciation, the average will be made up of both significant declines in the stock market and major recoveries as well. Volatility, like the poor, we have always with us. Because we use a rebalancing discipline, volatility in stock prices should actually help improve their overall investment results by providing opportunities to buy low and sell high at the margin.

Finally, there is certainly the possibility that the markets will do better than our worst-case model, perhaps significantly better. While it is our job to worry about the downside, and that does give our clients a quiet confidence, the column on the far right of the model in which stocks keep growing at 10% a year is not without interest. Have a good life!