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Wellington or Wellesley Income for Retirees

The primary difference between the funds is the amount of bonds held.  Wellington is around 40% bonds while Wellesley is 60%.  There has been discussions over which is the better fund for retirees who are making withdrawals from their portfolios. 

Studies done by Bengen and the Trinity authors based on historical data suggest that a portfolio of 50% stock and 50% bonds would support a 4% initial withdrawal adjusted for inflation for 30 plus years.  They also showed that a portfolio of 75% stock and 25% bonds failed only twice during the high inflation years.  My conclusion was that a portfolio with stocks between 75% and 50% would be the best for retirement.  That is why I was leaning toward Wellington as the better investment.

Others who use different methods such as cash flow disagree.  They are sold on Wellesley and I will admit that their arguments have me looking more closely at the fund.  So I decided to do a simple test to compare the performance of the three balanced funds that we own: Wellington, Wellesley, and American Funds Balanced Fund. Since everyone is concerned about a sequence of return risk (huge loss early in retirement) I couldn't think of a better year to start the test's retirement than 2008.

Assumptions:

  1. End of Year (EOY) 2007 balance is $100,000.  Retirement begins 2008.
  2. Withdrawals according to Bengen's 4% distribution rule.  Initial withdrawal is $4,000.
  3. Withdrawals on the first day of the year adjusted for inflation.
  4. Inflation is assumed to be 3% per year.
  5. Return or loss posted on the last day of the year.  Annual returns are from Yahoo Finance.
  Wellington Wellesley Balanced
2007  $     100,000  $      100,000  $     100,000
2008-4,00096,000-4,00096,000-4,00096,000
2008-22.23%           74,659-9.84%           86,554-25.73%           71,299
2009-4,12070,539-4,12082,434-4,12067,179
200922.34%           86,29816.02%           95,63921.08%           81,341
2010-4,24482,054-4,24491,396-4,24477,097
201011.04%           91,11310.65%         101,13013.02%           87,135
2011-4,37186,742-4,37196,759-4,37182,764
20113.95%           90,1689.63%         106,0763.82%           85,926
2012-4,50285,666-4,502101,574-4,50281,424
201212.67%           96,52010.06%         111,79314.19%           92,978
2013-4,63791,883-4,637107,156-4,63788,341
201319.76%         110,0399.19%         117,00321.73%        107,537
2014-4,776105,263-4,776112,227-4,776102,761
20149.90%         115,6848.07%         121,2848.85%        111,855
2015-4,919110,764-4,919116,364-4,919106,936
20150.14%         110,9191.28%         117,8541.75%        108,807
2016-5,067105,852-5,067112,787-5,067103,740
201611.09%         117,5918.08%         121,9008.61%        112,672
2017-5,219112,372-5,219116,681-5,219107,453
201714.82%         129,02610.20%         128,58215.47%        124,076
2018-5,376123,650-5,376123,207-5,376118,700
2018-3.35%         119,508-2.57%         120,040-2.70%        115,495

 

Conclusion:  None of the funds failed over the 11 year period. All had ending balances higher than the beginning balance.  Wellesley held up better than the other two but 22.2% and 25.7% losses in the first year of retirement is a little harder to overcome than Wellesley's 9.8% loss. The lowest cash value for all funds was in 2009 after the withdrawal:  AF Balanced was down to $67,179, Wellington $70,539 and Wellesley $82,434. Wellesley was fully recovered by 2011.  Wellington and Balanced fully recovered by 2013.

Withdrawals adjusted for inflation went over $5,000 per year in 2016.

I might test other periods because they will definitely have different results but the purpose of this test was to see the impact of a bad sequence of return.  I still think Wellington has more up side potential but Wellesley is more stable.  It is the fund I will recommend in my Investment Succession Plan for my wife.

 

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Re: Wellington or Wellesley Income for Retirees

From my own pov, Mustang, I think there are a couple of complications which are relevant:

Firstly, I think ANY set-and-forget portfolio is sub-optimal (it's almost certainly better than worst-case, however).  Optimal would be lightening equity, say, NOW, and ramping up equity after a, say, 30% pullback.

Secondly, while you've allowed for whatever the 'normal' response might be to a sequence cycle such as we have had, I think that 'bond' response has been ATYPICAL this time around, since the pullback was induced by a FINANCIAL crisis specifically.

Thirdly, the government hasn't allowed this 'crisis' to unfold as it would naturally.  They've leaked, tweaked data, held interest rates at historical lows, and on and on.  ANYTHING which has resulted cannot, imo, be depended upon to repeat.

All that being said, I DO think that less equity is a safer posture to take as a default for a retiree.  Otherwise, a longer time period suggests more equity works out better in general.  As usual, what one decides upon has to be influenced by one's needs, goals, and risk profile.

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Re: Wellington or Wellesley Income for Retirees

The answer is...lower than 40% see this article .

Kitces and Pfau concluded: "Declining equity glide paths do not necessarily help support retirement success. Static allocations generally fare worse than more conservative starting allocations that rise in equity exposure throughout retirement. Depending on the underlying assumptions, the optimal starting equity exposures are generally around 20 percent to 40 percent and finish at around 40 percent to 80 percent."

Basically, you start low and increase your stocks by 1% annually until your AA meet your goals.  Either the market does it for you and/or you withdraw from your bonds.

The first 5-10 years of your retirement are the most crucial where you don't want to lose a lot like 2002-2003 or 2008-9.   

The following is VWINX vs VWELX without changing AA for 34 years + withdrawal of 4%. To take care of inflation I added another 2.5% to the withdrawal.  See (link)

PortfolioInitial BalanceFinal BalanceCAGRStdevBest YearWorst YearMax. DrawdownSharpe RatioSortino RatioUS Mkt Correlation
VWINX$1 M$2.26 M2.40% 6.49%28.91%-9.84%-18.82% 0.931.550.69
 
VWELX$1 M$3,13 M3.37% 9.86%32.92%-22.30%-32.53% 0.731.110.91
 

 

It is clear that VWINX was a better choice(better SD, Sharp,Sortino) because both met the goal but VWELX had 51.9% more volatility.  This thread will generate the usual, many more posts that claim you can have higher % in stocks, sure you can but it's not a must

Joe, a typical retiree that needs under 3-3.5%(maybe 4%) annually from his portfolio with low SD+risk should have no problem starting with 20-40% in stocks and increase them to 50-60% in the next 20-30 years.  If Joe wants potentially to make more(example: for heirs) then, by all means, he needs to increase his % in stocks but it's not a must.

If Joe needs 4+% annually he must have higher % in stocks because he has no choice, sure, I agree with that too.

If Joe needs only 2% annually he should have no problem with 20% to 80% in stocks because he has enough money.

 

 

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Re: Wellington or Wellesley Income for Retirees

racqueteer:

I agree that successful market timing would be ideal.  I can't see the future.  My wife is smart as a whip but she can't see the future either.  We used "Dollar Cost Averaging" to build our portfolio and have never tried to time the market.  I don't think it would be a good idea to try to start now.

I have also read that the federal reserve has altered their policies and that their response to the last downturn was a little different than before.  I'm not sure the conditions of any downturn is exactly the same.  In 1987 it was computer selling that crashed the market.  I knew a Major at HQ SAC that mortgaged his house to the max and threw it all into the market in 1987.  Even though markets do bounce back I would never have done that.

That said I am not relying on just my little test for information.  The Trinity studies have been updated to 2018.  The result is that authors are now saying its a "4.5% rule" not a "4% rule."

FD1000:

I have read a couple of articles by Kitces and Pfau before.  I understand the upward glide slope strategy just as I understand the Bucket Approach.  I am looking for a simpler approach. 

Micheal Kitces also wrote in 2015 that two-thirds of the time the ending balance is twice the beginning balance and that one-third of the time it is three times the beginning balance.  He recommended periodic reviews and when the portfolio's value was 50% higher than the beginning balance the retiree could give themselves a 10% raise.

If I have read it correctly the table you posted showed an ending balance for Wellesley that was 2.26 times its initial balance.  The ending balance for Wellington was 3.13 times its initial balance.  The ride with Wellington might be bumpier but, like you said, if someone has a secondary goal of leaving something for his heirs then Wellington seems to be the better choice.  And, I agree completely that Wellesley is a good choice if only 3-3 1/2% is taken.  4-5% needs a greater allocation of stock.  I have read that most people have not saved enough for retirement so the higher percentage of stock may be necessary for them.

We have a secondary goal of leaving something to our kids. 

Darn.  I'm now debating with myself again over which is the better fund for her.  My retirement goes away when I die and she will need more than 3%.  But if I hang on longer then our investments will grow and 3% might be enough. I fully intend to hang on but life doesn't always give us what we want.  80% of married women outlive their husbands.  So its not a matter of if a succession plan is needed.  Its a matter of when.

Both Wellington and Wellesley are very good options.  Which is picked depends on individual needs.

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Re: Wellington or Wellesley Income for Retirees

@Mustang , using Portfolio Visualizer 2007-19 will make the calculations in your OP easier. You can test actual/historical inflation-adjusted withdrawals, and also change timeframes easily.

YBB
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Re: Wellington or Wellesley Income for Retirees

What studies done by Bengen and the Trintiy authors based on the returns broad market stocks and bonds, typically, Treasury notes and bonds, is not as relevent to an analysis of the Vanguard Wellington and Wellesley Income funds as using the returns of those funds.  Look at the earlier post in this conversation with a chart of the initial withdrawal rate that each fund has supported for different starting years with the annual withdrawals adjusted for inflation and the end balance equal to the initial balance adjusted for inflation.

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Re: Wellington or Wellesley Income for Retirees

As to depending solely on the income distributions of the Vanguard Wellington or Wellesley Income fund, the following chart is of what the income distributions taken in cash would have been, for the years that both funds have existed.

 

2018-vwelx-vwinx.png

Overall, the inflation-adjusted income distributions of the Wellesley Income fund have decreased over time, while the inflation-adjusted distributions of the Wellington fund have been relatively steady over time.

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Re: Wellington or Wellesley Income for Retirees [SWR, PWR]


@PatMorgan wrote:

What studies done by Bengen and the Trintiy authors based on the returns broad market stocks and bonds, typically, Treasury notes and bonds, is not as relevent to an analysis of the Vanguard Wellington and Wellesley Income funds as using the returns of those funds.  Look at the earlier post in this conversation with a chart of the initial withdrawal rate that each fund has supported for different starting years with the annual withdrawals adjusted for inflation and the end balance equal to the initial balance adjusted for inflation.


Portfolio Visualizer [PV] has Safe Withdrawal Rate [SWR] and Perpetual Withdrawal Rate [PWR] in the Metrics tab.

SWR leads to final balance of $1 [common in withdrawal studies].

PWR leads to final balance that is equal to inflation-adjusted initial balance [less common, but you use it].

I am curious how the PV data compare with your data [I think you use Yahoo Finance data].

For example, for the OP example with PV, Portfolio Visualizer 2007-19

                  SWR         PWR

VWINX     10.62%     4.70%

VWELX     10.23%     5.29%

YBB
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Re: Wellington or Wellesley Income for Retirees [SWR, PWR]


@yogibearbull wrote:.

I am curious how the PV data compare with your data [I think you use Yahoo Finance data].

The withdrawal rates that I calculate tend to be lower than what PV calculates because I take the withdrawal for a year at the end of the previous year, while  PV takes the withdrawal for a year at the end of the year.  My creditors don't give me an interest free loan for up to a year.

In addition, I suspect that I do the inflation adjustment slightly differently than PV, but I have not taken the time to investigate the details.

For 2007 through 2018 (starting date at the end of 2006 and ending date at the end of 2018), I calculate the PWR of VWINX as 3.98% and the PWR of VWELX as 4.13%.  Those calculations use the annual total returns of the funds from Vanguard.

For the distribution data,I usually use what the Morningstar Portfolio Manager reports.  With a few funds I have requested the complete distribution history from Vanguard.  There are some minor differences between the data from Monrningstar and Vanguard.  Yahoo reports the total distribution per share and not a breakdown between the income and capital gain distributions that I need for some calculations.

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Re: Wellington or Wellesley Income for Retirees [SWR, PWR]

@PatMorgan , thanks for providing the data. Those are significant differences in the PWR for VWINX [PV 4.70% vs your 3.98%] and VWELX [PV 5.29% vs your 4.13%].

Unfortunately, timing of annual withdrawals [at end of the periods] cannot be changed in PV. But a change from annual to monthly withdrawals didn't change PV PWR results at all which surprised me. 

Why do you need separate data for dividend and CG distributions for PWR. It seems that you would reinvest all distributions and take withdrawals [which you do at the beginning of the periods] from the balance.

I noticed these SWR and PWR features in PV only today even though I have been using PV for quite a while.

YBB
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Re: Wellington or Wellesley Income for Retirees [SWR, PWR]


@yogibearbull wrote:

Why do you need separate data for dividend and CG distributions for PWR. It seems that you would reinvest all distributions and take withdrawals [which you do at the beginning of the periods] from the balance.


I wrote: "Yahoo reports the total distribution per share and not a breakdown between the income and capital gain distributions that I need for some calculations. [emphasis added]"  I need separate data to generate the chart in a previous post of the income distributions for a year with income distributions taken in cash and capital gain distributions reinvested.  The separate data is not needed to calculate withdrawal rates supported by total returns.

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*

For a 3% draw in 3% inflation 6.19% is needed.

That locks in growth of the draw and the principal on a real basis, with draws at the beginning of the period.

It's the poor little pizza for me.

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Btw

The poor little pizza reliably delivers 3%+ income to replace the 3% draw.

In the absence of being able to actually grow the portfolio replacing the draw is actually a big deal.

 

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Re: Wellington or Wellesley Income for Retirees

Mustang, our secondary goal is also to leave it for our kids but the main one is for us to use it for whatever reason. Do I really care if my kids will have 2 or 3 million left?  it's a lot of money. But, I do care to sleep well at night.  When you are gone your wife probably will be more conservative.

Basically, why not take less risk at least until age 70 and then increase risk.  Over LT VWELX makes about 10-15% more with 50% more volatility which proves it's not worth it unless you must do it.

Trading is a good tool if you know how to use it.

As you know I'm doing it with only 10-15% in stocks. 

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btw

All my risky money will be in the little pizza til i die.

 

 

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Explorer ○

*

Absolutely 0% chance of anything on this thread getting me out of vwiax, more like reinforcement of the position.

🍕🍕🍕🍕🍕🍕🍕🍕🍕🍕

0% chance going forward too.

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Re: *

Here we go again, one-liner Ken posts every hour about Wellesley without any analysis to why and how it works.

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Re: *


@FD1001 wrote:

Here we go again, one-liner Ken posts every hour about Wellesley without any analysis to why and how it works.


In general, the question of why and how it works is vastly different than why and how it worked, in the past, let alone how and why it will work, going forward!

Regardless of how VWINX and VWELX performed, in the past (or VWEHX, VTSMX, VBMFX, et al, for that matter), I would be much more comfortable withdrawing ANY real, inflation adjust amount from an all PDI portfolio than any combo of any of the above, based on the simple fact that PDI currently distributes 8.14% while VWINX (3.06%), VWELX(2.69%), VWEHX(5.73%), VTSMX(1.88%), and VBMFX(2.69%) all distribute considerably less.

ElLobo, de la casa de la toro caca grande
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SWR, PWR for PIMIX, PKO, PDI, PCI

Portfolio Visualizer SWR* and PWR* data since inception for popular Pimco funds is simply astounding. These are historical data.

                 SWR         PWR      Inception-06/2019

PIMIX      13.65%     6.48%     01/2008-06/2019 [includes financial crisis]

PKO         14.45%     9.81%     01/2008-06/2019 [includes financial crisis]

PDI          24.59%    12.31%    01/2013-06/2019 [not crisis tested]

PCI          23.86%    10.28%    01/2014-06-2019 [not bad considering poor start]

*SWR is annual inflation-adjusted withdrawal that just exhaust the initial principal.

*PWR is annual inflation-adjusted withdrawal that have final balance equal to the inflation-adjusted initial principal.

YBB
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Re: SWR, PWR for PIMIX, PKO, PDI, PCI


@yogibearbull wrote:

Portfolio Visualizer SWR* and PWR* data since inception for popular Pimco funds is simply astounding. These are historical data.

                 SWR         PWR      Inception-06/2019

PIMIX      13.65%     6.48%     01/2008-06/2019 [includes financial crisis]

PKO         14.45%     9.81%     01/2008-06/2019 [includes financial crisis]

PDI          24.59%    12.31%    01/2013-06/2019 [not crisis tested]

PCI          23.86%    10.28%    01/2014-06-2019 [not bad considering poor start]

*SWR is annual inflation-adjusted withdrawal that just exhaust the initial principal.

*PWR is annual inflation-adjusted withdrawal that have final balance equal to the inflation-adjusted initial principal.


Why and How?  The answer, of course, is leverage.  2X, twice the return, is 2X the NAV appreciation/depreciation PLUS 2X the distribution yield.  Withdraw less than the yield results in the planting of seed corn.  Remember, these are BOND, not stock, funds!

ElLobo, de la casa de la toro caca grande
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