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Mustang

Just a few thoughts to get the discussion going...

Annualized TR is the constant growth rate needed to get the portfolio value from value1 to value2 over a number of years, with all distributions reinvested.

A portfolio of risky assets is unlikely to experience constant return and if draws are being taken there is some money flowing out of the portfolio.

I think the 2 situations are apples vs oranges. I plan for the latter, the former is more suited for an accumulator.

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What I think is important to a retiree is how he gets his TR...NOT annualized TR, a "smoothing" of individual TRs.

TR is the sum of capital return (NAV plus cap gains) and income return. 

There is more uncertainty in the capital return than the income return so it's natural to tilt toward income return when drawing. IOW there's a shift toward positive cash flow to meet yearly expenses.

Capital returns can be a huge source of positive cash flow, capital losses can be a huge source of share depletion...draw risk.

We're rollin'...

 

 

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Re: Mustang

That is true.  That is one of the reasons I tested withdrawals and sequence of return risk in a spreadsheet (Wellington vs. Wellesley thread).  I wanted to understand it a little better.  I tested the three balanced funds where we have investments.  Two are moderate-allocation (Wellington and AF Balanced) and one is a conservative-allocation fund (Wellesley).  All three are Morningstar 5-star funds.  Looking at 15-year returns Wellington averages 8.23%,  Wellesley 7.08% and Balanced 7.32%.  (American Funds may be one of the best in stocks but I think their bond management lags behind Vanguard's.)

I picked the 2008 crash for the start of retirement.  That was the year that Wellington lost 22% (rounded), Wellesley lost 10% and AF Balanced lost 26%.  Initial withdrawal was 4% adjusted each year for 3% inflation. None of the funds failed.  Wellesley lost less but it still took until 2011 to fully-recover.  Wellington and Balanced both fully-recovered in 2013.

In all three funds withdrawals were at times from selling units (shares) even Wellesley.  With a 10% loss in 2008 the 2009 withdrawal has to come from selling shares.  I don't have a problem with that.  I look at total value not number of shares.

I agree that the current performance (since 2008) might be a bit unusual so I think I will test other periods before making a final decision.

For me the general rule that a lot of authors write about, that you can take a 3% initial withdrawal from assets like Wellesley and 4% from assets like Wellington, is still a good rule of thumb to follow if your planning horizon is 30 years. Mine isn't.  I'm really don't think I'll live to 100 but my wife is younger and women live longer than men.  I just read a report that said 80% of married women will outlive their husbands.

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Re: Mustang


@Mustang wrote:

For me the general rule that a lot of authors write about, that you can take a 3% initial withdrawal from assets like Wellesley and 4% from assets like Wellington, is still a good rule of thumb to follow if your planning horizon is 30 years. Mine isn't.  I'm really don't think I'll live to 100 but my wife is younger and women live longer than men.  I just read a report that said 80% of married women will outlive their husbands.


Please post links to what those authors have written.  The calculations that I have done, see the chart in an earlier reply to you, indicate that for periods of at least 6 years, the Wellesley Income fund supported at least about a 4% initial withdrawal rate while leaving a balance at the end of 2018 equal to the initial balance adjusted for inflation.

Those author are likely making assumptions of what the future returns will be.  Whether those assumptions will turn out to be accurate is not known.

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Re: Mustang

PatMorgan:  I haven't been saving the articles I've read.  I never thought I'd join a discussion forum.  So I went out looking and found only one that talked about a 50/50 mix of Wellesley/Wellington having an 81% chance of lasting 30 year with a 4% initial withdrawal.  I think it said 64% if the retirement period is extended to 35 years.

I believe I have associated information from the Trinity studies for allocations with less than 50% stock with Wellesley and that was a mistake.  Wellesley Income is a managed fund different from the generic allocations in those studies. It also has a greater percentage of stock.

But I also think it would be a mistake to judge the funds performance by only the last few years.  Wellesley is hot right now.  Morningstar reports its 12 month performance is 10.35%.  That is great.  For comparison it reports Wellington at 10.74%.  Both funds are outperforming their categories by over 4 1/2 percentage points. Looking at 3 year and 5 year performance Wellesley did not fare so good. (6.02% to 9.9% and 5.83% to 7.49%)  I just recently added it but I'm now looking at its 15 year performance.  It was 7.08% while Wellington's was 8.23%.  At the 15 year point both funds were beating their categories by almost 2% points.

I stand corrected.  I will stop saying that Wellesley will only support a 3% withdrawal.  It is obviously outperforming a generic conservative allocation fund.  By the way, the same can be said of Wellington compared to a generic moderate allocation fund.  Both are really good funds.

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Re: Mustang


@Mustang wrote:

PatMorgan:  I haven't been saving the articles I've read.  I never thought I'd join a discussion forum.  So I went out looking and found only one that talked about a 50/50 mix of Wellesley/Wellington having an 81% chance of lasting 30 year with a 4% initial withdrawal.  I think it said 64% if the retirement period is extended to 35 years.


The probability of success rates on that web page depend on simulated sequences of returns. In my opinion, actual sequences of returns are more useful.

Using the actual sequence of returns, the lowest initial withdrawal rate, with later annual withdrawals adjusted for inflation, that an annually rebalanced 50:50 VWEIX:VWELX supported over 30 years was 4.64%, starting at the end of 1972. The initial withdrawal rate that was supported over 35 years was 4.47%, again starting at the end of 1972.

Those lowest supported initial withdrawal rates do not include the performance of the funds over the last few years.  They do include the poor performance for 1973 and 1974.

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Re: Mustang

Thank you for that explanation.  Bengen and the Trinity authors use historical returns.  They were looking for a 100% success rate.  Others use Monte Carlo testing.  Many of them believe an 85% success rate is good.  I couldn't understand that until I read that Monte Carlo testing includes scenarios that are somewhat unrealistic such as 5 straight years of losses combined with two years of breakeven.  Looking all the way back to 1929 that has never happened.

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