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Bengen's 4% Distribution Method

We've had a lot of good discussions lately.  In those discussion I have mentioned that I do not believe that one size fits all. That I am a total return investor.  I do not mind selling shares.  All of my dividends and capital gains are reinvested.  I also mentioned that I think some withdrawal strategies are complicated and some provide the desired income less than half the time.  For the "4% rule" below I have summarized the information I included in my succession plan.

Those that want a stable, inflation adjusted income from investments should investigate Bengen's 4% distribution strategy.  He first reported his findings in 1994.  Using general market data he looked at fifty-one 30-year retirement periods starting each year from 1926 through 1976 and showed that if investors had a portfolio of 50% stocks/50% bonds then they would not have run out of money even under the worst conditions.  Bengen tested other asset allocations.  He discovered that a 75/25 stock to bond allocation shorten longevity a year in only two of the fifty-one 30-year periods but on average it accumulated 124% more wealth.  Bengen found that the worst time to retire wasn't 1929 but the high inflation years of the 1970s.  Inflation was the killer.

It is easy to implement. For a 30-year retirement period, the investor multiplies the total portfolio value by 4% to get the first year withdrawal in dollars.  Each subsequent year's withdrawal in is then increased by inflation.  The percent is only used the first year to get the initial withdrawal.

His analysis has been updated by others.  In 2018, again using general market data, Wade Pfau updated the Trinity study which had updated Bengen's study. He looked at retirement periods from 1926-2017.  The success rates below were taken from his charts for a 4% initial withdrawal adjusted for inflation.  It is clear from these charts for the best success that in general the stock allocation of the portfolio should be between 50-75% for all retirement periods.

                                                                                 Success rates for…

                          Allocation                      Period 25 yr.  30 yr.    35 yr.    40 yr.

                        100% stock                            99%        94%        91%        89%       

                          75% stock                          100%       98%        93%        92%

                          50% stock                          100%     100%       97%        87%

                          25% stock                          100%       87%        71%        45%

                            0% stock                            79%        44%        28%        11%

Bengen's rule comes from a desired 30 year retirement.  For other periods the initial withdrawal rate can be more.  The top success rate is for a portfolio that is 75% stock.  The bottom is for a portfolio that is 50% stock.

Initial Withdraw                                                Success rates for…

       Percent       3%                       4%                       5%                     6%                      7% 

      15 years       100/100%        100/100%            100/100%          97/100%             82/85%

      20 years       100/100%        100/100%            100/99%            81/79%              

      25 years       100/100%        100/100%             84/85%              

      30 years       100/100%          98/97%               76/70%

      35 years       100/100%          93/97%

      40 years       100/100%          92/87%

Like others have said, one of the most important things is knowing your budget, subtracting other incomes to know what is needed and calculating the initial withdrawal.  If the investor needs a 6% withdrawal then that investor should not expect the portfolio to last 30 years.  Historically, the probability is pretty low.

It would be nice if everyone used the same probability of success but they don't.  Instead of historical testing some use Monte Carlo testing which is computer generated performance.  The computer can generate some pretty bad sequence of return such as seven years of losses with three years of breakeven.  Those that use Monte Carlo testing screen out those unrealistic scenarios by accepting a lower probability of success.  Many think 85% is good.  That is not true of historical testing.  Those were real scenarios and the investor needs to get as close to 100% as possible.

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Re: Bengen's 4% Distribution Method

Mustang ...   As you say, this is easy to implement.  When I decided to retire in 2013 my retirement money was with Schwab.  My Schwab rep set up an office visit for me with a boutique firm that would handle my retirement account and distribution in retirement.  They would do what you are talking about and like a lot of wealth management companies do.  Essentially, I would own a pie chart of stocks and bonds and every month they would simply turn the spigot and sell uniformly all my holdings sufficient to pay me my monthly dividends.  Maybe, maybe they would look to opportunistically sell what was appreciated but maybe not, and maybe nothing is up.  I am convinced they would be selling stocks that are depreciated because it is easier in order to give me my monthly distribution and this is no-no.  For this they would charge 1% or more of my PV and Schwab would get their fingers in the pie too.  The biggest risk with this is drawing income from sub-optimal sources during prolonged down markets.  This is why I like the buckets of money strategy as all sales come from Bucket 1 which is accumulated cash and low volatility bond OEFs.  

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Re: Bengen's 4% Distribution Method

The 4% rule for the rate of withdrawal with a 60-40 AA is very simple to implement and until the RMD is higher than the initial 4% + inflation adjustment I plan to follow it or, at least, a version of it. However, some people are arguing that it was conceived for a time of 'normal' bond returns, instead of the very lousy percentages of present times.  Two ways around the bad times would be to withdraw less than 4% (e.g. 3.5% or 3%) or alternatively increase your equity weight to 70% or 80%

Once the RMD dictates your withdraw rate the situation becomes more clear because you have a table to know what the percentage is and this percentage is yearly adjusted to account for your age and life expectancy.  

I still have a couple of years before retirement but I plan to initially follow a '3% rule', which along with two SS and a pension will allow us to keep our present standard of living. The thing I am still thinking about is how to generate the cash to withdraw from. Fortunately, I still have a couple of years to go.  

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Re: Bengen's 4% Distribution Method

Mustang,

Great post re Bengen and the 4% withdrawal. As I’m approaching retirement (2 years). I’ve been doing a LOT of reading re “safe withdrawal rates”, etc.

In this environment (extremely low interest rates, relatively high equity valuations), I worry that this MIGHT be that “1 in 100 times” where the 4% rule MIGHT not work. So my plan is to go with 3%, and then adjust down the road (hopefully upward) after 5-10 years or so. Right now, I feel like I’ll need to stay “heavy” in equities, since bonds yield such low amounts. Only real option is to save MORE than we need, just in case.

Win
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Re: Bengen's 4% Distribution Method

 

Good post, Mustang.

You posted that Bengen first reported his results in 1994.  I retired in 1993!!  **bleep**.

Retiring at age 48, I had done computer projections, and the biggest influencer was the inflation rate to use.  In hindsight, a 6% inflation factor was in common use in 1990's...I used 4.5% as a projection as base case.  This turned out to be high; and indeed a low inflation rate helps today.

I used a 40 year look.  At age 88, the game-plan was, if out of money, call our kids and tell them to come and get my wife and me.:-)

My situation was different.  I needed to withdraw 6.8% from portfolio, to get me to age 60, at which time a pension kicked in, and at 62 when Social Security would start.  This allowed me to lower the annual takeout then by a goodly amount. 

BTW Many are unaware that the IRS allows one to withdraw from their IRAs, before age 59 1/2, WITHOUT PENALTY, if they use "substantially equal payments" (like an annuity), per IRS tables, each year.  My 6.8% was in the upper-most range they allowed. 

Today, the unsettled matter is the fact that bonds/bond funds are at historic low yields, and what the effect this is on 4% SWR.  Some now say use 3%SWR!  Also very important: An analysis combining various studies suggested that the 30 year survival was 99% or better, for portfolios between 15% and 85% stocks.  That is, 100% stock or 100% bond portfolios have lower survival rates.  So with low bond rates, tilt to stocks.

This all worked out well, as my portfolio, instead of declining,  has grown much greater than even best case projections.

For those interested in more about the 4% SWR Rule, and to see great curve visualizations, data treatment and calculator, I recommend the work of James Otar, here:

 http://www.retirementoptimizer.com/

You can download for free, or at most $5, his complete work.  IMO it is worth it.

Best to all.

R48

 

 

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Re: Bengen's 4% Distribution Method

In my humble opinion, I wouldn't call this "Bengen's 4% Distribution 'method'".  First, 4% is just a number, representing how much cash a retiree requires whenever they start decumulating.  I wouldn't call a 5% Distribution Method the ElLobo method, simply because that was my 'target' 20 years ago!  8-)

So, here are some other 'methods', more like 'tactics' or 'strategies':

1) Withdraw a REAL X% from a retirement portfolio.

2) Withdraw a NOMINAL X% from a retirement portfolio.

3) Withdraw a FIXED PERCENTAGE X% of the yearly value of a retirement portfolio.

4) Withdraw a VARIABLE PERCENTAGE X% of the yearly value of a retirement portfolio.

5) Withdraw whatever the total value of your living expenses are every year, minus your pension, Social Security, part time wages, rents, and whatever other sources of income you need from you retirement portfolio.  Call this the Ad Hoc method, if you will!

But choosing one of the above is just the first part of your work preparing for the day you turn in your badge and walk out through the security gate.  The second more important job is to figure out what kind of portfolio gives you the greatest chance of not outliving it.

I'll leave it at that, for now.

ElLobo, de la casa de la toro caca grande
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Re: Bengen's 4% Distribution Method

@PaulR888  Even if you had more confidence in the advisor, I think you did well not to give the advisor literally a quarter of your gross annual withdrawal! (It  would be more than a quarter of your withdrawal net of taxes.)

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Re: Bengen's 4% Distribution Method

@PaulR888I wouldn't call what Schwab is doing Bengen's "4% Withdrawal Rule."

@ElLoboYou need to argue with Wikipedia and the rest of the financial community.  Not me.

                  https://en.wikipedia.org/wiki/William_Bengen

I used to have a mostly stock portfolio but as I got closer to MRDs I went to mostly moderate-allocation funds. I wanted to get in that 50-75% stock range. I posted this in another thread.  To sumerize, we have 65.9% of our portfolio in American Funds Balanced Fund. 23.1% in Vanguard Wellington. 6.6% in American Funds Mutual Fund. And, 4.4% in Vanguard Wellesley Income.  American Funds is in IRAs and Vanguard Funds are taxable.

Those are all 5-star funds and there are a lot of other funds just as good or better.  As of today, Morningstar reports that my portfolio would have averaged a 7.34% return for the last 15 years.   A 9.77% return for the last 10 years. And a 7.32% return for the last 5 years.  Heck, for the last 12 months its return was 6.19%.

A simple portfolio like this easily supports the initial withdrawals numbers in those tables.  Remember, the investor is selling shares not trying to live off dividends and capital gains.  Unless there is a huge sequence of return problem good years make up for bad.  That exact same portfolio made only 1.03% in 2015. But, it made 9.53% in 2016, made 15.23% in 2017, lost 2.81% in 2018, made 20.04% in 2019, and has lost 2.94% YTD.  Those returns are as of today.  This year has been rougher than most but ups and downs are pretty normal.  And this type of performance will support "the 4% rule" with something left over for the kids.

P.S. I have talked to exactly three financial advisors in my life.  The first was my company's financial advisor.  He sold me an annuity with somewhat large fees.  It may or may not come in handy but I later learned he was building a new house at the time.

I have talked to two other independent advisors.  After I showed them what I was doing they both said they couldn't help me.  When I pushed the second one he tried to sell me an annuity.  From my experience, financial advisors are nothing more than salesmen.

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Re: Bengen's 4% Distribution Method

A quarter of his income means his final port value is only 75% of what it should be. That's legal robbery.


@Tibbles wrote:

@PaulR888  Even if you had more confidence in the advisor, I think you did well not to give the advisor literally a quarter of your gross annual withdrawal! (It  would be more than a quarter of your withdrawal net of taxes.)


 

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Re: Bengen's 4% Distribution Method

Mustang ..   Only thing I really have to offer at this point is the following link from Paul Merriman website.  It is comprised of historical data from DFA.  The table I am linking is only one of many on his site, but one most relevant to me, a globally diversified portfolio with 70% US/ 30% International breakdown in the equities.  At the top of chart you can see how varying the bond/stock ratio changes the numbers.  The important info is at the bottom, how much are you willing to lose.  Something like this chart and what you are providing using in tandem would help one hone in on an appropriate AA.  

link

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Re: Bengen's 4% Distribution Method

@PaulR888Thanks for the information.  I think that would be very useful for those who manage their own asset asset allocation.  I used it for comparison.  According to Morningstar those funds I have benchmarked have around 9-10% foreign stock (rough calculations).  They would not work for someone who wants 30%.  The benchmark portfolio is also roughly 61% stock and 39% bonds/cash.  I noticed American Funds is sitting on a lot more cash than the Vanguard Funds.

From the table in the link you posted for a 60/40 allocation: 2015 had a 0.7% loss, 2016 a 9.9% gain, 2017 an 11.1% gain, 2018 a 6.8% loss, and 2019 a 16.9% gain

Morningstar's portfolio feature reports that the benchmark portfolio in 2015 had a 1.0% gain, 2016 a 9.5% gain, 2017 a 15.2% gain, 2018 a 2.8% loss and 2019 a 20.0% gain.

Thanks for the information.  Those benchmark funds seem to be keeping up and one of the goals is simplicity.  Something anyone can manage without paying high fees.  There are a lot of really good moderate-allocation funds available but you are right.  Most won't work if the investor needs 30% foreign stock in their portfolio.

 

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Re: Bengen's 4% Distribution Method

How about Vanguard Global Wellington as a moderate allocation fund with 30% foreign stocks? Mix and match with Wellington, which has about 10% foreign stocks, or with another balanced fund to reach your preferred percentage.

Alternatively, if you want to increase your foreign stock percentage, keep 80-90% in your balanced fund and add 10-20% of a foreign stock fund.

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Re: Bengen's 4% Distribution Method

Withdrawals are as easy as pie and you don't need a high cost financial advisor. (Sorry for the editorial.)  But withdrawals are really easy.  When it came time to withdrawal money from my traditional IRA I called American Funds.  The government provides a table of divisors that must be used.  The divisor for age 70 is 27.4.  For age 71 its 26.5. https://www.bankrate.com/retirement/ira-rmd-table/

The mutual fund company calculates the annual withdrawal then divides by 12 to get the monthly amount. It takes out the taxes I requested (20% federal/5% state) and sends me the difference. Yes, I am aware I have a little too much taxes taken out.  But I'd rather get a refund then pay at the end of the year.

Getting withdrawals using the "4% rule" should be almost as easy.  Use the tables to calculate the initial withdrawal rate for the expected retirement period.  Tell the mutual fund company to send you that much. 

It only gets complicated if you have a lot of funds.  I intend to have two mutual funds: Vanguard Wellington and Wellesley Income.  The majority of the investments will be in Wellington.  It earns about 1% point more than Wellesley every year... except down years.  In 2008 Wellington lost 22%.  Wellesley lost 10%. The investor needs to preserve as much investment as possible to build back on.  In most years the withdrawal would come from Wellington but in 2009 it would have come from Wellesley.  That is one of two decisions that needs to be made.

The other is how much.  After the initial withdrawal subsequent withdrawals are increased each year by inflation to provide a stable purchasing power.  Inflation was 1.9% in 2018 and 2.3% in 2019.  The table even forecasts the next couple of years for planning purposes. https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093

For a 20 year retirement a 5% initial withdrawal is likely to be sustainable.  It the portfolio's total value is $1M then the first annual withdrawal in 2017 would be $50,000 ($4167 per month.  Depending on the taxes set up take home would be around $3,125 per month.)  In 2018 the annual withdrawal would be $50,950 and in 2019 the annual withdrawal would be $52,122.

I am open for suggestions but this is how I'm sitting up everything for my wife.  It is easy to implement.  Easy to maintain and it should provide her a stable inflation adjusted income the rest of her life with plenty left over for the kids.

This could also be a solution for anyone who does not enjoy messing with investments daily.  Someone who wants a peace of mind knowing that there is a high probability that they will not run out of money during their lifetime.

P.S.  Any plan that someone has needs to be periodically reviewed and adjustments made.  A plan is only good until first contact with the enemy.  Because of the variability of returns annual reviews are probably too much.  A review every three to five years is probably sufficient.  The future is uncertain.  If returns are less then expected then take out less.  If more than expected then you have an opportunity to take out more.

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Re: Bengen's 4% Distribution Method

Mustang

Good thread.  Reading thru your post I find several good nuggets.

==================

"if investors had a portfolio of 50% stocks/50% bonds then they would not have run out of money even under the worst conditions....It is clear from these charts for the best success that in general the stock allocation of the portfolio should be between 50-75% for all retirement periods."

                                           Success rates for…

                          Allocation                      Period 25 yr.  30 yr.    35 yr.    40 yr.

                        100% stock                            99%        94%        91%        89%       

                          75% stock                          100%       98%        93%        92%

                          50% stock                          100%     100%       97%        87%

                          25% stock                          100%       87%        71%        45%

                            0% stock                            79%        44%        28%        11%

FD: it is clear that 50/50 is the winner and better than 75/25.  Based on history I would even go lower.  See PV(link)

PortfolioInitial BalanceFinal BalanceCAGRTWRRMWRRStdevBest YearWorst YearMax. Drawdown
VWELX$1,000,000$7,672,518 5.92% 10.28%11.70%10.02%32.92%-22.30%-32.53% 
VWINX$1,000,000$5,604,081 4.99% 9.31%10.70%6.59%28.91%-9.84%-18.82% 

 

As you can see above, VWINX with under 40% in stocks did what you need but the more interesting facts are

1) VWELX with over 60% in stocks only made 1% more annually   

2) VWELX SD was more than 50% higher but for an average investor is looks much worse, in 2008 the loss was more than twice as bad.  At the bottom VWELX lost over 30%. This can rattle an investor to make bad decisions.

You can be at 40-45% in stocks.

=========================

"A simple portfolio like this easily supports the initial withdrawals numbers in those tables."..."It only gets complicated if you have a lot of funds.  I intend to have two mutual funds: Vanguard Wellington and Wellesley Income.  The majority of the investments will be in Wellington."

FD: Bingo, KISS.  No need more than 2-3 funds and, definitely not buckets. A great US based moderate/conservative fund will do it.  No need for special funds such as SC, international, CEFs and others

=========================

I have talked to two other independent advisors.  After I showed them what I was doing they both said they couldn't help me.  When I pushed the second one he tried to sell me an annuity.  From my experience, financial advisors are nothing more than salesmen.

FD: Bingo, you are ready.

 

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Re: Bengen's 4% Distribution Method

@ElLoboYou need to argue with Wikipedia and the rest of the financial community.  Not me.

                  https://en.wikipedia.org/wiki/William_Bengen

I'm not arguing whether or not he was the first person to articulate the 4% withdrawal rate as a rule of thumb for retirement withdrawal rates from retirement savings.  I'm saying it's not a 'method', as defined by Merriam-Webster.  It's a 'goal', not the process or procedure for attaining the goal:

https://www.merriam-webster.com/dictionary/method

Here's the distinction.  I, like you, have a retirement goal.  Yours is to construct a portfolio that supports, say, a real, inflation adjusted 4% rate of withdrawal, for the next 30 years, without depleting your nestegg.

I have a similar goal, but mine is a real, inflation adjusted 5%.

You go through all that you are describing in this thread, which makes perfect sense, and is well researched.  That's your method, which you ascribe to Bengen.

On the other hand, my method is to construct a portfolio that distributes at least 5% cash each year and increases that amount by inflation each year.  I don't do anything that Bengen recommended way back when.

SO, if the purpose of THIS thread is to discuss retirement withdrawal methods, let's do it.  On the other hand, if the purpose of this thread is to get into the nitty gritty details of how you might achieve a real 4% doing what Bengen described, again have at it.  I have nothing to add.

ElLobo, de la casa de la toro caca grande
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Re: Bengen's 4% Distribution Method

@FD1001Thank you for your response.  I've never used Portfolio Visualizer before.  I found it very interesting and, in general,it  backs up my other research.  Confirmation is nice.

Yes, according to Bengen's data a 50/50 portfolio is best.  He also discovered that a 75/25 stock to bond allocation shorten longevity a year in only two of the fifty-one 30-year periods he tested but on average it accumulated 124% more wealth.  Portfolio Visualizer shows Wellington (roughly 60/40) as having a significantly higher ending balance than Wellesley (40/60).  I made the stock allocation a range because that is a risk reward trade-off.

With a secondary goal of leaving something for the kids, a higher stock percentage in Wellington seems a better fit.  If not for that Wellesley would be the number one choice.  As it is I will be using Wellesley as a down market fund.

The only difference between Bengen's (Trinity studies and others) is that Portfolio Visualizer appears to use a constant 4% withdrawal instead of a 4% initial withdrawal with subsequent withdrawals increased for inflation.

Again, thank you for that information and your comments. 

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@FD1001Thank you for your response.  I've never used Portfolio Visualizer before.  I found it very interesting and, in general,it  backs up my other research.  Confirmation is nice.

Yes, according to Bengen's data a 50/50 portfolio is best.  He also discovered that a 75/25 stock to bond allocation shorten longevity a year in only two of the fifty-one 30-year periods he tested but on average it accumulated 124% more wealth.  Portfolio Visualizer shows Wellington (roughly 60/40) as having a significantly higher ending balance than Wellesley (40/60).  I made the stock allocation a range because that is a risk reward trade-off.

With a secondary goal of leaving something for the kids, a higher stock percentage in Wellington seems a better fit.  If not for that Wellesley would be the number one choice.  As it is I will be using WellesPortfoley as a down market fund.

The only difference between Bengen's (Trinity studies and others) is that Portfolio Visualizer appears to use a constant 4% withdrawal instead of a 4% initial withdrawal with subsequent withdrawals increased for inflation.

Again, thank you for that information and your comments. 


Portfolio Visualizer allows you to use either a nominal or real rate of withdrawal (my first two 'methods'), allows yearly or monthly withdrawals, and also allows the withdrawal of a fixed percentage, my third 'method'.  So it goes well beyond 'Bengen's Method'! 8-)

ElLobo, de la casa de la toro caca grande
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Re: Bengen's 4% Distribution Method


@FD1001 wrote:

Mustang

Good thread.  Reading thru your post I find several good nuggets.

==================

"if investors had a portfolio of 50% stocks/50% bonds then they would not have run out of money even under the worst conditions....It is clear from these charts for the best success that in general the stock allocation of the portfolio should be between 50-75% for all retirement periods."

                                           Success rates for…

                          Allocation                      Period 25 yr.  30 yr.    35 yr.    40 yr.

                        100% stock                            99%        94%        91%        89%       

                          75% stock                          100%       98%        93%        92%

                          50% stock                          100%     100%       97%        87%

                          25% stock                          100%       87%        71%        45%

                            0% stock                            79%        44%        28%        11%

FD: it is clear that 50/50 is the winner and better than 75/25.  Based on history I would even go lower.  See PV(link)

PortfolioInitial BalanceFinal BalanceCAGRTWRRMWRRStdevBest YearWorst YearMax. Drawdown
VWELX$1,000,000$7,672,518 5.92% 10.28%11.70%10.02%32.92%-22.30%-32.53% 
VWINX$1,000,000$5,604,081 4.99% 9.31%10.70%6.59%28.91%-9.84%-18.82% 

 

As you can see above, VWINX with under 40% in stocks did what you need but the more interesting facts are

1) VWELX with over 60% in stocks only made 1% more annually   

2) VWELX SD was more than 50% higher but for an average investor is looks much worse, in 2008 the loss was more than twice as bad.  At the bottom VWELX lost over 30%. This can rattle an investor to make bad decisions.

You can be at 40-45% in stocks.

..................

 


I  think you are giving far to much credence to past performance. Going forward, a long period of time, the longer that period, the more unique the period becomes, the less one is able to derive any interpretative meaning from that past period of time.

Secondly, VWELX has recently changed its stock holding too much for any meaningful predictions from past performance, I suggest you due diligence of the equity sleeve of the fund and see for yourself the significant difference, too much a difference for any meaningful predictive conclusion based on past performance.

Given the nature of active funds, past performance beyond five, maybe seven years, is questionable, unless the management never makes any changes in equity holdings, which would make it a poorly managed fund, in most cases. Long term past performance of active funds, compared to index funds only tells one thing, whether the management has any worthy talent, or not.

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Re: Bengen's 4% Distribution Method

I have read somewhere, but I don't remember where, how just taking your required RMD's compares so the 4% Distribution Rule, and other distribution methods. Does anyone have this info

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Re: Bengen's 4% Distribution Method

@jody49  Below I'll paste in what I posted earlier on the RMD method, which is the withdrawal strategy I prefer.

 

4% (inflation adjusted) is a modest annual drawdown, especially for those of us very unlikely to live 30 more years. It should provide generously for heirs! For maximizing one’s own spending, retirement researcher Wade Pfau likes the “actuarial” approach implicit in the IRS’s RMDs—or an aggressive form of the approach. (What is said to justify the aggressiveness is that the RMDs are designed on the assumption that funds subject to them will earn 0%.) Here’s a link to a Pfau article on this:

https://retirementresearcher.com/retirement-spending-required-minimum-distributions/

Here the strategy is compared with other drawdown strategies:

https://retirementresearcher.com/comparing-retirement-spending-rules-using-historical-data-xyz-rule/

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