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Re: Bengen's 4% Distribution Method


@jody49 wrote:

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


It doesn't compare at all to the Bengen method being described in this thread.  It is what I call method #4:

1) Withdraw a REAL X% from a retirement portfolio.  Bengen method, given amount of cash, rising each year with inflation

2) Withdraw a NOMINAL X% from a retirement portfolio.  Bengen method without a yearly inflation adjustment

3) Withdraw a FIXED PERCENTAGE X% of the yearly value of a retirement portfolio.  Amount of cash withdrawn is a given percentage of the yearly value, similar to RMDs

4) Withdraw a VARIABLE PERCENTAGE X% of the yearly value of a retirement portfolio. RMDs from an IRA, similar to method 4 but the percentage is variable

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!  What almost every retiree that I know actually does during retirement!  8-))

Every year, the IRS tells you that you are required to withdraw some percentage of the end of the year value of your IRA.  The percentage isn't constant.  It depends on a few things, specifically your expected lifetime, whether it's an inherited IRA, whether you are the spouse or a child of the deceased IRA owner, and other things.  Whatever the percentage, you multiply it by the end of the year value of the IRA and that's how much cash you need to withdraw from the IRA.

The IRS doesn't care what you do with that cash.  In fact, you don't really have to sell fund shares and withdraw the cash.  You can do an 'in kind' transfer of those shares from the IRA to a regular taxable account, so there is no buy/sell transaction costs.

What the IRS DOES require you to do is to treat the RMD as regular income, and pay taxes on it.  So, for the 'in kind' transfer, you can pay the taxes from some other income you might have, like Social Security or a pension.  The IRS doesn't care.

You also have to transfer the shares to a regular taxable account.  You can't transfer them to another IRA, even a Roth.  Transfer to a Roth is considered a Roth Conversion.  You pay taxes on such a conversion but your conversion doesn't count against your RMD requirement.

At any rate, the Bengen method is to withdraw, and spend, a given amount of cash each year, the amount increasing each year with inflation.  A RMD is a variable percentage of the yearly value of the IRA, not your whole portfolio, aka my method #4!

One final point.  Although the percentage of the yearly value of the Traditional IRA that the IRS requires you to take out and pay taxes on each year ALWAYS goes up as you grow older, it never gets to 100%.  The percentage starts a bit under 4% and gets to 4% fairly soon after RMDs start.  At your age 115, the RMD happens to be 52.63% but stays at that lever for the rest of your life.

The RMD percentage is calculated simply by taking the inverse of your expected lifetime, which is given in this table:

IRA required minimum distribution 
 
Age of retireeDistribution period (in years)RMD%Age of retireeDistribution period (in years)RMD%
7027.43.65%939.610.42%
7126.53.77%949.110.99%
7225.63.91%958.611.63%
7324.74.05%968.112.35%
7423.84.20%977.613.16%
7522.94.37%987.114.08%
76224.55%996.714.93%
7721.24.72%1006.315.87%
7820.34.93%1015.916.95%
7919.55.13%1025.518.18%
8018.75.35%1035.219.23%
8117.95.59%1044.920.41%
8217.15.85%1054.522.22%
8316.36.13%1064.223.81%
8415.56.45%1073.925.64%
8514.86.76%1083.727.03%
8614.17.09%1093.429.41%
8713.47.46%1103.132.26%
8812.77.87%1112.934.48%
89128.33%1122.638.46%
9011.48.77%1132.441.67%
9110.89.26%1142.147.62%
9210.29.80%115 and older1.952.63%

 

Hope this answers your question.

 

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

Thank you all for your posts with information and links. I am amazed at all the knowlege! I now need to take my time reading it all and sorting thru it for my own situation.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

.....

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. 


In PV, once you set "Withdraw a fixed amount" calculated as 4% of initial balance, a window asks about Inflation-Adjustment and you can click Yes or No. If you click Yes, that is then 4% of initial balance plus annual inflation adjustment. If you click No, then that is constant withdrawal you noted above.

YBB
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Re: Bengen's 4% Distribution Method

I use an alternate method.  Every year I list all my known expenses for everything; taxes, food, shelter, utilities, auto, rx, insurances, etc.  If something changes, or a new ongoing expense comes up, I change the list.  I then compare that to my current investment income, as I don't really want to stick to a budget or scrimp, to see where I stand $ wise.  Right now, my taxable dividends plus s/s covers all, with my RMD payments left over for whatever.  An added bonus is when the wife says she needs something I can say "go right ahead" and be a hero.  Currently I am 100% bond funds and CD's.  I am withdrawing 3.3% for necessities, but can go as high as 5 % without spending principle.  It was not always this way.  When first retiring I was 50/50.  That was 01/2007.  Two years later, my portfolio was down $200K, my new house had lost 1/2 its value, and the worst investment I ever made, non-tradable (also known as private) bond Reits were locked up with dividends eliminated for the next 4 years.  By the time they could be redeemed, they had been converted to stocks, marked to market, and I permanently lost another $50K selling them.  It took 6 years to make back stock losses and never recouped the housing loss. Sequence of returns risk is real. The first year or two of retirement should be your trial period as you gauge expenses, and you may want to keep your stock % lower to see how you handle market fluctuations without a steady paycheck coming in.  I do miss the go-go stock years of the 90's, but having experienced the great recession first hand, am now afraid of losing it all while retired, so will stick to bonds and adjust my buying as necessary, based on dividends.  At IRS.gov you can download a chart for figuring RMD's.  If you follow it, you will never run out of cash.                                                                                                                  

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Re: Bengen's 4% Distribution Method


@madphil wrote:

I use an alternate method.  Every year I list all my known expenses for everything; taxes, food, shelter, utilities, auto, rx, insurances, etc.  If something changes, or a new ongoing expense comes up, I change the list.  I then compare that to my current investment income, as I don't really want to stick to a budget or scrimp, to see where I stand $ wise.  Right now, my taxable dividends plus s/s covers all, with my RMD payments left over for whatever.  An added bonus is when the wife says she needs something I can say "go right ahead" and be a hero.  Currently I am 100% bond funds and CD's.  I am withdrawing 3.3% for necessities, but can go as high as 5 % without spending principle.  It was not always this way.  When first retiring I was 50/50.  That was 01/2007.  Two years later, my portfolio was down $200K, my new house had lost 1/2 its value, and the worst investment I ever made, non-tradable (also known as private) bond Reits were locked up with dividends eliminated for the next 4 years.  By the time they could be redeemed, they had been converted to stocks, marked to market, and I permanently lost another $50K selling them.  It took 6 years to make back stock losses and never recouped the housing loss. Sequence of returns risk is real. The first year or two of retirement should be your trial period as you gauge expenses, and you may want to keep your stock % lower to see how you handle market fluctuations without a steady paycheck coming in.  I do miss the go-go stock years of the 90's, but having experienced the great recession first hand, am now afraid of losing it all while retired, so will stick to bonds and adjust my buying as necessary, based on dividends.  At IRS.gov you can download a chart for figuring RMD's.  If you follow it, you will never run out of cash. By the way, I totally blame Trump and the Fed for the lousy bond and CD returns.  They really stuck it to seniors  while trying to cover their spending mess.  In 10 years your grandkids will be asking if we were all on crack back then.                                                                                                                 


That seems to be a combination of what I call methods #4 and #5!  BTW, you do about the same as I!  8-))

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


@FatKat wrote:


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.


VWELX has changed its stocks holding not only recently but throughout its history. Past performance should not be used as an absolute, but how the fund has done relative to other funds over many years is likely meaningful.

The fund has always been managed by Wellington Management. The individuals who manage the portfolio have changed over time, but the management firm has had a consistent approach, except from the late 1960s to the late 1970s as a result of Wellington Management merging with a more aggressive investment management firm, a merger that John Bogle called his biggest mistake.

As far as I can tell, the most recent public release of the portfolio holdings of VWELX was for the end of March 2020, about two and half months ago.  The portfolio holdings at the end of December 2019 and March 2020 indicate that 19% of the stocks in the fund at the end of December 2019 were not in the fund at the end of March 2020, and 12% of the stocks in the fund at the end of March 2020 were not in the fund at the end of December 2019.

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Re: Bengen's 4% Distribution Method


@PatMorgan wrote:

@FatKat wrote:


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.


VWELX has changed its stocks holding not only recently but throughout its history. Past performance should not be used as an absolute, but how the fund has done relative to other funds over many years is likely meaningful.

The fund has always been managed by Wellington Management. The individuals who manage the portfolio have changed over time, but the management firm has had a consistent approach, except from the late 1960s to the late 1970s as a result of Wellington Management merging with a more aggressive investment management firm, a merger that John Bogle called his biggest mistake.

As far as I can tell, the most recent public release of the portfolio holdings of VWELX was for the end of March 2020, about two and half months ago.  The portfolio holdings at the end of December 2019 and March 2020 indicate that 19% of the stocks in the fund at the end of December 2019 were not in the fund at the end of March 2020, and 12% of the stocks in the fund at the end of March 2020 were not in the fund at the end of December 2019.


Changes in VWELX/VWENX due to manager change are pointed out in the most recent April 2020 analyst report. Basically, it will have lesser value [fewer cyclicals - energy, financals] and more growth [more GARP] orientation but will still have LC-blend style overall.   https://community.morningstar.com/t5/forums/forumtopicprintpage/board-id/bonds/message-id/6708/print...

YBB
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Re: Bengen's 4% Distribution Method

@yogibearbullI read the information in your link.  That must be why Morningstar has changed Wellington's category from large cap value to large cap blend.  With all of the news I've been reading about companies forgoing or cutting back their dividends that is probably a good change.

But Wellington is just one fund in my benchmark portfolio.  American Funds Balanced Fund is almost three times its size and it has pretty much always been a large cap blend fund.  Its 15-year return is 7.18% while Wellington's is 7.87%.  Its 10-year return is 9.89% while Wellington's is 9.59%. They are virtually tied at the 5 and 3 year points.  But for the last 12-months Balanced Fund is outperforming Wellington's 6.98% to 5.63%.  I can't see the future but it seems like its time to go a little more growth oriented.

@FatKat  Great discussion.  Thank you for pointing that out.

 

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@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.

 


I don't need a 30% foreign stock allocation.  I happen to have it in the equity portion of my Rollover IRA.  But someday I anticipate inheritance so will have more in allocation/balanced funds in my Trust account.  And I won't be filtering for 30% foreign stock.  I thought the linked table I provided would offer a different perspective to Bengen.  Bengen suggests the best allocation for long term longevity but I think it is useful to prepare one's psyche for the possible worst case drawdowns based upon many years, even though the table does not match up exactly with the allocations you are talking about.  I am a little more conservative than you and my 5 allocation/balanced funds I prefer at this time, in order of preference, are:  VWINX, FMSDX, USBLX, MACFX and HBLVX.  

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Re: Bengen's 4% Distribution Method

Tibbles posted this article in a different 4% withdrawal thread.  It is a very interesting article comparing Bengen’s “4% Rule” (What Pfau calls Constant Inflation Adjusted Spending – BASELINE) to other withdrawal strategies some of which ElLobo mentioned in one of his posts.

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

It is basically another confirmation that Bengen’s “4% rule” works.  Wade Pfau tested these strategies on a 50/50 portfolio using a PAY RULE program.  Since I want to be neither overly optimistic nor overly pessimistic I focused more on the 50th percentile line in the tables.  It is important to remember that the goal of these tests is to use up almost all the money at the 10th percentile or worst case scenario.

In his BASELINE the opportunity to spend or purchasing power doesn’t change. (Note: I consider it an opportunity because we do not have to spend it all.)  Using a constant percent with no inflation adjustments purchasing power decreases 79% over 30 years.  The more you spend now the less you can spend later.  And, as with all percent-of-portfolio methods volatility is horrible.  In other articles I have read that it results in lower than desired income 48% of the time.

His third strategy jogged something in my memory.  I read an article once that said retirees spend less as they grow older.  This means that the annual increases can be somewhat less than the standard inflation rate.  His third withdrawal strategy is half inflation adjusted and half not.  This strategy would work for people who need an initial withdrawal greater than 4% for their 30 year retirement.  Pfau’s initial withdrawal was 5.45%.  And this is easy to implement.  Just multiply the first withdrawal’s dollar amount by half the inflation rate to calculate subsequent withdrawals instead of the full inflation rate.

He goes on to discuss several other strategies.  Some are more complicated than others.  But they all successfully passed the test.  Since my goal is a stable income for my wife, I still like Bengen’s “4% rule” best. (Please remember, the initial withdrawal doesn’t have to be 4%.  It varies depending on the expected length of the retirement period.)

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

Tibbles posted this article in a different 4% withdrawal thread.  It is a very interesting article comparing Bengen’s “4% Rule” (What Pfau calls Constant Inflation Adjusted Spending – BASELINE) to other withdrawal strategies some of which ElLobo mentioned in one of his posts.

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

It is basically another confirmation that Bengen’s “4% rule” works.  Wade Pfau tested these strategies on a 50/50 portfolio using a PAY RULE program.  Since I want to be neither overly optimistic nor overly pessimistic I focused more on the 50th percentile line in the tables.  It is important to remember that the goal of these tests is to use up almost all the money at the 10th percentile or worst case scenario.

In his BASELINE the opportunity to spend or purchasing power doesn’t change. (Note: I consider it an opportunity because we do not have to spend it all.)  Using a constant percent with no inflation adjustments purchasing power decreases 79% over 30 years.  The more you spend now the less you can spend later.  And, as with all percent-of-portfolio methods volatility is horrible.  In other articles I have read that it results in lower than desired income 48% of the time.

His third strategy jogged something in my memory.  I read an article once that said retirees spend less as they grow older.  This means that the annual increases can be somewhat less than the standard inflation rate.  His third withdrawal strategy is half inflation adjusted and half not.  This strategy would work for people who need an initial withdrawal greater than 4% for their 30 year retirement.  Pfau’s initial withdrawal was 5.45%.  And this is easy to implement.  Just multiply the first withdrawal’s dollar amount by half the inflation rate to calculate subsequent withdrawals instead of the full inflation rate.

He goes on to discuss several other strategies.  Some are more complicated than others.  But they all successfully passed the test.  Since my goal is a stable income for my wife, I still like Bengen’s “4% rule” best. (Please remember, the initial withdrawal doesn’t have to be 4%.  It varies depending on the expected length of the retirement period.)


From the reference:

"In this analysis, we want all of the strategies to have a 10% chance that their real wealth will fall below $15,000 from an initial $100,000 by year 30 of retirement. We’ll further assume that we are using a 50/50 portfolio of stocks and bonds and is based on rolling periods from history. You can see the results in the table below.

spending4

That's the traditional problem with this stuff.  It's very easy to define a strategy, or method, that worked in the past.  You simply 'tweek' your model and see what happens.  Actually, what HAPPENED, in the past.  This fund worked better than THAT fund, as long as you kept X% in 5 buckets and didn't start your retirement in 1965, for example!!!!!

But what about going forward?  Using historical return sequences (rolling periods from history) limits the usefulness of your statistics.  As does the use of Monte Carlo simulations, with input data (average annualized returns, SD risks, and correlation coefficients of those returns) based upon that same historical data.  Especially whenever you can't really consider Black Swan events.

Nevertheless, given all of these uncertainties, how will you, or anyone else, ever figure out which of these permutations, to the Bengen method, is better, or worse, and, if so, by how much?  Furthermore, once you start down the actual retirement path, conforming religiously to whatever method you choose, how far down the path can you get before you decide that your Plan A isn't going to work and so you switch to Plan B.  And if that Plan B is better than continuing on down the road with Plan A, why did you start with Plan A on the day you retired?

It's been the collective retirement withdrawal strategy wisdom within the M* village, especially on the Investing During Retirement and the Income and Dividend Investing forums over the last 2 decades that most of you looking to turn in your badge can quite comfortably plan to take a 3-4% yearly draw on your nestegg and not worry too much about spending down your nestegg sometime in the next 30 years.

The same wisdom seems to be that you'll be OK regardless of what your stock/bond allocation happens to be, whether or not your include international stocks or bonds, whether you go with index or active funds, individual stocks, individual bonds, value, growth, high yield, diversified or not, simply because there is absolutely no way to use 'past performance data' to predict the future performance!

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

Paul Merriman has also posted many items on this over the years,  Attached is link of many tables that he walks through in some of his podcasts as well as an article.  

link

link

Over the years, I have followed the table, Conservative Worldwide (70% US/ 30% Int'l) Fixed Distribution Schedule ($40,000).  It is amazing to see at the end of the data what the original amount grew to despite the total distribution takeout.

And notwithstanding the above information, another take on this is, if you continue to live only on the distribution kickoff of your portfolio (i.e., yield), you will never run out of money.  

 

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

Paul Merriman has also posted many items on this over the years,  Attached is link of many tables that he walks through in some of his podcasts as well as an article.  

link

link

Over the years, I have followed the table, Conservative Worldwide (70% US/ 30% Int'l) Fixed Distribution Schedule ($40,000).  It is amazing to see at the end of the data what the original amount grew to despite the total distribution takeout.

And notwithstanding the above information, another take on this is, if you continue to live only on the distribution kickoff of your portfolio (i.e., yield), you will never run out of money.  

 


+1

Furthermore, if that portfolio distribution yield equates to your desired rate of withdrawal, say 4%, AND the distribution cash itself grows over time, say by inflation, you have just matched the Bengen method at a 100% Probability of Success!

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


@ElLobo wrote:

@PaulR888 wrote:

Paul Merriman has also posted many items on this over the years,  Attached is link of many tables that he walks through in some of his podcasts as well as an article.  

link

link

Over the years, I have followed the table, Conservative Worldwide (70% US/ 30% Int'l) Fixed Distribution Schedule ($40,000).  It is amazing to see at the end of the data what the original amount grew to despite the total distribution takeout.

And notwithstanding the above information, another take on this is, if you continue to live only on the distribution kickoff of your portfolio (i.e., yield), you will never run out of money.  

 


+1

Furthermore, if that portfolio distribution yield equates to your desired rate of withdrawal, say 4%, AND the distribution cash itself grows over time, say by inflation, you have just matched the Bengen method at a 100% Probability of Success!


Terrible idea to depend on high distributions without looking at performance + risk attributes.

Suppose you started on 01/2015 with AMLP instead of SPY because AMLP covers your 4% + more while SPY doesn't. PV(link) shows that after about 5 years starting with one million and taking 4% withdrawals selecting AMPL was a terrible choice.

Table.PNG

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Re: Bengen's 4% Distribution Method

@Mustang 

Pfau has another table comparing the very same withdrawal rules, but based on the assumption of a 4% initial withdrawal for each rule from a $100,000 accumulation, using a 50-50 allocation. The withdrawal is then adjusted annually for 30 years in accord with each rule. (The results are based on rolling 30-year periods from 1996 to 2015.) For most purposes, this provides a more useful comparison than the one assuming vastly different initial withdrawals for each rule. I’d love to post the table, which has all of the same columns, but I don’t see it online anymore and don’t want to infringe its 2018 copyright. I’ll report some of the results, just for the 50th and 10th percentiles.

1. Bengen (“Constant Inflation-Adjusted Spending, Baseline”)
Real spending in 10/20/30 years, 50th percentile: $4,000/$4,000/$4000
Real spending in 10/20/30 years, 10th percentile: $4,000/$4,000/$4000
Remaining wealth after 30 years, 50th/10th percentile: $124,740/$27,730

2. Kitces Ratcheting Rule
Real spending in 10/20/30 years, 50th percentile: $4,000/$5,320/$7,090
Real spending in 10/20/30 years, 10th percentile: $4,000/$4000/$4000
Remaining wealth after 30 years, 50th/10th percentile: $79,500/$25,630

3. Modified RMD Rule (1.24 times the RMD, not 1.6, as in the other table)
Real spending in 10/20/30 years, 50th percentile: $5,080/$6,650/$6,220
Real spending in 10/20/30 years, 10th percentile: $3,200/$3,620/$4,250
Remaining wealth after 30 years: $41,570/$30,250

At the 90th percentile, rule 3 lets you spend really big, but still leaves only about $70K for heirs. The size of my legacy is not a major concern, and I prefer rule 3 for its simplicity. Spending needs can vary greatly from year to year: new car, new roof, needs of children, medical expenses. Maybe I needed to spend 8% of my assets last year. If I’m on the Bengen plan, now what? If I have a dedicated emergency fund and/or new-car fund and/or indulgence fund, separate from the assets to which the 4% rule is applied, how much should the fund(s) contain and how should they be replenished? Ugh, I don’t want those complications. With the standard or modified RMD rule, I spend what I need to spend and then, for next year, I do what I always do: take the RMD%, or the modified RMD%, for my age and remaining accumulation. No need for separate funds or for modifications of my earlier strategy. As with the 4% rule, of course, there’s no need to take the entire amount allowed by the modified RMD rule. The rule serves to tell you the maximum you can comfortably take. The RMD stategy can be applied to taxable as well as to tax-deferred funds.

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Re: Bengen's 4% Distribution Method

 

If anyone is concerned about what percentage withdrawal to use, consider doing this:

Retire again each year!

That is, after your first retirement year ends, let's say 31 December, you are no different than a person considering retiring then, but you have an N - 1 retirement period.  That is, you now need a 29 year look.  Then next december you need a 28 year survival...etc.  You then adjust your spending/withdrawing accordingly.

Fact is, with a 99% assurance, most retirees will have more than enough...a portfolio growing more than worse-case scenario.  Thus you will likely be adjusting allowable spending upward much more than downward, by this approach.  

Retiring at age 48, I did this--reconsidering where I was each 31 December.  However, after a while I realized I would likely never run out of money, and I simply never ran any portfolio survival calculations again.

R48

 

 

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Re: Bengen's 4% Distribution Method

A basic principle to follow in a dynamic optimization under uncertainty is redo the calculation periodically with realized outcomes.   Following the 4% rule can often result in unnecessary under spending.   One easy way to redo retirement income computation is to use a (or two) good retirement income calculator each year with updated data.   Schwab is introducing a promising free retirement income calculator although it still looks like it needs more work.    I have not checked MaxiFiPlanner but it may be worth a look (at a cost).   It is a shame that Vanguard does not provide a decent retirement income calculator with all their resources.   TRP retirement income calculator is better but still needs improvement.

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Re: Bengen's 4% Distribution Method


@FD1001 wrote:

@ElLobo wrote:

@PaulR888 wrote:

Paul Merriman has also posted many items on this over the years,  Attached is link of many tables that he walks through in some of his podcasts as well as an article.  

link

link

Over the years, I have followed the table, Conservative Worldwide (70% US/ 30% Int'l) Fixed Distribution Schedule ($40,000).  It is amazing to see at the end of the data what the original amount grew to despite the total distribution takeout.

And notwithstanding the above information, another take on this is, if you continue to live only on the distribution kickoff of your portfolio (i.e., yield), you will never run out of money.  

 


+1

Furthermore, if that portfolio distribution yield equates to your desired rate of withdrawal, say 4%, AND the distribution cash itself grows over time, say by inflation, you have just matched the Bengen method at a 100% Probability of Success!


Terrible idea to depend on high distributions without looking at performance + risk attributes.

Suppose you started on 01/2015 with AMLP instead of SPY because AMLP covers your 4% + more while SPY doesn't. PV(link) shows that after about 5 years starting with one million and taking 4% withdrawals selecting AMPL was a terrible choice.

Table.PNG


Clueless and wrong as usual.  I keep a diversified portfolio with no sector above 12% and no stock above 4% and no fund above 7%.  And my portfolio yield of 4% is what Josh Peter's managed to and is my SWR.  This is better than any concoction of bond funds you come up with and claim to invest at least $300K.

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Re: Bengen's 4% Distribution Method


@retiredat48 wrote:

 

If anyone is concerned about what percentage withdrawal to use, consider doing this:

Retire again each year!

That is, after your first retirement year ends, let's say 31 December, you are no different than a person considering retiring then, but you have an N - 1 retirement period.  That is, you now need a 29 year look.  Then next december you need a 28 year survival...etc.  You then adjust your spending/withdrawing accordingly.

Fact is, with a 99% assurance, most retirees will have more than enough...a portfolio growing more than worse-case scenario.  Thus you will likely be adjusting allowable spending upward much more than downward, by this approach.  

Retiring at age 48, I did this--reconsidering where I was each 31 December.  However, after a while I realized I would likely never run out of money, and I simply never ran any portfolio survival calculations again.

R48

 

 


Actually, this is what most of us do anyhow, whenever you think about it.  Except that you don't have to do n, n-1, . . . . calculations every year.

So, for example, say you have a retirement nestegg worth $104,000 on the day you turn in your badge.  You want to withdraw that real 4%, and so you know that you will be withdrawing $4,000 in year 1.  Since you receive pension and Social Security monthly, you want to take monthly withdrawals from your portfolio.  $4,000/year is $333/month, so round down to $300.

Your initial nestegg is $100,000 in stocks, bonds, and funds, while you set aside a bit more than 1 year of retirement withdrawals in a money market account, or the extra $4000.

Each month, you take $300 from your money market account and send it to your bank.  On the other hand, all stock dividends, bond interest, and fund distributions are NOT reinvested, being taken as cash, in your money market account.

It's clear that, as long as your PORTFOLIO distribution yield is at least 4%, then $4,000, or more, goes into money market each year, from your portfolio.  In other words, more cash goes INTO money market, from you stocks/bonds/funds, than is taken out and sent to your bank.

On the other hand, if the portfolio distribution yield is less than 4%, less cash goes in than is taken out.  Eventually, you will end up depleting your money market account, but it won't be in that first year.  It will be well into your second year, maybe even the third year.  Nevertheless, once a year, at the end of the year, you would sell off enough of your stocks, bonds, or funds to bring money market back up to $4000.

Or maybe even $4,120, ifn you are taking a real 4% from your portfolio and inflation were 3% for the year.

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

@Tibbles 

I thought the modified RMD method was interesting but I thought 1.6 times the RMD rate was a bit too much.  At 1.24 times the RMD rate it warrants a second look.  Thank you.   But I worry that any percent-of- portfolio method is too volatile for a stable income.

Both it and Bengen's 4% rule appear to be easy to implement.  Unless I misunderstood, the investor takes the MRD rate which is published online and multiplies it times 1.24 (or 1.6).  Then he multiplies that modified RMD rate times the end of year portfolio balance to get his next annual withdrawal.  For Bengen's 4% rule the investor takes last year's withdrawal in dollars and multiplies it times the inflation rate which is published online to get his next annual withdrawal.  Both are pretty easy methods.

I believe that everything starts with a budget.  There is an old saying, "If you don't know where you are going any path will get you there."  Unfortunately "there" might be a rented trailer living off social security if it’s the wrong path.

I use a software package called Quicken to pay my bills.  Because I track it I know where all of our money is spent.  All forecasts are based on historical data and updated for things that change. I have a family budget and for my secession plan I prepared a single person budget.  Every line of the single budget was adapted from the family budget.  For example, utilities are expected to be the same as long as the individual stays in the same house but gasoline for cars was cut to 70% of the family budget.  Why not 50%?  Because my wife and I ride together a lot and those trips will most likely still take place.

We also know the changes that will take place on the income side.  My military retirement and my social security go away but  she will have survivor insurance benefits, her own social security benefits and the MRDs from our traditional IRAs will no longer be reinvested. 

Unfortunately, this is only 55% of the family budget and only 75% of the single person budget.  Dividends/interest by themselves will not make up the difference.  That is why I like Bengen’s 4% rule (actually she only needs an initial withdraw of 2.5% to make up the difference but I like a little pad in my budgets for unknown unknowns.)

I was a little concerned by your statement, “With the standard or modified RMD rule, I spend what I need to spend and then, for next year, I do what I always do: take the RMD%, or the modified RMD%, for my age and remaining accumulation.”  I'm guessing that is how you deal with the volatility.  Yes, you can do that but pretty much what you are doing is stealing from future withdrawals.  Too much of that and it may be hard to live off the future withdrawals.  I glad that works for you and I will look a little closer at the modified RMD method.  It might work for us as well but I will keep our cash reserve.

We keep sufficient cash to meet unexpected needs.  Because of uncertain times it currently 9% of our portfolio and it is not a part of our withdrawal calculations.  Heck, our Roth IRAs are not a part of the calculations either.  They are also saved for emergencies.

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