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Re: Bengen's 4% Distribution Method


@Mustang wrote:

It has been a long discussion.  I wish to thank everyone who participated.  It really helped me think things through.

To summarize, my wife’s income from other sources will be 25% short of meeting her expenses. I need a simple easy to use withdrawal method that will provide her a stable income with no loss of purchasing power and no years of big cutbacks.

Bengen’s 4% Distribution method seemed to fit the bill but sample testing using our Vanguard Wellington Fund  identified some flaws.  The first was a sequence of return failure.  Starting the 30-year retirement in 1968 resulted in a failure.  The portfolio ran out of money after 25 years.  The investment went negative in year 2 and never recovered.  The only thing that saved it was taking one percentage point less than full inflation increases every year.

The second problem was excess accumulated wealth.  Starting the 30-year retirement in 1990 Wellington’s value increased steadily until the ending balance was 3.75 times its initial balance.  A method was needed to give the retiree more money during his lifetime.

Here is what I’m putting in my succession plan for my wife to use should something happen to me.  For our taxable accounts we are using a modified Bengen 4% Distribution method.  After depositing the insurance she is to take the portfolio’s balance and multiple it times 4%.  That is her initial withdrawal.  For example, a starting balance of $500,000 would result in an initial withdrawal of $20,000.

 At the beginning of the next year, she answers a question. Is the portfolio’s ending balance bigger than the initial balance?  If so then she multiplies the previous withdrawal in dollars by inflation.  If it is smaller then she multiplies it by inflation minus one percentage point.  That is her next withdrawal.  For example, if inflation is 3% and the end of year balance is $515,000 then the next withdrawal would be $20,600 ($20,000 x 1.03).  If the ending balance was $480,000 then the next withdrawal would be $20,400 ($20,000 x 1.02).

Every three years there is an opportunity to ratchet up the withdrawal and take a bonus.  After calculating the next withdrawal she would subtract that from the portfolio’s end of year balance.  If the balance is still 50% higher than the initial balance then she would increase that withdrawal by 10%.  It may take a little time for this to happen.  For example, it’s the sixth year.  The next inflation adjusted withdrawal is calculated to be $23,185.  The portfolio’s end of year balance has grown to $780,000.  $780,000 minus $23,185 is $756,815.  That is 51% higher than the portfolio's initial balance ($756,815/$500,000 = 1.514) so she would give herself a 10% raise.  The next withdrawal would be $25,504 ($23,185 x 1.1).

The following year would be a normal end of year review.  Is the portfolio's ending balance bigger than the initial balance?  The next opportunity for a bonus would in the ninth year.  Is the ending balance 50% bigger than the initial balance after the next withdrawal?  The answers to these two questions sets up the withdrawals to possibly avoid the somewhat rare sequence of return failure and to take advantage of portfolio's long term growth.

I think this approach is simple, easy to use and unless something extraordinary happens it should provide her with a somewhat stable income. (MRDs from the T-IRA will still vary from year to year.)

What do you think?


 

It is a well-thought deaccumulation plan in the sense that the money should last the desired time and, if your wife understands it, then it should be fine.  

For our case, it would be too much of a straight jacket plan (I favor the idea of the discretionary bucket proposed by Guyton). Besides, I feel that you need to have long conversations with your wife on what could be done when you're no longer around and s**t happens.

Good luck  

 

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Re: Bengen's 4% Distribution Method

I agree with LoBo. All these rules on how to calculate a 4% SWR are much too complicated which Is why I have an investment portfolio that generates a 4% yield in qualified dividends which together with SS and RMDs provide 150% of my expenses and taxes. If I ever need additional cash I can take a tax free withdrawal from a Roth IRA.

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Re: Bengen's 4% Distribution Method


@Saratoga wrote:

BTW, something never discussed about retiring, and the risk of running adversely on performance and SWRs, is the usefulness of just one month of employment on retirement analyses.  If you have to, you can take temp jobs, such as December/XMAS, allowing you to take out less in down years.  Such jobs abound in Florida...especially during peak-season times.  Many seniors do such work, simply to balance their life.  Find a fun job for a few weeks.  Put all the earned income into IRAs.

R48

 

A typical temporary work for a retired professor is a part time instructor.   Alas, it often pays only about $3000 per course.   On the plus side, complaining students can keep you occupied for a whole semester.
 

Saratoga

 

 


Student complaining means you will better enjoy your time away, retired. :-)

BTW a professor teaching a course does not involve much actual classroom time, right?  So it is  moderate extra work, albeit spread out over 3-4 months.  Besides, professors will like this, because they are like the host interviewers on The 60 Minutes TV show--they work till they die!

R48

 

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Re: Bengen's 4% Distribution Method

I guess complexity is in the eye of the beholder.  I think buckets of money are simple and people believe too complicated.  Many of these other analyses are interesting but yes too complicated and I find no usefulness on slicing and dicing 2 funds with withdrawals.  For what purpose for me?  The Merriman charts are much clearer and useful to me.  I am not heavily invested in nor drawing down from those 2 funds.  So many other things to keep my eye on.  For me, it's all about deciding personal comfort AA and portfolio construction, diversification, investment choice, strategy on time line for investments (know where you automatically get income each month and where you go should you need more and letting a your equity time to run and never forced to sell).

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Re: Bengen's 4% Distribution Method

We have been looking at balanced funds thus far, so I thought I would chart a 50 / 50 portfolio of TLT and SPY along with VWELX and VWINX for reference.  I think the 50/50 port is closer to the original 4% rule intention.

Rebalance summary with VWINX and VWELX.jpg

I could calculate for a longer TLT/SPY time period. This only charts YTD values.

The 50/50 was calculated both as a 20% band rebalanced portfolio, and as a buy and hold portfolio.  Rebalancing at a 25% difference between TLT and SPY resulted in the higher end balance of $112,511.50. 

The rebalancing premium compares the B&H portfolio with the rebalanced one. I think the number of days under $100k is important because distributions taken during these periods reduce the initial investment. The SD of the options use YTD data. I think portfolio SD is important.

Rebalancing works best when using assets which have short-term price movements that are negatively-correlated. The rebalancing premium is driven by the compounding share count. Excluding dividends and capital gains distributions, the share count will remain constant when using the buy and hold strategy.

Share Count.jpg

This chart shows the compounding of the total share count each time the portfolio is rebalanced. The market return (including negative) is added to the rebalancing premium.

Sometimes the long-term price-trend (market return) of each asset will move in opposite directions while shorter-term price movements remain negatively correlated.  Under these conditions, the portfolio value can still increase.

 Inverse Price Trend.jpg

In other cases, the portfolio balance can grow even when the long-term price-trend for both assets is negative while the short-term price movements remain negatively correlated. The magic of the compounding share count facilitates this.

 Negative price trend.jpg

Simplicity favors the single fund, but there are other options for those who don't mind a bit more complexity.

Holiday

 

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

I guess complexity is in the eye of the beholder.  I think buckets of money are simple and people believe too complicated. ...


Yes, complexity is in the eye of the beholder. The bucket approach as described by Christine Benz is too complicated for me. I have not been able to determine unstated details of the rebalancing rules sufficiently well to reproduce with sufficient accuracy the results that Christine has presented.

Inflation adjustments to the withdrawal amount are easy. Use the CPI-U values from the government web site and multiply the withdrawal amount for last year by CPI-U for this year and divide by the CPI-U for last year. Different individuals adjusting for CPI-U can get different results because of what they use as the CPI-U for a year. Some use the CPI-U for a particular month, such as December; some use the average of the CPI-U over a 12-month period.

The suggestion in another post: "Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal." can result in the amount withdrawn for a year being much less than the initial withdrawn adjusted for inflation. For example, using that approach with the Wellesley Income fund starting in 1971, the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation. I suppose some here would not object to a 25% decrease in standard of living.

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Re: Bengen's 4% Distribution Method


@PatMorgan wrote:

@PaulR888 wrote:

I guess complexity is in the eye of the beholder.  I think buckets of money are simple and people believe too complicated. ...


Yes, complexity is in the eye of the beholder. The bucket approach as described by Christine Benz is too complicated for me. I have not been able to determine unstated details of the rebalancing rules sufficiently well to reproduce with sufficient accuracy the results that Christine has presented.

Inflation adjustments to the withdrawal amount are easy. Use the CPI-U values from the government web site and multiply the withdrawal amount for last year by CPI-U for this year and divide by the CPI-U for last year. Different individuals adjusting for CPI-U can get different results because of what they use as the CPI-U for a year. Some use the CPI-U for a particular month, such as December; some use the average of the CPI-U over a 12-month period.

The suggestion in another post: "Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal." can result in the amount withdrawn for a year being much less than the initial withdrawn adjusted for inflation. For example, using that approach with the Wellesley Income fund starting in 1971, the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation. I suppose some here would not object to a 25% decrease in standard of living.


It can, indeed, but the first year is always the lowest amount of withdrawal, in nominal dollars.  The purpose of doing so is to avoid spending down the portfolio whenever a real inflation adjusted 4% is taken out each year, come hell or highwater.  Mustang's method is described as a 'modified' Bengen method.  In up years, the withdrawal goes up with inflation.  In down years, the withdrawal still goes up with inflation - 1%.

The 'advantage' in up years, using what I described, is that,, after a big year, the withdawal itself goes up way more than inflation.  That is, if the portfolio TR is +20% for one year, the amount of the withdawal also ratchets up 20%.

At the beginning of the next year, she answers a question. Is the portfolio’s ending balance bigger than the initial balance? If so then she multiplies the previous withdrawal in dollars by inflation. If it is smaller then she multiplies it by inflation minus one percentage point."

In fact, changing Mustang's method to inflation in up years, nominal, rather than inflation minus 1, l in down years would, obviously, help portfolio survivability.

In fact, it might prove interesting to see a figure of a Bengen 4% real rate of withdrawal, Mustang's modified Bengen method, and the method I proposed.

"Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal.  Easy peesy!

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


@PatMorgan wrote:

The suggestion in another post: "Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal." can result in the amount withdrawn for a year being much less than the initial withdrawn adjusted for inflation. For example, using that approach with the Wellesley Income fund starting in 1971, the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation. I suppose some here would not object to a 25% decrease in standard of living.


Thank you for looking at that. That confirms what I had read elsewhere which is using a 3% inflation rate reduces the retiree's purchasing power by as much as one-third in 15 years.  A reduction in the standand of living of 25% in 10 or 33% in 15 years is not an acceptable outcome.  Neither is running out of money. 

Going back to the stagflation years inflation sometimes ran  12-13%.  If the study is right and a retiree typically spends 1% less than inflation each year then only taking an inflation -1% increase wouldn't damage his standard of living too much and that little bit was enough to extend withdrawals 5 years for the stagflation retirement period starting in 1968.  That data was posted earlier.

This is indeed the worst case scenario.  Kitces said that using his test data which differs a little from Wellington since 1920 its happened only four times. Hopefully, this is a solution to a problem that never surfaces.

So why address it at all?  Our government is pumping trillions of dollars into an economy that was shut down.  High demand and little supply is one of the things that lead to inflation.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@PatMorgan wrote:

The suggestion in another post: "Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal." can result in the amount withdrawn for a year being much less than the initial withdrawn adjusted for inflation. For example, using that approach with the Wellesley Income fund starting in 1971, the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation. I suppose some here would not object to a 25% decrease in standard of living.


Thank you for looking at that. That confirms what I had read elsewhere which is using a 3% inflation rate reduces the retiree's purchasing power by as much as one-third in 15 years.  A reduction in the standand of living of 25% in 10 or 33% in 15 years is not an acceptable outcome.  Neither is running out of money. 

Going back to the stagflation years inflation sometimes ran  12-13%.  If the study is right and a retiree typically spends 1% less than inflation each year then only taking an inflation -1% increase wouldn't damage his standard of living too much and that little bit was enough to extend withdrawals 5 years for the stagflation retirement period starting in 1968.  That data was posted earlier.

This is indeed the worst case scenario.  Kitces said that using his test data which differs a little from Wellington since 1920 its happened only four times. Hopefully, this is a solution to a problem that never surfaces.

So why address it at all?  Our government is pumping trillions of dollars into an economy that was shut down.  High demand and little supply is one of the things that lead to inflation.


How is there high demand that will lead to inflation when May unemployment Rate was 13.3% (20 million workers Out of work), highest rate in history resulting in a Projected 40% decline in 2nd qtr GDP? Feb unemployment rate was only 3.6%. Shutdown of the economy means there are a lot of workers who are being paid a lot less than when they were working which causes deflation due to decline in demand. 

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Re: Bengen's 4% Distribution Method

Intruder ...  And Gundlach recentlty said that he and his peers running companies are questioning the need for lots of middle managers.  When he needs something he gets the information directly from the worker bees and some managers are MIA.  We may be soon seeing a wave of white collar $100K plus layoffs and jobs are going to be tough so maybe they will settle for lower pay.  Sounds like deflation to me.  

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

Intruder ...  And Gundlach recentlty said that he and his peers running companies are questioning the need for lots of middle managers.  When he needs something he gets the information directly from the worker bees and some managers are MIA.  We may be soon seeing a wave of white collar $100K plus layoffs and jobs are going to be tough so maybe they will settle for lower pay.  Sounds like deflation to me.  


ATT recently announced that it was closIng 250 of its mobile stores and eliminating 3400 jobs. There will be more to come.

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Re: Bengen's 4% Distribution Method


@Intruder wrote:

.

How is there high demand that will lead to inflation when May unemployment Rate was 13.3% (20 million workers Out of work), highest rate in history resulting in a Projected 40% decline in 2nd qtr GDP? Feb unemployment rate was only 3.6%. Shutdown of the economy means there are a lot of workers who are being paid a lot less than when they were working which causes deflation due to decline in demand. 


Because the federal government is paying the unemployed $600 over and above the state unemployment payments to stimulate the economy.  If someone was making  $1,000 per week ($25 per hour) then their Indiana unemployment would be around $390.  Add in the $600 and they are getting $990 to stay at home.  They basically have lost nothing.  But around here the store shelves are empty of many items.

Now those that have lost a $100,000 a year job will lose something. But there are tons more stimulus spending than that.  I don't know if it will.  I'm just suggesting that it could.  Johnson's Great Society pumped tons of stimulus money into the economy just before the stagflation years.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@Intruder wrote:

@Mustang wrote:

@PatMorgan wrote:

The suggestion in another post: "Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal." can result in the amount withdrawn for a year being much less than the initial withdrawn adjusted for inflation. For example, using that approach with the Wellesley Income fund starting in 1971, the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation. I suppose some here would not object to a 25% decrease in standard of living.


Thank you for looking at that. That confirms what I had read elsewhere which is using a 3% inflation rate reduces the retiree's purchasing power by as much as one-third in 15 years.  A reduction in the standand of living of 25% in 10 or 33% in 15 years is not an acceptable outcome.  Neither is running out of money. 

Going back to the stagflation years inflation sometimes ran  12-13%.  If the study is right and a retiree typically spends 1% less than inflation each year then only taking an inflation -1% increase wouldn't damage his standard of living too much and that little bit was enough to extend withdrawals 5 years for the stagflation retirement period starting in 1968.  That data was posted earlier.

This is indeed the worst case scenario.  Kitces said that using his test data which differs a little from Wellington since 1920 its happened only four times. Hopefully, this is a solution to a problem that never surfaces.

So why address it at all?  Our government is pumping trillions of dollars into an economy that was shut down.  High demand and little supply is one of the things that lead to inflation.


How is there high demand that will lead to inflation when May unemployment Rate was 13.3% (20 million workers Out of work), highest rate in history resulting in a Projected 40% decline in 2nd qtr GDP? Feb unemployment rate was only 3.6%. Shutdown of the economy means there are a lot of workers who are being paid a lot less than when they were working which causes deflation due to decline in demand. 


Because the federal government is paying the unemployed $600 over and above the state unemployment payments to stimulate the economy.  If someone was making  $1,000 per week ($25 per hour) then their Indiana unemployment would be around $390.  Add in the $600 and they are getting $990 to stay at home.  They basically have lost nothing.  But around here the store shelves are empty of many items.

And there is tons more stimulus spending than that.


Federal $600 a week unemployment expires at end of July.

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Re: Bengen's 4% Distribution Method


@Intruder wrote:


Federal $600 a week unemployment expires at end of July.


Yes and states are bringing a lot of people back to work. For the others, its an election year. Do you think it might be extended?  I've already heard some talk about that.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@PatMorgan wrote:

The suggestion in another post: "Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal." can result in the amount withdrawn for a year being much less than the initial withdrawn adjusted for inflation. For example, using that approach with the Wellesley Income fund starting in 1971, the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation. I suppose some here would not object to a 25% decrease in standard of living.


Thank you for looking at that. That confirms what I had read elsewhere which is using a 3% inflation rate reduces the retiree's purchasing power by as much as one-third in 15 years.  A reduction in the standand of living of 25% in 10 or 33% in 15 years is not an acceptable outcome.  Neither is running out of money. 

Going back to the stagflation years inflation sometimes ran  12-13%.  If the study is right and a retiree typically spends 1% less than inflation each year then only taking an inflation -1% increase wouldn't damage his standard of living too much and that little bit was enough to extend withdrawals 5 years for the stagflation retirement period starting in 1968.  That data was posted earlier.

This is indeed the worst case scenario.  Kitces said that using his test data which differs a little from Wellington since 1920 its happened only four times. Hopefully, this is a solution to a problem that never surfaces.

So why address it at all?  Our government is pumping trillions of dollars into an economy that was shut down.  High demand and little supply is one of the things that lead to inflation.


What you are describing is the difference between taking a real, inflation adjusted 4% from a retirement portfolio compared to taking a NOMINAL 4%.  As you go out in time, your purchasing power does decline.  That's not what you, or I, are doing, however.  You and I are ONLY taking a nominal withdrawal, in terms of the previous year's withdrawal, during those years where the total portfolio TR was negative, that is, the value of the portfolio, this year, is less than last years.

Of course, if the value of the retirement portfolio rises faster than inflation, there is no decrease in purchasing power whenever you take 4% of the current value of the portfolio, not 4% of its original value, inflation adjusted.  The only time you took inflation - 1% was whenever the TR of the portfolio was negative.

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

The following is a lot easier.  If you can, retire when the max withdrawal you need is 3%.  Why worry about 4%.

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Re: Bengen's 4% Distribution Method

@ElLoboAs far as withdrawals go I have always been looking at real dollars.  I have known the impact of inflation on purchasing power a very long time.  In none of my calculations or any of my posts have I used nominal withdrawals.  The only nominal numbers in my spreadsheets are account balances.

You are correct that when the portfolio suffers losses I'm looking at withdrawals less than real dollars but they are not exactly nominal. Withdrawals are adjusted upward just not as much as they would have been if a full inflation adjustment had been made.  And, if the report I read on retiree spending patterns is correct the less than inflation adjustment should have minimal impact on the retiree's lifestyle.

I got to looking at the 1968 Wellington 30-year retirement failure again.  I don't think the condition for full inflation increases should be a single year's performance.  I think the question should be, "Is the ending account balance greater than the initial account balance?"  If yes, take the full inflation increase.  If no, take the inflation minus 1 percentage point increase.

In the spreadsheet the 1968 Wellington fell behind in the second year and never caught up.  Many of the subsequent years were profitable.  Somehad over 20% returns but they weren't enough to overcome the sequence of return loss.

Remember for that specific retirement period the alternative was to take a little less now or run out of money at the 24 year point.  My goal of a stable income means I want to impact future lifestyle as little as possible.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@ElLoboAs far as withdrawals go I have always been looking at real dollars.  I have known the impact of inflation on purchasing power a very long time.  In none of my calculations or any of my posts have I used nominal withdrawals.  The only nominal numbers in my spreadsheets are account balances.

You are correct that when the portfolio suffers losses I'm looking at withdrawals less than real dollars but they are not exactly nominal. Withdrawals are adjusted upward just not as much as they would have been if a full inflation adjustment had been made.  And, if the report I read on retiree spending patterns is correct the less than inflation adjustment should have minimal impact on the retiree's lifestyle.

I got to looking at the 1968 Wellington 30-year retirement failure again.  I don't think the condition for full inflation increases should be a single year's performance.  I think the question should be, "Is the ending account balance greater than the initial account balance?"  If yes, take the full inflation increase.  If no, take the inflation minus 1 percentage point increase.

In the spreadsheet the 1968 Wellington fell behind in the second year and never caught up.  Many of the subsequent years were profitable.  Somehad over 20% returns but they weren't enough to overcome the sequence of return loss.

Remember for that specific retirement period the alternative was to take a little less now or run out of money at the 24 year point.  My goal of a stable income means I want to impact future lifestyle as littel as possible.


I understand that, Mustang.  My comment, wrt 'nominal' dollars, was in specific reference to Pat's comment, which you expanded upon!

So, let me point out the ONLY two differences between your 'Modified Bengen method' and the one I proposed, to wit, or lack thereof:

"Take 4% of the end of the year value of the portfolio and withdraw the greater of that value and last year's withdrawal.  Easy peesy!"

Modified Bengen:  Real, inflation adjusted 4% unless portfolio TR is negative for the year, in which case, you take inflation minus 1%.

My method:  Take 4% of the yearly value of the portfolio unless portfolio TR is negative for the year, in which case you take same amount this year as last year (nominal, IOW, from one year to the next.)

The 'advantage' of my method, as R48 pointed out, is that you basically re-retire each year, given that you 'start' that yearly retirement with the value of your portfolio that year, not years ago.  What you decide to take out depends completely on what your portfolio did over the last year, not on what it did over the number of years since you retired.

Finally, I'm NOT trying to convince you to do this.  I'm simply showing you ways to think 'outside the box' that you've, and others in this thread, have thought yourselves into!  I won't say anything more about this, unless you want me to describe the other benefits/factors involved in using this method.

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

Almost everyone is thinking of the very good last 30 years where we could make money almost by accident.  I tested taking 4% of the ending balance and using it if it was bigger than the previous withdrawal.  If it wasn’t the retiree keeps taking the previous year’s withdrawal using the 1968 Wellington spreadsheet.  We already know that Bengen’s 4% withdrawal failed during that retirement period.

Below is the results.  The imaginary retiree got a raise in 1969 and did not get another raise until 1981.  I used an inflation calculator.  It took $2.19 in 1980 to buy what $1 would buy in 1969.  The retiree lost 54% of his purchasing power.  Inflation adjusted withdrawals were $45,245 and he is only getting $20,719.  The inflation minus one percentage point adjustment at least gave him a livable income of $40,423.

Sorry but I don’t find the easy, peesy method acceptable.  I don’t know anyone who could afford to lose more than half their purchasing power.

year

Beg Bal

withdraw

return%

End Bal

1968

$500,000

$20,000

7.91

$517,968

1969

$517,968

$20,719

-7.83

$458,315

1970

$458,315

$20,719

6.4

$465,602

1971

$465,602

$20,719

8.88

$484,389

1972

$484,389

$20,719

10.88

$514,118

1973

$514,118

$20,719

-11.83

$435,030

1974

$435,030

$20,719

-17.73

$340,854

1975

$340,854

$20,719

25.18

$400,745

1976

$400,745

$20,719

23.36

$468,800

1977

$468,800

$20,719

-4.38

$428,456

1978

$428,456

$20,719

5.32

$429,429

1979

$429,429

$20,719

13.54

$464,049

1980

$464,049

$20,719

22.58

$543,435

1981

$543,435

$21,737

2.91

$536,879

1982

$536,879

$21,737

24.55

$641,608

1983

$641,608

$25,664

23.57

$761,122

1984

$761,122

$30,445

10.7

$808,860

1985

$808,860

$32,354

28.53

$998,042

1986

$998,042

$39,922

18.4

$1,134,415

1987

$1,134,415

$45,377

2.28

$1,113,868

1988

$1,113,868

$45,377

16.11

$1,240,625

1989

$1,240,625

$49,625

21.6

$1,448,256

1990

$1,448,256

$57,930

-2.81

$1,351,258

1991

$1,351,258

$57,930

23.65

$1,599,200

1992

$1,599,200

$63,968

7.93

$1,656,976

1993

$1,656,976

$66,279

13.52

$1,805,759

1994

$1,805,759

$72,230

-0.49

$1,725,034

1995

$1,725,034

$72,230

32.92

$2,196,907

1996

$2,196,907

$87,876

16.19

$2,450,483

1997

$2,450,483

$98,019

23.23

$2,898,941

1998

$2,898,941

   
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Re: Bengen's 4% Distribution Method


@Mustang wrote:

<snip>

You are correct that when the portfolio suffers losses I'm looking at withdrawals less than real dollars but they are not exactly nominal. Withdrawals are adjusted upward just not as much as they would have been if a full inflation adjustment had been made.  And, if the report I read on retiree spending patterns is correct the less than inflation adjustment should have minimal impact on the retiree's lifestyle.

I got to looking at the 1968 Wellington 30-year retirement failure again.  I don't think the condition for full inflation increases should be a single year's performance.  I think the question should be, "Is the ending account balance greater than the initial account balance?"  If yes, take the full inflation increase.  If no, take the inflation minus 1 percentage point increase.

<snip>

Remember for that specific retirement period the alternative was to take a little less now or run out of money at the 24 year point.  My goal of a stable income means I want to impact future lifestyle as little as possible.


@Mustang 

From what I have been reading, you (like me) want to "hedge" your retirement portfolio against market and inflation risk.

Premise List

  • Your equity allocation is VWELX
  • You have an allocation to bonds for ballast  and rebalancing

Hedge:

  • Subdivide the bond allocation
  • Ladder the division

Target Example:

  • 60% Stock Allocation
  • 24% Bond Fund (Long Treasury)
  • 16% Bond Ladder

Function:

  • Stocks provide inflation indexed growth
  • Bond OEF rebalance to 100% stocks at 40% drawdown
  • Ladder insures inflation-indexed withdrawals during market crashes.

 

Ladder Strategy.jpg

The table above is based on a 3% annual inflation rate. Logic formats the cells green when the future value is larger than the withdrawal target. Dividend cash flows are reinvested and compound until maturity.

I think you said that you were 5-years from retirement, so the bottom half could be your starting point.  Since these are ETF's implementation and changes are easy.  If you are 5 years out, and want a 5 hedge, you could either buy the 5 rungs now, or buy one each year.  Personally, I like it when the initial investment (PV) is less than the initial withdrawal. So, the bottom 3 rungs would catch my eye.

So, first populate your ladder according to retirement date and number of rungs. Then, either spend or reinvest the matured rung as opportunity dictates. You can buy $246K of future withdrawals for $202K today.  I only buy a hedge if it earns money.

If you already have an allocation to bonds, then consider carving your "hedge" out of that. Your remaining allocation could be LT Treasury bonds (flight to safety) and TIPs (inflation). This generally describes my strategy, but I own more than just treasury bond funds and laddered corporates.

Holiday

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