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FD1001

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06-25-2020
10:24 PM

Re: Bengen's 4% Distribution Method

@ElLobo wrote:For clarity, I plotted the amount of the withdraw for four cases. The red line is the Bengen method (real 4% withdrawal). The green line is your Bengen minus 1% in negative portfolio TR years. The purple line is my method (4% of year end portfolio value, never less than previous year withdrawal.) The blue line is the simple 4% of year end value.

First, Tibbles, the 'area' between the green and red lines is the total effect of the minus 1% adjustment to the inflation factor, where the difference, in 1992, 25 years into retirement, was the difference between completely spending down the portfolio (red line) and a successful strategy (green line). I dunno know about you but I surely don't want to be 20 years into retirement to find out my adjustment should have been 1.5%, rather than 1%! 8-)

The difference between blue and purple took care of the fact that Mustang never wanted to see his yearly withdrawal drop from one year to the next.

At any rate, as I said before, if your most important consideration is to have your retirement income stream be 'inflation adjusted', come hell or highwater, you will choose the red withdrawal. The green line is almost a real inflation adjusted 4%, but not exactly. Nevertheless, if you do choose the minus 1% green line, you run the risk of mis-calculating somewhere down the line and run the risk that you've exhausted your nestegg at 25 years into retirement. You are almost Income Certain.

On the other hand, if portfolio survivability is more important to you than an Income Certain withdrawal, you will forgo some income, in the early years, where the SOR risks are most important, as in this case, in order to guarantee that you won't outlive your nestegg.

Finally, MY real method is to have a portfolio that produces a 4% or more distribution yield ($40,000, for a $1 million portfolio) and have that distribution income keep pace with inflation. An all VWEHX portfolio, at a 5.33% distribution yield, fits the bill. So does an all PCI portfolio, at 11.07%. Or a 50/50 SDY/PCI. Or 50/50 SPY/PCI.

ElLobo is great at hindsight 20/20 but in reality, it's so much worse.

YTD....SPY -3.5%...QQQ +16.2%

ElLobo holdings:

MRRL YTD is gone, lost everything

AMZA YTD= -54.7%

PFFL YTD= -32.6%

SDYL YTD = -32.8%

PCI YTD = -21.9.7%

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ElLobo

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06-26-2020
07:24 AM

Re: Bengen's 4% Distribution Method

Corresponding to the yearly withdrawal chart below, here is the portfolio value chart for the same 4 methods. Again, the red line is the Bengen 4% method, which spent down the portfolio in 25 years. The green line is the Bengen with inflation minus 1% in down years. Blue and purple are my 4% of yearly value methods.

Clearly, for this worst case of a retirement, starting in 1968, where SOR risk happened to be greatest whenever looking back, there wasn't a significant difference among the 4 methods, for the first 15 years of retirement. In fact, it wasn't until 1987, or 19 years into a real, inflation adjusted withdrawal, that the Bengen method (real 4% withdrawal) resulted in a portfolio value that had declined by 50%, or down to $500,000. This is consistent with the withdrawal studies that suggest most any real, inflation adjusted withdrawal should last 20 (twenty, not 30!) years at an almost certain 100% chance of success.

This, in turn, suggests a different 'Modified Bengen 4% Method' of retirement withdrawal that absolutely will guarantee portfolio survivability. Simply stated:

"Take whatever real, inflation adjusted withdrawal rate you want/need UNTIL the NOMINAL value of your portfolio drops to 50% of its initial value, at which point you reevaluate."

This method has a few good characteristics:

- A positive setpoint where you take stock of things (portfolio value drops to 50% of its initial value) and switch to Plan B, ifn you want/have to.
- It clearly and ALWAYS handles those FUTURE years where the SOR risk rears its ugly head. Ifn the SOR risk doesn't come to pass, your portfolio value won't tank!
- It's completely independent of the assets you choose to hold in your retirement portfolio as well as whatever asset allocation you choose.
- It doesn't require any buckets or cash holdings to help get you through bad years until the rainy days arrive.
- It allows higher initial real, inflation adjusted withdrawal rates early on in retirement, whenever most retirees might want/need more cash to enjoy those golden years before they turn to lead. Ifn you take too much, and the SOR gods go against you, your portfolio value will fall 50% in a shorter period of time.
- The success of this method doesn't depend at all upon past performance data. Rather, you can simply check how this method worked by looking at past data, as we have done in this thread!
- In R48's terminology, you retire twice. Once whenever you stop working, a second time whenever you've spent down your retirement portfolio to 50% of its initial value, whenever that occurs.
- 50% itself is arbitrary. You might feel more comfortable with 75%. Some of us might want to try to maintain 100%, while some others might be agnostic to portfolio value during retirement! 8-)

ElLobo, de la casa de la toro caca grande

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Mustang

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06-26-2020
08:05 AM

Re: Bengen's 4% Distribution Method

@ElLobo wrote:For clarity, I plotted the amount of the withdraw for four cases. The red line is the Bengen method (real 4% withdrawal). The green line is your Bengen minus 1% in negative portfolio TR years. The purple line is my method (4% of year end portfolio value, never less than previous year withdrawal.) The blue line is the simple 4% of year end value.

Yes, I made a mistake. It was late and I was headed to bed when I posted it. I accidentally started with $1,000,000 instead of $500,000. We've been going back and forth on the starting value. Thanks for pointing that out. I changed one single number in the spreadsheet and my previous post is now fixed. You may look at it if you wish. Yes, the dollar amounts were off. But that didn’t change the fact that he lost 40% of his purchasing power by 1981 and 52% by 1987.

Your own chart shows that. The red line represents needed goods and services. The purple line represents available money using your method. Look how far below it is from needed goods and services.

Please note, I didn’t say that your method ran out of money because of scheduled withdrawals. I said it wouldn’t last because it would be raided. What do you think is going to happen? By 1981 cumulative inflation was 254%. The $30,431 withdrawal will only buy $11,980 of equivalent goods and services. That is only 60% of what he needs. How does he live off of that?

Hell and high water just hit. He has bills to pay. In 1981 he had $327,000 in investments and he’s starving. He is not going to let it sit there. He is going to tap into it.

You are quibbling over the inflation minus one percentage point method I used. You say perhaps it should have been minus one and half points. Perhaps that is true. But my method didn’t just come out of thin air. It came from an article that Michael Kitces wrote in 2017 talking about the wealth of spending data that was coming out. He said our spending decreases 1% per year in our 60s, 2% per year in our 70s, and 1% per year in our 80s. Using a 1% point below inflation adjustment shouldn't affect the retiree’s life style much. In fact, when considering reduced spending it is the green line on your chart that represents required goods and services not the red line.

The likely hood of the inflation minus one percentage point method causing an investment to go to zero is extremely low. Kitces in another article said that when using Bengen’s 4% rule with full inflation increases only 12 of 115 rolling 30-year retirement periods had ending balances lower than the starting balance. Since 1920 it happened only 4 times. The example we are using is the worst case scenario. It has a sequence of return failure coupled with very high inflation. I like using it as a worst case to test theories. And I thought it was very interesting that a one percentage point less than inflation adjustment fixed the retirement for the worst case scenario.

We must view things very differently. I’m beginning to think that you are afraid of any risk at all. Throughout your discussions on yield versus return, you were focused on the investment never being able to go to zero. Now you are doing it again. According to all available data the risk here is extremely low of that ever happening.

The only other thing I can think of is that you must view this as discretionary income. I don’t. I view it as something the retiree has to live off of.

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ElLobo

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06-26-2020
10:08 AM

Re: Bengen's 4% Distribution Method

@Mustang wrote:

@ElLobo wrote:For clarity, I plotted the amount of the withdraw for four cases. The red line is the Bengen method (real 4% withdrawal). The green line is your Bengen minus 1% in negative portfolio TR years. The purple line is my method (4% of year end portfolio value, never less than previous year withdrawal.) The blue line is the simple 4% of year end value.

Yes, I made a mistake. It was late and I was headed to bed when I posted it. I accidentally started with $1,000,000 instead of $500,000. We've been going back and forth on the starting value. Thanks for pointing that out. I changed one single number in the spreadsheet and my previous post is now fixed. You may look at it if you wish. Yes, the dollar amounts were off. But that didn’t change the fact that he lost 40% of his purchasing power by 1981 and 52% by 1987.

Your own chart shows that. The red line represents needed goods and services. The purple line represents available money using your method. Look how far below it is from needed goods and services.

Please note, I didn’t say that your method ran out of money because of scheduled withdrawals. I said it wouldn’t last because it would be raided. What do you think is going to happen? In 1981 cumulative inflation was 254%. The $30,431 withdrawal will only buy $11,980 of equivalent goods and services. That is only 60% of what he needs. How does he live off of that?

Hell and high water just hit. He has bills to pay. In 1981 he had $327,000 in investments and he’s starving. He is not going to let it sit there. He is going to tap into it.

You are quibbling over the inflation minus one percentage point method I used. You say perhaps it should have been minus one and half points. Perhaps that is true. But my method didn’t just come out of thin air. It came from an article that Michael Kitces wrote in 2017 talking about the wealth of spending data that was coming out. He said our spending decreases 1% per year in our 60s, 2% per year in our 70s, and 1% per year in our 80s. Using a 1% point below inflation adjustment shouldn't affect the retiree’s life style much. In fact, when considering reduced spending it is the green line on your chart that represents required goods and services not the red line.

The likely hood of the inflation minus one percentage point method causing an investment to go to zero is extremely low. Kitces in another article said that when using Bengen’s 4% rule with full inflation increases only 12 of 115 rolling 30-year retirement periods had ending balances lower than the starting balance. Since 1920 it happened only 4 times. The example we are using is the worst case scenario. It has a sequence of return failure coupled with very high inflation. I like using it as a worst case to test theories. And I thought it was very interesting that a one percentage point less than inflation adjustment fixed the retirement for the worst case scenario.

We must view things very differently. I’m beginning to think that you are afraid of any risk at all. Throughout your discussions on yield versus return, you were focused on the investment never being able to go to zero. Now you are doing it again. According to all available data the risk here is extremely low of that ever happening.

The only other thing I can think of is that you must view this as discretionary income. I don’t. I view it as something the retiree has to live off of.

You're making progress, newbie, unfortunately, slowly but slowly. You are riding your inflation minus 1% pony, looking at all other ponies within the box. I'm looking into the box from outside the box! 8-))

What you don't want to recognize is the YOU, and you alone, determine your 'rate of withdrawal', your 'method'. That's not in dispute. Nevertheless, whether or not that method survives retirement ISN'T up to you, it's completely determined by everyone ELSE, aka the 'markets', going forward, where it counts!

The 'Bengen Method' (your thread title, not mine) failed during the time period, starting in 1968, in 1992, whenever the final $48,784 was withdrawn where, the previous year, 1991, the real inflation adjusted amount of $157,538 was taken out. This number, $157, 538 equates to $40,000 back in 1968, adjusted for inflation.

At any rate, if the purpose of THIS thread was to examine the problems and issues with a real, inflation adjusted rate of retirement withdrawal, you've succeeded. Bengen's method failed, starting in 1968, and there was no real need for 262 replies to your OP!

I assumed, however, that you were looking for 'discussions' on retirement withdrawal 'methods'. After all, you ended your OP with:

" 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."

So I'm wondering why you ended your last post with:

"We must view things very differently. I’m beginning to think that you are afraid of any risk at all. Throughout your discussions on yield versus return, you were focused on the investment never being able to go to zero. Now you are doing it again. According to all available data the risk here is extremely low of that ever happening.

The only other thing I can think of is that you must view this as discretionary income. I don’t. I view it as something the retiree has to live off of."

ElLobo, de la casa de la toro caca grande

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Mustang

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06-26-2020
12:55 PM

Re: Bengen's 4% Distribution Method

I fully understand all of that. I have actually received a lot of good information from forum members even some from you when you weren't so busy trying to prove yourself right and everyone else wrong.

I have clearly stated over and over again that my goal is an easy to use method that provides a stable income. Knowing that why would you possibly think an approach that provides 40-50% less real income would be acceptable?

During our discussions we have looked at several different methods. A fixed percent times the portfolio's ending balance. The Modified RMD approach. Both are easy to use but because of market volatility they don't provide a stable income. But it was a really good discussion. It led to my realization that a lot was being left on the table and the discovery of the ratchet-up approach. During these discussions I also discovered the 1968 failure using Wellington Fund. On the extremely slim chance that it could occur again I discovered a work around was an easy to use. We just needed to tweak Bengen's 4% rule a little.

I thank everyone for their help in coming up with these ideas. A couple of little tweaks provided both downside protection and upside bonuses.

Yes, I know you are intentionally being patronizing. I have noticed that you do that and call names when you lose. I really don't care. It doesn't bother me. The only thing it really does is make you look bad.

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Mustang

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06-26-2020
01:28 PM

Re: Bengen's 4% Distribution Method

As a final attachment to my succession plan I created an end of year checklist. My wife laughed. She wanted to know if I thought I was back in ICBM operations. Back then we had a saying, "Read a step, do a step, get a banana." When dealing with nukes there is no room for error. We would disqualify crews from alert during evaluations if they missed a step on the checklist.

Its a single page checklist. At the top she will record the information needed for the review. Things like initial portfolio balance, end of year portfolio balance, last year's withdrawal, and the inflation rate. That is everything she needs.

Then she answers question 1:" Is the end of year portfolio balance bigger than the initial balance? If yes there is an equation to calculate the withdrawal using the inflation rate. If no then there is another equation to calculate the withdrawal using one percentage point less than the inflation rate.

If its the third year she answers question 2: "Is the portfolio's ending balance after subtracting the withdrawal in question 1 50% bigger than the initial balance." Shown are equations to subtract the withdrawal in question 1 from the portfolio's end of year balance. She then divides that into the portfolio's initial balance. The result answers the question. If the answer is yes she multiplies the withdrawal from question 1 times 1.1 to get the third year withdrawal. If the answer is no the withdrawal from question 1 becomes the third year withdrawal.

Since there are two funds in this portfolio (Vanguard Wellington and Vanguard Wellesley Income) both equally weighed at the beginning. She is instructed to take the withdrawal from the fund with the largest end of year balance.

When done she places the checklist in a file to reference the following year.

This really is an easy method. More importantly it provides a stable income. Thanks for all the help.

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Congratulations. You could program this so that all your wife needs to do is enter numbers. Actually once you program this or other methods, complexity does not matter much.

Saratoga

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06-26-2020
01:39 PM

Re: Bengen's 4% Distribution Method

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Mustang

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06-26-2020
01:57 PM

Re: Bengen's 4% Distribution Method

I didn't think about that. Maybe an Excel spreadsheet. Thanks for the idea.

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PatMorgan

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06-26-2020
02:04 PM

Re: Bengen's 4% Distribution Method

@ElLobo wrote: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!

Here is a chart of the method you proposed including the period for which the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation.

The line for the method of using an initial withdrawal rate of 4% and adjusting for inflation each year is too uninteresting to include. It would be a horizontal line at the vertical position corresponding to a constant real (inflation-adjusted) withdrawal per year, $400 for an initial withdrawal rate of 4%.

I'll leave it to someone else to post a chart of "Mustang's modified Bengen method". That method is designed for someone who plans to spend less each successive year in real (inflation-adjusted) terms, with the decrease being at a steady rate that avoids abrupt decreases.

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Tibbles

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06-26-2020
02:14 PM

Re: Bengen's 4% Distribution Method

Mustang: "During these discussions I also discovered the 1968 failure. On the extremely slim chance that it could occur again I discovered a work around was an easy to use."

Tibbles: Failure of basic Bengen occurred infrequently in the past (if investing primarily in U.S. markets), but that doesn't mean, does it, that there's an "extremely slim chance that it could occur again"? Bengen's testing period included the "American century" and the period of excellent returns of U.S. markets so far this century. Returns in most other markets were lower, and I suspect there would have been many failures of basic Bengen if investing in those markets. As you ponder conditions within this country, how confident are you that future returns will be as good as past returns? Other countries too, and the world as a whole, have challenges, even if some countries seem in better condition than the U.S. I doubt we could be confident that returns in non-U.S. markets will suffice to make future failures of basic Bengen, or your tweaks of it, rare. In any case, your investments, Mustang, are primarily in U.S. markets, aren't they? One option available to your wife if her withdrawal rule should at some point start to fail is to annuitize.

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Mustang

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06-26-2020
02:53 PM

Re: Bengen's 4% Distribution Method

@Tibbles I don't have the ability to test all possible retirement periods. Michael Kitces, a respected financial planner, has. In his paper **The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?** he writes, "As the chart above reveals, in only 12 of the 115 rolling 30-year time periods running from the early 1870s to present did the retiree who started with $100,000 in an annually rebalanced 60/40 portfolio finish with anything *less* than the original principal, even after doing a lifetime of inflation-adjusted spending starting at a 4% initial withdrawal rate. And those scenarios that did finish with less were all retirees who had the misfortune of retiring just before a ‘calamitous’ economic event, including the eves before the crash of 1907, World War I (and the post-war inflation spike), the Great Depression (including the second downturn in 1937), and leading up to the stagflationary 1970s. In the “modern era” of markets since the 1920s, such a less-than-starting-principal outcome has only occurred four times: those retiring in 1929, 1937, 1965, and 1966."

It seems to me that 12 in 115 rolling 30-year retirement periods seem like a pretty slim chance. And that 10% wasn't that the investment went to zero. It was that the investment finished with less than $100,000. Even then 'calamitous’ economic events were the cause. In the modern era from 1920 on there were only 4 times that the investment ended with less than $100,000.

He also wrote, "In fact, not only do 90%+ of retirees finish with more than their starting principal after 30 years by follow..., the “typical” retiree actually finishes with many multiples of their starting wealth with this spending approach! Over 2/3rds of the time the retiree finishes with *more-than-double *their initial principal left over. And the median wealth at the end of 30 years is almost 2.8X principal! One-in-six scenarios finish with more than *quintuple *the retiree’s initial wealth! Since the 1920s – the “modern era” of stock investing (as illustrated by the classic Andex Charts based on Morningstar/Ibbotson data) – *the odds of doubling wealth is 80% *(on top of lifetime spending using the 4% rule), the median wealth at the end of the time period is 3.7X starting principal, and more than 1/3rd of retirees would have finished with over 5X their starting retirement portfolio!"

How confident am I of the future? The 4% withdrawal strategy is based on the worst case scenario using test data. Wellington, a managed fund that differs from the test data, had an even worse experience. I'm confident enough to start with a procedure that fixed Wellington's worst case and slowly ratchet -up withdrawals if returns are better.

Edit: In his first link Kitces said there is a 96% chance of having 100% of the initial investment using the 4% rule. And, he has a table of wealth accumulation for various years. 1969 was the only year the portfolio went to zero. Its good information.

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ElLobo

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06-26-2020
03:13 PM

Re: Bengen's 4% Distribution Method

@PatMorgan wrote:

@ElLobo wrote: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!Here is a chart of the method you proposed including the period for which the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation.

The line for the method of using an initial withdrawal rate of 4% and adjusting for inflation each year is too uninteresting to include. It would be a horizontal line at the vertical position corresponding to a constant real (inflation-adjusted) withdrawal per year, $400 for an initial withdrawal rate of 4%.

I'll leave it to someone else to post a chart of "Mustang's modified Bengen method". That method is designed for someone who plans to spend less each successive year in real (inflation-adjusted) terms, with the decrease being at a steady rate that avoids abrupt decreases.

Here is the figure I posted yesterday. Red line is Bengen, green line is Mustang's modified Bengen, blue and purple are fixed percentage of year end portfolio value (blue) with purple being no drop in withdrawal from previous year. Actual, not real, constant dollars, are shown on the Y axis.

ElLobo, de la casa de la toro caca grande

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I too think that your rule is very likely to work for your wife---if the U.S. does not become markedly less business-, market-, and capital-friendly than it has been.

Tibbles

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06-26-2020
03:16 PM

Re: Bengen's 4% Distribution Method

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Mustang

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06-26-2020
03:30 PM

Re: Bengen's 4% Distribution Method

Any particular reason why?

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@Mustang I take you to be asking why I think U.S. returns might well not be as good as in the past. I'm not an economist and have no special expertise in this area, but I take it that a good part of the reason for the past outperformance of U.S. markets in the last 60 years is that we have had a freer market and a purer (though by no means pure) form of capitalism than most other developed countries. It appears that this may not continue.

Tibbles

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06-26-2020
03:53 PM

Re: Bengen's 4% Distribution Method

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Wow. That is something that would affect far more than what we have been discussing. It would also affect our traditional IRAs and our our Roth IRAs. The only thing not affected is government pensions and social security. Hopefully, that is something the professional teams at American Funds and Vanguard can deal with. Since the funds we are in are invested mostly in large-cap companies with some giant cap companies I would assume that almost of all the companies involved are pretty much international companies. And I know that the funds we have invest a certain percentage in foreign owned companies. The last time I looked is was something like 9-10% foreign owned. It is something to consider. Thank you for pointing that out.

Mustang

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06-26-2020
04:12 PM

Re: Bengen's 4% Distribution Method

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ElLobo

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06-26-2020
04:32 PM

Re: Bengen's 4% Distribution Method

@Mustang wrote:I fully understand all of that. I have actually received a lot of good information from forum members even some from you when you weren't so busy trying to prove yourself right and everyone else wrong.

Yes, I know you are intentionally being patronizing. I have noticed that you do that and call names when you lose. I really don't care. It doesn't bother me. The only thing it really does is make you look bad.

Nice try, again. As you yourself have repeatedly stated, there are no right and wrong ways of doing this stuff, just our own individual ways. I really can't help it whenever you're stuck in first gear and refuse to at least think about things as you obviously haven't before. I still haven't figured out why you attempt to patronize me whenever I point out 'undocumented features' of both Bengen's method and your modification to it! 8-))

I'll leave you with this figure to ponder, taken from your spreadsheets (I, too, love spreadsheets!). The red line is Bengen's 4% real rate of withdrawal while the green figure is your modified Bengen minus 1% whenever portfolio TR is negative for the years. What I have plotted is the simple percentage of the year withdrawal to the yearly portfolio value. Obviously, the withdrawal amount goes up with inflation for Bengen, and goes up a bit less than inflation for your modification.

But the total portfolio value itself is also going up and down, in response to the market's affect on the total return of the portfolio. Remember, the early years saw low, or negative, real rates of portfolio return.

So, for example, both figures start out at a 4% withdrawal in 1968. Both methods reached a 10% withdrawal about 10 years into the retirement (1978/79). And so forth. In 1979, $79,867 was taken from the Bengen portfolio that had a start of the year value of $689,279, so $79,867 divided by $689,279 is a 11.6% rate of withdrawal, in 1979 dollars (4% in 1968 dollars.)

Now, my final question for this thread. You and Bengen have been withdrawing at a real, inflation adjusted 4%, in 1968 dollars. Ten years into your retirement, you're still withdrawing at that real 4% rate, in 1968 dollars, but your current rate of withdrawal, in 1978/79 dollars, is up to 10%. So, what does Bengen and all the retirement withdrawal studies say about retirement portfolio survivability whenever a real, inflation adjusted 10% is taken out, starting in 1979? Ifn it's less than 10 years, there's a good chance you'll spend down your portfolio, and Bengen did, before those 20 years come about.

(As a very rough rule of thumb, whenever the withdrawal rate is X%, the expected survivability is 1/X, so, for X = 4%, the portfolio is expected to survive 1/.04, or 25 years. So, for a 5% rate of withdrawal, expected survivability is 20 years, 16.7% for a 6% withdrawal, 14 years at 7%, 10 years at 10%, and, finally, 5 years at 20%. So, for Bengen, which got to 20% in 1987, the portfolio was depleted (spent down) 5 years afterwards, or in 1992.)

ElLobo, de la casa de la toro caca grande

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Saratoga

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06-26-2020
06:15 PM

Re: Bengen's 4% Distribution Method

My personal method when I retire will be different from this discussion in its initial stages. I have a modest living style. My expenses for the first seven to ten years or so should be mostly covered by my medium-size pension and social security. The pension is not inflation indexed so I will additionally need rmd for maybe another 7 years after that. Afterwards, I will also draw from taxable + tira + Roth in tax efficient ways using more sophisticated retirement income calculators as crosschecks.

For someone who is willing to reduce spending somewhat in hard times, hybrid endowment model seems promising. Here, you withdraw a weighted average of Bengen' s constant real withdrawal and a fixed percentage of portfolio value. For example, if you choose withdrawal rate of 4% and weight 0.5, you withdraw 0.5*constant real 4% withdrawal + 0.5*4% portfolio value. You can choose your weights depending on the proportion of your discretionary spending. Historical test of this given in Pfau is excellent and portfolio does not get near failure. A happy compromise of Mustang and El Lobo!

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PatMorgan

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06-26-2020
06:29 PM

Re: Bengen's 4% Distribution Method

@ElLobo wrote:

@PatMorgan wrote:

@ElLobo wrote: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!Here is a chart of the method you proposed including the period for which the average withdrawal for a 10 year period would have been 25% less than the initial amount adjusted for inflation.

The line for the method of using an initial withdrawal rate of 4% and adjusting for inflation each year is too uninteresting to include. It would be a horizontal line at the vertical position corresponding to a constant real (inflation-adjusted) withdrawal per year, $400 for an initial withdrawal rate of 4%.

I'll leave it to someone else to post a chart of "Mustang's modified Bengen method". That method is designed for someone who plans to spend less each successive year in real (inflation-adjusted) terms, with the decrease being at a steady rate that avoids abrupt decreases.

Here is the figure I posted yesterday. Red line is Bengen, green line is Mustang's modified Bengen, blue and purple are fixed percentage of year end portfolio value (blue) with purple being no drop in withdrawal from previous year. Actual, not real, constant dollars, are shown on the Y axis.

The figure you posted is unrelated to the one I posted. The one I posted has the title "VWINX $10,000 Initial Balance, Withdrawal MAX(4% Nominal Balance, Withdrawal for Previous Year)", the investment is clearly identified. The one you posted does not have a title that identifies the investment. The fact that chart you posted starts in 1968 indicates that the investment is not VWINX because its inception date was in 1970.

The subject of the conversation is: "Bengen's 4% Distribution Method". Because that method include making inflation adjusted withdrawal amounts, having a chart of the withdrawal amounts adjusted for inflation is more meaningful that a chart of a nominal withdrawal amounts.

Let's recap this thread of posts. I wrote in a previous post

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.

In a reply to that post you asked for a chart. I provided a chart. The title of the chart I posted obviously indicates that it is for the Wellesley Income fund. I suppose some consider chart titles and other chart annotations to be meaningless.

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Tibbles

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06-26-2020
07:20 PM

Re: Bengen's 4% Distribution Method

What’s below is from Pfau’s 2018 table that I referred to earlier. Pfau assumes here a 4% initial withdrawal for each strategy from a $100,000 accumulation, using a 50-50 allocation. The withdrawal is then adjusted annually for 30 years in accord with each strategy. (The results are based on rolling 30-year periods from 1926 to 2015.)

ENDOWMENT FORMULA – WEIGHTED AVERAGE

Real spending in 10/20/30 years, 90th percentile: $5,110/$6,510/$6,870

Real spending in 10/20/30 years, 50th percentile: $4,030/$4,160/$4,280

Real spending in 10/20/30 years, 10th percentile: $3,230/$3,160/$3,380

Remaining wealth after 30 years, 90th/50th/10th percentile: $257,840/$122,410/$73,150

KITCES RATCHETING RULE

Real spending in 10/20/30 years, 90th percentile: $4,840/$6,440/$9,430

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, 90th/50th/10th percentile: $236,960/$79,500/$25,630

The comparable figures for basic Bengen are all $4000.

From the info I have, I'm not sure what "weight" was used when applying the endowment formula. I'd guess .5.

As you say, a compromise. As compared with Kitces, on average the endowment formula gives less income, but a greater certainty of portfolio survival (if the portfolio is not "raided").