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Contributor ○○○

Re: Bengen's 4% Distribution Method

@PatMorgan 

In your charts why are Bengen's floors and ceilings a a straight line?  I thought they were suppose to be increased for inflation.

Edit: I see it.  You're using constant (nominal) dollars instead of real dollars.  Yes, that is exactly what I saw in my 1968 comparison except I was using real dollars.

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Re: Bengen's 4% Distribution Method

The primary reason I don’t like Vanguard’s method is, unless they have tons of discretionary income, like most of the methods we’ve discussed it severely impacte the retiree’s standard of living.  Bengen’s ceiling and floors method didn’t.

Throughout this discussion the only method I had found that made the 1968 30-year Wellington retirement a success without severely impacting the retiree's standard of living was increasing each subsequent withdrawal by inflation minus 1 percentage point.  Because of the floor in Bengen’s method its withdrawal never got below 85% of the initial withdrawal adjusted for inflation.

When all of the other methods were cutting back withdrawals 50-60%  of needed income (real $) it only cut back 15%.  And unlike the “inflation less one percentage point method” which kept cutting resulting in only 76% of the needed income in 1997.  It kept the cuts at 15%, its inflation adjusted floor, for the rest of the retirement period.

That is when I said it may be my new favorite.  I had not looked at 1990 and when I first did I had accidentally substituted Wellesley Income data for Wellington’s. (I’m running all of these methods through Wellesley Income as well with a starting date of 1971 instead of 1968.  Yesterday, I reorganized my spreadsheet and deleted some of those so I wouldn’t make that mistake again.)

Below is the comparison that made me like Bengen’s Ceilings and Floors method.  For Vanguard’s method look how low withdrawals are in 1978 and 1979 when the retiree need roughly $37,000 and $40,000 to live.  (I really hope copy and paste works. It didn’t.  Now for a second try.)

           Bengen's 4% rule           Bengen's                      Vanguard's

           Inflation - 1% point        Ceilings & Floors         Ceiling & Floors

Year

Beg Bal

Withdraw

Beg Bal

Withdraw

Beg Bal

Withdraw

1968

$500,000

$20,000

$500,000

$20,000

$500,000

$20,000

1969

$517,968

$20,740

$517,968

$20,719

$517,968

$20,719

1970

$458,295

$21,818

$458,315

$18,903

$458,315

$20,201

1971

$464,411

$22,822

$467,534

$19,961

$466,153

$19,696

1972

$480,802

$23,347

$487,318

$20,620

$486,103

$19,444

1973

$507,226

$23,907

$517,475

$21,321

$517,431

$20,416

1974

$426,142

$25,748

$437,459

$23,176

$438,218

$19,906

1975

$329,404

$28,658

$340,831

$26,026

$344,145

$19,408

1976

$376,474

$30,349

$394,072

$27,822

$406,506

$18,923

1977

$426,981

$31,532

$451,806

$29,186

$478,122

$19,125

1978

$378,128

$33,330

$404,110

$31,141

$438,893

$18,647

1979

$363,141

$35,996

$392,811

$33,944

$442,604

$18,181

1980

$371,441

$40,423

$407,458

$38,458

$481,890

$19,090

1981

$405,761

$45,072

$452,319

$43,265

$567,301

$20,044

1982

$371,185

$48,633

$420,958

$47,116

$563,182

$21,046

1983

$401,739

$49,994

$465,620

$48,906

$675,230

$22,099

1984

$434,651

$51,394

$514,933

$50,765

$807,074

$23,204

1985

$424,265

$52,885

$513,834

$52,745

$867,744

$24,364

1986

$477,335

$54,366

$592,638

$54,749

$1,083,997

$25,582

1987

$500,796

$54,420

$636,860

$55,351

$1,253,164

$26,861

1988

$456,554

$56,270

$594,767

$57,787

$1,254,262

$28,204

1989

$464,769

$58,183

$623,488

$60,329

$1,423,576

$29,614

1990

$494,409

$60,278

$684,801

$63,104

$1,695,058

$31,095

1991

$421,932

$63,352

$604,227

$66,954

$1,617,205

$32,650

1992

$443,383

$64,683

$664,338

$69,029

$1,959,303

$34,282

1993

$408,732

$65,912

$642,517

$71,031

$2,077,675

$35,996

1994

$389,170

$67,032

$648,750

$72,949

$2,317,714

$37,796

1995

$320,559

$68,172

$572,980

$74,919

$2,268,746

$39,686

1996

$335,474

$69,194

$662,023

$76,792

$2,962,866

$41,670

1997

$309,390

$70,786

$679,980

$79,326

$3,394,138

$43,754

 

$294,032

 

$740,186

 

$4,128,678

 

 

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Re: Bengen's 4% Distribution Method

Bengen’s 4% Rule provides the withdrawal that a retiree needs to maintain his standard of living.  Each withdrawal is in real dollars (adjusted for inflation).  Since 1994 financial experts have been discussing  its two biggest problems.  The first is the portfolio can run out of money.  The second is it sometimes leaves a lot of money behind that could have been used.  I looked at the downside in my last post of  Bengen’s 2001 Ceiling and Floor method.  Now I’m looking at the upside.

I had originally thought that the crossover point for which provided the best withdrawals was 82.  Now that I’ve fixed the data its 75.  Retiring at age 65, Bengen’s Ceiling and Floor method provides for a higher income than Kitces’ Ratchet-up approach for the first 10 years.  The two methods provided for about the same withdrawals for two years then Kitces’ Ratchet-up method takes off.  That 12-year ratchet in 2001 added an additional $3,500 to the withdrawal.  Because of really good returns Kitce’s method continue to outperform.

 The main question I had was when are you too old to enjoy it.  When the retiree is 80 years old (2004) Kitces’ Ratchet-up method’s withdrawal is 22% higher.  At 85 its 34% higher.  And, at 90 its 62% higher.  Does great returns that late in life (if the retiree lives that long) make the method superior?

It’s a great return method only.  It crashed and burned along with Bengen’s 4% Rule during the 1968 retirement.  The only way to make sure it works both way is combined with another method such as as a Bengen’s 4% method using inflation minus one percentage point.  I created checklists for both.  My wife said she would rather use the hybrid method using a modified 4% Rule for down markets and Kitces’ Ratchet-up method for up markets.  Here is the 1990 comparison.  I haven't tested the hybrid method.

                       Bengen's                         Bengen's                     Kitces" 3-yr

                        4% Rule                  Ceilings & Floors                Ratchet-Up

year

Beg Bal

Withdraw

Beg Bal

Withdraw

Beg Bal

Withdraw

1990

$500,000

$20,000

$500,000

$20,000

$500,000

$20,000

1991

$466,512

$21,220

$498,048

$19,922

$466,512

$21,220

1992

$550,604

$21,878

$581,258

$23,250

$550,604

$21,878

1993

$570,654

$22,512

$606,387

$24,255

$570,654

$22,512

1994

$622,250

$23,120

$667,414

$26,697

$622,250

$23,120

1995

$596,194

$23,744

$612,269

$24,491

$596,194

$26,119

1996

$760,900

$24,338

$757,705

$29,206

$757,744

$26,772

1997

$855,812

$25,141

$797,124

$30,169

$849,317

$27,655

1998

$1,023,636

$25,569

$921,803

$30,682

$1,012,534

$30,938

1999

$1,118,434

$25,978

$996,630

$31,173

$1,099,976

$31,433

2000

$1,140,634

$26,679

$925,487

$32,015

$1,115,666

$32,282

2001

$1,229,806

$27,586

$1,037,946

$33,103

$1,196,057

$36,717

2002

$1,252,593

$28,027

$1,079,101

$33,633

$1,207,916

$37,305

2003

$1,140,071

$28,700

$1,093,978

$34,440

$1,089,839

$38,200

2004

$1,341,980

$29,245

$1,161,889

$35,095

$1,269,855

$42,818

2005

$1,459,367

$30,211

$1,212,093

$36,253

$1,364,096

$44,231

2006

$1,526,625

$31,238

$1,216,759

$37,485

$1,409,880

$45,735

2007

$1,764,108

$32,019

$1,312,296

$38,422

$1,609,282

$51,566

2008

$1,877,065

$33,331

$1,345,338

$39,998

$1,688,096

$53,681

2009

$1,432,581

$33,365

$1,176,895

$40,038

$1,269,941

$53,734

2010

$1,709,843

$34,266

$1,318,982

$41,119

$1,486,204

$60,704

2011

$1,858,885

$34,780

$1,413,955

$41,735

$1,581,451

$61,614

2012

$1,894,334

$35,823

$1,504,365

$42,988

$1,578,350

$63,463

2013

$2,092,126

$36,432

$1,608,392

$43,718

$1,705,309

$70,996

2014

$2,459,843

$36,978

$1,708,467

$44,374

$1,955,620

$72,060

2015

$2,660,790

$37,274

$1,798,385

$44,729

$2,068,525

$72,637

2016

$2,625,090

$37,535

$1,776,103

$45,042

$1,997,085

$80,460

2017

$2,872,444

$38,323

$1,870,930

$45,988

$2,127,646

$82,150

2018

$3,251,304

$39,128

$2,011,086

$46,954

$2,346,593

$83,875

2019

$3,102,319

$39,872

$1,913,654

$47,846

$2,185,334

$94,015

2020

$3,751,804

 

$2,171,614

 

$2,562,074

 

 

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Re: Bengen's 4% Distribution Method

I agree that late returns are less valuable than early returns, because we may very well not be alive to receive them and may not be able to enjoy them if we are.

I’d be slow to exclude the standard Kitces because of the failure at age 89, using Wellington, for the 1968- period. For those using the index funds that Kitces tested, there wasn’t a failure. And even for those committed to Wellington (perhaps because it would be too taxing to make a switch), I understand that Wellington is transitioning to a blend fund, which would align it more closely with what was tested by Kitces. Besides, a very small chance of a late failure (when one may well be dead anyway) is arguably outweighed by the higher earlier withdrawals during bad periods (the 10th percentile periods as well as the extremely low percentile period starting 1968) than with Bengen Floors-and-Celings and with your modified Kitces.

In any case, we seem to have reached a pretty good understanding of the pros and cons of the most frequently discussed methods. Thanks for all your work on this!

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Re: Bengen's 4% Distribution Method

Yes.  The 1968 30-year Wellington retirement was an anomaly.  Bengen using 50% S&P 500 and 50% intermediate treasury bonds didn’t see it.  His tests were 100% successful at 4%.  But, the Trinity Study using 50% S&P 500 and 50% long-term, high grade corporate bonds may have.  Their test were 95% successful using 4%.  The future is unknown and perhaps I’m just being overly protective but I wanted something that would work.  Cutting spending just a little during down markets does.  It allows the portfolio to last 30 years and still provides a survivable income.

Here is one last spread sheet that I was looking at a lot. All of the methods work great if it’s a great market. But let’s assume the market goes to crap.  It is the feared sequence-of-return that people talk about.  After the first two years the retiree’s portfolio is down from its original investment.  He’s scared.  Every single investment expert will tell him to ride out the storm.  Do not retreat into bonds.

Baseline:  Bengen’s 4% Rule. 4% initial withdrawal with subsequent withdrawals increased by inflation.  This is the amount needed to maintain the current standard of living.

The table shows the percent of inflation adjusted withdrawals each method will pay if the anomaly hits.

Method 1.  4% initial withdrawal with subsequent withdrawals increased by inflation minus 1% point.

Method 2.  4% times end-of-year (EOY) balance or last withdrawal whichever is larger.

Method 3.  1/2 Bengen’s 4% rule plus 1/2 4% times EOY balance.

Method 4.  Government required minimum distribution (RMD) times 1.24.  That times the EOY balance.

Method 5. 4% times EOY balance with a ceiling 5% higher and a floor 2.5% lower of the last withdrawal.

Method 6. 4% times EOY balance with a ceiling 20% higher and a floor 15% lower than initial withdrawal adjusted for inflation.

Method 7.  Kitces’ ratchet up method was not used.  The portfolio balance never grew 50%.

 

Age

# 1

#2

#3

#4

#5

#6

65

100%

100%

100%

100%

100%

100%

66

99%

99%

99%

101%

99%

99%

67

98%

93%

91%

86%

91%

85%

68

97%

88%

85%

85%

84%

85%

69

96%

85%

83%

88%

80%

85%

70

95%

83%

82%

93%

81%

85%

71

94%

76%

73%

74%

73%

85%

72

94%

68%

59%

54%

63%

85%

73

93%

63%

54%

62%

58%

85%

74

92%

60%

55%

72%

56%

85%

75

91%

57%

52%

64%

51%

85%

76

90%

52%

48%

61%

46%

85%

77

89%

46%

45%

56%

42%

85%

78

89%

43%

45%

52%

39%

85%

79

88%

39%

43%

51%

38%

85%

80

87%

45%

45%

52%

38%

85%

81

86%

51%

49%

54%

39%

85%

82

85%

52%

52%

57%

39%

85%

83

84%

62%

58%

59%

40%

85%

84

84%

70%

66%

65%

41%

85%

85

83%

67%

68%

68%

41%

85%

86

82%

70%

71%

73%

42%

85%

87

81%

78%

77%

77%

42%

85%

88

80%

74%

75%

82%

41%

85%

89

80%

79%

79%

90%

42%

85%

90

79%

79%

82%

98%

43%

85%

91

78%

84%

86%

108%

44%

85%

92

77%

82%

85%

120%

45%

85%

93

77%

97%

95%

134%

46%

85%

94

76%

105%

104%

147%

47%

85%

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Re: Bengen's 4% Distribution Method

Because there are surprises here is the same table using the very good years of 1990 to the present.  Method #4 get the retiree the money earlier.  But that may be a riskier approach if a crash would come later.  All, including #4, hold back until the final years just in case.

Baseling:  Bengen’s 4% Rule.  4% initial withdrawal with subsequent withdrawals increased for inflation.

Method 1.  Not needed.  It leaves behind too much money that could be used.

Method 2.  4% times end-of-year (EOY) balance or last withdrawal whichever is larger.

Method 3.  1/2 Bengen’s 4% rule plus 1/2 4% times EOY balance.

Method 4.  Government required minimum distribution (RMD) times 1.24.  That times the EOY balance.

Method 5. 4% times EOY balance with a ceiling 5% higher and a floor 2.5% lower of the last withdrawal.

Method 6. 4% times EOY balance with a ceiling 20% higher and a floor 15% lower than initial withdrawal adjusted for inflation.

Method 7.  Kitces’ ratchet up method.  First use Bengen’s 4% rule.  Every three years if the EOY balance is 50% bigger after the Bengen proposed withdrawal than initial balance multiply the proposed withdrawal 110% to get the withdrawal.  Subsequent withdrawals are increase off of this.

 

Age

# 1

#2

#3

#4

#5

#6

#7

65

100%

100%

100%

100%

100%

100%

100%

66

99%

94%

94%

90%

92%

94%

100%

67

98%

101%

97%

106%

94%

106%

100%

68

97%

102%

100%

109%

95%

108%

100%

69

96%

108%

104%

118%

98%

115%

100%

70

95%

105%

102%

113%

100%

103%

110%

71

94%

125%

114%

144%

102%

120%

110%

72

93%

135%

125%

160%

104%

120%

110%

73

92%

157%

142%

191%

107%

120%

121%

74

92%

166%

155%

208%

111%

120%

121%

75

91%

162%

160%

208%

113%

120%

121%

76

90%

166%

165%

219%

115%

120%

133%

77

89%

163%

166%

220%

119%

120%

133%

78

88%

159%

156%

197%

122%

120%

133%

79

87%

161%

161%

228%

126%

120%

146%

80

86%

167%

166%

239%

128%

120%

146%

81

86%

165%

168%

241%

130%

120%

146%

82

85%

183%

178%

270%

133%

120%

161%

83

84%

183%

183%

274%

134%

120%

161%

84

83%

182%

162%

206%

141%

120%

161%

85

82%

178%

160%

237%

144%

120%

177%

86

81%

175%

164%

249%

149%

120%

177%

87

81%

170%

163%

241%

152%

120%

177%

88

80%

167%

167%

255%

157%

120%

195%

89

79%

184%

181%

287%

162%

120%

195%

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Frequent Contributor

Re: Bengen's 4% Distribution Method

I have a few questions that I hope you can clear up:

  1. Are you using Wellington or Wellesley for your retirement portfolio?  If so, do you think your analysis applies to any portfolio that has the same asset allocation (stocks and bonds) as VWINX/VWELX?  Specifically, rather than a balanced fund like these two, will you use two different funds, one for your stock allocation and another for your bond allocation?  If so, will you rebalance?  If so, how often?
  2. Are you using the modified Bengen (Bengen minus 1% during down years) as your withdrawal method.  If not, what other method will you use?  Finally, will you 'switch' from one method to another during your 30 year retirement period?  If so, what 'trigger' will you use to switch?
ElLobo, de la casa de la toro caca grande
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Re: Bengen's 4% Distribution Method

 

Nice job...Mustang and everyone.

R48

 

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Re: Bengen's 4% Distribution Method

Clear, informative tables. I'm going to print and file them. Yes, if the retiree gets anxious, climbing aboard your (inflation minus 1 percentage point) rule, with whatever initial withdrawal Bengen gives for the age at which s/he gets anxious, would provide a lot of reassuring safety. Until then, perhaps, either Bengen Floors-and-Ceiling or Kitces. For pre-tax accounts, of course, the IRS may at some point require a withdrawal larger than one's rule calls for.

I can't claim to have followed any rule. Good markets have thus far let me be relaxed about it. I use the (RMD times 1.24) rule simply for an idea of the maximum I could reasonably spend in a given year if I should want to.

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Re: Bengen's 4% Distribution Method

Very good questions.

Our retirement portfolio consists of American Funds Balanced Fund and Mutual Fund in our traditional IRA.  We have Wellington and Wellesley Income in taxable accounts.  We will use MRD from our T-IRA.  This theoretical discussion was to develop a plan for our taxable accounts.

The discussion is general in nature.  It would not apply to other funds.  Just like Bengen and the Trinity studies results differed using different bonds.  Any tests that I have done differ as well.  If someone is thinking of using one of these methods I'd advise listening to the experts then apply their advice to their particular situation.

No I will not use different stock and bond funds even though that might be better.  I don't want to mess with re balancing now and I really doubt I will be able to when I 90. My wife doesn't either.  That is why we chose balanced funds to begin with.

We aren't withdrawing anything now.  Just planning.  As an old ICBM crewman I used to live by checklists.  I cannot see the future.  I have prepared a checklist that uses the modified Bengen method using inflation -1% if the portfolio end of year (EOY) balance is down and using full inflation if it is up.  Using Kitces' method every third year there is a review and if the EOY balance is up 50% then the withdrawal is increased by 10% and it replaces the withdrawal without the increase in future Bengen 4% Rule calculations.  My wife has looked at it and said it was plenty easy to use.

She has one other decision to make.  Which fund to take the withdrawal out of.  It is just the fund with the biggest EOY balance.

I don't plan on switching but who knows.  Better information becomes available all the time.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

The primary reason I don’t like Vanguard’s method is, unless they have tons of discretionary income, like most of the methods we’ve discussed it severely impacte the retiree’s standard of living.  Bengen’s ceiling and floors method didn’t.


It is possible to combine preferred aspects that Bengen Floor-and-Ceiling has for bad starting years and that Vanguard Dynamic Spending has for good starting years. Use Vanguard Dynamic Spending but also use the Bengen floor percentage to determine a minimum withdrawal amount each year; do not use the Bengen ceiling.

The real (inflation-adjusted) withdrawal amount would be at least 3.6% of the initial balance, when using an initial withdrawal rate of 4% and a floor percentage of 10%. The real withdrawal amount would increase relative to the real withdrawal for the previous year by up to the percentage, for example 5%, of Vanguard Dynamic Spending.

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Re: Bengen's 4% Distribution Method

Just stop by to catch up and not read everything but have a thought.  Using all balanced funds in Trust is very simple and withstands your analyses presented.  Adding one level of complexity, one could think of a 2 pocket (not using bucket purposely) approach.  The balanced funds would be in your right pocket and spent only as needed.  The left pocket would be money to cover one year of gap expenses.  This would be money invested in liquid, low volatility assets like good low duration bond fund or money market that would be where you stick your hand first every month for money to spend.  No equities in this pocket.  Just a thought.  I doubt you will like because can't be analyzed as easily with your methodology.  But just mentioning in case others may want to think about.  That is what I am thinking for myself.  

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Re: Bengen's 4% Distribution Method

@PatMorgan  I thought I was done and you throw out an interesting idea.  If I get to that I'll test it tomorrow.

@PaulR888We have a little over a year's income in a savings account.  I don't count it in my analysis but its there if we need it.  I also don't count our Roth IRAs.  I consider them emergency money.

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Re: Bengen's 4% Distribution Method

This is not the Bucket system where you have multiple funds in three buckets spending cash first and pruning back funds that have grown each year to replenish cash.  I will leave that to individuals who want to be more active in managing their investments than I do.

When looking at all of this stuff.  I was testing Wellesley Income Fund as well as Wellington and comparing the two.  First I had to change Wellington’s start date from 1968 to 1971, the year Wellesley income was started.  It was interesting.  Moving the start date three years avoided the sequence-of return failure that happened in 1968.  Pretty much the same high inflation years but the 1971 start date did not run out of money early.  In fact it left behind a nice little nest egg.

But Wellesley Income Fund did better.  Starting with an original investment of $500,000 and using Bengen’s 4% Rule for withdrawals, withdrawals were exactly the same for both funds.  But comparing 30-year retirement periods starting in 1971 Wellesley’s ending balance was $2,993,000 and Wellington’s was $1,434,000.  The results were reversed using a start date of 1990.  Wellesley’s was only $2,606,000 and Wellington’s was $3,752,000.

Even today there are times Wellesley completely outshines Wellington. In 2008 I became convinced it should be my rainy day fund.  Although long term it typically earns 1% point less than Wellington, it lost 9.8% compared to Wellington’s 22.2%.   This year YTD it is earning a profit while Wellington has a loss.

Investing 50% into Wellington and 50% into Wellesley would give the portfolio roughly a 50/50 stock to bond asset allocation.  I do not want to have to re-balance every year. 50/50 is not a hard rule just a general target.

My plan is simple.  We just take the withdrawal that year from the fund which has the highest EOY balance.  During good years that would most likely be Wellington unless profits are so low it didn’t recover the previous year’s withdrawal.  During bad year withdrawals would come from Wellesley.

Do you guys think this will work?

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

This is not the Bucket system where you have multiple funds in three buckets spending cash first and pruning back funds that have grown each year to replenish cash.  I will leave that to individuals who want to be more active in managing their investments than I do.

When looking at all of this stuff.  I was testing Wellesley Income Fund as well as Wellington and comparing the two.  First I had to change Wellington’s start date from 1968 to 1971, the year Wellesley income was started.  It was interesting.  Moving the start date three years avoided the sequence-of return failure that happened in 1968.  Pretty much the same high inflation years but the 1971 start date did not run out of money early.  In fact it left behind a nice little nest egg.

But Wellesley Income Fund did better.  Starting with an original investment of $500,000 and using Bengen’s 4% Rule for withdrawals, withdrawals were exactly the same for both funds.  But comparing 30-year retirement periods starting in 1971 Wellesley’s ending balance was $2,993,000 and Wellington’s was $1,434,000.  The results were reversed using a start date of 1990.  Wellesley’s was only $2,606,000 and Wellington’s was $3,752,000.

Even today there are times Wellesley completely outshines Wellington. In 2008 I became convinced it should be my rainy day fund.  Although long term it typically earns 1% point less than Wellington, it lost 9.8% compared to Wellington’s 22.2%.   This year YTD it is earning a profit while Wellington has a loss.

Investing 50% into Wellington and 50% into Wellesley would give the portfolio roughly a 50/50 stock to bond asset allocation.  I do not want to have to re-balance every year. 50/50 is not a hard rule just a general target.

My plan is simple.  We just take the withdrawal that year from the fund which has the highest EOY balance.  During good years that would most likely be Wellington unless profits are so low it didn’t recover the previous year’s withdrawal.  During bad year withdrawals would come from Wellesley.

Do you guys think this will work?


Absolutely it will work!

Just for kicks, considering your taxable, Traditional IRA, and Roth as one whole portfolio, what is you overall total stock/bond/cash allocation?  I assume cash is 4%, given your reply to Paul.  No numbers, just percentages.  Then, can you tell me the overall distribution yield of your portfolio?

You've taken one of the two major (typical!) approaches to retirement planning, starting with a nestegg that you've built up over the years, then figuring out much you can take out of it, safely, and expect it to last at least 30 years, accounting for your expected wants and needs.

Others come at it from the most simplistic standpoint.  Here's how much money (investments and savings I have), here is how much money I need/want going forward, I want/need it to last 30 years, so here is the asset allocation (stocks/bonds/cash) I should go with and, finally, here are the specific funds or other investments I should go with.

Nothing wrong with doing things either way, of course.  We each have our own train of logical thought.  From your ongoing comments, it looks to me like your whole 'portfolio' (taxable, TIRAs, Roths, savings) might be something like 48/48/4 stock/bond/cash, given that you seem to favor balanced funds, specifically VWINX, VWELX, AMRMX, and ABALX (I can't find the symbol MRD.)  Given these 4 funds, my guess would be that your overall total portfolio distribution yield would be about 2.5%.  You've stated that you need about a 3% real rate of withdrawal during retirement (lasting 30 years) but are planning for 4% as a fudge factor.

You've stated that this whole discussion was specifically just for your taxable accounts.  Ifn you meant RMD (Required Minimum Distribution) from your TIRA, which makes sense, regardless of its allocation, that makes sense in terms of a withdrawal method.  Finally, you told Paul that your Roths were not part of this discussion, since you consider them to be 'emergency' money.

I don't know about the others, but, ifn the above is as you say, I have a completely different picture, today, than what I had at the start of this thread, 3 weeks ago.  I assumed your whole 'portfolio' included your taxable, TIRA, and Roth, not just taxable.  I assumed you needed 4%, not wanted 4% while needing only 3%, from your taxable account, not your whole portfolio.

In general, and to answer your specific question (Do I think it will work), my answer is yes, there should be no real issues since it looks like you need way less than 3% from your whole portfolio as well as want way less than 4% from your whole portfolio, given that those numbers apply specifically to your taxable account, not your whole portfolio!

Some suggestions.  First, even though the IRS requires RMDs from a TIRA, starting at age 70.5, just because you have to take that money out of it, and pay taxes, doesn't mean that you have to spend it or consider it part of your retirement planning.  You can either take a distribution in kind OR, if taken as cash, put the money right back into a taxable account, with no loss of value (other than the taxes paid).

Next, there are some good tax reasons for spending down your taxable account before touching your TIRA, then spending both down before touching your Roth, the goal being to minimize your tax bill, going forward.  Mega ditto for converting some, or all, of your TIRA to a Roth, regardless of your RMDs (conversions don't count towards RMDs).  Ifn you haven't already considered this, you might want to do so.

At any rate, it might also make a difference in terms of this thread.  Say your overall whole portfolio is equally spread between your taxable, TIRA, and Roth and you've determined that you absolutely need a real, inflation adjusted 3% from your portfolio.  So say your whole portfolio is valued at $1 million, meaning you have $333k in taxable, $333k in TIRA, and $333 in your Roths, so a 3% withdrawal would be $33,000/year.

One method would be to take $11,000 out of each of your three accounts, which is 3% from each.  Another method would be to take 10%, or $33,000 out of your taxable account, while nothing out of either your TIRA or your Roth.  A third method would be to take your RMD from your TIRA, then the rest from your taxable account.  Math wise, the three methods are equivalent, but the later 2 methods will exhaust your taxable account first.

This won't make any difference at all ifn your required rate of withdrawal is 3%.  Ifn it is 4%, then, given every thing else, you still won't have any problems, given your fudge factors and emergency ROTH money.  Nevertheless, even if you do assume 4% of your whole portfolio is needed (required), not simply wanted, you still might think of spending down your taxable first, to minimize future tax liabilities) by first taking and spending your RMDs, then spending down your taxable account first.

In my above example, your yearly 4% withdrawal is $40,000 (inflation adjusted), so first take your RMD from your TIRA, according to IRS regulations, then take whatever remains first from your taxable account.  SO, ifn you haven't reached age 70.5, the whole $40,000 would come from taxable, which starts retirement at a $333,333 value, or a real 12% withdrawal from taxable.  You fully expect you taxable account to be depleted in about 8 years (100% divided by 12% is 8.33 years).

Anyhow, you obviously have given this much more thought than others approaching retirement have, while those of us who have been out now for a decade or two can only relate to you what has worked, for us.  I can only offer some advice that my Dad gave me 60 years ago, which, while I didn't ignore it, didn't fully understand it, at that time.  He said, son, get lots while you're young.  It wasn't until I approach retirement 20 years ago that I fully understood that he mean real estate!  8-)

From vacation in Branson, MO, have a safe and healthy Fourth of July!

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

Mustang ...  Who knows if any of this will work?  We don't know the timing nor duration of black swan events in our future.  The main thing is that you are comfortable with it and tested it best you can.  That is all that counts in my mind.  I keep drawing parallels to book I am re-reading, "Golf is Not a Game of Perfect".  One quote:  "It is more important to be decisive than to be correct when preparing to play any golf shot, particularly a putt."  Go for it as you will have greater confidence in it with all the testing.  

Wrt to buckets, you are using one bucket.  I was only suggesting 2 buckets, like I plan to use when I am living off my Trust again.  I will be taking RMDs in 5 years and is a simple task to fill up liquidity in Bucket 1 to spend for the year and keep the allocation funds untouched to grow.  I agree with Christine Benz that it is sub-optimal to be spending allocation funds which will have a component of more volatility than you would have in a stock-less Bucket 1.  I have not tested this.  If anything, it is an intuitive belief and training from my buckets learning that it is better to spend first non-volatile assets.  If it's too complicated, OK.  Just wanted to point this out to others to consider.  

Edit:  Just read ElLobo and correcting that RMDs now start in the year you turn 72 not 70.5.  

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Re: Bengen's 4% Distribution Method

 

Mustang...I think you have it down pat as to a withdrawal scheme.  You spent considerable time.

But to me, what you will be invested in, is way more important.  Apply similar efforts to this aspect, and you will not worry at all about SWR.

In this regard, i consider you are placing a lot on Wellesley, based on past performance and usefulness in SWR (backward looking) analysis.  But bonds go in 33 year bull/bear market cycles.  We are in about year 39 for bonds.  Bond funds were great when Treasuries were at 15% yield; not so at 0.67% yield.  Wellesley is primarily bonds.

There are many investing guru's who consider the bond market today is UNINVESTABLE!  Meaning rates so low, projected returns so poor, that you most likely will build in negative REAL returns.  Are you considering what these guru's are saying?

If you go to just money market funds or cash, at zero percent yield, does you SWR plan work?  Perhaps just makes it...all the time.  So are you trading off reasonable investing spaces, for safety?

As a minimum, I would suggest Wellington Fund over Wellesley.  Or, how about some Preferred Share stock funds, that get yields around 5% or more?  Or income builder funds?  Also, I suggest a core and explore approach.  Core being your balanced or long term holdings; explore being in areas that may provide some long term growth.

Disclosure:  I have greatly reduced my bond fund holdings, first time in 50+ years...now in mostly very short term bond funds and MM funds...using patience to see where I will invest for next decade.  I doubt standard vanilla bonds will be much part of this.  And while I have owned Wellington since 1953, I am not adding to it.

Good luck

R48

 

 

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Re: Bengen's 4% Distribution Method

@retiredat48 

No, I haven’t specifically considered that. But I hope the fund managers have.

  Your comments concern me more for my traditional IRA than it does for my taxable funds.  I have been using the general rule for asset allocations.  10 years ago I was almost 90% stock split between growth and value funds with 10% in a moderate-allocation fund.  As I got closer to minimum required distributions I phased out the stock funds and am now 100% in a moderate-allocation fund.  I am currently doing the same for my wife's traditional IRA.  She is down to 10% stock funds and 90% moderate-allocation fund.  I had planned on phasing out the stock fund before her MRDs.

The last year seems to have confirmed that this is a good approach.  AF Mutual Fund (AMRMX) is a 5-star gold fund that is currently performing 8 points higher than it category/index and it is still losing almost 7% for the year to date and is barely breaking even for the last 12 months.  AF Balanced Fund (ABALX) is 5-star silver fund that is roughly 60% of our total portfolio (including taxable funds and cash). It is down only 0.4% for the year to date and is up 6.3% over the last 12 months.

According to Morningstar analysts what helped the fund was cutting back on its stock allocation from 65% to 60%.  Its bonds fall in the medium risk/moderate interest rate sensitive area.  Looking at the details 65% are AAA while the category average is 47%.  To compare, Wellington’s (VWENX) is 28% AAA.

I only know what this stuff means in general.  But I know the fund manager can go heavier to stocks or move to riskier bonds to get the best returns.

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Re: Bengen's 4% Distribution Method

I share retiredat48's skepticism concerning bonds. With interest rates so low, and the national debt exploding, I can’t imagine that we’ll not see inflation and rising rates once the pandemic is past. I’m also skeptical that managers of bond funds and the bond portions of balanced funds will be able to make a silk purse out of a sow’s ear.

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Re: Bengen's 4% Distribution Method

Good bond managers can find good returns and yield and are optimistic about being able to do so.  The global opportunity set of bond assets is vast.  

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