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Explorer ○

Re: Bengen's 4% Distribution Method

@Mustang  Right, an annual withdrawal of 1.6 times RMD is surely too high, and I’m sure that Pfau wouldn’t recommend it. For those wanting a simple rule, he has commended both 1.0 times RMD and 1.24 times RMD. (1.24 was the factor by which the 3.23% RMD for a 65-year old inheritor of an IRA needed to be multiplied to reach 4%.) He writes, “The RMD rules [of the IRS] assume investment returns of 0% . . . [W]ith this conservative return assumption, some retirees may decide that the RMD strategy provides overly conservative spending rates.”

Your budgeting skills and efforts are impressive. Lacking both the skills and the inclination to learn and implement them, and being a family of one, I simply keep track of my net worth. Aided by a long bull market, it keeps increasing even as my life expectancy keeps decreasing. Two things help: an inheritance and a basic lifestyle established when I was less affluent. The compensation for age is money. Most of us retirees have a lot more than we used to---and a lot more than we’re used to spending. So I just muddle along.

The statement you found confusing was indeed a misstatement. I wouldn’t feel free to take 1.24% of RMD in the face of continuing declines in my asset base. Even in these good times, I usually take only 1.0 times RMD. When extra money is needed for trips or whatever, I take what I need from cash or perhaps take more than the RMD from my IRA.

Thanks for filling me in on your interesting career. I was a philosophy professor. It’s partly because I spend most of my time even now on philosophy that I’m loathe to expend intellectual energy on budgeting. (I find investments and withdrawal rules more interesting!)

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

 

 

 

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

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



R48 reply in bold...the following is not a recommendation for or against budgeting; it is simply what I did:

In my 27 years of retirement (age 48) I have never done budgets.  And I had three kids in college when I retired.

It is simply not in my makeup to micro-manage this way.  Yes, I now tend to use charge cards for most things, and they often provide an excellent rackup of my expenses, so if I wanted to, each December I could total my spending .  But I never do.  And for the few big-hitter expenses, like a new car, or a new roof on the house (I have 3), these are predictable, knowable items to allow for.

Rather, ( as someone else posted)...I simply consider my portfolio value at year end, and almost "by observation" know if I am on-track...(or OK,) or not.  

R48

 

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:

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


Bengen used historical investment data of stocks and bonds. Please post a portfolio of actual investments that had: an initial distribution yield equal to a desired initial rate of withdrawal of at least 4%, distribution amounts that grew by inflation, and a 100% success rate over 30 years for all starting years.

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Re: Bengen's 4% Distribution Method


@PatMorgan wrote:

@ElLobo wrote:

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


Bengen used historical investment data of stocks and bonds. Please post a portfolio of actual investments that had: an initial distribution yield equal to a desired initial rate of withdrawal of at least 4%, distribution amounts that grew by inflation, and a 100% success rate over 30 years for all starting years.


Paul:  The DFA data table I already posted, while not showing actual investments, show a lot of success at various stock:bond allocations for a 4% withdrawal rate.  Whether an actual portfolio has a 4% yield or sells opportunistically and intelligently is simply a matter of convenience.  I don't want to think and hunt for monthly income so I like the yield convenience,  

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Re: Bengen's 4% Distribution Method


@PatMorgan wrote:

@ElLobo wrote:

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


Bengen used historical investment data of stocks and bonds. Please post a portfolio of actual investments that had: an initial distribution yield equal to a desired initial rate of withdrawal of at least 4%, distribution amounts that grew by inflation, and a 100% success rate over 30 years for all starting years.


Are you assuming investments didn't change from 1926 to the present?  I'm certain I misunderstood the question.

  I'm not going to redo all 51 of Bengen's retirement period. They are quoted often enough I believe they were all published, peer reviewed studies. 

Because I'm curious I will do the last 30 years of Vanguard Wellington. Here you go. Annual withdrawals are taken out on January 1st.  Annual return is calculated after the withdrawal.  Each withdrawal is increased for the previous year's inflation.  I would say that this retirement period beat all of my expectations.

year

Beg Bal

withdraw

return%

End Bal

inflation%

1990

$1,000,000

$40,000

-2.81

$933,024

6.1

1991

$933,024

$42,440

23.65

$1,101,207

3.1

1992

$1,101,207

$43,756

7.93

$1,141,307

2.9

1993

$1,141,307

$45,025

13.52

$1,244,500

2.7

1994

$1,244,500

$46,240

-0.49

$1,192,389

2.7

1995

$1,192,389

$47,489

32.92

$1,521,801

2.5

1996

$1,521,801

$48,676

16.19

$1,711,624

3.3

1997

$1,711,624

$50,282

23.23

$2,047,271

1.7

1998

$2,047,271

$51,137

12.06

$2,236,868

1.6

1999

$2,236,868

$51,955

4.41

$2,281,268

2.7

2000

$2,281,268

$53,358

10.4

$2,459,612

3.4

2001

$2,459,612

$55,172

4.19

$2,505,186

1.6

2002

$2,505,186

$56,055

-6.9

$2,280,141

2.4

2003

$2,280,141

$57,400

20.75

$2,683,960

1.9

2004

$2,683,960

$58,491

11.17

$2,918,734

3.3

2005

$2,918,734

$60,421

6.82

$3,053,249

3.4

2006

$3,053,249

$62,475

17.97

$3,528,216

2.5

2007

$3,528,216

$64,037

8.37

$3,754,131

4.1

2008

$3,754,131

$66,663

-22.3

$2,865,163

0.1

2009

$2,865,163

$66,729

22.2

$3,419,685

2.7

2010

$3,419,685

$68,531

10.94

$3,717,770

1.5

2011

$3,717,770

$69,559

3.85

$3,788,667

3

2012

$3,788,667

$71,646

12.57

$4,184,251

1.7

2013

$4,184,251

$72,864

19.66

$4,919,686

1.5

2014

$4,919,686

$73,957

9.82

$5,321,580

0.8

2015

$5,321,580

$74,548

0.06

$5,250,179

0.7

2016

$5,250,179

$75,070

11.01

$5,744,889

2.1

2017

$5,744,889

$76,647

14.72

$6,502,607

2.1

2018

$6,502,607

$78,256

-3.42

$6,204,638

1.9

2019

$6,204,638

$79,743

22.51

$7,503,608

2.3

2020

$7,503,608

$81,577

 

 

 
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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@PatMorgan wrote:

@ElLobo wrote:

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


Bengen used historical investment data of stocks and bonds. Please post a portfolio of actual investments that had: an initial distribution yield equal to a desired initial rate of withdrawal of at least 4%, distribution amounts that grew by inflation, and a 100% success rate over 30 years for all starting years.


Are you assuming investments didn't change from 1926 to the present?  I'm certain I misunderstood the question.

  I'm not going to redo all 51 of Bengen's retirement period. They are quoted often enough I believe they were all published, peer reviewed studies. 

Because I'm curious I will do the last 30 years of Vanguard Wellington. Here you go. Annual withdrawals are taken out on January 1st.  Annual return is calculated after the withdrawal.  Each withdrawal is increased for the previous year's inflation.  I would say that this retirement period beat all of my expectations.

year

Beg Bal

withdraw

return%

End Bal

inflation%

1990

$1,000,000

$40,000

-2.81

$933,024

6.1

1991

$933,024

$42,440

23.65

$1,101,207

3.1

1992

$1,101,207

$43,756

7.93

$1,141,307

2.9

1993

$1,141,307

$45,025

13.52

$1,244,500

2.7

1994

$1,244,500

$46,240

-0.49

$1,192,389

2.7

1995

$1,192,389

$47,489

32.92

$1,521,801

2.5

1996

$1,521,801

$48,676

16.19

$1,711,624

3.3

1997

$1,711,624

$50,282

23.23

$2,047,271

1.7

1998

$2,047,271

$51,137

12.06

$2,236,868

1.6

1999

$2,236,868

$51,955

4.41

$2,281,268

2.7

2000

$2,281,268

$53,358

10.4

$2,459,612

3.4

2001

$2,459,612

$55,172

4.19

$2,505,186

1.6

2002

$2,505,186

$56,055

-6.9

$2,280,141

2.4

2003

$2,280,141

$57,400

20.75

$2,683,960

1.9

2004

$2,683,960

$58,491

11.17

$2,918,734

3.3

2005

$2,918,734

$60,421

6.82

$3,053,249

3.4

2006

$3,053,249

$62,475

17.97

$3,528,216

2.5

2007

$3,528,216

$64,037

8.37

$3,754,131

4.1

2008

$3,754,131

$66,663

-22.3

$2,865,163

0.1

2009

$2,865,163

$66,729

22.2

$3,419,685

2.7

2010

$3,419,685

$68,531

10.94

$3,717,770

1.5

2011

$3,717,770

$69,559

3.85

$3,788,667

3

2012

$3,788,667

$71,646

12.57

$4,184,251

1.7

2013

$4,184,251

$72,864

19.66

$4,919,686

1.5

2014

$4,919,686

$73,957

9.82

$5,321,580

0.8

2015

$5,321,580

$74,548

0.06

$5,250,179

0.7

2016

$5,250,179

$75,070

11.01

$5,744,889

2.1

2017

$5,744,889

$76,647

14.72

$6,502,607

2.1

2018

$6,502,607

$78,256

-3.42

$6,204,638

1.9

2019

$6,204,638

$79,743

22.51

$7,503,608

2.3

2020

$7,503,608

$81,577

 

 

 

Paul:     Mustang ...  can you guarantee the fund will never have successive years with poor "return %" like 2008?  It lost almost $890K that year.  Another similar year (back to back) or sequence of years (so-called sequence of returns risk) would hit portfolio hard.  That is why I do not like liquidating balanced funds in a down stock market.  You are selling low and selling shares that will not be around when the market rebounds.  I much prefer keeping stocks in a separate bucket and only sell them high.  And never have to sell them so to maintain the shares and allow full price elasticity rebound when market turns around.

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Re: Bengen's 4% Distribution Method

@PaulR888Of course not.  Sequence of returns is a real risk.  But Bengen's analysis updated by the Trinity studies updated by Pfau covered all the 30 year retirement periods from 1926 to 2016 and a 50/50 portfolio never failed.

The only thing I don't like about the bucket approach is that I think it is more complicated than necessary.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@PaulR888Of course not.  Sequence of returns is a real risk.  But Bengen's analysis updated by the Trinity studies updated by Pfau covered all the 30 year retirement periods from 1926 to 2016 and a 50/50 portfolio never failed.

The only thing I don't like about the bucket approach is that I think it is more complicated than necessary.


Sequence of returns will not be real risk if an investor has sufficient income from all sources at retirement to pay expenses and taxes without having to sell assets at depressed prices. At current low interest rates bucket strategy is not worth the hassle.

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Re: Bengen's 4% Distribution Method

Mustang ....   Right now my Trust account has virtually nothing in it, only small placeholders so I don't get stopped out of a fund.  Someday, I expect an inheritance.  So, thinking ahead I have a straw man portfolio planned,

I will just use 2 buckets.  Assuming $1M portfolio for simplicity, I have planned:

First bucket: $230K bond OEFs, $80K Calif Muni funds and $90K liquid money markets.  This will be where I would look to get cash.  If I have to, I will sell the bond funds in the order that makes most sense.  I will not have to worry about the vagaries of the stock market.  

Second bucket:  5 of my favorite allocation/balanced funds.  I plan to re-invest all dividends.  I hope to never have to sell these except if I get into dire situation.  So I do like these funds particularly as I get older and my mind loses charge.  So here will be $120K in each fund, right now set for VWINX, FMSDX, USBLX, MACFX and HBLVX.

I expect to move RMDs here and maintain this allocation.  

 

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Re: Bengen's 4% Distribution Method


@PatMorgan wrote:

@ElLobo wrote:

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


Bengen used historical investment data of stocks and bonds. Please post a portfolio of actual investments that had: an initial distribution yield equal to a desired initial rate of withdrawal of at least 4%, distribution amounts that grew by inflation, and a 100% success rate over 30 years for all starting years.


Easy peesy.  100% VWEHX portfolio, starting in 1985, withdrawing a real, inflation adjusted 4% from it.  Here is the link: with fund distributions reinvested and shares sold each December, to cover the withdawal.  With this real 4% rate of withdrawal, the CAGR over those 35 years was 5.09% at a 7.03%SD risk.

In 1985, according to PV, $1million invested in VWEHX poduced $141,657 in distribution cash, for a 14.16% distribution yield.  That year, 4% was withdrawn and spent, so 10.16% was reinvested in new shares, increasing the total cash distributed in 1986.

If you, on the other hand, invested $1million in VWEHX in 1985 and take all distributions in cash, you get a slightly different story.   Here is that link:

For the 4% real withdrawal case, the value of the all VWEHX portfolio never went below $1 million, and its value, today, is $5.8 million, nominal, $2.4 million real.

For the 5% real withdrawal case, the value, today, was $3.9 million again with no sub $1 million year.

At 6% real withdrawal, today's value was $1.9 million, nominal, $790K real.

At 7% real withdrawal, the value after 30 years, or in 2015, was $735K nominal, while the $1 million nestegg was spent down at the end of 2019.

The PV data only goes back to 1985, so there were only 5-30 year retirement time periods since then.  The results were similar (no portfolio was ever spent down, hence the POS was 100%) for retiring with a 100% VWEHX portfolio at any year since 1985.

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


@Intruder wrote:

@Mustang wrote:

@PaulR888Of course not.  Sequence of returns is a real risk.  But Bengen's analysis updated by the Trinity studies updated by Pfau covered all the 30 year retirement periods from 1926 to 2016 and a 50/50 portfolio never failed.

The only thing I don't like about the bucket approach is that I think it is more complicated than necessary.


Sequence of returns will not be real risk if an investor has sufficient income from all sources at retirement to pay expenses and taxes without having to sell assets at depressed prices. At current low interest rates bucket strategy is not worth the hassle.


+100

In simple math terms, if W% is your required rate of retirement withdawal while Y% is your total portfolio distribution yield, you never sell shares nor do you ever deplete (spend down) your nestegg as long as Y% is Greater Than or Equal to W%.

For Pat, W% was 4% while the distribution yield for VWEHX hasn't been below 5% for quite some time, and it was very high in the early years of the fund.  Today, VWEHX yields 5.33% so an investment in this fund, for a retirement portfolio, will quite adequately cover a 4% rate of retirement withdrawal, while the excess 1.33% distribution yield gets reinvested back into the fund, compounding, but growing the number of shares owned.  That, in turn, should 'grow' the total distribution 33% (1.33% divided by 4%.)

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

Because I had the spreadsheet already built for Bengen’s 4% Withdrawal Rule I decided to test the Modified RMD method.  Pfau multiplied the RMD rate times 1.24 to get a starting percentage of 4%.  This was at age 65.  So for comparison, the imaginary retiree turned 65 in 1990.

1990-2019 were some very good years.  VERY GOOD! There wasn’t a sequence of return problem.  There was a little volatility but the crash didn’t occur until 2008.  That was when Wellington lost 22.3%.  Withdrawals started at roughly $40,000 in both tables in 1990.  Wellington lost 2.81% in 1990. In 1991 the withdrawal was $42,440 for Bengen’s 4% withdrawal method but it dropped to $38,177 for the modified RMD method.  That was the volatility I was concerned about.

But after that it was off to the races.  Wellington had a 23.65% return in 1991, a 32.92% return in 1995, a 23.23% return in 1997, a 20.75% return in 2003 with only two additional losses: 0.49% in 1994 and 6.9% in 2002.  There were other very good years.  I only mentioned those that were above 20%.

By the time 2008 rolled around it didn’t matter.  Withdrawals were increased only by inflation using Bengen’s 4% withdrawal method.  The gains increased the portfolio’s value not the withdrawal.  By 2008 the withdrawal increased from $40,000 to $66,663.  But the portfolio’s value increased from $1,000,000 to $3,754,000.  Using the Modified RMD method withdrawals leaped from $40,000 to $182,370 while the portfolio’s value increased from $1,000,000 to $2,399,000.

In 2009 withdrawals increased by inflation for Bengen's 4% rule but dropped $44,600 for the Modified RMD method.  That would not have been a problem unless the imaginary retiree had adapted his standard of living to a much higher level.

This proved me why periodic reviews are so important.  Bengen’s 4% rule was designed for the worst case scenario.  1990 to 2019 was hardly a worst case.  I wonder how this would have turned out if there had been a sequence of return problem?  Here is the Modified RMD table.

Age

Beg Bal

divisor

percent

Mod RMD%

Withdraw

return%

End Bal

65

$1,000,000

31

3.23

4.0052

$40,052

-2.81

$932,973

66

$932,973

30.3

3.3

4.092

$38,177

23.65

$1,106,415

67

$1,106,415

29.6

3.38

4.1912

$46,372

7.93

$1,144,105

68

$1,144,105

28.9

3.46

4.2904

$49,087

13.52

$1,243,065

69

$1,243,065

28.2

3.55

4.402

$54,720

-0.49

$1,182,522

70

$1,182,522

27.4

3.65

4.526

$53,521

32.92

$1,500,668

71

$1,500,668

26.5

3.77

4.6748

$70,153

16.19

$1,662,115

72

$1,662,115

25.6

3.91

4.8484

$80,586

23.23

$1,948,919

73

$1,948,919

24.7

4.05

5.022

$97,875

12.06

$2,074,280

74

$2,074,280

23.8

4.2

5.208

$108,028

4.41

$2,052,963

75

$2,052,963

22.9

4.37

5.4188

$111,246

10.4

$2,143,656

76

$2,143,656

22

4.55

5.642

$120,945

4.19

$2,107,462

77

$2,107,462

21.2

4.72

5.8528

$123,346

-6.9

$1,847,213

78

$1,847,213

20.3

4.93

6.1132

$112,924

20.75

$2,094,154

79

$2,094,154

19.5

5.13

6.3612

$133,213

11.17

$2,179,977

80

$2,179,977

18.7

5.35

6.634

$144,620

6.82

$2,174,169

81

$2,174,169

17.9

5.59

6.9316

$150,705

17.97

$2,387,081

82

$2,387,081

17.1

5.85

7.254

$173,159

8.37

$2,399,227

83

$2,399,227

16.3

6.13

7.6012

$182,370

-22.3

$1,722,498

84

$1,722,498

15.5

6.45

7.998

$137,765

22.2

$1,936,543

85

$1,936,543

14.8

6.76

8.3824

$162,329

10.94

$1,968,314

86

$1,968,314

14.1

7.09

8.7916

$173,046

3.85

$1,864,385

87

$1,864,385

13.4

7.46

9.2504

$172,463

12.57

$1,904,597

88

$1,904,597

12.7

7.87

9.7588

$185,866

19.66

$2,056,633

89

$2,056,633

12

8.33

10.3292

$212,434

9.82

$2,025,300

90

$2,025,300

11.4

8.77

10.8748

$220,247

0.06

$1,806,136

91

$1,806,136

10.8

9.26

11.4824

$207,388

11.01

$1,774,770

92

$1,774,770

10.2

9.8

12.152

$215,670

14.72

$1,788,600

93

$1,788,600

9.6

10.42

12.9208

$231,101

-3.42

$1,504,232

94

$1,504,232

9.1

10.99

13.6276

$204,991

22.51

$1,591,700

95

$1,591,700

8.6

11.63

14.4212

$229,542

 

 

 

https://www.bankrate.com/retirement/ira-rmd-table/

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

P.S.  Yes I know that there are computer programs that can do this in a heartbeat but I see more when I put it in a spreadsheet.  I guess I’m just old school that way.

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Re: Bengen's 4% Distribution Method

"This proved me why periodic reviews are so important. Bengen’s 4% rule was designed for the worst case scenario. 1990 to 2019 was hardly worst case. I wonder how this would have turned out if there had been a sequence of return problem?"

Hindsight is always 20/20.  Bengen's 4% method, like everything else back then, looked at the 1965 to 1985 time period as a 'worst case'.  Over that time period, although nominal stock and bond market returns were, for the most part, healthy, inflation reared it's ugly head so the REAL return of the markets was zero, or negative.

Are you familiar with Bill Bernstein's discussion of this?  The Retirement Calculator from Hell  This was the first of his 5 articles on the subject.

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


@Mustang wrote:

@PaulR888Of course not.  Sequence of returns is a real risk.  But Bengen's analysis updated by the Trinity studies updated by Pfau covered all the 30 year retirement periods from 1926 to 2016 and a 50/50 portfolio never failed.

The only thing I don't like about the bucket approach is that I think it is more complicated than necessary.


If all retirement withdrawal studies done by everyone and anyone showed that, from 1926 onward, a real, inflation adjusted 4% rate of retirement withdrawal never failed (ran out of money, depleted your retirement nestegg, spent down your savings, . . .) before 30 years, regardless of the stock/bond asset allocation chosen/analyzed, WHICH THEY ALL DID SO SHOW, why worry about 'fine tuning' your portfolio, going forward?  The 4% method survived all bad 'sequence of return' periods.

I'm not being critical or cynical or smart a***d about this.  I was in your shoes 25 years ago, as I approached my retirement, and faced the same questions you are facing today.  My 'observation' was that, if 4% was a no-brainer, what could I do to increase that number 25%, to a real, inflation adjusted 5%?

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

Yes, the high inflation years definitely skewed the results.  In 1994 Bengen said that:

  1.  An initial withdrawal rate of 3% made 50+ years in all fifty-one retirement periods.
  2. An initial rate of 4% made 35 years in all retirement periods.  Most made 50 years.
  3. An initial rate of 5% only made 20 years in the late 1960s-early 1970s (high inflation years).
  4. An initial rate of 6% failed to make the 30-year mark 31 times (a low 39% success rate).

If you focus on the last one then an initial rate of 6% was successful 20 times.  1990-2019 seems to be in one of those period.  You roll the dice and take your chances.  But, a slew of other experts were pretty much agreeing with Bengen.

  1. Morningstar:  40% stocks and a first year withdrawal of 2.8% has a 90% chance of success.
  2. T. Rowe Price: 60% stocks may have a 4.3%  first year withdrawal;  0% stocks only 2.8%.
  3. Vanguard: For an 85% chance of success then a portfolio with 20% stocks should have a 3.4% first year withdrawal, one with 50% stocks should have a 3.8% first year withdrawal, and one with 80% stocks should have a 4.0% first year withdrawal.
  4. Charles Schwab: use 3% if you need a rigid rule with 30-40% stocks.
  5. Merrill Lynch: 4% is not too far off.

I still believe in the old saying, "Plan for the worst, hope for the best."  I certainly wouldn't start out at 6% hoping that it would last.

My wife will have a portion of her income that is stable (survivor benefit insurance and social security).  She will have a portion that is variable (MRDs).  Bengen's 4% rule will make the last part stable but it definitely needs a mechanism for periodic review and changes.

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Re: Bengen's 4% Distribution Method

"Yes, the high inflation years definitely skewed the results.  In 1994 Bengen said that:

  1.  An initial withdrawal rate of 3% made 50+ years in all fifty-one retirement periods.
  2. An initial rate of 4% made 35 years in all retirement periods.  Most made 50 years.
  3. An initial rate of 5% only made 20 years in the late 1960s-early 1970s (high inflation years).
  4. An initial rate of 6% failed to make the 30-year mark 31 times (a low 39% success rate)."

As expected, given Bengen's method was to withdraw a REAL, INFLATION adjusted X% from a retirement portfolio!  And the skewness was completely due to the effect of the SOR (Sequence of Return) risk.  Poorer returns, early on in retirement, coupled with high inflation driven withdrawal rate!

SO, what did Bengen say about method #2 (withdrawing a NOMINAL X% from a retirement portfolio?  Same relatively poorer returns from 1965 through 1985 but a NOMINAL withdrawal rate?

The bottom line in this table is that the Probability of Success, POS, for both a 3% or 4% real, inflation adjusted rate of retirement withdrawal was/is essentially 100%, at 3%, or at least close enough for government work, at 4%!

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


@ElLobo wrote:

@Mustang wrote:

@PaulR888Of course not.  Sequence of returns is a real risk.  But Bengen's analysis updated by the Trinity studies updated by Pfau covered all the 30 year retirement periods from 1926 to 2016 and a 50/50 portfolio never failed.

The only thing I don't like about the bucket approach is that I think it is more complicated than necessary.


If all retirement withdrawal studies done by everyone and anyone showed that, from 1926 onward, a real, inflation adjusted 4% rate of retirement withdrawal never failed (ran out of money, depleted your retirement nestegg, spent down your savings, . . .) before 30 years, regardless of the stock/bond asset allocation chosen/analyzed, WHICH THEY ALL DID SO SHOW, why worry about 'fine tuning' your portfolio, going forward?  The 4% method survived all bad 'sequence of return' periods.

I'm not being critical or cynical or smart a***d about this.  I was in your shoes 25 years ago, as I approached my retirement, and faced the same questions you are facing today.  My 'observation' was that, if 4% was a no-brainer, what could I do to increase that number 25%, to a real, inflation adjusted 5%?


Paul:  Not true El.  Even at 4% SWR, some allocations do not have enough stock in them and they crap out over the long run.  Link is from Paul Merriman website and data is provided by DFA.  

Table 8:  All S&P 500, 0% to 30% stocks crap out. 

Table 12: Diversified, 50 US/50 Int'l, 0% to 10% stocks crap out.

Table 16:  Diversified, 70 US/30 Int'l, 0% to 10% stocks crap out.  

And of course, the more you increase the stock % in your portfolio allocation, the bumpier the ride and the greater the historical max. drawdown and you need the right psyche to be able to deal with that.  That is where the Fine Tuning Table comes in handy along with this Distribution Table.  I prefer to use these rather than Bengen only.  Bengen is not new, I have been aware of it along with Trinity, but I have been following Merriman's websites since I retired in early 2013 and these are the tables I use, understand and have greatest confidence in.  

link

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Re: Bengen's 4% Distribution Method

@ElLobo  This might be splitting hairs but Bengen's method doesn't withdraw a real, inflation adjusted percent.  It withdraws inflation adjusted dollars.  The percent is only used to calculate the first withdrawal. It is never used again after that.

From what I have read Bengen tested withdrawing the same nominal percentage each year.  His conclusion was the same as others.  I included the following in my succession plan.

"In 2013 Vanguard published a paper, “A More Dynamic Approach to Spending for Investors in Retirement.”  They did not use Bengen’s methodology but a percent of portfolio variant. Using their own capital market model they tested different withdrawal strategies over a 35 year retirement period using 10,000 different scenarios.  They said the “4% Distribution Rule” was the best for consistent income but it only had a 78% success rate.  (That is probably acceptable because of Monte Carlo testing.)'

"These advisors preferred a “percent of portfolio” approach with a ceiling on increases of 5% and a floor on decreases of 2 ½%.  The percent of portfolio method is multiplying a fixed percent times the previous years ending balance to determine the next year’s dollar withdrawal.  They said ceilings/floors had a success rate of 92% but income was almost as volatile as a “straight percent of portfolio” approach which resulted in lower than planned income 48% of the time. Vanguard’s approach resulted in lower than planned income 45% of the time."

Unless you have significant discretionary income it is not an acceptable approach when it provides lower than planned income 48% of the time. What is the retiree suppose to do? Cut back on groceries? And, adding ceilings and floor didn't help much. 

Yes, I am looking at the two approaches as if that is the only source of the retirees income.  I think that is how you should evaluate any withdrawal method.  Other stable income sources might mitigate the impact of volatility some.  But, that success is theirs not the volatile method's.   If you are close to the line then getting less than the planned income 48% of the time could be a real problem.

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

@ElLobo wrote:

@Mustang wrote:

@PaulR888Of course not.  Sequence of returns is a real risk.  But Bengen's analysis updated by the Trinity studies updated by Pfau covered all the 30 year retirement periods from 1926 to 2016 and a 50/50 portfolio never failed.

The only thing I don't like about the bucket approach is that I think it is more complicated than necessary.


If all retirement withdrawal studies done by everyone and anyone showed that, from 1926 onward, a real, inflation adjusted 4% rate of retirement withdrawal never failed (ran out of money, depleted your retirement nestegg, spent down your savings, . . .) before 30 years, regardless of the stock/bond asset allocation chosen/analyzed, WHICH THEY ALL DID SO SHOW, why worry about 'fine tuning' your portfolio, going forward?  The 4% method survived all bad 'sequence of return' periods.

I'm not being critical or cynical or smart a***d about this.  I was in your shoes 25 years ago, as I approached my retirement, and faced the same questions you are facing today.  My 'observation' was that, if 4% was a no-brainer, what could I do to increase that number 25%, to a real, inflation adjusted 5%?


Paul:  Not true El.  Even at 4% SWR, some allocations do not have enough stock in them and they crap out over the long run.  Link is from Paul Merriman website and data is provided by DFA.  

Table 8:  All S&P 500, 0% to 30% stocks crap out. 

Table 12: Diversified, 50 US/50 Int'l, 0% to 10% stocks crap out.

Table 16:  Diversified, 70 US/30 Int'l, 0% to 10% stocks crap out.  

And of course, the more you increase the stock % in your portfolio allocation, the bumpier the ride and the greater the historical max. drawdown and you need the right psyche to be able to deal with that.  That is where the Fine Tuning Table comes in handy along with this Distribution Table.  I prefer to use these rather than Bengen only.  Bengen is not new, I have been aware of it along with Trinity, but I have been following Merriman's websites since I retired in early 2013 and these are the tables I use, understand and have greatest confidence in.  

link


Yes, I am well aware of Merriman's work.

And, yes, you are technically correct.  Everything I have ever seen on this says that, at a real, 4% rate of withdrawal, the Probability of Success is never 100%, meaning the POF (Probability Of Failure) is never zero.  That's why everyone who does this stuff considers a POS of 95% or so 'good enough, close enough for government work'!

Some 'truths': The lower the real rate of withdrawal, the higher the POS.  The shorter time period required, the higher the POS.  In general, the higher the stock allocation, the higher the POS.

The, obvious, problem is making fine tuning changes to simply increase the POS from, say, 90% to 95%.  The issue is exactly how accurate either number really is?  And, even though absolutely accurate in terms of what happened, in the past (90% of the 30 year historical return sequences successfully supported a real, inflation adjusted 4% rate of retirement withdrawal, for example), what does that number really mean, going forward?  Is a 95% POS, going forward, any better than 90%?  All things considered, which I won't go into!  8-)

In my opinion, the ONLY thing that makes sense is to do something that changes this probabilistic outcome to a deterministic outcome.  That is, do something that makes the POS 100%.

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


@Mustang wrote:

@ElLobo  This might be splitting hairs but Bengen's method doesn't withdraw a real, inflation adjusted percent.  It withdraws inflation adjusted dollars.  The percent is only used to calculate the first withdrawal. It is never used again after that.

From what I have read Bengen tested withdrawing the same nominal percentage each year.  His conclusion was the same as others.  I included the following in my succession plan.

"In 2013 Vanguard published a paper, “A More Dynamic Approach to Spending for Investors in Retirement.”  They did not use Bengen’s methodology but a percent of portfolio variant. Using their own capital market model they tested different withdrawal strategies over a 35 year retirement period using 10,000 different scenarios.  They said the “4% Distribution Rule” was the best for consistent income but it only had a 78% success rate.  (That is probably acceptable because of Monte Carlo testing.)'

"These advisors preferred a “percent of portfolio” approach with a ceiling on increases of 5% and a floor on decreases of 2 ½%.  The percent of portfolio method is multiplying a fixed percent times the previous years ending balance to determine the next year’s dollar withdrawal.  They said ceilings/floors had a success rate of 92% but income was almost as volatile as a “straight percent of portfolio” approach which resulted in lower than planned income 48% of the time. Vanguard’s approach resulted in lower than planned income 45% of the time."

Unless you have significant discretionary income it is not an acceptable approach when it provides lower than planned income 48% of the time. What is the retiree suppose to do? Cut back on groceries? And, adding ceilings and floor didn't help much. 

Yes, I am looking at the two approaches as if that is the only source of the retirees income.  I think that is how you should evaluate any withdrawal method.  Other stable income sources might mitigate the impact of volatility some.  But, that success is theirs not the volatile method's.   If you are close to the line then getting less than the planned income 48% of the time could be a real problem.


Splitting hairs indeed.  The initial year amount of cash taken out is, say, 4% of the initial value of your nestegg.  That amount of cash taken out each year afterwards increases with inflation.  SO, if the initial value was $1million, than your initial withdawal amount was $40,000.

Method #1 (Bengen method) would increase that amount to $41,200 ifn inflation were 3%, in the second year.  $40,000 times 1.03 is $41,200.  Most people call that a real, inflation adjusted 4% rate of retirement withdrawal.

Method #2, withdraw a nominal 4% would have the same $40,000 taken out each year, going forward.

In BOTH cases, the amount of cash taken out is a given amount, determined on the day you retire, regardless of what the value of your portfolio did over time.  SO, under both methods, ifn the value of the portfolio declined from $1 million to $900,000 after one year, the percentage withdrawn under method #1 would be $41,200/$900,000, or 4.577%, while it would be slightly lower, at 4.444%, for method #2.

Which leads to my method #3, withdraw a fixed percentage of the yearly value of a retirement portfolio which, for a new portfolio value of $900,000 and a 4% withdrawal, $36,000 would be withdrawn and spent at the end of the first year.

And method #4 would correspond to something akin to RMDs from your retirement portfolio, for example, the same percentage used by the IRS, as I posted before.

Of course, what I call my method #4 is a bit different than the IRS.  If I need a $40,000 withdrawal from my retirement portfolio, or any other number for that matter, I would 'allocate' it to produce more than $40,000 dividend, interest, and distribution income!  As I pointed out to Pat, if my $1 million retirement portfolio were a 100% allocation to 'bonds' and my bond fund of choice was VWEHX, I would, today, hold 176,991 shares of the fund.  At today's distribution yield of 5.33%, I would expect to receive a grand total of $53,300 distribution cash income from this holding over the next year.

I would withdraw and spend either $40,000 or $41,200, or anything else other than the full amount, then buy more shares with what's left over.  And I would do this each and every year, going forward, expecting my POS to be 100%!  If I did take out a real, inflation adjusted 4% (the Bengen method), I would consider myself using that method, in terms of the 4% real rate of withdrawal, but I would NOT be allocating anything close to what he describes!  My allocation would be 0/100, but my bonds would NOT be a bond market index fund.  Rather, it would be a High Yield Corporate Bond fund, VWEHX.

VWEHX did not exist back in 1926.  In fact, it was begat in 1979, so we only have a 41 year historical record of it's returns, meaning we only have 11 - 30 year return sequences to do a Bengen/Trinity style analysis.  We could, on the other hand, use Portfolio Visualizer to get the risk/return characteristics of the fund and do a Monte Carlo Analysis, looking forward, to calculate the POS for various rate of withdrawal, real or nominal.

Enough for now.

@PaulR888, Merriman was a strong supporter of VWEHX back in the days whenever I was looking at this stuff (late 90's)!

Let me repeat my initial reply to your post, Mustang:

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

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

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

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

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

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

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

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

ElLobo, de la casa de la toro caca grande
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