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Re: Bengen's 4% Distribution Method


@Tibbles wrote:

Right, Pfau's modified rule is not for those with a minimax philosophy. The average result has been much better than for Bengen's rule, but as I noted a few hours ago: 

Pfau’s rule is suitable for those who (a) would enjoy a higher level of spending; (b) don’t prioritize the size of their financial legacy; and (c) are willing to forego the near guarantee of a real 4%, perhaps because their expenditures could be reduced if necessary without undo pain.

 


Bengen didn't say 4%+inflation for all retirement periods.  For a near 100% success rate it was 4% for 30 years, 4% for 25 years, 5% for 20 years, 6% for 15 years.  I'm going to expand on this a little an use 4.5% for 25 year, 7% for 10 years and 7.5% for 5 years (see the first post in this thread).

We have been talking about period reviews.  Using the 1990-2019 data, I wanted to see how that would work.  Below we are conducting a periodic review every five years and basically starting the retirement over using the rates in the paragraph above.  Here is the spreadsheet:

yearBeg Balwithdrawreturn%End Balinflation%
1990$1,000,000$40,000-2.81$933,0246.1
1991$933,024$42,44023.65$1,101,2073.1
1992$1,101,207$43,7567.93$1,141,3072.9
1993$1,141,307$45,02513.52$1,244,5002.7
1994$1,244,500$56,003-0.49$1,182,6742.7
1995$1,192,389$57,51532.92$1,508,4752.5
1996$1,508,475$58,95216.19$1,684,2003.3
1997$1,684,200$60,89823.23$2,000,3961.7
1998$2,000,396$61,93312.06$2,172,2411.6
1999$2,172,241$108,6124.41$2,154,6352.7
2000$2,154,635$111,54510.4$2,255,5723.4
2001$2,255,572$115,3374.19$2,229,9111.6
2002$2,229,911$117,182-6.9$1,966,9502.4
2003$1,966,950$119,99520.75$2,230,1981.9
2004$2,230,198$133,81211.17$2,330,5533.3
2005$2,330,553$138,2286.82$2,341,8423.4
2006$2,341,842$142,92717.97$2,594,0592.5
2007$2,594,059$146,5018.37$2,652,4194.1
2008$2,652,419$152,507-22.3$1,942,4320.1
2009$1,942,432$135,97022.2$2,207,4962.7
2010$2,207,496$139,64110.94$2,294,0781.5
2011$2,294,078$141,7363.85$2,235,2073
2012$2,235,207$145,98812.57$2,351,8331.7
2013$2,351,833$148,47019.66$2,636,5451.5
2014$2,636,545$197,7419.82$2,678,2940.8
2015$2,678,294$199,3230.06$2,480,4590.7
2016$2,480,459$200,71811.01$2,530,7402.1
2017$2,530,740$204,93314.72$2,668,1662.1
2018$2,668,166$209,237-3.42$2,374,8341.9
2019$2,374,834$213,21222.51$2,648,2032.3
2020$2,648,203$218,116   

 

Using Bengen's methodology along with periodic reviews not only prevents withdrawals lower than desired during bad years but also takes advantage of the very good years.

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Re: Bengen's 4% Distribution Method

Here is a comparison of the three methods I've looked at.  All withdrawals are adjusted for inflation. I'm only showing the years associated with the reviews.

 Bengen 4% Bengen with reviews Modified MRDs 
 Beg BalwithdrawalBeg BalwithdrawalBeg Balwithdrawal 
19901,000,00040,0001,000,00040,0001,000,00040,052
19941,244,50046,2401,244,50056,0031,243,06553,244
19992,236,86851,9552,172,741108,6122,074,280106,300
20042,683,96058,4912,230,198133,81220,994,154130,682
20092,865,16366,7291,942,732135,9701,722,498137,628
20145,321,58074,5482,636,545197,7412,056,633209,247

 

I have loved this discussion.  Bengen's 4% rule provides a stable income for 30 years even during the worst retirement periods in history.  But, because withdrawals are increased only for inflation, withdrawals increase slowly while the portfolio's balance increases rapidly for very good retirement periods.

Period reviews take advantage of the very good returns by creating a new initial withdrawal every five years using the higher percentage rate Bengen calculated as safe for the shorter remaining retirement period..  If the new calculation results in a lower withdrawal then no changes are made to the original plan.

As I have shown before, the Modified MRD method allows for nice increases during very good years but will result in lower than desired withdrawals during bad ones.

I'm going to modify my succession plan to include period reviews.  Thanks to all of you for a very good discussion.

 

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Re: Bengen's 4% Distribution Method

Mustang - I find your inflation numbers a bit low. It’s been my experience that medical costs have been rising much faster than CPI; property taxes a bit faster.  I typically use a 1.25 x 1.5 multiplier when doing my projections for withdrawals based on keeping up with ongoing expenses. 

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Re: Bengen's 4% Distribution Method

@SlipSliding There are also articles I've read that say retirees spend less than standard inflation increases.  At one time I was considering using one-half the inflation rate.  But I decided it was not a good idea.  Being retired military I was able to purchase some really good prescription drug insurance.  As for property taxes-that depends entirely on where you live.  Here they are very low and increases aren't much.

I don't have a lot of basis for adjusting the inflation rate so I just used the published rates.  I'm pretty sure that is what Bengen and the other experts use when they are doing their estimates.  If you want you could recalculate the tables using your adjusted inflation rates.  It would be interesting to see the results.

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Re: Bengen's 4% Distribution Method

Just for discussionary completeness, I believe this thread discusses only fixed distribution schedules.  Paul Merriman also discusses flexible distribution schedules that he suggests for people who have over-saved.  Definitely not me as I have only saved just enough (I hope).  If you have a lot of dough and you can maintain flexibility in spending needs and have adequate emergency fund, you can use a constant % of what your portfolio is worth every year.  Merriman personally uses the flexible distribution strategy.  On Jan 1 every year he siphons off 5% of PV as of Dec 31 and that is what he spends for the year, donates to charity, etc.  

Here is link of schedules from DFA that he posts on his website.  He said he will be doing an article about Flexible Distributions.  If I see, I will post in case anybody interested.  

link

Don't mean to over complicate or hijack thread.  If already discussed, please excuse me as I have not been following every post.  

P.S.  The tables are a little busy and complicated and if you haven't seen any webcasts or read articles may be difficult to decipher.  The upcoming article should help.  

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

Just for discussionary completeness, I believe this thread discusses only fixed distribution schedules.  Paul Merriman also discusses flexible distribution schedules that he suggests for people who have over-saved.  Definitely not me as I have only saved just enough (I hope).  If you have a lot of dough and you can maintain flexibility in spending needs and have adequate emergency fund, you can use a constant % of what your portfolio is worth every year.  Merriman personally uses the flexible distribution strategy.  On Jan 1 every year he siphons off 5% of PV as of Dec 31 and that is what he spends for the year, donates to charity, etc.  

Here is link of schedules from DFA that he posts on his website.  He said he will be doing an article about Flexible Distributions.  If I see, I will post in case anybody interested.  

link

Don't mean to over complicate or hijack thread.  If already discussed, please excuse me as I have not been following every post.  

P.S.  The tables are a little busy and complicated and if you haven't seen any webcasts or read articles may be difficult to decipher.  The upcoming article should help.  


I suggested this last Friday, but nobody was interested in discussing same.  Here is what I posted:

"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.

I'll leave it at that, for now."

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

Thank you Mustang for leading this thread. I had some idea about the 4% distribution rule but I see that there are more possibilities. I am sending a link to a long view podcast that somehow adds to the discussion. 

https://www.morningstar.com/podcasts/the-long-view/61 

 

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Re: Bengen's 4% Distribution Method

@PaulR888 In Bengen's methodology 4% isn't a target.  It is a calculated safe withdrawal rate (SWR) that historically has proven itself to allowa retiree's investments to last for 30 years 100% of the time if the asset allocation is 50% stocks and 50% bonds.  In his original analysis an asset allocation of 75% stocks and 25% bonds failed only twice in his 51 tested retirement periods but the portfolio's ending balance was 125% higher.

As I said at the outset my goal was an easy to implement method that would give my wife a stable income with the secondary goal of leaving something for our kids.

We have discussed flexible withdrawals. I tested one type of flexible withdrawal, the modified MRD method.  But you have to use a retirement period other than 1990-2019 to actually show the drawback of the method.  That was a period of almost constant growth. A period where Vanguard Wellington Fund, my moderate-allocation test fund, had a considerable number of years of returns over 20%.

A Vanguard report said that using the same percent times the portfolio's ending balance each year resulted in less than desired income 48% of the time.  They recommended ceilings and floors which in Monte Carlo testing had a 92% success rate but still resulted  in less than desired income 45% of the time. I showed this by using a retirement period starting in 1968.  Even though the Modified MRD method uses a larger percent every year it failed to provide the desired income in 7 of the first 10 years.

Using a constant percent method only meet one of my criteria.  Its easy to use.  For those who have a lot of flexible spending it might work but it has to be very flexible to work all the time. 

I'll use just one example, in 2008 Vanguard Wellington lost 22.2%. If our imaginary retiree had retired in 2007 with a portfolio ending balance of $1,000,000 the year before and he used 5% then his January 1st 2008 withdrawal would have been $50,000.  Losing 22.2% his 2008 ending balance would have been $739,100.  Again using 5% his January 1st 2009 withdrawal would have been $36,955.  If he can cut reduce spending 34% then he will be fine.

It is a very easy method to use and it is not just for people who have over saved.  People with sufficient fixed income from other sources like pensions and social security to cover their expenses can use it.  My wife and I could easily use that method.  The problem is this.  If something happens to me her income will be cut in half.  She will need an income from our investments that is a little more stable.

All of our situations are different.  There is no one size fits all solution.  And I believe that these discussions will help us pick the solution that best fits our needs.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@PaulR888 In Bengen's methodology 4% isn't a target.  It is a calculated safe withdrawal rate (SWR) that historically has proven itself to allowa retiree's investments to last for 30 years 100% of the time if the asset allocation is 50% stocks and 50% bonds.  In his original analysis an asset allocation of 75% stocks and 25% bonds failed only twice in his 51 tested retirement periods but the portfolio's ending balance was 125% higher.

As I said at the outset my goal was an easy to implement method that would give my wife a stable income with the secondary goal of leaving something for our kids.

We have discussed flexible withdrawals. I tested one type of flexible withdrawal, the modified MRD method.  But you have to use a retirement period other than 1990-2019 to actually show the drawback of the method.  That was a period of almost constant growth. A period where Vanguard Wellington Fund, my moderate-allocation test fund, had a considerable number of years of returns over 20%.

A Vanguard report said that using the same percent times the portfolio's ending balance each year resulted in less than desired income 48% of the time.  They recommended ceilings and floors which in Monte Carlo testing had a 92% success rate but still resulted  in less than desired income 45% of the time. I showed this by using a retirement period starting in 1968.  Even though the Modified MRD method uses a larger percent every year it failed to provide the desired income in 7 of the first 10 years.

Using a constant percent method only meet one of my criteria.  Its easy to use.  For those who have a lot of flexible spending it might work but it has to be very flexible to work all the time. 

I'll use just one example, in 2008 Vanguard Wellington lost 22.2%. If our imaginary retiree had retired in 2007 with a portfolio ending balance of $1,000,000 the year before and he used 5% then his January 1st 2008 withdrawal would have been $50,000.  Losing 22.2% his 2008 ending balance would have been $739,100.  Again using 5% his January 1st 2009 withdrawal would have been $36,955.  If he can cut reduce spending 34% then he will be fine.

It is a very easy method to use and it is not just for people who have over saved.  People with sufficient fixed income from other sources like pensions and social security to cover their expenses can use it.  My wife and I could easily use that method.  The problem is this.  If something happens to me her income will be cut in half.  She will need an income from our investments that is a little more stable.

All of our situations are different.  There is no one size fits all solution.  And I believe that these discussions will help us pick the solution that best fits our needs.


Paul:  OK, I was unaware that flexible had been discussed.  To your 2008 Wellington example, in the link I provided it shows various %s from 3% to 6%.  I have now expended my knowledge meter on this topic.  My final advice would be for anyone desiring further information (not you or others who have decided what they want to do) check out paulmerriman website   Bengen is retired and doubt he is teaching any more.  Merriman is retired from being an advisor but continues to work teaching.  There is a ton of information available on his site and new stuff comes out every week.  It has been very helpful to me over the last 7 years of my retirement.  Good luck.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@PaulR888 In Bengen's methodology 4% isn't a target.  It is a calculated safe withdrawal rate (SWR) that historically has proven itself to allowa retiree's investments to last for 30 years 100% of the time if the asset allocation is 50% stocks and 50% bonds.  In his original analysis an asset allocation of 75% stocks and 25% bonds failed only twice in his 51 tested retirement periods but the portfolio's ending balance was 125% higher.

As I said at the outset my goal was an easy to implement method that would give my wife a stable income with the secondary goal of leaving something for our kids.

We have discussed flexible withdrawals. I tested one type of flexible withdrawal, the modified MRD method.  But you have to use a retirement period other than 1990-2019 to actually show the drawback of the method.  That was a period of almost constant growth. A period where Vanguard Wellington Fund, my moderate-allocation test fund, had a considerable number of years of returns over 20%.

A Vanguard report said that using the same percent times the portfolio's ending balance each year resulted in less than desired income 48% of the time.  They recommended ceilings and floors which in Monte Carlo testing had a 92% success rate but still resulted  in less than desired income 45% of the time. I showed this by using a retirement period starting in 1968.  Even though the Modified MRD method uses a larger percent every year it failed to provide the desired income in 7 of the first 10 years.

Using a constant percent method only meet one of my criteria.  Its easy to use.  For those who have a lot of flexible spending it might work but it has to be very flexible to work all the time. 

I'll use just one example, in 2008 Vanguard Wellington lost 22.2%. If our imaginary retiree had retired in 2007 with a portfolio ending balance of $1,000,000 the year before and he used 5% then his January 1st 2008 withdrawal would have been $50,000.  Losing 22.2% his 2008 ending balance would have been $739,100.  Again using 5% his January 1st 2009 withdrawal would have been $36,955.  If he can cut reduce spending 34% then he will be fine.

It is a very easy method to use and it is not just for people who have over saved.  People with sufficient fixed income from other sources like pensions and social security to cover their expenses can use it.  My wife and I could easily use that method.  The problem is this.  If something happens to me her income will be cut in half.  She will need an income from our investments that is a little more stable.

All of our situations are different.  There is no one size fits all solution.  And I believe that these discussions will help us pick the solution that best fits our needs.


In general, whenever you retire, you have two different 'risks' to consider, rather, two different retirement 'goals' that are, to some extent, mutually exclusive.  You start with a given size nestegg and you control how much cash you take out of it each year.  The two 'conflicting' goals are whether you want a given amount of cash to take out each year, inflation adjusted or not, OR do you want to guarantee that your nestegg lasts a certain number of years?

It is quite easy to look at past historical returns to 'calculate' what worked, in the past.  It's a completely different matter to 'predict' what's going to happen, going forward, especially if your look ahead time period is 2-3 decades!  And, as you say, ifn the Probability Of Failure isn't zero, you have to come up with your own plan as to how to determine that you're well on you way down that bad road AND to come up with something that puts you back on track!  8-)

At any rate, good luck as you approach that day.  I sure hope things work out well for you.  BTW, does your wife understand what you are doing, enough so that, ifn you should kick the bucket, she knows what to do?

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

Hi Mustang - If your loss results in your wife losing half her income, the bottom line is that she will need to withdraw whatever amount is necessary to cover her expenses.   If that amount is 4% or less on a 50/50 portfolio, then Bengen's work suggests that you have no worries.  She can start by withdrawing that amount (expenses - income) during year 1, and adjust for inflation in the following years.  (BTW, Otar's work puts the US SWR at 3.8%)  If, looking ahead, that's not enough, then you may have to toss out your secondary goal altogether and play out the "die broke" scenario - i.e. establish a withdrawal rate that results in high probability of zero balance after 30 years.  My current plan is a die broke strategy, since our daughter has already received her inheritance.

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Re: Bengen's 4% Distribution Method


@CarlosDS wrote:

Thank you Mustang for leading this thread. I had some idea about the 4% distribution rule but I see that there are more possibilities. I am sending a link to a long view podcast that somehow adds to the discussion. 

https://www.morningstar.com/podcasts/the-long-view/61 

 


I listened to the tape.  It was very interesting and had some new approaches.  I took some notes and I hope I didn't misunderstand what he was saying.  He touches almost everything in our discussion.

The first thing I noticed is that Guyton said they never go against empirical research. When people do it usually doesn't turn out well.  He said that the current crisis is a text book bear market and that because of the historic high they had positioned their clients a little more conservatively before the crash.

He wasn't overly concerned about low, or negative interest rates.  He said that the purpose of bonds in their client’s portfolios wasn't so much for income but to be used when he didn't want to sell stock.  He gave an example of what you don't want.  Earlier this year when stocks dropped 20% a recommended bond fund dropped 7%. It is important that bonds hold their value.

He said that the sweet spots for sustainable withdrawals was an asset allocation of 60-70% stock.  He said he didn't keep a large cash reserve. 1-2 year government securities were the same as cash.

In his discussion on withdrawal strategies it seemed clear that his baseline was a 4% initial withdrawal later adjusted by inflation.  But if the retiree's spending was flexible the initial withdrawal could be higher. He said that during the 40 years coming up to retirement people had to be flexible.  That didn't stop when they became 65.

With flexible spending the initial withdrawal could be 5%, on a $1,000,000 portfolio that is $50,000.  But, he put “guard rails” up.  By constantly testing withdrawals if they became 6% then they had to drop down to around 4.5% to make up the difference. Another speaker suggest another approach could be just not taking inflation increases during bad years.

Discretionary Fund.  He sets up his clients with discretionary funds.  For example, instead of core spending of 5% of $1,000,000 ($50,000). They make it 5% of $800,000 ($40,000).  $200,000 is left for discretionary spending.  Clients hate it when the discretionary fund gets low.  A periodic review with them (his example was at age 73) covers ways to restock it. Lower annual withdraws is one of the ways.

People confuse core expenses from discretionary expenses and they put too much into core expenses.  Even housing expenses can change if the client moves.  As a cost accountant I am very familiar with fixed vs. variable expenses.  Guyton said that if the client cheats he needs to understand that they cannot be as certain that the money will last.

He discussed nursing homes.  People want to stay independent as long as possible. 50% of his clients have long-term care insurance.  Those are the ones where the core expenses require all the money at the highest withdrawal rate.  Even those who can afford long-term care need to understand the impact on the spouse who might outlive them another 15 years.

That’s my book report.  I hope I get an A. :-)

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Re: Bengen's 4% Distribution Method

@SlipSliding Actually her initial withdrawal rate needs to be 2.5% to cover the estimated single person expenses.  4% just gives her a little more discretionary income. 

I love this discussion for its theory and I'm trying to see how new approaches can be applied.  I'm assuming everyone else is as well.  From past discussions I have determined I need a different fund from Vanguard Wellington to use for withdrawals during down markets. Wellington is roughly a 60/40 fund.  I have chosen Vanguard Wellesley income, a 40/60 fund.  I had thought about it before but this discussion has proven to me that Bengen's 4% rule needs periodic reviews similar to what Guyton mentioned.  Not so much to replenish a discretionary fund but to take advantage of good portfolio growth.  I intend to incorporate those in my succession plan. 

@ElLobo My wife is aware of everything I am doing.  The purpose of a succession plan is to provide details.  There is only one scenario that puts things at risk.  That is long-term care.  I've only recently started looking at that.

 I thought that Guyton's Discretionary Fund was interesting.  By reducing their core withdrawals it gives them an emotional freedom from a strict budget. Emotional freedom is important.

Right now we are using our savings account at our local bank for a discretionary fund. I've even broken it down to how much could be spend on a new car, etc.  I’ve never thought about having a totally separate fund.  What would you do during a down market?

What Guyton says about long-term care needs to be considered.  We have the ability to pay for a few years but it will reduce future withdraws.

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:

@PatMorgan wrote:

Bengen discovered the 4% safe initial withdrawal rate in the mid 1990s based on historical performance of stocks and bonds.  Why would someone who started in 1985, 10 years before Bengen's article, take only 4% of the 14.17% yield that VWEHX had that year, take in cash only 28% of the income distribution amount?

I wrote: "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." [emphasis added]  I did not ask for only 4%, especially when a higher percentage could have been sustained.  I did not ask for only one starting year.

Just to be sure, you are saying someone who started taking the income distributions in cash from an account in VWEHX for 1998 should have taken 5% in cash out of the distribution yield that year of 8.23%, 61% of the yield, as opposed to 28% of the yield of someone who started for 1985.   Someone who started for 2003 should have taken 5% in cash out of the distribution yield that year of 8.09%, 62% of the yield.

The distribution yield of VWEHX for 2004 was 7.21%, making 5% taken in cash 69% of the distribution yield.  Why 69% of the yield for 2004, versus about 61% for 1998 and 2003, versus 28% for 1985?

 


Just to be sure, I'm saying that someone could have taken a real, inflation adjusted 4% from an all VWEHX portfolio, starting in 1985, never would have seen the value of the portfolio drop below its initial value, and had 5.8 times the initial value as of today, let alone drop to zero.  In all years, the amount of cash taken out of the portfolio was less than the total amount of distribution cash generated by the portfolio.


That leaves unanswered the "for all starting years" aspect of one question; 1985 is only one starting year. It also leaves unanswered why the percentage taken in cash from the yield when starting for 1985, 1998, 2003, and 2004 vary so much, from a low of 28% to high of 69%.

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Re: Bengen's 4% Distribution Method


@PatMorgan wrote:

@ElLobo wrote:

@PatMorgan wrote:

Bengen discovered the 4% safe initial withdrawal rate in the mid 1990s based on historical performance of stocks and bonds.  Why would someone who started in 1985, 10 years before Bengen's article, take only 4% of the 14.17% yield that VWEHX had that year, take in cash only 28% of the income distribution amount?

I wrote: "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." [emphasis added]  I did not ask for only 4%, especially when a higher percentage could have been sustained.  I did not ask for only one starting year.

Just to be sure, you are saying someone who started taking the income distributions in cash from an account in VWEHX for 1998 should have taken 5% in cash out of the distribution yield that year of 8.23%, 61% of the yield, as opposed to 28% of the yield of someone who started for 1985.   Someone who started for 2003 should have taken 5% in cash out of the distribution yield that year of 8.09%, 62% of the yield.

The distribution yield of VWEHX for 2004 was 7.21%, making 5% taken in cash 69% of the distribution yield.  Why 69% of the yield for 2004, versus about 61% for 1998 and 2003, versus 28% for 1985?

 


Just to be sure, I'm saying that someone could have taken a real, inflation adjusted 4% from an all VWEHX portfolio, starting in 1985, never would have seen the value of the portfolio drop below its initial value, and had 5.8 times the initial value as of today, let alone drop to zero.  In all years, the amount of cash taken out of the portfolio was less than the total amount of distribution cash generated by the portfolio.


That leaves unanswered the "for all starting years" aspect of one question; 1985 is only one starting year. It also leaves unanswered why the percentage taken in cash from the yield when starting for 1985, 1998, 2003, and 2004 vary so much, from a low of 28% to high of 69%.


Question was answered in my reply.

"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."

Easy peesy, again.  The amount of CASH taken out started out at $40,000 in 1985 and went up with inflation each year afterwards.  That's Bengen's method.  Not only did the value of the portfolio go up and down each year, so did the total portfolio cash flow, considering that, each year, whenever the amount of the withdrawal was less than the amount of portfolio cash produce, the excess cash was reinvested, buying more shares, each one of which now produced a bit more total portfolio distribution cash, going forward.

SO, if the numerator was a known number ($40,000, increasing with inflation each year), while the denominator (either the total portfolio value OR the total portfolio cash flow) varied, so will the PERCENTAGES involved.  The first percentage (total distribution cash divided by January 1 portfolio value) is the total portfolio distribution yield, Y%, for VWEHX.  The second percentages would be the answer to your question.

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


@Mustang wrote:

@SlipSliding Actually her initial withdrawal rate needs to be 2.5% to cover the estimated single person expenses.  4% just gives her a little more discretionary income. 

I love this discussion for its theory and I'm trying to see how new approaches can be applied.  I'm assuming everyone else is as well.  From past discussions I have determined I need a different fund from Vanguard Wellington to use for withdrawals during down markets. Wellington is roughly a 60/40 fund.  I have chosen Vanguard Wellesley income, a 40/60 fund.  I had thought about it before but this discussion has proven to me that Bengen's 4% rule needs periodic reviews similar to what Guyton mentioned.  Not so much to replenish a discretionary fund but to take advantage of good portfolio growth.  I intend to incorporate those in my succession plan. 

@ElLobo My wife is aware of everything I am doing.  The purpose of a succession plan is to provide details.  There is only one scenario that puts things at risk.  That is long-term care.  I've only recently started looking at that.

 I thought that Guyton's Discretionary Fund was interesting.  By reducing their core withdrawals it gives them an emotional freedom from a strict budget. Emotional freedom is important.

Right now we are using our savings account at our local bank for a discretionary fund. I've even broken it down to how much could be spend on a new car, etc.  I’ve never thought about having a totally separate fund.  What would you do during a down market?

What Guyton says about long-term care needs to be considered.  We have the ability to pay for a few years but it will reduce future withdraws.


As Paul has pointed out, down markets don't affect us.  Our total portfolio cash flow covers our withdrawals.  If my $1million portfolio produces $50,000/year distribution cash, and I withdraw and spend $40,000, neither Paul or I ever have to sell something to cover a withdrawal.  This assumes, by the way, that all dividends/interest/distributions are taken as cash, NOT reinvested back into whatever generated the distribution.

On the other hand, ifn you are using, say, a stock market index fund for your portfolio, which yields, say, 1.78%, then you DO have to sell shares whenever you take your withdrawal, to the tune of 2.22% per year.  SO, your $1 million portfolio generated only $17,800 during the year.  In order to cover your $40,000 withdrawal, you need to sell $22,200 worth of VFINX each year, regardless of whether the NAV is up, or down!  If NAV is up, less shares need to be sold.  If NAV is down, more shares!

Here's where it gets interesting.  You start retirement with $1 million in VFINX,meaning 3465 shares at today's NAV of $288.61.  Ifn you needed $22,200 to cover your withdrawal, then you would need to sell 77 shares today to cover it.  But that leaves you with 3,465 minus 77, or 3,388 shares, going into next year.

What's interesting is that this is the failure mechanism in these kinds of retirement withdrawal studies.  The value of your portfolio goes to zero whenever you sell your last share!

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

Guyton's discretionary fund is an excellent idea to allow flexibility on the withdrawal rate, especially at the beginning of the retirement life. Never heard of this before. 

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:

On the other hand, ifn you are using, say, a stock market index fund for your portfolio, which yields, say, 1.78%, then you DO have to sell shares whenever you take your withdrawal, to the tune of 2.22% per year.  SO, your $1 million portfolio generated only $17,800 during the year.  In order to cover your $40,000 withdrawal, you need to sell $22,200 worth of VFINX each year, regardless of whether the NAV is up, or down!  If NAV is up, less shares need to be sold.  If NAV is down, more shares!

Here's where it gets interesting.  You start retirement with $1 million in VFINX,meaning 3465 shares at today's NAV of $288.61.  Ifn you needed $22,200 to cover your withdrawal, then you would need to sell 77 shares today to cover it.  But that leaves you with 3,465 minus 77, or 3,388 shares, going into next year.

What's interesting is that this is the failure mechanism in these kinds of retirement withdrawal studies.  The value of your portfolio goes to zero whenever you sell your last share!


Yes. Empirical research has shown that 100% stock funds sometimes fail.  That is outside of the recommended asset allocation.  On the other hand empirical research has shown that portfolios of 50-75% stock have a 100% success rate. Guyton's research confirmed this.  He said the sweet spot for sustainable withdrawals was 60-70% stock, 30-40% bonds.

He pretty much confirmed the 4% withdrawal rate as well.  He talked of a partner who calculated that 4.3% was too high. The 5% rate could only be used with, as he put it, guard rails that reduced spending.  That is where flexible spending is needed.

I understand what you are saying. Its just that you have a ton of research going against you.  Didn't you find it interesting that Guyton doesn't use bonds for income?  That to him the most important thing is that they do not lose value so that they can be sold when the stock market crashes to prevent the sale of stock?

Changing the subject, I have been thinking about those discretionary funds.  He didn't say but I have a feeling he is putting them in 1-2 year treasury bonds.  He did say he considers them the same as cash.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@ElLobo wrote:

On the other hand, ifn you are using, say, a stock market index fund for your portfolio, which yields, say, 1.78%, then you DO have to sell shares whenever you take your withdrawal, to the tune of 2.22% per year.  SO, your $1 million portfolio generated only $17,800 during the year.  In order to cover your $40,000 withdrawal, you need to sell $22,200 worth of VFINX each year, regardless of whether the NAV is up, or down!  If NAV is up, less shares need to be sold.  If NAV is down, more shares!

Here's where it gets interesting.  You start retirement with $1 million in VFINX,meaning 3465 shares at today's NAV of $288.61.  Ifn you needed $22,200 to cover your withdrawal, then you would need to sell 77 shares today to cover it.  But that leaves you with 3,465 minus 77, or 3,388 shares, going into next year.

What's interesting is that this is the failure mechanism in these kinds of retirement withdrawal studies.  The value of your portfolio goes to zero whenever you sell your last share!


Yes. Empirical research has shown that 100% stock funds sometimes fail.  That is outside of the recommended asset allocation.  On the other hand empirical research has shown that portfolios of 50-75% stock have a 100% success rate. Guyton's research confirmed this.  He said the sweet spot for sustainable withdrawals was 60-70% stock, 30-40% bonds.

He pretty much confirmed the 4% withdrawal rate as well.  He talked of a partner who calculated that 4.3% was too high. The 5% rate could only be used with, as he put it, guard rails that reduced spending.  That is where flexible spending is needed.

I understand what you are saying. Its just that you have a ton of research going against you.  Didn't you find it interesting that Guyton doesn't use bonds for income?  That to him the most important thing is that they do not lose value so that they can be sold when the stock market crashes to prevent the sale of stock?

Changing the subject, I have been thinking about those discretionary funds.  He didn't say but I have a feeling he is putting them in 1-2 year treasury bonds.  He did say he considers them the same as cash.


You were the one asking about selling something whenever the NAV was down.  I simply responded to your question! 8-)

I have no research going against me.  Let me, again, ask a simple question.  If my retirement portfolio produces, say, $50,000 of distribution cash per year, regardless of my asset allocation, and I withdraw and spend $40,000, reinvesting the excess distribution cash, explain how it can fail before 2050?  In your terminology, explain how the POS can be anything other than 100%.

In fact, let's up the game a bit.  Your research says that a 4.3% real rate of withdrawal was too high.  I say it isn't, and is almost as safe as a 4% rate, and both have a 100% POS, whenever withdrawing from a portfolio that distributes at least 5%, or $50,000/year.  As above, explain how that can fail?

Ifn I found it interesting that he didn't use bonds for income, as everyone else does, I would opine that he, like most everyone else, would find it strange that I use stocks for income, not for growth!  8-))

BTW, if you think a 5% portfolio distribution is 'reaching for yield', I would opine that a single fund, VWEHX, portfolio, into which you have invested $1 million should produce $53,300 in distribution cash, going forward, next year.  I would further opine that I could withdraw and spend $43,000 over the next 12 months, and reinvest $10,300 in buying more shares of the fund.  At today's NAV of $5.70, that would mean buying 1807 more shares over the next 12 months, or 150 more shares per month.

I would opine that I wouldn't worry about spending down my all bond VWEHX portfolio, withdrawing at a real, inflation adjusted 4.3%/year, going forward.  I would, however, opine that your all VFINX portfolio, selling 77 or more shares each year, has a much higher Probability Of Failure than mine!

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

@ElLobo  The 4.3% was Guyton's company's research not mine.  You seem to think the world of VWEHX.  I really don't know that much about it but I'll be glad to take a closer look.  Thank you for the information. 

Oh, and since Guyton isn't concerned with bond returns he is probably using treasury bond in the Discretionary Fund that is meant to be depleted.

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