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Re: Bengen's 4% Distribution Method


@ElLobo wrote:

 

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


What are you talking about?  I just looked up VWEHX (Vanguard High Yield Corporate).  According to Morningstar its credit quality is low.  Here is a comparison of its performance to Wellington’s (VWENX).

                                                   YTD     12-mo     3 yr         5 yr         10 yr      15 yr

                VWEHX                 -2.06%      3.14%    3.95%    4.79%    6.54%    6.03%

                VWENX                 -2.85%      6.10%    7.47%    7.51%    9.57%    7.89%

I’m confused.  Did you write down the wrong symbol?  How to you get 5% out of a fund that hasn’t averaged 5% in the last 5 years.  Especially if that is your initial withdrawal and you are adjusting subsequent withdrawals by inflation.

p.s. I don't own VFINX.  I don't remember ever discussing it.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@ElLobo wrote:

 

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


What are you talking about?  I just looked up VWEHX (Vanguard High Yield Corporate).  According to Morningstar its credit quality is low.  Here is a comparison of its performance to Wellington’s (VWENX).

                                                   YTD     12-mo     3 yr         5 yr         10 yr      15 yr

                VWEHX                 -2.06%      3.14%    3.95%    4.79%    6.54%    6.03%

                VWENX                 -2.85%      6.10%    7.47%    7.51%    9.57%    7.89%

I’m confused.  Did you write down the wrong symbol?  How to you get 5% out of a fund that hasn’t averaged 5% in the last 5 years.  Especially if that is your initial withdrawal and you are adjusting subsequent withdrawals by inflation.

p.s. I don't own VFINX.  I don't remember ever discussing it.


No, I wrote down the correct symbol, VWEHX, Vanguard's High Yield Corporate Bond fund, that's been around for 41 years.  What you are confusing is the difference between 'total return' and 'distribution yield'.

TR is the sum of the distribution yield return of a fund PLUS/MINUS the change in value (NAV) of the fund over time.  Each month, since fund inception in 1979, the fund has sent out a dividend/distribution.  Over the last 12 months, the monthly distribution has averaged $0.025 so, for the last year (TTM), VWEHX has distributed $0.30/share.  Ifn you divide the yearly distribution, $0.3, by the fund NAV, $5.71/ you get the distribution yield, which Yahoo! quotes today at 5.33%.

So, if 1 share of VWEHX distributed $0.30 over the last 12 months and you have $1 million invested in the fund, with a NAV of $5.71, you own 175,131 shares of VWEHX and received $52,539 from the fund over the last 12 months (my 'rough' number was $53,300!)

VWEHX is an all bond fund, but the fund is NOT a bond market INDEX fund, as Bengen, Trinity, and everyone else assumes in your retirement withdrawal studies.  VWENX is a balanced fund, holding an approximate 65/35 stock/bond allocation.  I have no idea whether or not the stocks and bonds held by VWENX are in market cap weighted proportions, again the assumption in Bengen, Trinity, and all retirement withdrawal studies that are based on HISTORICAL return sequences.

According to Yahoo!, the distribution yield for VWENX is 2.71%, so for $1million invested in it, you should receive $27,100 distribution cash each year.  But you're withdrawing $40,000 (or $43,000 or $50,000 or whatever amount of cash you want/need), so, each year, you have to sell fund shares to cover the withdrawal.

According to Yahoo!, the distribution yield for VWEHX is 5.33%, so for $1million invested in it, I should receive $53,300 distribution cash each year.  I'll withdraw the same amount of cash as you ($40,000 or $43,000 or $50,000), but I won't be selling any shares.  I'll have cash left over each year and will reinvest that excess cash back into VWEHX, for future growth.

(p.s., although you don't own VFINX, you've been discussing it this whole thread.  Bengen, Trinity, and all retirement withdrawal studies that look at past historical return sequences typically look at the stock market index, the most common being the S&P500.)

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


@Mustang wrote:

@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.


I'm not sure what Guyton is doing.  He seems to doing 'seat of the pants' retirement withdrawal planning, and charging his clients good, hard cold cash to do it!  He certainly isn't using Bengen's method!  8-)

I used VWEHX as an example of a fund that distributes more cash than what you want to withdraw and spend from your portfolio.  Bengen's 'method' was a real, inflation adjusted 4%.  VWEHX distributes 5.33%.  Although I am very familiar with the fund and, at one time, represented a significant portion of my retirement portfolio, I haven't owned any shares for probably 10 years now.

Here is what you posted in your OP:

"That I am a total return investor. I do not mind selling shares. All of my dividends and capital gains are reinvested. I also mentioned that I think some withdrawal strategies are complicated and some provide the desired income less than half the time. "

I am a portfolio distribution yield focused investor.  I abhor selling shares to cover a withdrawal.  All of my dividends and capital gains are taken as cash, which ALWAYS total more than the amount of cash I want to withdrawal from my portfolio.  After I take my withdrawal, I reinvest what remains back into my portfolio.  I think all withdrawal strategies other than mine are way overly complicated, difficult to describe let alone understand, and have a non-zero chance of depleting a portfolio unless overly complicated measures are taken.  My simple withdrawal strategy provides the desired income all the time, with essentially zero chance of spending down a nestegg.

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


@ElLobo wrote:

@Mustang wrote:


What are you talking about?  I just looked up VWEHX (Vanguard High Yield Corporate).  According to Morningstar its credit quality is low.  Here is a comparison of its performance to Wellington’s (VWENX).

                                                   YTD     12-mo     3 yr         5 yr         10 yr      15 yr

                VWEHX                 -2.06%      3.14%    3.95%    4.79%    6.54%    6.03%

                VWENX                 -2.85%      6.10%    7.47%    7.51%    9.57%    7.89%

I’m confused.  Did you write down the wrong symbol?  How to you get 5% out of a fund that hasn’t averaged 5% in the last 5 years.  Especially if that is your initial withdrawal and you are adjusting subsequent withdrawals by inflation.


According to Yahoo!, the distribution yield for VWENX is 2.71%, so for $1million invested in it, you should receive $27,100 distribution cash each year.  But you're withdrawing $40,000 (or $43,000 or $50,000 or whatever amount of cash you want/need), so, each year, you have to sell fund shares to cover the withdrawal.

According to Yahoo!, the distribution yield for VWEHX is 5.33%, so for $1million invested in it, I should receive $53,300 distribution cash each year.  I'll withdraw the same amount of cash as you ($40,000 or $43,000 or $50,000), but I won't be selling any shares.  I'll have cash left over each year and will reinvest that excess cash back into VWEHX, for future growth.


This discussion is proof that communication is difficult.  It just dawned on me that we are comparing apples to oranges because you are interested in yield and I am interested in total return.  I'm sure you were more aware of this than I.

“Yield is defined as the income return on an investment, which is the interest or dividends received… Investors focusing strictly on yield are typically looking to preserve the principal and allow that principal to generate income.  Growth is often a secondary investing consideration.’

“Total return refers to interest, capital gains, dividends, and distributions realized over a given period of time… Total return investors typically focus on the growth in their portfolio over time. They will take distributions as needed from a combination of the income generated from the yield on various holdings and the price appreciation of certain securities.’

“High-yield bonds are another vehicle used by investors reaching for yield—also known as junk bonds. These are below-investment-grade bonds and many of the issuers are companies in trouble or at an elevated risk of getting into financial trouble. High-yield bonds are often purchased by individual investors through a mutual fund or ETF. This minimizes the risk of default as the impact of any one issue defaulting is spread among the fund’s holdings.’

“One major benefit of using a total return approach is the ability to spread your portfolio across a wider variety of asset classes that can actually reduce overall portfolio risk… This approach also allows investors to determine which holdings they will tap for their cash flow needs.”

https://www.investopedia.com/articles/investing/121015/yield-vs-total-return-how-they-differ-and-how...

“There are various ways to calculate yield, which can be a source of confusion for many investors. The bottom line is that if a fund’s share price didn’t change and it paid a 5% yield in a given year, the fund’s total return would be 5% for that year.’

“Unfortunately, it doesn’t always work that way in real life. In addition to the return provided by yield, the daily fluctuations in the share price (or “net asset value”) also make a contribution to total return.’

“In a given year, these fluctuations can cause the total return to be higher or lower than the fund’s yield. If a fund that yields 5% also has a 5% increase in its share price, its total return is 10%. If the same fund experiences a 5% decline in its share price, the total return is 0%.’

“While a fund that invests in high yield bonds will usually have a higher yield than another bond fund that invests in higher-quality securities, the amount of principal fluctuation may not be appropriate for investors with low-risk tolerance or who may need the money in the near future.’

‘Investors need to take care not to confuse yield with total return. Just because a fund has a reported yield of 7% doesn’t mean that’s the actual return on your investment.”

https://www.thebalance.com/the-difference-between-yield-and-total-return-417081

You have been talking about not selling shares.  Because I look at total return and include growth in my calculations I  assumed that the original investment was not impacted by the distribution.  All of my charts have shown that the original investment had grown.

But that isn’t true when yield is bigger than total return.  The share price has gone down.  You might have the same number of shares but their value is less.  I’ll use the three year returns as an example because it clearly shows the difference.  If VWEHX’s (High Yield Corporate) yield is 5.33% and its return is 3.95% then the investment lost 1.38% of its value every year for three years in order to make those distributions.  If VWENX’s  (Wellington’s) draw is 5.33% and its return is 7.47% then its value has increased 2.14% in each of the three years even if you had to sell shares to get the the distribution.

The only reason that the imaginary investor did not loose part of his original investment is if he bought 15 years ago when VWEHX’s total return is greater than its yield and the distributions are returns on past glories.

Sorry, but I think I’ll keep my apples.  As I have said before I’m a total return investor and I don’t mind selling shares.  I look at total portfolio value.  But, thank you for this discussion.  It helped me to better understand our different views on investing.

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:


No, I wrote down the correct symbol, VWEHX, Vanguard's High Yield Corporate Bond fund, that's been around for 41 years.  What you are confusing is the difference between 'total return' and 'distribution yield'.

TR is the sum of the distribution yield return of a fund PLUS/MINUS the change in value (NAV) of the fund over time.  Each month, since fund inception in 1979, the fund has sent out a dividend/distribution.  Over the last 12 months, the monthly distribution has averaged $0.025 so, for the last year (TTM), VWEHX has distributed $0.30/share.  Ifn you divide the yearly distribution, $0.3, by the fund NAV, $5.71/ you get the distribution yield, which Yahoo! quotes today at 5.33%.

So, if 1 share of VWEHX distributed $0.30 over the last 12 months and you have $1 million invested in the fund, with a NAV of $5.71, you own 175,131 shares of VWEHX and received $52,539 from the fund over the last 12 months (my 'rough' number was $53,300!)

VWEHX is an all bond fund, but the fund is NOT a bond market INDEX fund, as Bengen, Trinity, and everyone else assumes in your retirement withdrawal studies.  VWENX is a balanced fund, holding an approximate 65/35 stock/bond allocation.  I have no idea whether or not the stocks and bonds held by VWENX are in market cap weighted proportions, again the assumption in Bengen, Trinity, and all retirement withdrawal studies that are based on HISTORICAL return sequences.

<snip>


Mustang,

El Lobo's argument is deceptive. He argues a time-frame fallacy by suggesting a parallel which is based on a singular meaning. His meaning is, in fact, NOT STATIC as is required by his argument.  For example:

The monthly average monthly distribution for VWEHX in 1988 was $0.10, or $1.20 per share annually, and the last 12 month  average was $0.025, or only $0.30 per year. Obviously ..... NOT STATIC.

His argument is already false and we are just getting started.

He is saying to the retiree in 1988 that he could earn $1.20 per share per year in perpetuity. Reality has the reader earning $0.30 per share annually in 2020, or only 25% of 1980's cash flow of $1.20. 

But the whole truth is actually much worse than this.  Remember that $1.20 dividend in 1980? In today's inflation adjusted dollars, you would need $25.90 annually to maintain purchasing power. 

So, $0.30 per year in today's dollars compared to $25.90?  But wait, this story still gets worse.

Realizing his mistake, our retiree decides to sell his share so he can reinvest in something safer. OH NO! The share I bought for $9.54 is only worth $5.70.  I will take a 38% capital loss.

We are experiencing substantial pain at this point, but are still not where this really hurts.

Swearing off junk bonds forever, the retiree who once had a retirement portfolio of $9.54 sells it and reinvests his $5.70 in the investment grade bond fund VFICX.  The retiree has to pay $10.51 to buy the annual dividend of $0.352, so his $5.70 will only get an annual cash flow of $0.19.  An $0.11 loss in cash flow? This is when the weeping and gnashing of teeth begins in earnest.

VWEHX 1.jpg

Buying and selling VWEHX based on the credit cycle is one thing, but suggesting a retirement plan intended to last for decades is a different story. In the context that he delivers it, EL's argument is deeply flawed on many levels. Don't waste your time even thinking about it; it will rot your brain. His latest daisy is AMLP which is flawed for the same many reasons as a buy and hold retirement plan.

My instinct is that a 4% withdrawal is pretty ambitious given the current yield environment; I am more comfortable planning for a 3% withdrawal with growth based on a significantly underperforming market. I use the Monte Carlo tool on the Fidelity Website as a sanity check.

History will sometimes rhyme, but at other times, it will completely forget the chorus.

Holiday

PaulR888 said "Total return and income focused are not mutually exclusive"       +1

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Re: Bengen's 4% Distribution Method

I feel I can have my cake and eat it too.  For me, total return and income focused are not mutually exclusive.  I look for both.  I have 50% equity portfolio that gives me growth.  But the icing on the cake is that, for convenience only, the portfolio is tilted but not wildly tilted to kick off cash that equals my SWR.  (Yield is not a free lunch, but it makes me feel better as it is the closest thing to my old paycheck.)  I keep a globally diversified AA so my assets are spread over many baskets.  Watching my daily portfolio beta to the S&P 500, except for crazy times like Corona chaos, I am generally in a range of .3 to .6.  I guess I will keep my baskets of apples too, 

I don't think any of us are stupid.  We've been doing this for quite awhile and we each researched and acted as we felt best for us. The discussion helps us evaluate, explain and defend what we have been doing but we are all pre-biased toward our prior ways and hard to make drastic change as that would admit a prior mistake.  So we generally keep doing what we have been doing and say it is best for our goals and psyche which is OK.  But I hope someone just getting started with a clean slate can benefit by seeing pluses and minuses to our different approaches.  

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:


I'm not sure what Guyton is doing.  He seems to doing 'seat of the pants' retirement withdrawal planning, and charging his clients good, hard cold cash to do it!  He certainly isn't using Bengen's method!  8-)


You are right.  He is not using Bengen’s method.  He has modified it.  He is taking a percent times the core portfolio's balance to get the initial withdrawal in dollars.  He is then increasing each year's withdrawal by inflation.  The difference is that before he starts he subtracts 20% for future discretionary spending.  The example he gave was dividing a $1,000,000 portfolio into two funds, an $800,000 core fund and a $200,000 discretionary fund.

Guyton's $800,000 x 5% is a $40,000 initial withdrawal.  Bengen's $1,000,000 x 4% is a $40,000 initial withdrawal.  It's the same thing except he can advertise that he gives a higher percent and allows discretionary spending.

The $200,000 discretionary fund is depleted at will and it doesn't matter if it goes to zero.  But, after taking out the discretionary fund, the core fund has a very good chance of being depleted early. Historically, 4% will last for a 30 years. 5% will only last 20 years.

Knowing this Guyton closely monitors the portfolio.  The withdrawal is increasing every year. Depending upon returns the core portfolio’s balance could be increasing very slowly or even decreasing.  When the withdrawal becomes 6% of the balance he calls the client for a review.  This is the flexible spending part, he cuts the clients money until the core portfolio’s balance catches up.  He said he uses 4.5%.  He randomly picked the clients age at 73.

Think about this.  If the client retired at 65 then he has received 8 years of inflation adjusted withdrawals.  Using a standard inflation rate of 3% at 73 his withdrawal has increased to $50,760.  If that is a 6% of the core fund then the core fund’s balance is around $845,000.  Cutting back to 4.5% means the withdrawal is reduced to $38,000.  $12,760 less than expected.  And it stays there until the portfolio catches up.  Flexible spending means spending less.

Guyton is robbing Peter to pay Paul and he knows it.  But it makes his clients feel good.  If returns are high enough (like the 1990-2019 retirement period.) he never has to tell them.  Bengen’s method includes the worst case scenario.  That scenario might never happen. Guyton is rolling the dice hoping it works out and, in his example, 8 years later his client pays the price.

Still, I think the idea of a discretionary fund is a good one.  I keep mine in my saving account at our bank.  While it is 9% of our portfolio I do not include it in any portfolio calculations.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@ElLobo wrote:

@Mustang wrote:


What are you talking about?  I just looked up VWEHX (Vanguard High Yield Corporate).  According to Morningstar its credit quality is low.  Here is a comparison of its performance to Wellington’s (VWENX).

                                                   YTD     12-mo     3 yr         5 yr         10 yr      15 yr

                VWEHX                 -2.06%      3.14%    3.95%    4.79%    6.54%    6.03%

                VWENX                 -2.85%      6.10%    7.47%    7.51%    9.57%    7.89%

I’m confused.  Did you write down the wrong symbol?  How to you get 5% out of a fund that hasn’t averaged 5% in the last 5 years.  Especially if that is your initial withdrawal and you are adjusting subsequent withdrawals by inflation.


According to Yahoo!, the distribution yield for VWENX is 2.71%, so for $1million invested in it, you should receive $27,100 distribution cash each year.  But you're withdrawing $40,000 (or $43,000 or $50,000 or whatever amount of cash you want/need), so, each year, you have to sell fund shares to cover the withdrawal.

According to Yahoo!, the distribution yield for VWEHX is 5.33%, so for $1million invested in it, I should receive $53,300 distribution cash each year.  I'll withdraw the same amount of cash as you ($40,000 or $43,000 or $50,000), but I won't be selling any shares.  I'll have cash left over each year and will reinvest that excess cash back into VWEHX, for future growth.


This discussion is proof that communication is difficult.  It just dawned on me that we are comparing apples to oranges because you are interested in yield and I am interested in total return.  I'm sure you were more aware of this than I.

“Yield is defined as the income return on an investment, which is the interest or dividends received… Investors focusing strictly on yield are typically looking to preserve the principal and allow that principal to generate income.  Growth is often a secondary investing consideration.’

“Total return refers to interest, capital gains, dividends, and distributions realized over a given period of time… Total return investors typically focus on the growth in their portfolio over time. They will take distributions as needed from a combination of the income generated from the yield on various holdings and the price appreciation of certain securities.’

“High-yield bonds are another vehicle used by investors reaching for yield—also known as junk bonds. These are below-investment-grade bonds and many of the issuers are companies in trouble or at an elevated risk of getting into financial trouble. High-yield bonds are often purchased by individual investors through a mutual fund or ETF. This minimizes the risk of default as the impact of any one issue defaulting is spread among the fund’s holdings.’

“One major benefit of using a total return approach is the ability to spread your portfolio across a wider variety of asset classes that can actually reduce overall portfolio risk… This approach also allows investors to determine which holdings they will tap for their cash flow needs.”

https://www.investopedia.com/articles/investing/121015/yield-vs-total-return-how-they-differ-and-how...

“There are various ways to calculate yield, which can be a source of confusion for many investors. The bottom line is that if a fund’s share price didn’t change and it paid a 5% yield in a given year, the fund’s total return would be 5% for that year.’

“Unfortunately, it doesn’t always work that way in real life. In addition to the return provided by yield, the daily fluctuations in the share price (or “net asset value”) also make a contribution to total return.’

“In a given year, these fluctuations can cause the total return to be higher or lower than the fund’s yield. If a fund that yields 5% also has a 5% increase in its share price, its total return is 10%. If the same fund experiences a 5% decline in its share price, the total return is 0%.’

“While a fund that invests in high yield bonds will usually have a higher yield than another bond fund that invests in higher-quality securities, the amount of principal fluctuation may not be appropriate for investors with low-risk tolerance or who may need the money in the near future.’

‘Investors need to take care not to confuse yield with total return. Just because a fund has a reported yield of 7% doesn’t mean that’s the actual return on your investment.”

https://www.thebalance.com/the-difference-between-yield-and-total-return-417081

You have been talking about not selling shares.  Because I look at total return and include growth in my calculations I  assumed that the original investment was not impacted by the distribution.  All of my charts have shown that the original investment had grown.

But that isn’t true when yield is bigger than total return.  The share price has gone down.  You might have the same number of shares but their value is less.  I’ll use the three year returns as an example because it clearly shows the difference.  If VWEHX’s (High Yield Corporate) yield is 5.33% and its return is 3.95% then the investment lost 1.38% of its value every year for three years in order to make those distributions.  If VWENX’s  (Wellington’s) draw is 5.33% and its return is 7.47% then its value has increased 2.14% in each of the three years even if you had to sell shares to get the the distribution.

The only reason that the imaginary investor did not loose part of his original investment is if he bought 15 years ago when VWEHX’s total return is greater than its yield and the distributions are returns on past glories.

Sorry, but I think I’ll keep my apples.  As I have said before I’m a total return investor and I don’t mind selling shares.  I look at total portfolio value.  But, thank you for this discussion.  It helped me to better understand our different views on investing.


I wasn't trying to convince you of anything, Mustang.  Having gone over all of this whenever I approached retirement back in the late 90's, I knew exactly where you were coming from, as well as the strengths, but more importantly, the constraints and limitations, of the Bengen method and all such 'total return' strategies.  Rest assured that everything you have pointed out in your thread has been discussed ad nauseaum  on these forums, especially Dividend & Income Investing and Investing During Retirement forums over the last 20 years.

Based upon your replies to my postings, especially your 'cut and paste' quotes from basic Investing 101 articles, I'm quite certain that you have very little idea as to how your 'total return' style of retirement investing differs from my 'yield focused' style.  I'm giggy with that.  I'm 2/3rds down my personal road to retirement, while you're just starting out.  I can honestly tell you that the rear view mirror is a lot clearer than the windshield!

I have highlighted in red misconceptions about 'yield' and 'total return' that you have in your mind.  Consider this figure which I generated 10 years ago that looked at the 'total return', 'distribution yield' and 'capital change' components of that return over the first 30 years of VWEHX's lifetime.  I looked at monthly distributions and fund NAVs to do the yearly calculations.  Note that this figure represents 1 share of the fund, not a 'portfolio'!

What this figure told me, and should tell you, is that the distribution yield was fairly steady around 10% or so each and every year.  The total return ,green line), then, was represented as that always positive 10% or so yield to which a yearly increase, or decrease (growth or decline), capital change was applied.  Remember that TR = Yield +/- Capital Change.

Conceptually, whenever your withdrawal strategy focuses on that yield, and doesn't really care whether the fund NAV went up or down, since you're not selling shares, you are always buying 'em, your 'results' become, as I pointed out, deterministic, not probabilistic, meaning the POS is 100% and the POF is zero!

Vanguard quotes the long term TR for VWEHX as 8.14% over its lifetime.  At today's $5.71 NAV and it's initial $10 NAV, the fund has lost $4.29 over that 41 year lifetime, or about a 1% per year capital loss.  Since TR = Y +/- Cap Change, then 8.14% = Y% - 1%, or the average yield of VWEHX over its lifetime was 9.14%, or over twice what most everyone considers a 'safe' real, inflation adjusted rate of retirement withdrawal!

74863_163155027056451_6949408_n.jpg

By the way, VWEHX is just one example of a fund that distributes more than 4% these days.  There are lots of others, for example, the all bond CEF, PCI, currently yielding 11%.

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

@ElLoboThose "misconceptions" come directly from the "basic investing 101 articles."  From other member's replies I don't believe them to be misconceptions at all.

On size doesn't fit all.  If that type of investing works for you then that is great.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@ElLoboThose "misconceptions" come directly from the "basic investing 101 articles."  From other member's replies I don't believe them to be misconceptions at all.

On size doesn't fit all.  If that type of investing works for you then that is great.


Believe what you want, and don't patronize me, newbie!  8-))

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


@Holiday wrote:

@ElLobo wrote:


No, I wrote down the correct symbol, VWEHX, Vanguard's High Yield Corporate Bond fund, that's been around for 41 years.  What you are confusing is the difference between 'total return' and 'distribution yield'.

TR is the sum of the distribution yield return of a fund PLUS/MINUS the change in value (NAV) of the fund over time.  Each month, since fund inception in 1979, the fund has sent out a dividend/distribution.  Over the last 12 months, the monthly distribution has averaged $0.025 so, for the last year (TTM), VWEHX has distributed $0.30/share.  Ifn you divide the yearly distribution, $0.3, by the fund NAV, $5.71/ you get the distribution yield, which Yahoo! quotes today at 5.33%.

So, if 1 share of VWEHX distributed $0.30 over the last 12 months and you have $1 million invested in the fund, with a NAV of $5.71, you own 175,131 shares of VWEHX and received $52,539 from the fund over the last 12 months (my 'rough' number was $53,300!)

VWEHX is an all bond fund, but the fund is NOT a bond market INDEX fund, as Bengen, Trinity, and everyone else assumes in your retirement withdrawal studies.  VWENX is a balanced fund, holding an approximate 65/35 stock/bond allocation.  I have no idea whether or not the stocks and bonds held by VWENX are in market cap weighted proportions, again the assumption in Bengen, Trinity, and all retirement withdrawal studies that are based on HISTORICAL return sequences.

<snip>


Mustang,

El Lobo's argument is deceptive. He argues a time-frame fallacy by suggesting a parallel which is based on a singular meaning. His meaning is, in fact, NOT STATIC as is required by his argument.  For example:

The monthly average monthly distribution for VWEHX in 1988 was $0.10, or $1.20 per share annually, and the last 12 month  average was $0.025, or only $0.30 per year. Obviously ..... NOT STATIC.

His argument is already false and we are just getting started.

He is saying to the retiree in 1988 that he could earn $1.20 per share per year in perpetuity. Reality has the reader earning $0.30 per share annually in 2020, or only 25% of 1980's cash flow of $1.20. 

But the whole truth is actually much worse than this.  Remember that $1.20 dividend in 1980? In today's inflation adjusted dollars, you would need $25.90 annually to maintain purchasing power. 

So, $0.30 per year in today's dollars compared to $25.90?  But wait, this story still gets worse.

Realizing his mistake, our retiree decides to sell his share so he can reinvest in something safer. OH NO! The share I bought for $9.54 is only worth $5.70.  I will take a 38% capital loss.

We are experiencing substantial pain at this point, but are still not where this really hurts.

Swearing off junk bonds forever, the retiree who once had a retirement portfolio of $9.54 sells it and reinvests his $5.70 in the investment grade bond fund VFICX.  The retiree has to pay $10.51 to buy the annual dividend of $0.352, so his $5.70 will only get an annual cash flow of $0.19.  An $0.11 loss in cash flow? This is when the weeping and gnashing of teeth begins in earnest.

VWEHX 1.jpg

Buying and selling VWEHX based on the credit cycle is one thing, but suggesting a retirement plan intended to last for decades is a different story. In the context that he delivers it, EL's argument is deeply flawed on many levels. Don't waste your time even thinking about it; it will rot your brain. His latest daisy is AMLP which is flawed for the same many reasons as a buy and hold retirement plan.

My instinct is that a 4% withdrawal is pretty ambitious given the current yield environment; I am more comfortable planning for a 3% withdrawal with growth based on a significantly underperforming market. I use the Monte Carlo tool on the Fidelity Website as a sanity check.

History will sometimes rhyme, but at other times, it will completely forget the chorus.

Holiday

PaulR888 said "Total return and income focused are not mutually exclusive"       +1


Nothing deceptive at all, Holiday.  If my portfolio distributes 5.33% hard cold cash, while I withdraw and spend 4%, then I'm 1) not selling shares to cover a withdrawal and, more importantly, 2) always reinvesting 1.33% of the distribution cash, buying more shares, each one of which will distribute 5.33%, going forward.  Bottom line is that I'm always spending portfolio 'income', not 'capital'.

The problem you have is typical.  You look at TR and distributions for 1 share of a fund, but neglect to consider that all portfolios consist of hundreds or thousands of shares of funds.  Whenever you do retirement withdrawals, from a portfolio, you hafta count shares.

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


@ElLobo wrote:


Nothing deceptive at all, Holiday.  If my portfolio distributes 5.33% hard cold cash, while I withdraw and spend 4%, then I'm 1) not selling shares to cover a withdrawal and, more importantly, 2) always reinvesting 1.33% of the distribution cash, buying more shares, each one of which will distribute 5.33%, going forward.  Bottom line is that I'm always spending portfolio 'income', not 'capital'.

The problem you have is typical.  You look at TR and distributions for 1 share of a fund, but neglect to consider that all portfolios consist of hundreds or thousands of shares of funds.  Whenever you do retirement withdrawals, from a portfolio, you hafta count shares.


Hmmm,

I calculated for 1 share which is proportionally accurate for any number of shares.

Speaking of accurate, what is up with this?

74863_163155027056451_6949408_n.jpg

Your chart ends in 2009, and you seem to be passing it off as though it was for 2020.

Most would consider this as being "deceptive".

Also, you really are "spending portfolio capital" whenever price is eroding at current yield. Not only has the annual dividend of VWEHX decreased, but the price of the share has also. It is the worst of both worlds even if you refuse to acknowledge it.

Think of a Low-Quality and High-Coupon Corporate Bond Ladder where every bond is bought at a Premium. Assume the cost of $116 to $129 for each $100 of face value. This portfolio would deliver high current income because the average coupon is high, but the portfolio value will erode over time as each bond matures at par and capital losses are incurred. Since 1980, yields have fallen and spreads have narrowed which means that each bond is replaced with a smaller coupon at a higher price. This is most likely the dynamic under the hood of VWEHX. Next up ... more capital losses through inflation and/or yield increases.

You are betting the farm on a bygone era. Your view is ancient, static, and inaccurate. You may wish to reconsider your use of the term "newbie" because it's correlation with the implied expertise has not been established.

Let's review some up-to-date data. Notice that the 2009 bottom of the V in price corresponds with the spike in yield at the end of your outdated chart.

VWEHX 1.jpg

I do look at Total Return AND the distribution rate from the shares. Like PaulR888, I don't think an income focus along with a total return awareness have to be a mutually exclusive choice. Clearly, you take the binary view.

BTW, if the math won't work for 1 share, then "multiplying" by 1000's of shares will only "multiply" the problems.

I hope that helps.

Thank you,

Holiday

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Re: Bengen's 4% Distribution Method


@Holiday wrote:

@ElLobo wrote:


Nothing deceptive at all, Holiday.  If my portfolio distributes 5.33% hard cold cash, while I withdraw and spend 4%, then I'm 1) not selling shares to cover a withdrawal and, more importantly, 2) always reinvesting 1.33% of the distribution cash, buying more shares, each one of which will distribute 5.33%, going forward.  Bottom line is that I'm always spending portfolio 'income', not 'capital'.

The problem you have is typical.  You look at TR and distributions for 1 share of a fund, but neglect to consider that all portfolios consist of hundreds or thousands of shares of funds.  Whenever you do retirement withdrawals, from a portfolio, you hafta count shares.


Hmmm,

I calculated for 1 share which is proportionally accurate for any number of shares.

Speaking of accurate, what is up with this?

74863_163155027056451_6949408_n.jpg

Your chart ends in 2009, and you seem to be passing it off as though it was for 2020.

Most would consider this as being "deceptive".

Also, you really are "spending portfolio capital" whenever price is eroding at current yield. Not only has the annual dividend of VWEHX decreased, but the price of the share has also. It is the worst of both worlds even if you refuse to acknowledge it.

Think of a Low-Quality and High-Coupon Corporate Bond Ladder where every bond is bought at a Premium. Assume the cost of $116 to $129 for each $100 of face value. This portfolio would deliver high current income because the average coupon is high, but the portfolio value will erode over time as each bond matures at par and capital losses are incurred. Since 1980, yields have fallen and spreads have narrowed which means that each bond is replaced with a smaller coupon at a higher price. This is most likely the dynamic under the hood of VWEHX. Next up ... more capital losses through inflation and/or yield increases.

You are betting the farm on a bygone era. Your view is ancient, static, and inaccurate. You may wish to reconsider your use of the term "newbie" because it's correlation with the implied expertise has not been established.

Let's review some up-to-date data. Notice that the 2009 bottom of the V in price corresponds with the spike in yield at the end of your outdated chart.

VWEHX 1.jpg

I do look at Total Return AND the distribution rate from the shares. Like PaulR888, I don't think an income focus along with a total return awareness have to be a mutually exclusive choice. Clearly, you take the binary view.

BTW, if the math won't work for 1 share, then "multiplying" by 1000's of shares will only "multiply" the problems.

I hope that helps.

Thank you,

Holiday


As I said, my TR, yield, and cap change chart was drawn 10 years ago, whenever I lasted looked at this for VWEHX.  Never said or implied it was up to date.  In fact, the actual years are shown on the figure.

What you are missing is that the total portfolio cash flow equates to the number of shares owned times the per share distribution amount, and the total portfolio value equates to the fund NAV times the number of shares owned.  Whenever you buy or sell shares, in order to cover a withdrawal or reinvest excess distribution cash, the number of shares you  own at the end of the year is different than the number owned at the beginning of the year.

So although you can calculate the TR of the fund, you can't calculate the TR of the PORTFOLIO unless you keep track of how many shares you own.

Think of withdrawing $40,000 from a portfolio worth $1 million is a 4% rate of withdrawal, just like withdrawing $400 from a portfolio worth only  $10,000.

Whenever you sell shares and withdraw the proceeds from that sale, you are spending capital.  Whenever the fund NAV goes down, you are not spending capital.  You are experiencing an unrealized capital loss, according to the IRS.

Hope this helps you understand total return, yield, and capital gains/losses, and retirement withdrawals, for a portfolio!  8-))

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

While I don't deny that ElLobo's argument is on the face of it deceptive, and that yield is an inferior way of characterizing portfolio income performance since the portfolio cost basis is not the same as the fund NAV, his argument regarding reinvestment of unspent funds does hold water under certain assumptions.

Being the spreadsheet maven that I am, I downloaded VWEHX price and dividend data back to 6/1/1988.  Assume that a retiree invested an amount equivalent to $1MM in today's dollars ($641,171 in 1988), had starting monthly expenses of $2,250 (equivalent to my monthly expenses of $4,960 today), inflation averaged 2.5% over that time, and all income over and above monthly expenses were reinvested.  The initial NAV of $8.55 buys 74,990 shares.  Today, the portfolio would have a total of 320,197 shares worth roughly $1.648MM.  

Examining the assumptions, it turns out that an initial investment of $488,000 pays the bills and holds it own in portfolio value, but dividends are not enough to cover expenses starting in Nov, 2011 - it takes a starting investment of around $570,000 to do that.

Other assumptions can certainly be challenged, but it was a fun exercise to show that, while ElLobo may have a point about the reinvestment aspect, the ability to always have sufficient income to cover expenses isn't just about yield.  In the case of VWEHX, and investor who purchased based on the initial yield covering initial expenses ($250,000) would have been sorely disappointed, having to start selling shares in 1990 to make up the difference, and selling the last share 2002.

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Re: Bengen's 4% Distribution Method


@SlipSliding wrote:

While I don't deny that ElLobo's argument is on the face of it deceptive, and that yield is an inferior way of characterizing portfolio income performance since the portfolio cost basis is not the same as the fund NAV, his argument regarding reinvestment of unspent funds does hold water under certain assumptions.

Being the spreadsheet maven that I am, I downloaded VWEHX price and dividend data back to 6/1/1988.  Assume that a retiree invested an amount equivalent to $1MM in today's dollars ($641,171 in 1988), had starting monthly expenses of $2,250 (equivalent to my monthly expenses of $4,960 today), inflation averaged 2.5% over that time, and all income over and above monthly expenses were reinvested.  The initial NAV of $8.55 buys 74,990 shares.  Today, the portfolio would have a total of 320,197 shares worth roughly $1.648MM.  

Examining the assumptions, it turns out that an initial investment of $488,000 pays the bills and holds it own in portfolio value, but dividends are not enough to cover expenses starting in Nov, 2011 - it takes a starting investment of around $570,000 to do that.

Other assumptions can certainly be challenged, but it was a fun exercise to show that, while ElLobo may have a point about the reinvestment aspect, the ability to always have sufficient income to cover expenses isn't just about yield.  In the case of VWEHX, and investor who purchased based on the initial yield covering initial expenses ($250,000) would have been sorely disappointed, having to start selling shares in 1990 to make up the difference, and selling the last share 2002.


So, $2,250 monthly expenses, in 1988, equates to an annual withdrawal of $27,000.  At an initial portfolio value of $641,171, your real, inflation adjusted rate of retirement withdrawal was $27000/$641171, or 4.21%.

Of course, if the starting value is $488,000, the real rate of withdrawal happens to be $27,000/$488,000, or 5.53%, while taking $27,000 from an initial portfolio worth only $250,000 means a real, inflation adjusted 10.8%.  No wonder the nestegg was depleted, as it would be regardless of which fund you choose!

Pat Morgan showed that the 'Safe' withdrawal rate for VWEHX was 7%.

At any rate, back in 2009, I had the complete monthly history of VWEHX in terms of a monthly NAV, monthly distributions, and monthly inflation.  Twas fun to 'run the numbers' in terms of different withdrawal 'methods', as I wanted to discuss with Mustang for a week now!  Nevertheless, thanks for doing this work, Slipsliding!  For example, here is a figure looking at taking a fixed percentage of the yearly value of an all VWEHX portfolio, in nominal dollars, as I recall:

155258_163156360389651_5093390_n.jpg

As a check, can you look at a starting value of $675,000 back in 1988, such that the real, inflation adjusted rate of withdrawal was exactly 4%?  Portfolio Visualizer shows that your portfolio value, today, will be $2,150,405.  Here is the link.

Also, according to this PV link, where the VWEHX fund distributions were not reinvested but taken as cash, ifn you look at the bottom figure (Portfolio Income by year), there was never any year where the total amount of portfolio distribution cash generated was less than $25,000 (although, starting from $82,395 in 1988, it has continuously gone down since no excess distribution cash was ever reinvested - the number of shares owned stays the same), a second 'method' that a yield focused investor might choose to do is to take the yearly withdrawal but accumulate the excess yield into a cash bucket, saving it for a rainy day.

SO, if $82,395 was generated, in 1988, while $27,000 was withdrawn and spent, $55,395 remained in the cash bucket.  Then, in 1989, $81,852 was generated, while a real $27,000 was taken out, so another $55,000 or so was added to the bucket.  Can you, again, rerun your share count analysis and tell us how long before the cash bucket gets exhausted?  I'm just curious.

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


@ElLobo wrote:

@PatMorgan wrote:

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.


The results for 1985 as the only starting year do not answer the question of what the result were for all starting years. An answer would include the results for other starting years, including 1979, the first full calendar year of VWEHX.

An answer to the question about the percentages taken in cash from the yield for different starting years would describe how the percentage would have been determined using information known at that time. The 4% safe withdrawal rate would not have been known before Bengen's article was published in 1994.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@ElLoboThose "misconceptions" come directly from the "basic investing 101 articles."  From other member's replies I don't believe them to be misconceptions at all.

On size doesn't fit all.  If that type of investing works for you then that is great.


Don't bother with ElLobo, in his world only distributions count.  In the last 5 years SPY made 10.1% annually but AMLP made -12.2%.  In ElLobo world AMLP is better because it had higher distributions.  Even my 2.5 grandson understands that making 10% is better than losing -12% annually...EXCEPT for ElLobo.

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Re: Bengen's 4% Distribution Method


@FD1001 wrote:

@Mustang wrote:

@ElLoboThose "misconceptions" come directly from the "basic investing 101 articles."  From other member's replies I don't believe them to be misconceptions at all.

On size doesn't fit all.  If that type of investing works for you then that is great.


Don't bother with ElLobo, in his world only distributions count.  In the last 5 years SPY made 10.1% annually but AMLP made -12.2%.  In ElLobo world AMLP is better because it had higher distributions.  Even my 2.5 grandson understands that making 10% is better than losing -12% annually...EXCEPT for ElLobo.


He admitted that he was focused on distribution yield.  He even admitted that he thinks all withdrawal strategies other than his are overly complicated and difficult for him to understand.  He wrote:

“I am a portfolio distribution yield focused investor.  I abhor selling shares to cover a withdrawal.  All of my dividends and capital gains are taken as cash, which ALWAYS total more than the amount of cash I want to withdrawal from my portfolio.  After I take my withdrawal, I reinvest what remains back into my portfolio.  I think all withdrawal strategies other than mine are way overly complicated, difficult to describe let alone understand, and have a non-zero chance of depleting a portfolio unless overly complicated measures are taken.  My simple withdrawal strategy provides the desired income all the time, with essentially zero chance of spending down a nestegg.”

@SlipSliding 

Thanks for cranking the numbers. Even simple math showed the fund was living on past glories. Distributing a yield that is greater than the fund's return isn't sustainable.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@FD1001 wrote:

@Mustang wrote:

@ElLoboThose "misconceptions" come directly from the "basic investing 101 articles."  From other member's replies I don't believe them to be misconceptions at all.

On size doesn't fit all.  If that type of investing works for you then that is great.


Don't bother with ElLobo, in his world only distributions count.  In the last 5 years SPY made 10.1% annually but AMLP made -12.2%.  In ElLobo world AMLP is better because it had higher distributions.  Even my 2.5 grandson understands that making 10% is better than losing -12% annually...EXCEPT for ElLobo.


He admitted that he was focused on distribution yield.  He even admitted that he thinks all withdrawal strategies other than his are overly complicated and difficult for him to understand.  He wrote:

“I am a portfolio distribution yield focused investor.  I abhor selling shares to cover a withdrawal.  All of my dividends and capital gains are taken as cash, which ALWAYS total more than the amount of cash I want to withdrawal from my portfolio.  After I take my withdrawal, I reinvest what remains back into my portfolio.  I think all withdrawal strategies other than mine are way overly complicated, difficult to describe let alone understand, and have a non-zero chance of depleting a portfolio unless overly complicated measures are taken.  My simple withdrawal strategy provides the desired income all the time, with essentially zero chance of spending down a nestegg.”

@SlipSliding 

Thanks for cranking the numbers. Even simple math showed the fund was living on past glories. Distributing a yield that is greater than the fund's return isn't sustainable.


I think you are conflating two different metrics. It’s not unusual for a Profitable Stock to have a return that is sustainable even though the dividend exceeds the growth. For example a stock which pays an annual 5% dividend can also have an annual 3% increase in the price after the dividends are paid. Despite the fervent beliefs of BHers there is no correlation between the Payment of a dividend and a reduction in the price of the stock at the opening of the day the stock goes ex dividend. It’s not unusual for the opening price on the ex dividend date to be above the ex dividend price of the implied open. On many days the opening price is higher than the prior days close.

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Re: Bengen's 4% Distribution Method


@ElLobo wrote: So, $2,250 monthly expenses, in 1988, equates to an annual withdrawal of $27,000.  At an initial portfolio value of $641,171, your real, inflation adjusted rate of retirement withdrawal was $27000/$641171, or 4.21%.

 

My analysis was simply to determine the monthly distribution generated by the total number of shares owned in the portfolio on the last day of that month, e.g. June 30, 1988. If the distribution was greater than the monthly inflation adjusted expenses for that month (2,250 on June 30, 1988, 2,254.69 on July 31, 1988 and so on) additional shares were purchased at the NAV reported on the first day of the next month, e.g., July 1, 1988, and added to the total share count. No consideration was given to withdrawal rate - just trying to cover inflation adjusted monthly expenses with actual monthly distributions of a portfolio purchased at retirement.  I leave all other questions as exercises for the reader. 

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