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Re: Bengen's 4% Distribution Method


@Mustang wrote:

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.


A previous post contains a relevant chart. The chart shows what would have happened by taking in cash 5%/12 of the end 1997-12 balance of a VWEHX account from the income distribution for 1998-01, adjusting the amount taken for later months for inflation, and making share transactions each month with the difference between the distribution amount and the amount taken in cash.

For 1998 the distribution yield, for all income distributions taken in cash, was 8.23%. The growing difference between the Withdrawal (taken) and Income (distribution) lines indicates it is doubtful that taking 5% out of the 8.23% yield for the starting year and adjusting the amount taken for inflation will last 30 years.

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:

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

More accurately, I wrote what Portfolio Visualizer reported for an analysis for which you provided a link. In a post I wrote:

The PV analysis in the first links does not use the method the question was about: taking the yield in cash and not selling shares; PV reinvests the yield and sells shares. The PV analysis reports that the SWR was 7.00%. Extending that analysis to have portfolios of 100% VWELX and 100% VWINX, PV reports that the SWR for VWELX was 9.97% while the SWR of VWINX was 9.01%. I would not use VWEHX when better alternatives are available.

As to what I show, here is a chart of the initial withdrawal rate that the funds have supported for 30 years, for starting years going back to 1971, the first full calendar year of VWINX.

 

vwelx-vwinx-vwehx-1971-1990-30yr.svg

.

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Re: Bengen's 4% Distribution Method


@SlipSliding wrote:

@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. 


I fully understand.  In your calculation, you withdrew the $2,250, correct, and reinvested the excess distribution cash.  I'm just pointing out that, with the initial value that you assumed ($641,171, or $1 million in today's dollars), that 'corresponded' to, in Mustang's terminology, a 4.21% real, inflation adjusted withdrawal, starting in June 1988.

You said that your living expenses, today, were $4,960/month, or $59,520/year.  Ifn your retirement portfolio were worth $1million, today, and you were withdrawing all of your living expenses from it, starting today, your rate of withdrawal would be 5.952%, well above the safe 4%.

I'm not being critical of your work.  I'm probably the only one posting, in this thread, other than Intruder and Paul, who fully understands it!  8-))

ElLobo, de la casa de la toro caca grande
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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.


Another rookie mistake, Mustang, and a complete lack of a basic understanding of total return, yield, and capital gains/losses.

SlipSliding's simple math was that he started with 74,990 shares of VWEHX, worth $641,171 on June 1, 1988.  Each month up until today, he withdrew $2,250 to cover his living expenses, and he increased that amount each month by inflation.  Today, he owns 320,197 shares worth a total of $1,648,000.  Looks quite sustainable to me!

At today 5.33% distribution yield for VWEHX, the portfolio will produce $87,838 distribution cash next year.  His living expenses, today, are $4,960/month, or $59,920/year, more than adequately covered by the $87,838 total portfolio distribution cash.  This means that the 'excess' $27,819 seed corn will buy more shares, again, next year.

Note that his analysis shows that shares were never sold, especially to cover a withdrawal, over the last 31 years.  Can't get any more sustainable than that, especially whenever the Probability Of Failure is zero, that is, absolutely NO chance of spending down his nestegg!  8-))

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

Bottom line, Mustang, is that you're quite happy with Bengen's 'method', so have at it.  It's your hard earned savings that you are putting at risk.  I sure hope things go well for you.  Have a great retirement.  8-)

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.


Paul:  I have not followed all the detailed back and forth but the above is succinct statement of ElLobo approach.  He has been doing it for many years and is continuing with it and doesn't voice any concern so that tells me portfolio construction, asset selection, diversification and performance is good.  But to give me more confidence, I ask ElLobo 2 questions:

(1) What is the % of PV of the investment you have the most money in?  Please provide same for sector.

(2) Do you have a backup plan for access to liquidity to pay expenses in case the distributions are cut drastically?  

Paul, dalla casa del toro piccola cacca

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Re: Bengen's 4% Distribution Method


@PaulR888 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.


Paul:  I have not followed all the detailed back and forth but the above is succinct statement of ElLobo approach.  He has been doing it for many years and is continuing with it and doesn't voice any concern so that tells me portfolio construction, asset selection, diversification and performance is good.  But to give me more confidence, I ask ElLobo 2 questions:

(1) What is the % of PV of the investment you have the most money in?  Please provide same for sector.

(2) Do you have a backup plan for access to liquidity to pay expenses in case the distributions are cut drastically?  

Paul, dalla casa del toro piccola cacca


1)  Here is my complete portfolio, as of this evening:

    Yield 
Stocks 62.96%AMZA34.58%14.10%MLP ETF
  SDYL28.38%7.90%2X Leveraged Divey Aristrocrat ETN
Bonds34.39%PCI18.05%11.00%1.8X Leveraged Bond CEF
  PFFL16.34%14.70%2X Leveraged Preferred Stock ETN
Cash  2.66%  

 

2)  Up until recently, whenever my ex sold the house, my backup plan was a Home Equity Line of Credit, with a credit line similar to the value of my portfolio at the beginning of the year.  Never had to use it for normal living expenses.  At the beginning of the year, prior to the market crash, my portfolio threw off about 2.1X the amount of cash I was withdrawing, and that portfolio distribution cash flow had been 'growing' at about a 19% per year for the last decade or so, obviously well above the rate of inflation.

However, my portfolio back then (at the beginning of the year) had a sizable position in MRRL, the UBS 2X leveraged MREIT ETN, that essentially triggered a mandatory redemption whenever its unit price dropped below $5/share on March 18.  I lost a good chunk of change in March, but I didn't know what the effect of that would be until the monthly distributions were declared in April.

Whenever they came out, my withdrawal coverage had dropped, from about 2.1X my withdrawal to roughly 1.1X, as I recall.  In other words, my total portfolio cash flow was cut roughly 50%!

Although it wasn't really necessary, I skipped 2 months worth of withdrawals, given the stimulus money that came in and what I had in the bank.  But I also changed my cash management strategy.  Rather than reinvesting all excess distributions, I've started to simply build up a cash bucket, for rainy days.  That's why I have 2.66% showing in my table for cash.  I also cut my withdrawal 25%, given that I was building up my rainy day fund within my portfolio, rather than in the bank.

Hope this helps.

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

Yikes ElLobo.  I should have followed your posts more closely.  I was totally off the mark in my speculation and conclusion about your portfolio.  For me and most, way too concentrated and risky.  I do understand what you are doing, but I certainly would not recommend to anyone, not even my worst enemy.  Good luck ElLobo.  

P.S.  Just did some math and PV is down 34.6%, excluding cash and despite a tremendous recovery from the trough drawdown.  Starting at $1,000,000 on Jan 1, PV is now $654,000.  

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

Yikes ElLobo.  I should have followed your posts more closely.  I was totally off the mark in my speculation and conclusion about your portfolio.  For me and most, way too concentrated and risky.  I do understand what you are doing, but I certainly would not recommend to anyone, not even my worst enemy.  Good luck ElLobo.  

P.S.  Just did some math and PV is down 34.6%, excluding cash and despite a tremendous recovery from the trough drawdown.  Starting at $1,000,000 on Jan 1, PV is now $654,000.  


No problem, Paul.  From my retirement in 2003 up through the end of 2018, my portfolio was 20-25 individual higher yielding individual stocks, each at 3-6% or so of my PV!  I went to a 2X leveraged portfolio in order to get some much needed diversification!  8-)

As I first mentioned to Mustang, whenever planning retirement withdrawals, you first hafta determine your rate of withdrawal, then choose and allocate investments that you believe gives you the best chance to be successful.

Finally, you gotta remember that, whenever I retired, I needed a 5% or so withdrawal rate, given that my retirement nestegg wasn't as large as what I would have liked.  I retired at a time where we lived through the irrational exuberance and the bursting of the tech bubble.  Had I retired at the same time as my ex, LaLoba, in 1998, I would have been much better off!

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

I retired in 2017.  I believe the 4% rule is a general rule of thumb for a withdrawal rate.  Each person has to tailor their financial situation to their individual circumstances. As a CPA, when I advised clients my number one rule was for them to know their personal cash flow in and cash flow out and then you can best determine what your financial situation will be in retirement.  Thus, your best withdrawal rate, then you can better determine how long that will last.  No one person or family is the same and this is not a cookie cutter exercise and neither is the withdrawal rate.  Maybe you need to make some changes before or during retirement dependent on your individual circumstances.   I am not a big fan of the 4% rule because it is a cookie cutter approach based on the markets past trends.

I am currently withdrawing at a 3% rate and monitor my portfolio quarterly to change this if I need to based on my circumstances.  I have been blessed that I am drawing minimal social security until I reach age 70.  May be you need to start withdrawals at 62.  There is no one best answer that fits all.  This all depends on your individual circumstances.  

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Re: Bengen's 4% Distribution Method

Under the worst circumstances seems not to be related to the current socio-economic scenario.  How do you define the worse circumstances if one of them includes basic economic theory destroying either the US $ or ZIRP Everlasting?   How do you anticipate the onslaught of more tax revenue enhancements on retirement assets.  NJ is currently so conically ramped on State county and city] /town. revenues it is contemplating the inclusion of SS payments in calculating  your state income tax.  How do you anticipate another round of something like "THE SECURE ACT".  So that guarantees that the Gov't will collect more taxes at an accelerated rate on our tax sheltered retirement assets with some amelioration for Roths.  Now when you hit your 55 in 401-ks and 59 1/2 in IRAs, you may want to immediately add 2% to your SWR to Finance gifting and Roth conversions.   Secure act requires a re -examination of the withdrawal rate strategy.   Worst circumstances now include a simple "NORMALIZATION" of interest rates as spawned by market forces over coming "Don't fight the Fed".  What if the .TNX goes back to just 3%.  What if gold goes to $2400 and keeps going as Palladium did on it's way to $3K.  The 4th quarter of 2018 was a very clear model as to what will happen when US interest rates rise.  As in the 70's and early 80's no one could imagine  interest rates going on a 35 year decline.  Now no one can conceive of the US $ getting bounced as a global reserve currency or the .TNX moving to near 4%.    4t Qtr 2018 shows that bonds drop in value and Bond Funds as not owned in material ways by the Banks, Insurance and Pension Trusts, get killed as the ever fickle retail investors discover that bond funds are not bonds. Even worse with indexing adopted by retail investors they all own the same half dozen bond funds and all sell when they perceive that bond funds unlike bonds that do not default, are not safe.  

Today, estate planning may require us to get more aggressive sooner in plans for our distribution rates.  The advent of receiving SS benefits may be a time to consider increasing withdrawal rates, especially towards Roth conversions.  Instead of the SS windfall allowing us to reduce our retirement asset draw downs  we may need to consider it a source of tax payments on aggressively stepping up Roth conversions.  Gifting to beneficiaries may also show some promise in our withdrawal stategies.  Annual gifting out of non-Roth assets put into higher quality dividend aristocrat, TBTF Wall St  bank preferreds, and large utilities can create a virtual annuity of for now tax advantaged securities.  

Higher rates asserting out of US fiscal and monetary profligacy,  half a dozen State and major city pension fund collapses,  could be just a few quarters away.  Rising inflation does not always mean that assets grow at the same rates.  Right now you can get better rates on "tax free" munis than on investment grade corporate bonds.  Risk is rising disproportionately in munis.  

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Re: Bengen's 4% Distribution Method


@RickW wrote:

I retired in 2017.  I believe the 4% rule is a general rule of thumb for a withdrawal rate.  Each person has to tailor their financial situation to their individual circumstances. As a CPA, when I advised clients my number one rule was for them to know their personal cash flow in and cash flow out and then you can best determine what your financial situation will be in retirement.  Thus, your best withdrawal rate, then you can better determine how long that will last.  No one person or family is the same and this is not a cookie cutter exercise and neither is the withdrawal rate.  Maybe you need to make some changes before or during retirement dependent on your individual circumstances.   I am not a big fan of the 4% rule because it is a cookie cutter approach based on the markets past trends.

I am currently withdrawing at a 3% rate and monitor my portfolio quarterly to change this if I need to based on my circumstances.  I have been blessed that I am drawing minimal social security until I reach age 70.  May be you need to start withdrawals at 62.  There is no one best answer that fits all.  This all depends on your individual circumstances.  


Hi RickW, welcome to M*!

As I look back and remember my thinking 2 decades ago, the question I was trying to get a handle on wasn't, "How much can I safely withdraw from my nestegg?", it was, "Is my nestegg large enough to support a comfortable retirement for the rest of my life?"

Bill Bernstein had a series of 5 online articles that looked at this.  His thinking went along these lines.  The long term, historical, return of the stock market was about 10% nominal, 7% real inflation adjusted.  So, based upon that, a retiree should be able to withdraw a nominal 10%, real inflation adjusted 7% from his/her nestegg and expect to never spend down the nestegg.  That thinking, in turn, led into his discussion of Sequence Of Return risks over the 1965 to 1985 time period and a determination that a real inflation adjusted 4% retirement withdrawal was fairly safe, all things considered.

But I was still working at that time, still contributing to my nestegg.  Whenever I did a back of the envelope estimate of my retirement income (pension and Social Security) and my retirement expenses, I simply back calculated the size of my nestegg  I would need to balance out things.  I would suggest that for most people who are not that knowledgeable about investing, a 3-4% 'target' is appropriate and not much thought needs to go into fine tuning asset allocation and/or withdrawal strategies.  That is, you should be able to safely retire whenever your nestegg is large enough such that you need a 4%, or less, real inflation adjusted rate of withdrawal to support your retirement lifestyle.

However, ifn you want/need more than that, you should consider either working a few more years OR be knowledgeable enough about investing to be able to 'sharpen your pencil' and do things to mitigate, minimize, or outright eliminate the risks of spending down your nestegg.

In my specific case, I wanted a 5% rate but choose to sharpen my pencil rather than work a few more years.  I retired at age 58, shortly after 9/11, and constructed a retirement portfolio that distributed more than 5%.  The only thing that really changed whenever I retired was that I started taking cash out of my portfolio, rather than adding working capital cash to it!  My standard of living didn't change one iota!

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

R-48 cites the "72-t" plan for SEPPs.  But he does not explain that the Med Term AFR. Applicable Federal Rate that limits the 72 t distribution amounts is approximately half what it likely was when he AND I executed a 72-t.  My Rate against the AFR back in 2007 was below the default (upper rate allowed) rate, and was 4.23% along with the combining of the required negative amortization rate calculated against your current  age and life expectancy I ended with a 5.6% withdrawal rate.  But now the benchmark rate is so low as to make the amounts of your SEPPs so small as to not being adequate to support your retirement income needs.  Now you need to have a separate bucket of assets/cash to Draw on for 5 years or age 59 1/2 which ever comes LAST. So ages 54 and 55 are likely the most ideal time age to select the use of a 72-t plan.  You will then have that single page tax form to fill out that class the distributions report as having penalty due are in fact in a SEPP and exempt from that tax code. Due to the 2008 market crash I started putting $500/mo of my 72-t distributions in savings.  At the end of 72-t I cancelled distributions entirely for 3 months and drew outhouse savings instead. I also went to a 3% withdrawal plan as 72-t expired when I re-started distribuions.  So that is one way to get around using the IRS plan that once in a lifetime allows you to slightly reconfigure your withdrawal rates by switching from life expectancy to a MRD plan. Something that was supposed to protect against a major market swoon swamping your getting too aggressive in setting your withdrawals.  But the AFR is so low now as to make that IRS re-calculation not very helpful.   With 72-t ending near your ASAP collecting of SS 2 years or less,  you can stay with the 3% for that period and then again when SS starts again cut your distributions if your retirement accounts have not recovered towards an amount more consistent with your anticipated neg amortization that should not be much greater than a 2 1/2 % to 3% avg annual decline.  If you are lucky or just smart you may not take much of a hit in two once in a life time market swoon of plus 35% .  

But now our estates / retirement assets are gravely threatened by The Secure Act.  The Secure Act is just a warning shot as to what portions of your SS may be taxable, whether qualified dividends will be allowed into the future, how tax free muni income will be, and what other schemes are lying-in wait to void the promises made on retirement savings.  So now withdrawal rates at least from non Roth accounts need to be reconsidered against threats from very aggressive taxation vs maximizing withdrawals with Roth Conversions and annual gifting to beneficiaries. If you are going to a 7% with drawl rate vs the 4.5% need to support your retirement living costs that excess accumulates in your cash acct.  For now you can use that excess as some of your first cash bucket and invest in the virtual tax shelter of qualified dividend securities. If this is set up in a trust then the assets transfer automatically upon your death and there are no tax issues as a need to do 13.5% distributions or greater from inherited regular /RO IRAs, to maintain a schedule of a ten year negative amortization to ZERO $s.    What is in the inherited ROTH can serve to offset the taxes on those aggressive withdrawals.  While the    has to be distributed before ten years expire you do not have to withdraw any of it until a month or so before the ten years expire and then it will as of the current statutes avoid any taxes whatsoever.  

SWRs likely need to be re-considered on IRA assets.  Conversions to Roth can stretch out that 10 years your estate has to spend down the accounts.  The end result to your estate might be to create the self tax funding combo of IRAs and Roths where there is less income distributions in $ terms  required from one account and more than adequate tax exempt income from the other to pay those lessening tax burdens .

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Re: Bengen's 4% Distribution Method

Hey SlipSlide,

Thank you for your analysis.  I was on your path but got lost on which assumptions to start with.  Your analysis gave me some guidance, so I roughly recreated what you were thinking.

VWEHX 2.jpg

Since the 5% withdrawal rate has been thrown around, and the starting yield of VWEHX was 11%, it seemed reasonable to assume a $500K starting value which would spend 50% of the distribution, and reinvest the rest.

The first negative reinvestment was on 12/31/2001 and the frequency began to increase until all reinvestment distributions were negative around 2011. 

As a bond investor who has about 33% of my bond allocation in ladders, I am familiar with the power of compounding a reinvested dividend stream.

Dividend reinvestment into a declining share price can work out if the rate remains constant, and no distributions are taken. But the combination of a declining share price, a declining distribution rate, and periodic withdrawals is a recipe for a bad outcome. I recognized the pattern, but did not follow through with the calculations until you encouraged me.

Testing the premise: Reinvesting 50% of the distributions and spending the rest is a reasonable (even generous) beginning given the strong phrasing of the advocate.  However, the portfolio fails to support itself as advertised.

Did the plan fail? That is a matter of opinion. But, the plan is on the verge of failure after 33 years by all measures. The portfolio will crash very fast from this point which is exactly when the high medical bills are expected.

To my concern:

The "Yield Argument as presented by Lobo" is a Time-Frame-Fallacy based on a parallel path defined by a singular point:  Yield. His argument allows for no changes in either price or distribution rates and projects an unrealistic outcome with certainty. This is my quarrel.

The single-point model will work without any rate of change in the variables. It can even be effective within a limited range of changes in the variables. But, it is incorrect to insist that this strategy will work under ALL circumstances; that nothing else needs to be known except yield.

Thank you,

Holiday

Edited to correct the portfolio return value, and beginning share count. I had used the 1980 price instead of the 1987 price, and the return value was looking at something other than the dollar value of the portfolio.

@SlipSliding 

 

 

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Re: Bengen's 4% Distribution Method


@Holiday wrote:

Hey SlipSlide,

Thank you for your analysis.  I was on your path but got lost on which assumptions to start with.  Your analysis gave me some guidance, so I roughly recreated what you were thinking.

VWEHX 2.jpg

Since the 5% withdrawal rate has been thrown around, and the starting yield of VWEHX was 11%, it seemed reasonable to assume a $500K starting value which would spend 50% of the distribution, and reinvest the rest.

The first negative reinvestment was on 2/28/2006 and the frequency began to increase until all reinvestment distributions were negative around 2008.  There were very large outflows in 2009 which is exactly opposite of what is suggested by the yield calculation chart for that time period which happens to be exceptionally high. Unfortunately, the portfolio was selling shares at extraordinarily low prices exactly when the distribution yield was the highest

As a bond investor who has about 33% of my bond allocation in ladders, I am familiar with the power of compounding a reinvested dividend stream.

Dividend reinvestment into a declining share price can work out if the rate remains constant, and no distributions are taken. But the combination of a declining share price, a declining distribution rate, and periodic withdrawals is a recipe for a bad outcome. I recognized the pattern, but did not follow through with the calculations until you encouraged me.

Testing the premise: Reinvesting 50% of the distributions and spending the rest is a reasonable (even generous) beginning given the strong phrasing of the advocate.  However, the portfolio fails to support itself as advertised.

Did the plan fail? That is a matter of opinion. But, the plan is on the verge of failure after 33 years by all measures. The portfolio will crash very fast from this point which is exactly when the high medical bills are expected.

To my concern:

The "Yield Argument as presented by Lobo" is a Time-Frame-Fallacy based on a parallel path defined by a singular point:  Yield. His argument allows for no changes in either price or distribution rates and projects an unrealistic outcome with certainty. This is my quarrel.

The single-point model will work without any rate of change. It can even be effective within a limited range of changes. But, it is incorrect to insist that this strategy will work under ALL circumstances; that nothing else needs to be known.

Thank you,

Holiday

@SlipSliding 

 

 


 

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


@NomasDOZ wrote:

Under the worst circumstances seems not to be related to the current socio-economic scenario.  How do you define the worse circumstances if one of them includes basic economic theory destroying either the US $ or ZIRP Everlasting?   How do you anticipate the onslaught of more tax revenue enhancements on retirement assets.  NJ is currently so conically ramped on State county and city] /town. revenues it is contemplated the inclusion of SS payments in calculating  your state income tax.  How do you anticipate another round of something like "THE SECURE ACT".  So that guarantees that the Gov't will collect more taxes at an accelerated rate on our tax sheltered retirement assets with some amelioration for Roths.  Now when you hit your 55 in 401-ks and 59 1/2 in IRAs.  You may want to immediately add 2% to your SWR to Finance gifting and Roth conversions.   Secure act requires a re -examination of the withdrawal rate strategy.   Worst circumstances now include a simple "NORMALIZATION" of interest rates as spawned by market forces over coming "Don't fight the Fed".  What if the .TNX goes back to just 3%.  What if gold goes to $2400 and keeps going as Palladium did on it's way to $3K.  The 4th quarter of 2018 a very clear model as to what will happen when US interest rates rise.  As in the 70's and early 80's no one could imagine  interest rates going on a 35 year decline.  Now no one can conceive 0of the US $ getting bounced as a global reserve currency.    4t Qtr 2018 shows that bonds drop in value and Bond Funds as not owned in material ways by the Banks, Insurance and Pension Trusts, get killed as the ever fickle retail investor discover that bond funds are not bonds. Even worse with indexing adopted by retail investors they all own the same half dozen bond funds and all sell when they perceive that bond funds unlike bonds that do not default are not safe.  

Today, estate planning may require us to get more aggressive sooner in plans for our distribution rates.  The advent of reviving SS benefits may be a time to consider increasing withdrawal rates, especially Roth conversions.  Instead of the SS windfall allowing us to reduce our retirement asset draw downs  we may need to consider it a source of tax payments on aggressively stepping up Roth conversions.  Gifting to beneficiaries may also show some promise in our withdrawal stategies.  Annual gifting out of non-Roth assets put into higher quality dividend aristocrat, TBTF Wall St  bank preferreds, and large utilities can create a virtual annuity of for now tax advantaged securities.  

Higher rates asserting out of US fiscal and monetary profligacy,  half a dozen State and major city pension fund collapses,  could be just a few quarters away.  Rising inflation does not always mean that assets grow at the same rates.  Right now you can get better rates on "tax free" munis than on investment grade corporate bonds.  Risk is rising disproportionately in munis.  


You need to forget everything you learned in eco 101 because those rules no longer apply any more than the Phillips curve applies to Changes in fed interest rates. Raising taxes in a recessIon is the dumbest thing to do because it reduces cash consumers have which should be spent to grow the economy. Government learned the hard way during the depression why raising taxes is not a good idea. Second,  since all tax legislation must originate in the house do you think Nancy Pelosi is going to raise taxes on her middle Class constituents? Raising taxes on retirement accounts would only increase economic burdens on workers who have lost their jobs and have to live off smaller asset base and would result in democrats becoming the minority party in the house.

No one inside the beltway cares about $T increases in the deficit. Treasury is issuing $3T in bonds in June to fund the $3T recovery program. Interest rate will be less than 1.5%. Federal reserve will buy remainder of treasury bonds that investors don’t purchase. If fed buys $2T of the Treasury bonds at an interest rate of 1.25% Fed will receive $25B in interest a year of which $20B will be returned to the Treasury at the end of each year.

Fed has said that interest rates will remain at 0 until at least 2022. Last time rates hit 0 was 2008 when the rate Remained at 0 for 7 years while the economy grew. It will be difficult for fed to raise interest rates above 0 when other central banks are issuing fixed income with negative rates . About 25% of sovereign fixed income ($14T)  has negative rates which is why US 10 year bond with +0.75% yield is a desirable investment and US will remain the world’s reserve currency. As a comparison yield on 10 yr German bund is -0.29%.

Low yields on fixed income is why 20% of my assets are invested in high yielding stocks taxed at capital gains rates which replaced bonds.

NJ is not going to tax SS because there is a general election in 2021 for the democratic legislature and governor. Last time NJ democrats raised taxes on the middle class in 1990 the legislature, republicans Reduced taxes after they took control of the legislature the following year and an unknown republican became governor 2 years later and was reelected because she lowered taxes.

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Re: Bengen's 4% Distribution Method

EL,

I edited the post you quoted to correct the starting share count (it was using the wrong price, and the portfolio return value. You were asking where the equilibrium point was so I fished for it.  It turned out to be at 50% of the starting yield which reinvested the other half.  

VWEHX 2.jpg

So, given the equilibrium of of 50% of starting yield, wouldn't it be prudent to assume 50% of the current yield of around 5% (2.5%) as the sustainable future rate for this fund? Without knowing the future, my instinct is that a VWEHX retirement portfolio will quickly crash at a 4% withdrawal rate.  I can easily recalculate for different scenario's now that the spreadsheet is done. But, your premise of any withdrawal rate less than the starting distribution yield is clearly wrong.

Sorry for the misfire, my posting finger was faster than my ability to review.

Holiday

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Re: Bengen's 4% Distribution Method

Hi Mustang -

Just so we’re all on the page, my manual what-if showed that the goal of having sufficient dividend income to cover expenses over the specified 32 year period required a starting value of at least $570K. The question I set out to answer was “could it have been done”, and it turns out that yes it could, provided that the retiree invested sufficient funds in the beginning, and only cashed out an inflation adjusted amount each month - no more, no less.

In addition, my analysis was completely retrospective; a trait it shares with all major SWR studies. Any projections based on it, or any other retrospective analysis, are made at the projector’s peril.

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Re: Bengen's 4% Distribution Method


@ElLobo wrote:

As I first mentioned to Mustang, whenever planning retirement withdrawals, you first hafta determine your rate of withdrawal, then choose and allocate investments that you believe gives you the best chance to be successful.


I agree.  I thought I had mentioned this before.  Several years ago when I originally wrote my succession plan I estimated incomes (survivor benefit plan, social security and traditional IRA MRDs) and expenses.  The shortfall had to come from investments.  And, before a retiree picks a withdrawal method and rate (there are many) he needs to determine how flexible those expenses are.  Can he cut back spending 24% for a few years as in Guyton’s example that we discussed earlier.  My answer was no. 

I wanted an easy to use method that provided a stable income.  Easy to use ruled out Morningstar’s bucket approach.  It is too complicated having three buckets with multiple funds pruning back only the ones that grow to get income.  Stable income ruled out others such as Vanguard’s constant percent approach.  Even with ceilings and floors income was below the targeted amount 45% of the time.  And some I ruled out because most of my research, past and current, simply does not support them.

Based on my research back then I picked Bengen’s 4% rule and calculated my  wife’s withdrawal rate  to be 2.5%.  I like 4% because it gives her a little more discretionary income and it historically has a 100% success rate for a 30 year retirement.  I am in the process of updating that succession plan.  That is the reason for this thread.  I was wondering what other ideas were out there. 

I’m not as new to Morningstar as some might think.  I have been a premium member of Morningstar for over 20 years using it to research funds.  I hardly ever posted on the forum.

Researching a withdrawal plan back then had other advantages.  Most of the articles I read also discussed asset allocation.  When I retired from the company in 1990 our asset allocation was 80-90% stock.   My wife and I continued working part-time as adjunct professors.  That gave me time to change my allocation before I started MRDs.  My traditional IRA is now in a moderate-allocation fund.  My wife has several years to go before MRDs.  Hers is 90% moderate-allocation and 10% value oriented stock fund.  I intend to change that when the market recovers. And, because we do not need them at this time, all of my MRDs and part of her social security is being invested in a conservative-allocation fund.

This has been a great discussion.  I’ve thought of several things to add to my succession plan such as periodic reviews to take advantage of better than planned portfolio growth, and a discretionary spending account kept separate from her core retirement portfolio, and I’ve even wondered how much flexibility is needed to use something like the Modified MRD approach.  It has been both interesting and our discussions are addicting.

P.S.  I am new to investing in bonds or bond fund.  I've never been interested in it.  That is why I'm using balanced funds for that side of the portfolio. Thanks for the tutorials.  But they haven't changed my mind at all.  Some of them have even convinced me to keep Bengen's 4% rule.

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Re: Bengen's 4% Distribution Method


@Holiday wrote:

EL,

I edited the post you quoted to correct the starting share count (it was using the wrong price, and the portfolio return value. You were asking where the equilibrium point was so I fished for it.  It turned out to be at 50% of the starting yield which reinvested the other half.  

VWEHX 2.jpg

So, given the equilibrium of 50%, wouldn't it be prudent to assume 50% of the current yield of around 5% as the sustainable future rate for this fund?

Sorry for the misfire, my posting finger was faster than my ability to review.

Holiday


No problem, Holiday.  Save me posting a lengthy response!  There is a simple answer to your question.

The 'sustainable' withdrawal rate for VWEHX, or any other fund, is its distribution yield, in dollars, not in percentages!  It isn't based on the historical return or distribution amounts.  The best indication of what the distribution will be, going forward a year at a time is the trailing 12 month distribution history.

It's 'sustainable' given the fact that you never sell any shares to cover a withdawal.  Ifn you withdraw and spend 100% of the distribution cash, you never buy any more shares either!  It's completely sustainable in that, whenever you never sell shares, you never worry about selling the last share that you own!  That's what you do whenever you always sell shares, to cover the withdrawal, whenever the withdrawal exceeds the distribution cash.  As a result, the POS is ALWAYS 100% while the POF is ALWAYS 0, going forward!

The ONLY question, then, is if that future cash flow will be a real, inflation adjusted amount ( doubt it!), a nominal amount (most probable, based on historical distribution amounts), a varying amount (should not be constant but not too variable), or whatever, and whether or not that cash flow covers your living expenses.

In terms of VWEHX, Yahoo! states that its distribution yield is 5.33% today.  That means that, ifn you have $1million invested in that fund today, you can expect $53,300 distribution cash to come your way over the next 12 months, or roughly $4,442 at the end of each month, going forward.  Ifn your real rate of withdrawal, going forward, is 4%, then that means you need to withdraw and spend $3,333/month, each month, going forward.  That gives you about $1,100/month to play with.

You can take that $1,100 and put it back into VWEHX, or into some other fund, or buy individual bonds, or TIPS, or simply put it in a Mason jar and hide underneath your front porch.  That's hard cold cash.

At the end of the next 12 months, you can do what R48 suggests and 're-retire', to figure out whether you need more, or less, withdrawal cash going forward and, if so (need more), make any portfolio adjustments to get it done.

Edited to add - After I wrote my response, I see that you added to your reply, specifically:

"Without knowing the future, my instinct is that a VWEHX retirement portfolio will quickly crash at a 4% withdrawal rate. I can easily recalculate for different scenario's now that the spreadsheet is done. But, your premise of any withdrawal rate less than the starting distribution yield is clearly wrong."

My answer it that it won't, given that today's VWEHX distribution yield is 5.33%, while 4% will be taken out, going forward.  The bottom line is that a real, inflation adjusted 4% has never crashed before, whenever taken from an all VWEHX portfolio, and should never crash, going forward, as long as the total portfolio distribution cash exceeds the amount of cash being withdrawn.

By the way, in your example, taking $2,250/month ($27,000/year), inflation adjusted, from a portfolio with a starting value of $500,000 represents a real, inflation adjusted 5.4% real, rate of withdrawal, considerably higher than the 4% we have been discussing!

ElLobo, de la casa de la toro caca grande
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