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Post by mozart522 on Oct 15, 2023 12:23:02 GMT
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Post by yogibearbull on Oct 15, 2023 13:12:17 GMT
A less known aspect of Portfolio Visualizer (PV) is that its Metrics tab provides the Safe Withdrawal Rates (SWRs) for portfolios enters (those could be individual funds too). PV SWR definition is almost the same as that by Bengen's, " (PV) Safe withdrawal rate is the percentage of the original portfolio balance that can be withdrawn at the end of each year with inflation adjustment without the portfolio running out of money (dollar amount withdrawal)." In the PV Run below (thanks to PV for now shortening its Links for posting), the realized SWRs over the run period (about 29 years) are: VTMFX 7.13% VWELX 8.94% PRWCX 9.35% VFINX 9.11% (benchmark, SP500) These are much higher than 4%, but unlike Bengen, these aren't the worst cases - they are past snapshots of specific PV run period. This means that those who started with 4% inflation-adjusted withdrawals on 10/1/1994 are looking at huge balances even after years of withdrawals (those can be found from separate PV runs). The experience may not be repeated in future. www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3ZO8Y5I99GDJlZZ3OaUeP6Edit/Add. Here is the PV run for balances remaining after 4% inflation-adjusted withdrawals (monthly frequency), 10/1/1994-9/30/2023. www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3GTcL9ATuSxJCDXwlQ19ta |
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Post by Mustang on Oct 22, 2023 23:08:01 GMT
I'm not sure I would use averages from the last 30 years. Returns over the last 30 year have been very good and are probably not representative of future returns.
Bengen originally did his research because financial advisors at the time were using averages (I think it was 7%.) and it the economy had a downturn the retiree would definitely run out of money early. He was looking for a better method. Here are my responses to the article:
1. Yes, a 4% initial withdrawal is specifically for a 30-year payout. Longer payout periods require a lower initial withdrawal. Shorter payout periods allow a larger initial withdrawal. No only did Bengen's original study show this but so did the Trinity Study, Wade Pfau's 2018 update to the Trinity Study, and numerous Monte Carlo simulations.
2. Yes, it assumes investment fees, like taxes, are paid by the retiree not the portfolio. I know advisors selling annuities make a big deal out of this but it shouldn't be a surprise that the income is taxable or that if additional withdrawals are made to pay fees then more than 4% is being taken out and the portfolio risks running out of money.
3.Yes, analysis not only by Bengen and others using both historical data and computer simulations show that for a 30-year payout period the highest probability of success is with a portfolio that is 50-75% equity. Bengen actually wrote in his first paper that a 75% stock portfolio reduced the payout period a little but it never fell under 30 years and it had a 124% higher ending balance. His recommendation was to be as close to 75% as possible but never less than 50%. By the way, the portfolio with the lowest success rate was 100% bonds.
4. Yes, but, if I remember correctly, Bengen's original research had a minimum safe withdrawal of 4.25%. Bengen never actually recommended 4%. He said that the initial withdrawal should be between 4-5%. Others called it the 4% Rule. Bengen later refined his research adding small cap stocks which increase the initial withdrawal a little but it was still between 4-5%. Other changes didn't make much difference either. His original study used treasury bonds. Other studies used corporate bonds with similar results.
5. Yes, 4% is for the worst case scenario. The average is around 7% and some retirement periods, especially those starting in the 90s could have used 10%. These withdrawals are not set and forget. At a minimum an annual inflation increase must be made. Just a question, how would the investor feel if his initial withdrawal was 10% then the worst case scenario repeated itself. He would run out of money around the 10 year point. There are various methods for ratcheting up withdrawals if the market does better than the worst case. Michael Kitces wrote that if the portfolio's balance reaches 150% of its initial balance then the retiree can give himself a 10% raise. The raise should not be taken more than once ever three years to make sure it doesn't deplete the portfolio.
6. Actually it doesn't sat anything about spending. It is research about withdrawals not spending. Unless the retiree is completely unable to manage money the two are not the same thing. A lot of working people are on salary making the same amount every month. They save for unusual expenses (at least I did). It isn't any different but... spending research lets the retiree modify the 4% Rule a little. Studies on spending indicate that a retiree will spend 1% less per year in their 60s, 2% less in their 70s and 1% less in their 80 (not including medical expenses). This gives the retiree a safety margin. Kitces wrote that taking taking an increase of one percentage point less than inflation each year increases the initial withdrawal rate from 4% up to 4.4-4.8%. Morningstar's Benz showed pretty much the same result using Monte Carlo simulations. If I remember correctly her research raised the initial withdrawal rate from 3.3 to 3.9%.
7. It is highly unlikely that the retiree with die broke since the initial withdrawal rate is based on the worst case scenario. But it is quite possible he will die rich if he uses an initial 4% withdrawal rate and it later turns out to be a great bull market that would have allowed a 10%. (If only we could see the future.) But annual reviews and periodic upward adjustments will increase withdrawals taking into consideration the better performance.
The purpose of the 4% Rule is to provide a stable income. If the retiree wants withdrawals to match portfolio performance they should use one of the dynamic (or variable) withdrawal methods. But they come with a risk. They give the retiree less than planned income almost half the time.
Note: I have all of the actual data in my files but I wrote this from memory. Overall it is correct but there may be some small errors.
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Post by FD1000 on Oct 22, 2023 23:18:32 GMT
We retired until we could go with under 2% annual withdrawal.
Our idea was to retire only once and never look back or worry about it.
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Post by FD1000 on Oct 23, 2023 13:42:20 GMT
Withdrawal more has less to do with income. It depends a lot more on the portfolio size and the annual expense it has to support.
Suppose you have 2 different retirees, both have the same annual expense of $100K.
Retiree A has all her money in the SPY and portfolio = 5 million.
Retiree B has all her money in PDI and portfolio = 2 million but income is higher than retiree A.
Which retiree is in a better shape? Which retiree can have a higher withdrawal?
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Post by Mustang on Oct 23, 2023 16:54:38 GMT
Withdrawal more has less to do with income. It depends a lot more on the portfolio size and the annual expense it has to support. Suppose you have 2 different retirees, both have the same annual expense of $100K. Retiree A has all her money in the SPY and portfolio = 5 million. Retiree B has all her money in PDI and portfolio = 2 million but income is higher than retiree A. Which retiree is in a better shape? Which retiree can have a higher withdrawal? It would be easier to see if you show us the math?
Edit: There is a big difference investing during the accumulation phase and investing during the withdrawal phase. Withdrawals for living expenses must be taken regardless of market conditions.
Modern Portfolio Theory shows the returns associated with risk. Below is a Young Research chart. The line is the efficient frontier. This changes over time depending on market conditions. The data is from 1977-2017. Returns are on the left hand side, risk (volatility) is along the bottom. The minimum risk portfolio is somewhere around 75% bonds and 25% stock. A portfolio of 100% bonds has lower returns and more risk than the minimum risk portfolio. A portfolio of 100% stock had a return of approximately 10.75%, around 126% of the minimum risk portfolio but volatility went from a standard deviation of around 8.3 to around 17.5. That is over twice the risk. Individual investors need to pick the asset allocation that matches their risk tolerance.
None of the articles I have read have suggested investing in either a 100% bond or 100% stock portfolio. Here is some data from Wade Pfau's 2018 update of the Trinity Study. His data set is from 1926-2017. He is showing the success rates for a 4% initial withdrawal adjusted each year for inflation.
Historic success rates for 4% initial withdrawal Payout Period
Asset Allocation 25 yr. 30 yr 35 yr. 40 yr. 100% stock 99% 94% 91% 89%
75% stock 100% 98% 93% 92%
50% stock 100% 100% 97% 87%
25% stock 100% 87% 71% 45%
0% stock 79% 44% 28% 11%
This chart from his research shows the success rates for various initial withdrawal rates and different payout periods. The percentage above the slash (/) is for a portfolio that is 75% stock. The percentage below the slash is for a portfolio that is 50% stock.
Historic success rates for various initial withdrawal rates
Withdrawal rate 3% 4% 5% 6% 7%
15 years 100/100% 100/100% 100/100% 97/100% 82/85%
20 years 100/100% 100/100% 100/99% 81/79% 68/62%
25 years 100/100% 100/100% 84/85% 69/60% 59/44%
30 years 100/100% 98/100% 78/70% 59/46% 48/25%
35 years 100/100% 93/97% 69/59% 55/34% 38/9%
40 years 100/100% 92/87% 66/45% 45/17% 30/0%
Based on all of the research I have read a portfolio between 50-75% stock has reasonable risk and the highest success rates.
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Post by FD1000 on Oct 23, 2023 22:13:00 GMT
Mustang, maybe I didn't explain it well.
There are investors that believe that security that pays higher income is superior to a lower one.
When this claim fails they try to claim it's "safer" because you don't have to sell shares to support the annual expense. The above is far from accurate.
Most articles and research I have read discuss risk adjusted performance.
Higher income doesn't guarantee risk adjusted performance.
This is why I gave an extreme example of QQQ that pays low distributions VS a fund that pays much higher.
Or ATT vs MSFT
OR MLP,CEFs and REITs are superior to SPY.
It's a debate that goes back at least 15 years on several forums.
You are discussing a different scenario of stock to bonds ratios which over time effect risk adjusted performance.
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