User:Nisiprius/4%-rule withdrawals from real mutual funds

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Revision as of 08:09, 22 November 2020 by Nisiprius (talk | contribs) (This is a rough draft in progress. Of course I welcome editing at any time but it's not really "ready.")
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This is a member contribution representing Nisiprius' personal opinions. It's based on this forum posting.

Most "[safe withdrawal rate]" studies have used stock indexes and similar data, often the Ibbotson SBBI data series. In real life, investors would not have had any practical vehicles for realizing these results. On the other hand, a handful of balanced mutual funds have had very long histories, in some cases almost as long as the Ibbotson data, and could actually have been invested in. I decided to see how withdrawals according to the traditional "4% rule" would have fared using real-world mutual funds.

Introduction and caveats

1) The "4% rule" is what it is, I'm not recommending it as an actual system to follow literally. 2) All the funds that failed did so for starting dates in the mid-1960s when inflation hit double digits and the "death of equities" occurred. As usual with extreme events, some will say they are outliers and can be ignored, while others point to Nassim Nicholas Taleb's dictum that by definition the worst case is always worse than what was previously considered to be the worst case. 3) These funds might have lower expense ratios now. 4) I don't think this idiosyncratic analysis doesn't tell you much useful about the future of these funds. 5) I don't think these results should be used as a measure of relative fund quality.

"4% rules"

I used the simple methodology of Bengen[1] and the [Trinity study|"Trinity" study]. I assumed a starting portfolio of $100,000, and a $4,000 withdrawal at the start of the first year of retirement. In subsequent years, the withdrawal is kept at "$4,000 real," i.e. $4,000 adjusted for inflation. The time frame is taken to be thirty years. The regime "succeeds" if it is possible to take thirty $4,000-real annual withdrawals and have money left at the end, and fails if it runs out of money before making thirty full payments.

4% Real Withdrawals
Fund Ticker Failures Calendar Years of Failures
Theoretical 60 S&P 500/40 IT govt bonds fund N/A 0 N/A
Fidelity Puritan Fund FPURX 0 N/A
George Putnam Balanced Fund Class Y PGEYX 1 1969
Dodge & Cox Balanced Fund DODBX 3 1966, 1968, and 1969
T.Rowe Price Balanced Fund RPBAX 3 1966, 1968, and 1969
MFS Massachusetts Trust (100% stocks) MITTX 7 1930, all years from 1965-1970, and 1973
Vanguard Wellington VWELX 8 all years from 1962-1969