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

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Nisiprius/4%-rule withdrawals from real mutual funds is a member contribution representing Nisiprius' personal opinions. It's based on Bogleheads® forum topic: "4% rule" withdrawals from real mutual funds.

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 suggesting 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, causing "the death of equities." 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) This analysis isn't meant to predict the future of these funds. 5)These are actively managed funds. Their characteristics, for example in the 1960s, are not the same as their characteristics today; in many case, they don't even have the same managers.

"4% rule"

I used the simple methodology of Bengen[1] and the "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.

"Shortfall" calculation

When the portfolio fails to sustain 30 consecutive withdrawals, I measure shortfall in years, giving prorated partial credit for whatever withdrawal was possible in the last year. That is, if the 26th scheduled payment was supposed to be $14,000, but there is only $7,000 left in the portfolio, I count that as "enough for 25.5 payments" and score it as a "4.5-year shortfall."

Data used

I looked at five actual balanced funds:

  • the Fidelity Puritan Fund, FPURX;
  • George Putnam Balanced Fund, PGEYX;
  • Dodge & Cox Balanced Fund, DODBX;
  • T. Rowe Price Balanced Fund, RPBAX;
  • and the Vanguard Wellington Fund, VWELX.

I also looked at

  • a theoretical 60/40 portfolio based on the Ibbotson Associates data series for "large-company stocks," which is the S&P 500 index and its predecessors; and "intermediate-term government bonds;"
  • for 100%-stock advocates, as an example of withdrawals from 100% stocks in the real world, the Massachusetts Investors' Trust (MITTX) fund.

Summary of results

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


The red bars descending from the top indicate shortfalls. The blue bars at the bottom indicate the balance of the portfolio at the end of thirty years.