Withdraw rate for VWIAX

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Houdini563
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Withdraw rate for VWIAX

Post by Houdini563 »

I have been researching for quite a while where to put about 1.2 million $ specifically for retirement monthly withdrawals. This money will gradually mature from CDs and my plan is to slowly transfer this money during market downturns over the next several years. (All this money is former 401K $ all pretax).

I’m absolutely sold on VWIAX. It’s track record is suburb and it seems to buffer economic downturns very well.

So here are my questions:

1). Based on what I’ve read it’s best to reinvest and dividends and capital gains and just take withdrawals. True?

2). In my case from that 1.2 million $ I’d like to take $50,000 annually in $4167 monthly deposits to my checking account. I do not plan to adjust this amount for inflation. Money should last for at least 30 years. Is this a safe withdrawal rate?

Thank you.
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Sheepdog
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Re: Withdraw rate for VWIAX

Post by Sheepdog »

Houdini563 wrote: Wed Oct 13, 2021 9:56 pm I have been researching for quite a while where to put about 1.2 million $ specifically for retirement monthly withdrawals. This money will gradually mature from CDs and my plan is to slowly transfer this money during market downturns over the next several years. (All this money is former 401K $ all pretax).

I’m absolutely sold on VWIAX. It’s track record is suburb and it seems to buffer economic downturns very well.

So here are my questions:

1). Based on what I’ve read it’s best to reinvest and dividends and capital gains and just take withdrawals. True?

2). In my case from that 1.2 million $ I’d like to take $50,000 annually in $4167 monthly deposits to my checking account. I do not plan to adjust this amount for inflation. Money should last for at least 30 years. Is this a safe withdrawal rate?

Thank you.
What is VWIAX? Please add descriptions as everyone doesn't know all of the symbols. Thank you
Last edited by Sheepdog on Wed Oct 13, 2021 10:12 pm, edited 1 time in total.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
Topic Author
Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

Vanguard Wellesley Income fund Admiral shares.
JoinToday
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Re: Withdraw rate for VWIAX

Post by JoinToday »

Houdini563 wrote: Wed Oct 13, 2021 9:56 pm I have been researching for quite a while where to put about 1.2 million $ specifically for retirement monthly withdrawals. This money will gradually mature from CDs and my plan is to slowly transfer this money during market downturns over the next several years. (All this money is former 401K $ all pretax).

I’m absolutely sold on VWIAX. It’s track record is suburb and it seems to buffer economic downturns very well.

So here are my questions:

1). Based on what I’ve read it’s best to reinvest and dividends and capital gains and just take withdrawals. True?

2). In my case from that 1.2 million $ I’d like to take $50,000 annually in $4167 monthly deposits to my checking account. I do not plan to adjust this amount for inflation. Money should last for at least 30 years. Is this a safe withdrawal rate?

Thank you.
1. No. Reinvest until you need to take withdrawals. Then once you start withdrawals, stop reinvesting and direct dividends and cap gains to a money market fund or checking acct.

2. My crystal ball is cracked, and was cloudy even before being cracked, so I can't even begin to predict the future with any accuracy. I would take 1/30 of the value in the first year, 1/29 of the value in the second year, etc. Maybe do a 2 or 3 year averaging to smooth out withdrawals if you want.

3. Why are you putting it in VWIAX during market downturns? just invest it when the CDs mature. Do you think you can time the market successfully?
I wish I had learned about index funds 25 years ago
Topic Author
Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

The $ mature a year before I retire so I have time to pick and choose when I deposit $ into VWIAX. So why not buy in say $150,000 increments during times where the market is down a bit rather than buying at its zenith?

First time I’ve heard to take dividends etc. Everything I’ve read revolves around the 4% rule.

Crystal ball? For long term retirement income the idea is take periodic withdrawals based upon the 4% rule. My original questions center around its feasibility within VWIAX.
venkman
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Re: Withdraw rate for VWIAX

Post by venkman »

Houdini563 wrote: Wed Oct 13, 2021 10:39 pm Crystal ball? For long term retirement income the idea is take periodic withdrawals based upon the 4% rule. My original questions center around its feasibility within VWIAX.
The 4% rule was formulated in 1994, when bond yields were a lot higher. The 60% bond allocation of VWIAX has a current yield to maturity of 1.7%.

If you don't care about having much left over, you should be pretty safe withdrawing 4% annually for 30 years from VWIAX.

But, if you don't care about having much left over, you might also consider annuitizing some of the fixed income portion of the portfolio. A 65-year-old can get a lifetime payout around 5.5-6% on an immediate annuity. That gives you some longevity protection, and means the rest of your portfolio doesn't have to work as hard.
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Re: Withdraw rate for VWIAX

Post by JoinToday »

Houdini563 wrote: Wed Oct 13, 2021 10:39 pm The $ mature a year before I retire so I have time to pick and choose when I deposit $ into VWIAX. So why not buy in say $150,000 increments during times where the market is down a bit rather than buying at its zenith?
I believe the evidence shows people are better off putting their money in the market, rather than waiting for a dip. In general, the market goes up while you are waiting for a dip so you lose out on the gains.
First time I’ve heard to take dividends etc. Everything I’ve read revolves around the 4% rule.
If dividends are 1.5% or 2%, I would not reinvest the dividends, and then withdraw 4% of the investment. I would use (take) the dividends, and withdraw 2% or 2.5% as needed to make up the 4% withdrawal. If the dividends are 5% or 6%, use 4% of the dividends for your yearly withdrawal, and reinvest what is not used.
Crystal ball? For long term retirement income the idea is take periodic withdrawals based upon the 4% rule. My original questions center around its feasibility within VWIAX.
I don't know how any of us can give you a definitive answer to your question. It is probably reasonably safe. How far off in the future is retirement (I may have missed this)? If I were retiring soon, I would be concerned with sequence of return risk. Low bond yields (currently) plus reversion to the mean in the stock portion would be worrisome to me.
I wish I had learned about index funds 25 years ago
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Re: Withdraw rate for VWIAX

Post by JoinToday »

venkman wrote: Wed Oct 13, 2021 11:29 pm ....
But, if you don't care about having much left over, you might also consider annuitizing some of the fixed income portion of the portfolio. A 65-year-old can get a lifetime payout around 5.5-6% on an immediate annuity. That gives you some longevity protection, and means the rest of your portfolio doesn't have to work as hard.
This is the right answer. Annuitize your money to get the yearly income needed. Lowest risk option.
I wish I had learned about index funds 25 years ago
Topic Author
Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

The funds YTD return is over 6%. It’s 10 year return is nearly 8%. I understand that bond yields have diminished but here we are in 2021 bond yields are down but VWIAX is still producing well ahead of a 4% return. Assuming it’s total return exceeds 4% why would withdrawing 4% diminish the original principle?

Over the last 50 years VWIAX has done very well during inflationary periods.
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

Again I am trying to understand here.

If VWIAX bond yield is as what was stated as 1.70%. Dividend yield is 2.5% PLUS you have stock appreciation to consider.

Why then would a withdrawal rate of 4% (4% rule) then erode principle over time? You would have to have the sum of all three (bond yield, dividend yield AND stock appreciation) fall below 4% before a 4% withdrawal rate erodes original principle correct?
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Re: Withdraw rate for VWIAX

Post by JoinToday »

Houdini563 wrote: Thu Oct 14, 2021 1:01 am The funds YTD return is over 6%. It’s 10 year return is nearly 8%. I understand that bond yields have diminished but here we are in 2021 bond yields are down but VWIAX is still producing well ahead of a 4% return. Assuming it’s total return exceeds 4% why would withdrawing 4% diminish the original principle?

Over the last 50 years VWIAX has done very well during inflationary periods.
If you assume the total return exceeds 4%, you are guaranteed (100% guarantee) that you can withdraw 4%. But if your assumption turns out to be wrong, you might not be able to withdraw 4%.

Look at portfolio visualizer.
VWINX is VWIAX with Investor share for a longer time frame (Portfolio #1, blue trace).
VIGRX is a large cap growth fund (39%) + VFICX (Intermediate Term Investment grade bonds, 59%) + 2% cash (Portfolio #2, red trace)
Portfolio #3 (orange trace) is 60% US equity, 40% Intermediate Term Investment grade bonds.

Bottom line: VWIAX is a good fund. Easy to buy and manage. But I am not seeing outstanding. And if you are inclined, you might get a more tax efficient portfolio by buying the individual fund components and placing the bonds in your traditional IRA and equity in after tax accounts -- but none of us know what is in the rest of your portfolio, or if there are other assets.

Plots from 1994 to 2021:
https://www.portfoliovisualizer.com/bac ... tion5_2=39

Plot from 2009 to 2021 (Blatant data mining on my part)
https://www.portfoliovisualizer.com/bac ... tion5_2=39
I wish I had learned about index funds 25 years ago
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Re: Withdraw rate for VWIAX

Post by JoinToday »

Houdini563 wrote: Thu Oct 14, 2021 2:00 am Again I am trying to understand here.

If VWIAX bond yield is as what was stated as 1.70%. Dividend yield is 2.5% PLUS you have stock appreciation to consider.

Why then would a withdrawal rate of 4% (4% rule) then erode principle over time? You would have to have the sum of all three (bond yield, dividend yield AND stock appreciation) fall below 4% before a 4% withdrawal rate erodes original principle correct?
I just looked up VWIAX. Current 30 day SEC yield is 1.92%. If there is 0% appreciation of the stock & bonds, doesn't this mean a 4% withdrawal will require 2.08% withdrawal of the principal every year? and if nothing changes (yield or appreciation/depreciation), the withdrawal rate for 30 years is $52,992.32/year. You are golden.

If there is a bear market, things may not be so rosy (what are the odds of a bear market after 12 years of a bull market?).

On the other hand, if inflation picks up, and bond market interest rates go up (lets ignore the impact of rising interest rates to bond fund value due to fund duration), 4% might be easy.
I wish I had learned about index funds 25 years ago
Topic Author
Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

I am carrying $200,000 in cash so I can switch off VWIAX during a recessionary period.
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

I’m still confused.

Does the 30 day SEC yield includes Stock dividends, bond yield AND stock appreciation? So in other words it would represent the max withdrawal you could take from the fund without taking principle?

If this is the case why is the fund showing over 6% return on a continuous basis?

When I run a Monte Carlo analysis taking 4% non inflation adjusted there is 99% plus odds that my initial investment will last 30 years. I understand this is looking at past results but then again I’m looking 30 years into the future. Long term.

The 1.92% vs over 6% just does not ring true.
Topic Author
Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

One other point that I would ask for clarification is that I’ve been following VWIAX for the last say two years and the highest 30 day sec yield I’ve seen was around 3%. That again does not jive with the 6% plus return VWIAX provides.

So what is the variable that is missing?
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Re: Withdraw rate for VWIAX

Post by animarising »

My Inherited IRA has been 100% invested in Wellesley Income Fund since my Mom died in 2015. I take the RMDs each year and the base about of the fund stays stable and even grows a bit. Your biggest problem may be super huge RMDs from this fund pushing you into higher tax and Medicare IRMAA brackets. If you're not yet 72 years old, I suggest a plan to pay taxes now and plunk the money into a Roth VWIAX.
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

So are you saying I should be able to take 4% annually in monthly deposits into my checking account and based on your experience not worry that I’m pulling out principle?

From what I have just read the 30 day sec yield calculation does not include/consider stock appreciation.
sycamore
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Re: Withdraw rate for VWIAX

Post by sycamore »

Houdini563 wrote: Thu Oct 14, 2021 3:22 am Does the 30 day SEC yield includes Stock dividends, bond yield AND stock appreciation?
...
From Vanguard's site:
A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield.
So SEC yield does NOT include fund price appreciation. Remember that SEC yield is an estimate. The distribution yield is the actual yield, which as noted man vary a bit from the SEC yield.
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SquawkIdent
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Re: Withdraw rate for VWIAX

Post by SquawkIdent »

Houdini563 wrote: Wed Oct 13, 2021 9:56 pm I have been researching for quite a while where to put about 1.2 million $ specifically for retirement monthly withdrawals. This money will gradually mature from CDs and my plan is to slowly transfer this money during market downturns over the next several years. (All this money is former 401K $ all pretax).

I’m absolutely sold on VWIAX. It’s track record is suburb and it seems to buffer economic downturns very well.

So here are my questions:

1). Based on what I’ve read it’s best to reinvest and dividends and capital gains and just take withdrawals. True?

2). In my case from that 1.2 million $ I’d like to take $50,000 annually in $4167 monthly deposits to my checking account. I do not plan to adjust this amount for inflation. Money should last for at least 30 years. Is this a safe withdrawal rate?

Thank you.
Because the future is unknown, it’s almost impossible to answer your question with certainty.

But we can look at alternatives to increase safety.

How flexible is your withdrawal rate? Maybe 4% per year of the portfolio value? Take dividends and capital gains in cash and then supplement that with withdrawals.

I see you have an additional $200K in cash to supplement this. That’ll obviously help in times the fund has “issues”. Nice.

Many options…
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

I found that the DISTRIBUTION YIELD for VWIAX is 4.07% currently. Sounds perfect for a 4% withdrawal rate!
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Re: Withdraw rate for VWIAX

Post by sycamore »

Houdini563 wrote: Thu Oct 14, 2021 6:01 am So are you saying I should be able to take 4% annually in monthly deposits into my checking account and based on your experience not worry that I’m pulling out principle?

From what I have just read the 30 day sec yield calculation does not include/consider stock appreciation.
Correct that SEC yield does not include price appreciation.

Whether you want to drawdown principal is an interesting question. Most (all?) studies done on safe withdrawal rates assume that the portfolio is being spent down eventually to zero. If you don't want it to go to zero (like you want to pass on an inheritance) that's fine but you may have to live with a lower withdrawal rate in order to preserve some of the portfolio.

Not wanting to drawdown any principal is, practically speaking, very hard for most people as it requires lots of assets and relatively low expenses. It may be possible for you (yay!) but I would be worried about trying to build the portfolio around the idea that "I must never drawdown principal!" like it's some sort of mantra "never eat your seed corn!"

Taking Wellesley's dividends and not reinvesting them is fine. If that happens to meet your spending needs, you're set! If your expenses rise for whatever reason, you may have to sell a few shares. That's fine too. If your expenses continue to rise too much, then that would indeed be a long term problem. But if you can keep the total withdrawal rate (dividends plus any sold shares) around 4%, you're in good shape.

There are tons of threads about safe withdrawal rates. Much of it comes down to (1) number of years' expenses you need from the portfolio; (2) keeping expenses in check; and (3) having a portfolio with a reasonable amount of stocks (anywhere from 30 to 70%) to help counteract inflation. Given your parameters (30 years, $1.2 million, and use of Wellesley at 35% stocks), I'd say you have a workable plan.

Also remember that "safe withdrawal rate" is the amount you need to withdraw to cover residual living expenses, i.e., your expenses that aren't covered by Social Security, pension, or an annuity. Do you have any of those?
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Re: Withdraw rate for VWIAX

Post by animarising »

SEC yield has nothing to do with your actual return. It's just a requirement to list it according to a specified formula and no one pays attention except the government agency.

BTW, the 4% rule may be a bit antiquated; Vanguard recommends a dynamic spending plan. You would use the percentage approach, perhaps 5% for year one, to calculate a spending level based on your portfolio value at the prior year-end. Then, determine a range of acceptable spending based on the prior year's actual portfolio value. To find the range, increase the prior year's spending by 5% (the ceiling) and reduce it by -2.5% (the floor).

You just have to harden yourself to the fact that markets go up and markets go down. I used to be pretty good at "forecasting" dips. I went 100% to CASH the day after Baby Bush got inaugurated and missed the dot-com bust. I did so again in July 2008, but discovered that putting a much larger sum of money back really challenged me in 2009. I swore I'd never yank money out again, because the larger your assets, the more difficult it becomes to reinvest. And I haven't! Think of yourself as a surfer riding the swells. Markets go up, and markets go down.

Vanguard says both my 10-year and 5-year performance has yielded an 8.4% return; over the past 3-years, 9.7%; one-year 16.7%. Hope this helps you move forward!
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

Wouldn’t be best to reinvest dividends and distributions on a constant basis and just take my 4% off the top in equal monthly installments?
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

We should have 2.3 million in total when I retire next year. My wife won’t retire until two years later. Over and above this we will both have SS (around $52,000) and a home worth $550,000. No significant debt of any kind.
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Re: Withdraw rate for VWIAX

Post by sycamore »

Houdini563 wrote: Thu Oct 14, 2021 6:31 am Wouldn’t be best to reinvest dividends and distributions on a constant basis and just take my 4% off the top in equal monthly installments?
That's a reasonable way to take withdrawals from your portfolio. Another reasonable approach is to spend the distributions; if you don't need all the distributions for spending, then reinvest the rest. Either approach is likely to be good enough.

I don't know what "best" means. There's no universal "best" that applies to everyone and all situations, so decide on your priorities and then build a withdrawal mechanism around that.

One consideration is whether you hold the fund in a taxable account. In a taxable account, each reinvested distribution becomes a new share lot with its own basis and holding period. Not exactly a big problem, but for people who have trouble deciding which lot to sell it's easier to just spend the distribution if you were planning to sell shares soon anyway.
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

All 1.2 million are funds from past employer 401ks that I’ve never touched other than roll into CDs a few years ago. All pre tax $ which I prefer to let grow/pull from as pre tax money.
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Re: Withdraw rate for VWIAX

Post by nolesrule »

Houdini563 wrote: Thu Oct 14, 2021 8:30 am All 1.2 million are funds from past employer 401ks that I’ve never touched other than roll into CDs a few years ago. All pre tax $ which I prefer to let grow/pull from as pre tax money.
So the money is pre-tax in traditional IRAs then?

In a pre-tax account it doesn't matter whether you withdraw distributions or reinvest them and sell shares to withdraw funds or do some of each because taxes are only on the amount withdrawn. Do whatever you find is easier for you to manage.
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

To give a full view. Here is what we have as of today;

CDs. Traditional 1,000,000 (3.2%)
IRA1. Traditional 190,000 (4.5% fixed)
IRA2. Traditional 120,000 (4.5% fixed)
Cash. 200,000 (bank savings)
Current 401K. 415,000 target date fund
Current 401k. 155,000 target date fund
VWIAX. 71,000
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goingup
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Re: Withdraw rate for VWIAX

Post by goingup »

Houdini563 wrote: Thu Oct 14, 2021 6:31 am Wouldn’t be best to reinvest dividends and distributions on a constant basis and just take my 4% off the top in equal monthly installments?
I think most people spend the distributions and then sell shares for the rest of the money needed.

Owning VWIAX for income is a common strategy for retirees. The benefits are a relatively low volatility (conservative) fund which pays a quarterly distribution. The downsides are the distributions can vary. There are also often both ST and LT capital distributions.

Take a look at the Distributions page under VWIAX at Vanguard to get an idea of the income you'd receive for owning $1m in shares. Recently it would be $35-40K. If you want a steady monthly cash-flow, one idea would be to send the quarterly distributions to the settlement (MM) fund. Park an additional $50K in cash there. Set up automatic monthly withdrawals from the MM fund to your checking. The account will replenish in perpetuity (sort of), but you'd need to sell shares once in awhile to cover the shortfall.
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Re: Withdraw rate for VWIAX

Post by dbr »

You are missing the math that the evolution of the portfolio is determined by the periodic return less the withdrawals. The sources of that return are the dividends paid by the fund together with the change in asset values of the investments, but it is only the total, period by period that matters.

4% withdrawal studies do that math and end up with the conclusion that stock and bond funds like VWIAX have little chance of running out of money at the end of 30 years with 4% of initial value indexed for inflation* withdrawn each year. Different chances of running out money are posted for different lengths of time and different withdrawal rates. If you want you can worry that such historical results aren't good predictions for someone starting now, but there is no simple way to get a better estimate. Strangely, or not, for withdrawal rates around 4% there is little dependence on asset allocation. The increased return with more in stocks is offset by the damage done from getting bad sequences of returns with more risky investments. At lower withdrawal rates asset allocation matters even less. What is strongly affected by asset allocation is the amount left at the end, which can be huge and even huger for asset allocations with more return.

The problem of ensuring less failure without ending up with lots of unspent money is fundamental. The standard solution to that is to give up the money and buy a fixed annuity. That also has the benefit of insuring longevity risk. The absence of inflation indexed SPIAs is a severe problem. In practice a person would annuitize some of the money and invest the rest.

*That one is increasing withdrawals with inflation is huge.
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Re: Withdraw rate for VWIAX

Post by dbr »

goingup wrote: Thu Oct 14, 2021 8:53 am
Houdini563 wrote: Thu Oct 14, 2021 6:31 am Wouldn’t be best to reinvest dividends and distributions on a constant basis and just take my 4% off the top in equal monthly installments?
I think most people spend the distributions and then sell shares for the rest of the money needed.

Owning VWIAX for income is a common strategy for retirees. The benefits are a relatively low volatility (conservative) fund which pays a quarterly distribution. The downsides are the distributions can vary. There are also often both ST and LT capital distributions.

Take a look at the Distributions page under VWIAX at Vanguard to get an idea of the income you'd receive for owning $1m in shares. Recently it would be $35-40K. If you want a steady monthly cash-flow, one idea would be to send the quarterly distributions to the settlement (MM) fund. Park an additional $50K in cash there. Set up automatic monthly withdrawals from the MM fund to your checking. The account will replenish in perpetuity (sort of), but you'd need to sell shares once in awhile to cover the shortfall.
Yes, and an option is that many brokers will arrange to just withdraw and issue fixed monthly amounts from your holding.
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Re: Withdraw rate for VWIAX

Post by magicrat »

Houdini563 wrote: Thu Oct 14, 2021 6:31 am Wouldn’t be best to reinvest dividends and distributions on a constant basis and just take my 4% off the top in equal monthly installments?
Only if you want to pay unnecessary taxes.
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Re: Withdraw rate for VWIAX

Post by Breezy »

JoinToday wrote: Wed Oct 13, 2021 10:16 pm
Houdini563 wrote: Wed Oct 13, 2021 9:56 pm I have been researching for quite a while where to put about 1.2 million $ specifically for retirement monthly withdrawals. This money will gradually mature from CDs and my plan is to slowly transfer this money during market downturns over the next several years. (All this money is former 401K $ all pretax).

I’m absolutely sold on VWIAX. It’s track record is suburb and it seems to buffer economic downturns very well.

So here are my questions:

1). Based on what I’ve read it’s best to reinvest and dividends and capital gains and just take withdrawals. True?

2). In my case from that 1.2 million $ I’d like to take $50,000 annually in $4167 monthly deposits to my checking account. I do not plan to adjust this amount for inflation. Money should last for at least 30 years. Is this a safe withdrawal rate?

Thank you.
1. No. Reinvest until you need to take withdrawals. Then once you start withdrawals, stop reinvesting and direct dividends and cap gains to a money market fund or checking acct. Since it's in pretax, the OP is fine reinvesting the dividends.

2. My crystal ball is cracked, and was cloudy even before being cracked, so I can't even begin to predict the future with any accuracy. I would take 1/30 of the value in the first year, 1/29 of the value in the second year, etc. Maybe do a 2 or 3 year averaging to smooth out withdrawals if you want.

3. Why are you putting it in VWIAX during market downturns? just invest it when the CDs mature. Do you think you can time the market successfully?
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Re: Withdraw rate for VWIAX

Post by Grt2bOutdoors »

Houdini563 wrote: Thu Oct 14, 2021 6:20 am I found that the DISTRIBUTION YIELD for VWIAX is 4.07% currently. Sounds perfect for a 4% withdrawal rate!
You do realize that the distribution yield is NOT guaranteed, that it can change at ANY time.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

Yes but the 4% rule has proven itself over time. Times could change drastically in the future certainly but still no reason to believe that the 4 % rule will NOT “work” over the next 30 years as it has over the past 50.
dbr
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Re: Withdraw rate for VWIAX

Post by dbr »

Houdini563 wrote: Thu Oct 14, 2021 10:12 am Yes but the 4% rule has proven itself over time. Times could change drastically in the future certainly but still no reason to believe that the 4 % rule will NOT “work” over the next 30 years as it has over the past 50.
But his point is that taking distribution yield does not fix the withdrawal at 4% just because it is that for now.
Kevin K
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Re: Withdraw rate for VWIAX

Post by Kevin K »

dbr wrote: Thu Oct 14, 2021 8:54 am You are missing the math that the evolution of the portfolio is determined by the periodic return less the withdrawals. The sources of that return are the dividends paid by the fund together with the change in asset values of the investments, but it is only the total, period by period that matters.

4% withdrawal studies do that math and end up with the conclusion that stock and bond funds like VWIAX have little chance of running out of money at the end of 30 years with 4% of initial value indexed for inflation* withdrawn each year. Different chances of running out money are posted for different lengths of time and different withdrawal rates. If you want you can worry that such historical results aren't good predictions for someone starting now, but there is no simple way to get a better estimate. Strangely, or not, for withdrawal rates around 4% there is little dependence on asset allocation. The increased return with more in stocks is offset by the damage done from getting bad sequences of returns with more risky investments. At lower withdrawal rates asset allocation matters even less. What is strongly affected by asset allocation is the amount left at the end, which can be huge and even huger for asset allocations with more return.

The problem of ensuring less failure without ending up with lots of unspent money is fundamental. The standard solution to that is to give up the money and buy a fixed annuity. That also has the benefit of insuring longevity risk. The absence of inflation indexed SPIAs is a severe problem. In practice a person would annuitize some of the money and invest the rest.

*That one is increasing withdrawals with inflation is huge.
Amen to all of the above. I love Wellesley too but its stellar past performance reflects not only excellent management but a golden era for both bonds and the art of selecting high-dividend stocks. I wouldn't want to place all of my eggs in that basket of very narrowly concentrated assets in retirement.

A savvy retired friend who writes a personal finance and investing blog has about half of his portfolio in Wellesley and most of the rest in Vanguard LifeStrategy Moderate Growth. He's thus diversifying across strategies (active and passive) and offsetting Wellesley's concentrated sector bets in a nearly 100% domestic allocation with big swaths of TSM index funds with plenty of international exposure while also getting to his preferred 50:50 longterm equity:fixed percentages. He also began buying SPIA's at age 60 with a plan to increase them to about half of his holdings by 70 when SS kicks in for him. It strikes me that that kind of hedging of one's bets may be prudent.
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willthrill81
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Re: Withdraw rate for VWIAX

Post by willthrill81 »

Houdini563 wrote: Wed Oct 13, 2021 9:56 pm 2). In my case from that 1.2 million $ I’d like to take $50,000 annually in $4167 monthly deposits to my checking account. I do not plan to adjust this amount for inflation. Money should last for at least 30 years.
You're talking about withdrawing just a smidge over 4% of the starting balance. I'm curious as to why you are not planning to adjust your withdrawals for inflation. That certainly makes sense from a portfolio survival perspective, but are you just expecting your expenses in retirement to not keep pace with inflation?

If you're only withdrawing about 4% of the nominal starting balance each year and not ratcheting it up over time for inflation, then that has historically been very safe.

In reality though, virtually everyone naturally realizes the need to reduce their withdrawals in the event of poor portfolio performance. Bond heavy funds like Wellesley have done very well since around 1981 because interest rates have fallen pretty consistently since then, but that tailwind is very likely over. Don't expect Wellesley to have the kind of returns over the next decade at least that it's had over the last 40 years. As such, you should be prepared to reduce your withdrawals, at least temporarily, in the event that your portfolio doesn't do well.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

VWIAX returns historically are higher than 4%. Think 6-7 depending on time frame. So 4% into the future I think is reasonable.

Reason I am not adjusting for inflation is my calculations, all in, including social security after tax is $10,000 per month. This is our take home pay today. Our fixed expenses are only $5500. So lots of $ to play with and save as we do now.

The point is we want to transition into retirement and maintain the same incoming $ stream, same lifestyle, same everything.
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Houdini563
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Re: Withdraw rate for VWIAX

Post by Houdini563 »

So into the future if we find the need to adjust for inflation we will do so but my feeling is by that time we will be out of our current home and living someplace where the cost of living is much reduced.
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willthrill81
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Re: Withdraw rate for VWIAX

Post by willthrill81 »

Houdini563 wrote: Thu Oct 14, 2021 10:50 am VWIAX returns historically are higher than 4%. Think 6-7 depending on time frame. So 4% into the future I think is reasonable.

Reason I am not adjusting for inflation is my calculations, all in, including social security after tax is $10,000 per month. This is our take home pay today. Our fixed expenses are only $5500. So lots of $ to play with and save as we do now.

The point is we want to transition into retirement and maintain the same incoming $ stream, same lifestyle, same everything.
Again, don't pay much attention to Wellesley's historic returns for the purpose of estimating how much you can withdraw. Past is not prologue, especially with bonds.

That said, withdrawing a nominal 4% of the portfolio's starting balance is reasonable. I'm sure that you'll be mindful of how the fund performs, and it seems that you have plenty of flexibility in your spending and could reduce your withdrawals if needed. But keep in mind that just 2% inflation over 30 years means that something that costs $100 today would cost $181 dollars in 30 years.

If you aren't planning on spending the funds, don't withdraw them; give them the chance to continue to grow.

You should be just fine. Enjoy retirement! :D
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
FactualFran
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Re: Withdraw rate for VWIAX

Post by FactualFran »

Houdini563 wrote: Wed Oct 13, 2021 10:39 pm Crystal ball? For long term retirement income the idea is take periodic withdrawals based upon the 4% rule. My original questions center around its feasibility within VWIAX.
The calculations behind the 4% rule used withdrawal amounts adjusted for inflation. Actual return data of investor shares of the fund (VWINX) go back to July 1970. The highest initial withdrawal rate that resulted in a fund account always having supported end of month inflation-adjusted withdrawals for at least 360 months was 4.86%. Depletion at 360 months happened when the first withdrawal was made at the end of December 1972.

The fund had negative inflation-adjusted returns for the years 1973, 1974, and 1977-1981. Those returns reduced the ability of an account to sustain inflation-adjusted withdrawals.

If the withdrawals had not been adjusted for inflation, which generally increased occurred each month, then the account would have lasted longer.
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