Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Treating a Mutual Fund Like an Annuity

beebee
edited April 4 in Fund Discussions
Using Portfolio Visualizer's portfolio analysis tool I wondered if the "safe withdrawal rate" data could be used as a substitute for an annuity rate. SWR is a historical data point that changes depending on the historical start and end date. An annuity is a guaranteed income based in part on today's low interest rates. Obviously two different approaches to securing income in retirement. I'd like to consider part of my retirement income being derived from a Safe Withdrawal of stocks, bonds, and alternatives.

Exploring some older mutual funds (VWINX, VWELX, PRWCX, and VGHCX) I discovered the following SWRs (found within the Metrics tab):

VWINX = 7.18%
VWELX = 8.02%
PRWCX = 9.16%
VGHCX = an astouding 14.31%

In other words, for each $1,000 invested in these four funds, each could safely pay out their SWR each year of:

Year 1:
VWINX = $71.80
VWELX = $80.20
PRWCX = $91.60
VGHCX = an astounding $143.10 (close to double VWINX's SWR)

note: the annual dollar amount would adjust based on the annual mutual fund's dollar value at the end of each year:

Using VWINX's SWR (I set the annual withdrawal of a fixed percent of 7.18%) and I tested all four funds over the past 35 years (back tested from 1986 - 2021). All four survived a 7.18% annual withdrawal. Both VWINX and VWELX ending "cash value" were impacted by inflation. The 2021 (inflation adjusted value) of VWINX being only $567 of its original $1,000 value. Both PRWCX and VGHCX value stayed ahead of inflation while paying out 7.18% annually. VGHCX's value grew four fold over the last 35 year time frame. As a result it paid out larger and larger amounts annually compared to the other three fund choices. While VWINX paid out a pretty steady amount over the 35 year time frame (between $70 - $100), VGHCX's pay outs grew from $70 in year 1 (1987) to over $400 - $600 annually (years 13 - 35).

Most annuities don't provide inflation riders and many do not offer a cash value upon death. So strictly speaking even VWINX would be a good substitute for an annuity that pays out 7% with a ending cash value of $1,351 (equivalent to $567 back in 1986). The other three funds were an even better "annuity income" choice at that SWR.

None of these funds busted (went to zero) at this 7.18% Safe Withdrawal Rate. In fact, VGHCX's inflation adjusted cash value was $4,141...four times what was invested back in 1986. In addition, VGHCX provided larger and larger annual income pay outs that kept up with (exceeded inflation). Will the healthcare sector, and more importantly this fund, continue to offer such great performance?

Here's the link to PV with these four funds. The "Metrics" tab has the data on SWR (Safe Withdrawal Rate). Let me know if you find a fund with a SWR higher than VGHCX (14.13%).

PV Link

Comments

  • Thank you for your efforts with this data.
  • It looks to me VGHCX was a grand slam !!!
    Happy Easter, Derf
  • This is interesting work, thank for the table.

    Playing around with other funds in comparison looks handy, too. My old standbys PRBLX/PRILX fare nicely compared to PRWCX as well. Glad to know both are core fund positions for me.:)
  • It looks to me VGHCX was a grand slam !!!

    That's assuming investors have the stomach for it. It went through a patch where excluding withdrawals, it dropped 33.17%. How many people would have stuck with it, let alone taken the scheduled withdrawals, which would have increased the drop to 42.88%? And that's just month-to-month calculations. Daily peak to daily trough was likely worse.

    That drop lasted the better part of two years (1 year, 9 months), and the fund took nearly an additional two years (1 year, 10 months) to recover.

    Investors may have had an even harder time sticking with PRWCX: max (monthly) drawdown of 36.61% with no withdrawals, 45.38% including withdrawals. That fall took the same 1 year, 9 months as it did for VGHCX, though PRWCX recovered faster, taking "only" 1 year, 2 months.

    (Some drawdown figures come from the "Drawdown" tab on the PV page.)

    I'm not saying that past results including these bumps in the road aren't impressive, or don't suggest a good likelihood of doing very well by investing aggressively. I am asking, when people do encounter sizeable bumps (even with a small withdrawal rate), whether they will hang on. Unlike using an annuity, they have no guarantee of success with funds: "past performance does not guarantee future returns."

    Unfortunately people have a tendency to bail at the worst times. One will do better by making a plan, any plan, whether it is self-managed retirement, an annuity, target date funds, or anything else and just unemotionally sticking with it.
  • edited April 4
    msf said:



    Unfortunately people have a tendency to bail at the worst times. One will do better by making a plan, any plan, whether it is self-managed retirement, an annuity, target date funds, or anything else and just unemotionally sticking with it.

    Excellent observation.

    That's why if you treat a fund as an annuity, stick to it. You can't run and dump an annuity once you're under contract (or not easily/quickly/without penality) so you should treat that 'annuity' fund the same way. Don't look at it more than 4x a year and set the automatic withdrawls/sales to take place automatically if you can -- but otherwise, leave it alone unless it's imploding for real reasons (firm goes bust, fund changes mandate drastically, etc) not just market volatility.
  • An interesting read. Thanks, @bee. It all put a new floor under the way I'm operating.
  • So it would seem wise to have a pot of $$$$$ to draw from when Mr. Market doesn't cooperate. If one could cut their spending (budget) The pot could be reduced .
    Happy Easter to All, Derf
    P.S It would seem where you live,
    Life style, & age would determine
    the size of the pot. Inflow VS
    outflow.
Sign In or Register to comment.