If you are a do-it-yourself investor you may not have familiarity with American Funds, but many investors who have worked through an advisor have invested via American Funds. Three of their better known funds are Growth Fund of America (AGTHX), EuroPacific Growth Fund (AEPGX), and Bond Fund of America (ABNDX). The investment allocation in this analysis looks like this:
AGTHX 40%
AEPGX 20%
ABNDX 40%
So how would we do investing with these three instruments for accumulation and distribution phases?
Accumulation Phase: Monte Carlo 20 years
Our hypothetical investor puts away $500 per month for 20 years. I’m using a Monte Carlo simulation for outcomes instead of choosing a particular 20 year period. I’ll review 5 different groups of outcomes using the 10th, 25th, 50th, 75th, and 90th percentile. The 10th percentile group represents poor outcomes and the 90th percentile represents better outcomes.
10th Percentile $296,204
25th Percentile $375,861
50th Percentile $477,894
75th Percentile $605,044
90th Percentile $739,091
20 Years of Saving $500 Monthly
Our poorest outcome at the end of 20 years is a balance of $296,204. Only 10% of outcomes are worse than that. Our best outcome is a balance of $739,091. Again, only 10% of outcomes are better than this. If we use the 25th percentile, we can say that most of the time (75%) the investor ends with more than $375,861.
Distribution Phase: Monte Carlo
In this phase we start with $100,000 and take out 5% per year and see how many portfolios survive random time periods of 30 years. Distributions are adjusted for inflation and the portfolio is rebalanced annually. This allows a 65 year old to have confidence that their portfolio will last as long as they do. Overall, 94.49% of portfolio return sequences had a balance at the end of 30 years. Here are the percentile outcomes:
10th $101,520
25th $359,993
50th $785,484
75th $1,467,633
90th $2,371,430
90% of portfolios had a balance at least equal to the starting amount of $100,000 (but only in nominal, not inflation-adjusted, terms). This is a very good sign as these portfolios were able to increase distributions to account for inflation.