SWR, different perspective.

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midareff
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SWR, different perspective.

Post by midareff » Sun Dec 31, 2017 4:12 pm

We have VPW, an excellent tool but with an actuarial based... we have SWR based in an 4% + CPI basis....

I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.

I look at the VPW for me (age 70, 6 years retired) and it varies too drastically for me so perhaps I apply a three year portfolio average to smooth the results. We pay a lot for medical insurance so while there are co-pays and drug costs there seems to be a handle on that. With a COLA'd pension and SS paying nearly all the bills it seems the portfolio pays the rest. ... travel, luxury stuff and so forth. Maybe this retirement was stronger thankjust enough, as it was defined 6 years ago.

So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?

sport
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Re: SWR, different perspective.

Post by sport » Sun Dec 31, 2017 4:22 pm

There may be long term care, or assisted living expenses at advanced ages. Even the common 4% WR may not be enough to accommodate these. If you spend extra when you are in your early retirement years, you may have made this problem worse in your later years.
Last edited by sport on Sun Dec 31, 2017 4:23 pm, edited 1 time in total.

dcabler
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Re: SWR, different perspective.

Post by dcabler » Sun Dec 31, 2017 4:22 pm

You might want to read this article:
https://www.i-orp.com/help/RealityRetir ... anning.pdf

delamer
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Re: SWR, different perspective.

Post by delamer » Sun Dec 31, 2017 5:01 pm

Let’s say you can sleep well at night knowing you are able to pay out of savings for 5 years of nursing home or assisted living care at $75,000 per year. So set aside $375,000 of your nest egg as untouchable and spend the rest on the discretionary stuff.

Your number could be very different than $75,000, depending on local costs, whether you have a spouse/partner, the amount you can use from fixed income to pay for a facility, etc.. Your number could even be zero.

And if your assets are meant to cover unknown expenses for healthcare or a new roof, then add a buffer to the untouchable amount.

tibbitts
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Re: SWR, different perspective.

Post by tibbitts » Sun Dec 31, 2017 5:10 pm

midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.

So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
I would guess you're overestimating the cola'd pension crowd.

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Sheepdog
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Re: SWR, different perspective.

Post by Sheepdog » Sun Dec 31, 2017 6:01 pm

tibbitts wrote:
Sun Dec 31, 2017 5:10 pm

I would guess you're overestimating the cola'd pension crowd.
I agree with this statement. In my 10 years plus here, there are not many with cola'd pensions. Many do not even have pensions.....I don't.....well, I did, but took it as a lump sum and invested it with my savings.

Anyway, I will be in my 20th retirement year in 2018 (age 85 in 2018). I never tried to guess what I will spend in any year. I knew it would vary because of such things as travel, new autos for me or my wife, home remodeling, major medical. Yes, I have a goal, but an average goal over years which was for us an average withdrawal of 4.5% when I started. I increased that goal to an average of 4.75% a year 3 years ago as my balance was growing still. I handle special spending wants by how much of those annual maximum spending goals I actually did not want or need. We redid our 2 baths in recent years with no qualms about doing so because of that unspent amount. The last one was in 2017 and paid off from investments. I will buy my wife a new auto with cash in 2018 with no qualms because the average was not needed in the past and I have that unused amount available. I can write a $25,000f, $40,000, or whatever amount check without hesitation as long as it is within the calculation amount. Withdrawals vary considerably, but the average withdrawals remain quite even. And, as my investment balance continues to grow, I can spend even more, if I want.
People should not say everything they think. They should think about everything they say.

delamer
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Re: SWR, different perspective.

Post by delamer » Sun Dec 31, 2017 6:14 pm

tibbitts wrote:
Sun Dec 31, 2017 5:10 pm
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.

So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
I would guess you're overestimating the cola'd pension crowd.

I got the impression the OP was asking about her/his personal situation.

I am not sure what you mean in this context by overestimating — do you mean the number in that situation or the likelihood that someone in that situation is living solely off their pension or something else?

heyyou
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Re: SWR, different perspective.

Post by heyyou » Sun Dec 31, 2017 7:47 pm

Depending on your expected longevity, look into buying a ladder of annuities periodically purchased over a decade (interest rate diversification), using most of your fund assets, and start spending all of your steady income from every source. Put your few remaining fund assets in a 2050 retirement fund for the unattended equity growth.

An alternative: Scott Burns looked at WD rates with no inflation adjustment and it was almost 7%.
https://assetbuilder.com/knowledge-cent ... less-later
That front loads your spending to earlier in retirement, which fits your request.
ETA: With your current age of 70, you can re-run that for a 25 year retirement, or just split between 20 and 30 year percentages. Yes, that split would not suit an actuary, but you have SS and COLA'd pension.

ryman554
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Re: SWR, different perspective.

Post by ryman554 » Mon Jan 01, 2018 2:15 am

heyyou wrote:
Sun Dec 31, 2017 7:47 pm
Depending on your expected longevity, look into buying a ladder of annuities periodically purchased over a decade (interest rate diversification), using most of your fund assets, and start spending all of your steady income from every source. Put your few remaining fund assets in a 2050 retirement fund for the unattended equity growth.

An alternative: Scott Burns looked at WD rates with no inflation adjustment and it was almost 7%.
https://assetbuilder.com/knowledge-cent ... less-later
That front loads your spending to earlier in retirement, which fits your request.
ETA: With your current age of 70, you can re-run that for a 25 year retirement, or just split between 20 and 30 year percentages. Yes, that split would not suit an actuary, but you have SS and COLA'd pension.
Why on Earth are you suggesting the OP get annuities? The OP is the last person on the planet who should buy one of them.

They seem to have all fixed expenses taken care of easily. The question was how to handle variability in expenses for fun stuff and/or unexpected expenses and how to model said changes over time. These are the kind of things that annuities are particularly poor at dealing with, since it locks you into a fixed expenses yearly if used efficiently.

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midareff
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Re: SWR, different perspective.

Post by midareff » Mon Jan 01, 2018 7:49 am

heyyou wrote:
Sun Dec 31, 2017 7:47 pm
Depending on your expected longevity, look into buying a ladder of annuities periodically purchased over a decade (interest rate diversification), using most of your fund assets, and start spending all of your steady income from every source. Put your few remaining fund assets in a 2050 retirement fund for the unattended equity growth.

And exactly why would I do that?

longinvest
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Re: SWR, different perspective.

Post by longinvest » Mon Jan 01, 2018 9:51 am

Hi Midareff,

Happy new 2018 year!
midareff wrote:
Sun Dec 31, 2017 4:12 pm
We have VPW, an excellent tool but with an actuarial based...
What do you mean by VPW being actuarial based? It's not.

VPW is a portfolio depleting method which targets, by default, its last withdrawal at age 99. The last withdrawal age can be increased to a higher age (using the spreadsheet), but this isn't generally needed unless one has bequest motives. Why? Simply because it's more efficient to simply eliminate longevity risk at age 80, if one is still alive, by converting enough of the residual portfolio into an inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).

By more efficient, I mean that the inflation-indexed SPIA will deliver a possibly higher payout ratio than VPW's withdrawal percentage. As a bonus, its payments will continue as long as the retiree lives (or as long as at least one of the two retirees lives, in the case of a 100% joint and survivor inflation-indexed SPIA).
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.
VPW is the mathematical solution to taking reasonable withdrawals from a portfolio to deplete it at a specific age, with no risk of premature depletion. Why wouldn't it be a good method to take withdrawals from a Bogleheads portfolio composed of risky assets (bonds and stocks)?

VPW is a tool to be used within a larger retirement plan. It is my opinion that it is one of the best, if not the best method, for taking withdrawals from a portfolio, as it isn't based on predicting future returns (which are unpredictable).

I invite you to click on the ↑ and read the following post. It explains how to build a workable (anxiety-repellent) retirement plan by combining stable lifelong income and variable portfolio withdrawals:
longinvest wrote:
Sun Sep 03, 2017 10:43 am
...
One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.
[Continued...]
The plan presented in the linked post above is really simple to design and implement. It balances one's need for relatively stable income with one's need for liquidity (e.g. keeping a portfolio).
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I look at the VPW for me (age 70, 6 years retired) and it varies too drastically for me so perhaps I apply a three year portfolio average to smooth the results. We pay a lot for medical insurance so while there are co-pays and drug costs there seems to be a handle on that. With a COLA'd pension and SS paying nearly all the bills it seems the portfolio pays the rest. ... travel, luxury stuff and so forth. Maybe this retirement was stronger thankjust enough, as it was defined 6 years ago.
VPW withdrawals are as stable or as volatile as one's portfolio. A 100% total-market bonds portfolio will deliver very stable withdrawals as the portfolio will be very stable. A 100% stocks portfolio will deliver volatile withdrawals as the portfolio will be volatile. A balanced 50/50 portfolio will deliver mildly volatile withdrawals.

But, the thing is that what counts is not the withdrawal, but total income. If I had 50% of my income coming from Social Security and a pension (or an inflation-indexed SPIA), a 10% increase or decrease in portfolio withdrawal would represent a 5% variation in income (as 10% of 50% is 5%).

To put things into perspective, I'm still in the accumulation phase. My personal expense variations are higher than 5% per year. The total income, between myself and my wife, has varied by significantly more than 5% in the past. Life isn't straight like a spreadsheet; it throws us curves and gifts. We simply adapt.
midareff wrote:
Sun Dec 31, 2017 4:12 pm
So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
If all bills can be paid by SS and a COLA's pension, I think that one can do whatever want wishes with the remaining portfolio. One has freedom. One should pick whatever will allow one to sleep at night and reduce anxiety to zero.

Each year, between 70 and 80, I would just use VPW as a guide to get an approximate idea of how much I can withdraw. I would take as much as I want as long as it isn't significantly more than VPW's guidance. I wouldn't worry about taking exactly the amount calculated by VPW*. But, that's me. I have no trouble being flexible and adapting to circumstances.

* Or, maybe I would and put any excess money into I-bonds, CDs, and high-interest savings accounts.

Good luck!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

dbr
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Re: SWR, different perspective.

Post by dbr » Mon Jan 01, 2018 10:28 am

You are asking a good question about estimating what one is likely to spend as a function of age. The answer to that is that there is probably data out there on average, but individuals will vary so much from it I doubt that information would be helpful. You can try to estimate your own likely level of spending, but the real answer is whatever you want or need as things come up. It might be expected in general that people do back off on spending for travel and activities as they age and spend more on care and convenience. Of course people might spend more on activities as they are less likely to "rough it" on cheaper activities and pay more for amenties.

If you are making the observation that SWR studies are not a plan for what people spend, then I would say what an amazing surprise that is.

tibbitts
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Re: SWR, different perspective.

Post by tibbitts » Mon Jan 01, 2018 10:55 am

delamer wrote:
Sun Dec 31, 2017 6:14 pm
tibbitts wrote:
Sun Dec 31, 2017 5:10 pm
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.

So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
I would guess you're overestimating the cola'd pension crowd.

I got the impression the OP was asking about her/his personal situation.

I am not sure what you mean in this context by overestimating — do you mean the number in that situation or the likelihood that someone in that situation is living solely off their pension or something else?
I was addressing the "today's retiree, at least the retiree we might find on this .org" part. I think the number of people here or elsewhere with cola'd pensions is already small and is shrinking. It won't go to zero for a while (military, etc.) but probably will eventually.

longinvest
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Re: SWR, different perspective.

Post by longinvest » Mon Jan 01, 2018 11:13 am

Tibbitts,
tibbitts wrote:
Mon Jan 01, 2018 10:55 am
I was addressing the "today's retiree, at least the retiree we might find on this .org" part. I think the number of people here or elsewhere with cola'd pensions is already small and is shrinking. It won't go to zero for a while (military, etc.) but probably will eventually.
For practical purpose, an inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA) is the same thing as a Cost of Living Adjusted (COLA'd) pension.

Some people complain that inflation-indexed SPIAs are expensive. They are, but so are COLA'd pensions. The difference is that pensioners had their personal and employer contributions taken off their paycheck for 35 years, so they didn't get to see how expensive their pension was.

Anybody who saves enough into a balanced portfolio of low-cost total-market index funds all life long (using 401k, IRA, Roth IRA, and similar tax shelters) will be able to buy an inflation-indexed SPIA and enjoy the same serenity as pensioners.

Unlike pensioners, they actually get to decide how much they'll buy. They have more freedom (along with greater responsibility).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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midareff
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Re: SWR, different perspective.

Post by midareff » Mon Jan 01, 2018 5:42 pm

longinvest wrote:
Mon Jan 01, 2018 9:51 am
Hi Midareff,

Happy new 2018 year!
midareff wrote:
Sun Dec 31, 2017 4:12 pm
We have VPW, an excellent tool but with an actuarial based...
What do you mean by VPW being actuarial based? It's not.

VPW is a portfolio depleting method which targets, by default, its last withdrawal at age 99. The last withdrawal age can be increased to a higher age (using the spreadsheet), but this isn't generally needed unless one has bequest motives. Why? Simply because it's more efficient to simply eliminate longevity risk at age 80, if one is still alive, by converting enough of the residual portfolio into an inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).

From the web: : relating to statistical calculation especially of life expectancy. VPW takes a start date and end date and pays out 100% of the remainder on the end date, be it $1 or $1M. In the model I've been referencing it pays out 34.4%, 50.8% and 100% of portfolio the last three years. That certainly is one way to handle an end date. I guess if you don't die that last year you would be SOL, and please don't advise me to use my portfolio to buy annuities when I'm 80, when my cola'd pension and SS pay our fixed expenses. The threads question was about increasing the WR prior to that period so travel and such activities could be plentiful; before the creaks of older age set in.

By more efficient, I mean that the inflation-indexed SPIA will deliver a possibly higher payout ratio than VPW's withdrawal percentage. As a bonus, its payments will continue as long as the retiree lives (or as long as at least one of the two retirees lives, in the case of a 100% joint and survivor inflation-indexed SPIA).

The problem with "possibly higher" is that it could well be possibly lower, and lower by a bunch. How about the couple that sacked their portfolio in 2009 to buy inflation indexed SPIA(s) and then missed this bull run. How did they do with that? My other issue with VPW is it simply provides too volatile withdrawal amounts and does (IMHO) need some smoothing. I believe, but could be mistaken, we discussed using the average of the prior three years portfolio ending balance as the amount the VPW WR is to be applied to.
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.
VPW is the mathematical solution to taking reasonable withdrawals from a portfolio to deplete it at a specific age, with no risk of premature depletion. Why wouldn't it be a good method to take withdrawals from a Bogleheads portfolio composed of risky assets (bonds and stocks)? Because pf the specific volatility in yearly withdrawals associated with its rigorous use.

VPW is a tool to be used within a larger retirement plan. It is my opinion that it is one of the best, if not the best method, for taking withdrawals from a portfolio, as it isn't based on predicting future returns (which are unpredictable). I agree, it is one of the best I have run across, no argument there. OTOH, it does have its warts, same as all other plans. Some of the warts (to me, YMMV) I have already expressed.

I invite you to click on the ↑ and read the following post. It explains how to build a workable (anxiety-repellent) retirement plan by combining stable lifelong income and variable portfolio withdrawals:
longinvest wrote:
Sun Sep 03, 2017 10:43 am
...
One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.
[Continued...]
The plan presented in the linked post above is really simple to design and implement. It balances one's need for relatively stable income with one's need for liquidity (e.g. keeping a portfolio).
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I look at the VPW for me (age 70, 6 years retired) and it varies too drastically for me so perhaps I apply a three year portfolio average to smooth the results. We pay a lot for medical insurance so while there are co-pays and drug costs there seems to be a handle on that. With a COLA'd pension and SS paying nearly all the bills it seems the portfolio pays the rest. ... travel, luxury stuff and so forth. Maybe this retirement was stronger thankjust enough, as it was defined 6 years ago.
VPW withdrawals are as stable or as volatile as one's portfolio. A 100% total-market bonds portfolio will deliver very stable withdrawals as the portfolio will be very stable. A 100% stocks portfolio will deliver volatile withdrawals as the portfolio will be volatile. A balanced 50/50 portfolio will deliver mildly volatile withdrawals.

But, the thing is that what counts is not the withdrawal, but total income. If I had 50% of my income coming from Social Security and a pension (or an inflation-indexed SPIA), a 10% increase or decrease in portfolio withdrawal would represent a 5% variation in income (as 10% of 50% is 5%).

To put things into perspective, I'm still in the accumulation phase. My personal expense variations are higher than 5% per year. The total income, between myself and my wife, has varied by significantly more than 5% in the past. Life isn't straight like a spreadsheet; it throws us curves and gifts. We simply adapt.
midareff wrote:
Sun Dec 31, 2017 4:12 pm
So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
If all bills can be paid by SS and a COLA's pension, I think that one can do whatever want wishes with the remaining portfolio. One has freedom. One should pick whatever will allow one to sleep at night and reduce anxiety to zero.

Each year, between 70 and 80, I would just use VPW as a guide to get an approximate idea of how much I can withdraw. I would take as much as I want as long as it isn't significantly more than VPW's guidance. I wouldn't worry about taking exactly the amount calculated by VPW*. But, that's me. I have no trouble being flexible and adapting to circumstances.

* Or, maybe I would and put any excess money into I-bonds, CDs, and high-interest savings accounts.

Good luck!

longinvest
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Joined: Sat Aug 11, 2012 8:44 am

Re: SWR, different perspective.

Post by longinvest » Mon Jan 01, 2018 7:19 pm

midareff wrote:
Mon Jan 01, 2018 5:42 pm
longinvest wrote:
Mon Jan 01, 2018 9:51 am
Hi Midareff,

Happy new 2018 year!
midareff wrote:
Sun Dec 31, 2017 4:12 pm
We have VPW, an excellent tool but with an actuarial based...
What do you mean by VPW being actuarial based? It's not.

VPW is a portfolio depleting method which targets, by default, its last withdrawal at age 99. The last withdrawal age can be increased to a higher age (using the spreadsheet), but this isn't generally needed unless one has bequest motives. Why? Simply because it's more efficient to simply eliminate longevity risk at age 80, if one is still alive, by converting enough of the residual portfolio into an inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).
From the web: : relating to statistical calculation especially of life expectancy. VPW takes a start date and end date and pays out 100% of the remainder on the end date, be it $1 or $1M. In the model I've been referencing it pays out 34.4%, 50.8% and 100% of portfolio the last three years. That certainly is one way to handle an end date. I guess if you don't die that last year you would be SOL, and please don't advise me to use my portfolio to buy annuities when I'm 80, when my cola'd pension and SS pay our fixed expenses. The threads question was about increasing the WR prior to that period so travel and such activities could be plentiful; before the creaks of older age set in.
From "the web"? Do you have a more specific reference?

Apparently, someone on "the web" didn't read our Wiki's VPW page which specifically says:
Every few years, you should review your overall retirement plan. (If you are over 80 years old and your health is better than anticipated, for example, you might want to lookup withdrawal percentages using (age - 5 years) or (age - 10 years)).
Also, I pointed you to a specific post which details how to use VPW as part of an overall retirement plan. Here's its main points:
longinvest wrote:
Sun Sep 03, 2017 10:43 am
So, here's an example of a workable plan for retirement:
  1. Delay Social Security (SS) until age 70 to maximize this lifelong non-portfolio inflation-indexed income.
  2. Fill the gap in Social Security payments between retirement and age 70 using a non-rolling TIPS ladder. It is important to exclude this non-rolling ladder from the portfolio used for variable withdrawals; this non-rolling ladder is part of the lifelong non-portfolio stable inflation-indexed income. Forum member #Cruncher has developed an awesome tool for this; the link is at the end of the following post:
    Re: How should I build a TIPS income ladder?.
  3. Those without a defined benefit pension can buy a small inflation-indexed SPIA at retirement as a supplement to the above SS & gap-ladder income.
  4. At the beginning of every retirement year, lookup the appropriate percentage according to (i) the age of the retiree (or spouse, the lowest of the two) and (ii) the asset allocation of the portfolio* in the VPW table. Multiply this percentage by the current portfolio balance. Withdraw the resulting amount from the portfolio while rebalancing it.
  5. Around age 80, assuming one is still alive, use enough of the remaining portfolio to buy an inflation-indexed SPIA which will provide sufficient lifelong non-portfolio stable inflation-indexed income, when combined with existing non-portfolio income, in case of survival beyond age 100**. The idea is that even if the portfolio gets down to zero, total income should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
  6. Continue depleting the remaining portfolio using VPW, but cap the withdrawal percentage at 20% (at age 95 and beyond).
* It is important to apply VPW on a balanced portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals.
** VPW plans for a last withdrawal at age 99.

This is a simple, but extremely robust plan. It tries to balance the amount of stable non-portfolio income with the amount of liquidity kept under the retiree's control in the portfolio. It is anxiety repellent, as a workable plan should be.

It is a very affordable plan for long-time Bogleheads who lived below their means and retire in their 60s. The plan is more expensive for people who want to retire in their early 40s, due in part to the cost of the non-rolling TIPS ladder to cover the gap in Social Security payments for almost 30 years, but mostly due to the very high cost of the necessary supplemental inflation-indexed SPIA at retirement, as Social Security payments are lower for people with a shorter work history.

[...]

I could have suggested to use of a CD ladder or an even simpler high-interest savings account, in point 2, as has been suggested in Delay Social Security to age 70 and Spend more money at 62, except that on this particular thread, some members have been discussing retirement in their 30s and 40s, which would expose the gap money to an excessive amount of inflation risk.
In other words, no reasonable VPW user will ever wait until age 97 to revisit his retirement plans. It would be ridiculous to go on blindly taking 35%, 50%, and 100% withdrawals from one's portfolio and then go live under a bridge eating cat food for the rest of one's life. :oops:

The reason our Wiki page shows the mathematical withdrawal rates at ages 97, 98, and 99 is to make sure readers are completely aware of the situation and they don't ignore the call to revisit one's retirement plan every few years. Its goal isn't to tell people that they'll all die before age 100!
midareff wrote:
Mon Jan 01, 2018 5:42 pm
longinvest wrote:
Mon Jan 01, 2018 9:51 am
By more efficient, I mean that the inflation-indexed SPIA will deliver a possibly higher payout ratio than VPW's withdrawal percentage. As a bonus, its payments will continue as long as the retiree lives (or as long as at least one of the two retirees lives, in the case of a 100% joint and survivor inflation-indexed SPIA).
The problem with "possibly higher" is that it could well be possibly lower, and lower by a bunch. How about the couple that sacked their portfolio in 2009 to buy inflation indexed SPIA(s) and then missed this bull run. How did they do with that? My other issue with VPW is it simply provides too volatile withdrawal amounts and does (IMHO) need some smoothing. I believe, but could be mistaken, we discussed using the average of the prior three years portfolio ending balance as the amount the VPW WR is to be applied to.
Lower by a bunch? Let's look at the mathematics. A conservative actuarial table will consider that an 80-year old retiree (applied to a large group of 80 year old people) will, on average, die before age 95 (a quick calculation using current SPIA payout rates reveals that insurance companies use a lower actuarial average death age, so this estimate is quite conservative). Assuming a 0% real discount rate, this gives us 100%/15 = a 6.67% payout ratio. TIPS yields are currently higher than that, so there's another profit margin, built in here.

The VPW withdrawal percentage for a 30% stocks / 70% bonds portfolio (based on Vanguard's Target Retirement Income Fund for age 80 investors) is 6.4% as found in the cell for Age 80, Asset Allocation 30/70 in the VPW table of our Wiki.

That's lower than a very conservative inflation-indexed SPIA payout ratio of 6.67% at age 80.

In order for inflation-indexed SPIA ratios to fall significantly lower than this, TIPS yields would have to become very negative (something like -5% or -10%) or the average longevity would have to significantly jump (to 105 or 110), all this within the next 10 years, for someone currently of age 70.

Anyway, if a 70 years-old person is afraid of such eventuality, that person could easily buy an inflation-indexed SPIA today, at age 70, with a somewhat lower payout ratio than the VPW percentage at age 70, but not much. That would be a very small price to pay for peace of mind. Retirement should be about enjoying life, not about worrying about the future.
midareff wrote:
Mon Jan 01, 2018 5:42 pm
longinvest wrote:
Mon Jan 01, 2018 9:51 am
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.
VPW is the mathematical solution to taking reasonable withdrawals from a portfolio to deplete it at a specific age, with no risk of premature depletion. Why wouldn't it be a good method to take withdrawals from a Bogleheads portfolio composed of risky assets (bonds and stocks)?
Because pf the specific volatility in yearly withdrawals associated with its rigorous use.
This can only happen when people inappropriately apply VPW on a volatile 100% stocks portfolio in unrealistic retirement scenarios where one doesn't have any stable non-portfolio income such as Social Security, a pension, or an inflation-indexed SPIA.

The variability of total income is very low when combining VPW withdrawals from a balanced portfolio (50% to 70% in bonds) with Social Security and a pension or an inflation-indexed SPIA.
midareff wrote:
Mon Jan 01, 2018 5:42 pm
longinvest wrote:
Mon Jan 01, 2018 9:51 am
VPW is a tool to be used within a larger retirement plan. It is my opinion that it is one of the best, if not the best method, for taking withdrawals from a portfolio, as it isn't based on predicting future returns (which are unpredictable).
I agree, it is one of the best I have run across, no argument there. OTOH, it does have its warts, same as all other plans. Some of the warts (to me, YMMV) I have already expressed.
I think that often people build unrealistic retirement scenarios, where they assume that people won't have Social Security or a pension, and they'll be completely unable to buy a SPIA. Then they apply a "percent of portfolio" withdrawal method like VPW on a highly volatile portfolio (like 100% stocks). Then they falsely claim that the withdrawal method doesn't work, instead of realizing that it's the wider retirement plan which doesn't work!

I'll repeat it yet again: VPW is just a tool to use within a larger retirement plan.

Let me make an analogy with utensils. A fork can be quite useful to eat, but it's not the best utensil to cut a steak. It's best to combine a fork with a knife to cut then eat a steak.
midareff wrote:
Mon Jan 01, 2018 5:42 pm
longinvest wrote:
Mon Jan 01, 2018 9:51 am
I invite you to click on the ↑ and read the following post. It explains how to build a workable (anxiety-repellent) retirement plan by combining stable lifelong income and variable portfolio withdrawals:
longinvest wrote:
Sun Sep 03, 2017 10:43 am
...
One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.
[Continued...]
The plan presented in the linked post above is really simple to design and implement. It balances one's need for relatively stable income with one's need for liquidity (e.g. keeping a portfolio).
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I look at the VPW for me (age 70, 6 years retired) and it varies too drastically for me so perhaps I apply a three year portfolio average to smooth the results. We pay a lot for medical insurance so while there are co-pays and drug costs there seems to be a handle on that. With a COLA'd pension and SS paying nearly all the bills it seems the portfolio pays the rest. ... travel, luxury stuff and so forth. Maybe this retirement was stronger thankjust enough, as it was defined 6 years ago.
VPW withdrawals are as stable or as volatile as one's portfolio. A 100% total-market bonds portfolio will deliver very stable withdrawals as the portfolio will be very stable. A 100% stocks portfolio will deliver volatile withdrawals as the portfolio will be volatile. A balanced 50/50 portfolio will deliver mildly volatile withdrawals.

But, the thing is that what counts is not the withdrawal, but total income. If I had 50% of my income coming from Social Security and a pension (or an inflation-indexed SPIA), a 10% increase or decrease in portfolio withdrawal would represent a 5% variation in income (as 10% of 50% is 5%).

To put things into perspective, I'm still in the accumulation phase. My personal expense variations are higher than 5% per year. The total income, between myself and my wife, has varied by significantly more than 5% in the past. Life isn't straight like a spreadsheet; it throws us curves and gifts. We simply adapt.
midareff wrote:
Sun Dec 31, 2017 4:12 pm
So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
If all bills can be paid by SS and a COLA's pension, I think that one can do whatever want wishes with the remaining portfolio. One has freedom. One should pick whatever will allow one to sleep at night and reduce anxiety to zero.

Each year, between 70 and 80, I would just use VPW as a guide to get an approximate idea of how much I can withdraw. I would take as much as I want as long as it isn't significantly more than VPW's guidance. I wouldn't worry about taking exactly the amount calculated by VPW*. But, that's me. I have no trouble being flexible and adapting to circumstances.

* Or, maybe I would and put any excess money into I-bonds, CDs, and high-interest savings accounts.

Good luck!
Last edited by longinvest on Mon Jan 01, 2018 8:01 pm, edited 1 time in total.
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Re: SWR, different perspective.

Post by 2015 » Mon Jan 01, 2018 7:55 pm

longinvest, thank you for your continued patience in explaining VPW. I will add your latest post on the subject to other posts by you I have bookmarked for reference when I implement VPW next year.

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Re: SWR, different perspective.

Post by midareff » Tue Jan 02, 2018 8:01 am

That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.

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Re: SWR, different perspective.

Post by dbr » Tue Jan 02, 2018 9:09 am

midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.

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Re: SWR, different perspective.

Post by longinvest » Tue Jan 02, 2018 9:15 am

dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
I don't know... How do I do it, today, as someone still in the accumulation phase? I look at how much income I have and consider the expenses I'd like to make, and I adapt my spending and savings accordingly.

It would be so nice if I knew how much my salary will be between now and retirement, as well as market returns between now and retirement, and between retirement and my death (along with the exact date of my death). Oh! And I also need to know exactly when my car will need to be replaced and the exact price of its replacement. And the exact future tax rates. And, and, and, ...

The fact is that the future is uncertain. Not only future income, but future expenses too! Yes, this is a lot of uncertainty. This has been true of my life so far and I expect it to remain true for the remaining of it. I deal with it by being flexible and adapting to my current circumstances. I try not to worry too much about the future, as I don't have complete control. I try to act on things I control, like my savings rate and adapting my spending to make sure it's never above what my available income allows for. Saving a little more (but not too much, as the goal isn't to live poor and die with a huge unpent pile of money) is a great tool to lower one's anxiety.

I did not provide an exact answer with precise amounts down the the penny. Here's the suggestion I made:
longinvest wrote:
Mon Jan 01, 2018 9:51 am
If all bills can be paid by SS and a COLA's pension, I think that one can do whatever want wishes with the remaining portfolio. One has freedom. One should pick whatever will allow one to sleep at night and reduce anxiety to zero.

Each year, between 70 and 80, I would just use VPW as a guide to get an approximate idea of how much I can withdraw. I would take as much as I want as long as it isn't significantly more than VPW's guidance. I wouldn't worry about taking exactly the amount calculated by VPW*. But, that's me. I have no trouble being flexible and adapting to circumstances.

* Or, maybe I would and put any excess money into I-bonds, CDs, and high-interest savings accounts.
Last edited by longinvest on Tue Jan 02, 2018 9:23 am, edited 1 time in total.
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Re: SWR, different perspective.

Post by dbr » Tue Jan 02, 2018 9:23 am

longinvest wrote:
Tue Jan 02, 2018 9:15 am
dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
I don't know... How do I do it, today, as someone still in the accumulation phase? I look at how much income I have and I adapt my spending accordingly.

It would be so nice if I knew how much my salary will be between now and retirement, as well as market returns between now and retirement, and between retirement and my death (along with the exact date of my death). Oh! And I also need to know exactly when my car will need to be replaced and the exact price of its replacement. And the exact future tax rates. And, and, and, ...

I did not provide an exact answer with precise amounts down the the penny. Here's the suggestion I made:
longinvest wrote:
Mon Jan 01, 2018 9:51 am
If all bills can be paid by SS and a COLA's pension, I think that one can do whatever want wishes with the remaining portfolio. One has freedom. One should pick whatever will allow one to sleep at night and reduce anxiety to zero.

Each year, between 70 and 80, I would just use VPW as a guide to get an approximate idea of how much I can withdraw. I would take as much as I want as long as it isn't significantly more than VPW's guidance. I wouldn't worry about taking exactly the amount calculated by VPW*. But, that's me. I have no trouble being flexible and adapting to circumstances.

* Or, maybe I would and put any excess money into I-bonds, CDs, and high-interest savings accounts.
Well, withdrawal does not apply in the accumulation state, does it? The calculations are useful for getting estimates for how much to accumulate.

But your answer to what happens when withdrawing is very realistic. SWR in general sets a trend or a boundary around or within which one has a safe plan, but actual withdrawals will be variable, sometimes by a lot, and need to be traced as a trend against the guideline. Having a more refined guide such as VPW is certainly helpful.

Also, this SWR stuff is really relevant only when the retiree is pushing the limits. People that have large fractions of expenses covered by sources other than portfolio withdrawals won't care about VPW or any other kinds of withdrawals. People that do have to care might well be advised to use some of the assets to annuitize some of their income.

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Re: SWR, different perspective.

Post by longinvest » Tue Jan 02, 2018 9:28 am

Dbr,
dbr wrote:
Tue Jan 02, 2018 9:23 am
Well, withdrawal does not apply in the accumulation state, does it? The calculations are useful for getting estimates for how much to accumulate.
<Off topic>
Actually, the principles of it can actually be useful in the accumulation phase. Here's a thread about it, on our Canadian sister forum: The After-Tax Spending Plan - Financial Wisdom Forum
</Off topic>
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Re: SWR, different perspective.

Post by dbr » Tue Jan 02, 2018 9:37 am

longinvest wrote:
Tue Jan 02, 2018 9:28 am
Dbr,
dbr wrote:
Tue Jan 02, 2018 9:23 am
Well, withdrawal does not apply in the accumulation state, does it? The calculations are useful for getting estimates for how much to accumulate.
<Off topic>
Actually, the principles of it can actually be useful in the accumulation phase. Here's a thread about it, on our Canadian sister forum: The After-Tax Spending Plan - Financial Wisdom Forum
</Off topic>
Thanks for that.

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Re: SWR, different perspective.

Post by AlohaJoe » Tue Jan 02, 2018 10:16 am

dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
If you know the expected future spending dynamic then it is "easy" to adapt your withdrawals to fit that dynamic. From "The Only Spending Rule Article You'll Ever Need"....(where they write "ARVA" just read it as "a PMT based withdrawal scheme like VPW".)
The ARVA need not provide for a constant real spending level, but might have some other, perhaps front-loaded, shape.

[...]

One way to do these things is to modify the shape of the payout, the relative amounts spent over time; there is nothing special about equal payments (equal in either nominal or real terms) other than their resemblance to car payments or mortgage payments and their ease of calculation on a spreadsheet or financial calculator.

As with any stream of cash flows, the “shape” of the cash flow payouts to a retiree can be engineered to be anything the retiree wants, as long as the various cash flow payouts have the same present value, on a risk-free real interest rate basis, as the available assets (the ARVA annuity value, economically a liability, is necessarily equal to the original investment plus the present value of any additional funds expected to be received).

[...]

To fully generalize the flexibility of the ARVA approach, the investor can accommodate any desired shape of his or her anticipated consumption. We have focused on regular periodic consumption, but consumption planning can include nonrecurring items including providing for the children’s college expenses, contingency reserves, and specific bequests. The only limitation is that the sum of the present values of these future payments, along with the desired consumption spending annuity in whatever shape, be equal to the assets available (economic assets and liabilities must be equal!). Choose an approximate horizon for, say, the college fund, and price a zero coupon inflation-protected bond against it. Repeat for any other special allowances.
I think the hard part about exercises like this is most people have low confidence in the (admittedly scarce) research on spending patterns in retirement and how applicable they are you us as individuals.

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Re: SWR, different perspective.

Post by dbr » Tue Jan 02, 2018 10:19 am

AlohaJoe wrote:
Tue Jan 02, 2018 10:16 am
dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
If you know the expected future spending dynamic then it is "easy" to adapt your withdrawals to fit that dynamic. From "The Only Spending Rule Article You'll Ever Need"....(where they write "ARVA" just read it as "a PMT based withdrawal scheme like VPW".)
The ARVA need not provide for a constant real spending level, but might have some other, perhaps front-loaded, shape.

[...]

One way to do these things is to modify the shape of the payout, the relative amounts spent over time; there is nothing special about equal payments (equal in either nominal or real terms) other than their resemblance to car payments or mortgage payments and their ease of calculation on a spreadsheet or financial calculator.

As with any stream of cash flows, the “shape” of the cash flow payouts to a retiree can be engineered to be anything the retiree wants, as long as the various cash flow payouts have the same present value, on a risk-free real interest rate basis, as the available assets (the ARVA annuity value, economically a liability, is necessarily equal to the original investment plus the present value of any additional funds expected to be received).

[...]

To fully generalize the flexibility of the ARVA approach, the investor can accommodate any desired shape of his or her anticipated consumption. We have focused on regular periodic consumption, but consumption planning can include nonrecurring items including providing for the children’s college expenses, contingency reserves, and specific bequests. The only limitation is that the sum of the present values of these future payments, along with the desired consumption spending annuity in whatever shape, be equal to the assets available (economic assets and liabilities must be equal!). Choose an approximate horizon for, say, the college fund, and price a zero coupon inflation-protected bond against it. Repeat for any other special allowances.
I think the hard part about exercises like this is most people have low confidence in the (admittedly scarce) research on spending patterns in retirement and how applicable they are you us as individuals.
Thanks for the interesting reference. I think you are correct that the issue is not that the spending profile is not constant as that it is not known. In fact it would be terrible if it were known. No one should spend their retirement enslaved by a spending plan.

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Re: SWR, different perspective.

Post by midareff » Tue Jan 02, 2018 10:43 am

dbr wrote:
Tue Jan 02, 2018 10:19 am
AlohaJoe wrote:
Tue Jan 02, 2018 10:16 am
dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
If you know the expected future spending dynamic then it is "easy" to adapt your withdrawals to fit that dynamic. From "The Only Spending Rule Article You'll Ever Need"....(where they write "ARVA" just read it as "a PMT based withdrawal scheme like VPW".)
The ARVA need not provide for a constant real spending level, but might have some other, perhaps front-loaded, shape.

[...]

One way to do these things is to modify the shape of the payout, the relative amounts spent over time; there is nothing special about equal payments (equal in either nominal or real terms) other than their resemblance to car payments or mortgage payments and their ease of calculation on a spreadsheet or financial calculator.

As with any stream of cash flows, the “shape” of the cash flow payouts to a retiree can be engineered to be anything the retiree wants, as long as the various cash flow payouts have the same present value, on a risk-free real interest rate basis, as the available assets (the ARVA annuity value, economically a liability, is necessarily equal to the original investment plus the present value of any additional funds expected to be received).

[...]

To fully generalize the flexibility of the ARVA approach, the investor can accommodate any desired shape of his or her anticipated consumption. We have focused on regular periodic consumption, but consumption planning can include nonrecurring items including providing for the children’s college expenses, contingency reserves, and specific bequests. The only limitation is that the sum of the present values of these future payments, along with the desired consumption spending annuity in whatever shape, be equal to the assets available (economic assets and liabilities must be equal!). Choose an approximate horizon for, say, the college fund, and price a zero coupon inflation-protected bond against it. Repeat for any other special allowances.
I think the hard part about exercises like this is most people have low confidence in the (admittedly scarce) research on spending patterns in retirement and how applicable they are you us as individuals.
Thanks for the interesting reference. I think you are correct that the issue is not that the spending profile is not constant as that it is not known. In fact it would be terrible if it were known. No one should spend their retirement enslaved by a spending plan.
Agreed and an interesting reference from my perspective as well, since it is what I originally inquiring about.

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Re: SWR, different perspective.

Post by 2015 » Tue Jan 02, 2018 12:15 pm

dbr wrote:
Tue Jan 02, 2018 9:23 am
longinvest wrote:
Tue Jan 02, 2018 9:15 am
dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
I don't know... How do I do it, today, as someone still in the accumulation phase? I look at how much income I have and I adapt my spending accordingly.

It would be so nice if I knew how much my salary will be between now and retirement, as well as market returns between now and retirement, and between retirement and my death (along with the exact date of my death). Oh! And I also need to know exactly when my car will need to be replaced and the exact price of its replacement. And the exact future tax rates. And, and, and, ...

I did not provide an exact answer with precise amounts down the the penny. Here's the suggestion I made:
longinvest wrote:
Mon Jan 01, 2018 9:51 am
If all bills can be paid by SS and a COLA's pension, I think that one can do whatever want wishes with the remaining portfolio. One has freedom. One should pick whatever will allow one to sleep at night and reduce anxiety to zero.

Each year, between 70 and 80, I would just use VPW as a guide to get an approximate idea of how much I can withdraw. I would take as much as I want as long as it isn't significantly more than VPW's guidance. I wouldn't worry about taking exactly the amount calculated by VPW*. But, that's me. I have no trouble being flexible and adapting to circumstances.

* Or, maybe I would and put any excess money into I-bonds, CDs, and high-interest savings accounts.
Well, withdrawal does not apply in the accumulation state, does it? The calculations are useful for getting estimates for how much to accumulate.

But your answer to what happens when withdrawing is very realistic. SWR in general sets a trend or a boundary around or within which one has a safe plan, but actual withdrawals will be variable, sometimes by a lot, and need to be traced as a trend against the guideline. Having a more refined guide such as VPW is certainly helpful.

Also, this SWR stuff is really relevant only when the retiree is pushing the limits. People that have large fractions of expenses covered by sources other than portfolio withdrawals won't care about VPW or any other kinds of withdrawals. People that do have to care might well be advised to use some of the assets to annuitize some of their income.
As the saying goes, "it ain't necessarily so." I'm one of those in retirement who has a large fraction of expense covered by sources other than withdrawals and I very much care about VPW. Financially conservative by nature, I probably wouldn't spend all that I might possibly spend without a tool such as VPW. In retirement, I've been unable to find anything superior.

As to all this theorizing about spending in retirement, none of it has had anything to do with my actual experience. I have put in bold longinvest's statement above which is what has happened to me almost by accident, if only because it's a very natural course of action to take. Moreover, the biggest surprise to me in retirement has been the great degree of deflation in my expenses. Even without VPW, which I won't implement until next year due to moves I'll be making then, I'm spending more than I've spent in the last 20 years. Then again, I planned for it. I've discovered if you do sufficient planning, remain adaptable and flexible, you won't have to get mired in the minute details.

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Re: SWR, different perspective.

Post by 2015 » Tue Jan 02, 2018 12:32 pm

dbr wrote:
Tue Jan 02, 2018 10:19 am
AlohaJoe wrote:
Tue Jan 02, 2018 10:16 am
dbr wrote:
Tue Jan 02, 2018 9:09 am
midareff wrote:
Tue Jan 02, 2018 8:01 am
That is certainly a great defense of the VPW longinvest, however I don't see any of it addressing the original questions perspective.
Which was how to reconcile a withdrawal scheme with the actual need for money to spend which follows a different dynamic entirely.
If you know the expected future spending dynamic then it is "easy" to adapt your withdrawals to fit that dynamic. From "The Only Spending Rule Article You'll Ever Need"....(where they write "ARVA" just read it as "a PMT based withdrawal scheme like VPW".)


[...]

One way to do these things is to modify the shape of the payout, the relative amounts spent over time; there is nothing special about equal payments (equal in either nominal or real terms) other than their resemblance to car payments or mortgage payments and their ease of calculation on a spreadsheet or financial calculator.

As with any stream of cash flows, the “shape” of the cash flow payouts to a retiree can be engineered to be anything the retiree wants, as long as the various cash flow payouts have the same present value, on a risk-free real interest rate basis, as the available assets (the ARVA annuity value, economically a liability, is necessarily equal to the original investment plus the present value of any additional funds expected to be received).

[...]

To fully generalize the flexibility of the ARVA approach, the investor can accommodate any desired shape of his or her anticipated consumption. We have focused on regular periodic consumption, but consumption planning can include nonrecurring items including providing for the children’s college expenses, contingency reserves, and specific bequests. The only limitation is that the sum of the present values of these future payments, along with the desired consumption spending annuity in whatever shape, be equal to the assets available (economic assets and liabilities must be equal!). Choose an approximate horizon for, say, the college fund, and price a zero coupon inflation-protected bond against it. Repeat for any other special allowances.
I think the hard part about exercises like this is most people have low confidence in the (admittedly scarce) research on spending patterns in retirement and how applicable they are you us as individuals.
Thanks for the interesting reference. I think you are correct that the issue is not that the spending profile is not constant as that it is not known. In fact it would be terrible if it were known. No one should spend their retirement enslaved by a spending plan.
Perhaps it's because I'm already in retirement, but I'm baffled by all this complexity around retirement spending. I don't see how creating a simple excel spreadsheet which represents future guesstimated spending requirements based on past spending patterns is tantamount to being "enslaved". It's simple budgeting, married with adaptability and flexibility and that's all there is to it, at least for me. FWIW, I'm following the reserves model condominium associations use in estimating future expenses with attendant required (although flexible!) funding dates.

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Re: SWR, different perspective.

Post by dbr » Tue Jan 02, 2018 12:33 pm

2015 wrote:
Tue Jan 02, 2018 12:15 pm
dbr wrote:
Tue Jan 02, 2018 9:23 am


Also, this SWR stuff is really relevant only when the retiree is pushing the limits. People that have large fractions of expenses covered by sources other than portfolio withdrawals won't care about VPW or any other kinds of withdrawals. People that do have to care might well be advised to use some of the assets to annuitize some of their income.
As the saying goes, "it ain't necessarily so." I'm one of those in retirement who has a large fraction of expense covered by sources other than withdrawals and I very much care about VPW. Financially conservative by nature, I probably wouldn't spend all that I might possibly spend without a tool such as VPW. In retirement, I've been unable to find anything superior.

As to all this theorizing about spending in retirement, none of it has had anything to do with my actual experience. I have put in bold longinvest's statement above which is what has happened to me almost by accident, if only because it's a very natural course of action to take. Moreover, the biggest surprise to me in retirement has been the great degree of deflation in my expenses. Even without VPW, which I won't implement until next year due to moves I'll be making then, I'm spending more than I've spent in the last 20 years. Then again, I planned for it. I've discovered if you do sufficient planning, remain adaptable and flexible, you won't have to get mired in the minute details.
I made a fairly serious miss-statement in what I wrote. What I should have said is that if large fractions of the needed spending is covered by other sources of income and as a consequence one does not need large withdrawals from assets, then withdrawal issues don't matter. It is definitely possible for the smaller fraction of spending needed from investments to be a rate of withdrawal from assets that pushes the limit and that retiree would be concerned about how to do that. In addition such a person would not be interested in annuitizing his assets.

dbr
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Re: SWR, different perspective.

Post by dbr » Tue Jan 02, 2018 12:42 pm

2015 wrote:
Tue Jan 02, 2018 12:32 pm


Perhaps it's because I'm already in retirement, but I'm baffled by all this complexity around retirement spending. I don't see how creating a simple excel spreadsheet which represents future guesstimated spending requirements based on past spending patterns is tantamount to being "enslaved". It's simple budgeting, married with adaptability and flexibility and that's all there is to it, at least for me. FWIW, I'm following the reserves model condominium associations use in estimating future expenses with attendant required (although flexible!) funding dates.
Yes, because you didn't get trapped into the discussion that causes all this in the first place. The discussion that people get trapped in is taking all the modelling that tells us how portfolios respond under withdrawal in retirement and trying to turn that into a plan for how to spend in retirement.

I think doing things that way has it all backwards. The first thing you do is what you did, which is make reasonable guesstimates of future spending, probably with some contingencies and realizing spending may be variable in different time periods. One then looks at sources of income and how much one might need to withdraw from investments and verifies that the withdrawals on average are going to be in line with what we know is on average doable. If one sees a red flag then there has to be a step back to rethink things. The biggest red flag is that overall withdrawal rate is going to be way to high. There is also a gray flag where one is on the boundary between no problem and maybe there is a problem. The green flag goes up when one has saved more than enough to support withdrawals. The red/gray/green is really an idea discussed by Otar in his book. Finally one is prepared to be flexible.

2015
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Re: SWR, different perspective.

Post by 2015 » Tue Jan 02, 2018 12:50 pm

dbr wrote:
Tue Jan 02, 2018 12:33 pm
2015 wrote:
Tue Jan 02, 2018 12:15 pm
dbr wrote:
Tue Jan 02, 2018 9:23 am


Also, this SWR stuff is really relevant only when the retiree is pushing the limits. People that have large fractions of expenses covered by sources other than portfolio withdrawals won't care about VPW or any other kinds of withdrawals. People that do have to care might well be advised to use some of the assets to annuitize some of their income.
As the saying goes, "it ain't necessarily so." I'm one of those in retirement who has a large fraction of expense covered by sources other than withdrawals and I very much care about VPW. Financially conservative by nature, I probably wouldn't spend all that I might possibly spend without a tool such as VPW. In retirement, I've been unable to find anything superior.

As to all this theorizing about spending in retirement, none of it has had anything to do with my actual experience. I have put in bold longinvest's statement above which is what has happened to me almost by accident, if only because it's a very natural course of action to take. Moreover, the biggest surprise to me in retirement has been the great degree of deflation in my expenses. Even without VPW, which I won't implement until next year due to moves I'll be making then, I'm spending more than I've spent in the last 20 years. Then again, I planned for it. I've discovered if you do sufficient planning, remain adaptable and flexible, you won't have to get mired in the minute details.
I made a fairly serious miss-statement in what I wrote. What I should have said is that if large fractions of the needed spending is covered by other sources of income and as a consequence one does not need large withdrawals from assets, then withdrawal issues don't matter. It is definitely possible for the smaller fraction of spending needed from investments to be a rate of withdrawal from assets that pushes the limit and that retiree would be concerned about how to do that. In addition such a person would not be interested in annuitizing his assets.
Well I was trying to point out (admittedly not too well) there is a flip side to the fear of running out of money, especially for financially conservative and frugal people like me. Were it not for a tool like VPW, I'd probably be spending the rest of my days being too careful about money when it isn't necessary. When I played around with VPW earlier this year, I realized there was no way I could spend annually all that was calculated even in the worst starting year scenario and after making provisions for leaving a legacy. It's a huge relief realizing I have another spending cushion. Almost as bad as running out of money is being too careful and never getting the chance to fully enjoy what you've spent so many years building.

heyyou
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Re: SWR, different perspective.

Post by heyyou » Tue Jan 02, 2018 6:47 pm

I doubt there is info about when retirees switch from traveling expenses while healthy, to less traveling due to aging. If there was, it would be much too broad to apply to financial planning for an individual, then there are couples with one person healthy and one not, so their traveling ceases which would further skew the data.

My murky response far above is to front load retirement spending from your market portfolio, using nominal annuities or spending a fixed percentage of the retirement day portfolio with no inflation adjustments.

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midareff
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Re: SWR, different perspective.

Post by midareff » Wed Jan 03, 2018 4:48 pm

heyyou wrote:
Tue Jan 02, 2018 6:47 pm
I doubt there is info about when retirees switch from traveling expenses while healthy, to less traveling due to aging. If there was, it would be much too broad to apply to financial planning for an individual, then there are couples with one person healthy and one not, so their traveling ceases which would further skew the data.

My murky response far above is to front load retirement spending from your market portfolio, using nominal annuities or spending a fixed percentage of the retirement day portfolio with no inflation adjustments.
From the traveling we have done the last four years our observations seem to be that folks are getting along pretty well through the mid 70's and you see very few traveling and doing longer shore excursions into the 80's.

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TimeRunner
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Re: SWR, different perspective.

Post by TimeRunner » Wed Jan 03, 2018 5:08 pm

I-ORP (Optimal Retirement Planner) allows one to model several retirement strategies other than a simple indexed constant spend plan. Here's the link to the help screen that describes them (as of date of this post), and also has links to the papers where they are described in detail: https://www.i-orp.com/GOPtax/help/ORPHelpQ.html#rrplan
“The Party told you to reject the evidence of your eyes and ears. It was their final, most essential command.” - George Orwell, 1984

freebeer
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Re: SWR, different perspective.

Post by freebeer » Wed Jan 03, 2018 5:20 pm

longinvest wrote:
Mon Jan 01, 2018 9:51 am
...
VPW is the mathematical solution to taking reasonable withdrawals from a portfolio to deplete it at a specific age, with no risk of premature depletion. ...
Uh, VPW is (notwithstanding the over-generality of its name) *a* mathematical solution to this problem, not *the* solution. Other solutions are conceivable even within the bounds of the same definition of "reasonable", and of course different people may differ on what is "reasonable".

cherijoh
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Re: SWR, different perspective.

Post by cherijoh » Wed Jan 03, 2018 5:26 pm

tibbitts wrote:
Sun Dec 31, 2017 5:10 pm
midareff wrote:
Sun Dec 31, 2017 4:12 pm
I think neither of these curves fit today's retiree... at least the retiree we might find on this .org, as do many of the other WR paper authors that come here to post. I may be way wrong and you are very free to say so, but I think the WR basis varies differently.

So here comes the question........ when your bills can be paid by SS and a cola'd pension, and the rest of the spending is discretionary for travel and luxuries, what does that expenditure curve look like as you age? What I'm getting at, is how far the middle years, 70-75 or 78 or even 80 or so, can be blown up for discretionary travel and luxuries, while you can enjoy them, before you have to throttle down again due to lack of abilities?
I would guess you're overestimating the cola'd pension crowd.
Government workers generally get a generous cola'd pension, but anyone in the private sector is lucky these days to get to retirement age with a pension that wasn't frozen in the middle of their career.

DVMResident
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Re: SWR, different perspective.

Post by DVMResident » Wed Jan 03, 2018 6:02 pm

midareff, others authors have pointed out the volatility issue of VPW before. ERN published a 22 part series on SWR, with a good amount of time spent on VPW.

Here's the score card comparing the tested withdrawal strategies (note the volatility score):

Image
Source: Early Retirement Now: The Ultimate Guide to Safe Withdrawal Rates – Part 11: Six Criteria to Grade Withdrawal Rules


Volatility historical data:
Image

I don't have much pragmatic advice. I'm much younger, but foresee the same issues you are having VPW (though prefer it the 4% in spades) and keeping an eye on more satisfying SWR model development. Maybe you'll find this series helpful. If you end up changing anything from this thread, please post an update. Very interested.

Forgive me, I haven't read through all the replies in detail (will do now, looks like good info).

2015
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Re: SWR, different perspective.

Post by 2015 » Wed Jan 03, 2018 7:32 pm

heyyou wrote:
Tue Jan 02, 2018 6:47 pm
I doubt there is info about when retirees switch from traveling expenses while healthy, to less traveling due to aging. If there was, it would be much too broad to apply to financial planning for an individual, then there are couples with one person healthy and one not, so their traveling ceases which would further skew the data.

My murky response far above is to front load retirement spending from your market portfolio, using nominal annuities or spending a fixed percentage of the retirement day portfolio with no inflation adjustments.
Actually, Dirk Cotton has done some outstanding work on spending declines in retirement. I personally am not using declining expenditures in my planning, but found found Cotton's post enlightening nonetheless (as I do all his posts):

http://www.theretirementcafe.com/search ... t+spending

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TimeRunner
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Re: SWR, different perspective.

Post by TimeRunner » Wed Jan 03, 2018 8:08 pm

2015 wrote:
Wed Jan 03, 2018 7:32 pm
heyyou wrote:
Tue Jan 02, 2018 6:47 pm
I doubt there is info about when retirees switch from traveling expenses while healthy, to less traveling due to aging. If there was, it would be much too broad to apply to financial planning for an individual, then there are couples with one person healthy and one not, so their traveling ceases which would further skew the data.

My murky response far above is to front load retirement spending from your market portfolio, using nominal annuities or spending a fixed percentage of the retirement day portfolio with no inflation adjustments.
Actually, Dirk Cotton has done some outstanding work on spending declines in retirement. I personally am not using declining expenditures in my planning, but found found Cotton's post enlightening nonetheless (as I do all his posts):

http://www.theretirementcafe.com/search ... t+spending
Just to tie this back to my previous post, Cotton's blog post refers to David Blanchett's paper and work. Blanchett's model is one of the choices one can use in modeling retirement spending strategies in I-ORP. Both Cotton and I-ORP's author (James Welch) reference Blanchett. Small world. :beer
“The Party told you to reject the evidence of your eyes and ears. It was their final, most essential command.” - George Orwell, 1984

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