I've been swapping a few PMs with Longinvest, and he suggested to share a few highlights.
First, I stumbled upon an old BH thread where the very exact same idea of using PMT down to depletion was discussed. This is an interesting read.http://www.bogleheads.org/forum/viewtopic.php?t=41514
Thank you, Siamond, for uncovering this prior art. I really enjoyed reading that thread.
Next, like many others, the jittery trajectory of VPW's withdrawals (as a direct function of the portfolio balance jitters) doesn't quite work for me. And I really do not want to change my AA to address this issue.
I think that not changing AA is one of the main points that leads you to want to modify VPW. (I'll come back to this later). I propose that this is not a VPW issue; it is a Siamond issue with using VPW as-is
So, let me restate what you wrote differently: VPW will only deliver a jittery trajectory if you keep an inappropriate withdrawal-time AA.Just for the benefit of readers of this thread
: I'll illustrate how VPW does actually deliver very smooth withdrawals
, when an appropriate AA is selected. I'll show graphs of VPW withdrawals for two retirement backtest simulations using Vanguard Target Retirement's 30% stocks / 70% bonds AA (with stocks: 70% US / 30% International) for a retired person:
- A 35-year retirement starting in 1966; that's the retirement year for which a traditional 4% SWR fails.
- An incomplete (35-year) retirement starting in 2000; it contains two big stock market drawdowns in 2000 and 2008.
I used a logarithmic scale to make sure not to hide any volatility in smaller withdrawals, in early retirement.
Here's the 1966 withdrawal path:
The biggest drop from 1973 to 1975 was approximately 10%.
And here's the 2000 partial withdrawal path:
In 2009, after experiencing the horrible 2008 year for stocks, the withdrawal was down something like 10%.
As you can see, VPW is not jittery when you have an appropriate AA.
I played with a few ideas, and the one that seems to work the best is to compute the PMT formula as usual for each year, but then use as withdrawal goal the rolling average of the past few years (say 5). Such math has to be done in real dollars. This goes a long way in smoothing the trajectory of a sideways market, while not introducing issues with big bulls or bears. Somebody suggested the same thing on this old BH thread.
Next (and this fits well with the smoothing idea), I much prefer to have a lower cap on the # of remaining periods (i.e. 5 years before depletion, if you're still alive, you may want to foresee more than 5 years of life to come!). A lower cap of 10 years, or something like that, seems reasonable. This works better than simply extending the depletion period by 10 years.
Finally, if your personal goal is NOT to spend it all (e.g. leave a significant bequest, self-insure for LTC, etc), then an interesting idea could be to use the 'Final Value' of the PMT formula. It could be half of your initial portfolio, or even all of it, that is up to you. This also fits well with the smoothing and lower cap ideas. This one is a longer discussion, I modeled it, it works, but the outcome is more sensitive to the expected market returns vs reality than I originally expected. Anyhoo, this is an interesting avenue for investigation.
Siamond, let me try to summarize what you are seeking, just so that you can correct me if I am wrong. You're looking for a withdrawal method:
- that can deliver smooth withdrawals regardless of AA,
- that can continue to deliver sufficient withdrawals, in case you live longer than anticipated,
- that lets you specify a target bequest.
Is this what you seek? If yes
, I will start a new thread
with a different proposal that addresses such constraints using some (hopefully nice) new ideas that I got! (It's actually different from VPW, due to your hard constraints).Just for the benefit of readers of this thread
I have already shown that VPW can deliver smooth withdrawals.
VPW can also deliver withdrawals for a longer time; just select a longer initial depletion period. (By default, VPW uses a 35-year depletion period for a 65-year old person). You should also revise your plan every few years and set up a new (longer) depletion period if you think that your life expectancy is higher than you previously thought. Just make it longer than your best estimate.
As for leaving a bequest, that must be done separately from VPW. VPW will, of course, leave bequest as long as you die before the end of the depletion period. That is actually expected, otherwise, you failed to revise your plan every few years! If you end-up broke at 120 years-old, it is because you misused VPW. You really think you can make it to 120? Just select a depletion period that ends at 125 or 130. Just let me know when you get there!
But, let's be serious. Let say you have $3,000,000 (for VPW and bequest) and you'd like to leave a $1,000,000 (constant dollar) bequest. One sure way to do so is to buy $1,000,000 of TIPS. Then, you can apply VPW on the remaining $2,000,000 and add the TIPS interest payments to your VPW withdrawals. Or pick any variation on this.
In other words, I think that VPW:
- Is good at doing what it was meant to do: To deplete a portfolio over a time-certain period.
- Is not a complete retirement plan in itself.
- Is not a comprehensive retirement calculator that integrates SS, pensions, etc.
- Is very simple to use.
- Provides a nice backtesting framework in its spreadsheet.
- Is fairly easy to recreate from scratch using a piece of paper, a pen, and a simple financial calculator.
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