Variable Percentage Withdrawal (VPW)

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gordoni2
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Re: Variable Percentage Withdrawal (VPW)

Post by gordoni2 » Sat Jun 11, 2016 7:50 pm

Below are certainty equivalents (CEs) for the different mathematical schemes described in my previous post as well as for the 4% rule. A certainty equivalent is the level consumption amount a retiree would be indifferent to receiving compared to the set of consumption paths they might receive. These numbers are for a $200k portfolio, with an iid 4.0% geometric mean real return, standard deviation of 14.0%, and $15k year Social Security. Coefficient of relative risk aversion 3. No bequest motive. Female, age 65, born 1950, stochastic lifespan using SSA AS120 life table.

Code: Select all

scheme  maxage     CE     score
4% rule  n.a.    $22,509   72%
1/N        95    $24,351   90%
1/N       100    $23,682   84%
VPW        95    $25,149   98%
VPW       100    $24,976   96%
FLRA       95    $25,078   97%
FLRA      100    $24,798   94%
SLRA     n.a.    $24,959   96%
Merton     95    $24,770   94%
Merton    100    $24,295   89%
SDP      n.a.    $25,386  100%

The score is computed by comparing the CE value to the SDP CE value after factoring out Social Security. All schemes other than 4% rule, 1/N, and Merton maxage=100 performed well. This was for a $200k portfolio. For a $2m portfolio, nearly all schemes performed poorly:

Code: Select all

scheme  maxage     CE     score
4% rule  n.a.    $62,958   57%
1/N        95    $66,252   61%
1/N       100    $80,730   78%
VPW        95    $68,357   64%
VPW       100    $89,303   89%
FLRA       95    $68,402   64%
FLRA      100    $88,828   88%
SLRA     n.a.    $97,507   98%
Merton     95    $67,678   63%
Merton    100    $85,652   84%
SDP      n.a.    $98,904  100%

Summary. VPW maxage=100 seems to work reasonably well in general, but for large portfolios (relative to defined benefits) it is possible to do better; 11% better in the example scenario. It probably took several years to grow the portfolio 11%, so this shouldn't be squandered needlessly. SLRA works well, but like SDP is somewhat challenging to compute. This analysis is for a fixed asset allocation throughout retirement. If you are willing to dynamically adjust your asset allocation you can probably do better, although not by a huge amount. Overall, there is no simple and accurate solution as to how much to withdraw.

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Re: Variable Percentage Withdrawal (VPW)

Post by AlohaJoe » Sun Jun 12, 2016 10:27 pm

gordoni2 wrote:These numbers are for a $200k portfolio, with an iid 4.0% geometric mean real return, standard deviation of 14.0%, and $15k year Social Security. Coefficient of relative risk aversion 3. No bequest motive. Female, age 65, born 1950, stochastic lifespan using SSA AS120 life table.


Interesting!

Out of curiosity, why did you pick a coefficient of risk aversion of 3? And why did you decide to run this including the $15k of social security? It doesn't really affect your results substantially (without running the math, I would expect the same relative ordering with and without the inclusion of social security), I was just curious why you chose to run it that way.

The score is computed by comparing the CE value to the SDP CE value after factoring out Social Security.


Your "score" is similar to the Withdrawal Efficiency Rate metric in Blanchett et al (2008). Have you read that? Just curious if you read it and have intentionally avoided using it. I've liked this kind of metric since I first read about it, since it offers some kind of ground for comparison. Certainly, there are a lot of things it leaves out -- resilience to spending shocks, failure to meet minimum needed amounts, etc -- but it seems like a great starting point.

Code: Select all

scheme  maxage     CE     score
4% rule  n.a.    $62,958   57%
1/N        95    $66,252   61%
1/N       100    $80,730   78%
VPW        95    $68,357   64%
VPW       100    $89,303   89%
FLRA       95    $68,402   64%
FLRA      100    $88,828   88%
SLRA     n.a.    $97,507   98%
Merton     95    $67,678   63%
Merton    100    $85,652   84%
SDP      n.a.    $98,904  100%


Overall your results show something I've begun to strongly believe: that any scheme that isn't fundamentally built on stochastic lifespans/mortality is going to be outperformed by those that do. I know (well, I've read research showing that) people guesstimate their own mortality based on their family but I still think that is a far cry from — at the start of retirement — making a guess about exactly how long your retirement needs to last.

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Re: Variable Percentage Withdrawal (VPW)

Post by naha66 » Sun Jun 12, 2016 11:48 pm

I know (well, I've read research showing that) people guesstimate their own mortality based on their family but I still think that is a far cry from — at the start of retirement — making a guess about exactly how long your retirement needs to last.


Yea that's my problem, my father died at 49 and my mother at 57, I'm 61 and very healthy.

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Re: Variable Percentage Withdrawal (VPW)

Post by AlohaJoe » Mon Jun 13, 2016 1:48 am

skjoldur wrote:The issue of WR vs. floor and upside is a common theme on the forums. I'm sure I don't really understand the intricacies. But when I look closely I come away with the impression that a sufficiently large chuck of bonds in the AA is a sort of floor.

If you take the advice that VPW makes sense if you can handle large swings in your spending (say 50%) and if your AA is moderate (say 50/50) then it means that your bond allocation is roughly sufficient for 100% of your 'floor' expenses.

Maybe there is a rule of thumb in there somewhere?


I don't know that anyone can ever provide a rule of thumb for this because most of the reasons people want a guaranteed floor are to protect against speculative/black swan type risks that are inherently very difficult, if not impossible, to predict.

IMHO, in many cases people are a bit inconsistent with their "floor". Bernstein, for instance has recommended building a floor out of "high-quality corporate bonds" since equity returns aren't guaranteed (and corporate bonds are?). But I don't find that a very compelling line of argument. In other cases, people worry about black swan equity events but don't worry about black swan pension events. The reality is that all of this stuff is super-complicated so it's not like there is any clear cut right or wrong answer to most of these questions and sometimes having the "wrong" answer but sleeping better at night is worth the tradeoff.

In https://www.kitces.com/blog/income-floo ... rates-swr/ Kitces points out that it isn't like annuity companies have some magic source of investment returns, so if SWRs drop really low then annuities will be bleeding money as well. And since there are apparently only three insurance companies in America that sell inflation-indexed SPIAs (there was a bogleheads thread a few months ago about this), it is difficult to diversify substantially if you're truly worried about these kinds of black swan events. (After all insurance companies failed during the Great Depression...)

In most discussions on this forum (like everywhere else in life), people are usually coming to the discussion with different assumptions. If you're talking about a 65-year old retiree with a pension and social security both about to kick in then the floor is effectively "free" (it has already been paid for). If you're talking about a 50-year old retiree then things are more complicated. My intuition (without having done much thinking or math) is that for an early retiree who is posting on bogleheads they are probably better off buying a deferred, non-indexed annuity to protect against longevity and just suck up the purchasing power losses due to inflation (since most non-medical expenses tend to drop towards the end of retirement anyway).

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Re: Variable Percentage Withdrawal (VPW)

Post by hudson » Mon Jun 13, 2016 6:27 am

AlohaJoe wrote:
skjoldur wrote:The issue of WR vs. floor and upside is a common theme on the forums. I'm sure I don't really understand the intricacies. But when I look closely I come away with the impression that a sufficiently large chuck of bonds in the AA is a sort of floor.

If you take the advice that VPW makes sense if you can handle large swings in your spending (say 50%) and if your AA is moderate (say 50/50) then it means that your bond allocation is roughly sufficient for 100% of your 'floor' expenses.

Maybe there is a rule of thumb in there somewhere?


I don't know that anyone can ever provide a rule of thumb for this because most of the reasons people want a guaranteed floor are to protect against speculative/black swan type risks that are inherently very difficult, if not impossible, to predict.

IMHO, in many cases people are a bit inconsistent with their "floor". Bernstein, for instance has recommended building a floor out of "high-quality corporate bonds" since equity returns aren't guaranteed (and corporate bonds are?). But I don't find that a very compelling line of argument. In other cases, people worry about black swan equity events but don't worry about black swan pension events. The reality is that all of this stuff is super-complicated so it's not like there is any clear cut right or wrong answer to most of these questions and sometimes having the "wrong" answer but sleeping better at night is worth the tradeoff.

In https://www.kitces.com/blog/income-floo ... rates-swr/ Kitces points out that it isn't like annuity companies have some magic source of investment returns, so if SWRs drop really low then annuities will be bleeding money as well. And since there are apparently only three insurance companies in America that sell inflation-indexed SPIAs (there was a bogleheads thread a few months ago about this), it is difficult to diversify substantially if you're truly worried about these kinds of black swan events. (After all insurance companies failed during the Great Depression...)

In most discussions on this forum (like everywhere else in life), people are usually coming to the discussion with different assumptions. If you're talking about a 65-year old retiree with a pension and social security both about to kick in then the floor is effectively "free" (it has already been paid for). If you're talking about a 50-year old retiree then things are more complicated. My intuition (without having done much thinking or math) is that for an early retiree who is posting on bogleheads they are probably better off buying a deferred, non-indexed annuity to protect against longevity and just suck up the purchasing power losses due to inflation (since most non-medical expenses tend to drop towards the end of retirement anyway).


High quality corporate bonds and deferred, non-indexed annuities would not work for me as both can be "ugly". AAA/AA bonds and single premium immediate annuities work for me.

Both of these books helped me shape my opinions...but you've been around a long time and already know all this stuff.

https://www.amazon.com/Only-Guide-Winni ... 8&qid=&sr=

https://www.amazon.com/Only-Guide-Alter ... 8&qid=&sr=

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Re: Variable Percentage Withdrawal (VPW)

Post by gordoni2 » Mon Jun 13, 2016 6:41 pm

AlohaJoe wrote:Out of curiosity, why did you pick a coefficient of risk aversion of 3? And why did you decide to run this including the $15k of social security? It doesn't really affect your results substantially

Economists seem divided on what is a fair value to use for the coefficient of relative risk aversion. Based on my readings many seem to think it is the range 1 to 3 based on people's attitudes towards risk, however there are some who look at the asset allocation decisions people actually make that claim it must be 10 or more as a result.

Social Security has a big effect on all of the maxage schemes (planning for a fixed lifespan). Without Social Security, beyond maxage, consumption would be zero, giving a utility of negative infinity, and the maxage schemes would perform very poorly.

Your "score" is similar to the Withdrawal Efficiency Rate metric in Blanchett et al (2008). Have you read that?

Yes, it is similar, in that it uses certainty equivalents, but there are differences. Blanchett's WER is for a fixed lifespan. Also as I see it the big problem with the Blanchett et al. (2012) paper is they don't include guaranteed income (to be precise they use 0.1% Social Security). If they had included a reasonable amount of guaranteed income I suspect they would have produced different results. It is possible to generalize the WER to overcome these problems. I did this in the past, but I am not sure the metric should still be called a WER. Rather than confuse people with a new metric I report an intuitively simple score.

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Re: Variable Percentage Withdrawal (VPW)

Post by AlohaJoe » Mon Jun 13, 2016 10:44 pm

gordoni2 wrote:
AlohaJoe wrote:Out of curiosity, why did you pick a coefficient of risk aversion of 3? And why did you decide to run this including the $15k of social security? It doesn't really affect your results substantially

Economists seem divided on what is a fair value to use for the coefficient of relative risk aversion. Based on my readings many seem to think it is the range 1 to 3 based on people's attitudes towards risk, however there are some who look at the asset allocation decisions people actually make that claim it must be 10 or more as a result.


Interesting, thanks for sharing that. I had also seen numbers in the range of 1-4 or so but I've never really seen an explanation for how people pick them.

I don't suppose you have a link to anyone talking about using 10 or more? I'd be curious to read more about that.

Social Security has a big effect on all of the maxage schemes (planning for a fixed lifespan). Without Social Security, beyond maxage, consumption would be zero, giving a utility of negative infinity, and the maxage schemes would perform very poorly.


Agreed. Though for me personally (and for everyone else in Australia), there is no such thing as "social security". So there is still a lot of value in seeing how maxage schemes perform without social security unpinning it for the rest of the world :)

Your "score" is similar to the Withdrawal Efficiency Rate metric in Blanchett et al (2008). Have you read that?

Yes, it is similar, in that it uses certainty equivalents, but there are differences. Blanchett's WER is for a fixed lifespan.[/quote]

I don't understand this part. WER isn't for a fixed lifespan. It uses monte carlo simulations of stochastic lifespans. In their paper they use joint mortality of a couple that are both 65 based on the Annuity 2000 Mortality Table.

It is possible to generalize the WER to overcome these problems. I did this in the past, but I am not sure the metric should still be called a WER. Rather than confuse people with a new metric I report an intuitively simple score.


If you have anything written about this generalisation, I'd be keen to read it.

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Re: Variable Percentage Withdrawal (VPW)

Post by gordoni2 » Mon Jun 13, 2016 11:44 pm

AlohaJoe wrote:I don't suppose you have a link to anyone talking about using 10 or more? I'd be curious to read more about that.

Try this paper: What is a realistic aversion to risk for real-world individual investors?

It talks about coefficients of relative risk aversion as high as 300! That said, for asset allocation purposes it is the inverse of the coefficient of relative risk aversion that determines the stock allocation, so the difference between 3 and 300 could be viewed as less than the difference between 1 and 2.

I don't understand this part. WER isn't for a fixed lifespan.

Oops, I spoke too quickly. You are right.

If you have anything written about this generalisation, I'd be keen to read it.

Nothing written, but I have working code inside a much bigger application. PM me and I can point you at it if you like, but it is not pretty.

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Re: Variable Percentage Withdrawal (VPW)

Post by siamond » Sat Jul 30, 2016 6:06 pm

Longinvest wrote the following on another thread:

longinvest wrote:While I am not a fan of tweaks to VPW, I won't say anything if one wants to apply mild short-term smoothing to its withdrawals (no long-term memory). For instance, I think that Siamond is a fan of short-term VPW withdrawal smoothing to allow for a higher stock allocation during retirement. (Personally, I prefer using bonds to lower volatility, but here's not the place for this debate). On the other hand, I think that it would be a mistake to let the market decide of an investor's asset allocation (AA). I think that the only sensible Bogleheads approach is to stick to a strategic AA, selected based on the investor's own circumstances without taking into account any kind of market valuation. It's fine to select a fixed AA, or an AA with a preset glide (like "age in bonds" or "age - 10" in bonds"). It is my opinion that dynamic/tactical AA does not meet our "Never try to time the market" principle.

Personally, I truly believe in keeping my AA as constant as possible for the rest of my life, barring some rather extreme events. But many people do like the idea of glidepaths in retirement. Now this makes me curious. How would one use VPW in combination with an AA with a preset glide?

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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Sat Jul 30, 2016 6:32 pm

siamond wrote:How would one use VPW in combination with an AA with a preset glide?


Personally, I would simply follow the VPW instructions, which say:

Bogleheads Wiki
Variable percentage withdrawal
4. How to use variable-percentage withdrawals during retirement
4.1 With the spreadsheet
https://www.bogleheads.org/wiki/Variabl ... preadsheet

...
3. Click on the VPW tab and:
    ...
    2. Each year:
      1. Check that the asset allocation corresponds to the planned allocation of your portfolio for the upcoming year (Domestic Stocks, International Stocks, and Domestic Bonds). If necessary, adjust the values. (This happens, for example, when a retirement portfolio is on a glide path).


That is what made sense to me, at the time, when I wrote it.

Minor variations in asset allocation have a meaningless impact on VPW withdrawal rates. Taking 4.3% of the current balance (at the time of withdrawal), instead of 4.2%, for one year or two, won't make a tangible difference on the general withdrawal path.

Let me pick the 55-years old VPW withdrawal rates, across allocations (from 20%/%80 to 80%/20% stocks/bonds AA, in 10% steps), as an example:
3.6% 3.9% 4.1% 4.3% 4.5% 4.8% 5.0%

That's a difference of barely 0.2% to 0.3% for a 10% change in AA. Most glide paths change much less than this, every year (otherwise, they would reach 100% bonds in less than 10 years).

Every 5 years, one should reevaluate the entire retirement plan. Using the AA of the next year, at that point, to select upcoming withdrawal rates for the next 5 years would be good enough, in my opinion.
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Re: Variable Percentage Withdrawal (VPW)

Post by siamond » Sat Jul 30, 2016 6:46 pm

longinvest wrote:Every 5 years, one should reevaluate the entire retirement plan. Using the AA of the next year, at that point, to select upcoming withdrawal rates for the next 5 years would be good enough, in my opinion.

Yeah, ok, that kinda works. I doubt that people would remember doing so in practice though. Not everybody is as disciplined as you are! Anyhoo, I just wanted to log the question and one possible answer, for future reference if somebody else ponders about it.

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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Sat Jul 30, 2016 7:18 pm

Siamond,

siamond wrote:How would one use VPW in combination with an AA with a preset glide?

siamond wrote:I just wanted to log the question and one possible answer, for future reference if somebody else ponders about it.


It was still an excellent question.

Here's the theory behind the approach proposed in the VPW instructions.

If we apply the proposed approach (using next year's AA to select a withdrawal rate) on a static return model where stocks and bonds had a constant return for the entire retirement, each and every year, that would lead to a series of slightly declining withdrawals. We could have tried to keep them level, but after thinking about it for a while, I decided that this would add a lot of complexity (adapting for an "age in bonds" glide path is different from adapting for a TargetRetirement glide path, for exemple), without making any noticeable difference, in real life, due to the variability in market returns. I came to the conclusion that the gain was not worth the trouble.

So, I decided that keeping it simple was good enough.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Mon Aug 01, 2016 9:21 am

For those interested, in viewtopic.php?p=3000385#p3000358, I illustrated an example of how to combine a VPW withdrawal with rebalancing.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Sat Aug 06, 2016 8:35 pm

In another thread, Lieutenant.Columbo asked the following questions:

viewtopic.php?f=2&t=196768&p=3006499#p3006499
Lieutenant.Columbo wrote:
longinvest wrote:For those retiring earlier, I would recommend accumulating more. A rule of the thumb would be to multiply the ratio of VPW rates between retirement and 65 by 4%. Example: To retire at 55, I would multiply VPW's ratio of 55-years old and 65-years old percentages by 4% (see lines 55 and 65 of the 50/50 allocation in the VPW table): (4.3 / 4.8) X 4% = 3.6%, or accumulate 28 times residual expenses plus the money required to fill the gap between retirement and the start of lifelong base income payments.


1. what's the mathematical reason behind calculating the ratio of the two VPW rates?

2. what is the reason for multiplying by 4?

3. interestingly, using the calculation you suggested, and for the same two ages (55, 65) the resulting withdrawal rate for someone with an 80% stock/20% bond portfolio is 3.64% (while it was 3.58% for the scenario you described);
I was surprised at how similar both withdrawal rates are for such different portfolios;
what are your thoughts on this?

thank you


Here are my answers:

1. what's the mathematical reason behind calculating the ratio of the two VPW rates?


The VPW percentages increase with age. By taking the ratio of VPW percentages between retirement and 65, it gives us an idea of how much less one should withdraw from a portfolio when retiring earlier. It might not be precise, but it should be a good enough approximation.

For example, with a 50/50 portfolio, one would withdraw 4.8% of his portfolio on the first year of retirement at age 65, using VPW.

With the same 50/50 portfolio, one would withdraw 4.3% of his portfolio on the first year of retirement at age 55, using VPW.

So, the person retiring at 55 would withdraw (4.3/4.8) = 89.6% of what a person retiring at 65 would withdraw from the same portfolio.

2. what is the reason for multiplying by 4?


The 4 represents the traditional 4% SWR planning number, used as a ratio to estimate how much one needs to accumulate to retire. The idea is if it is "safe" to take out 4%, it means that we need to accumulate 100%/4% = 25 times our planned withdrawal needs.

Why use this number? Why not take the initial VPW percentage at 65, instead? Because the VPW will lower withdrawals, during retirement, after bad market years. This means that if one was to retire just before a storm (like 1927-1928 or 2007-2008), one would get lower withdrawals in subsequent years after retirement.

Interestingly, when we backtest VPW with asset allocations ranging between 25/75 to 75/25 stocks/bonds, we discover that the median VPW withdrawal was higher than 4% of the initial portfolio, in almost all backtested scenarios. We can see this in the Withdrawal Statistics chart of the VPW spreadsheet:

Note: Look at the blue line.

25% US stocks / 75% US bonds

Image

50% US stocks / 50% US bonds

Image

75% US stocks / 25% US bonds

Image

As we can see, except for a few retirement years in the late 1930s, early 1940s, and mid 1960s with a low 25% stocks allocation, all the medians were higher than $40,000 (e.g. 4% of the simulated initial $1,000,000 portfolio).

That's what I consider good enough, and it matches well with the traditional number almost everybody uses. I like simplicity, so I won't fight it. I'll accept the 4% SWR as planning number, regardless of asset allocation (assuming the investor is a Boglehead with at least 25% in each of stocks and bonds).

3. interestingly, using the calculation you suggested, and for the same two ages (55, 65) the resulting withdrawal rate for someone with an 80% stock/20% bond portfolio is 3.64% (while it was 3.58% for the scenario you described);
I was surprised at how similar both withdrawal rates are for such different portfolios;
what are your thoughts on this?


As I picked 50/50, for my example, the ratio was probably in the middle of possible ratios. If I take the 55 to 65 years old 80/20 stocks/bonds ratio, it is 5.0/5.5 = 91%. If I take the 55 to 65 years old 20/80 stocks/bonds ratio, it is 3.6/4.2 = 86%. The 50/50 stocks/bonds ratio of 89.6% is in between.

Notes

Let me remind readers that this is just a simple rule of thumb that I have developed for myself. One should never lose sight that one cannot insure a lifelong base of income using withdrawals from a portfolio of risky assets (stocks and bonds)*, regardless of the chosen withdrawal method. As a consequence, VPW withdrawals are best combined with lifelong base income such Social Security, pension (if any), and (if necessary) an inflation-indexed Single Premium Immediate Annuity (SPIA).

* Yes, bonds have risks, too, not only stocks. Bonds have interest rate risk. Bonds have liquidity risk. Some bonds have credit risk. etc.

The gap between (early-)retirement and the start of lifelong income payments is best filled by setting aside enough money into cash investments (high-interest savings accounts, CDs) which don't fluctuate in value and earn enough interest to match inflation. See: viewtopic.php?t=102609 for an example of this (to delay Social Security to 70). Of course, this money should not be taken into account when calculating a VPW withdrawal. In terms of early retirement planning, this money should be in addition of whatever money is needed for VPW withdrawals according to the ratio calculated using our rule of thumb.
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Re: Variable Percentage Withdrawal

Post by Lieutenant.Columbo » Sun Sep 04, 2016 7:34 pm

longinvest wrote:
siamond wrote:Maybe try to do something with re-adjusting the math every year based on life expectancy models (like the one SS uses)?


Maybe you're expecting to live forever; there are science-fiction novels about that, and maybe science is getting there. I don't know.

The solution would be similar to what I have already suggested: for the part you don't want to deplete, you use Constant-Percentage Withdrawal (CPW). Now, you could try to improve it with the same idea as VPW 2.0. Maybe a CPW 2.0 with a payment tolerance interval?


Slowly but surely reading through the thread now for the 1st time. Learning the pros and cons.

I will have a post later on with several general VPW questions, but I am asking this one here, so that you see the context that triggered my question.

I know I am not living forever. But some individuals live up to 100, 110, 115. In case my spouse or I are one of those, we'd like to be financially prepared, and hence plan Now for that.

I see int he VPW spreadsheet (with which I've been playing around today) that it does accept death ages in the 100s.

My question here is:
does the backtesting and other additional data in the other tabs support that VPW will be successful at not depleting your portfolio before the end of a, for example, 55 year retirement period is up (say for retirement at age 55 with depletion at age 110, for instance)?

I guess another way to state the question is:
is the VPW spreadsheet as reliable/dependable for large retirement periods (a.k.a Retiring at 50 or 55 and dying after 110 yrs old) as it is for shorter retirement periods and dying in the 90s?

Or, in regards to this:
should one set up the VPW variables (retirement age, death age, AA) with death set at 110 or 115, so that this scenario is taken into account from the very beginning? or maybe death 95 should be set at first, and if one is healthy at age 90, then reset the VPW spreadsheet to death at, say 115?

thank you
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Re: Variable Percentage Withdrawal

Post by BlueEars » Sun Sep 04, 2016 7:50 pm

Lieutenant.Columbo wrote:...
My question here is:
does the backtesting and other additional data in the other tabs support that VPW will be successful at not depleting your portfolio before the end of a, for example, 55 year retirement period is up (say for retirement at age 55 with depletion at age 110, for instance)?

I guess another way to state the question is:
is the VPW spreadsheet as reliable/dependable for large retirement periods (a.k.a Retiring at 50 or 55 and dying after 110 yrs old) as it is for shorter retirement periods and dying in the 90s?

thank you

I personally use Last Withdrawal Age = 110 for 3 reasons:
(1) I do not want to deplete too far down and using 1968 as a retirement year shows the inflation adjusted portfolio never went below 50% of the starting portfolio. That occurred 15 years after 1968.
(2) I might just get to that 110 but am not planning on it.
(3) The VPW answer is something I can easily live with i.e. I can easily live at or below it's withdrawal results. I'm just being honest here, I'd probably reject a plan that was too painful to implement. :)

Of course, the VPW data is only as good as the past bad economies will be reflected in future returns. Should we get something worse then start years like 1929 or 1968, we may have to cope in ways unknown. I am optimistic that VPW is a good tool for planning. Mid course corrections may be required.

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Re: Variable Percentage Withdrawal

Post by Lieutenant.Columbo » Sun Sep 04, 2016 8:12 pm

BlueEars wrote:the VPW data is only as good as the past bad economies will be reflected in future returns. Should we get something worse then start years like 1929 or 1968, we may have to cope in ways unknown. I am optimistic that VPW is a good tool for planning. Mid course corrections may be required.


thank you for your input

I am glad to see I am not the only one planning for the eleventh decade...

by mid-course correction, do you mean corrections to one's VPW spreadsheet entered data?
AND/OR retirement plan/strategy correction?

thanks!
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Sun Sep 04, 2016 8:40 pm

BahamaMan wrote: I always withdraw the Full VPW amount from my Investment Portfolio into my Cash spending account. This cash is not part of my asset allocation, and will never be invested in anything other than Cash.

The VPW withdrawal amount gets you to sell your Investments when the market is high and pull back when it is low. It is a discipline just like dollar cost averaging is. It forces you to sell at higher prices and Less with market declines. It takes the 'emotion' out of withdrawals. The Withdrawal Amount drives the Budget, not the other way around!


am I understanding well? you withdraw the whole VPW amount each year even if you do not (or will not) need that much, correct? and you save in cash any leftovers for when VPW spits out a lower Withdrawal due to market going down, correct?

This is very interesting, as I was thinking that I would calculate the VPWbut still withdraw a smaller amount if I saw I did not need the full amount recommended by VPW.
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Sun Sep 04, 2016 8:47 pm

longinvest wrote:
Leif wrote:You are right. I had my last withdrawal age set to 93. Thanks.

That looks low to me. Personally, I wouldn't reduce it below 99. Actually, I would start increasing it above 100 in my 80s, if my health is still good.


as per my previous question:

why not increase above 100 from day 1 so that you do not have to (possibly) struggle between 80 and (if applicable) 100s because you spent too much during until age 80s?

thank you

excellent thread, excellent spreadsheet!
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Re: Variable Percentage Withdrawal

Post by BlueEars » Sun Sep 04, 2016 9:06 pm

Lieutenant.Columbo wrote:
BlueEars wrote:the VPW data is only as good as the past bad economies will be reflected in future returns. Should we get something worse then start years like 1929 or 1968, we may have to cope in ways unknown. I am optimistic that VPW is a good tool for planning. Mid course corrections may be required.


thank you for your input

I am glad to see I am not the only one planning for the eleventh decade...

by mid-course correction, do you mean corrections to one's VPW spreadsheet entered data?
AND/OR retirement plan/strategy correction?

thanks!

Mid-course corrections would be things one cannot anticipate. For instance, for us spending is a problem ... a good problem to have. VPW says we should consider withdrawing 4.4% this year. But we are on track to maybe spend 3.3% or so. We have to choose what to consider with that 1.1%. I think longinvest proposes putting that in a cash equivalent kitty (if I recall).

Windfalls can come about by life events like (1) medical bills much lower then anticipated, (2) children graduate from college and actually get good jobs to become entirely self supporting, (3) stock/bond returns better then anticipated, (4) brilliant investing that works out (just kidding).

So anyway one has a lot of time to consider these things in retirement and adjust accordingly. VPW is a good planning tool and can be rerun over the years.

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Re: Variable Percentage Withdrawal (VPW)

Post by heyyou » Sun Sep 04, 2016 10:46 pm

At Lieutenant.Columbo:
For longer retirements of 40 or more years, the withdrawal rate for them is very near the same as the perpetuity rate for an endowment portfolio. The endowment would try to not invade principal, and if it did, it would try to replace it when recovery occurred. My point is there is some WD rate where the initial and ending portfolio values are similar. If your necessary expenses are mostly covered by guaranteed income sources, your variable portfolio withdrawals could be spent on lifestyle improvements.

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Re: Variable Percentage Withdrawal

Post by longinvest » Mon Sep 05, 2016 8:29 am

Lieutenant.Columbo,

Lieutenant.Columbo wrote:does the backtesting and other additional data in the other tabs support that VPW will be successful at not depleting your portfolio before the end of a, for example, 55 year retirement period is up (say for retirement at age 55 with depletion at age 110, for instance)?

is the VPW spreadsheet as reliable/dependable for large retirement periods (a.k.a Retiring at 50 or 55 and dying after 110 yrs old) as it is for shorter retirement periods and dying in the 90s?


The mathematics of VPW work with any depletion period length. By design, VPW will deplete the portfolio on the exact chosen date, not before nor after.

Lieutenant.Columbo wrote:should one set up the VPW variables (retirement age, death age, AA) with death set at 110 or 115, so that this scenario is taken into account from the very beginning? or maybe death 95 should be set at first, and if one is healthy at age 90, then reset the VPW spreadsheet to death at, say 115?


Our goal is to build a retirement plan that will never lead us to ruin, regardless of how long we get to live.

So, the Last Withdrawal Age should never be lower than 99.

Why 99? Simply because it reasonable default starting value, as very few retirees get to live beyond 100:

From Wikipedia - Demographics of the United States:
Image

As the Wiki page states clearly, one should revise his retirement plan every few years.

Now, by age 80, a few things happen:
  • Most retirees suffer from some disability. (Reduced sight, hearing, mobility, some kind of chronic condition, etc).
  • Most retirees reduce the number outside activities, and therefore spend significantly less.
  • Some retirees feel their body telling them (quite clearly) that they won't get to live for another 20 years.
  • The price of a single premium immediate annuity (SPIA) becomes cheaper, even when including an inflation rider.

At that point, a retiree still in good health could simply buy an inflation-indexed SPIA, if necessary, to cover (along with Social Security) all essential expenses, just as insurance in case one got lucky to live much older than 100. One could also update the Last Withdrawal Age to 109 (or 119, if in very good health) for the remaining portfolio.

See viewtopic.php?t=144089#p2150816 for a discussion of common concerns.

Lieutenant.Columbo wrote:
BlueEars wrote:Mid course corrections may be required.


by mid-course correction, do you mean corrections to one's VPW spreadsheet entered data?
AND/OR retirement plan/strategy correction?


The only VPW parameter that might need adjusting is the Last Withdrawal Age. There's an exception when one has a sliding asset allocation (such as "age in bonds"), in which case the planned asset allocation for the next year should be used to determine the VPW percentage.

One should not touch the internal VPW calculations parameters as VPW automatically adjust withdrawal levels to actual returns. For an illustration of this, see this post: viewtopic.php?f=10&t=192105&start=250#p2998990.

Lieutenant.Columbo wrote:why not increase above 100 from day 1 so that you do not have to (possibly) struggle between 80 and (if applicable) 100s because you spent too much during until age 80s?


As previously explained, for the vast majority of retirees, including those who die after 100, this would deprive them from enjoying their money with their loved ones during their younger and healthier years. Delaying extra consumption until one is unable to enjoy the process doesn't seem like a very sensible plan.

Think about it. By the time one is 110, his children are probably in their 80s, if still alive.

Let me get philosophical, just a bit. If one intends to live forever, shouldn't one think of participating actively in society? What would be life if we had a large majority of 100 to 1000 years old people just sitting all day long, waiting for the minority of less-than 100 years old workers to feed and entertain them? Have you seen the movie "In Time"?

Getting back down to reality: Starting VPW with a Last Withdrawal Age of 99 is good enough. If one wants to start with a higher number, the spreadsheet allows for it, but one should consider the consequences of possibly delaying consumption too much.
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Re: Variable Percentage Withdrawal (VPW)

Post by hudson » Mon Sep 05, 2016 8:56 am

https://www.ssa.gov/oact/STATS/table4c6.html

If I'm reading this correctly...
From the Social Security Actuarial Life Table, at age 100, out of 100,000 men, 935 are living.
From the same table, out of 100,000 women, 2745 are living.

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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Mon Sep 05, 2016 9:04 am

What's the impact of changing the Last Withdrawal Age when reaching age 80? It's pretty easy to estimate.

Given a 50/50 portfolio, the withdrawal percentage at 80 is 6.8% (See line 80 of the 50/50 column of the VPW Table). If we want to update the last withdrawal age to 109, that's like going back 10 years in the VPW Table (in other words, looking up using "age - 10"). We get a withdrawal percentage of 5.3%. That's a reduction of 22% in portfolio withdrawals.

Now, there's a good possibility that maybe 25% to 50% of total income comes from Social Security and pensions (and thus portfolio withdrawals are providing between 50% to 75% of total income). So, we're talking of an overall reduction of 10% to 15% before taxes.

After taxes, this will represent an even lower reduction (because one's marginal tax rate is usually higher than one's average tax rate).

I wouldn't have any worry about adjusting the Last Withdrawal Age when reaching age 80.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Mon Sep 05, 2016 9:17 am

Some food for thought:

Once you hit 60, it’s time to take ‘carpe diem’ seriously, by Fred Vettese (Chief actuary of Morneau Shepell)

Carpe diem is a Latin aphorism, usually translated "seize the day", taken from book 1 of the Roman poet Horace's work Odes (23 BC). (Wikipedia)

http://business.financialpost.com/perso ... -seriously

A 50-year-old man today can expect to live to about 87. For women, life expectancy is even longer. That might give the impression you have a lot of time in retirement to do the things you have always yearned to do, but life expectancy does not tell you how many healthy years of life you have remaining. What is more important as you plan your retirement is to know your disability-free life expectancyu' (DFLE).
[...]
The U.S. statistics are equally bleak and, moreover, they are trending in the wrong direction. The U.S. National Health Interview Survey that was conducted in 1998 showed that both men and women aged 65 could expect to live at least seven of their remaining years with some disease (this survey is based on self-reporting).

The same survey was conducted again 8 years later and while total life expectancy went up, the number of healthy years actually declined for both men and women — a 65-year-old man in 2006 could expect to spend more than half his remaining time with at least one disease.
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Re: Variable Percentage Withdrawal

Post by LadyGeek » Mon Sep 05, 2016 9:38 am

longinvest wrote:...Why 99? Simply because it reasonable default starting value, as very few retirees get to live beyond 100:

From Wikipedia - Demographics of the United States:

I'm not sure Wikipedia's sources are relevant for the intended purpose. Instead, I think life expectancy at age 65 would be more relevant.

I don't want to fine-tune the numbers, use 100 or whatever you want for planning. My intent is to identify appropriate sources for planning purposes.

hudson wrote:https://www.ssa.gov/oact/STATS/table4c6.html

If I'm reading this correctly...
From the Social Security Actuarial Life Table, at age 100, out of 100,000 men, 935 are living.
From the same table, out of 100,000 women, 2745 are living.

For comparison, the Canadian statistics: Life expectancy

Drilling down to The Daily — Life tables, Canada, provinces and territories, 2010-2012, then "Life expectancy at 65" - which I think is comparable to the US Social Security baseline (similar age group).

Life expectancy at 65 was 18.7 years among males and 21.7 years among females in 2010-2012, up 0.1 years for males and up 0.2 years for females compared with 2009-2011.

Which would be:

Male life expectancy: 83.7 years = 65 + 18.7
Female life expectancy: 86.7 years = 65 + 21.7
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Re: Variable Percentage Withdrawal

Post by siamond » Mon Sep 05, 2016 9:42 am

Lieutenant.Columbo wrote:I know I am not living forever. But some individuals live up to 100, 110, 115. In case my spouse or I are one of those, we'd like to be financially prepared, and hence plan Now for that. [...]

should one set up the VPW variables (retirement age, death age, AA) with death set at 110 or 115, so that this scenario is taken into account from the very beginning? or maybe death 95 should be set at first, and if one is healthy at age 90, then reset the VPW spreadsheet to death at, say 115?

Personally, I don't want to strongly rely on life expectancies data. Averages do not apply to individuals (my mother is 97, her father died at 99, good genes; my dad died at 60, and so did multiple brothers of his, bad genes). And who knows what medicine will bring us 20 or 30 years from now.

Also, I do NOT want to aim at portfolio depletion. First for psychological reasons (the portfolio drops near the end of a long life might make an aging retiree quite nervous in real life). Also, I want to secure enough money in my portfolio for (self-insured) LTC years, and there is no way I'll use a separate bucket for this. Finally, because I'd like to leave a sizable bequest to children, grandchildren, charities (barring unexpected LTC costs), and again, buckets are evil!

So I use a 'grace period' of 20 years, which I add to a reasonable life expectation of 95 (yes, one has to start somewhere). And in my simulations, I usually recompute the PMT formula every year, capping the # of periods parameter to a minimum of 20. And I will undoubtedly revisit those choices as time goes by.

As to skewing the VPW/PMT outcome in favor of earlier years (carpe diem, etc), this is a completely different matter, which I believe is better addressed by skewing the 'rate' parameter (e.g. add a small %) instead of playing on the number of periods.

PS. I do agree with longinvest that one might consider an SPIA in their late 70s/early 80s for *part* of their portfolio. Notably as a bonds replacement, as Prof. Pfau suggested. It's a very personal decision though, many parameters to take in account.

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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Mon Sep 05, 2016 10:48 am

Lieutenant.Columbo,

Lieutenant.Columbo wrote:
BahamaMan wrote: I always withdraw the Full VPW amount from my Investment Portfolio into my Cash spending account. This cash is not part of my asset allocation, and will never be invested in anything other than Cash.

The VPW withdrawal amount gets you to sell your Investments when the market is high and pull back when it is low. It is a discipline just like dollar cost averaging is. It forces you to sell at higher prices and Less with market declines. It takes the 'emotion' out of withdrawals. The Withdrawal Amount drives the Budget, not the other way around!


am I understanding well? you withdraw the whole VPW amount each year even if you do not (or will not) need that much, correct? and you save in cash any leftovers for when VPW spits out a lower Withdrawal due to market going down, correct?

This is very interesting, as I was thinking that I would calculate the VPWbut still withdraw a smaller amount if I saw I did not need the full amount recommended by VPW.


BahamaMan is not active anymore in the forums. But, I communicate regularly with him by email. He asked me to forward this answer to you:

"The answer is Yes. I have done this every year now, and I do have cash Surplus. But most importantly it is out of the Market.

It is one of the big benefits of VPW that forces you to sell more assets in Up market years. I did not fully appreciate this myself when I first started looking at VPW.
"
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Re: Variable Percentage Withdrawal (VPW)

Post by Case59 » Mon Sep 05, 2016 3:55 pm

I'm coming late to this thread. I've tried to read through all the pages but my eyes tend to cross with the statistical discussions. Apologies if this (possibly dumb) question has already been asked:

The VPW wiki says to withdraw the specified percentage at the beginning of the year, then re-balance. But any normal boglehead-type portfolio will be providing interest and dividends of roughly 2-2.5% during the year. So do you estimate the income from the portfolio at the beginning of the year, then withdraw the difference at that time?

Thanks
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Mon Sep 05, 2016 8:32 pm

Case59 wrote:The VPW wiki says to withdraw the specified percentage at the beginning of the year, then re-balance. But any normal boglehead-type portfolio will be providing interest and dividends of roughly 2-2.5% during the year. So do you estimate the income from the portfolio at the beginning of the year, then withdraw the difference at that time?

Case59,

I would do exactly as recommended by the wiki, withdrawing the specified percentage once a year and rebalance at the same time.

As for distributions that happen during the year, I like simple solutions. Here are two:
  1. let distributions accumulate into an interest paying cash account (or money-market fund) until the next withdrawal, or
  2. reinvest each distribution into an asset below its target allocation in the portfolio.

I would try to keep things as simple as possible and spend the rest of my time enjoying retirement.
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Mon Sep 05, 2016 9:28 pm

longinvest wrote:In another thread, Lieutenant.Columbo asked the following questions:

viewtopic.php?f=2&t=196768&p=3006499#p3006499
Lieutenant.Columbo wrote:
longinvest wrote:For those retiring earlier, I would recommend accumulating more. A rule of the thumb would be to multiply the ratio of VPW rates between retirement and 65 by 4%. Example: To retire at 55, I would multiply VPW's ratio of 55-years old and 65-years old percentages by 4% (see lines 55 and 65 of the 50/50 allocation in the VPW table): (4.3 / 4.8) X 4% = 3.6%, or accumulate 28 times residual expenses plus the money required to fill the gap between retirement and the start of lifelong base income payments.

...


Here are my answers:

1. what's the mathematical reason behind calculating the ratio of the two VPW rates?


The VPW percentages increase with age. By taking the ratio of VPW percentages between retirement and 65, it gives us an idea of how much less one should withdraw from a portfolio when retiring earlier. It might not be precise, but it should be a good enough approximation.

For example, with a 50/50 portfolio, one would withdraw 4.8% of his portfolio on the first year of retirement at age 65, using VPW.

With the same 50/50 portfolio, one would withdraw 4.3% of his portfolio on the first year of retirement at age 55, using VPW.

So, the person retiring at 55 would withdraw (4.3/4.8) = 89.6% of what a person retiring at 65 would withdraw from the same portfolio.

2. what is the reason for multiplying by 4?


The 4 represents the traditional 4% SWR planning number, used as a ratio to estimate how much one needs to accumulate to retire. The idea is if it is "safe" to take out 4%, it means that we need to accumulate 100%/4% = 25 times our planned withdrawal needs.

Why use this number? Why not take the initial VPW percentage at 65, instead? Because the VPW will lower withdrawals, during retirement, after bad market years. This means that if one was to retire just before a storm (like 1927-1928 or 2007-2008), one would get lower withdrawals in subsequent years after retirement.
...

That's what I consider good enough, and it matches well with the traditional number almost everybody uses. I like simplicity, so I won't fight it. I'll accept the 4% SWR as planning number, regardless of asset allocation (assuming the investor is a Boglehead with at least 25% in each of stocks and bonds).
...

Notes
...

The gap between (early-)retirement and the start of lifelong income payments is best filled by setting aside enough money into cash investments (high-interest savings accounts, CDs) which don't fluctuate in value and earn enough interest to match inflation. See: viewtopic.php?t=102609 for an example of this (to delay Social Security to 70). Of course, this money should not be taken into account when calculating a VPW withdrawal. In terms of early retirement planning, this money should be in addition of whatever money is needed for VPW withdrawals according to the ratio calculated using our rule of thumb.


longinvest,

your replies are very clear; thank you very much for clarifying these questions

1. in your recommendation regarding how much those retiring early should accumulate, you first suggest how to calculate the % to start withdrawing from the portfolio when early retiring, but later on you recommend using cash-like products to hold the money that will be used during "the gap".
is this a contradiction? Am I missing something?

2. you say it is safe to take the 4% as a planning tool.
is your opinion still that 4% is a good planning tool for those planning for a 50-year-long retirement (either via Early retirement and or via long longevity)?

thank you!
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Sep 06, 2016 7:33 am

Lieutenant.Columbo,

Lieutenant.Columbo wrote:1. in your recommendation regarding how much those retiring early should accumulate, you first suggest how to calculate the % to start withdrawing from the portfolio when early retiring, but later on you recommend using cash-like products to hold the money that will be used during "the gap".
is this a contradiction? Am I missing something?


This is not what I wrote. (Hint: The gap between retirement and the start of base income has nothing to do with VPW and portfolio withdrawals).

If one expects a lifelong base income of $30,000 annually from Social Security at 70, this amount is not exposed to market risk. The gap between 55 and 70 in base income should not be exposed to market risk; it should simply match inflation. This is feasible using cash investments or a short-term bond fund (simple but with a small inflation risk) or a TIPS ladder (complex but with no inflation risk). One would need to accumulate (70-55) X $30,000 = $450,000 to fill this gap in base income.

Lieutenant.Columbo wrote:2. you say it is safe to take the 4% as a planning tool.
is your opinion still that 4% is a good planning tool for those planning for a 50-year-long retirement (either via Early retirement and or via long longevity)?


This is not what I wrote. (Hint: If you look back at the entire context, you'll see that I was talking about planning for retirement at 65, when discussing the 4%).

I illustrated how to retire at 55, one has to multiply the 4% planning percentage by the ratio of VPW percentages at 55 and 65. For example, with a 50/50 stocks/bonds portfolio, this would give us: 4% X (4.3%/4.8%) = 3.58% (See the entries at lines 55 and 55 of the 50/50 column in the VPW Table).

Here's an example.

Assume that our essential expenses are $45,000 (our "needs" including taxes), and we expect to get $30,000 in annual Social Security payments by delaying them until 70. To retire comfortably, let's say that our desired expenses are $90,000 (our "needs + wants" including taxes). One third ($30,000) will come from lifelong base income, and two thirds will come from variable portfolio withdrawals from a 50/50 stocks/bonds Three-Fund Portfolio (with half the stocks in international). Some years, we might get more than $90,000, and others we might get less, but that's fine with us as we have lots of flexibility in our budget; we can always reduce it down to $45,000 if things get extremely bad.

Let's calculate how much we would need to retire at 65 and how much we would need to retire at 55.

To retire at 65, we would need:
  • (70 - 65) X $30,000 = $150,000 to fill the gap between 65 and 70 in Social Security payments.
  • ($90,000 - $30,000) / 4% = $1,500,000 portfolio for VPW withdrawals.
That makes for a total of $1,650,000 to retire at 65.

To retire at 55, we would need:
  • (70 - 55) X $30,000 = $450,000 to fill the gap between 55 and 70 in Social Security payments.
  • ($90,000 - $30,000) / (4% X (4.3%/4.8%)) = $1,675,000 portfolio for VPW withdrawals.
That makes for a total of $2,125,000 to retire at 55.
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Re: Variable Percentage Withdrawal

Post by Lieutenant.Columbo » Tue Sep 06, 2016 9:24 am

LadyGeek wrote:I don't want to fine-tune the numbers, use 100 or whatever you want for planning. My intent is to identify appropriate sources for planning purposes .


LadyGeek,
Would you please elaborate on what you meant in the highlighted text?
Thank you
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Re: Variable Percentage Withdrawal

Post by Lieutenant.Columbo » Tue Sep 06, 2016 10:18 am

siamond wrote:I use a 'grace period' of 20 years, which I add to a reasonable life expectation of 95 (yes, one has to start somewhere). And in my simulations, I usually recompute the PMT formula every year, capping the # of periods parameter to a minimum of 20. And I will undoubtedly revisit those choices as time goes by.

As to skewing the VPW/PMT outcome in favor of earlier years (carpe diem, etc), this is a completely different matter, which I believe is better addressed by skewing the 'rate' parameter (e.g. add a small %) instead of playing on the number of periods.


siamond,

I've closely followed your conversation with Cut-Throat and longinvest in this thread and in your own BoW method.

1. I believe the quoted paragraphs here are the essence of the way you'll handle withdrawal/longevity/future uncertainty.
Am I right? (that these two paragraphs summarize your philosophy?)

2. grace period of 20 years
does this mean that when you plan you shoot for a 95+20 life expectancy when you run VPW and or your BoW (aka BoBW)?

3. recompute the PMT formula every year, capping the # of periods parameter to a minimum of 20
Do you mean that, No matter your age, each year you will recompute and set your spreadsheet assuming you at least have 20 yrs left, correct?

4. skewing the 'rate' parameter (e.g. add a small %)
How do you plan to figure out the additional small %?

5. On a related note, how do/did you calculate when you will have or had enough assets to retire?

Thank you very much.
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Tue Sep 06, 2016 10:24 am

longinvest wrote:Lieutenant.Columbo,

Lieutenant.Columbo wrote:
BahamaMan wrote: I always withdraw the Full VPW amount from my Investment Portfolio into my Cash spending account. This cash is not part of my asset allocation, and will never be invested in anything other than Cash.

The VPW withdrawal amount gets you to sell your Investments when the market is high and pull back when it is low. It is a discipline just like dollar cost averaging is. It forces you to sell at higher prices and Less with market declines. It takes the 'emotion' out of withdrawals. The Withdrawal Amount drives the Budget, not the other way around!


am I understanding well? you withdraw the whole VPW amount each year even if you do not (or will not) need that much, correct? and you save in cash any leftovers for when VPW spits out a lower Withdrawal due to market going down, correct?

This is very interesting, as I was thinking that I would calculate the VPWbut still withdraw a smaller amount if I saw I did not need the full amount recommended by VPW.


BahamaMan is not active anymore in the forums. But, I communicate regularly with him by email. He asked me to forward this answer to you:

"The answer is Yes. I have done this every year now, and I do have cash Surplus. But most importantly it is out of the Market.

It is one of the big benefits of VPW that forces you to sell more assets in Up market years. I did not fully appreciate this myself when I first started looking at VPW.
"


longinvest,

what will happen to the BHs forum when you're not active in the forum any more?
the forum will half collapse :?

Thank you for keeping this thread so tidy and informative.

Thank you for reaching out to BMan
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Re: Variable Percentage Withdrawal

Post by siamond » Tue Sep 06, 2016 10:44 am

Lieutenant.Columbo wrote:1. I believe the quoted paragraphs here are the essence of the way you'll handle withdrawal/longevity/future uncertainty.
Am I right? (that these two paragraphs summarize your philosophy?)

This does summarize what I elected to do. I just would like to emphasize that this is a direct function of my personal goals and perceptions, not a general recipe.

Lieutenant.Columbo wrote:2. grace period of 20 years
does this mean that when you plan you shoot for a 95+20 life expectancy when you run VPW and or your BoW (aka BoBW)?

Essentially yes. I don't use the VPW spreadsheet, I came back to the underlying PMT formula (which is extremely simple), and I use 95+20 (minus current age) as an input to the PMT formula, for the # of periods parameter ('nper').

Lieutenant.Columbo wrote:3. recompute the PMT formula every year, capping the # of periods parameter to a minimum of 20
Do you mean that, No matter your age, each year you will recompute and set your spreadsheet assuming you at least have 20 yrs left, correct?

Yes. To do that, I compute the 'nper' parameter as min(20, 95+20-current-age). This is mostly to help with simulations, I just wanted to check if this would properly address an unexpected longevity in a smooth manner. By the time I'll get to 90 or so, I'm sure I'll revisit!

Lieutenant.Columbo wrote:4. skewing the 'rate' parameter (e.g. add a small %)
How do you plan to figure out the additional small %?

That is a pretty arbitrary call... Initially, I selected 0.5%, but then came back to 0.25%, as I have some uncertainties on future cash flows (income) and I decided to be more cautious for now. I did a lot of backtesting on PMT formulas, and this seemed like a good balance. Hard to explain in a few words. Just consider that 0.25% of $1M is $2500, hence roughly $200 per month, if this can help to calibrate yourself.

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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Tue Sep 06, 2016 10:48 am

longinvest wrote:Lieutenant.Columbo,

Lieutenant.Columbo wrote:1. in your recommendation regarding how much those retiring early should accumulate, you first suggest how to calculate the % to start withdrawing from the portfolio when early retiring, but later on you recommend using cash-like products to hold the money that will be used during "the gap".
is this a contradiction? Am I missing something?


This is not what I wrote. (Hint: The gap between retirement and the start of base income has nothing to do with VPW and portfolio withdrawals).

If one expects a lifelong base income of $30,000 annually from Social Security at 70, this amount is not exposed to market risk. The gap between 55 and 70 in base income should not be exposed to market risk; it should simply match inflation. This is feasible using cash investments or a short-term bond fund (simple but with a small inflation risk) or a TIPS ladder (complex but with no inflation risk). One would need to accumulate (70-55) X $30,000 = $450,000 to fill this gap in base income.

Lieutenant.Columbo wrote:2. you say it is safe to take the 4% as a planning tool.
is your opinion still that 4% is a good planning tool for those planning for a 50-year-long retirement (either via Early retirement and or via long longevity)?


This is not what I wrote. (Hint: If you look back at the entire context, you'll see that I was talking about planning for retirement at 65, when discussing the 4%).

I illustrated how to retire at 55, one has to multiply the 4% planning percentage by the ratio of VPW percentages at 55 and 65. For example, with a 50/50 stocks/bonds portfolio, this would give us: 4% X (4.3%/4.8%) = 3.58% (See the entries at lines 55 and 55 of the 50/50 column in the VPW Table).

Here's an example.

Assume that our essential expenses are $45,000 (our "needs" including taxes), and we expect to get $30,000 in annual Social Security payments by delaying them until 70. To retire comfortably, let's say that our desired expenses are $90,000 (our "needs + wants" including taxes). One third ($30,000) will come from lifelong base income, and two thirds will come from variable portfolio withdrawals from a 50/50 stocks/bonds Three-Fund Portfolio (with half the stocks in international). Some years, we might get more than $90,000, and others we might get less, but that's fine with us as we have lots of flexibility in our budget; we can always reduce it down to $45,000 if things get extremely bad.

Let's calculate how much we would need to retire at 65 and how much we would need to retire at 55.

To retire at 65, we would need:
  • (70 - 65) X $30,000 = $150,000 to fill the gap between 65 and 70 in Social Security payments.
  • ($90,000 - $30,000) / 4% = $1,500,000 portfolio for VPW withdrawals.
That makes for a total of $1,650,000 to retire at 65.

To retire at 55, we would need:
  • (70 - 55) X $30,000 = $450,000 to fill the gap between 55 and 70 in Social Security payments.
  • ($90,000 - $30,000) / (4% X (4.3%/4.8%)) = $1,675,000 portfolio for VPW withdrawals.
That makes for a total of $2,125,000 to retire at 55.


quick reply, as I need to reread this reply of yours more closely

when I said "you say it is safe to take the 4% as a planning tool", I was referring to your suggestion to multiply the ratio of percentages (65 yrs, 55 yrs) by 4.

I was asking you if you think the ratio should be multiplied by a number different than "4" when looking at a long retirement?
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Sep 06, 2016 1:41 pm

Lieutenant.Columbo,

I just don't understand your question. How do you get a longer retirement without retiring earlier?
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Re: Variable Percentage Withdrawal

Post by LadyGeek » Tue Sep 06, 2016 4:22 pm

Lieutenant.Columbo wrote:
LadyGeek wrote:I don't want to fine-tune the numbers, use 100 or whatever you want for planning. My intent is to identify appropriate sources for planning purposes .


LadyGeek,
Would you please elaborate on what you meant in the highlighted text?
Thank you

I think that selecting a statistical database which ranges over one's full lifespan would not be as useful as statistics starting from age 65.

Retirement planning starts at 65 (more or less). Once you've made it this far (age 65), all of the causes for dying before 65 have been removed from the statistics.

If statistics are available which match the age range for retirement planning, than it should have a higher confidence level than one which covers an entire population from birth (longinvest's reference - US Census).
LadyGeek wrote:
longinvest wrote:...Why 99? Simply because it reasonable default starting value, as very few retirees get to live beyond 100:

From Wikipedia - Demographics of the United States:

I'm not sure Wikipedia's sources are relevant for the intended purpose. Instead, I think life expectancy at age 65 would be more relevant.

I don't want to fine-tune the numbers, use 100 or whatever you want for planning. My intent is to identify appropriate sources for planning purposes.

hudson wrote:https://www.ssa.gov/oact/STATS/table4c6.html

If I'm reading this correctly...
From the Social Security Actuarial Life Table, at age 100, out of 100,000 men, 935 are living.
From the same table, out of 100,000 women, 2745 are living.

For comparison, the Canadian statistics: Life expectancy

Drilling down to The Daily — Life tables, Canada, provinces and territories, 2010-2012, then "Life expectancy at 65" - which I think is comparable to the US Social Security baseline (similar age group).

Life expectancy at 65 was 18.7 years among males and 21.7 years among females in 2010-2012, up 0.1 years for males and up 0.2 years for females compared with 2009-2011.

Which would be:

Male life expectancy: 83.7 years = 65 + 18.7
Female life expectancy: 86.7 years = 65 + 21.7
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Tue Sep 06, 2016 4:43 pm

longinvest wrote:Lieutenant.Columbo,

I just don't understand your question. How do you get a longer retirement without retiring earlier?


ok, let me try again...

The way I see it, this question is not fully-VPW, but tangentially.

To those retiring early, you suggest calculating how much they need to have on the day they retire by using (the percentages in) VPW, then multiplying by 4. In this fashion (STOP ME HERE IF I'm WRONG THIS FAR)

1. calculate the ratio of VPW % at early retirement age to the % at age 65
2. multiply resulting amount above by "4"
3. then you divide 100 by the amount resulting in 2., which gives you an approximation to how many times RLE one needs at retirement

Bear with me. I am almost ready to restate my question now.. :shock:

From what I understand the "4%" rule stems/applies to ~30-yr long retirements. But here we are taking about early retirement, which can potentially result in a (much?) longer-than-30-yrs retirement.

My questions to you is:

Do you think that it be necessary/cautious to multiply the ratio of VPW percentages by a percentage smaller than "4" (instead of multiplying by "4), in order to account/plan for a possibly-longer-than-30-yrs retirement?


thank you
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Re: Variable Percentage Withdrawal

Post by longinvest » Tue Sep 06, 2016 4:55 pm

LadyGeek wrote:I think that selecting a statistical database which ranges over one's full lifespan would not be as useful as statistics starting from age 65.

Retirement planning starts at 65 (more or less). Once you've made it this far (age 65), all of the causes for dying before 65 have been removed from the statistics.

If statistics are available which match the age range for retirement planning, than it should have a higher confidence level than one which covers an entire population from birth (longinvest's reference - US Census).

LadyGeek,

Technically, you are correct that one should consider life expectancy by looking ahead of current age (or retirement age). But, I was not really trying to estimate life expectancy. Let me explain.

I used Wikipedia's chart, even if imperfect, because it was good enough to illustrate how the number of survivors dwindle quickly after age 70 and very few remain alive at age 100. Of course, it would be better to have a series of charts covering future years, one chart per year of birth. But, I don't have any, and the chart each one of us needs won't exist until we're dead.

We do not want to build a plan that depletes our portfolio at our "life expectancy" age because it is an average (or a median?). In other words, half of the people will live longer than that. We definitely don't want a plan that fails 50% of the time!

Maybe the numbers reported by hudson are more appropriate, because they quantify the error in VPW's age 100 initial plan (regardless of at what age one makes the plan):

hudson wrote:https://www.ssa.gov/oact/STATS/table4c6.html

If I'm reading this correctly...
From the Social Security Actuarial Life Table, at age 100, out of 100,000 men, 935 are living.
From the same table, out of 100,000 women, 2745 are living.


In other words, less than 1% of men make it to age 100 and less than 3% of women make it to age 100.

Let me restate that our goal is to build a robust retirement plan that will never lead us to ruin, regardless of how long we live. And, we don't want to guess our date of death, either. (At least, not until our body and doctor clearly tell us something about it, with no doubt whatsoever). So, the idea is to start with an age 100 plan, and then update the plan when we get older.

By following my previous recommendation to update the plan at age 80 (viewtopic.php?p=3043510#p3041811), we get a plan that covers all survivors until age 110. Repeating the process at age 90 would cover all survivors until age 120. Each update costing approximately 15% in total income (viewtopic.php?p=3043510#p3041854), we're covering practically everybody at a 100% level until age 80, at a 85% level until age 90, and at a 70% level until age 120. Hopefully, this should be good enough.

Does this make sense?
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Sep 06, 2016 5:34 pm

Lieutenant.Columbo,

Lieutenant.Columbo wrote:My questions to you is:

Do you think that it be necessary/cautious to multiply the ratio of VPW percentages by a percentage smaller than "4" (instead of multiplying by "4), in order to account/plan for a possibly-longer-than-30-yrs retirement?



I have already answered your question:

viewtopic.php?p=3043510#p3041811
longinvest wrote:
Lieutenant.Columbo wrote:why not increase above 100 from day 1 so that you do not have to (possibly) struggle between 80 and (if applicable) 100s because you spent too much during until age 80s?


As previously explained, for the vast majority of retirees, including those who die after 100, this would deprive them from enjoying their money with their loved ones during their younger and healthier years. Delaying extra consumption until one is unable to enjoy the process doesn't seem like a very sensible plan.

Think about it. By the time one is 110, his children are probably in their 80s, if still alive.


(Note that if reducing income by 10% or 15% at age 80 makes one "struggle", then one didn't have enough wiggle room when retiring. This has already been discussed by BahamaMan earlier in this thread (see viewtopic.php?f=10&t=120430&start=550#p2838991 and viewtopic.php?f=10&t=120430&start=550#p2896636). VPW is not a "survival plan" for those who haven't saved enough before retiring.)

and

viewtopic.php?p=3043510#p3041867
longinvest wrote:Some food for thought:

Once you hit 60, it’s time to take ‘carpe diem’ seriously, by Fred Vettese (Chief actuary of Morneau Shepell)


I think that the proposed plan is good enough. At least, I think that it's a good starting point. Anyone is free to change it and adapt it to his own circumstances.

This thread is about how a Boglehead could build a simple and efficient, yet robust retirement plan by combining lifelong base income and variable withdrawals from a diversified portfolio. It would be irresponsible to recommend using too low an initial Last Withdrawal Age, so we don't. (Our initial plan is a 35-year plan at age 65, a 45-year plan at age 55, and a 60-year plan at age 40).

Personally, I refuse to encourage Bogleheads to delay significant spending until they're disabled or dead by using by using too high an initial Last Withdrawal Age, given the biological evidence we have. Our proposed retirement plan has to be a sensible (or workable*) plan.

* I'm reusing our first principle's vocabulary.
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Re: Variable Percentage Withdrawal

Post by LadyGeek » Tue Sep 06, 2016 6:43 pm

longinvest wrote:LadyGeek,

Technically, you are correct that one should consider life expectancy by looking ahead of current age (or retirement age). But, I was not really trying to estimate life expectancy. Let me explain.

I used Wikipedia's chart, even if imperfect, because it was good enough to illustrate how the number of survivors dwindle quickly after age 70 and very few remain alive at age 100. Of course, it would be better to have a series of charts covering future years, one chart per year of birth. But, I don't have any, and the chart each one of us needs won't exist until we're dead.

We do not want to build a plan that depletes our portfolio at our "life expectancy" age because it is an average (or a median?). In other words, half of the people will live longer than that. We definitely don't want a plan that fails 50% of the time!

Maybe the numbers reported by hudson are more appropriate, because they quantify the error in VPW's age 100 initial plan (regardless of at what age one makes the plan):
hudson wrote:https://www.ssa.gov/oact/STATS/table4c6.html

If I'm reading this correctly...
From the Social Security Actuarial Life Table, at age 100, out of 100,000 men, 935 are living.
From the same table, out of 100,000 women, 2745 are living.
In other words, less than 1% of men make it to age 100 and less than 3% of women make it to age 100.

Let me restate that our goal is to build a robust retirement plan that will never lead us to ruin, regardless of how long we live. And, we don't want to guess our date of death, either. (At least, not until our body and doctor clearly tell us something about it, with no doubt whatsoever). So, the idea is to start with an age 100 plan, and then update the plan when we get older.

By following my previous recommendation to update the plan at age 80 (viewtopic.php?p=3043510#p3041811), we get a plan that covers all survivors until age 110. Repeating the process at age 90 would cover all survivors until age 120. Each update costing approximately 15% in total income (viewtopic.php?p=3043510#p3041854), we're covering practically everybody at a 100% level until age 80, at a 85% level until age 90, and at a 70% level until age 120. Hopefully, this should be good enough.

Does this make sense?

Thanks for the clarification, as it's difficult to understand when one needs full precision (e.g. backtesting) or a rough estimate (qualitative) to be "good enough".

In this context, your use of US Census data does make sense. You are capturing the worst-case end-point age (corner case), then revising your end-point as time progresses. Utilizing the worst-case age will (hopefully) guarantee that the funds won't run out.

I mentioned the Canadian statistics for two reasons. First, it would be a good comparison against the US numbers. Second, I thought it would be a good reminder that this spreadsheet fully supports Canadian residents.

See our sister Canadian site's wiki, finiki: Variable percentage withdrawal - finiki, the Canadian financial wiki

The support thread is here: Variable Percentage Withdrawal (VPW) for Canadians

Disclaimer: Myself and longinvest are members of both forums.
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Re: Variable Percentage Withdrawal (VPW)

Post by itstoomuch » Tue Sep 06, 2016 6:44 pm

Amazing. I missed this thread. :oops:
Bookmarked.
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Tue Sep 06, 2016 6:50 pm

longinvest wrote:Lieutenant.Columbo,

Lieutenant.Columbo wrote:My questions to you is:

Do you think that it be necessary/cautious to multiply the ratio of VPW percentages by a percentage smaller than "4" (instead of multiplying by "4), in order to account/plan for a possibly-longer-than-30-yrs retirement?



I have already answered your question:

viewtopic.php?p=3043510#p3041811
longinvest wrote:
Lieutenant.Columbo wrote:why not increase above 100 from day 1 so that you do not have to (possibly) struggle between 80 and (if applicable) 100s because you spent too much during until age 80s?


As previously explained, for the vast majority of retirees, including those who die after 100, this would deprive them from enjoying their money with their loved ones during their younger and healthier years. Delaying extra consumption until one is unable to enjoy the process doesn't seem like a very sensible plan.

Think about it. By the time one is 110, his children are probably in their 80s, if still alive.


Note that if reducing income by 10% or 15% at age 80 makes one "struggle", then one didn't have enough wiggle room when retiring. This has already been discussed (specially by BahamaMan) earlier in this thread (see viewtopic.php?f=10&t=120430&start=550#p2838991 and viewtopic.php?f=10&t=120430&start=550#p2896636). VPW is not a "survival plan" for those who haven't saved enough before retiring.

and

viewtopic.php?p=3043510#p3041867
longinvest wrote:Some food for thought:

Once you hit 60, it’s time to take ‘carpe diem’ seriously, by Fred Vettese (Chief actuary of Morneau Shepell)


If the proposed plan is not good enough for you, you're free to improve it according to your own objectives.

This thread is about how a Boglehead could build a simple and efficient, yet robust retirement plan by combining lifelong base income and variable withdrawals from a diversified portfolio. It would be irresponsible to recommend using too low an initial Last Withdrawal Age, so we don't. (Our initial plan is a 35-year plan at age 65, a 45-year plan at age 55, and a 60-year plan at age 40).

Personally, I refuse to encourage Bogleheads to delay significant spending until they're disabled or dead by using by using too high an initial Last Withdrawal Age, given the biological evidence we have. Our proposed retirement plan has to be a sensible (or workable*) plan.

* I'm reusing our first principle's vocabulary.


longinvest,

I do not think those links answer my question

my question was NOT about how or if or when to use VPW; Nor even about how to modify ultraconservatively your VPW

my question was, precisely, about how (to use the percentage tables in VPW) to calculate how much total cash/investable assets one can retire on when retiring early

and about whether it makes more sense to calculate such total-assets amount by multiplying by "4" or by a smaller number (given that one is retiring early)

again: I was not asking about using a modified-VPW approach at all, AND I was not suggesting a withdrawal method lower than VPW's or even lower than 4%, BUT only asking about a slightly different way to calculate how much one should consider retiring on STILL using the VPW tables in order to calculate the SAME RATIO you suggest, BUT multipying by a nuber other than (and smaller than) "4", so that one does not find oneself in Mr White's predicament, i.e.: not having enough savings when retiring

so, in short: I was asking about how to calculate the savings one can retire on and subsequenclty "apply" VPW to
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Sep 06, 2016 7:43 pm

Lieutenant.Columbo wrote:again: I was not asking about using a modified-VPW approach at all, I was not suggesting a withdrawal method lower than VPW's or even lower than 4%, BUT about how to calculate how much one should consider retiring on, so that one does not find oneself in Mr White's predicament

Lieutenant.Columbo,

I think that you are asking for more precision than I can give you. I do not know how to predict future returns, and historical returns don't tell us what future returns will be. We do backtest our method on historical returns to get a rough idea of how it would have behaved and we hope that this can help us estimate how good and how bad things can get. But, the future could be worse or better than the past; we just don't know.

I have completely disclosed to you how I got to my rule of thumb calculation of how much money is required to retire. I have specifically explained why I consider 4% as a good enough number based on the backtesting data we have in the VPW spreadsheet (spanning from 1871 to 2015). Yes, I'm simply abusing the coincidence that the Trinity study claimed 4% was "safe" for a fixed inflation-adjusted withdrawal for 30 years, because it also happens to loosely match VPW's worst-case median withdrawal for a 35-year retirement. But, it's an easy number to remember, and we know that it is just an imprecise guess, to start with.

As we know it is imprecise, we make a retirement budget with lots of room for discretionary expenses (e.g. non-essential expenses), so that if we need to reduce spending, we don't have to reduce our non-discretionary expenses. Anyway, we want to have fun in retirement; we definitely don't want to be in survival mode on a minimal budget. So, we have to make sure that we'll have enough to be able to afford this fun and lots more, so that we'll still be able to have fun (and just cut the "lots more") if markets don't cooperate.

It is always a good idea to consider that 50% of our VPW withdrawal could disappear in the smoke of a market crash or because of inflation, regardless of our portfolio's asset allocation. So, our discretionary expenses should always be significantly more than 50% of our initial VPW withdrawal. If they're not, we should buy enough of an inflation-indexed Single Premium Immediate Annuity (SPIA) so that discretionary expenses represent a large enough portion of our portfolio withdrawals, or we should delay retirement and save more.

I think that the ratios in the example I've shown earlier in this thread are representative of a good planning approach:
viewtopic.php?f=10&t=120430&p=3043681#p3042842
longinvest wrote:Assume that our essential expenses are $45,000 (our "needs" including taxes), and we expect to get $30,000 in annual Social Security payments by delaying them until 70. To retire comfortably, let's say that our desired expenses are $90,000 (our "needs + wants" including taxes). One third ($30,000) will come from lifelong base income, and two thirds will come from variable portfolio withdrawals from a 50/50 stocks/bonds Three-Fund Portfolio (with half the stocks in international). Some years, we might get more than $90,000, and others we might get less, but that's fine with us as we have lots of flexibility in our budget; we can always reduce it down to $45,000 if things get extremely bad.


Using the calculated amounts at 65 and 55 later in that post, the VPW spreadsheet tells us that historically total income would have never got below $60,000 ( = $30,000 base income + VPW withdrawal ). In other words, we would still have had a $15,000 budget for fun in the worst year of the worst historical retirement. That includes retirements starting in 1906, 1929, 1937, 1966, and the first 16 years of a retirement in 2000 using the 50/50 allocation.

That's how I deal with the uncertainty of the future. Is it the only possible approach? Definitely not! But, it works for me.
Last edited by longinvest on Tue Sep 06, 2016 7:58 pm, edited 8 times in total.
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Re: Variable Percentage Withdrawal (VPW)

Post by BlueEars » Tue Sep 06, 2016 7:44 pm

Lieutenant.Columbo wrote:so, in short: I was asking about how to calculate the savings one can retire on and subsequenclty "apply" VPW to

Your savings is an input to VPW. Then VPW shows how that savings might have faired historically. The rest is left as an excise for the individual. We all have to consider our risk own tolerances (AA, max savings drawdown, etc).

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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Tue Sep 06, 2016 8:15 pm

longinvest wrote:
Lieutenant.Columbo wrote:again: I was not asking about using a modified-VPW approach at all, I was not suggesting a withdrawal method lower than VPW's or even lower than 4%, BUT about how to calculate how much one should consider retiring on, so that one does not find oneself in Mr White's predicament

Lieutenant.Columbo,

I think that you are asking for more precision than I can give you. I do not know how to predict future returns, and historical returns don't tell us what future returns will be. We do backtest our method on historical returns to get a rough idea of how it would have behaved and we hope that this can help us estimate how good and how bad things can get. But, the future could be worse or better than the past; we just don't know.

I have completely disclosed to you how I got to my rule of thumb calculation of how much money is required to retire. I have specifically explained why I consider 4% as a good enough number based on the backtesting data we have in the VPW spreadsheet (spanning from 1871 to 2015). Yes, I'm simply abusing the coincidence that the Trinity study claimed 4% was "safe" for a fixed inflation-adjusted withdrawal for 30 years, because it also happens to loosely match VPW's worst-case median withdrawal for a 35-year retirement. But, it's an easy number to remember, and we know that it is just an imprecise guess, to start with.

As we know it is imprecise, we make a retirement budget with lots of room for discretionary expenses (e.g. non-essential expenses), so that if we need to reduce spending, we don't have to reduce our non-discretionary expenses. Anyway, we want to have fun in retirement; we definitely don't want to be in survival mode on a minimal budget. So, we have to make sure that we'll have enough to be able to afford this fun and lots more, so that we'll still be able to have fun (and just cut the "lots more") if markets don't cooperate.

It is always a good idea to consider that 50% of our VPW withdrawal could disappear in the smoke of a market crash or because of inflation, regardless of our portfolio's asset allocation. So, our discretionary expenses should always be significantly more than 50% of our initial VPW withdrawal. If they're not, we should buy enough of an inflation-indexed Single Premium Immediate Annuity (SPIA) so that discretionary expenses represent a large enough portion of our portfolio withdrawals, or we should delay retirement and save more.

I think that the ratios in the example I've shown earlier in this thread are representative of a good planning approach:
viewtopic.php?f=10&t=120430&p=3043681#p3042842
longinvest wrote:Assume that our essential expenses are $45,000 (our "needs" including taxes), and we expect to get $30,000 in annual Social Security payments by delaying them until 70. To retire comfortably, let's say that our desired expenses are $90,000 (our "needs + wants" including taxes). One third ($30,000) will come from lifelong base income, and two thirds will come from variable portfolio withdrawals from a 50/50 stocks/bonds Three-Fund Portfolio (with half the stocks in international). Some years, we might get more than $90,000, and others we might get less, but that's fine with us as we have lots of flexibility in our budget; we can always reduce it down to $45,000 if things get extremely bad.


Using the calculated amounts at 65 and 55 later in that post, the VPW spreadsheet tells us that historically total income would have never got below $60,000 ( = $30,000 base income + VPW withdrawal ). In other words, we would still have had a $15,000 budget for fun in the worst year of the worst historical retirement. That includes retirements starting in 1906, 1929, 1937, 1966, and the first 16 years of a retirement in 2000 using the 50/50 allocation.

That's how I deal with the uncertainty of the future. Is it the only possible approach? Definitely not! But, it works for me.


Thank you longinvest, You are being very patient with me.

Your "65 and 55" example from earlier today is eye opening. It opened my eyes to finally starting to use my SS income at age 70 into consideration. Up until now I was calculating savings for retirement with no regard to SS.

BahamaMan's and your insistence to include discretionary (non essential) expenses in the budget has also opened my eyes to not planning only for non discretionary (essential) expenses. What was I thinking? :oops:

Thank you for explaining again your position regarding the "4%".

THANK YOU!
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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Re: Variable Percentage Withdrawal (VPW)

Post by TimeRunner » Tue Sep 06, 2016 8:46 pm

I'm a sucker for Happy Endings. :D
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Re: Variable Percentage Withdrawal (VPW)

Post by Lieutenant.Columbo » Tue Sep 06, 2016 9:16 pm

TimeRunner wrote:I'm a sucker for Happy Endings. :D


Ending?!

Here's a few more questions for
longinvest
about the nuances of VPW...:

1. the size of the portfolio does not determine the percentages of withdrawal.
Meaning: everything being equal the percentages of withdrawal will be the same regardless of whether the portfolio is worth $5M or $1M
correct?

2. Inflation?
please, remind me how VPW takes inflation into account, if it does; or maybe VPW is not concerned with inflation, if so disregard

3. what will you adding the prior year's market results to the VPW spreadsheet do to an ongoing VPW plan?
the percentages of withdrawal won't change, will they?

thank you

I apologize if you (if you and I) have already discussed these topics. I honestly cannot remember or find the answer.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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