The VPW wiki page
3. Every few years, you should review your overall retirement plan. (If you are over 80 years old and your health is better than anticipated, for example, you might want to increase the Last Withdrawal Age beyond its initial 99 value).
In a private discussion, BahamaMan shared with me some anecdotal evidence. He observed a big decline in his older friends at around age 85. Here are his words: "Many friends of mine over the last 10 years that were very healthy at age 80, contracted an illness a few years later that led to a very rapid decline and they died around age 85-88 ....... I cannot stress enough how rapid the decline is from age 80 to age 85.......
He expressed the opinion that changing the Last Withdrawal Age
at age 80 is not a good idea. For one thing, this could lead to an immediate and significant impact on withdrawals. For another, he thinks that this is premature, as many are still healthy at 80.
Instead, he proposes to slow the increase of VPW percentages after age 90, to avoid having to ever withdraw 100% of the portfolio. The simplest approach would have been to put a cap on percentages, but I personally don't like this because it leads to selecting an arbitrary number. Simply fixing the withdrawal percentage at the age 90 percentage leads to an abrupt change in withdrawals. So, after some back and forth, I proposed a simple formula that automatically adapts to the selected asset allocation (AA) and keeps the withdrawal decline relatively smooth.
Here are the percentages for plain VPW
(pVPW) and what I'll temporary call smooth-tail VPW
(sVPW) for comparison:
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Asset Allocation: 50% stocks / 50% bonds
Age pVPW sVPW
90 11.6% 11.6%
91 12.7% 12.4%
92 14.0% 13.3%
93 15.8% 14.1%
94 18.1% 14.9%
95 21.4% 15.7%
96 26.3% 16.4%
97 34.5% 17.1%
98 50.8% 17.8%
99 100.0% 18.5%
100 - 19.1%
101 - 19.8%
102 - 20.4%
103 - 20.9%
104 - 21.5%
105 - 22.0%
106 - 22.6%
107 - 23.1%
108 - 23.6%
109 - 24.0%
110 - 24.5%
111 - 24.9%
112 - 25.3%
113 - 25.8%
114 - 26.2%
115 - 26.5%
116 - 26.9%
117 - 27.3%
118 - 27.6%
119 - 28.0%
You can see how pVPW percentages keep increasing faster and faster to reach 100% at age 99, while sVPW percentages increase more slowly and remain at a level where a human is emotionally able to to make the withdrawal.
Actually, that was one of BahamaMan's points; he didn't think that he could follow through with an unmodified VPW after age 90, because percentages increased too drastically.
Here's how the withdrawal model looks like for the above 50/50 AA:
In the model, withdrawals are fixed until age 90, then they start decreasing but smoothly.
Of course, this is not meant, in anyway, to replace an income floor established when approaching age 80. But, while keeping true to the principle of VPW, it takes care of not fully depleting the portfolio in case one survives beyond age 100.
For the those interested in the mathematical calculation, here's the idea. After age 90, the withdrawal percentage is calculated by assuming the the previous year's percentage was for an 11-year depletion, calculating the growth rate such that this would happen, then calculating the payment for a 10-year depletion using that rate. Here's the actual formula:
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So, what are your thoughts about BahamaMan's suggestion? Should I eventually update the wiki and spreadsheet to add this smooth tail
to VPW percentages? Should we eliminate the recommendation to update the Last Withdrawal Age
Bogleheads investment philosophy |
Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds |