Variable Percentage Withdrawal (VPW)

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Postby longinvest » Sun Oct 09, 2016 5:13 pm

LadyGeek wrote:longinvest,

The Answer is inside the SPIA question and I totally missed the intent. Perhaps others have missed this point as well?

Would a user simply reduce the amount of the initial portfolio, or, is a portfolio final value (lower limit, floor) needed?

===============

Suggestion: Copy-n-paste the F.A.Q into the "Instructions" worksheet. This is important information that should be available within the spreadsheet directly.

LadyGeek,

You are right; things are currently disorganized. The FAQ should probably be moved into the wiki, too. Since the time I wrote the FAQ, I've learned quite a few things and my view of retirement planning has evolved.

I'll include the FAQ in the next spreadsheet version.
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Re: Variable Percentage Withdrawal (VPW)

Postby BlueEars » Sun Oct 09, 2016 5:32 pm

longinvest wrote:
LadyGeek wrote:longinvest,

The Answer is inside the SPIA question and I totally missed the intent. Perhaps others have missed this point as well?

Would a user simply reduce the amount of the initial portfolio, or, is a portfolio final value (lower limit, floor) needed?

===============

Suggestion: Copy-n-paste the F.A.Q into the "Instructions" worksheet. This is important information that should be available within the spreadsheet directly.

LadyGeek,

You are right; things are currently disorganized. The FAQ should probably be moved into the wiki, too. Since the time I wrote the FAQ, I've learned quite a few things and my view of retirement planning has evolved.

I'll include the FAQ in the next spreadsheet version.

The sentence in blue caught my eye. I've seen some experts evolve their views quite radically (Bernstein comes to mind). Several "experts" are pretty young and even very well off. This is as opposed to those who are living through the retirement planning process and will be more versed in their particular tradeoffs. I do wonder how expert anyone can be beyond some general tools and directions.

I do want to emphasize that I really appreciate all the views expressed in this thread and the hard work that has gone into VPW.

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Re: Variable Percentage Withdrawal (VPW)

Postby longinvest » Sun Oct 09, 2016 6:34 pm

BlueEars wrote:I've seen some experts evolve their views quite radically (Bernstein comes to mind).

BlueEars,

It's nothing as dramatic as that. I've only learned more, since then, about how to coherently combine VPW, delayed Social Security (with a bridging TIPS ladder), and SPIAs (bought late in life) within a retirement plan; that's all.
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Re: Variable Percentage Withdrawal (VPW)

Postby AlohaJoe » Sun Oct 09, 2016 7:16 pm

longinvest wrote:Somehow, insurance companies know a few things that escape many of us. At age 65, they are able to offer inflation-indexed SPIA payouts, which have no volatility whatsoever, that are more attractive* than a VPW percentage with a Last Withdrawal Age of 120 (which would expose the retiree to volatile portfolio withdrawals).


Reichling & Smetters's 2013 paper from the Congressional Budget Office, "Optimal Annuitization and Stochastic Mortality Probabilities", showed that only about 10% of households should annuitize.

even under conservative assumptions, it is indeed not optimal for most households to annuitize any wealth; many young households should actually short annuities.


Even though I personally am in favor of annuities, I recognise that my circumstances happen to put me in that range of 10% that Reichling & Smetters identify; I don't think it is clear that insurance companies know things that escape others.

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Re: Variable Percentage Withdrawal (VPW)

Postby longinvest » Mon Oct 10, 2016 9:45 am

AlohaJoe wrote:
longinvest wrote:Somehow, insurance companies know a few things that escape many of us. At age 65, they are able to offer inflation-indexed SPIA payouts, which have no volatility whatsoever, that are more attractive* than a VPW percentage with a Last Withdrawal Age of 120 (which would expose the retiree to volatile portfolio withdrawals).


Reichling & Smetters's 2013 paper from the Congressional Budget Office, "Optimal Annuitization and Stochastic Mortality Probabilities", showed that only about 10% of households should annuitize.

even under conservative assumptions, it is indeed not optimal for most households to annuitize any wealth; many young households should actually short annuities.


Even though I personally am in favor of annuities, I recognise that my circumstances happen to put me in that range of 10% that Reichling & Smetters identify; I don't think it is clear that insurance companies know things that escape others.

AlohaJoe,

I read parts of the paper (not all of it, because it is quite complex with lots of advanced mathematics) and I think that this paper actually agrees with common sense:
  • When young, one should buy life insurance (that's what shorting an annuity means).
  • When in late age, one should buy SPIAs with a part of accumulated wealth when Social Security is insufficient.

One of the paper's main objectives was to discredit the conclusion of Yaari (1965) about putting 100% of one's wealth into SPIAs at retirement in absence of bequest motives.

About the impressive 10% of households. See the explanation below Table 5: Fraction of wealth annuitized and fraction of households with any annuities, for the entire population, retirees, and non-retirees at different levels of management fees and bequest motives. It makes sense that the household of a 30-years old couple with children should buy life insurance rather than annuities! In that table, the 10% of all households becomes 27% when considering retired households alone (all retirees, including the many below age 80). This all makes a lot of sense when considering the population's (and retirees) age distribution.

Anyway, I think that it is the task of each person to apply common sense to their own situation. I am of the opinion that longevity risk should be avoided without paying too much for it and without crippling liquidity. Securing a floor of lifelong income by delaying Social Secutity to 70, bridging the gap using a TIPS ladder (or something relatively equivalent), and, when necessary, buying inflation-indexed SPIAs late in life with part of one's wealth (while they are still available, which means when one approaches age 80, after which fewer companies continue to sell SPIAs) accomplishes this. Of course, VPW would guide portfolio withdrawals all along.

It is quite possible that some retirees will get a sufficient income floor just from delayed Social Security (sometimes with an additional work pension). I think that an inflation-indexed SPIA should only be bought late in life when necessary to eliminate longevity risk.
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Re: Variable Percentage Withdrawal (VPW)

Postby jaj2276 » Sun Dec 18, 2016 3:34 pm

I just donated a good sum of money to a Vanguard Donor Advised Fund (seeded by appreciated stock to boot). I want to optimize my yearly distributions given the performance of the investment portfolio and have an idea for how long I expect this amount to last. Wouldn't VPN help me with this? Seems like I would select my current age, the amount I donated, the allocation, and the # of years I expect the money to last and VPN would do the rest. Yes?

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Re: Variable Percentage Withdrawal (VPW)

Postby BlueEars » Sun Jan 22, 2017 4:56 pm

Some time ago we talked about using VPW and accumulating a reserve with the unspent year's money. One would invest this money in some low risk investment such as CD's or short term bonds or even Tbills. For those of us who don't need all the percentage VPW says we can spend, this can be used to even out a possible bad set of down years like what was experienced starting with 1968. Right after 1968 there were two following bad recessions (1969 and 1973/74) and the bad inflation of the 1970's.

I wanted to see what would happen using a slightly modified VPW spreadsheet. So I basically added 2 columns. The reserve that is left unspent at the end of each year, and the accumulated reserve. Thus I assumed the same percentage spending as VPW but some of it was marked as available in future down years. The accumulated reserves were reduced in down years to correct the shortfall in the portfolio income.

Below is an example of this approach with the revised VPW. The couple had a $1M portfolio, drew $34000 from social security, and basically spent at a 3.1% rate from the portfolio. The first year they earmarked 1.4% of the portfolio for reserves. As we personally do, I separated the couple's spending into basics and fun (vacations, discretionary) spending. I am assuming that the reserves do not affect the fixed income returns very much. They will lower FI returns on average by the roughly the term premium for that percentage of FI used. Who knows, in a rising rate environment they might at least keep pace with intermediate bonds.

You can see that the cumulative reserves covered the difficult years up to age 80 for this example. The portfolio was still below the 50% of the start portfolio 15 years into this simulation i.e. the portfolio is still going to suffer overall in a bad sequence of years. Gives me more confidence in this use of VPW for our spending levels.

Image

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Re: Variable Percentage Withdrawal (VPW)

Postby AlohaJoe » Mon Jan 23, 2017 2:58 am

BlueEars wrote:Below is an example of this approach with the revised VPW. The couple had a $1M portfolio, drew $34000 from social security, and basically spent at a 3.1% rate from the portfolio.


I don't quite follow the example. It seems like you're saying "the couple has a fixed need of $65,000 a year. $34,000 comes from Social Security, leaving $31,000 from their portfolio. Instead of withdrawing whatever VPW says, what happens if we just withdraw $31,000 a year?"

That seems equivalent to saying, "Is a 3.1% inflation-adjusted withdrawal rate safe over a certain period of time?" The answer to which is yes, most people think it is safe over most time periods. But withdrawing an inflation-adjusted fixed amount seems to have little to do with VPW.

There is the slight twist of putting (small) amounts of "excess funds" into bonds but I'm not sure it is ever enough to be worth the effort.

I looked at something similar. After all, I agree you that, intuitively "VPW says to withdraw X but I only need 80% of X to be extremely happy" seems to suggest there is some room to do something with the 80%-X portion.

I didn't seriously pursue it but these were the rules I came up with:

- Every year run a PMT calculation. If you are spending more than this, then you need to cut spending.
- If you are spending less than this, then you have Excess Moneys.
- You can do two things with Excess Moneys: convert them to bonds (to de-risk your portfolio) or increase your standard of living. In regular VPW, 100% of the gains go to increasing your standard of living. The theory is that doing in incrementally like this will buffer you from future spending cuts.
- Withdrawals will draw from bonds preferentially if we've used Excess Moneys to buy extra bonds. That is, if we have "extra" bonds, we'll sell those first.

Let's say that whenever there is Excess Moneys you take 25% of it for lifestyle creep and the rest goes into bonds. And let's put a cap saying if we ever get to double our original standard of living we say enough is enough and just shovel everything into bonds. Obviously all of those are subject to lots of discussion.

I called this strategy "PMTPrime" in the following graphs.

For a 1990-2010 retiree things look like this:

As expected, income grew more slowly that raw VPW. We still had some nasty spending shocks, so already the strategy is looking a bit questionable.
Image

The bond percentages went as high as 50%, whereas they stay flat at 40% in VPW.
Image

And we do end up having slightly higher portfolio values at most points in time
Image

But 1990 was a pretty standard year. I just picked it because it was a nice round number. What about some bad years like 1966? Does this strategy help us weather that storm better?

Hmmm....not really.
Image
Image

Mainly because we never have enough good years to build up any kind of cushion

Image

After playing with it a bit, I couldn't really decide what problem it was solving, so I didn't explore it further.

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Re: Variable Percentage Withdrawal (VPW)

Postby BlueEars » Mon Jan 23, 2017 10:30 am

AlohaJoe wrote:
BlueEars wrote:Below is an example of this approach with the revised VPW. The couple had a $1M portfolio, drew $34000 from social security, and basically spent at a 3.1% rate from the portfolio.


I don't quite follow the example. It seems like you're saying "the couple has a fixed need of $65,000 a year. $34,000 comes from Social Security, leaving $31,000 from their portfolio. Instead of withdrawing whatever VPW says, what happens if we just withdraw $31,000 a year?"

That seems equivalent to saying, "Is a 3.1% inflation-adjusted withdrawal rate safe over a certain period of time?" The answer to which is yes, most people think it is safe over most time periods. But withdrawing an inflation-adjusted fixed amount seems to have little to do with VPW.

There is the slight twist of putting (small) amounts of "excess funds" into bonds but I'm not sure it is ever enough to be worth the effort.


As mentioned, I am retired and actually using this stuff. I need to be very explicit about my strategy and not just guess that things would have worked out in the past. If I did this example right, then that gives me more confidence.

What my example use of VPW shows is how to set up a small reserves fund to smooth out and cover spending needs. I'm just trying to explore (1) will having a reserve cover the needs in a bad set of years (2) how much reserve might be a good amount. In the example, the answer to (1) is yes, the left column covers those spending shortfall years shown in the next to the last column (red numbered years). Also regarding (2) the example suggests that since the left column is more then enough to cover the shortfall years, we might bump up the couple's basic spending or the couple might cap their reserve at say $40,000.

Note the "excess funds" are not to be put into just "bonds". This should go into a short term investment that is rolled over so that it can keep up with inflation and be there for spending when needed i.e. the duration should probably be 2 years or shorter. Also we do not have to let this excess grow too large and the VPW simulation can suggest where to cap it.

In simulations for our actual case (not the example), the reserve grew to something like 8% of the portfolio and then declined (starting in 1975 for the 1968 starting sequence) and our spending level was 3.3%. The 3.3% spending is what we have actually been averaging over the last 4 years.

It is just using VPW as a guide to smooth out spending should a very bad sequence emerge. This assumes one doesn't need all that VPW suggests. For those who really need all the VPW withdrawal amounts, this method does not help at all. They will just have to fully cut back spending should a really bad sequence emerge.

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Actual withdrawal

Postby billthecat » Tue Jan 24, 2017 2:54 pm

Why does the spreadsheet ask you to enter your actual withdrawal? It doesn't seem used anywhere. You already enter your starting balance the next year, which seems to be what matters, so it's not clear why it asks for your actual withdrawal.

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Re: Actual withdrawal

Postby BlueEars » Tue Jan 24, 2017 4:21 pm

billthecat wrote:Why does the spreadsheet ask you to enter your actual withdrawal? It doesn't seem used anywhere. You already enter your starting balance the next year, which seems to be what matters, so it's not clear why it asks for your actual withdrawal.

Hi, I notice this is your first post here. Welcome.

Are you asking about my spreadsheet view above from a few days ago? If so, this is just an experimental modification to Longinvest's official VPW. Those yellow boxes are my way of showing an input. They are only used for the column directly below it which is something I added for discussion purposes. They are then used to show the percentage actually spent and the difference is set aside as reserves. Since these columns are inflation adjusted they are basically constants in this example.

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Re: Actual withdrawal

Postby billthecat » Tue Jan 24, 2017 5:00 pm

BlueEars wrote:
billthecat wrote:Why does the spreadsheet ask you to enter your actual withdrawal? It doesn't seem used anywhere. You already enter your starting balance the next year, which seems to be what matters, so it's not clear why it asks for your actual withdrawal.

Hi, I notice this is your first post here. Welcome.

Are you asking about my spreadsheet view above from a few days ago? If so, this is just an experimental modification to Longinvest's official VPW. Those yellow boxes are my way of showing an input. They are only used for the column directly below it which is something I added for discussion purposes. They are then used to show the percentage actually spent and the difference is set aside as reserves. Since these columns are inflation adjusted they are basically constants in this example.


Hi - nope, I was referring to the spreadsheet available through the wiki. I was playing around with it, and didn't see why it asks for the actual withdrawal.

Second post! :happy

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Re: Actual withdrawal

Postby longinvest » Tue Jan 24, 2017 5:17 pm

billthecat wrote:Why does the spreadsheet ask you to enter your actual withdrawal? It doesn't seem used anywhere. You already enter your starting balance the next year, which seems to be what matters, so it's not clear why it asks for your actual withdrawal.


Billthecat,

It serves no other purpose than to keep track of the retiree's withdrawal history. This information would be lost otherwise, if the retiree's portfolio is on a glide path (such as "age in bonds"), because the recommended withdrawal amount changes when the asset allocation is changed.

longinvest
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Re: Variable Percentage Withdrawal (VPW)

Postby hiosilver » Tue Jan 24, 2017 5:19 pm

I believe it to be just for recording history. You're right, it has no bearing on the calculations.

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Re: Variable Percentage Withdrawal (VPW)

Postby billthecat » Tue Jan 24, 2017 6:42 pm

longinvest wrote:
billthecat wrote:Why does the spreadsheet ask you to enter your actual withdrawal? It doesn't seem used anywhere. You already enter your starting balance the next year, which seems to be what matters, so it's not clear why it asks for your actual withdrawal.


Billthecat,

It serves no other purpose than to keep track of the retiree's withdrawal history. This information would be lost otherwise, if the retiree's portfolio is on a glide path (such as "age in bonds"), because the recommended withdrawal amount changes when the asset allocation is changed.

longinvest


hiosilver wrote:I believe it to be just for recording history. You're right, it has no bearing on the calculations.


Thanks

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Re: Variable Percentage Withdrawal (VPW)

Postby sengsational » Mon Feb 13, 2017 6:06 pm

This is an interesting sheet / technique. I had not run into it until I started on a separate project that has the same kind of flavor to it.

Not wanting to hijack this thread, I've started a new one: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=210958#p3237343

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Re: Variable Percentage Withdrawal (VPW)

Postby FrugalInvestor » Mon Feb 13, 2017 6:51 pm

Blueears, I like your concept and the modified spreadsheet (above) supporting it. It sounds like we're in a similar situation...retired and living off our our portfolios and, coincidentally, spending about 3.3% (this is prior to SS for me at this point).

I've been very interested in VPW but haven't implemented it because of uncertainty about what happens in the down years. So I've just been sticking with a rule of thumb 3.3% which seemed more conservative. However, I do try and keep a 'reserve' amounting to about 2 years of spending to prevent me from having to withdraw during a severe downturn. Your modified VPW sheet looks to take a somewhat similar approach in a more structured and programmed manner, which I like.

However, I'd like to stop being so conservative in my withdrawals if it's not necessary for our future security. My wife gets frustrated because she sometimes feels that we're passing up opportunities for (extra) enjoyment while we are still healthy and active. Finding a formula to allow myself to comfortably loosen the reins a bit would be very valuable.

I'll spend a little more time with it but so far I like your concept. I not only need something to guide me and give me financial comfort (especially during down markets) but also to pass along to my wife in the event something happens to me.

Thanks for your ideas.
Last edited by FrugalInvestor on Mon Feb 13, 2017 8:57 pm, edited 1 time in total.
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Re: Variable Percentage Withdrawal (VPW)

Postby siamond » Mon Feb 13, 2017 8:54 pm

sengsational wrote:This is an interesting sheet / technique. I had not run into it until I started on a separate project that has the same kind of flavor to it.

Not wanting to hijack this thread, I've started a new one: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=210958#p3237343

You may want to check a series of posts starting here. One key idea basically combines VPW with a PE-based smoothing technique. I personally settled on something close to that.

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Re: Variable Percentage Withdrawal (VPW)

Postby BlueEars » Sun Feb 19, 2017 4:10 pm

FrugalInvestor wrote:Blueears, I like your concept and the modified spreadsheet (above) supporting it. It sounds like we're in a similar situation...retired and living off our our portfolios and, coincidentally, spending about 3.3% (this is prior to SS for me at this point).

I've been very interested in VPW but haven't implemented it because of uncertainty about what happens in the down years. So I've just been sticking with a rule of thumb 3.3% which seemed more conservative. However, I do try and keep a 'reserve' amounting to about 2 years of spending to prevent me from having to withdraw during a severe downturn. Your modified VPW sheet looks to take a somewhat similar approach in a more structured and programmed manner, which I like.

However, I'd like to stop being so conservative in my withdrawals if it's not necessary for our future security. My wife gets frustrated because she sometimes feels that we're passing up opportunities for (extra) enjoyment while we are still healthy and active. Finding a formula to allow myself to comfortably loosen the reins a bit would be very valuable.

I'll spend a little more time with it but so far I like your concept. I not only need something to guide me and give me financial comfort (especially during down markets) but also to pass along to my wife in the event something happens to me.

Thanks for your ideas.

Just got back from a short vacation. My wife too is into enjoying our later years and is a good counterpoint to my frugality. I think Longinvest's efforts are a great tool for testing out our spending models. It is rare to have such an open tool. What I showed above is not a new idea and was basically suggested by Longinvest. I've just tried to show the sequence of spending explicitly because it helps me to get comfortable with the ideas.

FWIW, for us I'm coming to the conclusion that the VPW withdrawal percentages can be somewhat managed to put aside our excess VPW withdrawals into a short term reserves fund (not subject to stock and intermediate term bond fluctuations). This helps in a sequence such as the one starting in 1966. It still doesn't prevent one from depleting the portfolio to around 50% (or below) of the initial value around 16 years into this 1966 start sequence. I'll just have to get comfortable with the idea that this kind of depletion is possible. That got one to 1982 which coincidentally started up a major bull market run.

One might also want to manage the reserves fund since the next years might be bad but not as bad as the 1966 sequence i.e. managing spending is still required going forward. One doesn't want to leave too much on the table. Might be forced to buy a new car. :wink:

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Re: Variable Percentage Withdrawal

Postby gilgamesh » Fri Jun 16, 2017 8:40 pm

longinvest wrote:Internally, VPW does calculate a long-term, asset-allocation-specific expected return rate, using the last century's real asset returns on US Stocks (5%) and Bonds (2%). This does not need to be precise at all. It just needs to give an approximate very long-term tangent of the graph. I've explained the intuition behind this in http://www.bogleheads.org/forum/viewtop ... 0#p1765039


Could someone please confirm the table in the boglehead VPW table assumes this historic return...that is 5% us stocks and 2% bonds. Thank you!

P.S: I wish it gave this information in the boglehead page here

https://www.bogleheads.org/wiki/Variabl ... withdrawal

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Re: Variable Percentage Withdrawal

Postby AlohaJoe » Fri Jun 16, 2017 9:36 pm

gilgamesh wrote:Could someone please confirm the table in the boglehead VPW table assumes this historic return...that is 5% us stocks and 2% bonds.


Go to the tab "Table" in the spreadsheet and look at that "VPW Parameters" area in the top right. Different versions of the spreadsheet will have slightly different numbers since longinvest would update it every year based on the most recent Credit Suisse report. It isn't based on US data. My version of the spreadsheet says

Based on the global (world) long-term growth of $1 from 1900 to 2015
according to the Credit Suisse Global Investment Returns Yearbook 2016.

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Re: Variable Percentage Withdrawal

Postby longinvest » Fri Jun 16, 2017 10:43 pm

Gilgamesh,

gilgamesh wrote:
longinvest wrote:Internally, VPW does calculate a long-term, asset-allocation-specific expected return rate, using the last century's real asset returns on US Stocks (5%) and Bonds (2%). This does not need to be precise at all. It just needs to give an approximate very long-term tangent of the graph. I've explained the intuition behind this in http://www.bogleheads.org/forum/viewtop ... 0#p1765039


Could someone please confirm the table in the boglehead VPW table assumes this historic return...that is 5% us stocks and 2% bonds. Thank you!


AlohaJoe provided the answer. The tables in the Wiki were calculated using an earlier version of the spreadsheet which had slightly different values. Note that I did not update the wiki's table last year, when I last updated the spreadsheet's internal rates, because precision is not important.

In the grand scheme of things, precision is really not important. Taking a withdrawals of 4.4% or 4.6% instead of 4.5% won't make a difference on the robustness of the withdrawal method. It's not like taking a 15% withdrawal, instead; that would make a difference.

In the spreadsheet, to avoid putting too arbitrary values, I've chosen long-term returns extracted from the Credit Suisse Global Investment Returns Yearbook. Unfortunately, in the 2017 version, the Yearbook doesn't provide the growth of $1 numbers anymore. So, when I'll update the spreadsheet with 2016 return data (didn't publish it yet), I'll probably leave the current values (based on growth from 1900 to 2015) in place.

Let me insist on it: Precision is not important at all here, given the huge uncertainties about future returns, and their annual variability.

gilgamesh wrote:P.S: I wish it gave this information in the boglehead page here

https://www.bogleheads.org/wiki/Variabl ... withdrawal


I wish I could easily summarize in the Wiki everything I've written in the Bogleheads forums about VPW, but this is a huge undertaking. One could easily write an entire booklet about VPW, its design, how to use it, and so on. It is a project of mine to work on making the wiki page more complete, someday. I just don't have the time, these days. For the time being, with the help of LadyGeek, I've tried to put the most important highlights into the Wiki page and provided a pointer to this thread.

This thread contains the main ideas and explanations, as well as a few pointers to posts in other threads. One could also look through my post history (clicking on my username), but I notice that I'm already up to more than 2,300 posts. There's a search feature, though, to filter posts. "VPW" would be a good keyword for that. :wink:

Finally, there's the fully open spreadsheet which provides all the details and formulas to recreate VPW tables from scratch, and which illustrates the use of VPW (along with base income: social security and pension) and how it would have behaved in the past (what is called backtesting).
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Re: Variable Percentage Withdrawal (VPW)

Postby longinvest » Sat Jun 17, 2017 8:31 pm

Gilgamesh,

You're lucky* that I was subscribed to the other thread, so I got notice of your reply.

* If you didn't notice, I am taking a leave from the Bogleheads forums, except for answering questions on some subscribed threads, when I get notice of a post.

In another thread:

viewtopic.php?p=3411924#p3411924
gilgamesh wrote:First of all, thank you for answering my question in the VPW thread, didn't want to thank you there and further clutter the thread.


You're welcome. It would be worse to scatter answers about VPW in other threads. So, I am replying here.

gilgamesh wrote:Isn't building either a TIPS ladder or CD the same as increasing bond exposure of the overall portfolio which you have shown reduces jitteriness on VPW withdrawal? I understand you don't recommend VPW as a stand alone retirement income strategy, and CD/TIPS ladder will be beneficial in that sense, but adding those just to smooth out WR is the same as increasing bond allocation to smooth it out, no?


No, it is not the same. I am proposing to use a non-rolling CD (or TIPS) ladder to build a predictable** income stream over a very specific time frame. While the non-rolling CD ladder carries some inflation risk, over the typical 7 years*** (from age 62 to 69) when it serves to fill the gap in delayed Social Security payments until age 70, the cumulative risk of inflation is low enough. The non-rolling CD ladder is very easy to build (easier than a non-rolling TIPS ladder) and it's often possible to find higher yielding CDs.

The role of the ladder is to deliver specific amounts of money on specific dates during a specific time period. It's effectively a do-it-yourself term-certain SPIA (Single Premium Immediate Annuity); it is not meant as the equivalent of a bond fund in a portfolio.

Like a SPIA, this income stream is not affected by stock or bond market fluctuations. While bond market fluctuations (or yields across the curve, if you prefer) affect the marked-to-market value of the non-rolling ladder, they don't affect the income stream, as there is no reinvestment risk whatsoever.

** The CD ladder allows for a predictable nominal income stream of increasing payments, hopefully matching inflation or beating it. A TIPS ladder would allow for a predictable real income stream.

*** Of course, the money for first year of the 8 missing Social Security payments is not put into the ladder; it is put into a savings account to be spent during the first year.

gilgamesh wrote:How about if the objective is to maximize withdrawal for the first 10 years of of a 40 year retirement. Which is different from the objectives laid out here or with VPW.


Future returns, specially those of each of the next 10 years, are impossible to predict for total-market bond and stock index funds. (See The Futility of Predicting Future Returns for an actual proof of this). Furthermore, VPW cannot guarantee an income floor. All it mathematically guarantees is that it won't prematurely deplete the portfolio, regardless of future returns.

So, trying to tweak VPW's percentages to front-load withdrawals is an exercise in futility. Of course one could easily increase the likelihood of higher initial withdrawals by increasing the internal rate, but this could easily leave the retiree in an undesirable financial position later on.

Also, we just don't know if markets won't decide to crash just after the day we retire. And if they do, we just don't know when they'll recover.

Principle #1 of our Philosophy tells us to Develop a workable plan. We must have a plan which will work even if markets crash at an inopportune time.

So, to guarantee that one will not only have enough, but actually have more during an initial 10-year period, the best way is to buy an income stream which is unaffected by markets for the additional spending in that initial period. This can be done using a non-rolling CD (or TIPS) ladder or a term-certain inflation-indexed SPIA.

Let me take a step back. Here's my workable plan for when I retire (far in the future):
1- I will delay government pensions (OAS and QPP, in Canada, equivalent to U.S. Social Security) until age 70 to maximize this lifelong non-portfolio inflation-indexed income base.
2- I will fill the gap in the above payments between retirement and age 70 using a non-rolling ladder.
3- I will have a sizeable non-indexed pension which will provide additional lifelong but decreasing base income (in real terms) unaffected by markets.
4- I will have a huge pot of money (a balanced portfolio) from which I will safely withdraw using VPW.
5- Around age 80, assuming I'm still alive, I will use enough of the remaining pot of money to insure my wife and myself a sufficient lifelong inflation-indexed income floor (taking into account government pensions). The idea is that even if the portfolio gets down to zero, this floor should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
6- I will continue depleting the remaining pot of money using VPW, but I might adjust the last withdrawal age, based on our specific circumstances. It's too early to say.

What I was suggesting, earlier, is to add an additional 10-year income stream to such a plan to take care of additional spending during the initial 10-year period. This should be simple enough.

gilgamesh wrote:Kitces had shown the first 10 years of poor market performance as the biggest influence in the success of a SAFEMAX withdrawal and thus the SWR needs to be unnecessarily conservative for this potential to happen, dampening the potential spending, which would have been unnecessary in majority of the cases.


Any study based on using SWR as an actual withdrawal method during retirement is meaningless. I won't waste my time discussing such a study.

Reminder: The goal of the Trinity study was not to to promote 4% SWR as an actual withdrawal method, it was to discredit the 8% and more withdrawal rates that some financial advisers were suggesting at the time based on stocks returning as much. Look for Nisiprius' request for clarification and the author's answer in our Wiki's Safe withdrawal rates page.

gilgamesh wrote:I have to of course keep track of SWR rate by keeping tally of what I would have withdrawn each year adjusted for inflation on a separate sheet (the actual balance via VPW will be different than this theoretical pathway if I decided to follow SAFEMAX from the start).


SWR is a dumb withdrawal method which lets most of its retirees die as the richest people in the graveyard, while bankrupting most of its remaining retirees. I don't understand why anyone would ever consider using such brainless method. By the way, you just don't know what SAFEMAX is, and nobody will know, until the day you die. Not very useful, if you ask me. :wink:

If you want my opinion, it's this: forget about SWR during retirement; it's a rough planning tool to help answer: how much do I approximately need to retire. If you want a stable income stream, just go and buy one. For lifelong income, SPIAs do exist and can be bought, including inflation-indexed ones. For time-limited income, one can easily build a non-rolling CD ladder. Of course, a stable income stream is more expensive than a fluctuating one. With some flexibility, one can afford to complement a base stable income with fluctuating income. A balanced portfolio along with VPW can provide such a complementary income while keeping fluctuations at a manageable level.

OK, it took a long time to write this post; I'm way over my Bogleheads time allocation. I just hope my post will help you design your own workable plan. Just try to stay away from anything that relies on guessing future returns; we just don't know, so it's not workable.

Cheers,

longinvest
Last edited by longinvest on Sun Jun 18, 2017 8:11 am, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

dbr
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Re: Variable Percentage Withdrawal (VPW)

Postby dbr » Sun Jun 18, 2017 8:04 am

longinvest wrote:
If you want my opinion, it's this: forget about SWR during retirement; it's a rough planning tool to help answer: how much do I approximately need to retire. If you want a stable income stream, just go and buy one. For lifelong income, SPIAs do exist and can be bought, including inflation-indexed ones. For time-limited income, one can easily build a non-rolling CD ladder. Of course, a stable income stream is more expensive than a fluctuating one. With some flexibility, one can afford to complement a base stable income with fluctuating income. A balanced portfolio along with VPW can provide such a complementary income while keeping fluctuations at a manageable level.



The forum should implement a bot that automatically inserts the above in the signature line of any post where the term "SWR" is found!

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Re: Variable Percentage Withdrawal (VPW)

Postby gilgamesh » Sun Jun 18, 2017 8:44 am

Longinvest

Thank you for the detailed reply. My plan is almost identical to yours except the pension part. I just didn't know what method of withdrawal I would implement for my side portfolio. My non-rolling TIPS ladder does account for my desire to have more for the first ten years of retirement.

I was hoping there might be a way to have the side portfolio skew towards having more for the first ten years as well. Thank you for letting me know it's not possible. VPW will be ideal as it based on the past average performance of the market, then corrected annually to my remaining balance (accounts for previous years market performance ) and past history (The future percentage withdrawal). I like that. I was looking for a withdrawal method based on average market performance. VPW does that. I wish there is a way to reduce its sensitivity to previous years market correction/crash (even if it was just the year to quickly rebound,...I know, VPW corrects it immediately after recovery) and smooth it out based on average performance within certain constraints (limits placed in terms of time &/or magnitude), but that of course is not viable (otherwise it would have been done) - it is mostly unnecessary with a floor. This side portfolio of mine only accounts for 20-25% of my desired income, and minor tweaking of that won't matter much in my situation for sure.

I just wanted to clarify there was no way of skewing a withdrawal method to make it top heavy. But, in the process you had validated my overall retirement plan too...cool!, and thanks!

Thank you for developing this VPW, I know it was and still is hard work. IMO your absence will be a great loss to this forum. I'm glad you were available to answer my question, appreciate it very much.

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Re: Variable Percentage Withdrawal (VPW)

Postby AlohaJoe » Sun Jun 18, 2017 9:43 am

gilgamesh wrote:I was hoping there might be a way to have the side portfolio skew towards having more for the first ten years as well. Thank you for letting me know it's not possible.


Of course it is possible. You just introduce some amount of risk. longinvest says it "could easily leave the retiree in an undesirable financial position later on". Everyone agrees that it "could" result in something bad later on. People can and do disagree about the size of that risk.

I wish there is a way to reduce its sensitivity to previous years market correction/crash (even if it was just the year to quickly rebound,...I know, VPW corrects it immediately after recovery) and smooth it out based on average performance within certain constraints (limits placed in terms of time &/or magnitude), but that of course is not viable (otherwise it would have been done)


Of course it can be done. It has been done. Again, it introduces some amount of risk and reasonable people will disagree about what kinds of risk are toleranble in what amounts under what circumstances.

But all of these are topics that have been rehashed ad nauseum -- I doubt parties on either side of the question are interested in talking about it more -- so you're probably better off looking through this thread to see how those previous conversations went.

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Re: Variable Percentage Withdrawal (VPW)

Postby siamond » Sun Jun 18, 2017 10:35 am

AlohaJoe wrote:
gilgamesh wrote:I was hoping there might be a way to have the side portfolio skew towards having more for the first ten years as well. Thank you for letting me know it's not possible.

Of course it is possible. You just introduce some amount of risk. longinvest says it "could easily leave the retiree in an undesirable financial position later on". Everyone agrees that it "could" result in something bad later on. People can and do disagree about the size of that risk.

A few of us modeled those things to death, and AlohaJoe summed it up perfectly. To be more specific, if you want to introduce such a skew, then increase a bit (say by stocks by a point and bonds by half a point, or something like that, don't go crazy!) the parameters in the VPW 'Table' tab, where longinvest conveniently provided an override mechanism.

You can check with the backtesting logic (in the same spreadsheet) how it would have changed past trajectories. Just be mindful about the long-term effects (and this is where the perception of 'risk' can differ greatly - we're all different in this respect), and the fact that stock vagaries are *very* unpredictable and may introduce a *lot* of noise (ups and downs) in any such plan...

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Re: Variable Percentage Withdrawal (VPW)

Postby gilgamesh » Sun Jun 18, 2017 12:27 pm

AlohaJoe wrote:
I wish there is a way to reduce its sensitivity to previous years market correction/crash (even if it was just the year to quickly rebound,...I know, VPW corrects it immediately after recovery) and smooth it out based on average performance within certain constraints (limits placed in terms of time &/or magnitude), but that of course is not viable (otherwise it would have been done)


Of course it can be done. It has been done. Again, it introduces some amount of risk and reasonable people will disagree about what kinds of risk are toleranble in what amounts under what circumstances.

But all of these are topics that have been rehashed ad nauseum -- I doubt parties on either side of the question are interested in talking about it more -- so you're probably better off looking through this thread to see how those previous conversations went.


I read most of this thread, it was hard to weed through some of the clutter and may have missed something. I am sure it said this jitteriness can be reduced by increasing bond exposure. I did not see any other methods of correction.

For instance, I did not see a method, where by, past market downswings including long tail events are compared to the one retiree is experiencing and modulate the following year's correction based on that. If I missed it, please let me know. After all, the whole withdrawal percentage is based on past history, why not a response to a market downswing be based on historical downswings as well?

For instance a market correction of 10% happens frequently, a retiree may not necessarily have to respond to each market correction the following year unless it reaches a point atypical of past history. Even a long tail event like 50% market crash may not require a full correction immediately following it. Why can't it be spread over the next few years. If over the next few years it doesn't match the past, the intensity of correction can be strengthened.

I understand not repeating what's been discussed prior, but can you tell me whether such a thing was contemplated? If so, I missed it and will read through the thread again more carefully.

P.S: My bad..., not just downswings, it has to be deviation either way from a certain range.
Last edited by gilgamesh on Sun Jun 18, 2017 1:00 pm, edited 1 time in total.

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Re: Variable Percentage Withdrawal (VPW)

Postby gilgamesh » Sun Jun 18, 2017 12:33 pm

siamond wrote:
AlohaJoe wrote:
gilgamesh wrote:I was hoping there might be a way to have the side portfolio skew towards having more for the first ten years as well. Thank you for letting me know it's not possible.

Of course it is possible. You just introduce some amount of risk. longinvest says it "could easily leave the retiree in an undesirable financial position later on". Everyone agrees that it "could" result in something bad later on. People can and do disagree about the size of that risk.

A few of us modeled those things to death, and AlohaJoe summed it up perfectly. To be more specific, if you want to introduce such a skew, then increase a bit (say by stocks by a point and bonds by half a point, or something like that, don't go crazy!) the parameters in the VPW 'Table' tab, where longinvest conveniently provided an override mechanism.

You can check with the backtesting logic (in the same spreadsheet) how it would have changed past trajectories. Just be mindful about the long-term effects (and this is where the perception of 'risk' can differ greatly - we're all different in this respect), and the fact that stock vagaries are *very* unpredictable and may introduce a *lot* of noise (ups and downs) in any such plan...


Thank you! ...yes! I could give a more favorable historical performance to skew it to be front heavy. However, I am uncomfortable with it, as it is not built on any foundation. I was hoping, it would be OK to run multiple withdrawal strategies con-concurrently, each based on its own logic with concrete foundation, but pick the best for each of the first ten years, before settling onto VPW after the ten years....anyhow, it really doesn't matter, I am not much interested in this anymore anyways.

I know you were the one to raise the issue with jitteriness of VPW. Was a smoothing based on past performance contemplated (please read my post above, to see what I mean), and if yes, would you know which parts of this thread where you guys discussed this? Or at least tell me whether it was discussed and I'll try to find it.

Thanks!

P.S: I'm sure spreading a market downswing over a few years was discussed, but what I am thinking is to modulate the correction based on historical downswings. Were these corrective measures abandoned to maintain simplicity or because either it's not possible, or of no significance. If it is just for inconvenience only, wouldn't be good to have different version of VPW incorporating these?

P.S2: it's not just market downswing, it's change in either direction beyond a certain threshold so the following years income is neither drastically increased or decreased.

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Re: Variable Percentage Withdrawal (VPW)

Postby siamond » Sun Jun 18, 2017 1:14 pm

gilgamesh wrote:I know you were the one to raise the issue with jitteriness of VPW. Was a smoothing based on past performance contemplated (please read my post above, to see what I mean), and if yes, would you know which parts of this thread where you guys discussed this? Or at least tell me whether it was discussed and I'll try to find it.

Well, I wasn't the only one being concerned, far from it, and longinvest's answer of increasing bonds exposure never satisfied me. Here is the thread where most of the corresponding discussion unraveled, sometimes in a constructive manner, sometimes in a more, er, 'animated' manner. It started by a discussion about Guyton-Klinger decision rules, another variable withdrawal method which puts a lot of emphasis on minimizing year-over-year changes, and then developed in a broader discussion about various ways to improve smoothing for both VPW and Guyton-Klinger.

At the end, longinvest and myself agreed to respectfully disagree, and I elected to follow one of the VPW/PMT variations being discussed in this thread for myself and have been doing it since then. I know a couple of folks followed suit, while others chose to follow longinvest's approach. To each their own! I am very curious to see how the various VPW followers will react to the next stock crisis though, I am sure this will trigger more lively discussion on such smoothing techniques or lack thereof... This is all a live experiment ready to happen! :wink:

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Re: Variable Percentage Withdrawal (VPW)

Postby gilgamesh » Sun Jun 18, 2017 4:49 pm

Thank you for posting that thread. It was very useful. Having read that, I think further discussion on smoothing VPW is not a good idea here. Everything that needs to be said has been said there.


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