Our wiki explains how to use variable-percentage withdrawals during retirement.
Our wiki provides a simple to use VPW Table.
Here are the links to the latest versions of the VPW Accumulation and Withdrawal Worksheet and the VPW Backtesting Spreadsheet.
- VPW-Accumulation-And-Retirement-Worksheet Screenshot 1
- VPW-Accumulation-And-Retirement-Worksheet Screenshot 2
- VPW Backtesting Spreadsheet Screenshot
The rest of this post contains the original text that I wrote, in July 2013, to present the idea I had for variable-percentage withdrawals (VPW). The VPW method was improved and simplified (relative to this initial post) to only require the retirement age and asset allocation. I suggest to new readers who have read the wiki page and who don't want to read all of the hundreds of posts of this thread to skip directly to this post written in August 2017 starting a series of posts where some of the key elements of VPW's current design are summarized.
I'm seeking comments on a withdrawal method I've thought up. I've been reading the forums for a while and I've read many Safe Withdrawal Rate (SWR) threads. I've also read the Withdrawal Methods Wiki page. Yet, I'm not satisfied with the methods I've seen :
- Constant-Dollar : I would need to make a huge leap of faith to start withdrawing 4% (or whatever %) of the my portfolio, and index it to inflation every year. (1) This is scary! I would be subject to bad sequence of return risk, and (2) there is a very high probability that I will leave much money unspent (if the bad sequence doesn't show up). I might be too old to spend it, once I realize that I have too big a pile of money.
- Constant-Percentage : This one does not have as much sequence of return risk (I can still end up with a much lower amount to spend than I expected, if I chose too high a percentage). The problem is that I am, again, quite likely to underspend and leave a lot of money unspent.
- Spend Only the Dividends : I would likely overspend my bonds and underspend my equities, unless, of course, I had a 50/50 portfolio and rebalanced it regularly. Yet, I would still be very likely to leave a lot of money unspent.
Let say I have a portfolio with an expected 3% real return. I want this portfolio to survive 30 years. I have no bequest motive, so I am happy to drawdown 100% of it.
At the start of year 1 of retirement, I withdraw 4.95% of my portfolio (and take the opportunity to rebalance it).
At the start of year 2 of retirement, I withdraw 5.06% of my remaining portfolio (and rebalance it).
At the start of year 3 of retirement, I withdraw 5.17% of my remaining portfolio (and rebalance it).
And so on, until year 30, where I withdraw 100% of my remaining portfolio. (No need to rebalance!)
So, even if the famous bad sequence of return was to happen, I wouldn't run out of money before the end of 30 years. As a bonus, I am sure to have spent it all; there's no risk of having a single dime left for year 31 (unless I died before year 30, of course).
The withdrawn amount varies as an increasing percentage of portfolio balance.
The percentages, above, are computed from a constant-payment 30-year annuity at 3%:
Year 1: 1.000000
Year 2: 0.978981 (= (1.000000 – 0.049533) * 1.03)
Year 3: 0.957331 (= ( 0.978981 – 0.049533) * 1.03)
Year 30: 0.049533
So, we get:
Year 1: 4.95% (= 0.049533 / 1.000000)
Year 2: 5.06% (= 0.049533 / 0.978981 )
Year 30: 100%
Now, I don't know about you, but personally, if I'm not dead at the end of 30 years, I'd like to have some minimal money left. So, as a first improvement, I would cap the increasing percentage at 20% to smooth out the final portfolio decline.
Another improvement is to cap the drawdown. Let say I want to drawdown 75% of my porfolio: I would apply the VPW method on this 75%, and I would only spend the expected return (3%) of the remaining (more precisely: (3/1.03) %, so that the capital can rebuild up). This would add up to:
Year 1: 4.44%
Year 2: 4.51%
Year 3: 4.59%
Year 25: 9.72%
Year 26: 9.95%
Year 27: 9.17%
Year 30: 7.09 %
Year 40: 3.67%
Year 50: 3.03%
With the two improvements, the rate increases until year 26. Then the rate starts declining. The “expected remaining balance” slides towards 25% of the original portfolio.
I am sure somebody has probably thought about something similar before. (I was partly inspired by the Canadian Registered Retirement Income Fund (RRIF) minimum withdrawal rules, probably similar to US RMD.)
I have an excel spread sheet to compute the percentages, given 3 inputs:
- expected real return
- number of years
- Drawdown percentage
So, does VPW make sense?