Variable Percentage Withdrawal (VPW)

[AlohaJoe]

Do you mind if I ask, do I understand VPW? It seems like such an outlier. Maybe this is too simple but is this really the inverse of the Taylor method?

It isn't the inverse of the Taylor method simply because there is no such thing as the Taylor method. It is a garbled bunch of nonsense with no definition. Taylor's method is "withdraw whatever you feel like". If the market goes down 20% how much do you reduce withdrawals? "Whatever you feel like." If the market goes up 20% how much do you increase withdrawals? "Whatever you feel like." The Taylor method is not a plan, it is mumbo jumbo. If he took the same approach to asset allocation -- "invest in whatever you want and adjust in up or down whenever you feel like it based on no analysis and just your gut feeling" -- he'd be laughed off of Bogleheads -- even though it has been amply demonstrated that withdrawal rates are vastly more important than asset allocation.

The actual Taylor method is: have so much money that the amount you withdraw is meaningless, that way you can adjust it up and down when you feel like it with no ill effects. After all, Taylor retired in the single best year to retire in US history. Based on the portfolio he had then, and the returns since then, he could withdraw the current equivalent of over $200,000 a year and still not run out.

Anyway, I can't really understand your chart. There is no "multiple" when talking about VPW, so I don't know what that 48 is or why you think the asset needed is higher than for "4% old CDW theory".

VPW is start higher and drop back as needed and the Taylor method is start lower and increase if market increases. (My words, not his!)

No, VPW does not start meaningfully higher. There is no actual difference between withdrawing $42,000 and $40,000 at age 65. (The numbers come from your screenshot.)

The difference is in what happens when the market crashes by 50% -- as it did in 2008. How much do you reduce withdrawals under the Taylor method?

The difference is in what happens when the market is okay but inflation is 10% for 10 years -- as happened in the 1970s. The Taylor method says nothing about what happens in this situation.

[2015]

Do you mind if I ask, do I understand VPW? It seems like such an outlier. Maybe this is too simple but is this really the inverse of the Taylor method?

It isn't the inverse of the Taylor method simply because there is no such thing as the Taylor method. It is a garbled bunch of nonsense with no definition. Taylor's method is "withdraw whatever you feel like". If the market goes down 20% how much do you reduce withdrawals? "Whatever you feel like." If the market goes up 20% how much do you increase withdrawals? "Whatever you feel like." The Taylor method is not a plan, it is mumbo jumbo. If he took the same approach to asset allocation -- "invest in whatever you want and adjust in up or down whenever you feel like it based on no analysis and just your gut feeling" -- he'd be laughed off of Bogleheads -- even though it has been amply demonstrated that withdrawal rates are vastly more important than asset allocation.

Well then I guess I could be "laughed off Bogleheads" because I view much of what passes as "analysis" here as no more than human narrative and muddled mumbo jumbo, with people talking past each other in circular debates. Can both "sides" possibly be right?? Same goes for the ongoing sewage pipeline break of financial "information," with its Sisyphean revisions to studies, papers, predictions, and the 800th edition of "The Only Guide You'll Ever Need", etc. At least when I throw my chicken bones they only give me one answer, as opposed to "read my complexity blog again tomorrow to help me monetize it."

The actual Taylor method is: have so much money that the amount you withdraw is meaningless, that way you can adjust it up and down when you feel like it with no ill effects. After all, Taylor retired in the single best year to retire in US history. Based on the portfolio he had then, and the returns since then, he could withdraw the current equivalent of over $200,000 a year and still not run out.
...
Without knowing the totality of Taylor's complete circumstances and choice over the years, isn't this conjecture at best?

No, VPW does not start meaningfully higher. There is no actual difference between withdrawing $42,000 and $40,000 at age 65. (The numbers come from your screenshot.)

The difference is in what happens when the market crashes by 50% -- as it did in 2008. How much do you reduce withdrawals under the Taylor method?

The difference is in what happens when the market is okay but inflation is 10% for 10 years -- as happened in the 1970s. The Taylor method says nothing about what happens in this situation.

I take the Taylor Method to encompass flexibility, which could include anything from going back to work to annuitization to other strategies in response to market changes. Unlike some, I am not pathologically obsessed with false precision, as opposed to being tyrannized by never ending Fake News Financial "Analysis." I find the study of the nature of risk (and risk mitigation) to be more valuable than anything I could gain as a "student of investing."

[megabad]

I have uploaded version 2.1 of the VPW backtesting spreadsheet.

Big thanks for the updates over the years. I always freaking loved the spreadsheet for the backtesting and how easy VPW is to explain.

[smectym]

Agree VPW is conclusively superior to too brittle methods (such as constant 4%) on the one hand, and too conservative approaches (such as mimicking RMD) on the other. I would add that “not that interested in the nuts-and-bolts of SWR theory” spouse is intuitively attracted to the common-sense flexibility of VPW. Since spouse is likely to live on after the obsessive one (me) has died, that’s a huge plus. Thanks to longinvest and all others on these strings.

Smectym

[longinvest]

I've created a VPW Accumulation And Retirement Worksheet which calculates portfolio contributions, during accumulation, and portfolio withdrawals, during retirement, while taking into account pensions with and without cost of living adjustments. It contains two separate sheets:

• Accumulation: This sheet calculates a (monthly, semimonthly, or biweekly) portfolio contribution amount, taking into account age, salary, portfolio balance and allocation, retirement age, and future pensions with and without cost of living adjustments.
• Retirement: This sheet calculates an (annual, quarterly, or monthly) portfolio withdrawal amount, taking into account current age, portfolio balance and allocation, and future pensions with and without cost of living adjustments.

Every year, one must enter new information (new age, new portfolio balance, etc.) into the worksheet so that it calculates a new portfolio contribution amount during accumulation, or a new withdrawal amount during retirement.

The spreadsheet can be used online or downloaded.

The links can be found on the Boglehead wiki VPW page: VPW Accumulation And Retirement Worksheet.

Here's a screenshot of the Retirement sheet:



I've kept the worksheet interface simple so that it's easy to use by a spouse who doesn't care about calculation details.

Here are some details for those who care about them.

At age 60, with a 60/40 stocks/bonds allocation, the VPW percentage is 4.7%, which multiplied by the $386,180 balance would imply a $18,150 withdrawal. But, the retiree will receive a $23,736 annually as Social Security payments in 10 years at age 70. The worksheet takes this future pension into account and finds that the retiree can withdraw $32,379 this year.

The worksheet also estimates the flexibility that the retiree must have to hold 60% in stocks while taking VPW withdrawals and delaying Social Security. It assumes that stocks could easily lose 50% of their value in a short time, and calculates that the impact a 30% portfolio loss would be an annual -$5,441 reduction in withdrawals, or 17%.

The Accumulation spreadsheet is similarly simple. It's derived from the recent variable savings rate spreadsheet and it's meant to replace it.

The Accumulation spreadsheet is seeks to determine portfolio contributions such that:

• (annual salary - annual pension contributions - annual portfolio contributions) = (future annual pensions payments + future annual portfolio withdrawals)

As the portfolio fluctuates, contributions fluctuate with it. The spreadsheet estimates the flexibility that the accumulating investor must have to hold 60% in stocks while saving for retirement. It assumes that stocks could easily lose 50% of their value in a short time, and calculates the impact on portfolio contributions.

Comments are welcome.

Enjoy!

[kelage]

Thank you.

[longinvest]

^^^
You're welcome.

Here's a screenshot of the Accumulation sheet:

[sandramjet]

I downloaded the excel sheet and tried the "retirement" page ... but I get nothing but a lot of #N/A errors, and I see that there are functions in cell B6 that don't seem to be supported ??
Also, if I set my inputs to no pensions, I get lots of DIV/0 errors. Suppose I don't have any pensions?

[LSLover]

^^^
You're welcome.

Here's a screenshot of the Accumulation sheet:

Longinvest,

I am currently 80% stocks/20% bonds in my asset allocation. Any way of modeling that in the spreadsheet?

[abner kravitz]

At age 60, with a 60/40 stocks/bonds allocation, the VPW percentage is 4.7%, which multiplied by the $386,180 balance would imply a $18,150 withdrawal. But, the retiree will receive a $23,736 annually as Social Security payments in 10 years at age 70. The worksheet takes this future pension into account and finds that the retiree can withdraw $32,379 this year.

Thanks for this spreadsheet, I really like the VPW stuff. I have an issue, though. In the example above, my download is showing an initial withdrawal of $8,643. Also, when I put in my numbers then added pensions, my withdrawals went down with each additional pension/SS.

Any thoughts on what is happening? I am using EXCEL for MAC circa 2011.

Thanks

[longinvest]

OK. There's a bug in the spreadsheet. I'll fix it later today. Thanks for alerting me about it.

[kd2008]

OK. There's a bug in the spreadsheet. I'll fix it later today. Thanks for alerting me about it.

In the retirement tab, when the pension bridge cost is zero (B50 through B53 are all zero), the pension bridge funding ratio formula: 1 - B57/SUM(B50:B53) ends up having a division by zero. That formula needs protection so that this does not happen.

[indyfish]

Also - in the Defined Benefit Pension parts - if the Pension is already started, but the Start Age is the same as the Age of the Retiree ($B$8) - then it shows a validation error.

[longinvest]

Also - in the Defined Benefit Pension parts - if the Pension is already started, but the Start Age is the same as the Age of the Retiree ($B$8) - then it shows a validation error.

This one is normal. When the pension is started, the "Start Age" is replaced with "---" and the cell must be left empty.

[longinvest]

I have uploaded version 1.3 of the VPW Accumulation And Retirement Worksheet.

Changes:

• Added 80/20 and 90/10 risky (concentrated in stocks) allocations (outside of the Benjamin Graham's 75/25 to 25/75 stocks/bonds range) at the request of LSLover.
• Solved bugs reported by sandramjet and kd2008. Thanks to both!

As usual, feel free to comment.

Enjoy!

[longinvest]

Thanks for this spreadsheet, I really like the VPW stuff. I have an issue, though. In the example above, my download is showing an initial withdrawal of $8,643. Also, when I put in my numbers then added pensions, my withdrawals went down with each additional pension/SS.

Any thoughts on what is happening? I am using EXCEL for MAC circa 2011.

Abner, can you try version 1.3? When you download the spreadsheet and open it, it should show the same numbers as in the images of this post (Retirement sheet) and this post (Accumulation sheet). If it doesn't we'll need the help of people with MACs. In the meantime, if you don't want to upload your data to an online spreadsheet, maybe you could install LibreOffice and use that version?

[sandramjet]

Thanks, that did solve the problems I was seeing. But now I have another (or user error).
For grins I was just testing how things look as I change the age. If I put in an age of say 80, and SS starting at 70, it shows an error (I set "already started" to yes). In fact it seems like anytime I started the SS input it shows error, and then shows current year income for that pension as 0. Is there something else that needs to be done?

[longinvest]

Thanks, that did solve the problems I was seeing. But now I have another (or user error).
For grins I was just testing how things look as I change the age. If I put in an age of say 80, and SS starting at 70, it shows an error (I set "already started" to yes). In fact it seems like anytime I started the SS input it shows error, and then shows current year income for that pension as 0. Is there something else that needs to be done?

A pension cannot start in the past. It must be marked as already started causing the "Start Age" heading to disappear. As a result, the cell must remain empty. It's like that by design.

I don't want users to confuse VPW withdrawals with constant withdrawals. All yellow cells must be update every year. Social Security payments, in particular, change every year (they're indexed to inflation). So, when a delayed pension becomes a current pension, it's important that the user updates the spreadsheet accordingly. I've just made sure the spreadsheet complains if the Start Age isn't removed.

[sandramjet]

Ok, that was not clear that you have to change 2 cells, not just mark it as "Already Started". It would seem more intuitive to me if it is marked as "already started" that would automatically clear the "start age" cell if that is needed. Or at least indicate that in the instructions.

[longinvest]

Ok, that was not clear that you have to change 2 cells, not just mark it as "Already Started". It would seem more intuitive to me if it is marked as "already started" that would automatically clear the "start age" cell if that is needed. Or at least indicate that in the instructions.

OK. You've got your wish. I've uploaded version 1.4 that relaxes the validations rules for pension Start Age. For a current pension, it can be left empty or contain a value smaller or equal to the retiree's age.

Is that simpler?

[abner kravitz]

Thanks for this spreadsheet, I really like the VPW stuff. I have an issue, though. In the example above, my download is showing an initial withdrawal of $8,643. Also, when I put in my numbers then added pensions, my withdrawals went down with each additional pension/SS.

Any thoughts on what is happening? I am using EXCEL for MAC circa 2011.

Abner, can you try version 1.3? When you download the spreadsheet and open it, it should show the same numbers as in the images of this post (Retirement sheet) and this post (Accumulation sheet). If it doesn't we'll need the help of people with MACs. In the meantime, if you don't want to upload your data to an online spreadsheet, maybe you could install LibreOffice and use that version?

Whatever you did seems to have done the trick. Thanks very much.

[SpaceCowboy]

Thanks @longinvest
Appreciate you including the PV calculation of both real and nominal pensions in the VPW calculation. I'd been doing this tweak manually for SS.
Appreciate all your efforts in building this useful tool and improving it.

[longinvest]

Appreciate you including the PV calculation of both real and nominal pensions in the VPW calculation. I'd been doing this tweak manually for SS.
Appreciate all your efforts in building this useful tool and improving it.

Thanks for the feedback.

The objective is for the new VPW worksheet to be simple enough so that a surviving spouse with little interest in financial calculations can easily use it.

The new worksheet hides the complexity of calculations to deal with delayed Social Security and a fixed pension while also keeping a single unified portfolio. During accumulation, it presents a simple amount (that changes every year of accumulation) to contribute to the portfolio. During retirement, it presents a simple amount (that changes every year of retirement) to withdraw from the portfolio. In both cases, it details current year income and the required flexibility to keep in the budget in the form of potential future additional savings (during accumulation) or withdrawal reduction (during retirement) in case of significant stock market losses.

For accumulating investors, it eliminates the illogical idea to aim for a specific number (like $1,000,000) or a specific simplistic multiple (like 25 times expenses). Instead, it gets the accumulating investor into the habit of adapting savings (and thus spending) to market returns and to always consider the impact of potential severe stocks losses on the entire retirement plan and future retirement savings, given the chosen asset allocation.

[fourniks]

Longinvest - I'll echo what others have said and love the simplicity of the original and new spreadsheets.

Question - In the case of my wife, if she takes her pension early, she gets a yearly "bonus" distribution until she turns 62, at which time the pension is "reduced" to its normal amount for the remainder of payout term (life). Her pension is COLA'd. In Firecalc, this can be handled by a recurring COLA'd "payment" (deduction) starting at 62. I was wondering if there was any way to accommodate this in the spreadsheet?

Four

[gjlynch17]

Question: On the "Table" tab of the VPW document, the Long-Term Real Growth Trends is set to 5.0% for stocks and 1.8% for bonds, and there is a note that this is based on data from Credit Suisse Global Investment Returns Yearbook 2016. When I look at the Credit Suisse Global Investment Returns Yearbook 2018, the numbers have been updated to 5.2% and 2.0% respectively. Should those values be changed on the "Table" tab? Doing this changes the withdrawal rates (slightly).

Sorry if I'm totally off here; I'm still learning how all of this works.

(I'm looking at page 37 of this document: https://www.credit-suisse.com/media/ass ... y-2018.pdf)

It's only is a wild-ass guess such that good returns are higher and bad returns are lower. So, I see no need to constantly change it. See this earlier post for a more detailed explanation.

There's no need for false precision. Changes in annualized historical returns over a period starting in 1900 and spanning more than a century are tiny. Updating the trends from year to year would mainly affect the rounding of percentages in the VPW table and lead to minor changes. For one thing, I don't want to give people the impression that the table changes over time. For another, I don't want them to think that the table is of high precision; it's not.

I insist: the table isn't meant to be used with ultimate precision. If the VPW table indicates 4.8%, taking 5% won't lead to premature portfolio depletion, and taking 4.5% won't lead to dying with a gigantic pile of unspent money. The percentages are the result of a calculation based on a wild-ass guess; they inherit the "wild-ass guess" property. So, they should be used as a guide to indicate approximately how much of the portfolio should be withdrawn today to pay taxes and fund the upcoming year's expenses given the current portfolio balance, the target asset allocation for the upcoming year, and the current age of the retiree.

Whether the specific percentage in the VPW table is 4.8% or 4.9% isn't important. These are rounded values resulting from a calculation based on a wild-ass guess. What's important is to understand that it wouldn't be sustainable to withdraw 7% or 8% instead of 4.8%, and keep over-withdrawing like that regularly. I've kept one decimal of precision (after being rightfully chastised by forum member Rodc, early in this thread, for the false precision of using the default two decimals of Microsoft Excel/Libreoffice Calc) so that annual percentage adjustments remain small. The difference between 4% and 5% of a portfolio is big; the difference between 4.4% and 4.5% is much smaller and leads to a more reasonable annual adjustment.

On a technical level, in the past, Credit Suisse Global Investment Returns Yearbooks provided a "growth of 1$" value since 1900. The newer free Summary editions since year 2017 don't provide this anymore. The cell's formula (based on the last of the older yearbooks) takes the 116th root of final growth value (e.g. $300 for stocks) minus one as (stocks) growth trend.

I have no strong opinion about whether to update the spreadsheet's trends based on the latest Credit Suisse Yearbook Summary or not, except that I want users to know that they can take a single copy of the VPW table and use it all retirement long.

A compromise would be to update the trends every 5 years (in 2020, 2025, etc) just to reinforce the idea of stability; that there's no need to update the VPW table yearly (or ever). Would that be more intellectually satisfying than using stale values from 2016?

Longinvest (and other contributors) thank you for all of your work in creating and describing the Variable Withdrawal Rate. I am late to the discussion as I am at the stage of beginning to consider early retirement (currently age 50). While we appear to be close to being able to retire based on our investment assets and spending, the thought of going without a consistent paycheck is something I am still trying to grips with psychologically. As you indicate above, there is simply no certainty or predictability with any withdrawal strategy given the enormous number of variables and potential outcomes. However, the VWR does seem like a prudent approach of balancing the two extremes of either being too conservative and too aggressive early in retirement.

With that said, the VWR seems to be overly optimistic in that I understand it relies on historical real returns from the Credit Suisse Yearbook Summary going back to 1900. I have been strongly influenced by Bernstein, Ilmanen, Schiller and others that it is dangerous to rely on historical returns to project future returns and that the starting point for any investment or withdrawal strategy should be a realistic assessment of potential future returns. Simply put, with the 10-year treasury yielding 2.10%, I do not believe it is realistic to assume 1.8% real returns on bonds and 5% real returns on equities (although as I believe that may be realistic for international equities but not U.S. equities). If I understand your advanced spreadsheet (and admittedly I may not fully understand that or the VWR strategy), adjusting the CS historical real returns of equities and bonds from 5% and 1.8% to 3.5% and 0.5%, respectively would reduce my VWR from 4.3% to 3.3%. As you indicate above, this is a fairly significant difference. You do have a very helpful sensitivity analysis in the spreadsheet for a 50% immediate drop in equities (which would in turn likely increase expected future returns), but this does not account for the scenario of no immediate drop but future low returns.

You clearly state your returns in your spreadsheet "A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return. It's not a prediction of future returns from now. It is fixed and must never be updated. At the top of a bubble, it is likely to overestimate future returns. At the bottom of a crash it is likely to underestimate future returns. The wild-ass guesses, below, are based on the global (world) long-term growth of $1 from 1900 to 2015 according to the Credit Suisse Global Investment Returns Yearbook 2016." My question is why start with historical returns rather than an estimate of future returns? Granted, future returns are merely a WAG, but it seems like it would be a more accurate WAG to use some consensus of expected future returns based on current interest rates and valuations rather than historical returns that were achieved at different valuations and interest rates.

Thanks again for all of your efforts and contributions on the VWR as it has been very helpful in understanding the factors and nuances in attempting to achieve a realistic withdrawal strategy and connecting it with other income sources such as social security and pension.

[dcabler]

Question: On the "Table" tab of the VPW document, the Long-Term Real Growth Trends is set to 5.0% for stocks and 1.8% for bonds, and there is a note that this is based on data from Credit Suisse Global Investment Returns Yearbook 2016. When I look at the Credit Suisse Global Investment Returns Yearbook 2018, the numbers have been updated to 5.2% and 2.0% respectively. Should those values be changed on the "Table" tab? Doing this changes the withdrawal rates (slightly).

Sorry if I'm totally off here; I'm still learning how all of this works.

(I'm looking at page 37 of this document: https://www.credit-suisse.com/media/ass ... y-2018.pdf)

It's only is a wild-ass guess such that good returns are higher and bad returns are lower. So, I see no need to constantly change it. See this earlier post for a more detailed explanation.

There's no need for false precision. Changes in annualized historical returns over a period starting in 1900 and spanning more than a century are tiny. Updating the trends from year to year would mainly affect the rounding of percentages in the VPW table and lead to minor changes. For one thing, I don't want to give people the impression that the table changes over time. For another, I don't want them to think that the table is of high precision; it's not.

I insist: the table isn't meant to be used with ultimate precision. If the VPW table indicates 4.8%, taking 5% won't lead to premature portfolio depletion, and taking 4.5% won't lead to dying with a gigantic pile of unspent money. The percentages are the result of a calculation based on a wild-ass guess; they inherit the "wild-ass guess" property. So, they should be used as a guide to indicate approximately how much of the portfolio should be withdrawn today to pay taxes and fund the upcoming year's expenses given the current portfolio balance, the target asset allocation for the upcoming year, and the current age of the retiree.

Whether the specific percentage in the VPW table is 4.8% or 4.9% isn't important. These are rounded values resulting from a calculation based on a wild-ass guess. What's important is to understand that it wouldn't be sustainable to withdraw 7% or 8% instead of 4.8%, and keep over-withdrawing like that regularly. I've kept one decimal of precision (after being rightfully chastised by forum member Rodc, early in this thread, for the false precision of using the default two decimals of Microsoft Excel/Libreoffice Calc) so that annual percentage adjustments remain small. The difference between 4% and 5% of a portfolio is big; the difference between 4.4% and 4.5% is much smaller and leads to a more reasonable annual adjustment.

On a technical level, in the past, Credit Suisse Global Investment Returns Yearbooks provided a "growth of 1$" value since 1900. The newer free Summary editions since year 2017 don't provide this anymore. The cell's formula (based on the last of the older yearbooks) takes the 116th root of final growth value (e.g. $300 for stocks) minus one as (stocks) growth trend.

I have no strong opinion about whether to update the spreadsheet's trends based on the latest Credit Suisse Yearbook Summary or not, except that I want users to know that they can take a single copy of the VPW table and use it all retirement long.

A compromise would be to update the trends every 5 years (in 2020, 2025, etc) just to reinforce the idea of stability; that there's no need to update the VPW table yearly (or ever). Would that be more intellectually satisfying than using stale values from 2016?

Longinvest (and other contributors) thank you for all of your work in creating and describing the Variable Withdrawal Rate. I am late to the discussion as I am at the stage of beginning to consider early retirement (currently age 50). While we appear to be close to being able to retire based on our investment assets and spending, the thought of going without a consistent paycheck is something I am still trying to grips with psychologically. As you indicate above, there is simply no certainty or predictability with any withdrawal strategy given the enormous number of variables and potential outcomes. However, the VWR does seem like a prudent approach of balancing the two extremes of either being too conservative and too aggressive early in retirement.

With that said, the VWR seems to be overly optimistic in that I understand it relies on historical real returns from the Credit Suisse Yearbook Summary going back to 1900. I have been strongly influenced by Bernstein, Ilmanen, Schiller and others that it is dangerous to rely on historical returns to project future returns and that the starting point for any investment or withdrawal strategy should be a realistic assessment of potential future returns. Simply put, with the 10-year treasury yielding 2.10%, I do not believe it is realistic to assume 1.8% real returns on bonds and 5% real returns on equities (although as I believe that may be realistic for international equities but not U.S. equities). If I understand your advanced spreadsheet (and admittedly I may not fully understand that or the VWR strategy), adjusting the CS historical real returns of equities and bonds from 5% and 1.8% to 3.5% and 0.5%, respectively would reduce my VWR from 4.3% to 3.3%. As you indicate above, this is a fairly significant difference. You do have a very helpful sensitivity analysis in the spreadsheet for a 50% immediate drop in equities (which would in turn likely increase expected future returns), but this does not account for the scenario of no immediate drop but future low returns.

You clearly state your returns in your spreadsheet "A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return. It's not a prediction of future returns from now. It is fixed and must never be updated. At the top of a bubble, it is likely to overestimate future returns. At the bottom of a crash it is likely to underestimate future returns. The wild-ass guesses, below, are based on the global (world) long-term growth of $1 from 1900 to 2015 according to the Credit Suisse Global Investment Returns Yearbook 2016." My question is why start with historical returns rather than an estimate of future returns? Granted, future returns are merely a WAG, but it seems like it would be a more accurate WAG to use some consensus of expected future returns based on current interest rates and valuations rather than historical returns that were achieved at different valuations and interest rates.

Thanks again for all of your efforts and contributions on the VWR as it has been very helpful in understanding the factors and nuances in attempting to achieve a realistic withdrawal strategy and connecting it with other income sources such as social security and pension.

This idea of using expected returns with a PMT based withdrawal method instead of fixed expected returns is discussed in this thread: viewtopic.php?t=263790

[longinvest]

Longinvest - I'll echo what others have said and love the simplicity of the original and new spreadsheets.

Question - In the case of my wife, if she takes her pension early, she gets a yearly "bonus" distribution until she turns 62, at which time the pension is "reduced" to its normal amount for the remainder of payout term (life). Her pension is COLA'd. In Firecalc, this can be handled by a recurring COLA'd "payment" (deduction) starting at 62. I was wondering if there was any way to accommodate this in the spreadsheet?

Four

Four, your wife's yearly bonus until age 62 is meant to smooth her lifelong income while assuming that she'll claim Social Security at age 62. I'd suggest doing exactly that: taking her pension when she retires, and claiming Social Security at age 62.

In the Accumulation worksheet (in the years before retirement), she would enter her pension without the bonus, and enter her projected Social Security payment when claimed at age 62 but use her pension start age as Social Security start age.

During retirement, she would enter enter in the Retirement worksheet her pension without the bonus, and enter her bonus as current Social Security payment in the years before age 62, and her actual Social Security payment (updated every year) thereafter. Actually, when reaching age 62, she could reassess and decided if she claims Social Security or delays it to age 70.

[longinvest]

Gjlynch17, the new VPW Accumulation And Retirement Worksheet states:

• A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return.
• Its role is to distinguish between a high annual return and a low annual return.
• It's not a prediction of future returns. It is fixed and must never be changed.
• At the top of a bubble, it is likely to be higher than future returns. At the bottom of a crash it is likely to lower than future returns.
• The selected growth trends are based on the long-term returns of world stocks and bonds from 1900 to 2018 according the Summary Edition of the Credit Suisse Global Investment Returns Yearbook 2019.

My question is why start with historical returns rather than an estimate of future returns? Granted, future returns are merely a WAG, but it seems like it would be a more accurate WAG to use some consensus of expected future returns based on current interest rates and valuations rather than historical returns that were achieved at different valuations and interest rates.

The VPW method is a Bogleheads method that never tries to time the market.

Many pundits like to make 10-year return predictions to gain media exposure. The financial media loves such predictions. Yet, it's safe enough for pundits; almost nobody will remember their predictions in 10 years. Do you really remember a prediction made by a pundit 10 years ago?

Let's do a mental exercise. Let's assume, for a second, that we had a perfect return prediction for the next 10 years. Remember that the growth trend distinguishes between high and low returns. The thing is this: even if the future return of next 10 years is low, it still doesn't make sense to use it as growth trend. The growth trend isn't a future return prediction.

It's important to think ahead of time about the consequences of one's choices. Decreasing withdrawals (because future returns are low) when the portfolio is up and increasing withdrawals (because future returns are high) when the portfolio is down is a "sell less high, sell more low" approach to portfolio withdrawals. It's a form of "buy high, sell low", a counterproductive investing approach. It wouldn't be a good idea to do that.

The VPW method sensibly ignores all future return predictions.

[gjlynch17]

This idea of using expected returns with a PMT based withdrawal method instead of fixed expected returns is discussed in this thread: viewtopic.php?t=263790

Dcabler, thank you for the link. Very helpful.

The VPW method sensibly ignores all future return predictions.

Longinvest, thank you for your response. Even though we disagree on the merits of this decision, I appreciate that your Advanced User spreadsheet, makes it possible to adjust for expected returns.

Overall, I really like your spreadsheet and analysis. One question I have on the Advanced Spreadsheet relates to the calculation of future Social Security and pension benefits. In my specific situation, I am currently Age 50 and hope to retire at Age 55. I hope to defer taking social security and a modest COLA pension until Age 70. The advanced user spreadsheet accurately calculates the PV of future Social Security and pension benefits on the right columns (Cells E26, E27, E33, E34) but for the planning scenarios at retirement, it uses the FV of the Social Security and pension benefits (Cells B51 and B52 are tied to the Future Values in B15 and B17) even though they will not kick it for another 15 years after beginning of retirement in my case (Age 70). It seems one should do the PV calculation at the applicable retirement date (hopefully Age 55 for me). I appreciate your thoughts and those of others if I am missing something, which is certainly possible.

Thanks again for all of your efforts on this.

[longinvest]

Gjlynch17, none of the VPW spreadsheets contains a return prediction (or "expected return"). The VPW for advanced users spreadsheet has its own separate discussion thread.

[LadyGeek]

It's in the wiki: Variable percentage withdrawal (Variable Percentage Withdrawal for Advanced Users)

Direct link to the support thread: Variable Percentage Withdrawal (VPW-adv) for Advanced Users

[longinvest]

One question I have on the Advanced Spreadsheet relates to the calculation of future Social Security and pension benefits. In my specific situation, I am currently Age 50 and hope to retire at Age 55. I hope to defer taking social security and a modest COLA pension until Age 70. The advanced user spreadsheet accurately calculates the PV of future Social Security and pension benefits on the right columns (Cells E26, E27, E33, E34) but for the planning scenarios at retirement, it uses the FV of the Social Security and pension benefits (Cells B51 and B52 are tied to the Future Values in B15 and B17) even though they will not kick it for another 15 years after beginning of retirement in my case (Age 70). It seems one should do the PV calculation at the applicable retirement date (hopefully Age 55 for me). I appreciate your thoughts and those of others if I am missing something, which is certainly possible.

Gjlynch17, I've replied to your question in the VPW for Advanced Users thread.

[longinvest]

Two persons are born in 1917 and both start working at the age of 25 in 1942 getting a $60,000 salary which remains fixed, indexed to inflation, until both retire at age 65. During work years, both contribute $3,180 yearly to Social Security. Starting at age 65, both get $20,784 annually as Social Security pension. Both invest their retirement savings into a balanced domestic (US) 60/40 stocks/bonds portfolio. Neither buys a SPIA at age 80 and both die on their 95th birthday.

The first person chooses to use the VPW Accumulation and Retirement Worksheet to determine portfolio contributions during work years and portfolio withdrawals during retirement.

The second person chooses to make fixed 10% of salary portfolio contributions during work years and fixed 4% of initial retirement portfolio withdrawals indexed to inflation regardless of portfolio balance during retirement.

Here's a chart of available income during work years (salary minus Social Security cost and portfolio contribution) and during retirement (Social Security pension plus portfolio withdrawal) for both strategies on the left axis. The chart also shows portfolio balances for both strategies on the right axis. All amounts are in inflation-adjusted dollars. (I'll provide the detailed data in tabular form in my next post).



The person using the VPW worksheet adapts savings during accumulation and portfolio withdrawals during retirement to market returns. During the 1950s until the mid 1960s, the portfolio grows fast, leading to smaller savings. From 1966 to the early 1980s, the portfolio barely grows $55,000 from $375,000 to $430,000 despite increased savings due to bad market returns. The transition from accumulation to retirement at age 65 is smooth. During retirement, withdrawals increase with market returns until 2000 when they start declining. Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

The person using fixed 10% savings and fixed 4% withdrawals indexed to inflation gets a steady inflation-indexed available income during accumulation of ($60,000 - $3,180 - $6,000) = $50,820. At age 65, the transition to retirement is not smooth. Available income drops 26% to ($20,784 Social Security + (4% X $422,251)) = $37,674 and remain steady in inflation-adjusted dollars during retirement. Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.

[longinvest]

Here's the detailed simulation data in tabular form for my previous post.

Code: Select all

                                                                       VPW                                                      Fixed                                   
  Age    Year      Return       Salary   Pension    Pension Cost     Balance      Contribution    Withdrawal    Available      Balance      Contribution    Withdrawal    Available   
   25    1942       4.75%      $60,000                 $3,180           $0           $6,566                      $50,254          $0           $6,000                      $50,820    
   26    1943      11.81%      $60,000                 $3,180         $6,566         $6,566                      $50,254        $6,000         $6,000                      $50,820    
   27    1944      10.18%      $60,000                 $3,180        $13,908         $6,545                      $50,275       $12,709         $6,000                      $50,820    
   28    1945      21.57%      $60,000                 $3,180        $21,869         $6,509                      $50,311       $20,002         $6,000                      $50,820    
   29    1946      -20.70%     $60,000                 $3,180        $33,095         $6,353                      $50,467       $30,316         $6,000                      $50,820    
   30    1947      -7.21%      $60,000                 $3,180        $32,598         $6,679                      $50,141       $30,041         $6,000                      $50,820    
   31    1948       5.56%      $60,000                 $3,180        $36,928         $6,824                      $49,996       $33,877         $6,000                      $50,820    
   32    1949      13.90%      $60,000                 $3,180        $45,805         $6,797                      $50,023       $41,760         $6,000                      $50,820    
   33    1950      11.67%      $60,000                 $3,180        $58,971         $6,608                      $50,212       $53,566         $6,000                      $50,820    
   34    1951       8.44%      $60,000                 $3,180        $72,461         $6,417                      $50,403       $65,818         $6,000                      $50,820    
   35    1952       8.79%      $60,000                 $3,180        $84,994         $6,279                      $50,541       $77,373         $6,000                      $50,820    
   36    1953       2.64%      $60,000                 $3,180        $98,747         $6,103                      $50,717       $90,177         $6,000                      $50,820    
   37    1954      29.28%      $60,000                 $3,180        $107,460        $6,148                      $50,672       $98,561         $6,000                      $50,820    
   38    1955      16.90%      $60,000                 $3,180        $145,070        $5,014                      $51,806       $133,417        $6,000                      $50,820    
   39    1956       1.12%      $60,000                 $3,180        $174,597        $4,222                      $52,598       $161,961        $6,000                      $50,820    
   40    1957      -4.41%      $60,000                 $3,180        $180,780        $4,414                      $52,406       $169,780        $6,000                      $50,820    
   41    1958      21.39%      $60,000                 $3,180        $177,223        $5,032                      $51,788       $168,295        $6,000                      $50,820    
   42    1959       3.55%      $60,000                 $3,180        $220,168        $3,718                      $53,102       $210,298        $6,000                      $50,820    
   43    1960       6.09%      $60,000                 $3,180        $231,702        $3,738                      $53,082       $223,763        $6,000                      $50,820    
   44    1961      11.82%      $60,000                 $3,180        $249,546        $3,509                      $53,311       $243,386        $6,000                      $50,820    
   45    1962      -0.80%      $60,000                 $3,180        $282,548        $2,651                      $54,169       $278,151        $6,000                      $50,820    
   46    1963      11.52%      $60,000                 $3,180        $282,938        $3,203                      $53,617       $281,925        $6,000                      $50,820    
   47    1964      10.04%      $60,000                 $3,180        $318,741        $2,257                      $54,563       $320,408        $6,000                      $50,820    
   48    1965       5.38%      $60,000                 $3,180        $352,994        $1,390                      $55,430       $358,571        $6,000                      $50,820    
   49    1966      -5.20%      $60,000                 $3,180        $373,364        $1,141                      $55,679       $383,851        $6,000                      $50,820    
   50    1967       5.87%      $60,000                 $3,180        $355,081        $2,608                      $54,212       $369,881        $6,000                      $50,820    
   51    1968       3.18%      $60,000                 $3,180        $378,538        $2,278                      $54,542       $397,598        $6,000                      $50,820    
   52    1969      -10.24%     $60,000                 $3,180        $392,872        $2,374                      $54,446       $416,262        $6,000                      $50,820    
   53    1970       4.31%      $60,000                 $3,180        $355,015        $4,833                      $51,987       $379,635        $6,000                      $50,820    
   54    1971       8.27%      $60,000                 $3,180        $375,165        $4,745                      $52,075       $402,014        $6,000                      $50,820    
   55    1972       7.62%      $60,000                 $3,180        $410,918        $3,978                      $52,842       $441,242        $6,000                      $50,820    
   56    1973      -16.61%     $60,000                 $3,180        $446,189        $3,254                      $53,566       $480,844        $6,000                      $50,820    
   57    1974      -23.88%     $60,000                 $3,180        $375,348        $7,442                      $49,378       $406,995        $6,000                      $50,820    
   58    1975      17.59%      $60,000                 $3,180        $293,167       $12,264                      $44,556       $315,816        $6,000                      $50,820    
   59    1976      16.46%      $60,000                 $3,180        $357,001       $10,362                      $46,458       $377,369        $6,000                      $50,820    
   60    1977      -7.67%      $60,000                 $3,180        $426,108        $8,217                      $48,603       $445,465        $6,000                      $50,820    
   61    1978      -3.78%      $60,000                 $3,180        $401,640       $10,545                      $46,275       $417,296        $6,000                      $50,820    
   62    1979       0.78%      $60,000                 $3,180        $397,017       $12,007                      $44,813       $407,536        $6,000                      $50,820    
   63    1980       7.18%      $60,000                 $3,180        $412,128       $12,585                      $44,235       $416,723        $6,000                      $50,820    
   64    1981      -8.04%      $60,000                 $3,180        $454,304       $11,889                      $44,931       $452,644        $6,000                      $50,820    
   65    1982      20.84%                $20,784                     $429,667                      $21,469       $42,253       $422,251                      $16,890       $37,674    
   66    1983      12.11%                $20,784                     $493,265                      $25,003       $45,787       $489,837                      $16,890       $37,674    
   67    1984       4.48%                $20,784                     $524,986                      $27,016       $47,800       $530,238                      $16,890       $37,674    
   68    1985      23.28%                $20,784                     $520,292                      $27,204       $47,988       $536,359                      $16,890       $37,674    
   69    1986      14.40%                $20,784                     $607,861                      $32,321       $53,105       $640,382                      $16,890       $37,674    
   70    1987      -2.93%                $20,784                     $658,403                      $35,634       $56,418       $713,259                      $16,890       $37,674    
   71    1988       8.86%                $20,784                     $604,513                      $33,336       $54,120       $675,955                      $16,890       $37,674    
   72    1989      17.24%                $20,784                     $621,786                      $34,975       $55,759       $717,461                      $16,890       $37,674    
   73    1990      -5.94%                $20,784                     $687,968                      $39,518       $60,302       $821,338                      $16,890       $37,674    
   74    1991      23.02%                $20,784                     $609,937                      $35,824       $56,608       $756,670                      $16,890       $37,674    
   75    1992       5.58%                $20,784                     $706,265                      $42,473       $63,257       $910,065                      $16,890       $37,674    
   76    1993       7.30%                $20,784                     $700,839                      $43,218       $64,002       $943,023                      $16,890       $37,674    
   77    1994      -3.74%                $20,784                     $705,617                      $44,692       $65,476       $993,728                      $16,890       $37,674    
   78    1995      25.56%                $20,784                     $636,216                      $41,462       $62,246       $940,319                      $16,890       $37,674    
   79    1996      10.34%                $20,784                     $746,753                      $50,172       $70,956      $1,159,426                     $16,890       $37,674    
   80    1997      20.33%                $20,784                     $768,629                      $53,355       $74,139      $1,260,709                     $16,890       $37,674    
   81    1998      15.53%                $20,784                     $860,655                      $61,874       $82,658      $1,496,630                     $16,890       $37,674    
   82    1999      11.00%                $20,784                     $922,825                      $68,892       $89,676      $1,709,532                     $16,890       $37,674    
   83    2000      -5.00%                $20,784                     $947,904                      $73,702       $94,486      $1,878,908                     $16,890       $37,674    
   84    2001      -4.69%                $20,784                     $830,449                      $67,476       $88,260      $1,768,824                     $16,890       $37,674    
   85    2002      -11.38%               $20,784                     $727,211                      $61,983       $82,767      $1,669,817                     $16,890       $37,674    
   86    2003      18.18%                $20,784                     $589,527                      $52,939       $73,723      $1,464,828                     $16,890       $37,674    
   87    2004       5.76%                $20,784                     $634,142                      $60,296       $81,080      $1,711,180                     $16,890       $37,674    
   88    2005       1.09%                $20,784                     $606,906                      $61,459       $82,243      $1,791,901                     $16,890       $37,674    
   89    2006       8.26%                $20,784                     $551,412                      $59,880       $80,664      $1,794,421                     $16,890       $37,674    
   90    2007       1.90%                $20,784                     $532,150                      $62,479       $83,263      $1,924,417                     $16,890       $37,674    
   91    2008      -20.27%               $20,784                     $478,611                      $61,361       $82,145      $1,943,836                     $16,890       $37,674    
   92    2009      16.42%                $20,784                     $332,655                      $47,147       $67,931      $1,536,268                     $16,890       $37,674    
   93    2010      11.16%                $20,784                     $332,401                      $52,902       $73,686      $1,768,925                     $16,890       $37,674    
   94    2011       0.62%                $20,784                     $310,697                      $56,676       $77,460      $1,947,600                     $16,890       $37,674    
   95    2012                                                        $255,595                                                 $1,942,673                                
                                                                                                                $4,098,990                                                $3,163,021  

[longinvest]

Here's another simulation starting in 1949 and ending in 2019. Retirement is in 1989 after a nice portfolio recovery period.

[longinvest]

And, here's the retirement in 1966 scenario:



Note that the person using the VPW worksheet stopped portfolio contributions during the last decade of work, from 1956 to 1965, except for a $1,392 contribution in 1958.

[5th_Dimension]

Longinvest, Thank you for taking the time to make these spreadsheets. One feature you had on previous spreadsheets was the ability to put in an inheritance amount to be left at the end of the term. That might be useful to have in this one as well. I like the idea of having a buffer amount available .

[Dwayne]

A few years ago I was fortunate to find Bogleheads.org. The site provided a financial education I sorely needed and have benefited from. A couple of weeks ago I spent some time in the VPW thread and Wiki. Longinvest's work is the next step in my education. Thank you for suggesting and supporting the VPW concept.

I've downloaded version 1.4 of the spreadsheet, filled in my info, and run into some confusion. The VPW Wiki regarding VPW for Advanced Users notes: "... targeted at advanced users who fully understand the risks of filling the gap in future pension payments...".

Unless I misunderstand what I'm seeing in the basic spreadsheet it suggests an annual portfolio withdrawl which bridges the gap between now and a pension which starts when I turn 65 in a few years.

The "Initial Withdrawl Percentage" (cell B55) is 4.7% (age 61). The suggested "Annual Portfolio Withdrawl" (in green - cell B14) is 6.22% of the portfolio balance. The "Initial Portfolio Withdrawl" (cell B61) (in the calculations section below the main spreadsheet) is 4.26% of the portfolio balance. The spreadsheet also lists calculations referring to pension bridge costs. For reference I'm working in Excel.

I'm perfectly happy withdrawing 4.7% of my portfolio balance based on the table in the Wiki and calling it good. It's more money than I expected to have available in retirement. At the same time, I'd like to be sure I'm not missing something in the spreadsheet which would benefit me, or warn of a potential shortfall.

Thank you for any guidance you can offer.

Dwayne

[longinvest]

One feature you had on previous spreadsheets was the ability to put in an inheritance amount to be left at the end of the term. That might be useful to have in this one as well. I like the idea of having a buffer amount available .

If you look at my posts of earlier today, you'll see that in the three 70-year simulations, a retiree who had a $60,000 salary and saved for 40 years from age 25 to age 65, died at age 95 with a portfolio of more than $250,000 in inflation-adjusted dollars, more than 4 times the annual salary. This is quite a sizeable portfolio in relative terms!

The "spreadsheet for advanced users" was an experiment. It allowed me to assess various properties of mixing VPW with pension bridges and a potential residual portfolio target. I've learned from this experiment that:

• Integrating a future pension with VPW withdrawals dampens total income volatility. That's a nice property.
• Integrating a fixed residual portfolio target with VPW withdrawals increases total income volatility. That's an undesirable property.

The three simulations of earlier today are also useful to observe that a specific inflation-adjusted amount of money has a different effective value at different times. For example, in the first simulation, the VPW user retired in 1982 with only a $430,000 portfolio, yet this proved to be an extremely valuable portfolio in the upcoming decades. In the second simulation the retiree retired in 1989 with 60% more (near $690,000), yet this portfolio value over the next decades wasn't worth 60% more than the $430,000 of the 1982 retiree. Finally, in the third simulation the retiree had a $1,000,000 portfolio, yet it proved less valuable than the $430,000 portfolio of the 1982 retiree.

What I'm trying to explain is that it simply makes no sense to target a specific inheritance amount, like it doesn't make sense to target a specific retirement portfolio amount. We don't know when we'll die. If we really wanted to do things correctly, we would logically have to adjust the size of the target bequest to its unknown future effective value during the decades after our death! And, lastly, trying to aim for such a specific bequest amount increases the volatility of total income and, thus, harms the retiree.

As a consequence, I've decided to exclude this idea from the new VPW worksheet.

I think that more desirable alternative approaches to inheritances and bequests are:

• Provide gifts to children, grandchildren, and favorite charities while alive, taken from excess money that VPW withdrawals provide and that the retiree doesn't need. Take the opportunity to check that the money is properly used or managed before giving additional gifts.
• For major donations, build a separate portfolio (possibly managed by the receiving charity organization) and regularly add to it when VPW provides excess money over the retiree's needs.

In other words, I think that a retiree should always put personal financial safety first, before any inheritance or bequest goal. Adding a specific residual portfolio target to the VPW worksheet would fail this principle. I hope that I've provided you with good enough alternatives.

[longinvest]

I've downloaded version 1.4 of the spreadsheet, filled in my info, and run into some confusion. [...]

Unless I misunderstand what I'm seeing in the basic spreadsheet it suggests an annual portfolio withdrawl which bridges the gap between now and a pension which starts when I turn 65 in a few years.

The "Initial Withdrawl Percentage" (cell B55) is 4.7% (age 61). The suggested "Annual Portfolio Withdrawl" (in green - cell B14) is 6.22% of the portfolio balance. The "Initial Portfolio Withdrawl" (cell B61) (in the calculations section below the main spreadsheet) is 4.26% of the portfolio balance. The spreadsheet also lists calculations referring to pension bridge costs. For reference I'm working in Excel.

I'm perfectly happy withdrawing 4.7% of my portfolio balance based on the table in the Wiki and calling it good. It's more money than I expected to have available in retirement. At the same time, I'd like to be sure I'm not missing something in the spreadsheet which would benefit me, or warn of a potential shortfall.

Effectively, the Retirement sheet of version 1.4 of the VPW Accumulation and Retirement Worksheet bridges the gap between now and a delayed pension.

That's why the suggested withdrawal amount (in green, cell B14) might be higher than 4.7% of the current portfolio balance (cell B9). This is normal and desirable, as it is meant to provide a temporary replacement for an upcoming pension.

(Note that a fixed pension without cost of living adjustments could have had the reverse impact; it could have reduced the suggested withdrawal amount to less than 4.7% of the current portfolio balance.)

What's important to pay close attention to is the Required Flexibility section. The portfolio loss value (cell B17), the portfolio balance after loss (cell B18), and the portfolio withdrawal reduction (cell B19) are critical values. These are estimates of what could easily happen given the portfolio's asset allocation. It's important for the retiree to have sufficient flexibility in the budget to easily deal (if necessary, in the future) with the calculated income reduction (cell B19).

It's also important to look at the Annual Income After Loss section. It shows what retirement income could look like if markets misbehaved. It's another way to view the impact of the loss of income reported in the Required Flexibility section.

VPW's withdrawals are variable. The Required Flexibility and Annual Income After Loss sections are meant to help understand how total income could easily fluctuate (on the negative side) if markets misbehaved.

If you already understand this, you're not missing anything.

[KarenC]

One feature you had on previous spreadsheets was the ability to put in an inheritance amount to be left at the end of the term. That might be useful to have in this one as well. I like the idea of having a buffer amount available .

[…]

What I'm trying to explain is that it simply makes no sense to target a specific inheritance amount, like it doesn't make sense to target a specific retirement portfolio amount. We don't know when we'll die. If we really wanted to do things correctly, we would logically have to adjust the size of the target bequest to its unknown future effective value during the decades after our death! And, lastly, trying to aim for such a specific bequest amount increases the volatility of total income and, thus, harms the retiree.

As a consequence, I've decided to exclude this idea from the new VPW worksheet.

[…]

Thank you for this explanation! (I has also wondered about this.)

[5th_Dimension]

Thank you for the explanation

[longinvest]

The vlogosphere talks about VPW.

I just saw this video on YouTube: Variable Percentage Withdrawal for Retirement Planning (2019).

[LadyGeek]

^^^

The vlogger has a very strong dislike of inflation-indexed Single Premium Immediate Annuities. I'm not sure, but I think the vlogger is approaching the point from a cost to purchase perspective (?).

The wiki description:

At age 80, if you're still alive, it's important to consider using part (but not all) of your remaining portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA), so that the estimated Income Floor After 100 is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risks associated with living past age 100.

From this post forward, the rationale for purchasing the inflation-indexed SPIA is discussed. There are further comments and clarifications that disagree with the rationale.

I don't have a SPIA and don't fully understand the points of contention, but wanted to ask if this description should mention a cost trade against a SPIA that is not indexed to inflation?

[longinvest]

^^^

The vlogger has a very strong dislike of inflation-indexed Single Premium Immediate Annuities. I'm not sure, but I think the vlogger is approaching the point from a cost to purchase perspective (?).

It would effectively be illogical for two streams of income, one with with fixed payments and one with increasing payments, to have an identical price. Obviously, the stream of income with increasing payments must be more expensive to buy.

But, as our goal is to dampen the financial risks related to living beyond age 100, it's important to select an inflation-indexed SPIA*. We're not trying to get the most money "as fast as possible" from the SPIA; we're trying to protect our long-term purchase power.

* Single-Premium Immediate Annuity.

The wiki description:

At age 80, if you're still alive, it's important to consider using part (but not all) of your remaining portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA), so that the estimated Income Floor After 100 is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risks associated with living past age 100.

From this post forward, the rationale for purchasing the inflation-indexed SPIA is discussed. There are further comments and clarifications that disagree with the rationale.

Thanks for the link to the prior discussion.

It might be worth repeating some of the key points:

According to United States Life Tables, 2013 (page 6), 1.0% of males and 2.8% of females reach age 100. In particular, (1,023 / 51,252) = 2.0% of 80 years old males and (2,754 / 64,427) = 4.3% of 80 years old females make it to age 100. The chance of one spouse surviving to age 100, in a man and woman couple (both of age 80) is ((2.0% + 4.3%) - (2.0% X 4.3%)) = 6.2%. Note that this is for the general population, without accounting for socioeconomic status.

It's logical to calibrate financial plans on high-probability scenarios (like dying before 100). Yet, it would be prudent to also consider the consequences of low-probability adverse financial events (like living beyond 100) and, when necessary, plan to dampen their impact.

VPW is calibrated to deliver its last withdrawal at age 99. While the probability of still being alive at 100 is low, its financial consequences could be severe if VPW withdrawals were necessary for the comfort of the retiree. It's thus a good idea, at age 80, to buy sufficient inflation-indexed SPIA* income to insure one's lifelong financial well-being, when necessary.

* Indexed to the CPI or to a specific percentage like 3%.

Why not before 80? Because inflation-indexed SPIAs are more expensive when one is younger. Also, one might not even reach 80. Only 51% of males and 64% of females make it to 80.

Why not after 80? Because fewer insurance companies are willing to sell inflation-indexed SPIAs past this age, leading to less competition and higher prices.

I wouldn't buy more than strictly necessary to dampen the financial impact of surviving past 100. It's a low-probability event (98% of men and 96% of women, still alive at 80, don't make it to 100) and it's OK to be less wealthy when alive at 100. The goal, here, is to avoid ending up eating cat food under a bridge at 100 (figuratively).

Having sufficient lifelong inflation-indexed non-portfolio income, in old age, can also be helpful in case of cognitive decline or inability to manage the portfolio (due to the death of the spouse who was managing it).

You're asking a very good question:

I don't have a SPIA and don't fully understand the points of contention, but wanted to ask if this description should mention a cost trade against a SPIA that is not indexed to inflation?

I think that the wiki description shouldn't get into this. Insurance is expensive. We wouldn't tell homeowners to avoid buying flood insurance in regions exposed to floods because it's more expensive than in regions without floods! On the contrary, we would tell them that it's important to insure their home against flood, especially when the risk is real.

I think that it's very important to buy an inflation-indexed SPIA when a SPIA is necessary because income would drop too much due to insufficient Social Security after age 100. It wouldn't make sense to buy "long life insurance" that loses its protective features (by getting eroded by inflation) exactly when the financial risk we're trying to dampen shows up, in other words, when long life happens!

Let's be clear, here. We're only suggesting to buy as little as strictly necessary to avoid financial hardship after 100, and only when it really is needed. Some people already have an inflation-indexed pension in addition to Social Security, for example; they don't need to buy more inflation-indexed lifelong income at age 80.

Note that, based on US life tables, the probability is for 6.2% of 80-year old couples to have one spouse survive past the venerable age of 100 in the general US population. Given the known selection bias among buyers of SPIAs, I suspect this ratio is higher for annuitants. While this isn't the most likely scenario, for an 80-years old couple, it's still has a significant probability of happening. This isn't a one in a million cases scenario; it's a one in less than twenty cases scenario. Given the severe consequences involved, we should take such a scenario into consideration in our plans and dampen its unfavorable consequences.

Ideally, the inflation-indexed SPIA should be indexed to the CPI-U. In the US, at least one insurance company sells such SPIAs. In countries like Canada, where a SPIA indexed to the consumer price index isn't openly sold, one can buy a fixed inflation increment (like a 2% annual increment when the central bank rigorously adheres to a 2% inflation target, which is the case in Canada).

[LadyGeek]

^^^

The vlogger has a very strong dislike of inflation-indexed Single Premium Immediate Annuities. I'm not sure, but I think the vlogger is approaching the point from a cost to purchase perspective (?).

It would effectively be illogical for two streams of income, one with with fixed payments and one with increasing payments, to have an identical price. Obviously, the stream of income with increasing payments must be more expensive to buy.

But, as our goal is to dampen the financial risks related to living beyond age 100, it's important to select an inflation-indexed SPIA*. We're not trying to get the most money "as fast as possible" from the SPIA; we're trying to protect our long-term purchase power.

* Single-Premium Immediate Annuity.

I don't understand annuity pricing, so your statement associating increasing payments with a higher-price product was not obvious to me. In hindsight, I can see your point. Thanks.

[longinvest]

Here's a reply I wrote on another thread to dispel a myth about how VPW must be used in retirement:

By the way I believe the VPW info assumes you have a base guaranteed income to cover your basic living costs (pension, annuity, house or investment property) and the money invested using a VPW rate is money you need to be able to cut down on when the market tanks.
If you don't have your minimum needs taken care of, then VPW might not be suitable.
@longinvest please correct me if I'm wrong.

The bold and underlined statements are incorrect before age 80.

The VPW Accumulation And Retirement Worksheet does take into account current and future pensions. It also estimates the impact of a 50% stocks loss on the plan.

It's only at age 80 and later that the Retirement sheet calculates the projected income floor after age 100 and informs the retiree that this floor can be increased by buying an inflation-indexed SPIA*. Such a product is prohibitively expensive at earlier ages.

* Single-Premium Immediate Annuity.

For those who don't use the new worksheet, similar instructions are provided in our wiki for VPW Table users and VPW Backtesting Spreadsheet users:

3. Around age 80, if you're still alive, it is important to consider using part (but not all) of your remaining portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA), so that total non-portfolio income (including Social Security, pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risks associated with living past age 100.
4. It is suggested to limit the withdrawal percentage to no more than 10%, after buying the inflation-indexed SPIA.

The VPW Table is calibrated to deliver its last withdrawal at age 99 and deplete the portfolio. In practice, this never happens, as instructions suggest to cap withdrawals at 10%. (This is automatically done in the new worksheet). But, with the 10% cap, withdrawal amounts are significantly reduced after age 95. Establishing a sufficient income floor at age 80 is critical. Note that some people already have sufficient lifelong non-portfolio income at age 80 and don't need to buy more.

In the earlier years of retirement, a current pension (if any) and a future pension (like Social Security delayed to age 70) dampen the impact of stock losses on total retirement income (pensions + portfolio withdrawals). Increasing the portfolio's allocation to bonds will further dampen the impact of stock losses. The new worksheet automatically calculates the impact of a 50% stock loss on total retirement income, and informs the retiree about the flexibility that must be kept in the spending budget to easily reduce future withdrawals in case of such unfavorable market returns.

[longinvest]

In another thread, I wrote a post about the new VPW Accumulation And Retirement Worksheet:

Are there any simple retirement calculators that you prefer to use that will give me a good idea if we are on track? Also, perhaps takes account of taxes when withdrawing in retirement?

Here's a link to one of the simplest, yet most robust retirement calculators. It's our wiki's VPW Accumulation And Retirement Worksheet. The calculator can be used online or downloaded.

The VPW Worksheet calculator has two sheets: an Accumulation sheet for investors still in the accumulation phase, and a Retirement sheet for retirees.

The main feature that sets this calculator apart from most other calculators is that it implements a robust portfolio withdrawal method that adapts savings amounts (during accumulation) and withdrawal amounts (during retirement) to market returns while taking current and future pensions (with and without cost-of-living adjustments) into account. Most importantly, it never exposes the portfolio to premature depletion.

The calculator informs its user of the required flexibility that must be kept in the spending budget so that it will be easy to increase savings (during accumulation) or reduce portfolio withdrawals (during retirement) in case of unfavorable market returns (like stocks losing 50% of their value).

Here's a screenshot of the Retirement sheet for a young retiree, age 60, who has a $650,000 portfolio with a 30/70 stocks/bonds allocation, a $850/month pension (without cost-of-living adjustments), and who is delaying Social Security to age 70 to receive $2,065/month.

Yellow cells must be entered (or updated) every year of retirement to refresh calculations and get a new portfolio withdrawal amount suggestion.



The spreadsheet suggests a $38,306 portfolio withdrawal that will be combined with the (12 X $850) = $10,200 work pension to provide a total retirement income of $48,326 in 2019 at age 60 available for taxes and expenses.

It informs the user that it's important to keep a flexibility of at least $3,990 in the spending budget so that spending could be reduced accordingly in the future in case of unfavorable portfolio returns. This represents a ($3,990 / $48,326) = 8% income reduction in case of a 50% stocks loss. That's pretty robust for a method that will never prematurely deplete the portfolio.

Our wiki's variable percentage withdrawal (VPW) page contains instructions for how to use variable-percentage withdrawals during retirement. Detailed information about the method is provided in this thread.

Unfortunately, this simple calculator doesn't prepare one's morning coffee. It doesn't calculate taxes, either.

[longinvest]

Monthly VPW Withdrawals

Introduction

Curious readers who downloaded the new VPW Accumulation And Retirement Worksheet and played with its Retirement sheet probably noticed that it offers a monthly withdrawal option.

This post explains how to use monthly withdrawals with a small cash buffer organized in 12 monthly silos to dampen short-term fluctuations and add income predictability.

Plain Annual VPW

In its simplest form, VPW consists of looking up a percentage every year of retirement in the VPW Table based on age and asset allocation. This percentage is multiplied by the portfolio balance to obtain a withdrawal amount. The amount is withdrawn and combined with other retirement income (like Social Security) to pay taxes and fund expenses during the upcoming year.

To transform the annual withdrawal into monthly income, one can simply put the withdrawn amount into a high-interest savings account and then withdraw 1/12 of the account balance in the first month, 1/11 of the balance in the second month, 1/10 of the balance in the third month, and so on, until 1/1 of the account in the 12th month. Every year, a new VPW withdrawal is taken to replenish the empty savings account.

Note that, on average, the savings account contains approximately 5.5 months of income. This is because it contains 11 months of income during the first month down to 1 month of income during the 11th month. Over 12 months this averages to:
((11 months of income + 10 months of income + ... + 1 month of income) / 12) = 5.5 months of income.

This approach delivers slightly increasing withdrawals helping to fight inflation during the year, thanks to interest earned in the savings account.

The result is an income that remains stable for 12 months. Every year, when a new VPW withdrawal is taken, income changes. The new VPW Retirement Worksheet informs the retiree in advance of the flexibility that should be kept in the budget to easily adapt to the consequences of a 50% stock loss during the year. With a 50/50 stocks/bonds portfolio, such a loss would cause a 25% reduction in withdrawals. It is suggested to include bonds in the portfolio and to combine VPW withdrawals with Social Security and other retirement income to dampen total retirement income fluctuations.

Annoyance

One mildly annoying aspect of annual VPW withdrawals is the annual surprise. It's only on the day of withdrawal that one gets to know how much will be available for the next year. Of course, having already planned for the impact of a 50% stock loss, this surprise won't break the plan, but it's still annoying not to be able to start planning highly-discretionary expenses of the next year before the annual withdrawal.

That's where monthly withdrawals come.

Monthly Withdrawals And Monthly Silos

If we directly took monthly withdrawals as income, the annoyance identified above would get worse; we would only be able to plan highly-discretionary expenses one month in advance. But, we'll do things differently.

To transform an annual VPW withdrawal into monthly income, a savings account that contains 5.5 months of income on average during the year was used.

We'll use a similar amount of money to fill 12 monthly silos, which are 12 high-interest savings accounts named January, February, March, ..., December. They will constantly contain approximately 5.5 months of income.

The idea is this:

1. At the end of every month, when a monthly VPW withdrawal is taken from the portfolio, the withdrawn amount is divided in 12 equal parts which are deposited into the 12 monthly silos.
2. During each month of the year, that month's silo is emptied and the money is used as income for the month.

For example, at the beginning of March, the March silo contains the sum of 1/12 of last year's March withdrawal, 1/12 of last year's April withdrawal, ..., and 1/12 of this year's February withdrawal in addition of all the interest earned in this silo since it was last emptied. In other words, the March silo contains the average of the last 12 monthly VPW withdrawals plus interest. The silo is emptied and the money is used as income in March. At the end of March, a monthly VPW withdrawal is taken and distributed into the 12 silos. In April, the same happens with the April Silo.

At the end of the last month before retirement, it's important to pre-fill the silos appropriately. Here's how to do that:

1. Determine the first monthly VPW withdrawal amount using the VPW Retirement Worksheet. (Alternately, if using the VPW Table, calculate an annual withdrawal amount and divide it by 12 to obtain a monthly withdrawal amount).
2. Multiply the first month's VPW withdrawal amount by 6.5. Withdraw this amount from the portfolio.
3. Put 12/78 of the withdrawn amount into next month's silo, 11/78 of the withdrawn amount into the next silo, 10/78 into the next, and so on, until the 12 silos are prefilled with decreasing amounts. (The total is 78/78 of the withdrawn amount).
4. At the beginning of next month (a few days after the above), retire and withdraw that month's silo as income in addition to other retirement income.

Does it make a difference?

I've simulated annual and monthly VPW withdrawals on a 50/50 stocks/bonds portfolio, with stocks divided evenly between domestic (US) and international (ex US) from 1998 to 2018. The initial withdrawal is taken on December 31, 1997 at age 65 from a $1,000,000 portfolio. I've used cash monthly returns from Portfolio Visualizer as savings account returns.

Source data for simulations: Portfolio Visualizer

In the following figure, the black line represents monthly income (including interest) derived from annual VPW withdrawals taken on December 31. The red line represents monthly VPW withdrawals, and the green line represents monthly income from monthly silos (average of the last 12 monthly VPW withdrawals plus interest).



While monthly income from silos is smoother than the other two, it remains obvious that the major fluctuations (up in the late 1990s, down in the early 2000s, up in the mid 2000s, significantly down in 2008-2009, and then up) are determined by portfolio returns. It's the smaller short-term fluctuations that are significantly dampened by monthly silos.

It's worth zooming on the 2008-2010 period:



The drop in monthly income from annual VPW withdrawals was 24% from $5,829 in December 2008 to $4,416 in January 2009. The most severe part of portfolio losses happened in September and October 2008, just a few months before the next VPW withdrawal. The retiree was somehow lucky; had the next withdrawal happened at the end of February 2009, it would have been lower.

That's were silos shine:

1. They reduce the level of "luck" involved. By taking smaller monthly withdrawals and averaging them, retirement incomes fluctuations get less dependent on the luck of the portfolio's balance on withdrawal day, and mostly dependent on the more fundamental trend of market returns.
2. Silos inform the retiree well in advance of what will happen to income. One month in advance, the retiree can look into the upcoming month's silo and see it (11/12) = 92% filled. As we know that stocks are unlikely to lose more than 50% during the month, we can estimate at least 75% of the missing 8% with a 50/50 stocks/bonds portfolio. That's a 98% estimate of next month's income. Similarly we can estimate 96% of the next, and so on.

At the end of October 2008, the monthly VPW withdrawal was down to $4,314 from $5,208 two months earlier! But, the retiree knew that the full impact of this loss wouldn't be entirely felt until the 12th month, October 2009. That's unlike annual VPW withdrawals where the impact was fully felt in January 2009 with little advance warning.

Inflation

Let's compare monthly silo income from monthly VPW withdrawals with inflation as measured by CPI-U:



We see that CPI-U is more volatile on a small scale than monthly silo income. CPI-U is an indirect measure of inflation. It's pretty good at measuring inflation over longer periods of time, but on a small scale on charts, it exhibits a volatility that isn't really felt in real life.

Here's what happens when we average CPI-U over 12 months:



That's more a reasonable way to look at inflation, don't you think?

Inflation-Adjusted Silo Income

So, here it is, finally, the chart of inflation-adjusted silo income derived from monthly VPW withdrawals at age 65 from a 50/50 stocks/bonds $1,000,000 portfolio (without taking into account any non-portfolio income), using 12-months-average inflation:



Monthly income started at $4,138 and varied between a maximum of $4,680 and a minimum of $3,323 in average-inflation-adjusted terms.

Annual income (the sum of 12 months income) was:

Code: Select all

1998	$51,074
1999	$53,516
2000	$55,661
2001	$52,836
2002	$47,274
2003	$43,337
2004	$46,279
2005	$48,167
2006	$49,513
2007	$51,986
2008	$51,011
2009	$41,781
2010	$43,712
2011	$46,201
2012	$45,562
2013	$46,509
2014	$48,254
2015	$49,102
2016	$47,154
2017	$47,448
2018	$48,988

Annual income varied between a maximum of $55,661 in 2000 and a minimum of $41,781 in 2009, in average-inflation-adjusted terms.


About Sequence of Return Risk

Note that monthly VPW withdrawals have no sequence of return risk. Monthly VPW withdrawals aren't smoothed. Only monthly income is smoothed using monthly silos never containing more than approximately half an annual VPW withdrawal.

Conclusions

In this long post, I've presented a simple approach that combines monthly VPW withdrawals with 12 monthly silos (12 savings accounts named January to December) to significantly dampen short-term income fluctuations and increase short-term income predictability.

So, what do you think?

[Yukon]

I take the Taylor Method to encompass flexibility, which could include anything from going back to work to annuitization to other strategies in response to market changes. Unlike some, I am not pathologically obsessed with false precision, as opposed to being tyrannized by never ending Fake News Financial "Analysis." I find the study of the nature of risk (and risk mitigation) to be more valuable than anything I could gain as a "student of investing."

Well said. How would you suggest a person study the nature and mitigation of risk? A book suggestion, perhaps?