Variable Percentage Withdrawal (VPW)

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JustinR
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Joined: Tue Apr 27, 2010 11:43 pm

Re: Variable Percentage Withdrawal (VPW)

Post by JustinR »

Thank you for the work in creating the spreadsheet, but it could really use more explanation to be more user friendly. I suggest giving each yellow cell a note that explains what it is and how you get the information to put in there.
  1. On the accumulation tab for "Defined Benefit Pension #1" social security is filled in. How do we get the "Annual Contribution" number?
  2. What's "Cost of Living Adjustments"?
  3. I suggest renaming "semi-monthly" and "biweekly" to "twice a month" and "every two weeks" respectively.
flaccidsteele
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Location: Canada

Re: Variable Percentage Withdrawal (VPW)

Post by flaccidsteele »

JustinR wrote: Mon Sep 28, 2020 1:47 am Thank you for the work in creating the spreadsheet, but it could really use more explanation to be more user friendly. I suggest giving each yellow cell a note that explains what it is and how you get the information to put in there.
  1. On the accumulation tab for "Defined Benefit Pension #1" social security is filled in. How do we get the "Annual Contribution" number?
  2. What's "Cost of Living Adjustments"?
  3. I suggest renaming "semi-monthly" and "biweekly" to "twice a month" and "every two weeks" respectively.
+1 ^this

I would never use this method but maybe some find it useful
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
azanon
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Re: Variable Percentage Withdrawal (VPW)

Post by azanon »

Stubbie wrote: Mon Aug 10, 2020 7:45 pm
longinvest wrote: Mon Aug 10, 2020 5:23 pm Another planning approach is to only include the survivor pension amount, in the worksheet, instead of the full amount when both are alive. This eliminates the income drop on the first death, but it's likely to lead to extra (unplanned for) income when pensions start and for as long as both are alive. This extra income could be used for gifts, unplanned discretionary expenses, etc.
This is the approach that we have chosen, knowing that we likely could spend more money each year than the spreadsheet indicates, but also knowing that there is added ability to deal with future unplanned financial calamities.

Longinvest, let me add my thanks to you for spending the time to create such a great tool!

Stub
I don’t get that approach. If someone dies, the expenses for the remaining individual probably drop even more than the half pension amount lost, since the portfolio will be unaffected.
ScubaHogg
Posts: 725
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Re: Variable Percentage Withdrawal (VPW)

Post by ScubaHogg »

azanon wrote: Mon Sep 28, 2020 5:15 am
Stubbie wrote: Mon Aug 10, 2020 7:45 pm
longinvest wrote: Mon Aug 10, 2020 5:23 pm Another planning approach is to only include the survivor pension amount, in the worksheet, instead of the full amount when both are alive. This eliminates the income drop on the first death, but it's likely to lead to extra (unplanned for) income when pensions start and for as long as both are alive. This extra income could be used for gifts, unplanned discretionary expenses, etc.
This is the approach that we have chosen, knowing that we likely could spend more money each year than the spreadsheet indicates, but also knowing that there is added ability to deal with future unplanned financial calamities.

Longinvest, let me add my thanks to you for spending the time to create such a great tool!

Stub
I don’t get that approach. If someone dies, the expenses for the remaining individual probably drop even more than the half pension amount lost, since the portfolio will be unaffected.
Meh. It could go either way, especially with someone who is pension-heavy and portfolio light. Housing, for example, might not drop at all as many folks won’t want to move just because they lost their SO.
“Unexpected Returns dominate the Expected Returns” - Ken French
azanon
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Re: Variable Percentage Withdrawal (VPW)

Post by azanon »

ScubaHogg wrote: Mon Sep 28, 2020 6:50 am
azanon wrote: Mon Sep 28, 2020 5:15 am
Stubbie wrote: Mon Aug 10, 2020 7:45 pm
longinvest wrote: Mon Aug 10, 2020 5:23 pm Another planning approach is to only include the survivor pension amount, in the worksheet, instead of the full amount when both are alive. This eliminates the income drop on the first death, but it's likely to lead to extra (unplanned for) income when pensions start and for as long as both are alive. This extra income could be used for gifts, unplanned discretionary expenses, etc.
This is the approach that we have chosen, knowing that we likely could spend more money each year than the spreadsheet indicates, but also knowing that there is added ability to deal with future unplanned financial calamities.

Longinvest, let me add my thanks to you for spending the time to create such a great tool!

Stub
I don’t get that approach. If someone dies, the expenses for the remaining individual probably drop even more than the half pension amount lost, since the portfolio will be unaffected.
Meh. It could go either way, especially with someone who is pension-heavy and portfolio light. Housing, for example, might not drop at all as many folks won’t want to move just because they lost their SO.
Doing it the OP way is a guaranteed artificial reduction in income until one person is lost. This is contrary to the entire point of VPW which is relative maximum income from beginning to end of retirement. I'm surprised he suggested it TBH.

If one is going to skew anything, you want to skew higher spending on the front end given study after study that shows a decrease in spending as one ages (for obvious reasons).
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1210sda
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Re: Variable Percentage Withdrawal (VPW)

Post by 1210sda »

Longinvest,

Thanks for doing this. It's obvious a lot of work has gone into this.

I do have a question. You may have already answered, but at over 1,000 posts, I couldn't find it.

Is there a way to leave a legacy? Say, start out with a $1,500,000 portfolio but you want to make sure that $750,000 is left as an inheritance.
flaccidsteele
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Location: Canada

Re: Variable Percentage Withdrawal (VPW)

Post by flaccidsteele »

azanon wrote: Mon Sep 28, 2020 5:41 pm
ScubaHogg wrote: Mon Sep 28, 2020 6:50 am
azanon wrote: Mon Sep 28, 2020 5:15 am
Stubbie wrote: Mon Aug 10, 2020 7:45 pm
longinvest wrote: Mon Aug 10, 2020 5:23 pm Another planning approach is to only include the survivor pension amount, in the worksheet, instead of the full amount when both are alive. This eliminates the income drop on the first death, but it's likely to lead to extra (unplanned for) income when pensions start and for as long as both are alive. This extra income could be used for gifts, unplanned discretionary expenses, etc.
This is the approach that we have chosen, knowing that we likely could spend more money each year than the spreadsheet indicates, but also knowing that there is added ability to deal with future unplanned financial calamities.

Longinvest, let me add my thanks to you for spending the time to create such a great tool!

Stub
I don’t get that approach. If someone dies, the expenses for the remaining individual probably drop even more than the half pension amount lost, since the portfolio will be unaffected.
Meh. It could go either way, especially with someone who is pension-heavy and portfolio light. Housing, for example, might not drop at all as many folks won’t want to move just because they lost their SO.
Doing it the OP way is a guaranteed artificial reduction in income until one person is lost. This is contrary to the entire point of VPW which is relative maximum income from beginning to end of retirement. I'm surprised he suggested it TBH.

If one is going to skew anything, you want to skew higher spending on the front end given study after study that shows a decrease in spending as one ages (for obvious reasons).
+1 this
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

1210sda wrote: Mon Sep 28, 2020 9:33 pm Longinvest,

Thanks for doing this. It's obvious a lot of work has gone into this.

I do have a question. You may have already answered, but at over 1,000 posts, I couldn't find it.

Is there a way to leave a legacy? Say, start out with a $1,500,000 portfolio but you want to make sure that $750,000 is left as an inheritance.
1210sda, given a retirement starting at age 65 with a 60/40 stock/bond allocation, it would take until age 88 for VPW's model (before applying actual market returns) to reduce the portfolio balance to approximately 50% of its initial value (the chart's VPW percentage is capped at 10%):

Image

By that time, children are likely nearing age 60. They're hopefully financially independent and possibly retired.

According to United States Life Tables, 2013 (page 6), approximately 60% of those who were alive at 65 have already passed away at age 88. In other words, a majority of those who use VPW without any modification are likely to die with a sizeable portfolio balance (possibly bigger than 50% of the portfolio's inflation-adjusted balance at age 65).

I've experimented, in the past, with the idea of aiming for a specific residual portfolio balance. Here's a link to a post where I explain why I've decided to exclude this idea from the VPW Accumulation and Retirement Worksheet. Here are its conclusions:
longinvest wrote: Mon Jun 17, 2019 4:35 pm [...]
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.
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bogleplugs
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Re: Variable Percentage Withdrawal (VPW)

Post by bogleplugs »

@longinvest, you and the other bogleheads who have contributed to this have done remarkable work!

I have read through the nearly 1500 posts in this thread, the forward test thread, and the variable savings rate thread, and I have a couple remaining questions I didn't see asked or answered before. I hope you can please shed some light.

1) On the Accumulation tab of the VPW-Accumulation-and-Retirement-Worksheet, the suggested Portfolio Contribution seems to be driving towards saving enough now to eventually withdraw an amount to more or less replace current income available for taxes and expenses. But if we are doing a good job of living below our means, it seems like to trying to replace current income, instead of expected expenses in retirement, is aiming too high, no? I suggest there be a cell in this sheet to enter in expected expenses at retirement to help drive the Portfolio Contribution amount in green. My reasoning is that, for instance, I am in prime earning years with a large, young family. I do not expect to have to support the same spending level in retirement that I do now. If I save as much as is suggested in the green cell, I would end up over-saving now (at the expense of reducing near-term budget) for a target retirement income that is way too large.

2) Regarding the Annual Income After 50% loss on the Retirement tab, is this intended to be an estimate of any future minimum portfolio amount, or does it only apply to the current year? In other words, is it sufficient for planning purposes to only look at the current year's Suggested and Minimum withdrawals to have confidence that the VPW plan will work for the retiree going forward into the future? Or is there another parameter to pay attention to, for instance in the backtesting worksheet? When I use the backtesting sheet, the Minimum Total Income for a given year can be lower than the Minimum income after loss on the VPW sheet (sometimes ~10% lower, for 1966). Is there an expectation that the 50% loss could continue every year? In this worst of worst cases, VPW would have me continue withdrawing less and less out of a sinking portfolio, below what would be needed for living expenses. I'm not sure what I would do differently than VPW in this case anyway...

3) Regarding delaying social security until 70 -- if I put in my numbers for social security at 70 and compare with the numbers for social security at 67 (all other entries being constant), the suggested withdrawals are very nearly equal in both cases, and the two minimum withdrawals are nearly equal, too. I suspect this is because of the higher bridge cost needed to span the later time until 70 at the higher payment.

(retire @ 55 with $1.6M 80/20, $1707 Non-COLA pension @ 55, Social security $2359 @ 67 for me, $1180 @ 68 for spouse, vs $2949 and $1180 at 70 for both. Total_67 = $114,772, Min_67 = $83,352. Total_70 = $114,754, Min_70 = $83,334.)

Is this typical, or did I make a mistake? Or maybe it's unique to my situation? If this is accurate, then perhaps the there's a different reason to delay social security that isn't highlighted purely by the numbers on the sheet? Something like a reduced risk of dropping below a minimum comfortable withdrawal in the future. It seems like the withdrawal worksheet doesn't necessarily back up the assumption that it is better to delay social security (in my case at least), so there must be some other implicit reason to suggest it?

4) Smaller question about the SPIA at age 80. What is the relative cost of an annuity like this that would result in a payment that would replace withdrawals, and how does it leave the rest of the portfolio? In other words, buying an SPIA around age 80 is very expensive, how much of the remaining portfolio at age 80 would be used up by buying the annuity? How does the left over portfolio and remaining tail of VPW withdrawals look after this annuity cost has been spent? Does the VPW method actually support this plan, or for example, would this sort of annuity cost more than what the remaining portfolio has left in it, especially out past age 90? I guess I'm asking, have you backtested VPW with actual numbers for this annuity cost taken out at age 80?

Thanks for any help you can provide.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Bogleplugs, welcome to the forum!
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm @longinvest, you and the other bogleheads who have contributed to this have done remarkable work!

I have read through the nearly 1500 posts in this thread, the forward test thread, and the variable savings rate thread, and I have a couple remaining questions I didn't see asked or answered before. I hope you can please shed some light.

1) On the Accumulation tab of the VPW-Accumulation-and-Retirement-Worksheet, the suggested Portfolio Contribution seems to be driving towards saving enough now to eventually withdraw an amount to more or less replace current income available for taxes and expenses. But if we are doing a good job of living below our means, it seems like to trying to replace current income, instead of expected expenses in retirement, is aiming too high, no? I suggest there be a cell in this sheet to enter in expected expenses at retirement to help drive the Portfolio Contribution amount in green. My reasoning is that, for instance, I am in prime earning years with a large, young family. I do not expect to have to support the same spending level in retirement that I do now. If I save as much as is suggested in the green cell, I would end up over-saving now (at the expense of reducing near-term budget) for a target retirement income that is way too large.
The worksheet calculates an equilibrium savings amount by projecting the accumulator's current financial situation into the future. It aims to equalize the amount currently available for taxes and expenses after subtracting portfolio and pension contributions with projected retirement income (withdrawals + pensions). It's not a static calculation; it's part of an adaptive plan. The savings amount changes yearly as the investor's financial situation evolves.

For example, the salary of most people grows faster than inflation. This is normal as the worker's growing experience is increasingly valuable to employers. In early work years, when the investor's salary is smaller, the equilibrium savings amount will represent a smaller savings rate than the equilibrium savings rate once the salary has grown. Someone looking for a perfect static savings rate (unforeseeable) would complain that the worksheet's suggested savings amount is too low in early years.

There's a huge amount of uncertainty about future outcomes. We simply don't know what the future returns of our portfolio will be from now to our death. We don't know what our future salaries will be. We don't know when and how our personal circumstances will change in the future. There's a lot we don't know about the future. It's best to accept this and build a reasonable plan, instead of aiming for an elusive perfect plan.

The Accumulation sheet suggests an adaptive equilibrium savings amount. I think that this is good enough. If it ever results into slightly more money in retirement, in case of lucky portfolio returns, I'm sure the retiree will find a way to enjoy it.

It has been my experience that expenses that disappear have a nasty habit of getting replaced by new expenses. (After graduation, for example, children can need financial help with wedding and house down payment. Then there are grandchildren birthdays and holiday gifts, help with their college, and so on). I humbly propose that it would be overly optimistic to think that future spending will eventually go down just because children have left the nest.
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm 2) Regarding the Annual Income After 50% loss on the Retirement tab, is this intended to be an estimate of any future minimum portfolio amount, or does it only apply to the current year? In other words, is it sufficient for planning purposes to only look at the current year's Suggested and Minimum withdrawals to have confidence that the VPW plan will work for the retiree going forward into the future? Or is there another parameter to pay attention to, for instance in the backtesting worksheet? When I use the backtesting sheet, the Minimum Total Income for a given year can be lower than the Minimum income after loss on the VPW sheet (sometimes ~10% lower, for 1966). Is there an expectation that the 50% loss could continue every year? In this worst of worst cases, VPW would have me continue withdrawing less and less out of a sinking portfolio, below what would be needed for living expenses. I'm not sure what I would do differently than VPW in this case anyway...
Like I said above, the future returns of our portfolio from now to our death are unknown. It's best to accept it.

I have no expectations about future market returns. I suggest to ignore all prognosticators; their track record is poor.

Anyway, even perfect 10-year forward return predictions would be useless in the context of a lifelong retirement plan. This is quite obvious to me because it's similar to knowing the perfect future 1-day return on my savings account. I know exactly what that return will be, because my bank publishes in advance the interest rate it pays on savings. This doesn't tell me what interest rates will be next week, next month, next year, in 10 years, in 25 years, or in 50 years. Obvious, isn't it? What would matter, for perfectly designing one's lifelong financial plan, is perfect knowledge of all future returns (for all periods) from now to death, along with a precise date of death. These things are unknowable. It's best to accept the uncertainty and deal with it.

A base of stable lifelong inflation-indexed income can be bought; it's called an inflation-indexed SPIA* **. It's expensive at a young age. When it's absolutely needed, it's best to only buy as little as strictly necessary with a small part of one's portfolio at retirement. This part of retirement income will be insulated from market returns and portfolio fluctuations.

* Single premium immediate annuity.
** The Federal Reserve maintains a 2% long-term inflation target, see this.
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm 3) Regarding delaying social security until 70 -- if I put in my numbers for social security at 70 and compare with the numbers for social security at 67 (all other entries being constant), the suggested withdrawals are very nearly equal in both cases, and the two minimum withdrawals are nearly equal, too. I suspect this is because of the higher bridge cost needed to span the later time until 70 at the higher payment.

(retire @ 55 with $1.6M 80/20, $1707 Non-COLA pension @ 55, Social security $2359 @ 67 for me, $1180 @ 68 for spouse, vs $2949 and $1180 at 70 for both. Total_67 = $114,772, Min_67 = $83,352. Total_70 = $114,754, Min_70 = $83,334.)

Is this typical, or did I make a mistake? Or maybe it's unique to my situation? If this is accurate, then perhaps the there's a different reason to delay social security that isn't highlighted purely by the numbers on the sheet? Something like a reduced risk of dropping below a minimum comfortable withdrawal in the future. It seems like the withdrawal worksheet doesn't necessarily back up the assumption that it is better to delay social security (in my case at least), so there must be some other implicit reason to suggest it?
Are you really planning for an 80% stocks portfolio in retirement? Weren't you worrying about meeting specific spending goals (not much more, not much less) in your previous two questions? Don't you see the incoherence? An 80/20 stock/bond portfolio contains 4 times as much stocks as it contains bonds. The impact of bonds will be minor and the portfolio will behave mostly like an all-stock portfolio. It can't be otherwise, mathematically. A milder 60/40 portfolio already contains 50% more stocks than bonds.

Bonds, like stocks, are marketable securities. Their price is set by supply and demand. Nothing prevents bond holders from selling their bonds to buy stocks instead. In other words, stocks and bonds are already trading at their equilibrium prices. For information, the global (free float) capitalization ratio was approximately 54/46 stock/bond at the end of May 2020 (see this post). I suggest to consider holding a global balanced index portfolio, with a moderate home bias, that doesn't stray too far from global market (free-float) capitalization weights (see this post).

OK. Let's go back to your question.

It's pretty typical for the overall impact of delaying Social Security to age 70 not to make a significant difference (usually there's a small benefit) on the current contribution amount during accumulation or total retirement income during the earlier years of retirement.

The goal of delaying Social Security isn't to maximize the probabilistic amount one will extract back from Social Security over one's lifetime, or to significantly increase the amount available for taxes and expenses during accumulation and the earlier years of retirement. The goal is to increase the guaranteed amount of annual inflation-indexed income that will continue all lifelong, regardless of how long the retiree lives. It would be a mistake to consider one dollar of withdrawal from a portfolio of fluctuating assets to be perfectly equivalent to one dollar of income from Social Security within a VPW projection.
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm 4) Smaller question about the SPIA at age 80. What is the relative cost of an annuity like this that would result in a payment that would replace withdrawals, and how does it leave the rest of the portfolio? In other words, buying an SPIA around age 80 is very expensive, how much of the remaining portfolio at age 80 would be used up by buying the annuity? How does the left over portfolio and remaining tail of VPW withdrawals look after this annuity cost has been spent? Does the VPW method actually support this plan, or for example, would this sort of annuity cost more than what the remaining portfolio has left in it, especially out past age 90? I guess I'm asking, have you backtested VPW with actual numbers for this annuity cost taken out at age 80?

Thanks for any help you can provide.
According to United States Life Tables, 2013 (page 6), (5,973 / 51,252) = 12% of 80 years old males and (12,212 / 64,427) = 19% of 80 years old females make it to age 95. The chance of one spouse surviving to age 95, in a man and woman couple (both of age 80) is ((12% + 19%) - (12% X 19%)) = 28%. Note that this is for the general population, without accounting for socioeconomic status. It would be safe enough for an insurance company to use age 95 as life expectancy (when 50% of the cohort is anticipated to be dead) for a cohort of 80 year old joint life inflation-indexed SPIA buyers. The (50% - 28%) = 22% excess over survival rate allows for the adverse selection of annuitants and for a margin for insurance company expenses and profits.

If the insurance company is able to get a 2% nominal return on its investments, for a 2%-indexed SPIA, it will be able to support a (1 / (95 - 80)) = 6.7% annual payout rate. A lower 1% nominal return would support a 6.2% payout rate for the same 2%-indexed SPIA.

The insurance company can support significantly higher payout rates for 80-year old single male or female annuitants.

Backtesting is useful to learn about various risks that have shown up in the past. But, it doesn't inform us about future outcomes or about new risks that will show up.

Fortunately, mathematics and life tables tell us that payout rates will be reasonably sufficient at age 80 within a VPW plan.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Stubbie
Posts: 6
Joined: Fri May 29, 2020 6:09 am

Re: Variable Percentage Withdrawal (VPW)

Post by Stubbie »

azanon wrote: Mon Sep 28, 2020 5:41 pm
ScubaHogg wrote: Mon Sep 28, 2020 6:50 am
azanon wrote: Mon Sep 28, 2020 5:15 am
Stubbie wrote: Mon Aug 10, 2020 7:45 pm
longinvest wrote: Mon Aug 10, 2020 5:23 pm Another planning approach is to only include the survivor pension amount, in the worksheet, instead of the full amount when both are alive. This eliminates the income drop on the first death, but it's likely to lead to extra (unplanned for) income when pensions start and for as long as both are alive. This extra income could be used for gifts, unplanned discretionary expenses, etc.
This is the approach that we have chosen, knowing that we likely could spend more money each year than the spreadsheet indicates, but also knowing that there is added ability to deal with future unplanned financial calamities.

Longinvest, let me add my thanks to you for spending the time to create such a great tool!

Stub
I don’t get that approach. If someone dies, the expenses for the remaining individual probably drop even more than the half pension amount lost, since the portfolio will be unaffected.
Meh. It could go either way, especially with someone who is pension-heavy and portfolio light. Housing, for example, might not drop at all as many folks won’t want to move just because they lost their SO.
Doing it the OP way is a guaranteed artificial reduction in income until one person is lost. This is contrary to the entire point of VPW which is relative maximum income from beginning to end of retirement. I'm surprised he suggested it TBH.

If one is going to skew anything, you want to skew higher spending on the front end given study after study that shows a decrease in spending as one ages (for obvious reasons).
This is a good point. I might have to rethink this.
vals
Posts: 2
Joined: Mon Oct 05, 2020 1:56 am

Re: Variable Percentage Withdrawal (VPW)

Post by vals »

I'm a little confused by the calculations. I put in all my numbers as if I were to RE today, and it gives about what I expected to see. If I add in a possible future pension (need to work a couple more years for it to vest) that starts at age 62... the amount I can withdraw drops signifigantly.

Can anyone explain why that it? If anything I would expect having a set in stone future pension (that is adjusted) would increase my withdrawal flexibility now, not drop it by 90%.
Topic Author
longinvest
Posts: 4447
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Azanon and Stubbie,
Stubbie wrote: Sun Oct 04, 2020 1:45 pm
azanon wrote: Mon Sep 28, 2020 5:41 pm Doing it the OP way is a guaranteed artificial reduction in income until one person is lost. This is contrary to the entire point of VPW which is relative maximum income from beginning to end of retirement.
This is a good point. I might have to rethink this.
VPW is about developing a workable retirement plan. Doing this sometimes involves increasing the bond allocation which results in reducing current income to dampen the consequences of potential unfavorable stock returns.

It's logical to estimate the financial impact of the death of a first spouse and dampen it when necessary, even when this reduces current income.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

vals wrote: Mon Oct 05, 2020 2:00 am I'm a little confused by the calculations. I put in all my numbers as if I were to RE today, and it gives about what I expected to see. If I add in a possible future pension (need to work a couple more years for it to vest) that starts at age 62... the amount I can withdraw drops signifigantly.

Can anyone explain why that it? If anything I would expect having a set in stone future pension (that is adjusted) would increase my withdrawal flexibility now, not drop it by 90%.
Vals, welcome to the forum. It's difficult to help without numbers illustrating the situation. It would also be useful to report about the worksheet version and computer system which were used.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
vals
Posts: 2
Joined: Mon Oct 05, 2020 1:56 am

Re: Variable Percentage Withdrawal (VPW)

Post by vals »

longinvest wrote: Mon Oct 05, 2020 7:06 am
vals wrote: Mon Oct 05, 2020 2:00 am I'm a little confused by the calculations. I put in all my numbers as if I were to RE today, and it gives about what I expected to see. If I add in a possible future pension (need to work a couple more years for it to vest) that starts at age 62... the amount I can withdraw drops signifigantly.

Can anyone explain why that it? If anything I would expect having a set in stone future pension (that is adjusted) would increase my withdrawal flexibility now, not drop it by 90%.
Vals, welcome to the forum. It's difficult to help without numbers illustrating the situation.
Ok, these numbers aren't the exact ones but should show the problem:

Age 41
Balance 300k
Allocation 90/10
Frequency: Monthly

Social security: Left it at the default, so age 70 1978/mo

Pension 2:
Started: yes
Start age: 30
Payment: 3406
COLA: Yes

Pension 3:
Started: No
Age: 62
Payment: 1063
COLA: Yes

I get suggested withdrawal: 14/mo

If I remove the pension 3 I get withdrawal of 740/mo

If I remove pension 2 (the one that already started) I get 1613/mo

If I remove the pension 2 and 3 I get withdrawal of 1523/mo

This doesn't many any sense to me.... It seems like having a pension that has already started is what is throwing it off. Either that, or I don't understand what it's trying to do.

Edit: This is on version 1.5 btw.
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

vals wrote: Mon Oct 05, 2020 7:18 am Ok, these numbers aren't the exact ones but should show the problem:

Age 41
Balance 300k
Allocation 90/10
Frequency: Monthly

Social security: Left it at the default, so age 70 1978/mo

Pension 2:
Started: yes
Start age: 30
Payment: 3406
COLA: Yes

Pension 3:
Started: No
Age: 62
Payment: 1063
COLA: Yes

I get suggested withdrawal: 14/mo

If I remove the pension 3 I get withdrawal of 740/mo

If I remove pension 2 (the one that already started) I get 1613/mo

If I remove the pension 2 and 3 I get withdrawal of 1523/mo

This doesn't many any sense to me.... It seems like having a pension that has already started is what is throwing it off. Either that, or I don't understand what it's trying to do.

Edit: This is on version 1.5 btw.
Vals, thanks for the illustration. This seems to be a case where the portfolio isn't sufficient to provide a full bridge for Social Security until it starts. I'll investigate (probably next weekend) to see if there's a calculation problem.
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Re: Variable Percentage Withdrawal (VPW)

Post by bogleplugs »

longinvest wrote: Sat Oct 03, 2020 12:28 pm
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm 1) On the Accumulation tab of the VPW-Accumulation-and-Retirement-Worksheet, the suggested Portfolio Contribution seems to be driving towards saving enough now to eventually withdraw an amount to more or less replace current income available for taxes and expenses. But if we are doing a good job of living below our means, it seems like to trying to replace current income, instead of expected expenses in retirement, is aiming too high, no?
The worksheet calculates an equilibrium savings amount by projecting the accumulator's current financial situation into the future. It aims to equalize the amount currently available for taxes and expenses after subtracting portfolio and pension contributions with projected retirement income (withdrawals + pensions). It's not a static calculation; it's part of an adaptive plan. The savings amount changes yearly as the investor's financial situation evolves.

For example, the salary of most people grows faster than inflation. This is normal as the worker's growing experience is increasingly valuable to employers. In early work years, when the investor's salary is smaller, the equilibrium savings amount will represent a smaller savings rate than the equilibrium savings rate once the salary has grown. Someone looking for a perfect static savings rate (unforeseeable) would complain that the worksheet's suggested savings amount is too low in early years.

There's a huge amount of uncertainty about future outcomes. We simply don't know what the future returns of our portfolio will be from now to our death. We don't know what our future salaries will be. We don't know when and how our personal circumstances will change in the future. There's a lot we don't know about the future. It's best to accept this and build a reasonable plan, instead of aiming for an elusive perfect plan.

The Accumulation sheet suggests an adaptive equilibrium savings amount. I think that this is good enough. If it ever results into slightly more money in retirement, in case of lucky portfolio returns, I'm sure the retiree will find a way to enjoy it.

It has been my experience that expenses that disappear have a nasty habit of getting replaced by new expenses. (After graduation, for example, children can need financial help with wedding and house down payment. Then there are grandchildren birthdays and holiday gifts, help with their college, and so on). I humbly propose that it would be overly optimistic to think that future spending will eventually go down just because children have left the nest.
Thanks Longinvest for your response. I get the points you make about uncertainty in the future. I am not trying to get to a static plan, nor a perfect plan, I'm trying to understand where the limitations of this tool are so that I can have confidence in applying it correctly. Especially when trying to compare results across other tools and methods.

You highlight the equilibrium savings might result in slightly more money in retirement (oops!), but perhaps miss the implication that this tool might suggest more savings is needed than is comfortable in the current years in order to replace the current income (a discouraging thought), rather than a planned lower expenses in retirement.

It's a small nit though, and I take your larger comment that expenses may not always go down.
longinvest wrote: Sat Oct 03, 2020 12:28 pm
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm 2) Regarding the Annual Income After 50% loss on the Retirement tab, is this intended to be an estimate of any future minimum portfolio amount, or does it only apply to the current year? In other words, is it sufficient for planning purposes to only look at the current year's Suggested and Minimum withdrawals to have confidence that the VPW plan will work for the retiree going forward into the future?
Like I said above, the future returns of our portfolio from now to our death are unknown. It's best to accept it.

I have no expectations about future market returns. I suggest to ignore all prognosticators; their track record is poor.

Anyway, even perfect 10-year forward return predictions would be useless in the context of a lifelong retirement plan. This is quite obvious to me because it's similar to knowing the perfect future 1-day return on my savings account. I know exactly what that return will be, because my bank publishes in advance the interest rate it pays on savings. This doesn't tell me what interest rates will be next week, next month, next year, in 10 years, in 25 years, or in 50 years. Obvious, isn't it? What would matter, for perfectly designing one's lifelong financial plan, is perfect knowledge of all future returns (for all periods) from now to death, along with a precise date of death. These things are unknowable. It's best to accept the uncertainty and deal with it.
Again, I get your point about future uncertainty, and that's not what my meaning was intended to be. I was trying to understand the assumptions and limitations that the tool is governed by so I can use it to plan effectively. For planning purposes is this minimum withdrawal amount enough to consider or are there other things to take into account? Your response seems to indicate that this is all you would look at yourself.
longinvest wrote: Sat Oct 03, 2020 12:28 pm
bogleplugs wrote: Fri Oct 02, 2020 2:59 pm 3) Regarding delaying social security until 70 -- if I put in my numbers for social security at 70 and compare with the numbers for social security at 67 (all other entries being constant), the suggested withdrawals are very nearly equal in both cases, and the two minimum withdrawals are nearly equal, too. I suspect this is because of the higher bridge cost needed to span the later time until 70 at the higher payment.

(retire @ 55 with $1.6M 80/20, $1707 Non-COLA pension @ 55, Social security $2359 @ 67 for me, $1180 @ 68 for spouse, vs $2949 and $1180 at 70 for both. Total_67 = $114,772, Min_67 = $83,352. Total_70 = $114,754, Min_70 = $83,334.)

Is this typical, or did I make a mistake? Or maybe it's unique to my situation? If this is accurate, then perhaps the there's a different reason to delay social security that isn't highlighted purely by the numbers on the sheet? Something like a reduced risk of dropping below a minimum comfortable withdrawal in the future. It seems like the withdrawal worksheet doesn't necessarily back up the assumption that it is better to delay social security (in my case at least), so there must be some other implicit reason to suggest it?
Are you really planning for an 80% stocks portfolio in retirement? Weren't you worrying about meeting specific spending goals (not much more, not much less) in your previous two questions? Don't you see the incoherence? An 80/20 stock/bond portfolio contains 4 times as much stocks as it contains bonds. The impact of bonds will be minor and the portfolio will behave mostly like an all-stock portfolio. It can't be otherwise, mathematically. A milder 60/40 portfolio already contains 50% more stocks than bonds.
Not necessarily. I am testing out the sensitivity of certain parameters for the purpose of making a plan. I am not targeting specific spending goals, but trying to get an idea of minimum comfortable spending and the boundaries on the calculations. Isn't that what the Minimum withdrawal is supposed to suggest? I am perfectly comfortable with much more spending but trying to plan for a minimum as well.

It seems to me that the use case for this VPW worksheet would be to estimate what my minimum expenses in retirement might be, and plan such that the minimum withdrawal would cover that well, and then spend any excess in a very comfortable retirement. That's sort of the point of all my questions.
longinvest wrote: Sat Oct 03, 2020 12:28 pm It's pretty typical for the overall impact of delaying Social Security to age 70 not to make a significant difference (usually there's a small benefit) on the current contribution amount during accumulation or total retirement income during the earlier years of retirement.

The goal of delaying Social Security isn't to maximize the probabilistic amount one will extract back from Social Security over one's lifetime, or to significantly increase the amount available for taxes and expenses during accumulation and the earlier years of retirement. The goal is to increase the guaranteed amount of annual inflation-indexed income that will continue all lifelong, regardless of how long the retiree lives. It would be a mistake to consider one dollar of withdrawal from a portfolio of fluctuating assets to be perfectly equivalent to one dollar of income from Social Security within a VPW projection.
Ah hah! This is the nugget of wisdom I was looking for. This explains well why it might be better to delay social security even if the VPW calculations don't suggest a difference.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Bogleplugs,
bogleplugs wrote: Mon Oct 05, 2020 1:16 pm Thanks Longinvest for your response. I get the points you make about uncertainty in the future. I am not trying to get to a static plan, nor a perfect plan, I'm trying to understand where the limitations of this tool are so that I can have confidence in applying it correctly. Especially when trying to compare results across other tools and methods.

You highlight the equilibrium savings might result in slightly more money in retirement (oops!), but perhaps miss the implication that this tool might suggest more savings is needed than is comfortable in the current years in order to replace the current income (a discouraging thought), rather than a planned lower expenses in retirement.

It's a small nit though, and I take your larger comment that expenses may not always go down.
Targeting a specific spending amount in retirement would be a bad idea. It would be as illogical as aiming for a "25 times current expenses" portfolio to trigger retirement, which would have forced an investor with a $40K expense target and a $400K portfolio (2020 dollars) in 1982 to uselessly keep working, while letting another investor with a similar expense target and a $1M portfolio to prematurely retire in 1966. (See this post and the few posts that follow it, including this post). These are just different forms of the illogical (so-called) "Safe" Withdrawal Rate (SWR) method, a method which lets most of its adopters die with a gigantic unspent portfolio and some of the remaining ones to prematurely deplete their portfolio while still alive. It's best to completely evacuate from one's mind the idea of aiming for a specific spending or portfolio balance amount when using a portfolio of fluctuating assets with unknown future returns.

Let's consider another approach. One could reasonably aim for projected retirement income to be x% smaller (or x% bigger) than the current amount available for taxes and expenses (after subtracting portfolio and pension contributions). This x% would be constant but the amounts involved would fluctuate. It could easily be added to the Accumulation worksheet, but I didn't add it because it would most likely be misused by users, adjusting the percentage each year based on current projections to aim for a specific level of spending in retirement (which would be a mistake, as I've just explained).

Aiming for a specific level of spending isn't how things work in real life. I didn't just pick the home I wanted to live in and the car I wanted to drive, and then tell my employer to give me the appropriate salary so that I could afford them. Had this been possible, I would have chosen to live in a castle with awesome surroundings and have a personal helicopter to get to work, or something like that. If I can just ask for any salary I want and get it, why not? It's extremely easy to spend a lot of money. The concept of "having too much, so much that I couldn't spend it all" is something that very few healthy humans will ever experience. There's almost never too much money; there's only a lack of time or lack of health to spend it. The real problem is to not have sufficient money. Hoping for future expenses to drop by x% when reaching a milestone is a perfect recipe to end up with insufficient money in the middle of a future downturn.

A typical situation which would cause the illusion that the Accumulation worksheet's suggested portfolio contribution amount is "too high" would be putting a big down payment on a nice home and then trying to pay the mortgage too fast, leaving too little money for the family to enjoy a living standard appropriate for the chosen home and its surroundings. The problem isn't a savings amount problem; it's the insistence of prepaying for a significant part lifelong housing expenses as early as possible in life. It's fine, especially at a young age, to use low-cost debt to spread the cost of major items over a life-of-item appropriate time length. I see no problem with spreading over 5 years the cost of a new reliable car. In the first few years, insurance can be used to protect against the initial financial depreciation, in case of a total loss. The use of low-cost debt is also appropriate to spread the cost of housing, when buying, over the normal reliability period of the chosen home, before maintenance expenses ramp up.

I really think that when the equilibrium savings amount seems too high, it's because something else is wrong in the plan. Sometimes, it's because big expenses aren't appropriately spread over time (possibly using low-cost debt). Other times, it's because the chosen target financial independence age is too ambitious in relation to the investor's desire for spending. Or it could be due to living above one's means, but that's unlikely for members of this forum. Anticipating expenses to drop 50% (or some big percentage like that) after a specific milestone (paying off the mortgage, children leaving the nest, retirement, etc.) is probably indicative that something isn't properly balanced in the financial plan. I think that it would be a mistake to postpone proper retirement investing until that milestone; it's better to fix the plan (or reduce spending).

Another reason why I think that the equilibrium savings amount is good enough is that a small change in spending rate usually causes a much bigger change in savings rate. I've illustrated this unintuitive result in Q-5 and A-5 of this post (a 3.3% reduction in spending causing a 21% increase in savings). As we're in a situation where the investor wishes to spend noticeably more, the negative impact on the savings rate is potentially huge and in all likelihood will result into insufficient portfolio contributions for retirement.
bogleplugs wrote: Mon Oct 05, 2020 1:16 pm Again, I get your point about future uncertainty, and that's not what my meaning was intended to be. I was trying to understand the assumptions and limitations that the tool is governed by so I can use it to plan effectively. For planning purposes is this minimum withdrawal amount enough to consider or are there other things to take into account? Your response seems to indicate that this is all you would look at yourself.
The worksheet's -50% stock drop is a normal event for stocks. That's like saying that there will be a car accident in New York city tomorrow. It's not perfectly certain to happen, but it's nothing out of the ordinary. What's the worst case, for bonds and stocks? They can go to zero. They did in Russia and China during the past century. There's no protection against financial calamities. The VPW worksheet only aims to tell the investor that a -50% stock drop shouldn't cause any change in level of comfort for the accumulator or the retiree. It's a normal thing. When stocks start to drop more, the investor will have to start reducing comfort. That why I say the there must be comfort to start with, even after a -50% stock drop.

I suggest that you read this post I made on the "[Peter] Bernstein VS [Rick] Ferri" thread.
bogleplugs wrote: Mon Oct 05, 2020 1:16 pm I am testing out the sensitivity of certain parameters for the purpose of making a plan. I am not targeting specific spending goals, but trying to get an idea of minimum comfortable spending and the boundaries on the calculations. Isn't that what the Minimum withdrawal is supposed to suggest? I am perfectly comfortable with much more spending but trying to plan for a minimum as well.

It seems to me that the use case for this VPW worksheet would be to estimate what my minimum expenses in retirement might be, and plan such that the minimum withdrawal would cover that well, and then spend any excess in a very comfortable retirement. That's sort of the point of all my questions.
Here's a clear answer. There's no floor to how low VPW withdrawals can get, because there's no limit to how low future market returns (for both stocks and bonds) can get. That's the reality with have to live with. When I say that the future is uncertain and future returns are unknown, I mean it.

If you want (reasonable) certainty, just buy it. It's expensive, but it's available. Just don't buy too much of it, because liquidity is important.

Yet, I have a lot of trouble trying to understand what people are really fearing. Reducing expenses, during bad times, is just natural. It's most likely that a retiree using VPW with a balanced portfolio will be in better financial shape than many others in society. There's very little I really need in life; food, basic shelter, clothing, running water, and sufficient warmth. It doesn't need to cost much. The rest are just things I like. I could live without them, even if I don't want to. But, I would prefer for the transition to be slow enough so that I can more easily adapt. Bonds are useful for that.
bogleplugs wrote: Mon Oct 05, 2020 1:16 pm Ah hah! This is the nugget of wisdom I was looking for. This explains well why it might be better to delay social security even if the VPW calculations don't suggest a difference.
Let me just add that it's a good idea, for couples, to consider additional scenarios. See the last part of this post.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

longinvest wrote: Mon Oct 05, 2020 7:56 am
vals wrote: Mon Oct 05, 2020 7:18 am Ok, these numbers aren't the exact ones but should show the problem:

Age 41
Balance 300k
Allocation 90/10
Frequency: Monthly

Social security: Left it at the default, so age 70 1978/mo

Pension 2:
Started: yes
Start age: 30
Payment: 3406
COLA: Yes

Pension 3:
Started: No
Age: 62
Payment: 1063
COLA: Yes

I get suggested withdrawal: 14/mo

If I remove the pension 3 I get withdrawal of 740/mo

If I remove pension 2 (the one that already started) I get 1613/mo

If I remove the pension 2 and 3 I get withdrawal of 1523/mo

This doesn't many any sense to me.... It seems like having a pension that has already started is what is throwing it off. Either that, or I don't understand what it's trying to do.

Edit: This is on version 1.5 btw.
Vals, thanks for the illustration. This seems to be a case where the portfolio isn't sufficient to provide a full bridge for Social Security until it starts. I'll investigate (probably next weekend) to see if there's a calculation problem.
Vals, worksheet calculations are correct. The worksheet is doing its best with a clearly insufficient portfolio in a very early retirement situation. The result might seem unintuitive when only looking at the suggested portfolio withdrawal amount, but it makes sense when considering total retirement income and the overall financial situation of the early retiree.

Let's look at your scenarios in reverse order.

Scenario 1:

Image

The worksheet is informing us, using a simple projection with a 90/10 stock/bond allocation :!: (you chose this!), that the $300,000 portfolio is only able to cover ($1523 / $1,978) = 77% (a -23% deficit) of missing payments from age 41 until the start of Social Security at age 70. Worse, in case of a -50% stock loss, monthly withdrawals would drop by -$685 to $838, representing only 42% (a -58% deficit) of future social security payments. Clearly this portfolio is insufficient for such an early retirement scenario. Even if the early retiree was to make it to age 70, the portfolio would be depleted by then, leaving the retiree without any liquidity.

The worksheet could have rejected this scenario with a "You're not ready to retire!" error message. Instead, the worksheet does its best with the scenario and lets the user get to the same conclusion. So, it tells the early retiree that the equivalent of 77% of future Social Security payments is the maximum that should be withdrawn from the portfolio in the current month representing $18,278/year, and that if stocks were to lose -50%, the $300,000 portfolio would shrink by -$135,000 to only $165,000, and as a consequence, the retiree would have to try living on $10,053/year in total misery.

Scenario 2 (adding a $3,406/month inflation-indexed pension):

Image

Adding an already started $40,872/year pension improves cash flow. But, the portfolio retains its -23% deficit (-58% deficit after loss) to replace missing Social Security payments. As a consequence, the worksheet only allows the equivalent of 77% of pensions to be spent (but no less than sum of already started pensions, of course), (($23,736/year Social Security + $40,872/year Some Pension) X 77%) = $49,751/year. This is a significant improvement in terms of cash flow relative to scenario 1. The issue of potentially leaving the retiree with no liquidity at age 70 hasn't disappeared, but the pressure on the portfolio is somewhat reduced through a smaller portfolio withdrawal amount (($49,751 / 12) - $3,406) = $740. In case of a -50% stock loss, the worksheet suggests to stop withdrawals and only spend the already started pension.

By now it should be simple to understand the consequences of adding another delayed pension (bigger deficit, smaller withdrawal). Rows 39 to 69 show the main calculation elements. After adding the delayed pension, the funding ratio drops to 53% (a -47% deficit) before loss (row 58) and to 29% (a -71% deficit) after loss (row 66). That's a deficit of more than $400,000 after loss (row 65).
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Re: Variable Percentage Withdrawal (VPW)

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Re: Variable Percentage Withdrawal (VPW)

Post by NearlyRetired »

Hi longinvest

Firstly, congratulations on putting this deceptively simple spreadsheet together.

I do have a couple of questions that I cannot find answers to, so apologies if these have already been answered.

1. My understanding is that the sheet will calculate withdrawal amounts based on the fund running down to zero at 100.

Is there any way to change that to say 90 for example (I am interested in how the percentages might change with an earlier "end" date as based on family history I won't get there)?

2. VPW is calculating a withdrawal value higher than I currently need to meet my expenses.

Which is better, to withdraw what VPW suggests, or to take out what I need and leave the rest invested?

Thanks
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Re: Variable Percentage Withdrawal (VPW)

Post by sycamore »

NearlyRetired wrote: Wed Oct 21, 2020 10:05 am Hi longinvest
...
2. VPW is calculating a withdrawal value higher than I currently need to meet my expenses.

Which is better, to withdraw what VPW suggests, or to take out what I need and leave the rest invested?
I'm not longinvest but from the standpoint of ensuring portfolio longevity I'd say it's better to take what you need and leave the rest invested.

Here's one way to look at it: let's say you took out the VPW-suggested amount but didn't spend all of it. What would you do with the remainder? (a) put it in a savings account or (b) invest it back into your portfolio using your regular asset allocation.

If you choose (a), that's similar to investing in your portfolio but with an asset allocation slightly more in fixed income than before.
If you choose (b), you might as well just leave the remainder invested all along.
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Re: Variable Percentage Withdrawal (VPW)

Post by NearlyRetired »

sycamore wrote: Wed Oct 21, 2020 11:15 am
NearlyRetired wrote: Wed Oct 21, 2020 10:05 am Hi longinvest
...
2. VPW is calculating a withdrawal value higher than I currently need to meet my expenses.

Which is better, to withdraw what VPW suggests, or to take out what I need and leave the rest invested?
Here's one way to look at it: let's say you took out the VPW-suggested amount but didn't spend all of it. What would you do with the remainder? (a) put it in a savings account or (b) invest it back into your portfolio using your regular asset allocation.

If you choose (a), that's similar to investing in your portfolio but with an asset allocation slightly more in fixed income than before.
If you choose (b), you might as well just leave the remainder invested all along.
But presumably (a) would also help smooth future returns - in other words I would be building a buffer outside of the portfolio, but whether this is worth it or not I don't know
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Re: Variable Percentage Withdrawal (VPW)

Post by JasonFIRE »

NearlyRetired wrote: Wed Oct 21, 2020 10:05 am 1. My understanding is that the sheet will calculate withdrawal amounts based on the fund running down to zero at 100.

Is there any way to change that to say 90 for example (I am interested in how the percentages might change with an earlier "end" date as based on family history I won't get there)?

2. VPW is calculating a withdrawal value higher than I currently need to meet my expenses.

Which is better, to withdraw what VPW suggests, or to take out what I need and leave the rest invested?

Thanks
I have been thinking about these questions a lot, especially the second one, since I have recently FIREd. I am keen to see some more responses.

Since my wife is still working, I do not need to start to drawdown. But, I am wondering if it makes sense to start drawing and moving those proceeds to less risky assets.

With the Constant Dollar method, it seems like the longer one waits to withdraw, the better, and maintaining a certain asset allocation is key to making the whole thing work.
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Re: Variable Percentage Withdrawal (VPW)

Post by Ben Mathew »

JasonFIRE wrote: Wed Oct 21, 2020 3:01 pm
NearlyRetired wrote: Wed Oct 21, 2020 10:05 am 1. My understanding is that the sheet will calculate withdrawal amounts based on the fund running down to zero at 100.

Is there any way to change that to say 90 for example (I am interested in how the percentages might change with an earlier "end" date as based on family history I won't get there)?

2. VPW is calculating a withdrawal value higher than I currently need to meet my expenses.

Which is better, to withdraw what VPW suggests, or to take out what I need and leave the rest invested?

Thanks
I have been thinking about these questions a lot, especially the second one, since I have recently FIREd. I am keen to see some more responses.

Since my wife is still working, I do not need to start to drawdown. But, I am wondering if it makes sense to start drawing and moving those proceeds to less risky assets.

With the Constant Dollar method, it seems like the longer one waits to withdraw, the better, and maintaining a certain asset allocation is key to making the whole thing work.
It would be better to withdraw only what you need, and leave what you don't need invested in the fixed allocation. The fixed allocation is an important part of why this strategy works well (in certain circumstances). There would be no point in keeping the surplus in a different allocation.

Another way to think about this is that the origin of where your money came from does not matter. If you have $1 million in your portfolio, and it makes sense for you to invest it 60/40, then it doesn't matter if you saved the $1 million decades ago or saved only $950,000 decades ago + $50,000 from reduced consumption last year. The history of how you got the $1 million doesn't matter for the asset allocation.
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Re: Variable Percentage Withdrawal (VPW)

Post by JasonFIRE »

Ben Mathew wrote: Wed Oct 21, 2020 4:52 pm It would be better to withdraw only what you need, and leave what you don't need invested in the fixed allocation. The fixed allocation is an important part of why this strategy works well (in certain circumstances). There would be no point in keeping the surplus in a different allocation.
Thank you for the reply.

Respectfully, I do not understand this point. If one had simply spent all the money that VPW said they could spend, then it would not have changed VPW's outcome. In this case, one now has extra money they did not spend. So, on some level, it seems rational to keep that money in a safer investment, because again, doing so would not change the outcome of VPW had the money been spent.
Ben Mathew wrote: Wed Oct 21, 2020 4:52 pm Another way to think about this is that the origin of where your money came from does not matter. If you have $1 million in your portfolio, and it makes sense for you to invest it 60/40, then it doesn't matter if you saved the $1 million decades ago or saved only $950,000 decades ago + $50,000 from reduced consumption last year. The history of how you got the $1 million doesn't matter for the asset allocation.
Agree, but the question is what makes sense to do with money going forward.
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Re: Variable Percentage Withdrawal (VPW)

Post by sycamore »

JasonFIRE wrote: Wed Oct 21, 2020 5:09 pm
Ben Mathew wrote: Wed Oct 21, 2020 4:52 pm It would be better to withdraw only what you need, and leave what you don't need invested in the fixed allocation. The fixed allocation is an important part of why this strategy works well (in certain circumstances). There would be no point in keeping the surplus in a different allocation.
Thank you for the reply.

Respectfully, I do not understand this point. If one had simply spent all the money that VPW said they could spend, then it would not have changed VPW's outcome. In this case, one now has extra money they did not spend. So, on some level, it seems rational to keep that money in a safer investment, because again, doing so would not change the outcome of VPW had the money been spent.
Ben Mathew wrote: Wed Oct 21, 2020 4:52 pm Another way to think about this is that the origin of where your money came from does not matter. If you have $1 million in your portfolio, and it makes sense for you to invest it 60/40, then it doesn't matter if you saved the $1 million decades ago or saved only $950,000 decades ago + $50,000 from reduced consumption last year. The history of how you got the $1 million doesn't matter for the asset allocation.
Agree, but the question is what makes sense to do with money going forward.
Sorry, I don't follow what you say about VPW's outcome not changing under certain cases. Every year you need to update your VPW spreadsheet with your current age, current portfolio value, AA, etc. If VPW suggested a $60k withdrawal for year 2020 but you only withdrew $50k, then for 2021 your current portfolio value will be $10k more (than if you'd spent it), and thus VPW will suggest a higher 2021 withdrawal amount than it would have otherwise.

Similarly, if you withdraw the full $60k but keep the unspent money in a safer investment, that's basically the same as making your AA slightly more bond heavy. VPW only allows AA choices in 10% increments so we can't model some of the scenarios we're talking about.

How much "unspent" money are we talking about? $100 or $10,000?

To be sure, if you don't need to spend all of the VPW suggestion, don't spend it. My hunch is keeping the remainder in your original AA will yield the best outcome (financially), and putting it in a safer investment will be only fractionally less good. Whether my hunch is right depends on whether your AA will have a better future return than a safer investment. There's no way to know the future of course... which is why many people just decide on anAA (static, or declining with age, etc.) and stick to it. Don't try to make guesses at future market performance.
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Re: Variable Percentage Withdrawal (VPW)

Post by JasonFIRE »

sycamore wrote: Wed Oct 21, 2020 6:48 pm Sorry, I don't follow what you say about VPW's outcome not changing under certain cases.
Suppose VPW says I can spend 50k. I withdraw 50k. I spend 40k. I have 10k leftover. Whether I spend that 10k or not, if I do not reinvest it, then the outcome of VPW is not effected. So, since I have 10k left over, I must decide what to do with it. Reinvest in the same AA? Or, put in some inflation protected safer asset?

Your point about leaving it invested in the same AA makes sense. If market goes up, then one has a higher amount from which VPW will be calculated. On the other hand, if the market goes down, then one has a lower amount. If one had kept their "extra" in a safer investment, then they could live off of that instead of withdrawing from a lower portfolio.
sycamore wrote: Wed Oct 21, 2020 6:48 pm To be sure, if you don't need to spend all of the VPW suggestion, don't spend it. My hunch is keeping the remainder in your original AA will yield the best outcome (financially), and putting it in a safer investment will be only fractionally less good. Whether my hunch is right depends on whether your AA will have a better future return than a safer investment. There's no way to know the future of course... which is why many people just decide on anAA (static, or declining with age, etc.) and stick to it. Don't try to make guesses at future market performance.
Agree with all that. That is also my hunch. It feels a little bit to me like similar considerations in Constant Dollar. IIRC, it has been shown that keeping "cash cushions" is not as good as staying in the market.

But, it is an interesting question. If one is happy spending less - significantly less - than their VPW amount, then one must consider what to do with the remainder: leave it invested in the same AA vs do something else. That is the fundamental question.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

NearlyRetired wrote: Wed Oct 21, 2020 10:05 am Hi longinvest

Firstly, congratulations on putting this deceptively simple spreadsheet together.
Thanks NearlyRetired.
NearlyRetired wrote: Wed Oct 21, 2020 10:05 am I do have a couple of questions that I cannot find answers to, so apologies if these have already been answered.

1. My understanding is that the sheet will calculate withdrawal amounts based on the fund running down to zero at 100.
Our wiki's instructions on how to use variable percentage withdrawals during retirement make clear that, when properly used, the VPW method will never completely deplete the portfolio.
NearlyRetired wrote: Wed Oct 21, 2020 10:05 am Is there any way to change that to say 90 for example (I am interested in how the percentages might change with an earlier "end" date as based on family history I won't get there)?
The target last withdrawal age, to construct the VPW Table, isn't based a longevity projection; it's based on making sure that there will be sufficient money left in the portfolio at age 80 to use part of it, when necessary, to buy an inflation-indexed SPIA* so that total non-portfolio income (including Social Security or UK's equivalent old age benefit, pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risk associated with living past age 100.

* Single Premium Immediate Annuity.

The VPW Accumulation And Retirement Worksheet implements a robust plan which provides lifelong income, regardless of how long the retiree lives. It is a prudent plan; most retirees using it will die with a significant residual portfolio often bigger than 50% of the inflation-adjusted portfolio balance at age 65. See this post for details.

There's a detailed explanation in this post of why it's important to buy an inflation-indexed SPIA at age 80 when necessary to establish a sufficient income floor to live comfortably independently of portfolio withdrawals.

Now, if you simply want to experiment with various VPW settings and evaluate their impact to better understand how the VPW method was constructed, you can play with the VPW Backtesting Spreadsheet. It allows for changing the last withdrawal age and many other settings. But, VPW isn't meant to be used with such experimental settings. In real life, it's best to use the VPW Accumulation And Retirement Worksheet unmodified.
NearlyRetired wrote: Wed Oct 21, 2020 10:05 am 2. VPW is calculating a withdrawal value higher than I currently need to meet my expenses.

Which is better, to withdraw what VPW suggests, or to take out what I need and leave the rest invested?
One of the goals of VPW is to allow deferred spending to actually happen! When I save money, today, it isn't with the objective of dying with the biggest possible portfolio; it's because I am deferring spending I could do today to later.

The thing is this. When assets prices are higher, the portfolio is larger and VPW withdrawal amounts are likely bigger than what the retiree needs for great comfort. Let's say that the excess amount represents 1% of the retiree's portfolio. If the retiree leaves this money in the portfolio, this will only increase future withdrawal amounts by 1%. If, for example, next year's withdrawal amount drops by -20%, this might result in a drop of -19.2% instead. The retiree won't notice the difference.

If the retiree thinks of putting the money aside, just in case future withdrawals drop, this means that the retiree hasn't appropriately planned for using the variable percentage withdrawal method. The retiree is supposed to already have ample flexibility to reduce expenses in bad markets, taking into account stable lifelong income and asset allocation.

So, we're back to square one: what to do with the money? I say: either spend it, gift it, or earmark it for future specific near-term spending (leaving it appropriately in a savings account).

Here are ideas from previous posts:
longinvest wrote: Mon Jun 17, 2019 4:35 pm
  • 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.
longinvest wrote: Thu Oct 18, 2018 7:03 am Every year of retirement, my wife and I plan to give money we don't need and enjoy the process (hopefully making a difference in the lives of others).
In summary, I suggest to withdraw the money as suggested by the VPW worksheet and use it for something fun or meaningful which will increase the retiree's happiness. Isn't it for exactly this that the money was saved and invested decades earlier?
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Re: Variable Percentage Withdrawal (VPW)

Post by canadianbacon »

I have a question about the backtesting spreadsheet. I apologize in advance if it a bad one :). (I have to do this, I'm Canadian).

After some study of the VPW Accumulation and Retirement worksheet, it seems that as someone with a pension (CPP+OAS) kicking in at age 65, my withdrawal amount is determined by calculating the cost of a Pension Bridge, subtracting that from the overall Portfolio Balance, calculating a withdrawal based on that, and then finally adding the value of the pension.

Doing this, with my numbers (age 43, total pension ~14K per year, portfolio balance ~600K), results in an annual portfolio withdrawal of about 31K.

If I plug the same numbers into the backtesting spreadsheet, the CPP and OAS are added to my income from the start, even though I will not collect it for the first 22 years. Total income is 40K the first year instead of 31K.
If I zero out the CPP/OAS, the numbers will be too low (26K instead of 31K).
If I keep the CPP/OAS but lower the Initial Portfolio to 400K (subtract the Pension Bridge manually), the numbers look right to start (31K total income), but I think they will underestimate the volatility, because portfolio movements will be against the smaller number (400K instead of 600K).

I am wondering if there is a better way to use the spreadsheet for my situation. I can see it does a great job of showing how different scenarios would have played out historically, but I am having difficulty figuring out what those scenarios would have meant for me, since I have CPP/OAS that I will only collect in the future, and I don't think that use case is covered.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

canadianbacon wrote: Wed Oct 21, 2020 9:18 pm ([...] I'm Canadian). [...] it seems that as someone with a pension (CPP+OAS) kicking in at age 65 [...]
Canadianbacon, I suggest asking your question in our Canadian sister forum. Here's a link to the appropriate thread:
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canadianbacon
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Re: Variable Percentage Withdrawal (VPW)

Post by canadianbacon »

Sure, will copy it over.
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Re: Variable Percentage Withdrawal (VPW)

Post by NearlyRetired »

Hi longinvest

Thanks for the detailed reply and associated links. I will take another look at the Wiki.
longinvest wrote: Wed Oct 21, 2020 7:12 pm
The target last withdrawal age, to construct the VPW Table, isn't based a longevity projection; it's based on making sure that there will be sufficient money left in the portfolio at age 80 to use part of it, when necessary, to buy an inflation-indexed SPIA* so that total non-portfolio income (including Social Security or UK's equivalent old age benefit, pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risk associated with living past age 100.

* Single Premium Immediate Annuity.
Interesting - I hadn't picked up that the VPW is ensuring there is money left at 80 for an Annuity - I knew it was suggested but hadn't realised that this is baked into the calculations.
longinvest wrote: Wed Oct 21, 2020 7:12 pm
There's a detailed explanation in this post of why it's important to buy an inflation-indexed SPIA at age 80 when necessary to establish a sufficient income floor to live comfortably independently of portfolio withdrawals.
I will take a good look at this - thanks
longinvest wrote: Wed Oct 21, 2020 7:12 pm
Now, if you simply want to experiment with various VPW settings and evaluate their impact to better understand how the VPW method was constructed, you can play with the VPW Backtesting Spreadsheet. It allows for changing the last withdrawal age and many other settings
Perfect - that will give me exactly what I am looking for.
longinvest wrote: Wed Oct 21, 2020 7:12 pm
If the retiree thinks of putting the money aside, just in case future withdrawals drop, this means that the retiree hasn't appropriately planned for using the variable percentage withdrawal method. The retiree is supposed to already have ample flexibility to reduce expenses in bad markets, taking into account stable lifelong income and asset allocation.

So, we're back to square one: what to do with the money? I say: either spend it, gift it, or earmark it for future specific near-term spending (leaving it appropriately in a savings account).

Here are ideas from previous posts:
longinvest wrote: Mon Jun 17, 2019 4:35 pm
  • 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.
longinvest wrote: Thu Oct 18, 2018 7:03 am Every year of retirement, my wife and I plan to give money we don't need and enjoy the process (hopefully making a difference in the lives of others).
In summary, I suggest to withdraw the money as suggested by the VPW worksheet and use it for something fun or meaningful which will increase the retiree's happiness. Isn't it for exactly this that the money was saved and invested decades earlier?
I do have the capacity to live off the reduced amount VPW suggests, which I guess was why I was asking the question. I don't need the extra money, but the posts you have provided has given me food for thought.
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Re: Variable Percentage Withdrawal (VPW)

Post by delta123 »

Hi Longinvest,

A Couple of questions - and maybe they were answered in the past, my bad then:

For Accumulation Stage:
1. I guess one VPW spreadsheet per spouse. Are we using in both spreadsheets the age of the youngest spouse?
2. Ar we using only one benefit (CPP/SS/OAS..) and the lowest benefit or one befit = 1/2 of Spouse A + 1/2 Spouse B

For Retirement Stage:
3. The retiree has to have a flexibility due to the potential of 50% "loss" in stock. Having said that, assuming that someone wants to go KISS and is withdrawing the amount on Jan 1, 2020 and keeping the money in a HISA for monthly withdrawals to cover the expenses and taxes. In that case, how the retiree is factoring this year fluctuation:
--will this fluctuation be taken into consideration on the next withdrawal, 2021?
--is he adjusting the balance from HISA; therefore, there will be something saved/left for the next year's withdrawal?
--should the retiree use the monthly withdrawals?
4. How the spreadsheet is factoring a bear market for 2 consecutive years? Ex: First-year a "loss" of 50% following by another reduction of 50% next year?
5. In regards to the above flexibility in case of 50% loss, when the retiree resumes his normal withdrawal?
--is when everything gets back to normal, to the same valuation? What if there is a Japan case?

Thanks
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Delta123, all of your questions apply to both accumulation and retirement stages.
delta123 wrote: Fri Oct 23, 2020 2:26 pm 1. I guess one VPW spreadsheet per spouse. Are we using in both spreadsheets the age of the youngest spouse?
It's OK to use one or two spreadsheets with the age of the youngest spouse.
delta123 wrote: Fri Oct 23, 2020 2:26 pm 2. Ar we using only one benefit [...] and the lowest benefit or one befit = 1/2 of Spouse A + 1/2 Spouse B
What if one spouse was to die just the day before the first pension payment? I don't like for the survivor to end up, at that point, in a worse financial situation than if a pension hadn't been taken into account. But, that's a personal preference (or I should say, a preference of my wife and I).

Here's a hypothetical example in a model (ignoring actual market returns). Spouse1 is 55 and qualifies for an inflation-indexed $1,000/month pension at age 65 which has no survivor benefit. Spouse2 is 60 and qualifies for a $1,500/month pension at age 65 that which no survivor benefit. The couple has just retired with a $500,000 balanced (60/40 stocks/bonds) portfolio. As my goal is to illustrate the impact of these two pensions, I'll ignore all other pensions (like Social Security).

If I put age 55, a $500,000 portfolio, a 60/40 stock/bond allocation, a $1,000/month pension starting at age 65, and a $1,500 pension starting at age 60 (when the oldest spouse will be 65) in the Retirement Worksheet, I get a $44,051 annual portfolio withdrawal suggestion. This is based on an estimated $102,208 cost for the $1,000/month pension bridge and an estimated $83,709 cost for the $1,500/month pension bridge, leaving a $314,083 portfolio for the VPW withdrawal calculation which, at age 55, implies a $14,051 withdrawal. Adding this amount to the annual sum of the two bridged pensions results in the suggested withdrawal amount.

The couple takes $44,051 withdrawals for five years. At the beginning of the sixth year, Spouse2 dies. The residual portfolio balance is $354,961. Spouse1 is of age 60 and puts a $354,961 portfolio balance in the Retirement Worksheet along with an inflation-indexed $1,000/month pension starting at age 65. Total retirement income of the survivor drops by -41% to $26,051!

Had the couple planned as if only Spouse1's pension existed, the worksheet would have suggested a smaller $29,795 initial withdrawal. At the start of the sixth year, the survivor would be left with a $434,692 portfolio. Putting this into the spreadsheet at age 60 along with an inflation-indexed $1,000/month pension starting at age 65 results into a $29,795 withdrawal suggestion. In other words, Spouse1 is in no worse shape at age 60 than if Spouse2 had died when Spouse1 was 55. Repeating the exercise with Spouse2 instead would result in a suggestion of a $36,623 withdrawal amount at age 55. The lowest withdrawal amount, $29,795, should obviously be used if spouses don't want the survivor to suffer a significant income decline.

Planning for no total income reduction at death is safest for the survivor, but some couples might choose differently. What's important is for the couple to be aware of the consequences of first death on the survivor and choose appropriately.

Note that a simple and conservative approach is to plan as if one spouse was dead today and start survivor pensions at the normal pension start age (because they're not paid while the spouse is still alive). The chosen survivor is the one that gets the lowest portfolio withdrawal amount suggestion.
delta123 wrote: Fri Oct 23, 2020 2:26 pm 3. The retiree has to have a flexibility due to the potential of 50% "loss" in stock. Having said that, assuming that someone wants to go KISS and is withdrawing the amount on Jan 1, 2020 and keeping the money in a HISA for monthly withdrawals to cover the expenses and taxes. In that case, how the retiree is factoring this year fluctuation:
--will this fluctuation be taken into consideration on the next withdrawal, 2021?
--is he adjusting the balance from HISA; therefore, there will be something saved/left for the next year's withdrawal?
--should the retiree use the monthly withdrawals?
4. How the spreadsheet is factoring a bear market for 2 consecutive years? Ex: First-year a "loss" of 50% following by another reduction of 50% next year?
5. In regards to the above flexibility in case of 50% loss, when the retiree resumes his normal withdrawal?
--is when everything gets back to normal, to the same valuation? What if there is a Japan case?
Unfortunately, no withdrawal method can create returns that markets don't deliver.

Stable lifelong inflation-indexed income can be bought, indirectly by delaying Social Security to age 70, or directly from an insurance company in the form of a 2%-indexed SPIA*.

* Single Premium Immediate Annuity.

Here's a recent post I wrote about this:
longinvest wrote: Mon Oct 05, 2020 7:01 pm [...]
The worksheet's -50% stock drop is a normal event for stocks. That's like saying that there will be a car accident in New York city tomorrow. It's not perfectly certain to happen, but it's nothing out of the ordinary. What's the worst case, for bonds and stocks? They can go to zero. They did in Russia and China during the past century. There's no protection against financial calamities. The VPW worksheet only aims to tell the investor that a -50% stock drop shouldn't cause any change in level of comfort for the accumulator or the retiree. It's a normal thing. When stocks start to drop more, the investor will have to start reducing comfort. That why I say the there must be comfort to start with, even after a -50% stock drop.

I suggest that you read this post I made on the "[Peter] Bernstein VS [Rick] Ferri" thread.

[...] There's no floor to how low VPW withdrawals can get, because there's no limit to how low future market returns (for both stocks and bonds) can get. That's the reality with have to live with. When I say that the future is uncertain and future returns are unknown, I mean it.

If you want (reasonable) certainty, just buy it. It's expensive, but it's available. Just don't buy too much of it, because liquidity is important.

Yet, I have a lot of trouble trying to understand what people are really fearing. Reducing expenses, during bad times, is just natural. It's most likely that a retiree using VPW with a balanced portfolio will be in better financial shape than many others in society. There's very little I really need in life; food, basic shelter, clothing, running water, and sufficient warmth. It doesn't need to cost much. The rest are just things I like. I could live without them, even if I don't want to. But, I would prefer for the transition to be slow enough so that I can more easily adapt. Bonds are useful for that.
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Re: Variable Percentage Withdrawal (VPW)

Post by Barkingsparrow »

Apologies for posting some basic questions, but I did spend time scanning this monstrous thread to try and find answers.
Note that I'm not yet retired.

1. On the Accumulation Worksheet page, under Defined Benefit Pension #1, where I put my anticipated Social Security benefit. I fill in the Start Age of 70, and my expected Monthly Payment amount. What is the purpose of the Annual Contribution? I noted if I enter values for it that the Monthly Portfolio Contribution values changes.

2. On the Retirement Worksheet, I've filled in the following values.

a. Deferred Benefit Pension #1 - my expected social security benefit @ age 70.
b. Deferred Benefit Pension #2 - my spouse's expected social security benefit @ my age. That is, when she takes her social security benefit at her FRA, I'm filling in my age at that time.
c. Deferred Benefit Pension #3 - my spouse's expected spousal social benefit @ my age of 70.

Is this a correct/accurate way to enter these values?
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Barkingsparrow wrote: Sat Oct 24, 2020 11:19 am Apologies for posting some basic questions, but I did spend time scanning this monstrous thread to try and find answers.
Note that I'm not yet retired.

1. On the Accumulation Worksheet page, under Defined Benefit Pension #1, where I put my anticipated Social Security benefit. I fill in the Start Age of 70, and my expected Monthly Payment amount. What is the purpose of the Annual Contribution? I noted if I enter values for it that the Monthly Portfolio Contribution values changes.

2. On the Retirement Worksheet, I've filled in the following values.

a. Deferred Benefit Pension #1 - my expected social security benefit @ age 70.
b. Deferred Benefit Pension #2 - my spouse's expected social security benefit @ my age. That is, when she takes her social security benefit at her FRA, I'm filling in my age at that time.
c. Deferred Benefit Pension #3 - my spouse's expected spousal social benefit @ my age of 70.

Is this a correct/accurate way to enter these values?
Barkingsparrow, I suggest reading: If you still need help after reading them, please ask your specific questions on the Accumulation Worksheet thread. It's best to provide sufficient numbers so that I can fill a copy of the spreadsheet to understand the situation.
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eddie_money
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Thank you longinvest for creating the VPW sheet, and all others helped to make it what it is today.

I have done all sorts of calculations and testing with the (LibreOffice) sheet so far, and I am running in the following issue.

In the Retirement sheet, when I enter an age at 'Information For 2020' which is greater than the 'Start Age' filled in one of the DB pensions fields, the sheet throws an error. Is this as expected? Wouldn't it make sense the sheet still can calculate and suggest a withdrawal from a portfolio, including the DB pensions payments?

If the sheet does this on purpose, does this mean the rest of the portfolio must be withdrawn according to the VPW Table, on top of the defined benefit pensions?
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

JasonFIRE wrote: Wed Oct 21, 2020 7:02 pm
sycamore wrote: Wed Oct 21, 2020 6:48 pm Sorry, I don't follow what you say about VPW's outcome not changing under certain cases.
Suppose VPW says I can spend 50k. I withdraw 50k. I spend 40k. I have 10k leftover. Whether I spend that 10k or not, if I do not reinvest it, then the outcome of VPW is not effected. So, since I have 10k left over, I must decide what to do with it. Reinvest in the same AA? Or, put in some inflation protected safer asset?

Your point about leaving it invested in the same AA makes sense. If market goes up, then one has a higher amount from which VPW will be calculated. On the other hand, if the market goes down, then one has a lower amount. If one had kept their "extra" in a safer investment, then they could live off of that instead of withdrawing from a lower portfolio.
sycamore wrote: Wed Oct 21, 2020 6:48 pm To be sure, if you don't need to spend all of the VPW suggestion, don't spend it. My hunch is keeping the remainder in your original AA will yield the best outcome (financially), and putting it in a safer investment will be only fractionally less good. Whether my hunch is right depends on whether your AA will have a better future return than a safer investment. There's no way to know the future of course... which is why many people just decide on anAA (static, or declining with age, etc.) and stick to it. Don't try to make guesses at future market performance.
Agree with all that. That is also my hunch. It feels a little bit to me like similar considerations in Constant Dollar. IIRC, it has been shown that keeping "cash cushions" is not as good as staying in the market.

But, it is an interesting question. If one is happy spending less - significantly less - than their VPW amount, then one must consider what to do with the remainder: leave it invested in the same AA vs do something else. That is the fundamental question.
If you withdraw 50K but only spent 40K and left with 10K, just keep 10K in savings is what I say. The issue with constantly putting leftover back is it becomes very difficult to make big purchases like buying a house w/ a down payment. Keeping leftover cash would allow you to budget properly for such an event.

Of course, if you have 300K+ piled up or something then that's a different story. But anything less than a down payment (or whatever you think the most expensive purchasing event might be) should be set aside instead of merged back into your AA in my opinion.
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Re: Variable Percentage Withdrawal (VPW)

Post by luminous »

eddie_money wrote: Sat Nov 07, 2020 9:37 am Thank you longinvest for creating the VPW sheet, and all others helped to make it what it is today.

I have done all sorts of calculations and testing with the (LibreOffice) sheet so far, and I am running in the following issue.

In the Retirement sheet, when I enter an age at 'Information For 2020' which is greater than the 'Start Age' filled in one of the DB pensions fields, the sheet throws an error. Is this as expected? Wouldn't it make sense the sheet still can calculate and suggest a withdrawal from a portfolio, including the DB pensions payments?

If the sheet does this on purpose, does this mean the rest of the portfolio must be withdrawn according to the VPW Table, on top of the defined benefit pensions?
The sheet throws an error if "Already Started" is set to No, and age is greater than "Start Age" for the pension. If you set "Already Started" to Yes the error goes away.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Thank you luminous for pointing this out.
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Re: Variable Percentage Withdrawal (VPW)

Post by Free to Choose »

I am looking for guidance on how to enter my Social Security amount in the fantastic VPW Retirement Worksheet. I am using the worksheet to estimate an expected withdrawal amount when I plan to retire in my mid-fifties. Currently, I am in my early fifties.

My understanding is to enter the Social Security amount in today's dollars instead of future dollars. To estimate my SS, I am using Neurosphere's fantastic SS estimator spreadsheet, viewtopic.php?t=262772 (I used last year's version). It provides the following values:

#1- Inflation Assumption 1 (Zero price and zero wage inflations) @70 = $43,000 annually, in today's dollars.
#2- Inflation Assumption 2 (SS Trustees intermediate estimates) @70 = $55,000 annually, in today's dollars.

These values have a noticeable difference in the VPW Retirement Worksheet withdrawal amount.

Which value do you recommend? I see that the conservative value would be #1. I would like to use the more reasonable value to help me plan on decide on my retirement date decision.
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Free to Choose wrote: Tue Nov 17, 2020 9:04 pm To estimate my SS, I am using Neurosphere's fantastic SS estimator spreadsheet, viewtopic.php?t=262772 (I used last year's version). It provides the following values:

#1- Inflation Assumption 1 (Zero price and zero wage inflations) @70 = $43,000 annually, in today's dollars.
#2- Inflation Assumption 2 (SS Trustees intermediate estimates) @70 = $55,000 annually, in today's dollars.

These values have a noticeable difference in the VPW Retirement Worksheet withdrawal amount.

Which value do you recommend? I see that the conservative value would be #1.
Neurosphere's estimator is effectively awesome. I'd use zero inflation (option #1).

I'm aware that wages have historically inflated faster than prices (maybe 1% more than CPI inflation), but I don't like to project such an optimistic assumption into the future.
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Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

I also like to be conservative, so I'd choose option one. If you want to be a little less conservative split the difference. As you get closer to retirement both options should converge.
I know SS is designed to keep up with inflation, but the inflation rate it uses might not be the inflation rate you live with. It might be higher, or lower.

just for fun, google "does ss keep up with inflation"
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