## Variable Percentage Withdrawal (VPW)

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### Re: Variable Percentage Withdrawal

The ROUND()s were added by design in the spreadsheet. I round percentages to the nearest .1% and all \$ withdrawal amounts to the nearest \$1000.

This was done in response of being accused of false precision. We are modeling the withdrawal of thousands of dollars out of a portfolio using historical data that doesn't even provide for enough accuracy (transactions costs, spread, taxes, etc.). If rounding a few dollars out or in (during withdrawals) breaks the plan, then there's no plan. Note that I keep more precision tracking portfolio returns (I round to the nearest 1\$, much more precise than withdrawals).

The Backtesting sheet cannot model the withdrawal out of pocket money (a few thousand dollars), only out of a portfolio (hundred of thousand dollars). I could do as you suggest, but I somehow like the current intentional imprecision; it is a philosophical message to VPW users.

Now I see your intentions, which are clear. To ask this in another way - what is the minimum portfolio amount where the rounding has no effect? I think this occurs above \$600,000.

Philosophical messages are fine, but they should be documented. I would not have encountered this "feature" if I did not try these lower portfolio values. Can you perhaps restrict the minimum investment value to avoid these discrepancies?

The users need to know that accuracies are reduced below a certain threshold. It's very difficult to see the effects, especially when the Constant Dollar Withdrawal threshold starts cutting off earlier than the others - is it real or the effects of truncation?

An idea: Instead of a fixed "0" or "3" rounding error, replace it with a cell that can change depending if we want rounding enabled (0 or 3 place precision) or not (14 places, perhaps). Then, just change the referenced cell's value. I'll take a look at this (and will share the result if it looks promising). BTW, I'm using MS Excel for this round of testing.
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longinvest
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### Re: Variable Percentage Withdrawal

LadyGeek wrote:Now I see your intentions, which are clear. To ask this in another way - what is the minimum portfolio amount where the rounding has no effect? I think this occurs above \$600,000.

Philosophical messages are fine, but they should be documented. I would not have encountered this "feature" if I did not try these lower portfolio values. Can you perhaps restrict the minimum investment value to avoid these discrepancies?

The users need to know that accuracies are reduced below a certain threshold. It's very difficult to see the effects, especially when the Constant Dollar Withdrawal threshold starts cutting off earlier than the others - is it real or the effects of truncation?

An idea: Instead of a fixed "0" or "3" rounding error, replace it with a cell that can change depending if we want rounding enabled (0 or 3 place precision) or not (14 places, perhaps). Then, just change the referenced cell's value. I'll take a look at this (and will share the result if it looks promising). BTW, I'm using MS Excel for this round of testing.

The only rounding that doesn't scale down well is the rounding of payments. The .1% rounding of percentages and 1\$ rounding of portfolio balance are O.K.

I could eliminate the smaller payment rounding problem by making sure that I keep at least 2 significant digits. So, under \$10,000, I would round to the nearest \$100, under \$1,000 to the nearest \$10, and under \$100 to the nearest \$1.

What do you think of that?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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### Re: Variable Percentage Withdrawal

I think it increases the complexity of your spreadsheet, as you'll now have to track several thresholds.

I agree that the payments are where this gets complicated. Here's a formula from 'Details' E6:

\$48,000 =IF(\$A6="","",MIN(D6,ROUND(D6*VPW!\$B17/1000,0)*1000))

...which is a truncation. I forgot to mention that removal of ROUND() also needs removal of the '1000' and ends up as:

\$48,421 =IF(\$A6="","",MIN(D6,D6*VPW!\$B17))

which is 0.9% difference. No modifications were made to the entries, the spreadsheet is as you saved it (\$1,000,000). Removal of the truncation keeps your spreadsheet simple and clear.

The premise of your argument for rounding is certainly sound. We are disagreeing on the sequence of the implementation. My intentions are to maintain full precision, then round at the end of the calculations - which is what you display to the user (just format the cell displays).

Your implementation performs the rounding in the middle of the calculations - before it is presented to the user. Mathematically, there is no difference between them. However, you are losing information before the final step, which needs to be treated with additional considerations - and is where the complexities arise.

In the example above, E6 is held to the nearest 1,000 payment and results in a 0.9% difference without rounding. Compare that to your 0.1% rounding of percentages (and 1\$ of portfolio balance). I think you need to be consistent tracking precision (everything in %) and is why I think removal of rounding - until it's displayed to the user - is the simplest approach. You won't get tripped up with unforeseen conditions.

(This what I call a "deceptively simple" problem. A simple concept; but the problems are deceptively masked.)
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

sans souliers
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### Re: Variable Percentage Withdrawal

Whoa.
You need to just make withdrawals as the expenses come along.
There will be times of plenty and times of not-so-plenty, so pay attention to the pharaoh's dreams.
Or, just go ahead and parse it over and over again for the next 30-40 years or whatever length of time you have left.
My head started to hurt going into page two!
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.

longinvest
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### Re: Variable Percentage Withdrawal

LadyGeek wrote:I think it increases the complexity of your spreadsheet, as you'll now have to track several thresholds.

I agree that the payments are where this gets complicated. Here's a formula from 'Details' E6:

\$48,000 =IF(\$A6="","",MIN(D6,ROUND(D6*VPW!\$B17/1000,0)*1000))

...which is a truncation. I forgot to mention that removal of ROUND() also needs removal of the '1000' and ends up as:

\$48,421 =IF(\$A6="","",MIN(D6,D6*VPW!\$B17))

which is 0.9% difference. No modifications were made to the entries, the spreadsheet is as you saved it (\$1,000,000). Removal of the truncation keeps your spreadsheet simple and clear.

The actual error should be measured on the balance (where it has an impact on future calculations), not on the withdrawal. \$421/\$500,000 is less than .1%. It can grow a little higher, but only near the latest years, when the compounding of errors is not a error problem anymore.

Yet, to avoid making the formula too complex, I will reduce the rounding to the nearest \$100, and put a lower bound of \$100,000 on the initial portfolio. IF(\$A6="","",MIN(D6,ROUND(D6*VPW!\$B17/100,0)*100))

This will give us an error way below .1% (withdrawal error divided by remaining portfolio).

The premise of your argument for rounding is certainly sound. We are disagreeing on the sequence of the implementation. My intentions are to maintain full precision, then round at the end of the calculations - which is what you display to the user (just format the cell displays).

Your implementation performs the rounding in the middle of the calculations - before it is presented to the user. Mathematically, there is no difference between them. However, you are losing information before the final step, which needs to be treated with additional considerations - and is where the complexities arise.

In the example above, E6 is held to the nearest 1,000 payment and results in a 0.9% difference without rounding. Compare that to your 0.1% rounding of percentages (and 1\$ of portfolio balance). I think you need to be consistent tracking precision (everything in %) and is why I think removal of rounding - until it's displayed to the user - is the simplest approach. You won't get tripped up with unforeseen conditions.

(This what I call a "deceptively simple" problem. A simple concept; but the problems are deceptively masked.)

I disagree with you on changing the presentation of numbers without changing the calculation. My implementation does show what happens when you round the withdrawals. It also shows what happens when you withdraw the exact rounded VPW provided percentage every year. This seems right to me.

Rounding the presented numbers, while not rounding the actual calculations, could be equally interpreted as showing incorrect results. At least, the VPW percentages should be shown with enough precision so that the shown payments would be within the error range of presentation rounding. I would have to show more precision than .1% for VPW percentages and reopen a can of worms about false precision. I'm not willing to go there.
Last edited by longinvest on Tue Aug 27, 2013 7:06 am, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
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### Re: Variable Percentage Withdrawal

sans souliers wrote:Whoa.
You need to just make withdrawals as the expenses come along.
There will be times of plenty and times of not-so-plenty, so pay attention to the pharaoh's dreams.
Or, just go ahead and parse it over and over again for the next 30-40 years or whatever length of time you have left.
My head started to hurt going into page two!

Hi sans souliers,

The difficulty is to find a rigorous approach to put a cap on what you can safely withdraw every year from your portfolio. Simply going with intuition is probably good enough for people that have good intuition. Me, I do not trust my intuition that much, for financial matters; I prefer to see rational justifications.

Also, I have discovered with VPW, after adding back-testing in the spreadsheet, that delaying consumption does little to nothing to protect you from dips in the markets.

If you withdraw less than you could do safely early on, with an inflated portfolio (like in 1966), it is like if you had withdrawn the excess on your withdrawal and reinvested it into a very expensive market. When the dip comes later on, you hope to be able to withdraw more money, unfortunately, the reinvested money has shrunk to a much smaller amount. So, the difference on your safe consumption has not changed much during the dip.

Of course, a scheme like Constant-Dollar Withdrawal would keep your withdrawals higher, but this is very risky if you happened to retire into an expensive market. It can lead to full portfolio depletion way before you planned. You would be the wiser to not withdraw more than it would be safe, regardless of how future markets will behave (recovering from the dip or not). This is what VPW does for you; it does not attempt to guess future market moves, it only guides you into withdrawing a safe amount given your portfolio balance and your planned remaining time span to deplete it.

To make things worse, life is unfair. If you delay consumption too much from your 60s and 70s to your 80s and 90s, the utility of the additional available money is likely to have gone away. In other words, it is not very wise to live in misery in your 60s and 70s to be richer in your 80s and 90s when you'll have reduced mobility and needs, and when it will be too late to develop memories travelling with your grand-children.

You don't have to follow VPW to the letter, but it gives you a pretty good idea of what you can safely withdraw from your portfolio, without having to guess a Safe Withdrawal Rate (anticipating the worst possible future).

To be fair, I have to disclose that the main weakness of VPW, and it is not a small one, is that it cannot guarantee a floor on yearly withdrawals. As such VPW is not a retirement plan; it is only a tool to use within one. If markets dip deeply, withdrawals will follow suit. If you live longer than the selected depletion age, you still need to eat. You need to combine VPW with something else (like Social Security and pensions) to establish a spending floor and have a retirement plan.

[Added:] You can give a look at viewtopic.php?f=10&t=120430&start=150#p1787349 to see what would have happened if someone retired in 1966.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

sans souliers
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### Re: Variable Percentage Withdrawal

Hey, longinvest --
Thanks for the explanation.
You're right - for me, good enough is just that.
In retirement, I'm going to relax a bit and live more for the present;
not quite, but sorta like the birds of the air.
But now I see where you're coming from.
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.

Cut-Throat
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### Re: Variable Percentage Withdrawal

longinvest wrote:Also, I have discovered with VPW, after adding back-testing in the spreadsheet, that delaying consumption does little to nothing to protect you from dips in the markets.

If you withdraw less than you could do safely early on, with an inflated portfolio (like in 1966), it is like if you had withdrawn the excess on your withdrawal and reinvested it into a very expensive market. When the dip comes later on, you hope to be able to withdraw more money, unfortunately, the reinvested money has shrunk to a much smaller amount. So, the difference on your safe consumption has not changed much during the dip.

Yes, Longinvest I see what you were saying to me earlier. This is an important point!..... If you don't mind volatility, just spend freely and take the dips in stride.

However, if you are withdrawing from your portfolio currently, as I am, and are concerned about the High Stock valuations and Low interest rates on Bonds, there is something else you could employ. It reminds me of what William Bernstein called 'Dynamic Asset Allocation'. I believe he wrote about this in his Book "the Intelligent Asset Allocator". If you follow the "Pure" VPW and are worried about future market dips,
the important thing to do is to pull the Withdrawal Percentage out of the Market according to your asset Allocation. Whether you spend it all, is up to you. No sense leaving it in the market to be subjected to a Huge market tanking. You could put the remainder in Cash and use it to supplement a bad market dip. If we don't get a severe market dip, your portfolio has grown less, but who cares, we still have more to spend and we are in the withdrawal phase now and don't really want to grow the portfolio, as much as we want to 'consume it'.

Let's Face it.... We aren't retiring in 1982 today, where every year gets rosier and you don't really have to have a plan for withdrawals.

investor.saver1
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### Re: Variable Percentage Withdrawal

Wow! Lots of energy has gone into this thread on Variable Percentage Withdrawal.

A while back I created a spreadsheet that calculated an annual withdrawal amount based on various inputs: 1) Portfolio Value, 2) Projected returns, 3) inflation increases, 4) age, 5) years of distribution. I posted a link to the spread sheet in the thread below. The thread had little interest.

To my way of thinking, simplicity is supreme. I plan to run this spreadsheet every year after updating the input variables as needed due to changing economic or heath conditions. I'll then be moving the calculated withdrawal amount from my investment portfolio into my cash account. The cash account is managed so that it is spent down to \$0 each year. If my investments do well during the year, my portfolio value will increase and my withdrawal amount next year will be higher. If my investments do poorly during the year, my portfolio will decrease in value and my calculated withdrawal amount the following year will be lower. Simple!!!!
Investor.Saver1 | | Experience is something you don't get until just after you need it.

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### Re: Variable Percentage Withdrawal

May I suggest discussing the differences between VPW and investor.saver1's spreadsheet in his thread? Tool For Calculating Annual Withdrawals From Investment Port

investor.saver1 can explain his approach in further detail without side-tracking this one; and will allow other members to comment directly. You can never have too many spreadsheets.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Cut-Throat
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### Re: Variable Percentage Withdrawal

LadyGeek wrote:May I suggest discussing the differences between VPW and investor.saver1's spreadsheet in his thread? Tool For Calculating Annual Withdrawals From Investment Port

investor.saver1 can explain his approach in further detail without side-tracking this one; and will allow other members to comment directly. You can never have too many spreadsheets.

Sure, why don't you move all the posts over to that other thread. That should do it!

[Done! See: Tool For Calculating Annual Withdrawals From Investment Port --admin LadyGeek]

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### Re: Variable Percentage Withdrawal

longinvest wrote:

The actual error should be measured on the balance (where it has an impact on future calculations), not on the withdrawal. \$421/\$500,000 is less than .1%. It can grow a little higher, but only near the latest years, when the compounding of errors is not a error problem anymore.

Yet, to avoid making the formula too complex, I will reduce the rounding to the nearest \$100, and put a lower bound of \$100,000 on the initial portfolio. IF(\$A6="","",MIN(D6,ROUND(D6*VPW!\$B17/100,0)*100))

This will give us an error way below .1% (withdrawal error divided by remaining portfolio).
The premise of your argument for rounding is certainly sound. We are disagreeing on the sequence of the implementation...

I disagree with you on changing the presentation of numbers without changing the calculation. My implementation does show what happens when you round the withdrawals. It also shows what happens when you withdraw the exact rounded VPW provided percentage every year. This seems right to me.

Rounding the presented numbers, while not rounding the actual calculations, could be equally interpreted as showing incorrect results. At least, the VPW percentages should be shown with enough precision so that the shown payments would be within the error range of presentation rounding. I would have to show more precision than .1% for VPW percentages and reopen a can of worms about false precision. I'm not willing to go there.

I see your perspective for comparison of errors; that is a good compromise.

You present a good argument on interpretation of displayed results, which did not occur to me. As one "fluent" in spreadsheets, I've always separated the display of numbers from the internal precision. Perhaps this is not apparent to most users. I'll stop here and keep the can of worms sealed.

That being said, I had some free time today. I updated the spreadsheet to consolidate a few things and sent the link to you via PM.
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umfundi
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### Re: Variable Percentage Withdrawal

I guess I am somewhat mystified:

I think it is OK to round the answers of calculations (in accepted practice) to display them. I think it is unacceptable to round answers and then to use those rounded numbers in subsequent calculations.

I lived through the struggle for the standardization of IEEE arithmetic.

Keith
Déjà Vu is not a prediction

longinvest
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### Re: Variable Percentage Withdrawal

umfundi wrote:I guess I am somewhat mystified:

I think it is OK to round the answers of calculations (in accepted practice) to display them. I think it is unacceptable to round answers and then to use those rounded numbers in subsequent calculations.

I lived through the struggle for the standardization of IEEE arithmetic.

Keith

Hi Keith,

You're right. I shouldn't round anything other than, maybe:
2. actual withdrawals from the portfolio.

It does make sense to round these numbers if we expect VPW users to use rounded withdrawal percentages and make rounded withdrawals out of their portfolio.

Yet, you and LadyGeek have good points. It would simplify the spreadsheet formulas not to round anything other than the presentation. Also, if normal spreadsheet users expect that only the presentation is rounded, it is probably not a good idea to break their intuitive assumption.

I'll remove the rounding from calculations. I'll keep the presentation of withdrawal percentages rounded to .1% and money amounts to 1\$.
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longinvest
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### Re: Variable Percentage Withdrawal

LadyGeek wrote:That being said, I had some free time today. I updated the spreadsheet to consolidate a few things and sent the link to you via PM.

Thanks a lot for all the help. I got your PM; I'll look at your spreadsheet and work on VPW this weekend.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
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### Re: Variable Percentage Withdrawal

Cut-Throat wrote:Let's Face it.... We aren't retiring in 1982 today, where every year gets rosier and you don't really have to have a plan for withdrawals.

I should show the results for 1982... It was probably not as simple as you think. Just imagine how it probably felt for a retiree of 1982. Here are the annual real returns he got on his investment portfolio during the 16 years prior to his retirement:

Code: Select all

``1966   -2.85%1967   3.68%1968   2.21%1969   -8.12%1970   5.42%1971   6.20%1972   5.38%1973   -11.43%1974   -14.02%1975   11.88%1976   4.17%1977   -7.42%1978   -0.15%1979   -3.53%1980   2.01%1981   -4.60%``

This was an annualized -1% return (loss) in real terms over the last 16 years, for a 60% bonds / 40% stocks portfolio.

The retiree would probably not have accepted to withdraw 4% of his portfolio, increased by inflation every following year. Yet, we now know that he could have withdrawn way more. I'll show the graphs over the weekend, just for fun.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Cut-Throat
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### Re: Variable Percentage Withdrawal

I should show the results for 1982... It was probably not as simple as you think. Just imagine how it probably felt for a retiree of 1982. Here are the annual real returns he got on his investment portfolio during the 16 years prior to his retirement:

Oh, I know the period before 1982 very well. I was working then, and retiring back then was pretty simple compared to today.
Most had pensions. If you had a next egg, you had no trouble finding double digit interest rates.

The main problem was inflation. Especially real estate. The people retiring in 1982, for the most part, had paid off
Homes and were in good shape. The younger people buying houses were getting
Killed with 13 percent mortgages.

Today, those younger people are retiring with mostly no Pension. They have Savings looking for Interest rates under 1%. Stocks at High Levels. Yeah, I'd say it's a bit trickier today.

czeckers
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### Re: Variable Percentage Withdrawal

If you have no bequest motive and expect to draw down the entire portfolio, why not use an annuity? With the mortality credits you ought to be able to have a larger income stream than with any of your proposed strategies.

-K
The Espresso portfolio: | | 16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."

Cut-Throat
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### Re: Variable Percentage Withdrawal

czeckers wrote:If you have no bequest motive and expect to draw down the entire portfolio, why not use an annuity? With the mortality credits you ought to be able to have a larger income stream than with any of your proposed strategies.

-K

I have not seen an example of this. An annuity with inflation protection for a couple that is Women (Age 54) Man (Age 62). What is the SWR on this for example?

Then there is the whole issue of Trusting an insurance company, which I don't, and giving up future investment options, which are unknown at this time.
Last edited by Cut-Throat on Thu Aug 29, 2013 10:35 am, edited 1 time in total.

longinvest
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### Re: Variable Percentage Withdrawal

czeckers wrote:If you have no bequest motive and expect to draw down the entire portfolio, why not use an annuity? With the mortality credits you ought to be able to have a larger income stream than with any of your proposed strategies.

That is a very good question. That's why it is included in the Frequently Asked Questions (F.A.Q.) in viewtopic.php?f=10&t=120430&p=1761580#p1761563 and the spreadsheet:

Q: Why not use an annuity, instead?
A: Who told you that you couldn't also use an annuity with part of your money? Some people like to keep a certain amount of liquidity. VPW can be used for the liquid part of your portfolio, if you wish. You could also keep a money reserve on the side on which you don't apply VPW. The VPW table is simply a tool, not an overall retirement solution.

That reminds me that I should replace "annuity" with "SPIA" in the F.A.Q., to remove any ambiguity.
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Cut-Throat
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### Re: Variable Percentage Withdrawal

Cut-Throat wrote:
czeckers wrote:If you have no bequest motive and expect to draw down the entire portfolio, why not use an annuity? With the mortality credits you ought to be able to have a larger income stream than with any of your proposed strategies.

-K

I have not seen an example of this. An annuity with inflation protection for a couple that is Women (Age 54) Man (Age 62). What is the SWR on this for example?

Then there is the whole issue of Trusting an insurance company, which I don't, and giving up future investment options, which are unknown at this time.

I'll answer the question for you. I just ran the Calculator at Vanguard. You get a 3.475% WR on your assets. This is of course before you surrender 2% of your assets up front.

Why would you think this is a great deal ?.......Maybe at age 80 as others have done on this forum, but not at our ages.

siamond
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### Re: Variable Percentage Withdrawal

Back to refining/streamlining the VPW Excel sheet... I find it a bit confusing to have the 'classic' VPW totally separated from CVPW (tabs, charts, etc). They are exactly the same thing, imho. It's just that in the former provides a recommendation for the initial withdrawal rate, while the latter lets you pick it.

Couldn't we simplify accordingly? Jut showing a cell with the recommendation (as a function of the AA), using it as default, while allowing the end user to override its value? One way to do it is to have two cells side-to-side, one with the (computed) recommendation, the other by default being equal to the first one but allowing a manual entry, this should do it. Just an idea...

hiosilver
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### Re: Variable Percentage Withdrawal

longinvest
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### Re: Variable Percentage Withdrawal

It's my fault... I'm not on vacations anymore, so I have had very little time for posting on the forums. I will upload an updated spreadsheet as soon as I get some free time.
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hiosilver
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### Re: Variable Percentage Withdrawal

That's OK. I just expected some background talk on such a hot topic and didn't know if the thread was broken. I guess we're all just waiting. I agree with deleting all of the ROUND functions to make the formulas more readable. Excel keeps everything in double floating precision anyway regardless of rounding. It does not remember that a number has been rounded. I believe rounding is best done with the format function when a result is displayed.

umfundi
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### Re: Variable Percentage Withdrawal

hiosilver wrote:That's OK. I just expected some background talk on such a hot topic and didn't know if the thread was broken. I guess we're all just waiting. I agree with deleting all of the ROUND functions to make the formulas more readable. Excel keeps everything in double floating precision anyway regardless of rounding. It does not remember that a number has been rounded. I believe rounding is best done with the format function when a result is displayed.

An interesting quirk of older x86 processors (or math co-processors, remember those?) was that there were more bits in the floating point arithemetic (add, multiply, divide) than there were in the I/O. So, if you printed a number, it would be rounded to a lower precision. That made debugging quite interesting: If you put print statements in to trace a calculation, the answers would change.

Keith
Déjà Vu is not a prediction

oldman
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### Re: Variable Percentage Withdrawal

sorry for butting in but are social security, RMD, post or pretax, also, added distributions and Roth vs Trad IRA.

Cut-Throat
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### Re: Variable Percentage Withdrawal

oldman wrote:sorry for butting in but are social security, RMD, post or pretax, also, added distributions and Roth vs Trad IRA.

Not sure if this is a question, but I'll try.

Social Security is NOT part of VPW at all.
RMD is NOT part of VPW at all.
post or pretax (Taxes are NOT part of of VPW at all)
distributions of Roth or Trad IRA are NOT part of VPW at all.

All VPW is.............. you take your part of your stash that you want to subject to withdrawal and run it and it spits out a number.

All other facets of your retirement budget like Social Security, Taxes, or your Electric Bill are up to you to calculate, plan and pay for.

oldman
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Joined: Fri Nov 14, 2008 11:12 am

### Re: Variable Percentage Withdrawal

Cut-Throat wrote:
oldman wrote:sorry for butting in but are social security, RMD, post or pretax, also, added distributions and Roth vs Trad IRA.

Not sure if this is a question, but I'll try.

Social Security is NOT part of VPW at all.
RMD is NOT part of VPW at all.
post or pretax (Taxes are NOT part of of VPW at all)
distributions of Roth or Trad IRA are NOT part of VPW at all.

All VPW is.............. you take your part of your stash that you want to subject to withdrawal and run it and it spits out a number.

All other facets of your retirement budget like Social Security, Taxes, or your Electric Bill are up to you to calculate, plan and pay for.

Good enough. I've been trying 2 retirement calculators, ES Planner and ORP, that shows the cash flow and assumed VPW was similar. But I see now its using an asset allocation to project returns. I would think It would be best to do a calculation after each withdrawl and continue to show balances etc,etc. Adust allocations as necessary as well as withdrawls. I'll give it a try. thanks.

oldman
Posts: 61
Joined: Fri Nov 14, 2008 11:12 am

### Re: Variable Percentage Withdrawal

In this example,
Here is how a 65-years old person with a 32% US / 8% INT / 60% BOND and \$1,000,000 portfolio uses VPW :

1. She enters her Asset Allocation in the VPW sheet.
2. At age 65, the percentage (line 65 of the VPW Table) is 4.6%, so she withdraws \$46,000.
3. At age 66, the percentage is 4.7%. Assuming there was a bad year, and the market dropped 5%,
the portfolio balance is (\$1,000,000 - \$46,000) - 5% = \$906,300. She withdraws \$906,300 X 4.7% = \$43,000.
4. At age 67, the percentage is 4.8%. Assuming market increased 10%,
the portfolio balance is (\$906,300 - \$43,000) + 10% = \$949,630. She withdraws \$949,630 X 4.8% = \$46,000.

Questions1. Is there somewhere that shows the withdrawls \$46,000 in this case and the balance in the account?
2. Must I set up my own spreadsheet to do the market returns on a yearly or monthly basis and change the portfolio amount?

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal

oldman wrote:

Questions
2. Must I set up my own spreadsheet to do the market returns on a yearly or monthly basis and change the portfolio amount?

oldman, once you obtain VPW's percentage table for your asset allocation, you don't need a spreadsheet. Each year, you multiply your remaining portfolio balance by the given percentage (age-based), and the result is the amount you can withdraw for the year. Technically, you should withdraw the full amount in January and put it in a savings account.

If you would rather do monthly withdrawals, here is an approximation : each year, take that year's VPW percentage P and divide it by 12:
M = P / 12
On the first day of each month of that year, multiply the monthly percentage M by your remaining portfolio balance:
withdrawal = balance * M

Important: M must be recomputed every year.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

oldman
Posts: 61
Joined: Fri Nov 14, 2008 11:12 am

### Re: Variable Percentage Withdrawal

oldman, once you obtain VPW's percentage table for your asset allocation, you don't need a spreadsheet. Each year, you multiply your remaining portfolio balance by the given percentage (age-based), and the result is the amount you can withdraw for the year. Technically, you should withdraw the full amount in January and put it in a savings account.

why is there a preference for a yearly withdrawl? I used to withdraw yearly at end of year and then pay the estimated tax. When I changed to monthly, I paid est tax 4 x year. At the time it seemed by keeping cash deferred longer I could earn more on it. That's before interest went to zero.
Since we are age 78-80, can you suggest a withdrawl option? We both have both Trad and Roth IRA's and only Social Security. Our RMD has always been around 4% +. No extra distributions. We thought we should go to about 5%. Our asset allocation has always been all over the place with over 50%-70% equities and around 20-25% fixed.

Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

### Re: Variable Percentage Withdrawal

oldman wrote:why is there a preference for a yearly withdrawl? I used to withdraw yearly at end of year and then pay the estimated tax. When I changed to monthly, I paid est tax 4 x year. At the time it seemed by keeping cash deferred longer I could earn more on it. That's before interest went to zero.
Since we are age 78-80, can you suggest a withdrawl option? We both have both Trad and Roth IRA's and only Social Security. Our RMD has always been around 4% +. No extra distributions. We thought we should go to about 5%. Our asset allocation has always been all over the place with over 50%-70% equities and around 20-25% fixed.

At your ages, you have already 'won the game'. I think you can pretty much do anything you want now. You are past the 'Critical withdrawal phase.

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal

oldman wrote:
oldman, once you obtain VPW's percentage table for your asset allocation, you don't need a spreadsheet. Each year, you multiply your remaining portfolio balance by the given percentage (age-based), and the result is the amount you can withdraw for the year. Technically, you should withdraw the full amount in January and put it in a savings account.

why is there a preference for a yearly withdrawl? I used to withdraw yearly at end of year and then pay the estimated tax. When I changed to monthly, I paid est tax 4 x year. At the time it seemed by keeping cash deferred longer I could earn more on it. That's before interest went to zero.
Since we are age 78-80, can you suggest a withdrawl option? We both have both Trad and Roth IRA's and only Social Security. Our RMD has always been around 4% +. No extra distributions. We thought we should go to about 5%. Our asset allocation has always been all over the place with over 50%-70% equities and around 20-25% fixed.

The main reason I picked a yearly withdrawal was for simplicity and to allow back-testing using existing yearly historical data. Also, I wanted to keep the VPW table smaller (12 monthly withdrawals = 12 times bigger table for exact monthly percentages). There was also the easy mental comparison to the 4% constant-dollar rule.

I agree with Cut-Throat: I don't think that a monthly, quarterly, or yearly option will make much of a difference. Me, I would just pick the one that's most convenient to me. (For the quarterly formula, replace 12 with 4 in the monthly formula).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal

I've started revamping my Variable Percentage Withdrawal spreadsheet. Here is a link to the preview version: https://www.dropbox.com/s/n1pv94mhhr423 ... al-2.0.ods

I've regrouped all the important information on a single sheet:

You can view single withdrawal paths, too:

I welcome your opinion and any suggestion you might have.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

### Re: Variable Percentage Withdrawal

longinvest,

I have started running this and may not understand all you have done. My first comments may appear negative, but that may be just because I don't understand it fully. I'll have to play with it some more tomorrow.

1.) I liked the backtest detail on the previous version because I could see the starting portfolio number, and every year displayed vertically. It seems like this data is now gone.....This was the most important data to me.

2.) Also, I don't understand the minimum, 10th percentile etc....... I changed to a smaller VPW rate and my minimum was smaller than the higher VPW....which seemed to not be the case in your first version??

What I like is the backtest page in the old version that had all of the data there. Portfolio Balance, CVPW, Withdrawal amount, Rate of return...with the addition maybe of inflation rate. It also listed your age and the backtested year.

siamond
Posts: 3297
Joined: Mon May 28, 2012 5:50 am

### Re: Variable Percentage Withdrawal

longinvest, you've been busy... Overall, I like the new format.

1. agreed with cut-throat, it would be great to see the trajectory of the portfolio in addition to the trajectory of the withdrawals
2. let me suggest you add the 50th percentile to the percentile chart, i.e. the median value of withdrawal
3. let me suggest that the two primary withdrawal charts should be displayed in 'real' dollars, not nominal - much easier to interpret
4. let me suggest you include somewhere the total of all withdrawals (lowest, 5th/10th/50th percentile), this will help providing an aggregate metric for a given scenario (e.g. initial rate, stock/bonds balance, etc)
5. the larger withdrawal chart is... psychedelic!
=> to make it more useful, it would be great to be able to constrain it with a range of years (hint: Excel charts do not display anything for a cell with a #N/A value)
=> well, actually this should constrain the entire model, including percentiles, etc.
6. I liked the ability to switch between Simba and Shiller historical returns (the former opening the door to more diverse AAs)...

Will think more about it tomorrow... Nice work.

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal

Hi Cut-Throat,

Cut-Throat wrote:longinvest,

I have started running this and may not understand all you have done. My first comments may appear negative, but that may be just because I don't understand it fully. I'll have to play with it some more tomorrow.

That's OK. I'm showing the preview version to gather comments and improve it.

1.) I liked the backtest detail on the previous version because I could see the starting portfolio number, and every year displayed vertically. It seems like this data is now gone.....This was the most important data to me.

Actually, the data is there, but horizontally for every year. But, I agree that it is not as convenient to look at.

I'll duplicate the data in a more "human readable" format in an additional sheet, and maybe add the data of the chosen single path on the main sheet.

2.) Also, I don't understand the minimum, 10th percentile etc....... I changed to a smaller VPW rate and my minimum was smaller than the higher VPW....which seemed to not be the case in your first version??

The minimum shows you, for each year of retirement, the minimum withdrawal you would have made in any year between 1871 and 2012. The 5th percentile indicates that the withdrawal was historically lower 5% of the time, higher 95% of the time (1871-2012). 10th-percentile: likewise, the withdrawal was historically lower 10% of the time, higher 90% of the time.

The minimum curve is not a retirement path, it shows the sequence of lowest historical first-year withdrawal, followed by the lowest second-year withdrawal, and so on.

My objective is to show, in visual form, the historical withdrawal floor for the selected asset allocation and start rate.

What I like is the backtest page in the old version that had all of the data there. Portfolio Balance, CVPW, Withdrawal amount, Rate of return...with the addition maybe of inflation rate. It also listed your age and the backtested year.

This new version merges VPW and CVPW. You can set the start rate to any value that suits you. A recommended rate is shown, which corresponds to the old VPW rate.

As for the data of the selected path, it is all there on the Backtesting sheet, but maybe not as easy to visualize. As I said, above, I'll copy the relevant data on the main sheet.

Thanks for the quick feedback!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal

Hi siamond,

siamond wrote:longinvest, you've been busy... Overall, I like the new format.

Thanks.

1. agreed with cut-throat, it would be great to see the trajectory of the portfolio in addition to the trajectory of the withdrawals

2. let me suggest you add the 50th percentile to the percentile chart, i.e. the median value of withdrawal

The goal of the minimum, 5th, and 10th percentiles is to show the historical withdrawal floor. What would be the use of the median curve? You certainly can't expect anything near it. That's why I show the complete withdrawal graph (1871-2012); it allows you to visualize the dispersion of withdrawals.

When you change the personal allocation to 100/0, you see a very wide dispersion of results with bumpy rides. When you select a 0/100 allocation, you see a much narrower and dispersion with relatively straight trajectories.

3. let me suggest that the two primary withdrawal charts should be displayed in 'real' dollars, not nominal - much easier to interpret

It does make sense to show the historical real floor. Right, I'll change that.

I disagree on changing the full withdrawals graph. Inflation, as measured by the CPI, is an imprecise measure for individuals, and it introduces artificial volatility in the graph. If CPI wasn't published on a web site, I doubt that you could tell me exactly the difference between the general prices of last year and those of today. I couldn't. But, you'll know precisely the difference between your nominal withdrawals of last year and this year. The psychological impact of dropping nominal withdrawal amounts is significant. It's for this reason that I think that it is important to show nominal amounts in the full withdrawals graph.

4. let me suggest you include somewhere the total of all withdrawals (lowest, 5th/10th/50th percentile), this will help providing an aggregate metric for a given scenario (e.g. initial rate, stock/bonds balance, etc)

What's the point of the full total? If you get to spend it, you've failed, as you've lived as long as planned in your worst-case scenario. Showing this number is equivalent to showing the mean of withdrawal amounts. The mean is misleading; it is more impacted by very high values.

The only numbers that are of importance for planning are those showing the floor. You can visually estimate your chances of getting higher amounts by looking at the full graph.

As for the selected single withdrawal path, I could show the floor numbers (min, 5th, and 10th percentiles) to help reading its graphs.

5. the larger withdrawal chart is... psychedelic!
=> to make it more useful, it would be great to be able to constrain it with a range of years (hint: Excel charts do not display anything for a cell with a #N/A value)
=> well, actually this should constrain the entire model, including percentiles, etc.

Being able to set the range of years is a terrific idea! One could easily discard, then, pre-1900 numbers, for example. Thanks for the suggestion!

6. I liked the ability to switch between Simba and Shiller historical returns (the former opening the door to more diverse AAs)...

Just getting the Shiller data to show the full graph was a lot of gymnastics. I'll get to it. But I prefer to make the important changes before adding a second data set. The second data set complicates formulas.

Will think more about it tomorrow... Nice work.

Thanks for the feedback.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

siamond
Posts: 3297
Joined: Mon May 28, 2012 5:50 am

### Re: Variable Percentage Withdrawal

longinvest wrote:Thanks for the feedback.

Welcome. A little more...

On point#1, I just meant to show a portfolio trajectory for the year in focus, not for the big psychedelic display for which withdrawals seems good enough.

On #2 and #4 (yes, kind of the same, one is visual, the other is an aggregate number more easy to compare), I kind of suspected you would react like that! Personally, in my own Excel sheets, I show all percentiles per 10% chunk. As I like to look at the average and rosy cases as well as the grim ones, to see if my investment strategy would take advantage of good days as well as dealing reasonably ok with grim situations. I agree with you that one can't associate too much semantics with medians, but showing it would at least give a hint of what happens in the 90% of situations you don't quite show otherwise (the psychedelic display being too busy to see much details). Or you could just show all 10th percentiles and let the end user decide if they are interested or not...

Also, something I never solved... You show the lowest of all the lowest points. But no real cycle is like that, they all have bad years and good years. So in theory, we should pick the 'worse' cycle, and this is the real low. Trouble is I don't know how to define the 'worse' cycle with an aggregate metric (yup, median withdrawal ain't great as 1929 shows well). In my own Excel sheets, I ended up looking at the median per slice of 10 years of retirement, but this is getting complicated...

On #3 (inflation or not), I see what you mean, 'real' dollars aren't that real! Still, it is terribly difficult to intuitively grasp non-adjusted numbers projected 20 years down the road. Let me suggest the following. Add a global toggle "Display in real or nominal dollars". Then people can get both perspectives as they see fit. This would actually simplify your first tab by removing one chart (the 2 bottom ones becoming a single one).

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

I have added a new preview version at: https://www.dropbox.com/s/4k9b9br1f28qq7i/VPW-2.0.xls

Highlights:
• I removed all nominal calculations.
• I added back 2 data sets: Simba (default) and Shiller.
• I replaced the unreadable all-withdrawals graph with simpler multi-year graphs.
• I added "Worst Drop" statistics for withdrawals.

Is this better?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote:I have added a new preview version at: https://www.dropbox.com/s/4k9b9br1f28qq7i/VPW-2.0.xls

Highlights:
• I removed all nominal calculations.
• I added back 2 data sets: Simba (default) and Shiller.
• I replaced the unreadable all-withdrawals graph with simpler multi-year graphs.
• I added "Worst Drop" statistics for withdrawals.

Is this better?

Well, you're up late or up early.

Much Improved... I like it a lot! At first glance it seems to have about everything. I'll play with it some more and get back to you.

One thing I was looking for:

1.) We had talked about adding inflation next to the return on the VPW Page under simulation (it may help to explain what was going on for that year)

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

Cut-Throat wrote:Well, you're up late or up early.

Much Improved... I like it a lot! At first glance it seems to have about everything. I'll play with it some more and get back to you.

One thing I was looking for:

1.) We had talked about adding inflation next to the return on the VPW Page under simulation (it may help to explain what was going on for that year)

Hi Cut-Throat,

There was simply no space left to add another column on the main sheet.

I struggled to simplify the sheet, taking your cue that it must remain easy to use and to understand.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

Here is the new layout:

Do you think it is ready for release?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

Boy, the early 80s were such a great time to retire. A median withdrawal above \$100,000 on a million dollar portfolio, that's a 10% payout on a conservative 40/60 asset allocation!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote:Boy, the early 80s were such a great time to retire. A median withdrawal above \$100,000 on a million dollar portfolio, that's a 10% payout on a conservative 40/60 asset allocation!

Yes, don't ever mistake a Bull Market for being a Genius.

Yes, Looks like it's ready for Release!

Thanks again for some great work!

Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

### Re: Variable Percentage Withdrawal (VPW)

One additional thought, after playing with this tool some more.

I picked out a Backtested year of 1966 (A bad One)

When using the Asset Allocation inputs on the VPW page, I was amazed as it did not seem to matter what my asset allocation was. The Median and Minimal withdrawal rates did not seem to change much at all, no matter what my AA was.

Or am I interpreting this wrong?

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

Cut-Throat wrote:One additional thought, after playing with this tool some more.

I picked out a Backtested year of 1966 (A bad One)

When using the Asset Allocation inputs on the VPW page, I was amazed as it did not seem to matter what my asset allocation was. The Median and Minimal withdrawal rates did not seem to change much at all, no matter what my AA was.

Or am I interpreting this wrong?

Cut-Throat, I think that you are correct. The problem was high inflation. If you look at the (real) return column, you'll see that positive years were immediately canceled by negative years. Had you not made any withdrawal, your portfolio would have barely kept up with inflation, whether it was bond or stock heavy. You can see the detailed stock/bond/inflation numbers on the "Selection" sheet.

Luckily, VPW would have adapted to such an environment by making the appropriate withdrawal cuts. As soon as the markets recovered, VPW would have increased withdrawals back.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

### Re: Variable Percentage Withdrawal (VPW)

One small suggestion. On your graphs on the VPW Page. The scale is out to 160 years.

Most everyone's retirement span is under 50 years. A scale out to 50 years should be plenty.
The graph would be more spread out and more readable. Or am I looking at this wrong?

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

Cut-Throat wrote:One small suggestion. On your graphs on the VPW Page. The scale is out to 160 years.

Most everyone's retirement span is under 50 years. A scale out to 50 years should be plenty.
The graph would be more spread out and more readable. Or am I looking at this wrong?

I use a "scatter plot" (thanks to LadyGeek for the trick) which automatically adjusts the width of the graph. So, it doesn't make a difference.

(It's 150 years, actually, just enough to fit in all of Shiller's historical data, when I want to do other investigations.)
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR