Variable Percentage Withdrawal (VPW)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Cut-Throat
Posts: 2011
Joined: Sun Oct 17, 2010 9:46 am

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Tue Jul 30, 2013 8:03 am

Kudos to the Original Poster!

After playing with his spreadsheet for the last couple of days, this is the best Withdrawal Method that I have seen thus far!
It incorporates the best Variable methods and safeguards of Previous strategies I have looked at!

It seems to be a Conservative and Aggressive method at the same time.

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Tue Jul 30, 2013 11:45 pm

OK. I have improved the VPW spreadsheet : https://www.dropbox.com/s/0dmzcswmn4qzj ... drawal.xls

This version contains:
1- Instructions.
2- VPW Table.
3- Backtesting (with graphs).
4- Comparisons to: Constant-Dollar, Constant-Percentage, and 1/N Withdrawal methods.

Please let me know if it works and if you'd like any improvement.

Enjoy!

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

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 9:03 am

I've uploaded a new version. It adds random return simulation.

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

User avatar
papiper
Posts: 101
Joined: Tue May 28, 2013 10:36 am

Re: Variable Percentage Withdrawal

Post by papiper » Wed Jul 31, 2013 10:13 am

I was working a parallel track to your thoughts. The 4% rule + inflation always looked wrong to me as it wasn't age specific and could cause large future upsets if inflation does not reasonably match true portfolio growth. I would not recommend a variable strategy if you could not handle short term year to year downward swings in payout. Most plans are so risk adverse that they leave no room for upside. but if one has the basics covered, and as mentioned one uses the outcome as a top cap of yearly withdrawal, I believe this provides excellent advice - THANK YOU!

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 10:17 am

Here is a visual comparison for a 65-years old person that retired in 1972 with an inflation-adjusted $1,000,000 portfolio divided equally between US Bonds and US Stocks.

Constant-Dollar Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

Constant-Percentage Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

1/(100-age) Withdrawal in blue vs Variable Percentage Withdrawal in green:
Image

[Edited to update pictures with latest spreadsheet]
Last edited by longinvest on Wed Jul 31, 2013 12:18 pm, 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
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 12:01 pm

I've uploaded a new version that stop the backtest/simulation at 99(withdrawal)/100(balance)-years old.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Wed Jul 31, 2013 2:13 pm

longinvest wrote:I've uploaded a new version that stop the backtest/simulation at 99(withdrawal)/100(balance)-years old.


Super work on these Spreadsheets BTW !!.........Anyone who has not tried these are missing out on the best Withdrawal Scheme presented on this forum IMHO !!

I just downloaded the new version, but my graphs did not look like your Graphs in your above Post (Which I Like ! :happy ) They all went to Zero....Both Payment and Portfolio Balance. Know Why?
Last edited by Cut-Throat on Thu Aug 01, 2013 9:01 am, edited 1 time in total.

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 2:36 pm

Cut-Throat wrote:I just downloaded the new version, but my graphs did not look like your Graphs in your above Post (Which I Like ! :happy ) They all went to Zero....Both Payment and Portfolio Balance. Know Why?


Maybe it's because of minor differences between OpenOffice.org (which I use) and Microsoft Excel?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Wed Jul 31, 2013 2:38 pm

longinvest wrote:
Cut-Throat wrote:I just downloaded the new version, but my graphs did not look like your Graphs in your above Post (Which I Like ! :happy ) They all went to Zero....Both Payment and Portfolio Balance. Know Why?


Maybe it's because of minor differences between OpenOffice.org (which I use) and Microsoft Excel?


No wonder we were having a tough time communicating !

Your Graphs look much Better and less confusing.

Edit ---- OK I used OpenOffice and the Graphs now looked like yours.

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 3:24 pm

Cut-Throat wrote:
longinvest wrote:
Cut-Throat wrote:I just downloaded the new version, but my graphs did not look like your Graphs in your above Post (Which I Like ! :happy ) They all went to Zero....Both Payment and Portfolio Balance. Know Why?


Maybe it's because of minor differences between OpenOffice.org (which I use) and Microsoft Excel?


No wonder we were having a tough time communicating !

Your Graphs look much Better and less confusing.


OK, so here's the link to the native OpenOffice (http://openoffice.org) document: https://www.dropbox.com/s/3qjvdbdkj256b ... drawal.ods
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Wed Jul 31, 2013 3:36 pm

Yes...... I have already downloaded Open Office and converted the graphs.....They look good now and no wonder we were struggling to see what we were looking at. :oops:

I was not even aware that Open Office existed !

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Wed Jul 31, 2013 3:39 pm

Another possible Modification would be to make the 'Plan End' a Variable Input. Which is usually the case in most financial planners (Quicken etc.)

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 3:58 pm

Here are the results for a proverbial (random) bad sequence of returns for a 65-years old person with a typical retirement portfolio composed of 60% Bonds and 40% Stocks.

Constant-Dollar Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

Constant-Percentage Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

1/(100-age) Withdrawal in blue vs Variable Percentage Withdrawal in green:
Image

Here's the VPW table for 60% Bonds / 40% Stocks. It surprisingly starts at 4.6% at 65 years-old.
Image
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 4:10 pm

Cut-Throat wrote:Another possible Modification would be to make the 'Plan End' a Variable Input. Which is usually the case in most financial planners (Quicken etc.)


I just don't know how to generate a dynamic range chart in OpenOffice. :(
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Wed Jul 31, 2013 4:19 pm

longinvest wrote:Here are the results for a proverbial (random) bad sequence of returns for a 65-years old person with a typical retirement portfolio composed of 60% Bonds and 40% Stocks.

Constant-Dollar Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

Constant-Percentage Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

1/(100-age) Withdrawal in blue vs Variable Percentage Withdrawal in green:
Image

Here's the VPW table for 60% Bonds / 40% Stocks. It surprisingly starts at 4.6% at 65 years-old.
Image


This should be obvious, that the VPW is the best method we have seen. Aggressive withdrawals and Conservative when needed.
Your chances of running out of money are almost Nil, Save for a Complete financial Meltdown.

And your Withdrawal Rates can actually be a lot higher because you don't have the Fear of running out of Money! In all cases, the Starting Withdrawal Amounts are Higher with VPW, which is what is desired! All you need is the Flexibility to cut spending by 25% if a Worst Case Historical Decline is encountered. If you can't cut 25%, you should not be retired in the First Place.

Again..... Thanks to the Original Poster for Coming up with this Idea, and his/her work on the Spreadsheets.

User avatar
boknows
Posts: 122
Joined: Mon Jan 28, 2013 3:11 pm
Location: Fairfax, VA
Contact:

Re: Variable Percentage Withdrawal

Post by boknows » Wed Jul 31, 2013 4:46 pm

Cut-Throat wrote:
This should be obvious, that the VPW is the best method we have seen. Aggressive withdrawals and Conservative when needed.
Your chances of running out of money are almost Nil, Save for a Complete financial Meltdown.

And your Withdrawal Rates can actually be a lot higher because you don't have the Fear of running out of Money! In all cases, the Starting Withdrawal Amounts are Higher with VPW, which is what is desired! All you need is the Flexibility to cut spending by 25% if a Worst Case Historical Decline is encountered. If you can't cut 25%, you should not be retired in the First Place.

Again..... Thanks to the Original Poster for Coming up with this Idea, and his/her work on the Spreadsheets.


Am I missing where this thread talks about the implications of a period of inflation mixed with not-so-great market returns? If you pick a time period like the 1970s, you see your portfolio drop (which means your nominal spending as a % of portfolio would need to rise) and you see huge inflation (which would see your nominal spending as a % of portfolio would need to rise). If you just stuck to a constant % during those times, your real spending amount would be cut less than in half.

Wouldn't some sort of floor and ceiling model be better, to preserve your real spending? Floor at a number tracking your starting spending at 3% inflation, and a ceiling of a number tracking the starting spending amount at 5-6% inflation. That way, you're not absolutely killing your spending power, but it can go down... and the upside isn't huge if the market rallies big.
35 - Married - Aiming for FI/ER in early 40s.

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Wed Jul 31, 2013 4:50 pm

boknows wrote:Am I missing where this thread talks about the implications of a period of inflation mixed with not-so-great market returns? If you pick a time period like the 1970s, you see your portfolio drop (which means your nominal spending as a % of portfolio would need to rise) and you see huge inflation (which would see your nominal spending as a % of portfolio would need to rise).


Yes, you are missing something.....Look at the Backtesting of this method starting at 1972....Spending would be cut, but not as much as you indicate.

Have you downloaded the spreadsheet and run your Model against 1972?

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Wed Jul 31, 2013 7:40 pm

boknows wrote:Am I missing where this thread talks about the implications of a period of inflation mixed with not-so-great market returns? If you pick a time period like the 1970s, you see your portfolio drop (which means your nominal spending as a % of portfolio would need to rise) and you see huge inflation (which would see your nominal spending as a % of portfolio would need to rise). If you just stuck to a constant % during those times, your real spending amount would be cut less than in half.

Wouldn't some sort of floor and ceiling model be better, to preserve your real spending? Floor at a number tracking your starting spending at 3% inflation, and a ceiling of a number tracking the starting spending amount at 5-6% inflation. That way, you're not absolutely killing your spending power, but it can go down... and the upside isn't huge if the market rallies big.


I'll tilt the odds against VPW by picking the worst start year. I'll keep the same allocation (4.6% withdrawal at 65-years old), but remove all international stocks which did better than US stocks.

In 1973, Bonds returned 3.2%, (US) Stocks -18.3%, and inflation ran up to 8.7%. So, in real terms, the portfolio return was -13.0%.

To make things worse, 1974 followed with Bonds at 6.8%, Stocks at -27.3%, and inflation at 12.3%. The portfolio return was -17.1%.

Here' s the complete back-testing data.

Code: Select all

Asset Allocation: 60% Bonds / 40% Stocks
Retirement Age: 65
Retirement Year: 1973

Year   Return   Age    Withdrawal   Balance   Payment   Bonds   Stocks   Inflation
1973   -13.0%   65   4.6%   $1,000,000   $46,000   3.2   -18.3   8.7
1974   -17.1%   66   4.7%   $830,330   $39,000   6.8   -27.3   12.3
1975   12.4%   67   4.8%   $656,074   $31,000   8.1   38.4   6.9
1976   12.0%   68   4.9%   $702,750   $34,000   11.5   26.5   4.9
1977   -6.4%   69   5.0%   $749,137   $37,000   2.8   -4.4   6.7
1978   -4.5%   70   5.1%   $666,906   $34,000   2.0   7.3   9.0
1979   -0.3%   71   5.2%   $604,450   $31,000   6.4   22.8   13.3
1980   3.8%   72   5.3%   $571,653   $30,000   6.4   32.4   12.5
1981   -3.8%   73   5.4%   $562,331   $30,000   10.6   -3.9   8.9
1982   18.8%   74   5.5%   $512,156   $28,000   25.1   20.6   3.8
1983   9.4%   75   5.7%   $575,030   $33,000   8.0   21.8   3.8
1984   6.0%   76   5.8%   $592,723   $34,000   14.1   4.3   3.9
1985   18.9%   77   6.0%   $592,129   $36,000   17.8   31.9   3.8
1986   12.8%   78   6.2%   $661,354   $41,000   12.9   15.9   1.1
1987   -3.1%   79   6.4%   $699,993   $45,000   0.9   1.5   4.4
1988   6.8%   80   6.6%   $634,492   $42,000   7.4   17.8   4.4
1989   14.3%   81   6.9%   $632,785   $44,000   13.6   28.7   4.6
1990   -3.2%   82   7.2%   $673,175   $48,000   8.7   -6.2   6.1
1991   19.3%   83   7.5%   $605,215   $45,000   15.3   34.4   3.1
1992   5.1%   84   7.8%   $668,185   $52,000   7.1   9.6   2.9
1993   7.0%   85   8.2%   $647,444   $53,000   9.7   10.4   2.7
1994   -4.2%   86   8.7%   $636,236   $55,000   -2.7   -0.2   2.7
1995   22.1%   87   9.2%   $556,674   $51,000   18.2   35.8   2.5
1996   7.0%   88   9.9%   $617,549   $61,000   3.6   21.0   3.3
1997   16.1%   89   10.6%   $595,383   $63,000   9.4   31.0   1.7
1998   12.6%   90   11.5%   $618,011   $71,000   8.6   23.3   1.6
1999   6.2%   91   12.6%   $616,133   $78,000   -0.8   23.8   2.7
2000   -0.8%   92   13.9%   $571,587   $79,000   11.4   -10.6   3.4
2001   -0.9%   93   15.7%   $488,866   $77,000   8.4   -11.0   1.6
2002   -5.7%   94   18.0%   $408,290   $73,000   8.3   -21.0   2.4
2003   12.8%   95   20.0%   $316,279   $63,000   4.0   31.4   1.9
2004   4.2%   96   20.0%   $285,703   $57,000   4.2   12.5   3.3
2005   0.4%   97   20.0%   $238,220   $48,000   2.4   6.0   3.4
2006   6.1%   98   20.0%   $190,986   $38,000   4.3   15.5   2.5
2007   2.2%   99   20.0%   $162,273   $32,000   6.9   5.5   4.1
2008            $133,111            


As usual, the withdrawals started at $46,000, but they went down quickly to $31,000 to adapt to the extremely low returns, and bounced back to the mid $30 thousands. The market ran down again until the end of 1981. VPW adapted the withdrawals down to $28,000 in 1982. That's the only year where VPW gave a payment of less than $30,000 (3% of the original $1,000,000 portfolio) in inflation-adjusted dollars. Then, the markets bounced back with a huge bull market. VPW adapted and increased withdrawals to $79,000 in 2000.

Here's a picture:
Image
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Thu Aug 01, 2013 7:15 am

longinvest wrote:
As usual, the withdrawals started at $46,000, but they went down quickly to $31,000 to adapt to the extremely low returns, and bounced back to the mid $30 thousands. The market ran down again until the end of 1981. VPW adapted the withdrawals down to $28,000 in 1982. That's the only year where VPW gave a payment of less than $30,000 (3% of the original $1,000,000 portfolio) in inflation-adjusted dollars. Then, the markets bounced back with a huge bull market. VPW adapted and increased withdrawals to $79,000 in 2000.


You can also make your plan more conservative with less gyrations. I have mine set for 70% Bonds and 30% stocks, and a conservative 1.3% Real Return.

Backtesting to 1973, it starts out with a withdrawal of 3.4% or 34,000 on a $1 Million Portfolio, then dipped to 2.5% or 25,000 in 1981, but quickly recovered in 1983 to 29,000

More recently - Back testing to the year 2000. We start the year with 3.4% or 34,000. in 2003 it drops to 3.2% or 32,000. Recovers in 2007 to 38,000 or 3.8% and then dipping in 2009 to 34,000 again.

A much better plan than saying your SWR should be 2% IMHO. If your retirement does not start the first 10 years with a disastrous series of returns and inflation, chances are that your withdrawal amount will never be less than what you started with for your entire retirement.

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Thu Aug 01, 2013 8:28 am

Cut-Throat wrote:
longinvest wrote:
As usual, the withdrawals started at $46,000, but they went down quickly to $31,000 to adapt to the extremely low returns, and bounced back to the mid $30 thousands. The market ran down again until the end of 1981. VPW adapted the withdrawals down to $28,000 in 1982. That's the only year where VPW gave a payment of less than $30,000 (3% of the original $1,000,000 portfolio) in inflation-adjusted dollars. Then, the markets bounced back with a huge bull market. VPW adapted and increased withdrawals to $79,000 in 2000.


You can also make your plan more conservative with less gyrations. I have mine set for 70% Bonds and 30% stocks, and a conservative 1.3% Real Return.

Backtesting to 1973, it starts out with a withdrawal of 3.4% or 34,000 on a $1 Million Portfolio, then dipped to 2.5% or 25,000 in 1981, but quickly recovered in 1983 to 29,000

More recently - Back testing to the year 2000. We start the year with 3.4% or 34,000. in 2003 it drops to 3.2% or 32,000. Recovers in 2007 to 38,000 or 3.8% and then dipping in 2009 to 34,000 again.

A much better plan than saying your SWR should be 2% IMHO. If your retirement does not start the first 10 years with a disastrous series of returns and inflation, chances are that your withdrawal amount will never be less than what you started with for your entire retirement.


I think that you are setting the expected real returns too low for VPW. The role of the expected real return in VPW is not to be a worst case return forward from retirement start, but to be a very long-term expected return on the asset classes within your portfolio. Look at it this way: it is the return you would expect forward from the bottom of a future dip in market prices. VPW uses this rate to adjust the withdrawal percentages to avoid the problem of 1/N that delays consumption until the end. The comparison graphs are quite revealing about this undesired phenomenon. When you artificially tilt VPW's rate lower, you force VPW to act more like 1/N.

Already, VPW's expected returns are pretty low, when compared with real, historical long-term returns. I wouldn't recommend that you lower them further, even though the expected returns forward returns ahead from "now" on TIPS are near 0%. Remember that we are trying to guess the expected returns forward from the bottom of the market, not the top. Some people think that we are at the top.

I think that a better to plan would be as follows. Think of a conservative SWR, say 2.5% or 3.0%. Don't retire before you know that you could live on 2.5% of your portfolio (plus SS, plus pension, plus SPIAs, if applicable). But, when you retire, don't limit yourself to spend 2.5%. Spend using VPW's percentages. Some years, you'll get lots more money to spend than 2.5% (like 4.5% on your first year, if you retire at 65 with a 70% Bonds / 30% Stocks allocation). Other years, you won't get much more than 2.5% to spend, if you hit an unlucky market at the start of your retirement.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Thu Aug 01, 2013 8:50 am

longinvest wrote:I think that you are setting the expected real returns too low for VPW. The role of the expected real return in VPW is not to be a worst case return forward from retirement start, but to be a very long-term expected return on the asset classes within your portfolio. Look at it this way: it is the return you would expect forward from the bottom of a future dip in market prices. VPW uses this rate to adjust the withdrawal percentages to avoid the problem of 1/N that delays consumption until the end. The comparison graphs are quite revealing about this undesired phenomenon. When you artificially tilt VPW's percentage lower, you force VPW to act more like 1/N.

Already, VPW's expected returns are pretty low, when compared with real, historical long-term returns. I wouldn't recommend that you lower them further, even though the expected returns forward returns ahead from "now" on TIPS are near 0%. Remember that we are trying to guess the expected returns forward from the bottom of the market, not the top. Some people think that we are at the top.

I think that a better to plan would be as follows. Think of a conservative SWR, say 2.5% or 3.0%. Don't retire before you know that you could live on 2.5% of your portfolio (plus SS, plus pension, plus SPIAs, if applicable). But, when you retire, don't limit yourself to spend 2.5%. Spend using VPW's percentages. Some years, you'll get lots more money to spend than 2.5% (like 4.5% on your first year, if you retire at 65 with a 70% Bonds / 30% Stocks allocation). Other years, you won't get much more than 2.5% to spend, if you hit an unlucky market at the start of your retirement.


Yes, I see what you mean, and that is very valuable information.....In Practice However, I may wade in the shallows for a while, after all I don't need the money. :happy ...... Ramping up the spending in a few years will not be a problem for me at all, I am better at spending money than anyone I know ! :mrgreen: In fact I just returned last month from a $35K Photo Safari in East Africa. 8-)

I was quite flush with cash at a 3% of Portfolio Balance withdrawal rate.....Much More than I have ever spent per year over the past 30 years. Since running your spreadsheets, I have upped this to 3.4%, which will give me even more, so that is not a problem. :moneybag :moneybag

I also view all of these Withdrawal Plans as something that will be run on a continuing basis. If indeed we are entering a period of Historical Low returns from the Markets and/or Extreme Inflation, I may be glad that I approached this a bit more conservatively. I think you can appreciate that running numbers on a spreadsheet is easy to do compared to the actual 'working without a net' in actual retirement. :shock:

Thanks for posting this, as the numbers look very good back testing through the 1970s!

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Thu Aug 01, 2013 9:09 am

Cut-Throat wrote:
I also view all of these Withdrawal Plans as something that will be run on a continuing basis. If indeed we are entering a period of Historical Low returns from the Markets and/or Extreme Inflation, I may be glad that I approached this a bit more conservatively. I think you can appreciate that running numbers on a spreadsheet is easy to do compared to the actual 'working without a net' in actual retirement. :shock:

Thanks for posting this, as the numbers look very good back testing through the 1970s!


VPW cannot resolve the uncertainty of forward investment returns. All it can do is try to smooth out consumption.

In theory, to be totally safe, you would need to know the exact forward lowest bottom in the markets, and the exact return from that day to the day of your death. Then, VPW would allow you to spend more money than strictly necessary for until this market bottom day, and then it would let you spend relatively equal amounts until your death. (OK, this is not exactly how it works, but it's a good enough approximation).

In practice (real life), to be safe, your best bet is a floor of inflation-adjusted guaranteed payments, like SS and SPIAs (with strong solvency guarantees, if such a thing exists). One way to do this, without paying too much for it, is to delay SS as long as possible, and to delay the purchase of inflation-adjusted SPIAs until you're as old as possible. Meanwhile, you can use VPW to spend the part of your capital that is not set aside to purchase the SPIAs and to replace the revenues between your retirement date and the start of SS and SPIA payments.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Thu Aug 01, 2013 9:16 am

longinvest wrote:In practice (real life), to be safe, your best bet is a floor of inflation-adjusted guaranteed payments, like SS and SPIAs (with strong solvency guarantees, if such a thing exists). One way to do this, without paying too much for it, is to delay SS as long as possible, and to delay the purchase of inflation-adjusted SPIAs until you're as old as possible. Meanwhile, you can use VPW to spend the part of your capital that is not set aside to purchase the SPIAs and to replace the revenues between your retirement date and the start of SS and SPIA payments.


(Some people are willing to take more risk than that, of course.)
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Thu Aug 01, 2013 9:18 am

Cut-Throat wrote:Yes, I see what you mean, and that is very valuable information.....In Practice However, I may wade in the shallows for a while, after all I don't need the money. :happy ...... Ramping up the spending in a few years will not be a problem for me at all, I am better at spending money than anyone I know ! :mrgreen: In fact I just returned last month from a $35K Photo Safari in East Africa. 8-)


That sounds fun! I hope you were able to take some great pictures. :D
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Thu Aug 01, 2013 11:30 am

longinvest wrote:In practice (real life), to be safe, your best bet is a floor of inflation-adjusted guaranteed payments, like SS and SPIAs (with strong solvency guarantees, if such a thing exists). One way to do this, without paying too much for it, is to delay SS as long as possible, and to delay the purchase of inflation-adjusted SPIAs until you're as old as possible. Meanwhile, you can use VPW to spend the part of your capital that is not set aside to purchase the SPIAs and to replace the revenues between your retirement date and the start of SS and SPIA payments.


If you have been reading these forums long enough, you would know that I am one of the major proponents of delaying S.S. to age 70. And also a proponent of a 'Variable percentage of Portfolio Withdrawal'...Not with a Formula attached as you have done however.....And then there is the question of 'to be safe'...My definition of safe is to have enough money to spend every winter in the Bahamas. When you get closer to retirement, your definition of Needs and Wants Fluctuate.

I have never viewed any withdrawal scheme as an "End-All' gospel for retirement spending, just a tool to plan your spending around. I think your VPW is the best I've seen thus far, but that doesn't mean I'll follow it to a 'T'.

With that said the statements that you made --- Should probably be included in your Instructions for VPW, as it was not obvious to me that the planning Numbers are not from where you start today, but from a Market Bottom...A key difference.......
'The role of the expected real return in VPW is not to be a worst case return forward from retirement start, but to be a very long-term expected return on the asset classes within your portfolio. Look at it this way: it is the return you would expect forward from the bottom of a future dip in market prices. VPW uses this rate to adjust the withdrawal percentages to avoid the problem of 1/N that delays consumption until the end. The comparison graphs are quite revealing about this undesired phenomenon. When you artificially tilt VPW's percentage lower, you force VPW to act more like 1/N.

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 12:36 am

Hi longinvest,

You seem to have a really promising idea here.

I actually have been working on an Excel sheet to compare various SWR methods (including backtesting and a synthetic view to compare all outcomes of all starting years since 1961), I was mostly focusing on the Guyton-Klinger ideas (and some derivatives), but I started to read this thread, and couldn't go to bed until I entered your VPW method in my own Excel sheet.

I'll think a bit more about it and tweak things before sharing my own Excel sheet, but the bottomline is... call me impressed. Your model seems to be quite remarkable.

I have a few quick comments though:

1. The withdrawals may drop as fast as your portfolio (e.g. when a big crisis strikes), or increase real fast - this doesn't seem realistic in real life, I think we need to add a way to make it smoother, maybe view your math as the target, but cap the next-year-withdrawal to no more than [-X%, +X%] of the past year, then slowly catch up with the target.

2. How would you tweak the model to introduce an inheritance goal? Say I start by $2M, I'd like to enjoy retirement life as much as possible, but I'd also like to have a good chance of leaving $1M (in constant dollars) to my children, say $500M coming from my home, and $500M from my portfolio. In other words, don't spend it all, leave at least $500M at the end (well, on average, if the market drops right before I pass away, then the children will have to sit tight until it recovers).

3. It is a bit disturbing to have to make a prediction about the future market returns as an input to the model, and essentially use numbers for the next 30 years (or more) that are a direct function of what is really nothing more than a semi-educated guess. It would be good to have something a bit more adaptive. I am not quite sure how though. Maybe it's as simple as checking where we are every five years, get the latest predictions from the Bogleheads experts, and use it to adjust the numbers provided by your model! :wink:

4. The 20% rule at the end is harsh. Real harsh. I tried 15% instead, but I'm not sure this truly makes sense. Maybe the idea would be that, by the time you're getting somewhat close to your life expectancy, the model should be reset, year after year, always assuming you'll get 10 more years of life. Hm, not sure how to tune that.

Overall, kudos, you seem to be onto something... :beer
Last edited by siamond on Fri Aug 02, 2013 8:57 am, edited 1 time in total.

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 1:20 am

Actually... about my third point... Given how safe your model is (can't deplete the portfolio until you're way past your time)... A more aggressive market return assumption would lead to higher withdrawals in the early years, and lower withdrawals as you age. And the converse is of course true. Which means that the 'guess' on the future returns could be viewed as more of a skew towards how aggressive or not you want to be about your spend in the early years compared to the later years. Hm, this is actually handy!

It's funny, actually, looking at the math to figure out the withdrawal rate in the earlier years (e.g. 40 to 60), there isn't such a big difference between the expected market (real) returns and the initial withdrawal rate. I played with a few possible expected returns, and this assertion, although very approximate isn't too far off. And well, this is rather intuitive. So maybe it's just a way to think about it... Maybe the input parameter (at the top of the 'VPW Calculation' tab) should be viewed as a rough initial withdrawal rate, which can be more aggressive or more conservative (depending on your personal goals, and how you want to tilt your spend, early years or older years), and where using expected market returns (from reliable sources like this forum) is a good rule of thumb to play 'average'.

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Fri Aug 02, 2013 10:49 am

siamond wrote:1. The withdrawals may drop as fast as your portfolio (e.g. when a big crisis strikes), or increase real fast - this doesn't seem realistic in real life, I think we need to add a way to make it smoother, maybe view your math as the target, but cap the next-year-withdrawal to no more than [-X%, +X%] of the past year, then slowly catch up with the target.


Yeah, but you don't know if you are entering a Japan type economy....The Market may never recover in your lifetime, so this is what you want.

siamond wrote:4. The 20% rule at the end is harsh. Real harsh. I tried 15% instead, but I'm not sure this truly makes sense. Maybe the idea would be that, by the time you're getting somewhat close to your life expectancy, the model should be reset, year after year, always assuming you'll get 10 more years of life. Hm, not sure how to tune that.


After reaching age 95, there are many more harsh things in life than running a bit short of cash. And 95% of people won't see age 95 anyway, Much less age 100. I think it's 1 in 6,000 currently. I think a retirement planner that plans to age 100 is way more than enough! ...Let's be real.

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 11:22 am

Cut-Throat wrote:Yeah, but you don't know if you are entering a Japan type economy....The Market may never recover in your lifetime, so this is what you want.


Wasn't my point. I wasn't in denial about dropping spend by 25% or 30% if needs be. Maybe for a long time indeed. I was just suggesting to get there in multi-year steps. I will tune my own VPW model to allow to do so (while keeping X as a parameter, hence easily disabled). Based on my experience modelling G-K rules, this shouldn't be that impactful on outcomes.

Cut-Throat wrote:After reaching age 95, there are many more harsh things in life than running a bit short of cash. And 95% of people won't see age 95 anyway, Much less age 100. I think it's 1 in 6,000 currently. I think a retirement planner that plans to age 100 is way more than enough! ...Let's be real.


It's not 'a bit short on cash'. It's a LOT short on cash. Was very obvious on my simulations. Agreed that 100+ scenarios are unlikely, but who knows, it does happen (and may increasingly happen 30 to 50 years from now), and if it does, you don't want your portfolio to be near zero. You also don't want that if you suddenly need LTC and elected to NOT use a corresponding insurance. But maybe my request is actually the same point as having a way to reasonably guarantee inheritance (i.e some non-negligible money left near the end).

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Fri Aug 02, 2013 11:26 am

siamond wrote:It's not 'a bit short on cash'. It's a LOT short on cash. Was very obvious on my simulations. Agreed that 100+ scenarios are unlikely, but who knows, it does happen (and may increasingly happen 30 to 50 years from now), and if it does, you don't want your portfolio to be near zero. You also don't want that if you suddenly need LTC and elected to NOT use a corresponding insurance. But maybe my request is actually the same point as having a way to reasonably guarantee inheritance (i.e some non-negligible money left near the end).


Nothing to do with Long Range Planning. Ridiculous!....This is a spending plan......You don't follow it to a 'T'.

User avatar
1210sda
Posts: 1236
Joined: Wed Feb 28, 2007 8:31 am

Re: Variable Percentage Withdrawal

Post by 1210sda » Fri Aug 02, 2013 12:01 pm

Longinvest, I just downloaded your spreadsheet. Thanks for making it available to us.
I will play around with it. :happy

1210

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 3:06 pm

Hi siamond,

Thank you for the compliments and for taking the time to analyze and comment on VPW. Here are some answers.

siamond wrote:1. The withdrawals may drop as fast as your portfolio (e.g. when a big crisis strikes), or increase real fast - this doesn't seem realistic in real life, I think we need to add a way to make it smoother, maybe view your math as the target, but cap the next-year-withdrawal to no more than [-X%, +X%] of the past year, then slowly catch up with the target.


I think that this would try to change VPW into something it is not: VPW is not a "safe withdrawal rate" in the sense that it does not attempt to guarantee any income floor.

If you need a hard floor, please read my previous post about safety: viewtopic.php?f=10&t=120430&p=1765884#p1765079

If you can tolerate a softer floor, you can use a recent Guru SWR prediction to assess whether you have enough money to retire. Then you can use VPW to spend your money with a relative confidence that your payments shouldn't get too much below the expected SWR floor (except if the prediction was really wrong).

For example, you could use Wade Pfau's 2.8% prediction (viewtopic.php?f=10&t=119285&p=1743598#p1743311). So, if you need a soft floor income of $42,000 (in addition to Social Security), you should not retire today if you don't have $1,500,000. If you do, you can start withdrawing money using VPW's more aggressive percentages. Your income will vary with the markets (VPW doesn't try to hide market movements). Some years, you might get a lot more money than the inflation-adjusted SWR; you don't have to take it all off the portfolio, but if you don't, you're likely to leave a big pile of money behind. Other years, you won't have much more, or maybe a little less. (I don't take responsibility for anybody's prediction, though. I'd like to give you a prediction, but I dropped my crystal ball and broke it. It's really too expensive :moneybag to fix, it would cost me my retirement. :wink: ).

2. How would you tweak the model to introduce an inheritance goal? Say I start by $2M, I'd like to enjoy retirement life as much as possible, but I'd also like to have a good chance of leaving $1M (in constant dollars) to my children, say $500M coming from my home, and $500M from my portfolio. In other words, don't spend it all, leave at least $500M at the end (well, on average, if the market drops right before I pass away, then the children will have to sit tight until it recovers).


I tried to do that in my first post, but I realized that it confuses the different issues. I prefer to keep VPW as a simple tool to be used as part of a larger retirement plan, instead of letting VPW take care of the many aspects of retirement planning and spending.

Maybe you're onto something, though. I'm pretty sure that a Wiki page that explains how to use VPW (or another withdrawal method) as part of a comprehensive retirement plan would be quite useful.

3. It is a bit disturbing to have to make a prediction about the future market returns as an input to the model, and essentially use numbers for the next 30 years (or more) that are a direct function of what is really nothing more than a semi-educated guess. It would be good to have something a bit more adaptive. I am not quite sure how though. Maybe it's as simple as checking where we are every five years, get the latest predictions from the Bogleheads experts, and use it to adjust the numbers provided by your model! :wink:


The current version of VPW doesn't ask you to predict future market returns. It only asks you to provide your asset allocation. See (viewtopic.php?f=10&t=120430&p=1761580#p1761563).

Internally, VPW does calculate a long-term, asset-allocation-specific expected return rate, using the last century's real asset returns on US Stocks (5%) and Bonds (2%). This does not need to be precise at all. It just needs to give an approximate very long-term tangent of the graph. I've explained the intuition behind this in viewtopic.php?f=10&t=120430&start=50#p1765039

4. The 20% rule at the end is harsh. Real harsh. I tried 15% instead, but I'm not sure this truly makes sense. Maybe the idea would be that, by the time you're getting somewhat close to your life expectancy, the model should be reset, year after year, always assuming you'll get 10 more years of life. Hm, not sure how to tune that.


Just remove the 20% cap... It will remain smooth until 99, and at 100, it will drop to 0%. :twisted:

Actually, this just cannot be fixed, unless you use the idea described in my first post:
  • You apply VPW on the part of your money you want to deplete.
  • You use VPW's internal long-term expected return as a percentage for applying a Constant-Percentage Withdrawal (that preserves capital, except for market movements :mrgreen: ) on the part you want to leave behind.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 3:17 pm

siamond wrote:Actually... about my third point... Given how safe your model is (can't deplete the portfolio until you're way past your time)... A more aggressive market return assumption would lead to higher withdrawals in the early years, and lower withdrawals as you age. And the converse is of course true. Which means that the 'guess' on the future returns could be viewed as more of a skew towards how aggressive or not you want to be about your spend in the early years compared to the later years. Hm, this is actually handy!

It's funny, actually, looking at the math to figure out the withdrawal rate in the earlier years (e.g. 40 to 60), there isn't such a big difference between the expected market (real) returns and the initial withdrawal rate. I played with a few possible expected returns, and this assertion, although very approximate isn't too far off. And well, this is rather intuitive. So maybe it's just a way to think about it... Maybe the input parameter (at the top of the 'VPW Calculation' tab) should be viewed as a rough initial withdrawal rate, which can be more aggressive or more conservative (depending on your personal goals, and how you want to tilt your spend, early years or older years), and where using expected market returns (from reliable sources like this forum) is a good rule of thumb to play 'average'.


Maybe. It's all very approximate (because of my broken crystal ball).

I prefer to let the asset allocation determine the aggressiveness. It seems obvious, on past data, that 1/N is too pessimistic with a real expected return of 0%. It also seems logical that the aggressiveness can be generally tuned up the more the portfolio has stocks, if we're to believe the countless studies on SWR.

I just don't know. I've put the numbers that match past very long-term returns (from 1900 to 2012, according to Credit Suisse Global Investment Yearbook 2013).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 3:25 pm

1210sda wrote:Longinvest, I just downloaded your spreadsheet. Thanks for making it available to us.
I will play around with it. :happy

1210


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

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 3:32 pm

Cut-Throat wrote:
longinvest wrote:In practice (real life), to be safe, your best bet is a floor of inflation-adjusted guaranteed payments, like SS and SPIAs (with strong solvency guarantees, if such a thing exists). One way to do this, without paying too much for it, is to delay SS as long as possible, and to delay the purchase of inflation-adjusted SPIAs until you're as old as possible. Meanwhile, you can use VPW to spend the part of your capital that is not set aside to purchase the SPIAs and to replace the revenues between your retirement date and the start of SS and SPIA payments.


If you have been reading these forums long enough, you would know that I am one of the major proponents of delaying S.S. to age 70. And also a proponent of a 'Variable percentage of Portfolio Withdrawal'...Not with a Formula attached as you have done however.....And then there is the question of 'to be safe'...My definition of safe is to have enough money to spend every winter in the Bahamas. When you get closer to retirement, your definition of Needs and Wants Fluctuate.

I have never viewed any withdrawal scheme as an "End-All' gospel for retirement spending, just a tool to plan your spending around. I think your VPW is the best I've seen thus far, but that doesn't mean I'll follow it to a 'T'.


Sorry about that. I was writing this mostly for the benefit of future forum readers that might not necessarily know the shortcomings of Withdrawal methods.

With that said the statements that you made --- Should probably be included in your Instructions for VPW, as it was not obvious to me that the planning Numbers are not from where you start today, but from a Market Bottom...A key difference.......
'The role of the expected real return in VPW is not to be a worst case return forward from retirement start, but to be a very long-term expected return on the asset classes within your portfolio. Look at it this way: it is the return you would expect forward from the bottom of a future dip in market prices. VPW uses this rate to adjust the withdrawal percentages to avoid the problem of 1/N that delays consumption until the end. The comparison graphs are quite revealing about this undesired phenomenon. When you artificially tilt VPW's percentage lower, you force VPW to act more like 1/N.


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

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 4:23 pm

I've uploaded a new version with explanations in the VPW Calculation sheet. Enjoy! (See: viewtopic.php?f=10&t=120430&p=1761580#p1761563 for download links).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 4:41 pm

longinvest wrote:
siamond wrote:1. The withdrawals may drop as fast as your portfolio (e.g. when a big crisis strikes), or increase real fast - this doesn't seem realistic in real life, I think we need to add a way to make it smoother, maybe view your math as the target, but cap the next-year-withdrawal to no more than [-X%, +X%] of the past year, then slowly catch up with the target.


I think that this would try to change VPW into something it is not: VPW is not a "safe withdrawal rate" in the sense that it does not attempt to guarantee any income floor.

If you need a hard floor, please read my previous post about safety: viewtopic.php?f=10&t=120430&p=1765884#p1765079


Many thanks for your patient and clear answers, longinvest. Much appreciated.

Actually, we have a bit of a misunderstanding here. I wasn't seeking an income floor. I got your point in the other posts about that, the SSA thinking, etc. I was seeking a smoother ride when the market varies widely, by capping the variability year-over-year. Go down and up, ok, but not overly dramatically year over year. I actually did it in my own Excel sheet, and this works fine. I actually capped the variability at [-X%, +X%] of the inflation-adjusted past year withdrawal. Didn't go that well with 5%, but it seems to work fine for 10% variability. This seems much more reasonable to me. I was a tad nervous this would have an unintended long-term side-effect on your model, but this doesn't seem to be the case.

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 4:50 pm

longinvest wrote:
siamond wrote:Actually... about my third point... Given how safe your model is (can't deplete the portfolio until you're way past your time)... A more aggressive market return assumption would lead to higher withdrawals in the early years, and lower withdrawals as you age. And the converse is of course true. Which means that the 'guess' on the future returns could be viewed as more of a skew towards how aggressive or not you want to be about your spend in the early years compared to the later years. Hm, this is actually handy!

It's funny, actually, looking at the math to figure out the withdrawal rate in the earlier years (e.g. 40 to 60), there isn't such a big difference between the expected market (real) returns and the initial withdrawal rate. I played with a few possible expected returns, and this assertion, although very approximate isn't too far off. And well, this is rather intuitive. So maybe it's just a way to think about it... Maybe the input parameter (at the top of the 'VPW Calculation' tab) should be viewed as a rough initial withdrawal rate, which can be more aggressive or more conservative (depending on your personal goals, and how you want to tilt your spend, early years or older years), and where using expected market returns (from reliable sources like this forum) is a good rule of thumb to play 'average'.


Maybe. It's all very approximate (because of my broken crystal ball).

I prefer to let the asset allocation determine the aggressiveness. It seems obvious, on past data, that 1/N is too pessimistic with a real expected return of 0%. It also seems logical that the aggressiveness can be generally tuned up the more the portfolio has stocks, if we're to believe the countless studies on SWR.

I just don't know. I've put the numbers that match past very long-term returns (from 1900 to 2012, according to Credit Suisse Global Investment Yearbook 2013).


I downloaded your latest (somehow last night, I had an N-1th version), and saw the explanations on Credit Suisse numbers, and read again your explanation about using numbers more geared at starting from a dip.

Ok, I get it. Still, my point remains, I believe. I didn't mean 'aggressive' in the sense of the portfolio AA. I meant to spend more money in the early years of retirement than later (notably for an early retiree staying quite active -that's my plan!-). Or at least have a good chance to. If I increase the 'expected returns' numbers beyond your conservative values, that is exactly the effect I get. Which is actually very handy. While your nifty algorithm does adjust itself with the gyrations of the market.

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 4:56 pm

longinvest wrote:Actually, this just cannot be fixed, unless you use the idea described in my first post:
  • You apply VPW on the part of your money you want to deplete.
  • You use VPW's internal long-term expected return as a percentage for applying a Constant-Percentage Withdrawal (that preserves capital, except for market movements :mrgreen: ) on the part you want to leave behind.


Yes, I thought about that, but then again, we're back to the guessing game as the 'long-term expected return' is NOT what's going to happen for real! And with a constant %, this really affects the outcome quite a lot. I'm rather have something a tad more adaptive. But then, cut-throat is going to lecture me speaking of generals and plans and wars, etc. :wink: And I get his point (and loved the quote!), although I still want to have a plan... :wink:

There has to be a minor variation of your approach to address my goal... Oh well, this will be for another day! Thanks for your patience and insights.

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 4:59 pm

siamond wrote:Actually, we have a bit of a misunderstanding here. I wasn't seeking an income floor. I got your point in the other posts about that, the SSA thinking, etc. I was seeking a smoother ride when the market varies widely, by capping the variability year-over-year. Go down and up, ok, but not overly dramatically year over year. I actually did it in my own Excel sheet, and this works fine. I actually capped the variability at [-X%, +X%] of the inflation-adjusted past year withdrawal. Didn't go that well with 5%, but it seems to work fine for 10% variability. This seems much more reasonable to me. I was a tad nervous this would have an unintended long-term side-effect on your model, but this doesn't seem to be the case.


siamond, I see. Yet, I'm fearful this could lead to a failure in case the market was to get highly overvalued slowly over a long period of time, only to correct abruptly lower in a single year. Any artificial cap on variations will have such an effect. Now, if you're willing to live with the possibility of failure, then go with it. :happy

Personally, I am willing to acknowledge that the markets have taken back my money (perhaps temporarily, perhaps not) and reduce my spending immediately, before it is too late.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Variable Percentage Withdrawal

Post by umfundi » Fri Aug 02, 2013 5:07 pm

I do really think this is good stuff. Makes for a realistic rather than a worst-case withdrawal scenario.

But, like all back-tested and optimized scenarios, it will work until it doesn't.

Just to say, keep your hands on the wheel!

Keith
Déjà Vu is not a prediction

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Fri Aug 02, 2013 5:18 pm

siamond wrote:
longinvest wrote:Actually, this just cannot be fixed, unless you use the idea described in my first post:
  • You apply VPW on the part of your money you want to deplete.
  • You use VPW's internal long-term expected return as a percentage for applying a Constant-Percentage Withdrawal (that preserves capital, except for market movements :mrgreen: ) on the part you want to leave behind.


Yes, I thought about that, but then again, we're back to the guessing game as the 'long-term expected return' is NOT what's going to happen for real! And with a constant %, this really affects the outcome quite a lot. I'm rather have something a tad more adaptive. But then, cut-throat is going to lecture me speaking of generals and plans and wars, etc. :wink: And I get his point (and loved the quote!), although I still want to have a plan... :wink:

There has to be a minor variation of your approach to address my goal... Oh well, this will be for another day! Thanks for your patience and insights.


Future returns are just uncertain. A few days ago, on the help forums, dbr recommended that I read Larry Swedroe's "The Only Guide You'll Ever Need for the Right Financial Plan". In it, Larry Swedroe explains the difference between risk and uncertainty. He says that "the mistake many investors make is to view equities as closer to risk where the odds can be precisely calculated".

We just don't know; pick any constant-percentage you like. If you pick one that doesn't stray off too far from actual returns, your heirs will get approximately what you want. Otherwise, they'll get a big load of money, or a smaller pile than you wanted.

Usually, it is pretty difficult to get constant-percentage to deplete a significant part of a portfolio, when you use the rate I proposed. But, I haven't backtested it on Japan-like data. (It would be cool to have the data to backtest VPW on it!)
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
siamond
Posts: 3423
Joined: Mon May 28, 2012 5:50 am

Re: Variable Percentage Withdrawal

Post by siamond » Fri Aug 02, 2013 7:40 pm

longinvest wrote:We just don't know; pick any constant-percentage you like. If you pick one that doesn't stray off too far from actual returns, your heirs will get approximately what you want. Otherwise, they'll get a big load of money, or a smaller pile than you wanted.

Usually, it is pretty difficult to get constant-percentage to deplete a significant part of a portfolio, when you use the rate I proposed.


Well, here you are, you gave me the answer. Year after year, just add the inflation-equivalent to the 'heirs money", and any return beyond that should be added/removed from the capital that is used for the VPW formula. The 'heirs money' will be protected, and any extra return (or possible loss) will be used for my own benefit...

Sure, in real-life, I might not bother being that rigorous, but as a model, to see how it goes, this shouldn't be hard to do...

longinvest wrote:But, I haven't backtested it on Japan-like data. (It would be cool to have the data to backtest VPW on it!)

I was in Tokyo a few days ago (one day in planes & airports, 2 days in biz meetings, one day in planes & airports, lovely). Gave me quite some time to tweak my own Excel sheets as I just couldn't sleep much anyway...

And silly me, I didn't think to ask such data! :wink: This might not have been very polite, thinking about it... :?
Last edited by siamond on Fri Aug 02, 2013 7:51 pm, edited 2 times in total.

User avatar
1210sda
Posts: 1236
Joined: Wed Feb 28, 2007 8:31 am

Re: Variable Percentage Withdrawal

Post by 1210sda » Fri Aug 02, 2013 7:48 pm

Longinvest,
I've reviewed your spreadsheets. Couple of questions.

1.It appears that you are calculating the payment necessary to reduce the beginning balance to zero in "n" years (like a mortgage amortization schedule). You then divide the payment into the beginning balance to determine the withdrawal % for a given "n". ("n" being 100-current age, all the way to age 99). Is this correct ??
2. Once you have determined the w/d %, you multiply the current balance by this %. Is this correct ??
3. I saw where your VPW held up well in your back test of 1972 thru 2006. Have you tried this on a period that didn't have such a bad start, such as 1978 thru 2012 ??
4. In your back test, I assume that the "payment" dollars are "real" since you used "Portfolio Real Returns". Is this right?

Thanks again for sharing. Very nice work.

1210

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Sat Aug 03, 2013 7:33 am

umfundi wrote:I do really think this is good stuff. Makes for a realistic rather than a worst-case withdrawal scenario.

But, like all back-tested and optimized scenarios, it will work until it doesn't.

Just to say, keep your hands on the wheel!

Keith


+1

Dandy
Posts: 4755
Joined: Sun Apr 25, 2010 7:42 pm

Re: Variable Percentage Withdrawal

Post by Dandy » Sat Aug 03, 2013 8:06 am

Here is my main problem with most withdrawal strategies: at what year or age do you declare that your strategy isn't working? e.g. at year 29 when you are healthy and see that you only have about 1.2 years worth of money left? Earlier I hope.

The only strategy that seems to make sense to me is to start with the old 4% (although with today's interest rates I would start lower) adjust for inflation and then every few years reassess your assets, health and expenses and adjust the withdrawal rate or cut expenses. I actually think that is what most people will do. I doubt that many will continue to blindly take 4% plus inflation after several significantly bad years of portfolio shrinkage. They will cut expenses and wait for some portfolio recovery before they resume their formula withdrawal. Those that do not adjust their withdrawals may learn the difference between theory and actual.

So, if that is reality, devising a withdrawal scheme to cover 30 years seems more theoretical than practical. What worked 90% of the time in the past doesn't help a specific individual in the future. It's a guide. e.g. if the average temperature in June is
75 degrees but this June day the temperature is 60 degrees you need to wear a sweater - the average is not a help.

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

Re: Variable Percentage Withdrawal

Post by Cut-Throat » Sat Aug 03, 2013 8:24 am

Dandy wrote:Here is my main problem with most withdrawal strategies: at what year or age do you declare that your strategy isn't working? e.g. at year 29 when you are healthy and see that you only have about 1.2 years worth of money left? Earlier I hope.


The withdrawal method outlined in this thread has a strategy that will insure it works.

Have you downloaded the spreadsheet and plugged some numbers in, or did you just fire off a comment from the hip?

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Sat Aug 03, 2013 8:29 am

1210sda wrote:Longinvest,
I've reviewed your spreadsheets. Couple of questions.

1.It appears that you are calculating the payment necessary to reduce the beginning balance to zero in "n" years (like a mortgage amortization schedule). You then divide the payment into the beginning balance to determine the withdrawal % for a given "n". ("n" being 100-current age, all the way to age 99). Is this correct ??


1210, the payment is divided by the n'th year starting balance.

2. Once you have determined the w/d %, you multiply the current balance by this %. Is this correct ??


That's how you determine the dollar withdrawal from your portfolio.

3. I saw where your VPW held up well in your back test of 1972 thru 2006. Have you tried this on a period that didn't have such a bad start, such as 1978 thru 2012 ??


Which version of the spreadsheet did you download? In the latest version, you can select the VPW Backtest sheet, enter 1978 in the Retirement Year cell, and you'll get the full data.

It should look like this:
Image

You can also view the comparison to other strategies in the comparison sheets.

Here is what I get for a 60% Bonds / 40% Stocks (80% US / 20% International) $1,000,000 portfolio. Retirement Age 65. Retirement Year 1978.

Code: Select all

Year   Return   Age    Withdrawal   Balance   Payment   Bonds   US   International   Inflation
1978   -2.437235%   65   4.6%   $1,000,000.00   $46,000.00   1.996007984   7.2961373391   35.3540892888   9.0177133655
1979   -1.626764%   66   4.7%   $930,748.78   $44,000.00   6.3872255489   22.7667431879   4.1653164494   13.29394387
1980   3.136575%   67   4.8%   $872,323.47   $42,000.00   6.3872255489   32.4483481385   22.8706034848   12.5162972621
1981   -3.537926%   68   4.9%   $856,367.19   $42,000.00   10.5788423154   -3.8826230163   -0.4511802976   8.922363847
1982   17.090675%   69   5.0%   $785,555.48   $39,000.00   25.1497005988   20.570915261   -1.2189346162   3.829787234
1983   9.634795%   70   5.1%   $874,146.85   $45,000.00   7.9840319361   21.7686395848   25.4331081586   3.7909836066
1984   6.259409%   71   5.2%   $909,033.45   $47,000.00   14.0718562874   4.3018265296   7.9442630306   3.9486673248
1985   20.841769%   72   5.3%   $915,991.65   $49,000.00   17.7644710579   31.949296337   56.8711518807   3.7986704653
1986   16.987902%   73   5.4%   $1,047,688.04   $57,000.00   12.874251497   15.8798283262   68.3276416482   1.0978956999
1987   -1.219158%   74   5.5%   $1,158,985.16   $64,000.00   0.9381237525   1.5071364408   26.4501333599   4.4343891403
1988   7.736266%   75   5.7%   $1,081,635.56   $62,000.00   7.35   17.7762251722   29.9897798938   4.4194107452
1989   13.562821%   76   5.8%   $1,098,517.28   $64,000.00   13.64   28.6555544466   18.5831443029   4.6473029046
1990   -4.350797%   77   6.0%   $1,174,827.00   $70,000.00   8.65   -6.1782613035   -21.5394969714   6.1062648692
1991   18.094413%   78   6.2%   $1,056,758.22   $66,000.00   15.25   34.4445553448   19.2611611038   3.0642750374
1992   3.659573%   79   6.4%   $1,170,030.11   $75,000.00   7.14   9.5917756263   -8.5873819079   2.9006526468
1993   9.239249%   80   6.6%   $1,135,103.54   $75,000.00   9.68   10.4102205809   38.7790712167   2.7484143763
1994   -3.785521%   81   6.9%   $1,158,049.14   $80,000.00   -2.66   -0.17   5.4814667099   2.6748971193
1995   20.082482%   82   7.2%   $1,037,239.37   $75,000.00   18.18   35.79   9.6233516963   2.5384101536
1996   5.935523%   83   7.5%   $1,155,480.92   $87,000.00   3.58   20.96   7.5000623177   3.32247557
1997   13.562760%   84   7.8%   $1,131,900.85   $88,000.00   9.44   30.99   -1.0594012513   1.7023959647
1998   12.033331%   85   8.2%   $1,185,482.62   $97,000.00   8.58   23.26   15.6   1.6119032858
1999   6.692570%   86   8.7%   $1,219,463.33   $106,000.00   -0.76   23.81   29.92   2.6845637584
2000   -1.145223%   87   9.2%   $1,187,982.65   $109,000.00   11.39   -10.57   -15.61   3.3868092692
2001   -1.591430%   88   9.9%   $1,066,625.89   $106,000.00   8.43   -10.97   -20.15   1.5517241379
2002   -5.210657%   89   10.6%   $945,338.21   $100,000.00   8.26   -20.96   -15.08   2.376910017
2003   13.507830%   90   11.5%   $801,290.53   $92,000.00   3.97   31.35   40.34   1.8794914317
2004   4.805589%   91   12.6%   $805,100.29   $101,000.00   4.24   12.52   20.84   3.2555615844
2005   1.144450%   92   13.9%   $737,936.46   $103,000.00   2.4   5.98   15.57   3.415659485
2006   6.939443%   93   15.7%   $642,202.99   $101,000.00   4.27   15.51   26.64   2.5406504065
2007   2.948784%   94   18.0%   $578,759.46   $104,000.00   6.92   5.49   15.52   4.0812685828
2008   -12.430850%   95   20.0%   $488,759.09   $98,000.00   5.05   -37.04   -44.1   0.0914129006
2009   12.617212%   96   20.0%   $342,184.42   $68,000.00   5.93   28.7   36.73   2.72
2010   8.581675%   97   20.0%   $308,778.84   $62,000.00   6.42   17.09   11.12   1.5
2011   0.697747%   98   20.0%   $267,956.60   $54,000.00   7.56   0.96   -14.56   2.96
2012   7.215648%   99   20.0%   $215,449.48   $43,000.00   4.05   16.25   18.14   1.74
            $184,892.82               


Here are the comparison graphs.

Constant-Dollar Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

Constant-Percentage Withdrawal (4%) in blue vs Variable Percentage Withdrawal in green:
Image

1/(100-age) Withdrawal in blue vs Variable Percentage Withdrawal in green:
Image

4. In your back test, I assume that the "payment" dollars are "real" since you used "Portfolio Real Returns". Is this right?


Of course. I believe that it is important to plan retirement in real dollars and use annualized (CAGR) real returns, too.

Thanks again for sharing. Very nice work.


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

longinvest
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Sat Aug 03, 2013 9:52 am

Dandy wrote:Here is my main problem with most withdrawal strategies: at what year or age do you declare that your strategy isn't working? e.g. at year 29 when you are healthy and see that you only have about 1.2 years worth of money left? Earlier I hope.

The only strategy that seems to make sense to me is to start with the old 4% (although with today's interest rates I would start lower) adjust for inflation and then every few years reassess your assets, health and expenses and adjust the withdrawal rate or cut expenses. I actually think that is what most people will do. I doubt that many will continue to blindly take 4% plus inflation after several significantly bad years of portfolio shrinkage. They will cut expenses and wait for some portfolio recovery before they resume their formula withdrawal. Those that do not adjust their withdrawals may learn the difference between theory and actual.

So, if that is reality, devising a withdrawal scheme to cover 30 years seems more theoretical than practical. What worked 90% of the time in the past doesn't help a specific individual in the future. It's a guide. e.g. if the average temperature in June is
75 degrees but this June day the temperature is 60 degrees you need to wear a sweater - the average is not a help.


Dandy, thanks for commenting. I have added a Frequently Asked Questions sheet to the dynamic spreadsheet that addresses your worries.

You can find the download links in viewtopic.php?f=10&t=120430&p=1761580#p1761563

[Edited to fix a typo]
Last edited by longinvest on Sat Aug 03, 2013 10:36 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
Posts: 2473
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal

Post by longinvest » Sat Aug 03, 2013 10:26 am

siamond wrote:Well, here you are, you gave me the answer. Year after year, just add the inflation-equivalent to the 'heirs money", and any return beyond that should be added/removed from the capital that is used for the VPW formula. The 'heirs money' will be protected, and any extra return (or possible loss) will be used for my own benefit...

Sure, in real-life, I might not bother being that rigorous, but as a model, to see how it goes, this shouldn't be hard to do...


If I was to adopt such a strategy, I would be careful not to invest the heirs money into the markets. I would keep this money safe in CDs or Money Market Funds (MMF).

I would invest the rest and apply VPW on it. If, any year, interests don't cover inflation on the heirs money, I would take off the necessary amount from the annual VPW payment and add it into CDs/MMF.

The reason I wouldn't invest the heirs money is that, otherwise, I would be back into implementing a constant-dollar-withdrawal-like strategy (with all its sequence of return problems) for trying to keep the heirs money up to a constant-dollar balance.

Alternately, if you don't mind your heirs waiting, just put this money into TIPS (but not into TIPS funds). This way, your heirs will assuredly get their money if they wait until maturity. No risk.

On a personal note, I am a believer in giving the money while I am alive. As a primitive risk management strategy, I try not to create situations where I am more valuable to others dead than alive. :oops:

longinvest wrote:But, I haven't backtested it on Japan-like data. (It would be cool to have the data to backtest VPW on it!)

I was in Tokyo a few days ago (one day in planes & airports, 2 days in biz meetings, one day in planes & airports, lovely). Gave me quite some time to tweak my own Excel sheets as I just couldn't sleep much anyway...

And silly me, I didn't think to ask such data! :wink: This might not have been very polite, thinking about it... :?


Maye on your next travel? Lucky you! :D
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Post Reply