Do you follow a VWR formula?

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jjunk
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Do you follow a VWR formula?

Post by jjunk »

I'm currently reading McClung's "Living off your money" and he's got an entire section devoted to variable withdrawal formulas and their relative performance in his model. I'd never really thought about there being an actual VWR model per se, more that you'd spend what you needed and then adjust up or down accordingly (for good/bad markets). It got me to wondering how many here follow an actual formula like those proposed in his book vs. "eyeballing" it at the end of each year and gauging your spending for the upcoming year that way?

The EM example used in his book as the "winner" for best model in his estimation makes sense to me but I fear that would be too much for my wife to handle once I'm dead and gone. Curious about the strategy the retirees on the board use.
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22twain
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Re: Do you follow a VWR formula?

Post by 22twain »

The variable percentage withdrawal (VPW) method (link goes to wiki) gets a lot of discussion here, e.g. in this thread.

We don't plan to use any formal method of determining withdrawal amounts, because our current spending, shortly before complete retirement, is less than 2% of our investible assets, even before taking Social Security into account. Based on the common 4% rule of thumb, we have plenty of headroom for occasional irregular large expenses, or eventual increased medical expenses.

Similarly, when we were still working with "full salaries", we spent less than half our gross incomes, which left plenty of room for occasional new cars or work on the house. We've never followed a systematic budget.
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jebmke
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Re: Do you follow a VWR formula?

Post by jebmke »

I use the Taylor Larimore method. I withdraw what I need to pay my bills and monitor the balance. Some here on the board use a mathematical system but none of the retirees I know personally use any kind of formal system.
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jjunk
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Re: Do you follow a VWR formula?

Post by jjunk »

Excellent, thanks for the information. I was wondering if I was about to make things too complicated for my own good with these formulas.
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k66
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Re: Do you follow a VWR formula?

Post by k66 »

jjunk wrote:I'm currently reading McClung's "Living off your money" and he's got an entire section devoted to variable withdrawal formulas and their relative performance in his model. I'd never really thought about there being an actual VWR model per se, more that you'd spend what you needed and then adjust up or down accordingly (for good/bad markets). It got me to wondering how many here follow an actual formula like those proposed in his book vs. "eyeballing" it at the end of each year and gauging your spending for the upcoming year that way?

The EM example used in his book as the "winner" for best model in his estimation makes sense to me but I fear that would be too much for my wife to handle once I'm dead and gone. Curious about the strategy the retirees on the board use.
As 22twain already noted, there is the VPW (variable percentage method) and the closely related RMD-type approach (Required Minimum Distribution based on expected remaining life tables) that will better optimize your withdrawals rather than just hoping that "spending what you need" doesn't leave you short too early.

Background papers from Morningstar and Boston College:

Optimal Withdrawal Strategy for Retirement Income Portfolios

Can Retirees Base Wealth Withdrawals on the IRS' Required Minimum Distribitions?

among others.
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EnjoyIt
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Re: Do you follow a VWR formula?

Post by EnjoyIt »

I think all these formulas are great for creating a plan but useless when it comes to actually retiring. We are not robots who spend a specific percentage every year because that is what some formula says. I think you had it right the first time. I love the idea of preparing for a 4% withdrawal rate making sure that will fund plenty of fun and entertainment in my retirement and then adjusting during poor market conditions. I can always forgo an extra trip or a few nights on the town if I have to.

Realistically historically the only time 4% has failed was when a big recession occurred in the first few years of retirement. If we adjust spending during those few years you are home free for the rest of retirement.
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FinancialDave
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Re: Do you follow a VWR formula?

Post by FinancialDave »

I am currently using a form of variable withdrawal, driven by the IRS RMD tables. I have combated the problem of low initial withdrawals by starting at age 73 in the RMD table which is a starting withdrawal rate of 4.05%. I also have diversified the withdrawal bucket with half the money in dividend paying stocks and the other half in 7 index ETF's.

I withdraw amounts on a quarterly basis, so two withdrawals this year so far and the two accounts are still up by 14.3% & 11.5%, so if the market stays or continues up from here, it is looking like I will have growth in my income from not only the larger portfolio but also from the 3% increase in the RMD table (4.2% payout next year.)

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midareff
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Re: Do you follow a VWR formula?

Post by midareff »

I had the benefit of retiring in early 2012 and started with an initial WR of 3.5%. FWIW, we could live on my pension (3% annual COLA) and SS. The WR is for fun, toys, travel and the finer things. Had the market been stale or regressive I would not have increased the $ withdrawn since 2012. Fortunately the market has been on a bull run which has enabled me to stash roughly 23 or more years of draw in "safe" assets as Dr. Bernstein has described in his commentary on winning the game and stop playing. From here, with a market asset base near 150% of where I started at retirement, and a WR that is now up to 3.9% of that, my WR strategy has changed somewhat and intend to implement a ceiling and floor strategy for the upcoming few years of 3.5% to 4.5%. OTOH, at nearly 69 y/o I recognize my years to enjoy international travel have a sunset, or so to speak, have become limited and there are many parts of the world I still want to see. ... as well as ticking a few more things off the bucket list. Should the market remain around it's current levels I would have no second thoughts of a few years at 5%, or even higher for a special purchase or should a half dozen good international trip opportunities come up..

I guess in some ways I follow a formula and in some ways I don't. You have to be flexible (thank you Taylor) ... and you have to be able to fulfill those dreams you had while working.
heyyou
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Re: Do you follow a VWR formula?

Post by heyyou »

I second the suggestion to read about the numerous variable withdrawal (WD) strategies linked above by k66. My favorite was the modified RMD method until I read Living Off Your Money so I might re-start retirement spending with it.

Consider using what works for you until it is time for her to use what suits her abilities. A very conservative VWR, suitable for those who want to leave a legacy, is age/20, and that would be easy for your widow to use, as would a fixed percentage (shown as a divisor) of the remaining assets. For those who are somewhat innumerate, the reciprocal of small percentages makes a good divisor instead of needing to move the decimal point two places left before multiplying by the percentage. The IRS uses divisors for determining the rising RMD percentages.

Assuming that you live through the first decade of retirement, in your will, you could suggest age boundaries, i.e. divide remaining assets by 20 annually in her 70s, divide by 17 in her 80s, etc. You could even set it monthly--the divisor is 360 per month in her 70s, 200 in her eighties but with cognitive decline, a retiree might make two WDs in one month.

The remaining assets at the end of most retirement periods are usually very high, it is only the worst cases that have the risk of running out, and those would have decades of noticeable spending of more than the portfolio's growth and income. At the VPW website, their model shows the 1966 retiree's ending portfolio values for every year of that worst retirement case. Sequence of return risk would be obvious as it is happening. I will use those annual portfolio values as a gauge to monitor whatever VWR method I do choose to follow.

DW and I need a WD method to make sure that we are not under-spending, as we would if we used Taylor's method of spending what suits us.
Sidney
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Re: Do you follow a VWR formula?

Post by Sidney »

EnjoyIt wrote:I think all these formulas are great for creating a plan but useless when it comes to actually retiring. We are not robots who spend a specific percentage every year because that is what some formula says.
I agree. Very situation dependent. We actually spent more in 2008-10. It was a good time to get deals on home improvements so we did some remodeling. Travel deals were phenomenal so we actually bumped up our spending in those years.
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larklea
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Re: Do you follow a VWR formula?

Post by larklea »

My spreadsheet gives me a range of WD, using several factors (nothing earth-shattering or worth mentioning). Today's my first day of retirement, hoping for the best !

For my spouse, I set up a spreadsheet which has a monthly WD that's adjusted upwards starting at 3.5% wd in the first year. Too conservative, maybe, but it's simple and she can follow it. Once SS kicks in, it's more than enough.

She wanted something simple that she can understand if something happens to me. McClung's book is intriguing, just really digging into it.
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jjunk
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Re: Do you follow a VWR formula?

Post by jjunk »

larklea wrote:Today's my first day of retirement, hoping for the best !
Thanks for all the information everyone. And congrats larklea!
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siamond
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Re: Do you follow a VWR formula?

Post by siamond »

Personally, I need to have a solid plan instead of saving enough (too much?) to be able to 'wing it', so I do use a variable withdrawal method. This gives me a budget number, real life has a way to go wayward for sure, but it's good to have a target number to aim at. For large lump sums (e.g. fixing the roof, upgrade heating system, dream vacations), I essentially make a loan to myself in order to normalize the annual spend and more easily compare to my annual budget target.

After hesitating a lot and studying the matter at length, I ended defining my own derivative of VPW, in order to get a smoother trajectory than the base VPW. You can find a long discussion on the matter on this thread, as well as the description of another really solid withdrawal method (named after its authors, Guyton-Klinger).

PS. I read Mc Clung's book, and I am not too hot about EM, as something derived from Blanchett's MUFP just doesn't quite add up to me, there is too much 'hindsight' logic in there. This is a very well researched book though, very thought provoking.
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jjunk
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Re: Do you follow a VWR formula?

Post by jjunk »

Thanks Siamond, appreciate the input and I'll read up on the thread. My current "plan" was to have a years worth of planned expenses simply held in cash and then I'd replenish it at year end and start all over. We plan to live on a solid budget and we have slack to allow us to cut back when down markets occur. So my routine would look something like this...

Start: 50k
Year 1 (avg market): spend 35k, sell and replenish 35k
Year 2 (down market): spend 27k, sell and replenish 27k
Year 3 (up market): spend 35k, sell and add 10k

Obviously I dont think this market sequence is repetitive but the idea is the same. If we had 2+ down markets then we'd cut back more and continue with the process. Severe down markets like '08 would likely have us spend through the 50k with lowest possible expenses and then attempt to replenish it during up markets later
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