How to 'deal' with large swings in withdrawals when using VPW?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
mortal
Posts: 478
Joined: Mon Sep 15, 2008 11:15 pm

How to 'deal' with large swings in withdrawals when using VPW?

Post by mortal »

Howdy folks,

I've been thinking of my future hypothetical retirement lately, and one question that keeps popping up in my mind is this:

If one religiously follows the VPW method, or withdraws a constant (un-inflation adjusted) amount, (4% for the sake of argument), how do you deal with the large swings in withdrawal amounts inherent to this method?

Some math

Lets say you retire on $1,700,000. At 4% VPW this is enough to withdraw $68k. Great! Your base expenses are only around 50k. You have a blast spending your excess 18k on travel, fine dining, etc. The wife is happy, the kids are somewhat spoiled. Everything's golden! This goes on for years. You get comfortable.

Oh no, 2008 part duex! Your portfolio plunges 30% (good thing you had a 60/40 AA). Now 4% only gets you 50k. So, you cut back on your extravagances, no vacation, kids mope about and whine about not getting their PS15 for christmass. You get the picture.

Now, I'm sure that faced with such a situation, we'd all do what we had to do, embrace frugality and restraint, but my point is this, do you guys think it's realistic to expect family to be ok with such fluctuations in spending? When the market recovers, would you be able to increase spending, having just survived a harrowing crash?

I applaud the goal of VPW. I certainly would never spend myself into poverty, but I also don't wish to be the 'richest man in the graveyard'. I do wonder though if the reason a fixed WR is so popular is in it's comforting predictability. Perhaps one could implement a 'moving average' strategy that smooths the swings?
User avatar
snowshoes
Posts: 348
Joined: Tue Feb 03, 2015 12:33 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by snowshoes »

With new medicine people live to 100 regularly if they can afford it. I'd make sure the family appreciated what they received, not expected a fixed increase annually like .gov's inflations expectations. jmho
User avatar
warowits
Posts: 471
Joined: Tue Sep 29, 2015 2:38 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by warowits »

I think the VPW works best in conjunction with a fixed income either from Social Security, a pension, or an annuity. So I personally have thought about saving until I am 60, figuring out my SS payments if I wait until 70 (say 40k), and then using a chunk of my retirement funds to purchase a 10 year Spia that will provide me that level of income until SS kicks in. Then use the VPW method on the remainder of my retirement money.

From the Wiki
"VPW is best used in conjunction with guaranteed base income from Social Security, pensions, and, if necessary, inflation-indexed Single Premium Immediate Annuity (SPIA). "
https://www.bogleheads.org/wiki/Variabl ... retirement
AlohaJoe
Posts: 5653
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by AlohaJoe »

mortal wrote:If one religiously follows the VPW method, or withdraws a constant (un-inflation adjusted) amount, (4% for the sake of argument), how do you deal with the large swings in withdrawal amounts inherent to this method?
There are 3 schools of thought:

1. You only have large swings if you have lots of stocks. If the swings are too big, then it means you have too many stocks in your asset allocation. If you don't like the swings, sell some stocks and buy some bonds. Try 30/70.

Here's a chart showing a 1950-retiree using VPW with two different asset allocations.

Image

You can see that adding lots of bonds makes the ride a lot smoother.

Those who advocate this are strong believers that if you don't accept the income risk then you are "hiding" it where it can "build up", possibly with explosive and catastrophic results. "Investment risk translates directly into consumption risk." That's basically what happens with the traditional 4% SWR: by having constant income it "hides" problems and then the catastrophic result is that you suddenly run completely out of money. People in this camp, think it is better to accept the market risk than hide from it and have even worse problems in five, ten, or twenty years. Better to have to cut expenses 20% today than 80% tomorrow.

2. Retire with a large enough gap between "nice to have" and "necessities" that relatively large variations in annual income don't cause a substantial impact. I think is basically the scenario you outline and I agree that there are probably behavioural aspects (the hedonistic treadmill is a real thing) that are underplayed by those who advocate this scenario.

3. Try to find a middle path by smoothing out the year to year income swings. Those in this camp believe in some amount of "reversion to the mean". Think of risk a bit like a loan from a bank. They're borrowing some risk now and will pay it back later (when markets recover). There are numerous proposed strategies for smoothing income. Some of them are....

1. Average things out over the last few years.
2. Have "guard rails" that limit how much you increase/decrease in a single year
3. Use a valuation metric (like CAPE10) to determine the expected future returns calculation used in VPW.
4. Use math to "tilt" the withdrawal, where you multiply the VPW result by some smoothing factor.

For a fuller blog post about some of them, look at https://medium.com/@justusjp/income-smo ... .ks548ucqv
For a fuller blog post on "investment risk translates into consumption risk", look at https://medium.com/@justusjp/unfunded-p ... .s74mjlhwp
Now, I'm sure that faced with such a situation, we'd all do what we had to do, embrace frugality and restraint, but my point is this, do you guys think it's realistic to expect family to be ok with such fluctuations in spending? When the market recovers, would you be able to increase spending, having just survived a harrowing crash?
I've seen surveys where 80% of retirees say they would prefer a constant (but lower) income over a variable one. We also know from, say, Depression-era people or Holocaust-survivors that it is not always psychologically easy to adapt to "normality" and start spending more after a crisis.

Me personally: I think stability -- mixed with hopefully infrequent but large, if necessary, changes to income -- are probably better than constant smaller changes for most people. It seems like it would easier to make a one-time adjustment to lifestyle (no more European vacations, give up the skiing and horse riding hobby, and cut the wine habit) than to make constant smaller adjustments up & down.
User avatar
Sheepdog
Posts: 5664
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by Sheepdog »

It may be personality but I have found VPW to be my only way to provide for our needs and wants in my 17 + years retired. It takes discipline, but having been an engineer and factory manager thru decades of business feast and famine, hiring and firing, that discipline was in my psyche.
I picked a withdrawal percentage (an annual average of 4.5% not adjusted for inflation), out of the air, but based partly on some new study at the time (the 4% "rule"). I was to ignore inflation (have more, spend more. Have less, spend less.) There was no pension payments coming in, only Social Security.
The withdrawal history and spending needs varied considerably, you may say, between 3.1% and 7.5%, but by that discipline and keeping records, I know when we can buy that new car (one is scheduled for 2017), or buy a lake cottage (we no longer have), or take that cruise with an upscale stateroom (one is planned for this fall) or stay at home and be cautious (did that in 2016). For example, 2007 was a good year so we scheduled major spending for 2008 (new roof, auto). Bad timing, it was. The crash came, and it hurt, but that spending had already been planned and executed and we took out 6.6% that year. Combining that withdrawal and the crash put real pressure on this so called "discipline" resulting in a 2009 lowered withdrawal plan to 3.1% which was, obviously, on a much lower investment balance. (in 2011 we took out 7.5%, our highest withdrawal year.) That's the swing you are talking about? As I said,fiscal management makes it work. Except for the 2008 pain, we didn't miss anything. (Our 17 year withdrawal history was an average 4.59%.)
All that truly matters in the end is that you loved.
AlohaJoe
Posts: 5653
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by AlohaJoe »

Sheepdog wrote:resulting in a 2009 lowered withdrawal plan to 3.1% which was, obviously, on a much lower investment balance.
VPW ("Variable Percentage Withdrawals", as described in the wiki https://www.bogleheads.org/wiki/Variabl ... withdrawal) never tells you to withdraw 3.1%. The lowest percentage it ever suggests is 4.8%, and that's in your first year of retirement. Every year the percentage only goes up, it never goes down.

You seem to be talking about something other than the VPW that the OP is talking about.
User avatar
Sheepdog
Posts: 5664
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by Sheepdog »

AlohaJoe wrote:
Sheepdog wrote:resulting in a 2009 lowered withdrawal plan to 3.1% which was, obviously, on a much lower investment balance.
VPW ("Variable Percentage Withdrawals", as described in the wiki https://www.bogleheads.org/wiki/Variabl ... withdrawal) never tells you to withdraw 3.1%. The lowest percentage it ever suggests is 4.8%, and that's in your first year of retirement. Every year the percentage only goes up, it never goes down.

You seem to be talking about something other than the VPW that the OP is talking about.
OK, never mind. I never read that one, but my story shows how I "deal" with large swings in withdrawals. Let me call this one A hairy dog's Variable Percentage Withdrawal plan. :idea:
All that truly matters in the end is that you loved.
dcabler
Posts: 1705
Joined: Wed Feb 19, 2014 11:30 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by dcabler »

I've played around with so many withdrawal methods and have now landed on VPW as my most likely method once I hit retirement. The very nature of how it works means you're trading off volatility in annual withdrawals for a guarantee that your funds will last a certain number of years. What it doesn't guarantee is that there will never be a time where withdrawals are below the minimum you need to live on. And if you're like many of us, I suspect that upside volatility isn't so much of a worry. :D

Much of this has already been said, but I'll repeat it here.
- You don't have to use the suggested initial percentage rate specified in the spreadsheet. I created my own spreadsheet for backtesting, mainly because my choice of assets don't match up with the VPW spreadsheet available from bogleheads and it allows me to more easily check out smoothing methods, different seed percentages, and any other ideas that come along.

- There are many smoothing methods I've run across including
a) Using CAPE (specifically somewhere between 0.8/CAPE and 1.0/CAPE) to set the seed withdrawal rate each year that goes into the VPW percentage calculation.
b) Use some form of Bob Catchett's rule. Withdraw the larger dollar amount of 95% of the previous year's withdrawal or the withdrawal specified by this year's VPW percentage. It doesn't have to be 95%, you can run some backtests and see the effects that different percentages have. As a twist, you could use 95% of the previous year's inflation adjusted withdrawal instead, which provides a little better smoothing in inflation adjusted terms.
c)"Banking" the excess in a good year. That is, when the combination of the amount in your portfolio multiplied by this year's VPW results in more than you need, withdraw the full amount and save the rest for a rainy day for when those times happen where the VPW results in a withdrawal that is less than you need. You're effectively changing your overall AA when you do this to be more conservative and it is a little bucket-y. Probably ripe for more study and ideas...
d) datamining (gasp! Heresy!) - with some backtesting, you can see that a retirement in the late 1960's is the worst time to have started a retirement. With an SWR method, that's the starting point for when you're most likely to run out of funds before your retirement concludes. With VPW, that's the starting point where your withdrawals drop significantly over a number of years and take a very long time to get back to where you started thanks to a combination of high inflation and bear markets. And if you look at the withdrawals in real terms (late 1960's dollars), it's even worse. So if datamining doesn't bother you, you could add a fixed fraction of a percentage to say, the first 10-15 years of retirement which does help the situation that happened during that time period. But "pay me later" comes in and it reduces the withdrawals in later years. Will history repeat itself or rhyme? Who knows. Or, if you don't want to call it datamining, you could say that the reason to increase the percentage is that you want your first 10 years or so to have relatively more money available for travel, etc., before settling down to a lower cost lifestyle. And it doesn't have to be a fixed percentage. You could start with something higher and taper it down to 0 at which point the % to withdraw is fully dictated by the VPW algorithm.
e) I'm sure there are many more ideas here and naturally you can combine any or all of the above. But as soon as you start adding a lot of complexity, I would wonder about cognitive decline in later years and keeping up with what I did.
dcabler
Posts: 1705
Joined: Wed Feb 19, 2014 11:30 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by dcabler »

AlohaJoe wrote:
Sheepdog wrote:resulting in a 2009 lowered withdrawal plan to 3.1% which was, obviously, on a much lower investment balance.
VPW ("Variable Percentage Withdrawals", as described in the wiki https://www.bogleheads.org/wiki/Variabl ... withdrawal) never tells you to withdraw 3.1%. The lowest percentage it ever suggests is 4.8%, and that's in your first year of retirement. Every year the percentage only goes up, it never goes down.

You seem to be talking about something other than the VPW that the OP is talking about.
Well, it comes close. If you're 40 and you have a 20/80 portfolio, the first year is 3.2% (chart at the bottom of the Wiki)
Dandy
Posts: 6425
Joined: Sun Apr 25, 2010 7:42 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by Dandy »

There are not any set it and forget it retirement withdrawal plan that you can blindly follow. Retirement can last 30 years or more and comes with some possible major expense bumps in that time of life. Most suggestions are based on back tested data - fine - if the future looks anything like the past - any plans factor in negative interest rates? Lots of potential interest rate, inflation, tax, economic, health insurance, etc. potential changes that might also come into play.

Many plans are well thought out and offer a great way to start your withdrawal approach. But, you really need to periodically check your health, expenses and portfolio to make sure that plan you signed up for a decade ago still makes sense for you and your spouse. It should be relatively simple so somewhat diminished mental ability and or investment savvy isn't critical. So pick a plan but don't fall in love with it.

My approach is having X years of drawdown in "safe" products and the rest moderately to conservatively invested in a "risk" portfolio. When the equity market does well I will take all or at least some of my needs from the "risk" portfolio. When the equity market does poorly I will take my withdrawals all or mostly from my "safe" portfolio. I hope to gradually increase my withdrawals and my standard of living. But I will adjust my approach, if needed. Since I have heirs and am not trying to squeeze every dollar out of my portfolio I don't worry much about dying and leaving money "on the table".
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by The Wizard »

Especially when you have a large tax sheltered account, the withdrawal concept, both before and after age 70.5, can be more about taxable income smoothing, not just spendable income.
So, as others have pointed out, you live beneath your means to a degree in retirement and start accumulating more in your taxable account, which helps tide you over when the next crash comes...
Attempted new signature...
AlohaJoe
Posts: 5653
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by AlohaJoe »

dcabler wrote:c)"Banking" the excess in a good year. That is, when the combination of the amount in your portfolio multiplied by this year's VPW results in more than you need, withdraw the full amount and save the rest for a rainy day for when those times happen where the VPW results in a withdrawal that is less than you need. You're effectively changing your overall AA when you do this to be more conservative and it is a little bucket-y. Probably ripe for more study and ideas...
I won't pretend I've done anything conclusive or exhaustive but the little I've done so far doesn't leave me overly optimistic about this approach. Don't get me wrong, I think it probably helps...but likely only a little bit and under certain circumstances. I don't think it is a panacea and is probably more of a "cherry on top" kind of thing.

The hard part about answer this question is that it requires making a lot of assumptions that then open you up to people saying "well what about variant X? what about variant Y?"
  • What initial rate do you start with? The one that VPW (aka the PMT calculation) tells you to?
  • Is there really no circumstance under which you withdraw more than the starting amount (in inflation-adjusted terms)? Remember that in many scenarios you end up being "allowed" to withdraw 2x, 3x, or even 4x your starting amount. Surely at some point people decide to splurge and take an extra European holiday instead of banking it all.
  • How do you determine whether it "worked"?
  • What do you do with the stuff you "banked"? Do you keep your normal asset allocation? Do you put the banked stuff into something super-stable (bonds/cash/CDs)? Or maybe you go the way entirely and say that this is "bonus" money and can go towards small-cap emerging markets for the highest possible return?
  • What do you set as the threshold for contributing to the bank? Does that threshold ever "reset"? (Imaging the threshold starts out at $50,000 but then there's a big recession and so you're actually withdrawing $40,000 for 10 years. Is the threshold still $50,000 or is it $40,000?)
  • Is there ever a point when you stop banking? (Say, after the first 15 or 20 years of retirement?)
That said, here's why I say that I'm not optimistic about it being a big win. In the worst case scenarios...it never helps because you never have anything to "bank"

Image

There's actually two lines there...you just can't see the other one because they overlap perfectly. "Banking" didn't make a 1966 retirement any less miserable.

Then on the flip side how "bank" are you willing to build up?

Image

A 1950 retiree at some point to starts to think "surely I can splurge a little bit?!"

But saying "if we don't fix 1966 then it is useless" is probably setting the bar too high. Are there some bad but not quite horrible scenarios that we can make a little bit better?

Image

A 1955 retirement is a poster child for that. By "banking" for 20 years you don't need to cut spending in the last 10. Of course, that might be a small consolation if you're one of the 80% of people are dead before then or are too frail to spend the money anyway.

But for every 1955 there's a 1969

Image

Where it doesn't help for the first 22 years and then means you are "banking" things when you are 90...which seems kinda pointless?

Or a 1930 retirement

Image

...where you "bank" a big spike around year 7 and a smaller one in year 9 but you still have to cut spending nearly as much in over the rest of your retirement. The "banking" meant you didn't have that cool trip to Australia when you were 72 but now that you're 87 you get an extra $500 a year. Whoopee.

From my non-scientific poking around it seems like the magic ingredient required to "bank" and for that bank to actually pay off in any clear & meaningful way is extremely uncommon.
cjking
Posts: 1941
Joined: Mon Jun 30, 2008 4:30 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by cjking »

My plan is to disconnect income from spending, by having something called "savings", which are defined so as to be distinct from the "investments" that provide my "income." For the purpose of my plan, my definitions are:-

Investments: Assets whose primary purpose is to generate income. Asset balance is not directly available for spending. Any asset class allowed. An "asset allocation" governs the composition of "investments."
Savings: Accumulated income from which spending is funded, whole balance can be spent at any time. Only asset class "cash" allowed.
Withdrawal: The quarterly process of taking income, by moving money from investments to savings, using a predefined withdrawal algorithm to determine the amount.
Income: The money yielded by withdrawal. Will always cover minimum spending, by design.

So, the basic plan is I take the exact income from investments the withdrawal algorithm dictates, regardless of spending intentions. This income will always be enough to cover minimum spending. (Otherwise I would have saved more, and/or had lower minimum spending requirement, and/or had a different asset allocation, and/or had a different withdrawal algorithm.) When I want to spend on something that isn't essential, I look at my savings balance at the time, think about what other non-essentials I might want to spend the money on in the foreseeable future, and make a subjective decision accordingly.

I realise I may not be the first person to have come across the concept of "savings" to deal with variable income. :happy
cjking
Posts: 1941
Joined: Mon Jun 30, 2008 4:30 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by cjking »

Note that "savings" is a rule-free zone, other than requirement to hold them in immediately accessible cash, which is dictated by the need for savings to be entirely available for spending at any time.

There is no obligation for the savings balance to be non-zero at any point in time.

The savings balance does not affect the withdrawal algorithm. (Well, not usually. I do also have a rule that says I'll skip witdrawals if savings become really excessive. If I'm struggling to spend all my income, I may as well leave the excess invested for the next generation. Also, I'm allowed to skip withdrawals when markets are down, if I want to, and have savings to cover spending. I frame this is buying relief from the psychological discomfort of selling low, which seems like a legitimate luxury spend, to me. :happy )

Savings are not considered part of the asset allocation. They can't be, as being governed by rules would conflict with their purpose.

There are good reasons why we have lots of rules, governing asset allocations and withdrawals, but a major benefit of defining "savings" separate from "investments" is that it creates a sand-pit within which it is safe to make completely subjective decisions, that take into account more complex and subtle factors than can parameterise rules.
dcabler
Posts: 1705
Joined: Wed Feb 19, 2014 11:30 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by dcabler »

AlohaJoe wrote:
dcabler wrote:c)"Banking" the excess in a good year. That is, when the combination of the amount in your portfolio multiplied by this year's VPW results in more than you need, withdraw the full amount and save the rest for a rainy day for when those times happen where the VPW results in a withdrawal that is less than you need. You're effectively changing your overall AA when you do this to be more conservative and it is a little bucket-y. Probably ripe for more study and ideas...
I won't pretend I've done anything conclusive or exhaustive but the little I've done so far doesn't leave me overly optimistic about this approach. Don't get me wrong, I think it probably helps...but likely only a little bit and under certain circumstances. I don't think it is a panacea and is probably more of a "cherry on top" kind of thing.
.
Great work, Aloha Joe!
Was reading one of the blogs you posted earlier in this thread and the author mentioned "rainy day", which also reminded me a little bit of the banking idea. He also mentioned going directly into debt on day one if, say, your retirement started in the late 60's...

I see all of these major methods as the big "axe"
Algorithmic Variable vs. Fixed withdrawals vs. ad hoc, for example

Then maybe a knife and fork
for example, smoothing vs. not

Then squeezing every last drop of out of that lemon (or a cherry on top as you put it)
if smoothing, then what type?

:D
TN_Boy
Posts: 1983
Joined: Sat Jan 17, 2009 12:51 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by TN_Boy »

snowshoes wrote:With new medicine people live to 100 regularly if they can afford it. I'd make sure the family appreciated what they received, not expected a fixed increase annually like .gov's inflations expectations. jmho
No, with new medicine people do not "regularly" live to 100 no matter how much money they have. And most of the people who make it to 100 are female, thus getting gender correct is more important than the money you make. Living to 100 remains quite unusual.
heyyou
Posts: 3838
Joined: Tue Feb 20, 2007 4:58 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by heyyou »

At the OP:
There will always be some risks, somewhere, obvious or not. The slightly uncomfortable risk of variable WDs is better than the alternative risks of "set it and forget it" regardless of returns, until portfolio exhaustion.

Then there is the opposite risk of dying with several multiples of initial asset value unspent (that's decades of spending) which is even more common on Bengen/Trinity SWR of fixed real WDs, for those basing their WDs on the single worst known case. All retirement periods with better returns than the worst, have significant funds left over when using that method.

For variable WD methods, there is income smoothing by using a constant average of several of the most recent annual portfolio values. You get some warning of impending income variations, higher and lower. The VG fixed percentage WD of recent portfolio value has floor and ceiling amounts to buffer the annual variations.

Michael McClung in Living Off Your Money suggests having steady income sources (SS, annuity/pension) for most your necessary expenses, thus your variable income is mostly for discretionary spending. A bond ladder, spending at maturity is another steady source of income. He also adjusts the starting percentage range relative to current market valuations, and he has a floor and ceiling comparison similar to VG's variable method.

Now my personal opinion: Having lived within my means for thirty years, I expect to have to continue that through retirement. Due to lack of data, future market returns are not in the retirement spending calculators. As a teenager, I whined about everything, including where my parents chose to vacation.
cjking
Posts: 1941
Joined: Mon Jun 30, 2008 4:30 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by cjking »

Re. living to 100: the longevity calculator below tells me a 50-year-old male has a 10% probability of living to 100, and 25% of living to 95. I am quite surprised how high those numbers are.

http://visual.ons.gov.uk/how-long-will- ... d-to-last/
kolea
Posts: 1322
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by kolea »

mortal wrote:Howdy folks,

I've been thinking of my future hypothetical retirement lately, and one question that keeps popping up in my mind is this:

If one religiously follows the VPW method, or withdraws a constant (un-inflation adjusted) amount, (4% for the sake of argument), how do you deal with the large swings in withdrawal amounts inherent to this method?
I have a constant-dollar floor that is based on our non-discretionary (no travel, etc.) budget. By constant dollar, I mean the dollar value was set in year-0 of retirement and it grows with inflation. So our withdrawal rate = 3.3% but the floor (in terms of year-0 percentage) is about 2.5%.

That limits the down-hill side.

On the up-hill side there is no real limit but we are not big spenders and the policy is "use it or lose it". So any un-spent money we withdrew is returned to the investment pool (effectively).
Last edited by kolea on Sat Mar 04, 2017 1:13 pm, edited 1 time in total.
Kolea (pron. ko-lay-uh). Golden plover.
User avatar
TheTimeLord
Posts: 8730
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by TheTimeLord »

snowshoes wrote:With new medicine people live to 100 regularly if they can afford it. I'd make sure the family appreciated what they received, not expected a fixed increase annually like .gov's inflations expectations. jmho
What's it like to be 100 years old? It's one of those goals that people mention in passing, but the reality of joining the centenarian club may not be as cheerful as one might think.

First off, the oldest Americans are a small group, comprising just 0.02 percent of the population, or 55,000 people, according to an April report from the U.S. Census Bureau that examined 2007-2011 data from the American Community Survey.

Given that women tend to live longer than men, it's not surprising that about four-fifths of them are female. Most members of the 100-plus club are also widowed, while 17 percent live in poverty, or almost double the rate of people 65 years and older.

While the study doesn't note why the poverty rate is higher for the group than for U.S. seniors overall, it may be tied to the fact that women generally retire with less income than men.
http://www.cbsnews.com/news/how-many-am ... it-to-100/
In 2014, there were 72,197 Americans aged 100 or older, according to a report from the Centers for Disease Control and Prevention. That number is up 44 percent from 2000, when there were only 50,281 centenarians.

Read more: http://www.smithsonianmag.com/smart-new ... J6r4h9P.99
Give the gift of Smithsonian magazine for only $12! http://bit.ly/1cGUiGv
Follow us: @SmithsonianMag on Twitter
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
jebmke
Posts: 11926
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by jebmke »

cjking wrote:Re. living to 100: the longevity calculator below tells me a 50-year-old male has a 10% probability of living to 100, and 25% of living to 95. I am quite surprised how high those numbers are.

http://visual.ons.gov.uk/how-long-will- ... d-to-last/
I do taxes for seniors in the area. Last week I had one woman come in who was 101+ and at another site a fellow who just turned 100. Both were quite mobile, mentally sharp. We regularly get people in their 90s.
When you discover that you are riding a dead horse, the best strategy is to dismount.
TN_Boy
Posts: 1983
Joined: Sat Jan 17, 2009 12:51 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by TN_Boy »

jebmke wrote:
cjking wrote:Re. living to 100: the longevity calculator below tells me a 50-year-old male has a 10% probability of living to 100, and 25% of living to 95. I am quite surprised how high those numbers are.

http://visual.ons.gov.uk/how-long-will- ... d-to-last/
I do taxes for seniors in the area. Last week I had one woman come in who was 101+ and at another site a fellow who just turned 100. Both were quite mobile, mentally sharp. We regularly get people in their 90s.
Well, your sample is biased. The dead people over 90 don't come in to get help with their taxes .....

That longevity calculator is interesting; it has to make the assumption that life spans will increase at a rate similar to what they have been increasing, as best I can tell. But I don't know if anything in recent years has had the impact of huge wins like antibiotics in the mid 20th century. We don't actually know the expected improvements in longevity will occur.

I've known some sharp people in their 90s, and some healthy living people much younger that were not so lucky. But I saw while googling that a Nov 2016 study showed good evidence that the dementia rate is going down, which would certainly improve both longevity and quality of life for many people in their late 80s and 90s.

Those estimates in the linked calculator are much higher than I would have guessed. At least one article I found, based on SS data, indicated a substantially lower probability of somebody hitting 100 than the calculator above gives; of course, that is backward looking data.
User avatar
Artsdoctor
Posts: 4288
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by Artsdoctor »

If you've accumulated enough (and the definition of "enough" will also be debatable), the more powerful tool a retiree has is flexibility. In good years, you'd spend more and in bad years, you'd spend less. There are so many levels you can pull: little levels like eating out and clothing, larger levels like different types of travel (domestic versus international, economy versus business), and even larger still (a kitchen renovation, luxury cars versus not so much, or even buying more real estate). As long as you have your basic needs taken care of and as long as THAT money is not at risk, I think you'll be fine.
randomguy
Posts: 9208
Joined: Wed Sep 17, 2014 9:00 am

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by randomguy »

Artsdoctor wrote:If you've accumulated enough (and the definition of "enough" will also be debatable), the more powerful tool a retiree has is flexibility. In good years, you'd spend more and in bad years, you'd spend less. There are so many levels you can pull: little levels like eating out and clothing, larger levels like different types of travel (domestic versus international, economy versus business), and even larger still (a kitchen renovation, luxury cars versus not so much, or even buying more real estate). As long as you have your basic needs taken care of and as long as THAT money is not at risk, I think you'll be fine.
This issue isn't good years and bad years. Those are easy to deal with. You can set up all sorts of averaging (you have 3 years of money in CDs. Every year you contribute what VPW says and take out 1/3) to smooth out income. The issue is bad decades. Not spending as much in 73-74 helps but it doesn't solve the issue that you are getting 0% real return for the decade. Putting things off for 10-15 years for a 65 year old a lot of times means that things will not happen. You have to decide if you are ok with that or not.

In some ways this whole idea of cutting spending is the rich person game. It is easy to talk bout cutting spending 20% when you are making 100k in retirement. Cutting 20% when you are making the 45k or so that the median retirement couple makes is getting a lot closer to core essentials.
MathWizard
Posts: 4509
Joined: Tue Jul 26, 2011 1:35 pm

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by MathWizard »

The "kids mope about" will not be an issue with me.
Only my wife and I will need to be considered. Both of use are
adults and understand finances.

In retirement, I will not be supporting my kids. The best gift that I can
give my kids is not to have to support their parents financially in retirement,
and I have told my kids so. They may need to provide support of other kinds,
and we have demonstrated that with our parents.
User avatar
willthrill81
Posts: 22530
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by willthrill81 »

My current plan, which will likely change in some way as I'm a long way from FI, is to use a VPW of 4.5% but to combine that with a portfolio with minimal variation, even in tough years like 2008, so that we won't experience big swings in income. A portfolio like the Golden Butterfly would not have experienced a deeper drawdown than 10% during the last 45+ years, which should provide a stable enough income for almost any retiree. If you can't easily deal with a 10% drop in income, then you don't need to use a VPW IMHO.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
Artsdoctor
Posts: 4288
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: How to 'deal' with large swings in withdrawals when using VPW?

Post by Artsdoctor »

randomguy wrote:
Artsdoctor wrote:If you've accumulated enough (and the definition of "enough" will also be debatable), the more powerful tool a retiree has is flexibility. In good years, you'd spend more and in bad years, you'd spend less. There are so many levels you can pull: little levels like eating out and clothing, larger levels like different types of travel (domestic versus international, economy versus business), and even larger still (a kitchen renovation, luxury cars versus not so much, or even buying more real estate). As long as you have your basic needs taken care of and as long as THAT money is not at risk, I think you'll be fine.
This issue isn't good years and bad years. Those are easy to deal with. You can set up all sorts of averaging (you have 3 years of money in CDs. Every year you contribute what VPW says and take out 1/3) to smooth out income. The issue is bad decades. Not spending as much in 73-74 helps but it doesn't solve the issue that you are getting 0% real return for the decade. Putting things off for 10-15 years for a 65 year old a lot of times means that things will not happen. You have to decide if you are ok with that or not.

In some ways this whole idea of cutting spending is the rich person game. It is easy to talk bout cutting spending 20% when you are making 100k in retirement. Cutting 20% when you are making the 45k or so that the median retirement couple makes is getting a lot closer to core essentials.
One of the hardest things to do when you're a pre-retiree is to differentiate wants and needs. You'd think it would be easy but it's not.

If you have little to no room for error, then you probably should not be investing in equities. I wouldn't invest money in equities that I couldn't afford to lose.
Post Reply