TN_Boy,
TN_Boy wrote: ↑Wed Feb 21, 2018 8:45 am
The "raw" version of VPW has potentially more variation in yearly spending than I like
I've showed, in previous posts, that the impact of a 50% stock drop on retirement income could be as low a 15% when
combining VPW on a
balanced portfolio with
non-portfolio income (including any necessary bridge).
Stable income can be bought. It is sold, for a price, by insurance companies. Those in employer DB pension plans are forced to buy it. Others can buy it with their retirement savings. Social Security (SS) is a form of it, its payments can be increased by delaying SS to age 70, and a bridge for SS payments between retirement and age 70 can be bought from an insurance company or constructed using cash investments (I-Bonds, CDs, savings accounts) or bonds (properly constructed non-rolling TIPS ladder). VPW is not meant to replace annuities. No portfolio withdrawal strategy can efficiently replace an annuity, due to the impossibility of an individual to self-build mortality credits.
As for VPW without modifications, it is a logical mathematical approach to portfolio withdrawals. Artificially smoothing VPW withdrawals (e.g. without smoothing portfolio volatility) is inefficient. Such smoothing causes a "buy high / sell low" behavior (e.g. it keeps more invested in expensive markets, and sells more investments to make a withdrawal in cheap markets).
But, there's a logical and natural solution to reduce withdrawal volatility. This solution is to reduce portfolio volatility by including enough bonds in the portfolio to dampen stock volatility. Nominal volatility can be dampened with nominal bonds, and inflation-indexed volatility can be dampened with inflation-indexed bonds (such as TIPS). Letting withdrawals fluctuate along with the portfolio is a very efficient approach to taking money out of a portfolio and makes VPW is easy to follow by a retiree, even in bad scenarios. In deep crises, a VPW adopter is likely to cut his withdrawal
less, because of the mathematical guarantees of VPW, than an SWR adopter who will likely use his emotions to decide how much to cut spending (being emotionally unable to keep his SWR withdrawals constant after a major market crash).
Here's a short summary of what I've just written. When combining VPW with non-portfolio income, total retirement income stability can be increased in 2 ways : (1) by increasing the ratio of stable non-portfolio income relative to portfolio withdrawals, and (2) by dampening portfolio volatility with bonds.
TN_Boy wrote: ↑Wed Feb 21, 2018 8:45 am
Also, I keep seeing "the portfolio won't be prematurely depleted regardless of actual market returns" which is technically true, but in practice seriously misleading.
Our wiki provides an open, easy-to-use-and-modify backtesting spreadsheet so that everyone can see how bad things would have gotten, in the past, in bad scenarios.
The VPW wiki page is particularly clear about the importance of combining VPW with stable non-portfolio income. Also, I don't remember how many times I've written, in our forums, that VPW cannot guarantee any lower bound on withdrawals.
TN_Boy wrote: ↑Wed Feb 21, 2018 8:45 am
No matter what withdrawal method is used, really awful real returns may leave a retiree in some trouble
That's exactly why our VPW wiki page recommends to combine it with stable lifelong non-portfolio income.
TN_Boy wrote: ↑Wed Feb 21, 2018 8:45 am
I frequently see people assert on this board that people have fluctuating income pre-retirement, so no big deal to have it post retirement. Then I think about my situation, and frankly most of my friends, and most have had ..... pretty consistent, generally increasing income through the years. Many people are not so fortunate, but a lot are. A desire for *reasonably* stable retirement income is quite logical. That said, I will use some "common sense" during market downturns and retirees often do have the ability to be very flexible -- "let's go on that big trip in a year or two."
Let me repeat it: Stable lifelong inflation-indexed income
can be bought. It is called an
inflation-indexed Single Premium Immediate Annuity (SPIA). It's the only kind of annuity generally recommended on our forums. It comes at a price, but it does what it claims.
The closest thing to a self-built inflation-indexed SPIA is a non-rolling TIPS ladder. But, at age 65, for example, it is more expensive to construct such a 30-year ladder than to buy an inflation-indexed SPIA which delivers equivalent inflation-indexed payments. The ladder stops delivering payments after 30 years (age 95), leaving a significant longevity risk. The inflation-indexed SPIA, on the other hand, continues as long as the retiree survives. The SPIA is thus more efficient on both counts: it is less expensive and it
eliminates longevity risk.
I'm a proponent of using the right tool for the right job. A Hammer for a nail, and a screwdriver for a screw. In other words, non-portfolio income for income stability, VPW for portfolio withdrawals, and bonds to dampen portfolio volatility. Others can make other choices.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)