Downsides of VPW?

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msa6
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Downsides of VPW?

Post by msa6 » Mon Jun 03, 2019 9:29 pm

Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?

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Re: Downsides of VPW?

Post by willthrill81 » Mon Jun 03, 2019 10:04 pm

The tradeoff of any flexible withdrawal method compared to a fixed one is that you will have to cut your withdrawals at some point (unless you die before you ever encounter a market downturn :wink: ). If you have a 50/50 AA, a 50% stock decline would result in your withdrawals being cut by 25% if you were using VPW.

VPW itself is one application of the broader time value of money formula; it's withdrawal percentages have been calculated to completely deplete your portfolio by age 100, and historic returns for various AAs are already embedded in the withdrawal percentages shown. This makes it very user friendly, a definite advantage. For those wanting a more hands-on approach, including the ability to potentially smooth out your withdrawals, using the time value of money formula directly may be more appropriate. For instance, using 1/CAPE and current bond yields as forecasts of future returns, using this formula would have resulted in far smoother returns during the turbulent 2000-2009 period than VPW. But if you have enough income from sources beyond your portfolio that you aren't concerned with variability, VPW may be very appropriate for you.
“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

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Re: Downsides of VPW?

Post by venkman » Mon Jun 03, 2019 10:14 pm

https://www.bogleheads.org/wiki/Variabl ... withdrawal
VPW is best used in conjunction with guaranteed base income from Social Security, pensions, and, if necessary, inflation-indexed Single Premium Immediate Annuity (SPIA).

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Re: Downsides of VPW?

Post by 4nursebee » Tue Jun 04, 2019 4:23 am

I/we intend to use this method. I do not know the research into downsides, really have not paid attention to that. I view the downside as having to have enough cash or cash equivalents available to tolerate (psychologically and financially) small withdrawals if needed. Because of this we are growing this portion of our assets above all others. We are aiming for 2 years out of pocket expenses, not including healthcare or taxes.
4nursebee

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gasdoc
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Re: Downsides of VPW?

Post by gasdoc » Tue Jun 04, 2019 4:48 am

4nursebee wrote:
Tue Jun 04, 2019 4:23 am
I/we intend to use this method. I do not know the research into downsides, really have not paid attention to that. I view the downside as having to have enough cash or cash equivalents available to tolerate (psychologically and financially) small withdrawals if needed. Because of this we are growing this portion of our assets above all others. We are aiming for 2 years out of pocket expenses, not including healthcare or taxes.
I am glad you brought this up, as I've heard it before and have not really understood the principle. It seems like the concept of keeping more cash so that one can use cash rather than sell other investments during downswings is a type of market timing. How do you know when to use your cash, and know that by using your cash you are not delaying the selling of your equities to a time when the equities prices are even lower? Aren't you trying to time the market?

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Re: Downsides of VPW?

Post by azanon » Tue Jun 04, 2019 7:34 am

msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
Will touched on it, but the main "downside" is just making sure that all of your basic living expenses - those that you can't compromise - are covered by guaranteed sources of income plus a worst case scenario outcome with your VPW. I'd probably even simulate something more extreme than a 50% loss in the stock market.

Now one area I differ from the basic VPW guide is that, forced to choose, I'd prefer using a lower equity portfolio (say from 50% equities to 30% equities), before I'd take some of that money and buy a SPIA, while sticking with 50% equities. Or said another way, if I needed more stability, I'd go to that 25-30% equities in my portfolio before I'd even consider buying additional streams of guaranteed income of any type, simply because I know I actually gain portfolio efficiency up until that point. Said a third way, a (smaller) 50% portfolio + SPIA < a larger 30% equities portfolio.

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Re: Downsides of VPW?

Post by MikeG62 » Tue Jun 04, 2019 8:01 am

msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
Real Knowledge Comes Only From Experience

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Re: Downsides of VPW?

Post by Sandtrap » Tue Jun 04, 2019 8:13 am

Good question.
Yes. . and No.

How about posting a portfolio review request for actionable suggestions in better context regarding your retirement strategy?
Here's the format:
Portfolio Review Request Format:
https://www.bogleheads.org/forum/viewt ... =1&t=6212

j :happy

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Re: Downsides of VPW?

Post by Sandtrap » Tue Jun 04, 2019 8:14 am

MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j

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Re: Downsides of VPW?

Post by azanon » Tue Jun 04, 2019 8:24 am

MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.

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Re: Downsides of VPW?

Post by azanon » Tue Jun 04, 2019 8:26 am

Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I'd call retiring on eggs as an automatic entry into the "richest man/woman/couple in the graveyard" contest and, in some cases, an extra 5-10 years in the working phase of your life. Now let's have an :shock: :)

"Here lies j. We know by his retirement strategy he's probably rich." I kid. I know you don't mind it. :)

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Re: Downsides of VPW?

Post by MikeG62 » Tue Jun 04, 2019 8:28 am

azanon wrote:
Tue Jun 04, 2019 8:26 am
Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I'd call retiring on eggs as an automatic entry into the "richest man/woman/couple in the graveyard" contest and, in some cases, an extra 5-10 years in the working phase of your life. Now let's have an :shock: :)

Here lies j. We know by his retirement strategy he's probably rich. I kid. I know you don't mind it. :)
I agree with this.
Real Knowledge Comes Only From Experience

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dwickenh
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Re: Downsides of VPW?

Post by dwickenh » Tue Jun 04, 2019 8:29 am

Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I like the metaphor, and I love to eat some chickens!!

Best to you J,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

MikeG62
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Re: Downsides of VPW?

Post by MikeG62 » Tue Jun 04, 2019 8:33 am

azanon wrote:
Tue Jun 04, 2019 8:24 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.
This is probably true (more true than for VPW anyway), but G&K WD Decision rules do require cutting spend every time you hit another tripwire. In reality, this would very likely not be annually (or close to that), but it could be that or more in a severe bear market. Those cuts are an attempt to prevent you from running out of money. Better (IMHO) than blindly following a 4% WD rate regardless of how the market is doing because it never failed (in the US) before.

In our case, we are at a 3.0% WD rate with a very sizable % of our annual spend being discretionary. So lot's of room for us to cut before we felt a ton of pain.
Real Knowledge Comes Only From Experience

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Re: Downsides of VPW?

Post by randomguy » Tue Jun 04, 2019 9:00 am

azanon wrote:
Tue Jun 04, 2019 8:24 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.
Yeah but it has a lot of sequence of income risk.Nothing like spending the first 15 years of your retirement living on a less than 3% SWR. You work a life time and then spend what is left of your prime years doing nothing cause you don't have the cash. VPW cuts spending by a ton in bad times and lets you die as the richest guy in the graveyard if you die right on time (live long enough and you can deplete your portfolio again but as an 85 year old your rich ). That isn't what a lot of people want. GK and the like are less aggressive at cutting so you end up trading off Sequence of Income and Portfolio depletion risk. I think most people who actually look at the numbers would prefer GK to VPW but there is a bit of hindsight bias when you know the 81 is the turning point and that the great depression will end.

People talk about annuities, SS, pensions, and the like to compensate for the income issue. You can do that with any scheme. If I cover my basic expenses with SS, Pension, and so on, what is the big deal about running out of money in 25 years? Have like a 90% chance to be dead AND if I live big deal, my expenses are still covered. Or more realisitically spend like I want during the first 10-15 years when healthy and then ramp down to stretch what is left over 15-20 years instead of 10.

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Re: Downsides of VPW?

Post by willthrill81 » Tue Jun 04, 2019 9:00 am

MikeG62 wrote:
Tue Jun 04, 2019 8:33 am
azanon wrote:
Tue Jun 04, 2019 8:24 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.
This is probably true (more true than for VPW anyway), but G&K WD Decision rules do require cutting spend every time you hit another tripwire. In reality, this would very likely not be annually (or close to that), but it could be that or more in a severe bear market. Those cuts are an attempt to prevent you from running out of money. Better (IMHO) than blindly following a 4% WD rate regardless of how the market is doing because it never failed (in the US) before.

In our case, we are at a 3.0% WD rate with a very sizable % of our annual spend being discretionary. So lot's of room for us to cut before we felt a ton of pain.
There was a great post on Michael Kitces' website a couple of years ago by Derek Tharp that examined the impact of reducing one's withdrawals in certain conditions. Basically, the conclusion was that small but permanent reductions in withdrawals were more helpful than large but temporary reductions.

Image

Image

I personally those graphs highly interesting. Basically, not taking an inflation adjustment any year that stocks are down had almost the same impact on one's starting withdrawal rate that taking on a 3 year long 20% reduction did. The former would certainly result in much smoother withdrawals.

Of course, this post of Tharp's only examines reductions in withdrawals and not when one should increase them, something that any 'withdrawal policy statement' should include, IMHO. But it's still intriguing.
“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

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Re: Downsides of VPW?

Post by willthrill81 » Tue Jun 04, 2019 9:06 am

randomguy wrote:
Tue Jun 04, 2019 9:00 am
azanon wrote:
Tue Jun 04, 2019 8:24 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.
Yeah but it has a lot of sequence of income risk.Nothing like spending the first 15 years of your retirement living on a less than 3% SWR. You work a life time and then spend what is left of your prime years doing nothing cause you don't have the cash. VPW cuts spending by a ton in bad times and lets you die as the richest guy in the graveyard if you die right on time (live long enough and you can deplete your portfolio again but as an 85 year old your rich ). That isn't what a lot of people want. GK and the like are less aggressive at cutting so you end up trading off Sequence of Income and Portfolio depletion risk. I think most people who actually look at the numbers would prefer GK to VPW but there is a bit of hindsight bias when you know the 81 is the turning point and that the great depression will end.

People talk about annuities, SS, pensions, and the like to compensate for the income issue. You can do that with any scheme. If I cover my basic expenses with SS, Pension, and so on, what is the big deal about running out of money in 25 years? Have like a 90% chance to be dead AND if I live big deal, my expenses are still covered. Or more realisitically spend like I want during the first 10-15 years when healthy and then ramp down to stretch what is left over 15-20 years instead of 10.
:thumbsup

What you're suggesting is basically Wade Pfau's 'income flooring' (i.e. satisfying all essential spending needs with guaranteed income sources, then playing 'fast and loose' with one's remaining portfolio). I suggested a similar scheme, splitting one's portfolio into two 'pieces', one to cover essential spending and another to fund discretionary spending, with the explicit aim of running out of discretionary funds late in life being a feature, not a bug. The idea didn't fly well around here.
“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

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Sandtrap
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Re: Downsides of VPW?

Post by Sandtrap » Tue Jun 04, 2019 9:13 am

azanon wrote:
Tue Jun 04, 2019 8:26 am
Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I'd call retiring on eggs as an automatic entry into the "richest man/woman/couple in the graveyard" contest and, in some cases, an extra 5-10 years in the working phase of your life. Now let's have an :shock: :)

"Here lies j. We know by his retirement strategy he's probably rich." I kid. I know you don't mind it. :)
Ya!!!! :D

DW and I have been eating a lot of chickens for the past 3-4 years until Medicare kicks in at the end of this year for DW (younger). That ACA Subsidy Cliff Penalty is absolutely brutal (I've commented about it often here).
Next year we should be back into eggs. Yippeeee. :D

DW and I started doing this when we had apartment buildings (chickens = rental units) and rental income = eggs. It was a simple way of teaching finance to the kids. My parents did the same thing with me.

Thus. . . don't eat the chickens!!! :shock: :shock:

Actionably: VPW applies exactly to this scenario.
When some of the chickens are "slow layers", then you eat less eggs.

Be well.
jim :happy

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Re: Downsides of VPW?

Post by azanon » Tue Jun 04, 2019 9:14 am

randomguy wrote:
Tue Jun 04, 2019 9:00 am
azanon wrote:
Tue Jun 04, 2019 8:24 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.
Yeah but it has a lot of sequence of income risk.Nothing like spending the first 15 years of your retirement living on a less than 3% SWR. You work a life time and then spend what is left of your prime years doing nothing cause you don't have the cash. VPW cuts spending by a ton in bad times and lets you die as the richest guy in the graveyard if you die right on time (live long enough and you can deplete your portfolio again but as an 85 year old your rich ). That isn't what a lot of people want. GK and the like are less aggressive at cutting so you end up trading off Sequence of Income and Portfolio depletion risk. I think most people who actually look at the numbers would prefer GK to VPW but there is a bit of hindsight bias when you know the 81 is the turning point and that the great depression will end.

People talk about annuities, SS, pensions, and the like to compensate for the income issue. You can do that with any scheme. If I cover my basic expenses with SS, Pension, and so on, what is the big deal about running out of money in 25 years? Have like a 90% chance to be dead AND if I live big deal, my expenses are still covered. Or more realisitically spend like I want during the first 10-15 years when healthy and then ramp down to stretch what is left over 15-20 years instead of 10.
I might actually fall in the minority, if a large group of people are polled on GK vs VPW. For me personally, VPW would win because I will, matter-of-fact, have a strong floor with 2 SS + federal pension, and because of my personal preference for low equity portfolios anyway, which lessens the impact of the "cuts" you were referring too. In fact, I don't mind actually opining that if you want to use much higher than 50% equities for retirement, I'd probably steer someone away from VPW in favor of some alternative retirement income method.

As far as probably dying rich with VPW, well that's more probable than not, but I just compare VPW to what most people do, such as constant percentage, the "4% rule strategy" (aka constant dollar), or probably the largest group which is those that don't even spend their retirement money at all for various reasons (source: vanguard's internal research). Any of those strategies will leave a lot more than VPW does. So many would say I actually do have a lot of guts to use a strategy designed to go to zero by age 100.

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Re: Downsides of VPW?

Post by azanon » Tue Jun 04, 2019 9:18 am

Sandtrap wrote:
Tue Jun 04, 2019 9:13 am
azanon wrote:
Tue Jun 04, 2019 8:26 am
Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I'd call retiring on eggs as an automatic entry into the "richest man/woman/couple in the graveyard" contest and, in some cases, an extra 5-10 years in the working phase of your life. Now let's have an :shock: :)

"Here lies j. We know by his retirement strategy he's probably rich." I kid. I know you don't mind it. :)
Ya!!!! :D

DW and I have been eating a lot of chickens for the past 3-4 years until Medicare kicks in at the end of this year for DW (younger). That ACA Subsidy Cliff Penalty is absolutely brutal (I've commented about it often here).
Next year we should be back into eggs. Yippeeee. :D

DW and I started doing this when we had apartment buildings (chickens = rental units) and rental income = eggs. It was a simple way of teaching finance to the kids. My parents did the same thing with me.

Thus. . . don't eat the chickens!!! :shock: :shock:

Actionably: VPW applies exactly to this scenario.
When some of the chickens are "slow layers", then you eat less eggs.

Be well.
jim :happy
I've read throughout the years of your business successes and where that's landed you today. TBH, if i were you with your assets, I'd probably just eat eggs too. My dad's in that scenario. Me? I'm a bit more of a mere mortal, and really can't afford to just eat eggs, unless I choose to work way longer than I really want to. So it'll have to be poultry for me at the dinner table unless maybe way down the line, I somehow make it into his Will.

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Re: Downsides of VPW?

Post by randomguy » Tue Jun 04, 2019 9:53 am

azanon wrote:
Tue Jun 04, 2019 9:14 am

I might actually fall in the minority, if a large group of people are polled on GK vs VPW. For me personally, VPW would win because I will, matter-of-fact, have a strong floor with 2 SS + federal pension, and because of my personal preference for low equity portfolios anyway, which lessens the impact of the "cuts" you were referring too. In fact, I don't mind actually opining that if you want to use much higher than 50% equities for retirement, I'd probably steer someone away from VPW in favor of some alternative retirement income method.

As far as probably dying rich with VPW, well that's more probable than not, but I just compare VPW to what most people do, such as constant percentage, the "4% rule strategy" (aka constant dollar), or probably the largest group which is those that don't even spend their retirement money at all for various reasons (source: vanguard's internal research). Any of those strategies will leave a lot more than VPW does. So many would say I actually do have a lot of guts to use a strategy designed to go to zero by age 100.
During a period when bonds lost about 40% of their value, you are still ending up with some pretty large spending cuts. They might not be as rapid but that is still a pretty big loss to deal with. You would have to plot out GK and VPW to see which one looks better to you. Personally I think any scheme that I can't count on is pretty useless. YMMV.

You could argue that while VPW does worse in the worst cases, it does better in the more average cases as it is far more aggressive in ramping up spending. That is a good argument if you want to be spending more money. That isn't everyones goal.

These schemes all have tons of problems but most of them are unavoidable given the uncertainty. You need to pick one that matches your needs and fears and then plan on adjusting as 20+ years of life unfolds.

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Re: Downsides of VPW?

Post by azanon » Tue Jun 04, 2019 10:01 am

randomguy wrote:
Tue Jun 04, 2019 9:53 am
azanon wrote:
Tue Jun 04, 2019 9:14 am

I might actually fall in the minority, if a large group of people are polled on GK vs VPW. For me personally, VPW would win because I will, matter-of-fact, have a strong floor with 2 SS + federal pension, and because of my personal preference for low equity portfolios anyway, which lessens the impact of the "cuts" you were referring too. In fact, I don't mind actually opining that if you want to use much higher than 50% equities for retirement, I'd probably steer someone away from VPW in favor of some alternative retirement income method.

As far as probably dying rich with VPW, well that's more probable than not, but I just compare VPW to what most people do, such as constant percentage, the "4% rule strategy" (aka constant dollar), or probably the largest group which is those that don't even spend their retirement money at all for various reasons (source: vanguard's internal research). Any of those strategies will leave a lot more than VPW does. So many would say I actually do have a lot of guts to use a strategy designed to go to zero by age 100.
During a period when bonds lost about 40% of their value, you are still ending up with some pretty large spending cuts. They might not be as rapid but that is still a pretty big loss to deal with. You would have to plot out GK and VPW to see which one looks better to you. Personally I think any scheme that I can't count on is pretty useless. YMMV.

You could argue that while VPW does worse in the worst cases, it does better in the more average cases as it is far more aggressive in ramping up spending. That is a good argument if you want to be spending more money. That isn't everyones goal.

These schemes all have tons of problems but most of them are unavoidable given the uncertainty. You need to pick one that matches your needs and fears and then plan on adjusting as 20+ years of life unfolds.
Yeah, I know of that history with many bonds. That's why my federal account is mostly G fund, and the majority of my non-federal bonds are long-term TIPS. My spending cuts (worst case) should still be 100% in the discretionary category.

What I forgot to mention, and is very important to me, is that sequence of return risk is what personally scares me the most, meaning if i were a victim of it, i might be more likely to abandon my portfolio strategy. For me personally, I'm going to have more peace of mind knowing that i zeroed that risk out. YMMV, and maybe I am in the minority. That's ok, cause I'm used to being there.

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Re: Downsides of VPW?

Post by Misenplace » Tue Jun 04, 2019 10:23 am

This topic is now in the Investing Theory forum.

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Admiral
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Re: Downsides of VPW?

Post by Admiral » Tue Jun 04, 2019 10:28 am

azanon wrote:
Tue Jun 04, 2019 10:01 am
randomguy wrote:
Tue Jun 04, 2019 9:53 am
azanon wrote:
Tue Jun 04, 2019 9:14 am

I might actually fall in the minority, if a large group of people are polled on GK vs VPW. For me personally, VPW would win because I will, matter-of-fact, have a strong floor with 2 SS + federal pension, and because of my personal preference for low equity portfolios anyway, which lessens the impact of the "cuts" you were referring too. In fact, I don't mind actually opining that if you want to use much higher than 50% equities for retirement, I'd probably steer someone away from VPW in favor of some alternative retirement income method.

As far as probably dying rich with VPW, well that's more probable than not, but I just compare VPW to what most people do, such as constant percentage, the "4% rule strategy" (aka constant dollar), or probably the largest group which is those that don't even spend their retirement money at all for various reasons (source: vanguard's internal research). Any of those strategies will leave a lot more than VPW does. So many would say I actually do have a lot of guts to use a strategy designed to go to zero by age 100.
During a period when bonds lost about 40% of their value, you are still ending up with some pretty large spending cuts. They might not be as rapid but that is still a pretty big loss to deal with. You would have to plot out GK and VPW to see which one looks better to you. Personally I think any scheme that I can't count on is pretty useless. YMMV.

You could argue that while VPW does worse in the worst cases, it does better in the more average cases as it is far more aggressive in ramping up spending. That is a good argument if you want to be spending more money. That isn't everyones goal.

These schemes all have tons of problems but most of them are unavoidable given the uncertainty. You need to pick one that matches your needs and fears and then plan on adjusting as 20+ years of life unfolds.
Yeah, I know of that history with many bonds. That's why my federal account is mostly G fund, and the majority of my non-federal bonds are long-term TIPS. My spending cuts (worst case) should still be 100% in the discretionary category.

What I forgot to mention, and is very important to me, is that sequence of return risk is what personally scares me the most, meaning if i were a victim of it, i might be more likely to abandon my portfolio strategy. For me personally, I'm going to have more peace of mind knowing that i zeroed that risk out. YMMV, and maybe I am in the minority. That's ok, cause I'm used to being there.
I'm with you. Pension and tiny (1%) portfolio draw will cover unavoidable monthly expenses. Everything else will be discretionary and covered by a 3% draw. Once SS kicks in, portfolio draw is gravy. We plan to use VPW; however even in the best of times I highly doubt we would ever need to go above about 5% of portfolio.

Having a pension helps :D It also means that since our post-dual SS draw will be 1-2%, our pre-SS draw can be higher, if we want.

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Re: Downsides of VPW?

Post by Admiral » Tue Jun 04, 2019 10:46 am

willthrill81 wrote:
Tue Jun 04, 2019 9:06 am
randomguy wrote:
Tue Jun 04, 2019 9:00 am
azanon wrote:
Tue Jun 04, 2019 8:24 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
If I'm understanding this right, the catch to that alternative method is that it introduces some Sequencing of Return Risk (SoRR), which is arguably the greatest risk a portfolio is exposed to in early retirement. VPW has no SoRR.
Yeah but it has a lot of sequence of income risk.Nothing like spending the first 15 years of your retirement living on a less than 3% SWR. You work a life time and then spend what is left of your prime years doing nothing cause you don't have the cash. VPW cuts spending by a ton in bad times and lets you die as the richest guy in the graveyard if you die right on time (live long enough and you can deplete your portfolio again but as an 85 year old your rich ). That isn't what a lot of people want. GK and the like are less aggressive at cutting so you end up trading off Sequence of Income and Portfolio depletion risk. I think most people who actually look at the numbers would prefer GK to VPW but there is a bit of hindsight bias when you know the 81 is the turning point and that the great depression will end.

People talk about annuities, SS, pensions, and the like to compensate for the income issue. You can do that with any scheme. If I cover my basic expenses with SS, Pension, and so on, what is the big deal about running out of money in 25 years? Have like a 90% chance to be dead AND if I live big deal, my expenses are still covered. Or more realisitically spend like I want during the first 10-15 years when healthy and then ramp down to stretch what is left over 15-20 years instead of 10.
:thumbsup

What you're suggesting is basically Wade Pfau's 'income flooring' (i.e. satisfying all essential spending needs with guaranteed income sources, then playing 'fast and loose' with one's remaining portfolio). I suggested a similar scheme, splitting one's portfolio into two 'pieces', one to cover essential spending and another to fund discretionary spending, with the explicit aim of running out of discretionary funds late in life being a feature, not a bug. The idea didn't fly well around here.
This is what the VPW scheme (at least the spreadsheet created by longinvest) does. The VPW is only on a portion of the income above what is set aside in cash, as an annuity, or another safe instrument, used as a bridge to SS.

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Re: Downsides of VPW?

Post by bhsince87 » Tue Jun 04, 2019 10:48 am

I think the biggest downside of VPW, for some people, is the potential for significant income changes from year to year.

This can be an issue for folks who have always used a strict biweekly/monthly/yearly budget, and match cash flows of income/outgo.

We've been on a highly variable, bonus based salary for 20+ years, so this will not be an issue for us.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: Downsides of VPW?

Post by dcabler » Tue Jun 04, 2019 11:19 am

bhsince87 wrote:
Tue Jun 04, 2019 10:48 am
I think the biggest downside of VPW, for some people, is the potential for significant income changes from year to year.

This can be an issue for folks who have always used a strict biweekly/monthly/yearly budget, and match cash flows of income/outgo.

We've been on a highly variable, bonus based salary for 20+ years, so this will not be an issue for us.
Yep, that's the primary downside of VPW and other PMT-based techniques. When compared to SWR, it's a tradeoff of fluctuating income year on year with a guarantee that your portfolio will last exactly as long as you planned for vs. a steady, income adjusted income stream with the danger of either running out of money before you planned or leaving a huge pile of money when you croak.

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Re: Downsides of VPW?

Post by msa6 » Tue Jun 04, 2019 2:52 pm

As always, I really appreciate the wisdom of BH posters.

I'm going to do a little deeper dig on our expenses and give some more thought to how big a hit our portfolio could handle before we'd be forced to make really serious changes using a VPW strategy. We're a few years from SS, and there are no pensions, etc. in the mix. Regardless of what this reveals, the general concept of spending more freely when the portfolio looks good, and more carefully when it's struggling, very much feels to me like the right way to go.

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Re: Downsides of VPW?

Post by ResearchMed » Tue Jun 04, 2019 3:01 pm

Sandtrap wrote:
Tue Jun 04, 2019 9:13 am
azanon wrote:
Tue Jun 04, 2019 8:26 am
Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am
msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I'd call retiring on eggs as an automatic entry into the "richest man/woman/couple in the graveyard" contest and, in some cases, an extra 5-10 years in the working phase of your life. Now let's have an :shock: :)

"Here lies j. We know by his retirement strategy he's probably rich." I kid. I know you don't mind it. :)
Ya!!!! :D

DW and I have been eating a lot of chickens for the past 3-4 years until Medicare kicks in at the end of this year for DW (younger). That ACA Subsidy Cliff Penalty is absolutely brutal (I've commented about it often here).
Next year we should be back into eggs. Yippeeee. :D

DW and I started doing this when we had apartment buildings (chickens = rental units) and rental income = eggs. It was a simple way of teaching finance to the kids. My parents did the same thing with me.

Thus. . . don't eat the chickens!!! :shock: :shock:

Actionably: VPW applies exactly to this scenario.
When some of the chickens are "slow layers", then you eat less eggs.

Be well.
jim :happy
I haven't reviewed it for quite some time ("memo to self", etc.!) but I thought VPW was *not* this scenario, that it helps to "spend down". That is, in addition to the eggs, it helps one to pace the chickens through life expectancy?

Am I mis-remembering?

RM
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Re: Downsides of VPW?

Post by longinvest » Tue Jun 04, 2019 3:32 pm

msa6 wrote:
Tue Jun 04, 2019 2:52 pm
As always, I really appreciate the wisdom of BH posters.

I'm going to do a little deeper dig on our expenses and give some more thought to how big a hit our portfolio could handle before we'd be forced to make really serious changes using a VPW strategy. We're a few years from SS, and there are no pensions, etc. in the mix. Regardless of what this reveals, the general concept of spending more freely when the portfolio looks good, and more carefully when it's struggling, very much feels to me like the right way to go.
Msa6,

I am considering to build an easy-to-use spreadsheet similar to the new variable savings rate (VSR) spreadsheet to help estimate the flexibility that the spending budget should accommodate, when combining VPW withdrawals from a balanced portfolio with current and future pensions.

In a few words, VSR is an extension of VPW to accumulation time. It estimates how much one should save in the upcoming year, given one's age, salary, portfolio balance and allocation, planned retirement age, and future pensions (with and without cost of living adjustments). Like VPW, it makes no attempt to predict future returns; it adjusts savings, annually, to the new portfolio balance, new salary, new shorter retirement horizon, etc.

The VSR spreadsheet provides the accumulating investor with two amounts:
  1. The amount that should be saved (monthly, semimonthly, or biweekly) during the upcoming year.
  2. An amount of additional savings that one should be able to make if markets misbehaved (e.g. stocks lost 50%). In other words, that's the amount that should be easy to cut in the spending budget. It's the flexibility that using VSR requires.
The spreadsheet also informs the accumulating investor about the projected retirement income, before and after loss.

Here's a screenshot:

Image

A similar VPW spreadsheet would ask the retiree about his age, portfolio balance and allocation, current and future pensions (with and without cost of living adjustments), and provide two amounts:
  1. A suggested amount to withdraw from the portfolio (annually, quarterly, or monthly) during the upcoming year.
  2. A withdrawal reduction amount if markets misbehaved (e.g. stocks lost 50%). In other words, that's the amount that should be easy to cut in the spending budget. It's the flexibility that VPW requires.
The spreadsheet would also inform the retiree about the resulting total retirement income (including pensions and withdrawal), before and after loss. Starting at age 80, it would inform the retiree about the residual income after age 100 and suggest to buy an inflation-indexed SPIA* with part (not all) of the portfolio, if residual income seems insufficient.

* Single-Premium Immediate Annuity.

Would such a spreadsheet (online and downloadable) be useful to you?
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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Re: Downsides of VPW?

Post by msa6 » Tue Jun 04, 2019 3:59 pm

longinvest wrote:
Tue Jun 04, 2019 3:32 pm
msa6 wrote:
Tue Jun 04, 2019 2:52 pm
As always, I really appreciate the wisdom of BH posters.

I'm going to do a little deeper dig on our expenses and give some more thought to how big a hit our portfolio could handle before we'd be forced to make really serious changes using a VPW strategy. We're a few years from SS, and there are no pensions, etc. in the mix. Regardless of what this reveals, the general concept of spending more freely when the portfolio looks good, and more carefully when it's struggling, very much feels to me like the right way to go.
Msa6,

I am considering to build an easy-to-use spreadsheet similar to the new variable savings rate (VSR) spreadsheet to help estimate the flexibility that the spending budget should accommodate, when combining VPW withdrawals from a balanced portfolio with current and future pensions.

In a few words, VSR is an extension of VPW to accumulation time. It estimates how much one should save in the upcoming year, given one's age, salary, portfolio balance and allocation, planned retirement age, and future pensions (with and without cost of living adjustments). Like VPW, it makes no attempt to predict future returns; it adjusts savings, annually, to the new portfolio balance, new salary, new shorter retirement horizon, etc.

The VSR spreadsheet provides the accumulating investor with two amounts:
  1. The amount that should be saved (monthly, semimonthly, or biweekly) during the upcoming year.
  2. An amount of additional savings that one should be able to make if markets misbehaved (e.g. stocks lost 50%). In other words, that's the amount that should be easy to cut in the spending budget. It's the flexibility that using VSR requires.
The spreadsheet also informs the accumulating investor about the projected retirement income, before and after loss.

Here's a screenshot:

Image

A similar VPW spreadsheet would ask the retiree about his age, portfolio balance and allocation, current and future pensions (with and without cost of living adjustments), and provide two amounts:
  1. A suggested amount to withdraw from the portfolio (annually, quarterly, or monthly) during the upcoming year.
  2. A withdrawal reduction amount if markets misbehaved (e.g. stocks lost 50%). In other words, that's the amount that should be easy to cut in the spending budget. It's the flexibility that VPW requires.
The spreadsheet would also inform the retiree about the resulting total retirement income (including pensions and withdrawal), before and after loss. Starting at age 80, it would inform the retiree about the residual income after age 100 and suggest to buy an inflation-indexed SPIA* with part (not all) of the portfolio, if residual income seems insufficient.

* Single-Premium Immediate Annuity.

Would such a spreadsheet (online and downloadable) be useful to you?
Since you were nice enough to ask...yes! (Guessing it would be useful to others as well...thanks.)

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Re: Downsides of VPW?

Post by corn18 » Tue Jun 04, 2019 4:18 pm

This thread has been a great read. I think this is my plan:

1. My COLA pension with SS @ 70 will cover 100% of expenses (including taxes).
2. I think I am going to set aside enough to bridge SS from 55 to 70. By set aside, I just mean mental accounting. All money will reside in a 60/40 BH portfolio. No SPIA. This should require about $700k of my projected $1.7M of savings.
3. Then I can VPW the rest as discretionary spend. I can either spend this or save it each year and if the crap hits the fan, I still have my 100% floor.
Don't do something, just stand there!

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Re: Downsides of VPW?

Post by Sandtrap » Tue Jun 04, 2019 4:29 pm

ResearchMed wrote:
Tue Jun 04, 2019 3:01 pm
Sandtrap wrote:
Tue Jun 04, 2019 9:13 am
azanon wrote:
Tue Jun 04, 2019 8:26 am
Sandtrap wrote:
Tue Jun 04, 2019 8:14 am
MikeG62 wrote:
Tue Jun 04, 2019 8:01 am


I am using a modified version of Guyton and Klinger's Withdrawal Decision Rules (modified to use a lower initial WD rate and appropriate tripwires on either side of that). This approach appeals to me as it does not have the annual variability that VPW has. It will ratchet down spending, but it would take quite a sizable reduction in asset values before that happens (same on the upside). It has more of a smoothing effect.

FWIW, DW and I are in our 4th year of early retirement. So eating my own cooking so to speak.

This thread probably belongs in Investing Theory.
DW and I have called this, "Eating Chickens" instead of retiring on eggs. :shock:

Chickens being principal, eggs being earnings.

j
I'd call retiring on eggs as an automatic entry into the "richest man/woman/couple in the graveyard" contest and, in some cases, an extra 5-10 years in the working phase of your life. Now let's have an :shock: :)

"Here lies j. We know by his retirement strategy he's probably rich." I kid. I know you don't mind it. :)
Ya!!!! :D

DW and I have been eating a lot of chickens for the past 3-4 years until Medicare kicks in at the end of this year for DW (younger). That ACA Subsidy Cliff Penalty is absolutely brutal (I've commented about it often here).
Next year we should be back into eggs. Yippeeee. :D

DW and I started doing this when we had apartment buildings (chickens = rental units) and rental income = eggs. It was a simple way of teaching finance to the kids. My parents did the same thing with me.

Thus. . . don't eat the chickens!!! :shock: :shock:

Actionably: VPW applies exactly to this scenario.
When some of the chickens are "slow layers", then you eat less eggs.

Be well.
jim :happy
I haven't reviewed it for quite some time ("memo to self", etc.!) but I thought VPW was *not* this scenario, that it helps to "spend down". That is, in addition to the eggs, it helps one to pace the chickens through life expectancy?

Am I mis-remembering?

RM
You're correct.
Some chicken loss is inevitable through attrition.
And, some eggs must be allowed to hatch, though will not keep up with attrition. :shock:

j

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Re: Downsides of VPW?

Post by randomguy » Tue Jun 04, 2019 4:42 pm

bhsince87 wrote:
Tue Jun 04, 2019 10:48 am
I think the biggest downside of VPW, for some people, is the potential for significant income changes from year to year.

This can be an issue for folks who have always used a strict biweekly/monthly/yearly budget, and match cash flows of income/outgo.

We've been on a highly variable, bonus based salary for 20+ years, so this will not be an issue for us.

The big downside is that you don't spend enough for 10-15 years(not a year or two) in your prime retirement years just to end with more money than you need when your 90.

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Re: Downsides of VPW?

Post by longinvest » Tue Jun 04, 2019 4:45 pm

randomguy wrote:
Tue Jun 04, 2019 4:42 pm
bhsince87 wrote:
Tue Jun 04, 2019 10:48 am
I think the biggest downside of VPW, for some people, is the potential for significant income changes from year to year.

This can be an issue for folks who have always used a strict biweekly/monthly/yearly budget, and match cash flows of income/outgo.

We've been on a highly variable, bonus based salary for 20+ years, so this will not be an issue for us.

The big downside is that you don't spend enough for 10-15 years(not a year or two) in your prime retirement years just to end with more money than you need when your 90.
Randomguy,

As far as I know, nobody knows whether future markets will recover or not (think of Japan), and no portfolio withdrawal method can create returns that the market doesn't provide.

Our wiki's VPW page suggests that the retiree combines stable income with VPW withdrawals.

Do you have a better suggestion?
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Re: Downsides of VPW?

Post by longinvest » Tue Jun 04, 2019 4:54 pm

corn18 wrote:
Tue Jun 04, 2019 4:18 pm
2. I think I am going to set aside enough to bridge SS from 55 to 70. By set aside, I just mean mental accounting. All money will reside in a 60/40 BH portfolio. No SPIA. This should require about $700k of my projected $1.7M of savings.
Corn18, the new spreadsheet I'm proposing to build (see this post) won't require putting money into a separate cash investment to bridge the gap in income between retirement and the start of a pension. Instead, it will fund the bridge from the single retirement portfolio and estimate the resulting required flexibility when markets misbehave (e.g. a 50% stock loss).
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Re: Downsides of VPW?

Post by corn18 » Tue Jun 04, 2019 5:02 pm

longinvest wrote:
Tue Jun 04, 2019 4:54 pm
corn18 wrote:
Tue Jun 04, 2019 4:18 pm
2. I think I am going to set aside enough to bridge SS from 55 to 70. By set aside, I just mean mental accounting. All money will reside in a 60/40 BH portfolio. No SPIA. This should require about $700k of my projected $1.7M of savings.
Corn18, the new spreadsheet I'm proposing to build (see this post) won't require putting money into a separate cash investment to bridge the gap in income between retirement and the start of a pension. Instead, it will fund the bridge from the single retirement portfolio and estimate the resulting required flexibility when markets misbehave (e.g. a 50% stock loss).
I like it! :sharebeer
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Re: Downsides of VPW?

Post by megabad » Tue Jun 04, 2019 5:40 pm

msa6 wrote:
Mon Jun 03, 2019 9:29 pm
Starting to think hard about stepping back from the job, and starting to withdraw from our retirement accounts. My wife and I are 56. VPW approach looks very interesting to me. Seems that biggest downside will be likely variability in withdrawals year to year based on portfolio fluctuations. I feel pretty good that we could manage these, as our spending is reasonably fat with travel, eating out, and generally pretty nice living. Figure we can buffer in good years. But I see this as a consideration. What else am I not thinking about?
I don't think there are any downsides to VPW as long as you understand its purpose. It is simply a way to spend all of your savings over a defined period of time (and the ensure that it lasts that long). Since you don't need the money, I don't see that there are downsides. That is why the wiki says to pair it with an annuity.

I suppose the downside is that it would not work for the vast majority of Americans because most would not understand the purpose as it is directly contrary to how most people think of retirement savings and spending. Most Americans classify the majority of household spending as mandatory so VPW would not make sense to someone of that mentality. The idea that your withdrawal might be reduced by 50% or more doesn't make sense to most. Personally, I love strategies involving VPW because I think it is perfectly suited to someone who is risk averse and flexible.

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Re: Downsides of VPW?

Post by 5th_Dimension » Tue Jun 04, 2019 6:27 pm

longinvest wrote:
Tue Jun 04, 2019 4:54 pm

The new spreadsheet I'm proposing to build (see this post) won't require putting money into a separate cash investment to bridge the gap in income between retirement and the start of a pension. Instead, it will fund the bridge from the single retirement portfolio and estimate the resulting required flexibility when markets misbehave (e.g. a 50% stock loss).
I vote yes on making that, because I love playing with spreadsheets :happy
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Re: Downsides of VPW?

Post by One Ping » Tue Jun 04, 2019 7:13 pm

longinvest wrote:
Tue Jun 04, 2019 4:54 pm
corn18 wrote:
Tue Jun 04, 2019 4:18 pm
2. I think I am going to set aside enough to bridge SS from 55 to 70. By set aside, I just mean mental accounting. All money will reside in a 60/40 BH portfolio. No SPIA. This should require about $700k of my projected $1.7M of savings.
Corn18, the new spreadsheet I'm proposing to build (see this post) won't require putting money into a separate cash investment to bridge the gap in income between retirement and the start of a pension. Instead, it will fund the bridge from the single retirement portfolio and estimate the resulting required flexibility when markets misbehave (e.g. a 50% stock loss).
longinvest, will your new VSR spreadsheet be integrated with VPW so one would have a seamless planning tool covering from the start of accumulation phase through retirement to the end of withdrawal phase?
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Re: Downsides of VPW?

Post by longinvest » Tue Jun 04, 2019 8:01 pm

One Ping wrote:
Tue Jun 04, 2019 7:13 pm
longinvest wrote:
Tue Jun 04, 2019 4:54 pm
corn18 wrote:
Tue Jun 04, 2019 4:18 pm
2. I think I am going to set aside enough to bridge SS from 55 to 70. By set aside, I just mean mental accounting. All money will reside in a 60/40 BH portfolio. No SPIA. This should require about $700k of my projected $1.7M of savings.
Corn18, the new spreadsheet I'm proposing to build (see this post) won't require putting money into a separate cash investment to bridge the gap in income between retirement and the start of a pension. Instead, it will fund the bridge from the single retirement portfolio and estimate the resulting required flexibility when markets misbehave (e.g. a 50% stock loss).
longinvest, will your new VSR spreadsheet be integrated with VPW so one would have a seamless planning tool covering from the start of accumulation phase through retirement to the end of withdrawal phase?
That's an interesting idea. I'll think about it, because I'm trying to make these spreadsheets very easy to use (for a surviving spouse, for example).
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Re: Downsides of VPW?

Post by randomguy » Tue Jun 04, 2019 8:26 pm

longinvest wrote:
Tue Jun 04, 2019 4:45 pm

Randomguy,

As far as I know, nobody knows whether future markets will recover or not (think of Japan), and no portfolio withdrawal method can create returns that the market doesn't provide.

Our wiki's VPW page suggests that the retiree combines stable income with VPW withdrawals.

Do you have a better suggestion?
Adding stable income doesn't change anything. You can do that with any of these schemes. It doesn't change the fact that the portfolio fails to produce income when you might want it.

Better all comes down to your definition better. I might prefer to live on 40k/year for 28 years and then live on my stable income. You might prefer to live on 30k for 20 years and then 50k for the next 20. And someone else might prefer a steady 35k/year for 40 years. Or any of a zillion mixtures in between. You end up having to balance a bunch of different goals and risks and pick which one you can live with.

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Re: Downsides of VPW?

Post by bhsince87 » Tue Jun 04, 2019 8:31 pm

randomguy wrote:
Tue Jun 04, 2019 4:42 pm
bhsince87 wrote:
Tue Jun 04, 2019 10:48 am
I think the biggest downside of VPW, for some people, is the potential for significant income changes from year to year.

This can be an issue for folks who have always used a strict biweekly/monthly/yearly budget, and match cash flows of income/outgo.

We've been on a highly variable, bonus based salary for 20+ years, so this will not be an issue for us.

The big downside is that you don't spend enough for 10-15 years(not a year or two) in your prime retirement years just to end with more money than you need when your 90.

I don't understand this argument. Can you explain it in more detai? Maybe provide an example?

In many cases, VPW allows you to spend more than the 4% plus inflation plan. And ESPECIALLY in cases where the portfolio grows beyond inflation.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: Downsides of VPW?

Post by AlohaJoe » Tue Jun 04, 2019 8:55 pm

bhsince87 wrote:
Tue Jun 04, 2019 8:31 pm
I don't understand this argument. Can you explain it in more detai? Maybe provide an example?
Open up the VPW spreadsheet, go to the "Backtesting" tab, and change C19 "Start Year" to 1966.

Then look at I32, the inflation-adjusted withdrawal for the 10th year of retirement when you are 74 years old. It is $28,000.

Then look at I48, the inflation-adjusted withdrawal for the 27th year of retirement when you are 92 years old. It is $59,000.

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Re: Downsides of VPW?

Post by trueblueky » Tue Jun 04, 2019 9:03 pm

randomguy wrote:
Tue Jun 04, 2019 4:42 pm
bhsince87 wrote:
Tue Jun 04, 2019 10:48 am
I think the biggest downside of VPW, for some people, is the potential for significant income changes from year to year.

This can be an issue for folks who have always used a strict biweekly/monthly/yearly budget, and match cash flows of income/outgo.

We've been on a highly variable, bonus based salary for 20+ years, so this will not be an issue for us.

The big downside is that you don't spend enough for 10-15 years(not a year or two) in your prime retirement years just to end with more money than you need when your 90.
^^
If only I knew how much I would need when I'm 90, or several years later when DW is 90. Word is that last year (or five) can be expensive.

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Re: Downsides of VPW?

Post by bhsince87 » Tue Jun 04, 2019 9:11 pm

AlohaJoe wrote:
Tue Jun 04, 2019 8:55 pm
bhsince87 wrote:
Tue Jun 04, 2019 8:31 pm
I don't understand this argument. Can you explain it in more detai? Maybe provide an example?
Open up the VPW spreadsheet, go to the "Backtesting" tab, and change C19 "Start Year" to 1966.

Then look at I32, the inflation-adjusted withdrawal for the 10th year of retirement when you are 74 years old. It is $28,000.

Then look at I48, the inflation-adjusted withdrawal for the 27th year of retirement when you are 92 years old. It is $59,000.
Would you have prefered the the result of 0$ left with the 4% withdrawal method?

And I'm not being facecitious. Some people might prefer that approach. We do have a fairly strong safety net here, at least. Different strokes for different folks.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: Downsides of VPW?

Post by willthrill81 » Tue Jun 04, 2019 9:17 pm

megabad wrote:
Tue Jun 04, 2019 5:40 pm
I don't think there are any downsides to VPW as long as you understand its purpose.
In a way, you could make that argument about any of the 'mainstream' withdrawal strategies. They all have pros and cons, and none of them are 'one-size-fits-all'. AlohaJoe's post below demonstrates one of VPW's 'flaws'.
AlohaJoe wrote:
Tue Jun 04, 2019 8:55 pm
bhsince87 wrote:
Tue Jun 04, 2019 8:31 pm
I don't understand this argument. Can you explain it in more detai? Maybe provide an example?
Open up the VPW spreadsheet, go to the "Backtesting" tab, and change C19 "Start Year" to 1966.

Then look at I32, the inflation-adjusted withdrawal for the 10th year of retirement when you are 74 years old. It is $28,000.

Then look at I48, the inflation-adjusted withdrawal for the 27th year of retirement when you are 92 years old. It is $59,000.
Indeed. If the markets have a better than average run, which they are almost 50% likely to do if the future resembles the past, then you could see your VP withdrawals increase over time, even though you're more likely to want those funds when you're younger and, more importantly, still alive, which most retirees won't be by the time they should reach age 90.
bhsince87 wrote:
Tue Jun 04, 2019 9:11 pm
Would you have prefered the the result of 0$ left with the 4% withdrawal method?

And I'm not being facecitious. Some people might prefer that approach. We do have a fairly strong safety net here, at least. Different strokes for different folks.
Strictly speaking, 4% fixed real withdrawals would not have run out of funds for 1966 retirees at year 27.

But yes, some people around here have explicitly said that they do not want to reduce their withdrawals at all during retirement. So VPW isn't appropriate for such folks. We must all pick our poison.
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Re: Downsides of VPW?

Post by randomguy » Tue Jun 04, 2019 9:47 pm

bhsince87 wrote:
Tue Jun 04, 2019 9:11 pm
AlohaJoe wrote:
Tue Jun 04, 2019 8:55 pm
bhsince87 wrote:
Tue Jun 04, 2019 8:31 pm
I don't understand this argument. Can you explain it in more detai? Maybe provide an example?
Open up the VPW spreadsheet, go to the "Backtesting" tab, and change C19 "Start Year" to 1966.

Then look at I32, the inflation-adjusted withdrawal for the 10th year of retirement when you are 74 years old. It is $28,000.

Then look at I48, the inflation-adjusted withdrawal for the 27th year of retirement when you are 92 years old. It is $59,000.
Would you have prefered the the result of 0$ left with the 4% withdrawal method?

And I'm not being facecitious. Some people might prefer that approach. We do have a fairly strong safety net here, at least. Different strokes for different folks.
Lets say you prefer VPWs results. Do you still think spending 28k at 75 and 80k at 95 is a good result? Or is that a downside of using VPW? I consider it a major downside. You have to decide if the upsides outweigh it, Just like every other choice you make in life.

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Re: Downsides of VPW?

Post by bhsince87 » Tue Jun 04, 2019 10:20 pm

randomguy wrote:
Tue Jun 04, 2019 9:47 pm
bhsince87 wrote:
Tue Jun 04, 2019 9:11 pm
AlohaJoe wrote:
Tue Jun 04, 2019 8:55 pm
bhsince87 wrote:
Tue Jun 04, 2019 8:31 pm
I don't understand this argument. Can you explain it in more detai? Maybe provide an example?
Open up the VPW spreadsheet, go to the "Backtesting" tab, and change C19 "Start Year" to 1966.

Then look at I32, the inflation-adjusted withdrawal for the 10th year of retirement when you are 74 years old. It is $28,000.

Then look at I48, the inflation-adjusted withdrawal for the 27th year of retirement when you are 92 years old. It is $59,000.
Would you have prefered the the result of 0$ left with the 4% withdrawal method?

And I'm not being facecitious. Some people might prefer that approach. We do have a fairly strong safety net here, at least. Different strokes for different folks.
Lets say you prefer VPWs results. Do you still think spending 28k at 75 and 80k at 95 is a good result? Or is that a downside of using VPW? I consider it a major downside. You have to decide if the upsides outweigh it, Just like every other choice you make in life.
Yes, I'd much prefer spending 28k at 75 and 80k at 95 than having nothing left to spend at, say, age 85.

And zero to spend at age 86, 87, 88, 89, ....
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: Downsides of VPW?

Post by stlutz » Tue Jun 04, 2019 10:39 pm

Open up the VPW spreadsheet, go to the "Backtesting" tab, and change C19 "Start Year" to 1966.

Then look at I32, the inflation-adjusted withdrawal for the 10th year of retirement when you are 74 years old. It is $28,000.

Then look at I48, the inflation-adjusted withdrawal for the 27th year of retirement when you are 92 years old. It is $59,000.
How did one know in 1976 that the inflation problem would largely get solved by 10 years later and that the stock market would go on a huge run starting in 1982?

It's well worth reading the infamous "Death of Equities" article from Business Week in 1979 (https://ritholtz.com/1979/08/the-death-of-equities/). A lot of people read the title and remark on how dumb financial media is. But the article itself identifies a whole host of real problems. And the country largely solved those problems. That didn't have to happen. Same was true with the financial rescue in 2009. I'm personally much less sanguine that policy makers will make good decisions in how to handle the next economic "crisis", whatever it may be. The Great Depression didn't have to be as bad as it was--policy makers make it a lot worse at the time.

The main feature of VPW in my view is that withdrawals are based on how much money you actually have now. No sensible withdrawal plan would base withdrawals on how much money you had 10 years ago. These threads also reveal that the approach can be improved/gamed by adjusting the inputs for future projected returns. In that sense, you can still use the basic approach to come up with a more palatable withdrawal amount in any year. Spreadsheets and numbers can give an illusion of precision where it doesn't actually exist. But if one's portfolio is worth 50% of what it was 5 years ago, it's hard to argue that your withdrawals shoudn't be significantly lower.

Finally, those of us today have an asset that wasn't available to the 1966 retiree: TIPS. The retiree that year who had a significant portion of his portfolio in a portfolio of TIPS (duration matched to expected lifespan) actually does much, much better under any withdrawal approach. If one wants a steady amount of withdrawals, then use assets that actually provide for that.

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