This thread will illustrate a simple Bogleheads retirement approach by doing what we call a forward test, which is a simulation starting today (June 30, 2019) with a well-defined plan but unknown future portfolio returns. We'll simply look, month after month, at how the reality unfolds.
In particular, this thread will document portfolio returns and monthly retirement income of a hypothetical person who retires on July 1st, 2019 at age 65 with a $1,000,000 globally-diversified balanced portfolio. The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars)*.
* A plausible scenario of the retiree's accumulation journey is shown in this post.
This will be a pure Bogleheads Retirement simulation. No market timing, no concentration into any asset, no investment into alternative assets, no modulation of asset allocation or withdrawals based on guru prognostications or metrics.
The plan is laid out in advance in this post, written on June 30, 2019, on the eve of the simulated retirement date. It will be boringly and rigorously followed.
The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a globally-diversified 60/40 stocks/bonds all-in-one index fund which internally invests:
- 36% into Vanguard Total Stock Market Index Fund Investor Shares (VTSMX): 3,599 domestic stocks
- 28% into Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX): 8,238 domestic bonds
- 24% into Vanguard Total International Stock Index Fund Investor Shares (VGTSX): 6,414 international stocks
- 12% into Vanguard Total International Bond Index Fund Investor Shares (VTIBX): 5,885 international bonds
The simulated retirement is based on our wiki's Variable percentage withdrawal (VPW) method which allows the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
Monthly portfolio withdrawal amounts will be determined using the new VPW Accumulation And Retirement Worksheet which takes into account current and future pensions (like delayed Social Security), with and without cost-of-living adjustments. Portfolio withdrawals will be taken on the last day of the month and their short-term fluctuations will be dampened using a savings account containing a few months worth of withdrawals.
The dampening savings account will accrue interest based on the rates of high-interest online savings accounts (like an Ally savings account which currently pays 2.10%).
Monthly total retirement income will consist of:
- Monthly $1,000 payment from work pension.
- The monthly VPW withdrawal slightly adjusted up or down using a money transfer from or to the dampening savings account.
- Eventually, starting at age 70 in July 2024, a $2,000 monthly payment from Social Security. This amount will be updated appropriately (with the help of knowledgeable forum members) according to Social Security cost-of-living-adjustment rules.
OK. Let's start.
We enter the retiree's information into the Retirement sheet of the VPW Accumulation And Retirement Worksheet and we get:
The VPW Worksheet suggests to take a $5,356 withdrawal and tells us that total annual retirement income is currently estimated at $76,276. In case of unfavorable market returns where stocks would lose 50%, the portfolio would lose -$300,000 and retirement income would be reduced by -20% to $61,286. The retiree is OK with that.
As income for July 2019 and to pre-fill the dampening savings account, the retiree exceptionally withdraws 6 times the suggested amount. That's (6 X $5,356) = $32,136. This leaves ($1,000,000 - $32,136) = $967,864 invested into the Vanguard LifeStrategy Moderate Growth Fund at the end of June 2019.
After making the withdrawal, the retiree deposits (5 X $5,356) = $26,780 into the dampening savings account, and combines the remaining $5,356 with the $1,000 July work pension payment for a total income of $6,356 available to pay taxes and expenses in July 2019.
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
July 2019 total retirement income is ($1,000 work pension + $5,356 VPW withdrawal) = $6,356. Tomorrow morning, on July 1, 2019, total portfolio balance will be ($967,864 LifeStrategy Moderate Growth Fund + $26,780 dampening savings account) = $994,644.
Note that to get the red line to show, I had to enter a portfolio balance for the morning of June 1st, 2019. So, given that Vanguard LifeStrategy Moderate Growth Fund had a 4.39% return in June 2019, I temporarily entered a ($1,000,000 / (1 + 4.39%)) = $957,946.16 balance for that date. In order to preserve strict forward testing, this initial amount will be removed from future monthly charts.
Historical Annual Retirement Income
- 2019: $76,272 (annualized) -- $6,356, 1 month, starting retirement in July
This post has been modified on July 4, 2019 to simplify its income dampening approach. The original June 30, 2019 post (with minor modifications) has been copied here.