A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

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A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jun 30, 2019 10:37 am

Retirement funding can be simple. It's sufficient to combine income from Social Security (possibly delayed to age 70) and a pension (if any) with portfolio withdrawals from a balanced Bogleheads portfolio using a sensible approach.

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
That's broad global diversification across a total of 24,136 securities with automatic rebalancing for a small 0.13% expense ratio (including the expense ratios of underlying funds).

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:
  1. Monthly $1,000 payment from work pension.
  2. The monthly VPW withdrawal slightly adjusted up or down using a money transfer from or to the dampening savings account.
  3. 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.
In preparation for retirement, an initial withdrawal is hypothetically taken today from the $1,000,000 portfolio, exceptionally equal to 6 monthly VPW withdrawals, to provide income for July 2019 and pre-fill the dampening savings account with an additional 5 months worth of withdrawals.

OK. Let's start.

We enter the retiree's information into the Retirement sheet of the VPW Accumulation And Retirement Worksheet and we get:

Image

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.

Chart

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.

Image

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.
Last edited by longinvest on Mon Jul 08, 2019 6:18 pm, edited 20 times in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by moneyman11 » Sun Jun 30, 2019 5:00 pm

Like the VWR concept, but this “silos” thing seems rather overwrought.
What is gained over just making an annual withdrawal and putting it all in one savings account? Perhaps I’m missing or misunderstanding something.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by jaj2276 » Sun Jun 30, 2019 5:41 pm

Love the VPW concept and I like the addition of how to withdrawal the annual amount in the most efficient manner possible. OP details the monthly reasoning in the main VPW thread.

I'm not a big fan of the accumulation spreadsheet and thinks it detracts from VPW by making the entire thing more complex. I can't imagine that there are going to be many people who decide how much they can save simply by looking at this spreadsheet. I understand it could allow one to spend more money now (if you're ahead of the game) but you either save as little as possible or as much as possible and I doubt most people would change those two features of themselves.

As for this thread, I'm excited to see how it works. I'm currently using VPW to parcel out 20 years worth of charitable contributions from a DAF. This will give me a nice amount of experience to see how VPW worked out before I try it out on my retirement portfolio.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jun 30, 2019 5:49 pm

moneyman11 wrote:
Sun Jun 30, 2019 5:00 pm
Like the VWR concept
Moneyman11, most VWR concepts rely on various metrics and guru prognostications to calibrate, annually, their withdrawal rate calculations.

In contrast, our wiki's variable-percentage withdrawal (VPW) method has fixed withdrawal percentages based solely on age and asset allocation. This is shown in the VPW Table. When using VPW during retirement, withdrawal amounts are determined by looking up, every year, a new percentage in the VPW Table using the retiree's new age and asset allocation, and multiplying this percentage by the portfolio balance at the time of withdrawal.

The VPW Accumulation And Retirement Worksheet combines the above calculation with additional calculations that take into account current and future pensions, with and without cost-of-living adjustments, to determine the withdrawal amount. It also provides the option of quarterly or monthly withdrawals, instead of annual withdrawals. I'm using the monthly frequency option in this thread's forward test.
moneyman11 wrote:
Sun Jun 30, 2019 5:00 pm
this “silos” thing seems rather overwrought.
What is gained over just making an annual withdrawal and putting it all in one savings account? Perhaps I’m missing or misunderstanding something.
There was a link to a post that answers this question in details, in the initial post:
longinvest wrote:
Sun Jun 30, 2019 10:37 am
(See this post for a detailed explanation of monthly silos and their initial funding).
In a few words, silos significantly dampen short-term income fluctuations and increase short-term income predictability.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jun 30, 2019 6:16 pm

jaj2276 wrote:
Sun Jun 30, 2019 5:41 pm
Love the VPW concept and I like the addition of how to withdrawal the annual amount in the most efficient manner possible.
Thanks, Jaj2276. :)
jaj2276 wrote:
Sun Jun 30, 2019 5:41 pm
I'm not a big fan of the accumulation spreadsheet and thinks it detracts from VPW by making the entire thing more complex. I can't imagine that there are going to be many people who decide how much they can save simply by looking at this spreadsheet. I understand it could allow one to spend more money now (if you're ahead of the game) but you either save as little as possible or as much as possible and I doubt most people would change those two features of themselves.
We'll see how it goes. We see almost everyday in the forum posts about targeting a specific retirement number or a specific multiple of expenses (like 25 times expenses) regardless of retirement age and future pensions. The Accumulation sheet provides an actionable alternative to such ill-advised goals. I'd rather have retired with $500,000 (inflation-adjusted) in 1982 than with $1,000,000 (inflation adjusted) in 1966. It would have been quite inefficient to delay retirement with a $500,000 portfolio 1982 until $1,000,000 was accumulated. See this post and the few posts that follow for an illustration of this.

The reality is that we don't know what's ahead. So, instead of targeting a specific portfolio target size (which could trigger retirement at the worst possible time, at the top of a bubble), it's best to build a plan on things we can control: savings, flexibility, and choosing a target retirement age.
jaj2276 wrote:
Sun Jun 30, 2019 5:41 pm
As for this thread, I'm excited to see how it works. I'm currently using VPW to parcel out 20 years worth of charitable contributions from a DAF. This will give me a nice amount of experience to see how VPW worked out before I try it out on my retirement portfolio.
Have you thought about reporting about your experience every year (or every few years) in the main VPW thread? I'd enjoy reading about it.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by luminous » Sun Jun 30, 2019 6:38 pm

longinvest wrote:
Sun Jun 30, 2019 5:49 pm
moneyman11 wrote:
Sun Jun 30, 2019 5:00 pm
this “silos” thing seems rather overwrought.
What is gained over just making an annual withdrawal and putting it all in one savings account? Perhaps I’m missing or misunderstanding something.
There was a link to a post that answers this question in details, in the initial post:
longinvest wrote:
Sun Jun 30, 2019 10:37 am
(See this post for a detailed explanation of monthly silos and their initial funding).
In a few words, silos significantly dampen short-term income fluctuations and increase short-term income predictability.
I'm with moneyman11, the dampening is nice but the mechanics are just too complex. I could never see myself actually doing it in real life.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by luminous » Sun Jun 30, 2019 6:41 pm

longinvest wrote:
Sun Jun 30, 2019 10:37 am
[*] Eventually, starting at age 70 in July 2024, a $2,000 monthly payment from Social Security. This amount will be changed every July based on May-to-May changes in the CPI-U.
Social security annual cost of living increases don't work like this. They aren't pegged to CPI-U, and they increase every January not on the retirement anniversary date.

https://www.ssa.gov/OACT/COLA/latestCOLA.html
https://www.bls.gov/newsroom/faqs.htm#QuesT12
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jun 30, 2019 6:47 pm

luminous wrote:
Sun Jun 30, 2019 6:38 pm
longinvest wrote:
Sun Jun 30, 2019 5:49 pm
moneyman11 wrote:
Sun Jun 30, 2019 5:00 pm
this “silos” thing seems rather overwrought.
What is gained over just making an annual withdrawal and putting it all in one savings account? Perhaps I’m missing or misunderstanding something.
There was a link to a post that answers this question in details, in the initial post:
longinvest wrote:
Sun Jun 30, 2019 10:37 am
(See this post for a detailed explanation of monthly silos and their initial funding).
In a few words, silos significantly dampen short-term income fluctuations and increase short-term income predictability.
I'm with moneyman11, the dampening is nice but the mechanics are just too complex. I could never see myself actually doing it in real life.
Nobody's forcing anyone to make monthly withdrawals and use silos. The VPW Worksheet is configured, by default, for annual withdrawals.

For a forum forward test, it's definitely more interesting to select monthly withdrawals and silos.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jun 30, 2019 6:54 pm

luminous wrote:
Sun Jun 30, 2019 6:41 pm
longinvest wrote:
Sun Jun 30, 2019 10:37 am
[*] Eventually, starting at age 70 in July 2024, a $2,000 monthly payment from Social Security. This amount will be changed every July based on May-to-May changes in the CPI-U.
Social security annual cost of living increases don't work like this. They aren't pegged to CPI-U, and they increase every January not on the retirement anniversary date.

https://www.ssa.gov/OACT/COLA/latestCOLA.html
https://www.bls.gov/newsroom/faqs.htm#QuesT12
Thanks for the information. I've updated the initial post as follows:
longinvest wrote:
Sun Jun 30, 2019 10:37 am
Monthly total retirement income will consist of:
  1. Monthly $1,000 payment from work pension.
  2. The accumulated amount in the month-specific silo.
  3. 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 the Social Security cost of living adjustment rules.
I'll need the help of knowledgeable forum members for this. :)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Luckywon » Sun Jun 30, 2019 7:30 pm

Thanks longinvest for setting up this interesting simulation. What's the best way to follow this? Will you update with a new post every month to show the new silo values? Or update the original post?

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 01, 2019 8:30 am

Luckywon wrote:
Sun Jun 30, 2019 7:30 pm
Thanks longinvest for setting up this interesting simulation. What's the best way to follow this? Will you update with a new post every month to show the new silo values? Or update the original post?
I'll make new posts on this thread, usually after then end of the month (after the publication of VSMGX's returns).
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 01, 2019 8:34 am

What would be an appropriate high-interest savings account rate for July 2019? I suggested Ally's 2.10% rate in the first post as an initial approximation.

I'm looking for an online high-interest savings account that offers normal (non-promotional) good interest rates and that doesn't impose fees for carrying normal operations such as opening or closing the account, deposits, withdrawals, and monthly (electronic) statements.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 01, 2019 8:59 am

About handling major irregular expenditures, like a new roof or a new car, I suggest to do it normally like during accumulation years.

I'm still working. When I need a new car, my employer doesn't give me a car-buying bonus, unfortunately. That would be nice, wouldn't it? So, what should I do? I can either save money for it in advance out of monthly income, or I can use a low-interest car loan. Many new cars are sold with low-interest financing. For major home repairs (roof) or improvements (kitchen remodel), the same applies. Either save for it, or use a low-interest mortgage or home equity line of credit (HELOC) to pay for it out of monthly income. Of course, Bogleheads use debt with moderation (or avoid it)*.

* I'm in the later category. Both my wife and I are debt averse.

"When there are multiple solutions to a problem, choose the simplest one." -- Jack Bogle
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by retiringwhen » Mon Jul 01, 2019 9:09 am

longinvest wrote:
Mon Jul 01, 2019 8:34 am
What would be an appropriate high-interest savings account rate for July 2019? I suggested Ally's 2.10% rate in the first post as an initial approximation.

I'm looking for an online high-interest savings account that offers normal (non-promotional) good interest rates and that doesn't impose fees for carrying normal operations such as opening or closing the account, deposits, withdrawals, and monthly (electronic) statements.
Vanguard Federal Money Market VMFXX..... as the settlement account for the brokerage holding the LS fund would more than sufficient for this effort.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 01, 2019 9:15 am

retiringwhen wrote:
Mon Jul 01, 2019 9:09 am
longinvest wrote:
Mon Jul 01, 2019 8:34 am
What would be an appropriate high-interest savings account rate for July 2019? I suggested Ally's 2.10% rate in the first post as an initial approximation.

I'm looking for an online high-interest savings account that offers normal (non-promotional) good interest rates and that doesn't impose fees for carrying normal operations such as opening or closing the account, deposits, withdrawals, and monthly (electronic) statements.
Vanguard Federal Money Market VMFXX..... as the settlement account for the brokerage holding the LS fund would more than sufficient for this effort.
A money market fund has fluctuating interest payments. I really prefer a savings account with a known-in-advance interest rate.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by azanon » Mon Jul 01, 2019 9:16 am

I think combining VPW with a stock dominated portfolio (defined at > 50% equities) is not the best way to "sell" VPW. Portfolios around the 60% equity range are more appropriate for a constant percentage-type strategies designed to maintain the inflation-adjusted principle. And on top of that, it's usually far better to smooth those withdrawals at that high of an equity percentage.

A great example of this is Vanguard's own Managed Payout Fund, which selected 55% equities at adequate for maintaining the inflation-adjusted principle, and uses a 3-yr smoothed constant percentage. It's a great example, because it launched near the 07-09 crisis, so retirees got to see first hand how devastated a portfolio like that can get and definitely caused a rear scare for many who used it. Technically, the original plan failed and they had to pair down the withdrawals from 5% to 4%.

Just my opinion, but portfolios designed to spend into the principle and eventually exhaust the principle are better combined with lower equity portfolios - probably somewhere in the 20-40% range. And if VPW withdrawal rates at the 20-40% equity range aren't going to be enough $ for you, then my recommendation is don't retire yet if you still have a choice. It's one thing to say "I'm ok with that" (losing 300K of a million dollar portfolio) at arms-length, but try watching that actually happen in real life when you don't have a job anymore and you can't get it back - good luck with that. The well planned, but still modestly conservative retirement strategy is far superior to the hypothetical one that a computer would pick that, in theory, can shoot the moon on retirement income.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 01, 2019 11:01 pm

I'm thinking that I could develop an easy-to-use monthly silos spreadsheet that automatically calculates individual silo balances and distributes interest across them, so that the money is actually kept into a single high-interest savings account.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by D-Dog » Tue Jul 02, 2019 3:06 pm

longinvest wrote:
Mon Jul 01, 2019 11:01 pm
I'm thinking that I could develop an easy-to-use monthly silos spreadsheet that automatically calculates individual silo balances and distributes interest across them, so that the money is actually kept into a single high-interest savings account.
It seems like there is a simpler way to accomplish what you are trying to accomplish with the silos. Why not just prefund the bank account with N (you choose N) months of withdrawals at the beginning. Then each month add the normal VPW monthly withdrawal to the bank account and divide the resulting balance by (N+1). That is then your monthly income. Do the same thing every month. The larger you choose N the more the VPW withdrawals are smoothed. It’s not exactly the same as the silos but seems a lot easier.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Tue Jul 02, 2019 3:47 pm

D-Dog wrote:
Tue Jul 02, 2019 3:06 pm
longinvest wrote:
Mon Jul 01, 2019 11:01 pm
I'm thinking that I could develop an easy-to-use monthly silos spreadsheet that automatically calculates individual silo balances and distributes interest across them, so that the money is actually kept into a single high-interest savings account.
It seems like there is a simpler way to accomplish what you are trying to accomplish with the silos. Why not just prefund the bank account with N (you choose N) months of withdrawals at the beginning. Then each month add the normal VPW monthly withdrawal to the bank account and divide the resulting balance by (N+1). That is then your monthly income. Do the same thing every month. The larger you choose N the more the VPW withdrawals are smoothed. It’s not exactly the same as the silos but seems a lot easier.
This might be simpler, but it doesn't achieve my objectives:
  1. This would cause monthly income payments to be a weighted average of all VPW withdrawals since the start of retirement, with a higher weighting to recent withdrawals and a lower weighting to older withdrawals (with some interest thrown into it).
  2. This would inadequately divide interest across monthly income payments.
Silos isolate each upcoming monthly income payment and the interest it accrues from other upcoming payments. A silo insures that a monthly income payment exactly represents the average of the last 12 monthly VPW withdrawals plus interest; it maintains no memory of older VPW withdrawals.

The monthly silos spreadsheet should hide the complexity of calculations, similarly to how the VPW Retirement Worksheet hides the complexity of combining VPW withdrawals with fixed and delayed pensions. It will be easy to use and suggest a single money transfer per month; either a withdrawal from the savings account or a deposit into the savings account to appropriately transform the last monthly VPW withdrawal into monthly income.

You're getting me to think that I should build a combined spreadsheet. I'll have to think about how to keep its interface simple. But, this would allow for slightly improved monthly withdrawal calculations over the current VPW Retirement Worksheet*. Thanks.

* I had to make some simplifying assumptions, as the "month of the year" isn't available in the VPW Retirement Worksheet to properly calibrate a monthly withdrawal based on it. The new spreadsheet, being monthly based, would have access to this information.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 03, 2019 4:35 pm

azanon wrote:
Mon Jul 01, 2019 9:16 am
I think combining VPW with a stock dominated portfolio (defined at > 50% equities) is not the best way to "sell" VPW. Portfolios around the 60% equity range are more appropriate for a constant percentage-type strategies designed to maintain the inflation-adjusted principle. And on top of that, it's usually far better to smooth those withdrawals at that high of an equity percentage.

A great example of this is Vanguard's own Managed Payout Fund, which selected 55% equities at adequate for maintaining the inflation-adjusted principle, and uses a 3-yr smoothed constant percentage. It's a great example, because it launched near the 07-09 crisis, so retirees got to see first hand how devastated a portfolio like that can get and definitely caused a rear scare for many who used it. Technically, the original plan failed and they had to pair down the withdrawals from 5% to 4%.

Just my opinion, but portfolios designed to spend into the principle and eventually exhaust the principle are better combined with lower equity portfolios - probably somewhere in the 20-40% range. And if VPW withdrawal rates at the 20-40% equity range aren't going to be enough $ for you, then my recommendation is don't retire yet if you still have a choice. It's one thing to say "I'm ok with that" (losing 300K of a million dollar portfolio) at arms-length, but try watching that actually happen in real life when you don't have a job anymore and you can't get it back - good luck with that. The well planned, but still modestly conservative retirement strategy is far superior to the hypothetical one that a computer would pick that, in theory, can shoot the moon on retirement income.
Azanon, the hypothetical retiree of this thread has a $12,000/year fixed pension that, even after 35 years of retirement at age 100, is likely to have retained 50% of its purchase power ($6,000/year in real terms) in a 2% inflation environment, which is the Federal Reserve target. The retiree will also start receiving $24,000/year (inflation adjusted) from Social Security in 5 years (July 2024). The retiree's 2019 projected income is approximately $76,000 (annualized).

In other words, approximately 40% to 45% of the retiree's income is likely to come from pensions in 5 years (it could be more if markets plummet, or less if they soar).

In this context, the 60/40 stocks/bonds allocation doesn't seem out of line to me. The mathematical test of an immediate 50% stock loss results into a 20% drop in income. This tells us that the retiree's financial position is somewhat similar to holding a 40/60 stocks/bonds retirement portfolio without any pension, in terms of income fluctuations.

The retiree is fully aware that, within the spending budget, at least $1,250/month must be reserved for totally optional expenses that could easily be cut at any point. That's part of the "Required Flexibility" of the VPW plan, along with being comfortable seeing the portfolio lose $300,000 and melt to $700,000 within a short time:

Image

Volatility isn't the only risk, in investing. There are many other risks. Concentration into a single asset class has its own risks, too. The hypothetical retiree has chosen a broadly-diversified balanced portfolio that is invested into over 24,000 securities and isn't concentrated into either of the two main investment asset classes, stocks and bonds. It does contain a little more stocks than bonds but, as discussed above, the retiree has an ample amount of stable income upcoming shortly from pensions.
Last edited by longinvest on Wed Jul 03, 2019 10:48 pm, edited 1 time in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by azanon » Wed Jul 03, 2019 6:31 pm

longinvest wrote:
Wed Jul 03, 2019 4:35 pm
azanon wrote:
Mon Jul 01, 2019 9:16 am
I think combining VPW with a stock dominated portfolio (defined at > 50% equities) is not the best way to "sell" VPW. Portfolios around the 60% equity range are more appropriate for a constant percentage-type strategies designed to maintain the inflation-adjusted principle. And on top of that, it's usually far better to smooth those withdrawals at that high of an equity percentage.
Azanon, the hypothetical retiree of this thread has has a $12,000/year fixed pension that, even after 35 years of retirement at age 100, is likely to have retained 50% of its purchase power ($6,000/year in real terms) in a 2% inflation environment, which is the Federal Reserve's target. The retiree will also start receiving $24,000/year from Social Security in 5 years (July 2024). The retiree's 2019 projected income is approximately $76,000 (annualized).

In other words, approximately 40% to 45% of the retiree's income is likely to come from pensions in 5 years (it could be more if markets plummet, or less if they soar).

In this context, the 60/40 stocks/bonds allocation doesn't seem out of line, to me. The mathematical test of an immediate 50% stock loss results into a 20% drop in income. This tells us that the retiree's financial position is somewhat similar to holding a 40/60 stocks/bonds retirement portfolio without any pension, in terms of income fluctuations.

The retiree is fully aware that, within the spending budget, at least $1,250/month must be reserved for totally optional expenses that could easily be cut at any point. That's part of the "Required Flexibility" of the VPW plan, along with being comfortable seeing the portfolio lose $300,000 and melt to $700,000 within a short time:

Image

Volatility isn't the only risk, in investing. There are many other risks. Concentration into a single asset class has its own risks, too. The hypothetical retiree has chosen a broadly-diversified balanced portfolio that is invested into over 24,000 securities and isn't concentrated into either of the two main investment asset classes, stocks and bonds. It does contain a little more stocks than bonds but, as discussed above, the retiree has an ample amount of stable income upcoming shortly from pensions.
I'm not retired yet, but I've been in the workplace for 20 years with my wife, and we live on an "income" after savings, taxes, etc. Since all savings etc is taken care of, we don't shy away from spending that remaining "income", so we have expenses spread out over a variety of things. I then try to imagine a 20% hit, and that's pretty tough. Not impossible, but it's going to be a bit of a shock as something we enjoy is definitely going to have to get cut.

Then I try to think of my friends, etc, or real life cases, and I can think of examples where they took that level of cut, and it was a pretty hard situation.

I guess what I'm getting at, is that it might be easier just adjusting to a little bit lower lifestyle to begin with where a lower equity portfolio would reduce the VPW withdrawal rate, but then because of a conservative portfolio along with SS/Pension, the chance of a major shock is going to be pretty low. The portfolio I suggested probably cuts that same estimate stock market hit to around ~ -10%. That's going to feel a lot better.

It's just something to think about, and an individual choice, I guess. I just strongly suspect the - work a little bit longer to get to where a 30-40% equity portfolio will cut it - might be the wiser move. I haven't put pen to paper, but that might just be an extra year or 2 (60% vs. 30%)

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by FiveK » Wed Jul 03, 2019 6:32 pm

longinvest wrote:
Sun Jun 30, 2019 10:37 am
The retiree ... is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars).
FWIW, the series of SS earnings by year shown below yields a monthly benefit of $2,000 in 2019 dollars when starting at age 70 in 2024, assuming no COLA or wage base increases in years to come. That assumption is likely incorrect, but it's a start.

1979 $7,061
1980 $7,986
1981 $9,158
1982 $9,991
1983 $11,008
1984 $11,656
1985 $12,211
1986 $12,951
1987 $13,506
1988 $13,876
1989 $14,801
1990 $15,818
1991 $16,466
1992 $17,113
1993 $17,761
1994 $18,686
1995 $18,871
1996 $19,334
1997 $20,166
1998 $21,091
1999 $22,386
2000 $23,496
2001 $24,791
2002 $26,179
2003 $26,826
2004 $27,104
2005 $27,752
2006 $29,047
2007 $30,064
2008 $31,452
2009 $32,932
2010 $32,932
2011 $32,932
2012 $33,949
2013 $35,059
2014 $36,077
2015 $36,539
2016 $36,539
2017 $39,222
2018 $39,592

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 03, 2019 9:49 pm

FiveK wrote:
Wed Jul 03, 2019 6:32 pm
longinvest wrote:
Sun Jun 30, 2019 10:37 am
The retiree ... is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars).
FWIW, the series of SS earnings by year shown below yields a monthly benefit of $2,000 in 2019 dollars when starting at age 70 in 2024, assuming no COLA or wage base increases in years to come. That assumption is likely incorrect, but it's a start.
That's a cool exercise!

OK, let's assume that the hypothetical retiree started working at age 25, in July 1979. During the first 6 months only $200 was saved and invested into the portfolio at year end. Realizing that this wasn't going to be sufficient, 15% of salary was saved in 1980 and invested at year end. Every year after, savings were increased by one third of salary increase and invested at year end. So, for example, in 1981, salary increased by ($9,094-$7,931) = $1,163. As a consequence, savings were increased by ($1,163 / 3) = $387 from $1,190 in 1980 to $1,577 in 1981.

In inflation-adjusted dollars, the salary grew from approximately $25,000/year at age 25 to $40,000 at age 65.

Using annual returns collected in the VPW backtesting spreadsheet for a (42% US Stocks, 18% International Stocks, and 40% bonds) portfolio* from 1980 to 2011, and Vanguard LifeStrategy Moderate Growth Fund (VSMGX) annual returns from 2012 to 2018, and half year return in 2019, I get:

* This was VSMGX's allocation in 2012, after having switched to all index funds in late 2011.

This is all in nominal dollars.

Code: Select all

                                  Savings       Year-End               
 Year      Salary     Returns     Amount        Portfolio (June 30 in 2019)    
 1979          $3,506                   $200             $200
 1980          $7,931  18.91%         $1,190           $1,427
 1981          $9,094   0.12%         $1,577           $3,007
 1982          $9,921  21.45%         $1,853           $5,505
 1983         $10,931  16.69%         $2,190           $8,613
 1984         $11,574   8.32%         $2,404          $11,734
 1985         $12,126  31.30%         $2,588          $17,995
 1986         $12,860  24.47%         $2,833          $25,232
 1987         $13,412   5.42%         $3,017          $29,617
 1988         $13,779  15.35%         $3,139          $37,301
 1989         $14,698  19.58%         $3,445          $48,048
 1990         $15,708  -3.27%         $3,782          $50,259
 1991         $16,351  22.98%         $3,996          $65,803
 1992         $16,994   4.84%         $4,211          $73,200
 1993         $17,637  14.48%         $4,425          $88,224
 1994         $18,556  -0.05%         $4,731          $92,913
 1995         $18,739  23.98%         $4,793         $119,985
 1996         $19,199  11.33%         $4,946         $138,524
 1997         $20,026  16.66%         $5,221         $166,817
 1998         $20,944  16.01%         $5,527         $199,056
 1999         $22,230  15.08%         $5,956         $235,036
 2000         $23,333  -2.69%         $6,324         $235,026
 2001         $24,619  -4.86%         $6,752         $230,352
 2002         $25,996  -8.22%         $7,212         $218,639
 2003         $26,639  22.02%         $7,426         $274,208
 2004         $26,915  10.70%         $7,518         $311,071
 2005         $27,558   6.27%         $7,732         $338,316
 2006         $28,844  13.02%         $8,161         $390,515
 2007         $29,855   7.87%         $8,498         $429,739
 2008         $31,232 -21.47%         $8,957         $346,419
 2009         $32,702  21.04%         $9,447         $428,744
 2010         $32,702  11.75%         $9,447         $488,567
 2011         $32,702   0.81%         $9,447         $501,950
 2012         $33,713  11.76%         $9,784         $570,763
 2013         $34,815  15.04%        $10,151         $666,757
 2014         $35,826   7.07%        $10,488         $724,385
 2015         $36,285  -0.57%        $10,641         $730,897
 2016         $36,285   7.13%        $10,641         $793,650
 2017         $38,949  15.04%        $11,529         $924,544
 2018         $39,316  -4.91%        $11,651         $890,801
 2019         $20,347  12.26%             $0       $1,000,013
 
We'll assume that the small $1,000/year work pension didn't require employee contributions.

The retiree will feel quite wealthy with a $76,000 annual retirement income.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by FiveK » Wed Jul 03, 2019 10:20 pm

longinvest wrote:
Wed Jul 03, 2019 9:49 pm
FiveK wrote:
Wed Jul 03, 2019 6:32 pm
longinvest wrote:
Sun Jun 30, 2019 10:37 am
The retiree ... is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars).
FWIW, the series of SS earnings by year shown below yields a monthly benefit of $2,000 in 2019 dollars when starting at age 70 in 2024, assuming no COLA or wage base increases in years to come. That assumption is likely incorrect, but it's a start.
That's a cool exercise!
Used the SocialSecurity tab in the personal finance toolbox spreadsheet. Asked Excel's Data>What-If Analysis>Goal Seek to set cell I117 to value 2000 by changing cell G104. And so it did. Took longer to copy & paste into the post. ;)
OK, let's assume that the hypothetical retiree <snip>.
We'll assume that the small $1,000/year work pension didn't require employee contributions.
All very reasonable.
The retiree will feel quite wealthy with a $76,000 annual retirement income.
Indeed! Shoulda/coulda retired earlier....

But it's a very plausible scenario.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by AlohaJoe » Thu Jul 04, 2019 3:52 am

D-Dog wrote:
Tue Jul 02, 2019 3:06 pm
longinvest wrote:
Mon Jul 01, 2019 11:01 pm
I'm thinking that I could develop an easy-to-use monthly silos spreadsheet that automatically calculates individual silo balances and distributes interest across them, so that the money is actually kept into a single high-interest savings account.
It seems like there is a simpler way to accomplish what you are trying to accomplish with the silos. Why not just prefund the bank account with N (you choose N) months of withdrawals at the beginning. Then each month add the normal VPW monthly withdrawal to the bank account and divide the resulting balance by (N+1). That is then your monthly income. Do the same thing every month. The larger you choose N the more the VPW withdrawals are smoothed. It’s not exactly the same as the silos but seems a lot easier.
Here's a chart showing the difference in the two approaches over a randomly chosen 4-year period in the 1950s.

Image

I'll leave it to the reader to guess which line is which approach.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by 3-20Characters » Thu Jul 04, 2019 6:35 am

longinvest, thanks for doing this. I will follow with interest.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by looking » Thu Jul 04, 2019 7:21 am

at age 80 you can withdrawal ( stock %60 , bond %49 ) of $1,000,000.00 x7% = $70k

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 04, 2019 8:19 am

AlohaJoe wrote:
Thu Jul 04, 2019 3:52 am
D-Dog wrote:
Tue Jul 02, 2019 3:06 pm
longinvest wrote:
Mon Jul 01, 2019 11:01 pm
I'm thinking that I could develop an easy-to-use monthly silos spreadsheet that automatically calculates individual silo balances and distributes interest across them, so that the money is actually kept into a single high-interest savings account.
It seems like there is a simpler way to accomplish what you are trying to accomplish with the silos. Why not just prefund the bank account with N (you choose N) months of withdrawals at the beginning. Then each month add the normal VPW monthly withdrawal to the bank account and divide the resulting balance by (N+1). That is then your monthly income. Do the same thing every month. The larger you choose N the more the VPW withdrawals are smoothed. It’s not exactly the same as the silos but seems a lot easier.
Here's a chart showing the difference in the two approaches over a randomly chosen 4-year period in the 1950s.

Image

I'll leave it to the reader to guess which line is which approach.
AlohaJoe,

It's mathematically obvious that silos and a simple ratio will have relatively similar results. But, silos don't overweight the most recent withdrawal relative to previous withdrawals; silos only attribute 1/12th of the last withdrawal to income.

When I backest silos versus a simple 1/6.5 ratio on a 60/40 stocks/bonds portfolio with a 60/40 weighting of US/International stocks (using Portfolio Visualizer CASHX returns for cash) over the drawdown period from November 2007 to March 2009, I get:

Image

Note that I've started the left axis at $2,750 instead of $0. What we see is that silos were less reactive, in the short term, to the drawdown. The difference isn't huge; it's 50$ in March 2009, at the bottom of the drawdown.

Here's a similar comparison for the drawdown period of February 2018 to January 2019:

Image

But, to be fair, when I look at the overall November 2007 to January 2019 period, properly starting the left axis at $0, I get:

Image
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 04, 2019 8:19 am

I have to admit that the 1/6.5 ratio is simpler than silos and good enough.

OK, unless there's a big objection, I pronounce monthly silos dead.

To remove awkward ratios, I would simplify the monthly process further to:
  1. An initial withdrawal equal to half an annual VPW withdrawal is taken from the portfolio.
  2. A 1/6 ratio of the initial withdrawal is taken as income (for taxes and expenses).
  3. The remaining money from the initial withdrawal is put into a savings account.
  4. Each subsequent month:
    1. A withdrawal equal to 1/12 an annual VPW withdrawal is taken from the portfolio.
    2. An amount equal to 1/6 of the sum of the withdrawal and savings account is taken as income (for taxes and expenses):
      1. If income is greater than the withdrawal, missing money is withdrawn from the savings account.
      2. If income is smaller than the withdrawal, excess withdrawal money is deposited into the savings account.
This simpler process makes it possible to do monthly VPW withdrawals, with dampening savings account, using a simple sheet of paper, a calculator, and the VPW Table.

For example, if the retiree's age is 67, the 60/40 stocks/bonds portfolio balance is $943,738, and the savings account balance is $20,722, I get:
  1. The percentage in the VPW Table is multiplied by the portfolio balance and divided by 12. The current month portfolio withdrawal is ((5.1% X $943,738) / 12) = $4,011.
  2. Monthly income, for taxes and expenses, is equal to (($4,011 + $20,722) / 6) = $4,122. As a consequence:
    • The missing ($4,122 - $4,011) = $111 is withdrawn from the savings account.
What do you think?
Last edited by longinvest on Thu Jul 04, 2019 11:59 am, edited 2 times in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 04, 2019 11:37 am

For historical record of this forward test, I'm copying here the original first post as written on June 30, 2019 (with minor modifications made until July 3, 2019).

Today, July 4, 2019, I'll modify the first post to remove monthly silos and replace them with a much simpler dampening savings account.
longinvest wrote:
Sun Jun 30, 2019 10:37 am
Retirement funding can be simple. It's sufficient to combine income from Social Security (possibly delayed to age 70) and a pension (if any) with portfolio withdrawals from a balanced Bogleheads portfolio using a sensible approach.

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).

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
That's broad global diversification across a total of 24,136 securities with automatic rebalancing for a small 0.13% expense ratio (including the expense ratios of underlying funds).

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 will be divided into 12 equal parts to be deposited into 12 savings accounts named "January", "February", ..., and "December". These savings accounts will be called monthly silos.

Monthly silos 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:
  1. Monthly $1,000 payment from work pension.
  2. The accumulated amount in the month-specific silo.
  3. 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 the Social Security cost of living adjustment rules.
In preparation for retirement, a withdrawal is hypothetically taken today from the $1,000,000 portfolio to partially pre-fill silos. This initial withdrawal is exceptionally equal to 6.5 times the normal monthly VPW withdrawal. (See this post for a detailed explanation of monthly silos and their initial funding).

OK. Let's start.

We enter the retiree's information into the Retirement sheet of the VPW Accumulation And Retirement Worksheet and we get:

Image

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.

To pre-fill the 12 monthly silos, the retiree exceptionally withdraws 6.5 times the suggested amount. That's (6.5 X $5,356) = $34,814. This leaves ($1,000,000 - $34,814) = $965,186 invested into the Vanguard LifeStrategy Moderate Growth Fund at the end of June 2019.

The 12 monthly silos are pre-filled as follows:
  • July silo: (12 / 78) X $34,814 = $5,356.00
  • August silo: (11 / 78) X $34,814 = $4,909.67
  • September silo: (10 / 78) X $34,814 = $4,463.33
  • October silo: (9 / 78) X $34,814 = $4,017.00
  • November silo: (8 / 78) X $34,814 = $3,570.67
  • December silo: (7 / 78) X $34,814 = $3,124.33
  • January silo: (6 / 78) X $34,814 = $2,678.00
  • February silo: (5 / 78) X $34,814 = $2,231.67
  • March silo: (4 / 78) X $34,814 = $1,785.33
  • April silo: (3 / 78) X $34,814 = $1,339.00
  • May silo: (2 / 78) X $34,814 = $892.67
  • June silo: (1 / 78) X $34,814 = $446.33
Note that (12 + 11 + ... + 1) = 78 (which is equal to 6.5 X 12).

Added: Money is fungible. The retiree can use a single savings account, instead, and track the balances of 12 virtual monthly silos using a spreadsheet.

In early July 2019, the retiree will receive $1,000 from work pension and will withdraw the $5,356.00 from the July silo for a total retirement income of ($1,000.00 + $5,356.00) = $6,356.00 available to pay taxes and expenses.

Chart

Here's a chart of total retirement income (blue bars, left axis) and portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

July total income will be $6,356.00. Tomorrow morning, on July 1, 2019, portfolio balance will be $965,186.

Image

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: $6,356 (annualized $76,272) -- 1 month, starting retirement in July
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by siamond » Thu Jul 04, 2019 12:55 pm

I don't have anything against the proposed method (the simpler form does seem more sensible), but let me share some real life experience. I early retired mid-2014, so I've been in retirement mode for a while now. I compute my annual spending budget with a mix of Present Value (of existing and future cash flows, i.e. my wife's wages, future SS, future pensions, future house downsizing estimate, etc) and PMT logic fairly similar to the calculator longinvest posted, except for a more dynamic computation of the rate-of-return parameter. Dividing the annual budget by 12, I get a monthly number, but I view it as an average to aim at, not a monthly target per se.

Reality is our monthly spending patterns are quite irregular. I pay home/auto insurance in full on an annual basis (to get a discount). We have hefty property taxes to deal with. Vacation trips are of course highly irregular. Quarterly (kinda) estimated taxes are low in our case (love those LT capital gains!), but for other people, this could be another source of significant monthly irregularity. Etc.

Another reality is that we also have irregular income. My wife still works, hence wages, but as an educator, she doesn't get anything during the summer, and some weird stuff occurs in June and December. We have a sizable taxable account, hence dividends, which are highly irregular. I also got a few small lumps coming my way (small consulting gigs).

I tried to plan for quarterly withdrawals for a while, but this just didn't match real life... Note that the average monthly number is a spending budget, NOT a withdrawal target (cf. other sources of income, plus dividends).

Then I realized that I could simplify a good deal. I already track our monthly expenses in a rigorous manner (Mint + some spreadsheet massaging). All I have to do, really, is to make sure the cumulative monthly actual spending is reasonably on track to match the average spending budget. If we go astray (e.g. big vacation trip early in the year), we know we need to tighten the belt a bit more for the rest of the year.

What about income and withdrawals? Very simple and adaptive! Any income coming our way (e.g. wages, lump sums, dividends, SS/pension in the future) goes to either checking or savings account. Whenever the savings account gets low-ish, I sell shares for an arbitrary $25k (hence a withdrawal), which replenishes the savings account for a few months to come.

In other words, I totally departed from trying to mimic our working days where the primary income was based on regular wages. I switched to an annual spending budget and careful monthly expense tracking. Replenishing the savings account when needs be. This works beautifully, very simple and accommodates all irregularities in income & spending.

The only complication is the occasional very high expense (e.g. we upgraded our heating system, we had a once-a-lifetime trip to the Galapagos, I bought a new car, etc). For the new car, loan rates were so low, I took a monthly loan. For the other big events, I just made a 'virtual' loan to myself (yup, charging interest and all :greedy) to amortize, and I adjusted my spending tracking spreadsheet accordingly.

Bottomline: I have no need for a monthly withdrawal calculator. Annual spending budgeting and monthly tracking do the bulk of the job for me.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by stan1 » Thu Jul 04, 2019 1:14 pm

About the pension (which many people will not have):
I just ran a quote from Blueprint for a 65 year old male (born 07/01/2019) with no survivor. A $1,000 non-inflation adjusted SPIA would be $206K from the lowest priced vendor (Integrity Life).

So maybe this hypothetical person annuitized 20% of assets before embarking on this journey.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 04, 2019 2:58 pm

stan1 wrote:
Thu Jul 04, 2019 1:14 pm
About the pension (which many people will not have):
I just ran a quote from Blueprint for a 65 year old male (born 07/01/2019) with no survivor. A $1,000 non-inflation adjusted SPIA would be $206K from the lowest priced vendor (Integrity Life).
1) That's 10% more expensive than the quote I get on immediateannuities.com.
2) I see no reason to buy a nominal SPIA*. Inflation-indexed SPIAs exist. See this discussion about nominal annuities.
3) It's best to wait until age 80 and buy an inflation-indexed SPIA, when necessary to dampen the financial risk of life beyond age 100.
* Single-Premium Immediate Annuity.
Last edited by longinvest on Thu Jul 04, 2019 3:10 pm, edited 3 times in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Big Dog » Thu Jul 04, 2019 3:04 pm

I'm confused...how does one download the excel spreadsheet? From dropbox, I only receive a *.ods file, which when double-clicked turns into a *cpgz file. (Is that zipped? If so, which sw will open it?)

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 04, 2019 3:15 pm

Big Dog wrote:
Thu Jul 04, 2019 3:04 pm
I'm confused...how does one download the excel spreadsheet? From dropbox, I only receive a *.ods file, which when double-clicked turns into a *cpgz file. (Is that zipped? If so, which sw will open it?)
The .ods extension refers to the LibreOffice Calc version (a free open-source software), not to the Microsoft Office Excel version.

For the Microsoft Office Excel spreadsheet (.xlsx extension), the link is in this section of the VPW wiki page: Download (Microsoft Office Excel).
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 04, 2019 3:32 pm

FiveK wrote:
Wed Jul 03, 2019 10:20 pm
longinvest wrote:
Wed Jul 03, 2019 9:49 pm
FiveK wrote:
Wed Jul 03, 2019 6:32 pm
longinvest wrote:
Sun Jun 30, 2019 10:37 am
The retiree ... is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars).
FWIW, the series of SS earnings by year shown below yields a monthly benefit of $2,000 in 2019 dollars when starting at age 70 in 2024, assuming no COLA or wage base increases in years to come. That assumption is likely incorrect, but it's a start.
That's a cool exercise!
Used the SocialSecurity tab in the personal finance toolbox spreadsheet. Asked Excel's Data>What-If Analysis>Goal Seek to set cell I117 to value 2000 by changing cell G104. And so it did. Took longer to copy & paste into the post. ;)
That's an awesome toolbox! Thanks for the link. I've added a reference to it on the Bogleheads wiki VPW page.
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snackdog
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by snackdog » Fri Jul 05, 2019 6:09 am

I agree with the comments that spending should be tracked monthly but withdrawals should be as needed or annual and should be set up to match a monthly average. Our monthly spending is all over the place. The variance is as high as double the average (prop taxes) and low as about half the average (limited discretionary spending, no taxes, broken furnaces, etc).

And while it is nice to see it going forward, it is going to take us several decades to get a result. I am perfectly happy with back-testing since there are many more possible scenarios and I have no reason to believe the next 30 will be statistically different.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by 3-20Characters » Fri Jul 05, 2019 6:35 am

snackdog wrote:
Fri Jul 05, 2019 6:09 am
I agree with the comments that spending should be tracked monthly but withdrawals should be as needed or annual and should be set up to match a monthly average. Our monthly spending is all over the place. The variance is as high as double the average (prop taxes) and low as about half the average (limited discretionary spending, no taxes, broken furnaces, etc).
+1
I withdraw as needed and track expenses. We usually have about a year’s worth of cash in bank and mm funds but it’s not special in the sense that that amount of cash is part of our overall aa and we would hold it regardless of spending. I have no qualms about selling equities or bonds to fund expenses if needed. I record total expenses at the end of each year on my master portfolio spreadsheet and calculate what % of portfolio we withdrew (based on the portfolio balance at start of year).

Nevertheless, I applaud longinvest for taking on this project and documenting it here.

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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Fri Jul 05, 2019 6:47 am

snackdog wrote:
Fri Jul 05, 2019 6:09 am
I agree with the comments that spending should be tracked monthly but withdrawals should be as needed or annual and should be set up to match a monthly average. Our monthly spending is all over the place. The variance is as high as double the average (prop taxes) and low as about half the average (limited discretionary spending, no taxes, broken furnaces, etc).
Snackdog, my employer doesn't increase my pay during months or years when I have extra expenses, and doesn't reduce my pay during months or years when I have fewer expenses. I simply use basic budgeting techniques to deal with the mismatch.

I consider retirement income similarly to employment income. This thread is about how to create monthly retirement income. It isn't about budgeting techniques to dampen the mismatch between income and expenses.

Also, my wife and I have no intention to die with a huge pile of unspent money. When we'll retire, we intend to follow VPW relatively closely, like we do with our budget, but we'll maintain some flexibility about it, like we do with our budget.
snackdog wrote:
Fri Jul 05, 2019 6:09 am
And while it is nice to see it going forward, it is going to take us several decades to get a result. I am perfectly happy with back-testing since there are many more possible scenarios and I have no reason to believe the next 30 will be statistically different.
Our wiki already provides a VPW Backtesting spreadsheet which contains almost 150 years of US return data (from 1871 to 2018) and almost 50 years of Canadian return data (from 1970 to 2018). Enjoy!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 06, 2019 9:29 am

I'd like to ask forum members for help choosing the proper amount on which to determine the next monthly withdrawal.

More precisely, I'd like to get their vote on which amount we should put into the VPW Worksheet as "Portfolio Balance":

Image

We have two choices:
  1. use the investment portfolio balance (LifeStrategy Fund balance) on July 31, 2019, or
  2. use the total portfolio balance (LifeStrategy Fund balance + Ally savings account balance) on July 31, 2019.
To help with this decision, here's some information.

Basically, the monthly withdrawal amount suggested by the VPW Worksheet is equal to the "Portfolio Balance" multiplied by the VPW Table percentage and divided by 12. In presence of pensions, the formula is a little more complicated, but this isn't relevant in the context of this post.

Interestingly, VPW Table percentages already account for a cash drag, as they model a single withdrawal taken at the start of the year which is then used to fund 12 months of taxes and expenses. In other words, the VPW Table is calibrated for keeping, on average, half an annual withdrawal in cash all year long.

If we choose to go with option A (using the investment portfolio balance excluding the savings account), withdrawals will initially suffer a 2.5% penalty. This is because the (annual) VPW percentage at age 65 for a 60/40 stocks/bonds portfolio is 5.0% and we've already withdrawn, at the end of June, half of an annual withdrawal (2.5%) as income for July and to prefill the dampening savings account.

Here's a monthly income comparison of the underlying withdrawal models of annual VPW withdrawals (blue) and monthly withdrawals (red) with a dampening savings account, using the investment portfolio balance excluding the savings account as basis for monthly withdrawals:

Image
The decline, starting at age 88, is due to capping the VPW percentage at 10%.

We can see the impact of the 2.5% penalty starting in the second month of income. As VPW is self correcting, the penalty is slowly eliminated due to the resulting slightly bigger portfolio (thanks to smaller withdrawals).

If we choose to go with option B (using total portfolio balance including the savings account), instead, the underlying annual and monthly withdrawal models will be very close. Here's a similar comparison, but using the investment portfolio balance including the savings account as basis for monthly withdrawals:

Image
The decline, starting at age 88, is due to capping the VPW percentage at 10%.

Note that these are only underlying models of VPW withdrawals before accounting for actual market returns. In real life, market returns change these shapes. Yet, the models have as much impact on withdrawals as market returns. Both are important.

So, what's your vote? Option A or option B?

You have until July 15 to cast (and change) your vote. I will disclose my own vote on July 16 along with the final decision.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Sat Jul 06, 2019 2:12 pm

I vote for A) exclude the savings account from portfolio balance.

I have a significant percentage of my portfolio in short term reserves, most in a savings account. I'm happy to exchange the potential drag on returns for the relative stability, but I'm willing to redeploy the money should I change my view on the cost / effect.

It seems to me the savings account in question exists for the purpose of smoothing the VPW withdrawals, and so is not available to, in effect, fund the portfolio for any additional withdrawals further down the line.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Tyler Aspect » Sat Jul 06, 2019 2:30 pm

It would be a chore for the end user to subtract out cash. Who among the users would know that a 6 month US Treasury bill is cash, but the 1 year Treasury Bill is not? Having to add up all the sweep funds across 7 accounts is not fun.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by FiveK » Sat Jul 06, 2019 2:31 pm

Metx wrote:
Sat Jul 06, 2019 2:12 pm
I vote for A) exclude the savings account from portfolio balance.
...
It seems to me the savings account in question exists for the purpose of smoothing the VPW withdrawals, and so is not available to, in effect, fund the portfolio for any additional withdrawals further down the line.
+1

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 06, 2019 3:37 pm

Metx wrote:
Sat Jul 06, 2019 2:12 pm
It seems to me the savings account in question exists for the purpose of smoothing the VPW withdrawals, and so is not available to, in effect, fund the portfolio for any additional withdrawals further down the line.
That's unfortunately incorrect. VPW percentages already account for the cash drag of 6 months worth of withdrawals. (5.5 months, to be exact). So, when taking monthly withdrawals based on annual VPW percentages, it's fine to include the cash buffer as part of the portfolio.

But, this is only true of such a small cash buffer. It wouldn't be true of a bigger one.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Sat Jul 06, 2019 4:10 pm

longinvest wrote:
Sat Jul 06, 2019 3:37 pm
That's unfortunately incorrect. VPW percentages already account for the cash drag of 6 months worth of withdrawals. (5.5 months, to be exact). So, when taking monthly withdrawals based on annual VPW percentages, it's fine to include the cash buffer as part of the portfolio.
So in the underlying annual VPW calculation, is it the anticipated interest gained on the withdrawn amount that's included in the portfolio, or the entire remaining balance? I may just have a mental block concerning including funds that are already earmarked for a specific very short term purpose as part of a general investment pool.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 06, 2019 4:26 pm

Metx wrote:
Sat Jul 06, 2019 4:10 pm
longinvest wrote:
Sat Jul 06, 2019 3:37 pm
That's unfortunately incorrect. VPW percentages already account for the cash drag of 6 months worth of withdrawals. (5.5 months, to be exact). So, when taking monthly withdrawals based on annual VPW percentages, it's fine to include the cash buffer as part of the portfolio.
So in the underlying annual VPW calculation, is it the anticipated interest gained on the withdrawn amount that's included in the portfolio, or the entire remaining balance? I may just have a mental block concerning including funds that are already earmarked for a specific very short term purpose as part of a general investment pool.
Metx, percentages, in the VPW Table were designed for annual withdrawals.

I take a withdrawal on December 31. I don't intend to spend all the money in January. So, what do I do? I divide the amount by 12, move 1 part to my spending account, and the remaining 11 parts to a savings account hopefully earning at least as much as average inflation (2% nominal). Each following month I move another part and its interest into my spending account. In early December, the last part and its interest is moved to the spending account depleting the savings account. On average, there was 5.5 months of withdrawals in the savings account all year long.

VPW percentages account for an average 5.5 months of withdrawals sitting all year long at a 0% real rate, and the rest of the portfolio being fully invested into the target asset allocation.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Sat Jul 06, 2019 5:07 pm

If I understand it right then in the case of an annual withdrawal, you could consider the amount withdrawn as discounted from the portfolio. If that's accurate then it would be consistent to discount the buffer put aside for the smoothing of the monthly withdrawals.

edit: Looking at it again I see that there is already a discount taken on a years worth of withdrawals even when calculated at the current monthly rate. However, I'd still consider the funds in the savings account as not being in the portfolio and so not subject it to any negative fluctuations experienced during the time span the buffer is meant to cover.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 06, 2019 5:48 pm

Metx wrote:
Sat Jul 06, 2019 5:07 pm
If I understand it right then in the case of an annual withdrawal, you could consider the amount withdrawn as discounted from the portfolio. If that's accurate then it would be consistent to discount the buffer put aside for the smoothing of the monthly withdrawals.
Metx, I don't really understand what you wrote.

So, I'll state my own explanations differently.

An annual 5.0% VPW withdrawal from a $1,000,000 portfolio assumes that on average ((5.5 / 12) X 5.0%) = 2.3% of the $1,000,000, that's $23,000, will be sitting in cash all year long.

Now, the 5.0% percentage isn't multiplied by ($1,000,000 - $23,000) = $977,000; it's multiplied by the entire portfolio, $1,000,000 to determine the annual withdrawal: ($1,000,000 X 5.0%) = $50,000. If I divide this amount in 12 parts, I get ($50,000 / 12) = $4,167 for each month of the year.

Now, assume that I used monthly VPW withdrawals with a buffer, instead, and that I had already divided my portfolio into a $977,000 investment portfolio and $23,000 sitting in cash. I want to take a single monthly withdrawal from the portfolio. If I calculate the monthly withdrawal based on the investment portfolio only, I get: (($977,000 X 5.0%) / 12) = $4,071, which suffers a 2.3% penalty relative to an annual withdrawal divided by 12. If, instead, I use the total portfolio, I get: ((($977,000 + $23,000) X 5.0%) / 12) = $4,167, an amount equal to what I get with an annual VPW withdrawal.

In other words, mathematically, the correct solution is B. I think that the two charts in this post illustrate this quite clearly. But sometimes the correct mathematical solution introduces more complexity than a simpler solution. That's why I'm asking forum members for help choosing how to proceed.

One argument in favor of A is "intuitiveness", as it doesn't take a series of posts to try explaining the principle.

One argument in favor of B is also "intuitiveness", as the total portfolio includes both the LifeStrategy fund and the cash buffer which could be sitting into a money market fund scattered across many investment accounts. Many investors prefer using a money market fund to chasing external high-interest savings accounts.

Actually, so far, when I asked for help selecting an appropriate savings account, I got a single feedback from forum member retiringwhen suggesting that "Vanguard Federal Money Market VMFXX..... as the settlement account for the brokerage holding the LS fund would more than sufficient for this effort". Maybe I should forget about the Ally savings account and use VMFXX instead, in this forward test. Feedback about this is still welcome, despite my initial reluctance to money-market funds.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by retiringwhen » Sat Jul 06, 2019 7:00 pm

I vote for B as I already do something like it.

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