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

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

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested \$5,348 portfolio withdrawal at the end of July 2019.

The retiree will get \$2,000/month Social Security payments in 5 years. That's \$24,000/year. The percentage for a 5-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 21.5% (age 95 in the table). As a consequence, (\$24,000 / 21.5%) = \$111,628 is kept aside (on paper) for Social Security bridge withdrawals.

The \$1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual (\$1,000 X 12 X (100% - 65.7%)) = \$4,116 is invested into the portfolio.

The retiree has a \$997,884 portfolio, but \$111,628 is kept aside (on paper) for Social Security bridge withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This results into a ((\$997,884 - \$111,628) X 5.0%) = \$44,313 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw \$24,000 in replacement of future Social Security payments, to invest \$4,116 to dampen the ravages of inflation on the fixed work pension, and to take a \$44,313 VPW withdrawal. This sums up to (\$24,000 - \$4,116 + \$44,313) = \$64,197 and results into a (\$64,197 / 12) = \$5,350 portfolio withdrawal at the end of July 2019. The small \$2 difference with the VPW Worksheet's suggested amount is due to rounding.

Note that Total Retirement Income also includes the monthly \$1,000 work pension payment for a total of (\$64,197 + (12 X \$1,000)) = \$76,197/year (\$6,350/month) available for taxes and expenses.

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stocks allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X \$997,884) = -\$299,365 portfolio loss, reducing the portfolio to (\$997,884 - \$299,365) = \$698,519 after the loss. This implies a ((\$24,000 - \$4,116 + ((\$698,519 - \$111,628) X 5.0%)) / 12) = \$4,102 monthly portfolio withdrawal which represents a (\$4,102 - \$5,350) = -\$1,248 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -\$1,248/month because stocks could easily lose -50% of their value within a short time period. In other words, at least \$1,248 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

The Vanguard LifeStrategy Moderate Growth Fund (VSMGX) invests into four distinct total markets: US Stocks, International Stocks, US Bonds, and International Bonds.

As proxy for these four markets, I'll use the following index ETFs:
• US Stocks: Vanguard Total Stock Market ETF (VTI)
• International Stocks: Vanguard Total International Stock ETF (VXUS)
• US Bonds: Vanguard Total Bond Market ETF (BND)
• International Bonds: Vanguard Total International Bond ETF (BNDX)
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test:

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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Topic Author
longinvest
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Joined: Sat Aug 11, 2012 8:44 am

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

The Bureau of Labor Statistics has published the CPI-U for July 2019.

We're interested to calculate an average CPI-U to associate with our forward test at the end of July 2019. Here were the last 12 CPI-U values as of July 2019:

Code: Select all

`````` Month   CPI-U
08/2018 252.146
09/2018 252.439
10/2018 252.885
11/2018 252.038
12/2018 251.233
01/2019 251.712
02/2019 252.776
03/2019 254.202
04/2019 255.548
05/2019 256.092
06/2019 256.143
07/2019 256.571
``````
We take note that the average CPI-U for the last 12 months at the end of July 2019 was 253.649.

Here were the last 12 CPI-U values as of July 2018:

Code: Select all

`````` Month   CPI-U
08/2017 245.519
09/2017 246.819
10/2017 246.663
11/2017 246.669
12/2017 246.524
01/2018 247.867
02/2018 248.991
03/2018 249.554
04/2018 250.546
05/2018 251.588
06/2018 251.989
07/2018 252.006
``````
The average CPI-U for the last 12 months at the end of July 2018 was 248.728.

The trailing 1-year average inflation at the end of July 2019 was ((253.649 / 248.728) - 1) = 1.98%.

The chosen Ally savings account has a 1.90% APY. It's 0.08% below trailing average inflation.
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Topic Author
longinvest
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Joined: Sat Aug 11, 2012 8:44 am

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

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in July 2019 dollars:

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retiringwhen
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Location: New Jersey, USA

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

longinvest wrote:
Sat Aug 24, 2019 11:58 am
The Bureau of Labor Statistics has published the CPI-U for July 2019.

The trailing 1-year average inflation at the end of July 2019 was ((253.649 / 248.728) - 1) = 1.98%.
Looking at this press release: https://www.bls.gov/news.release/cpi.nr0.htm, they calculated 1.8% do you know what is the difference?

Edit - oops, never mind, you are taking an average annual rate for each month over the past year, not the past year. BTW, why are you doing that? It seems to essentially make the inflation rate changes lag a bit by using a sort of 12 mos. moving average of averages.

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

retiringwhen wrote:
Tue Sep 03, 2019 5:51 pm
Edit - oops, never mind, you are taking an average annual rate for each month over the past year, not the past year. BTW, why are you doing that? It seems to essentially make the inflation rate changes lag a bit by using a sort of 12 mos. moving average of averages.
I've explained in an earlier post:
longinvest wrote:
Sat Jul 20, 2019 8:01 am
Variations in the consumer price index for all urban consumers (CPI-U), published monthly by the Bureau of Labor Statistics, are often used to measure inflation. This is an excellent measure of inflation over periods of time spanning multiple years or decades. Unfortunately, CPI-U is relatively volatile from month to month; it's certainly more volatile than the balance of a savings account with no contributions or withdrawals (only interest payments). As a result, tracking inflation using variations in CPI-U from month to month results into a relatively volatile estimate of inflation.

Our goal isn't to measure the volatility of inflation but simply to keep track of the decaying purchase power of our nominal dollars over time. So, in this thread, we will calculate the average CPI-U over the last 12 months and use variations in average CPI-U as a measure of inflation.
For a graphical illustration, here's part of a post on the VPW thread. It's the post where I first introduced the idea of buffered income from monthly VPW withdrawals (note that the buffering approach has been simplified since then):
longinvest wrote:
Sat Jun 29, 2019 11:58 pm
...
Inflation

Let's compare monthly [buffered] income from monthly VPW withdrawals with inflation as measured by CPI-U:

We see that CPI-U is more volatile on a small scale than monthly [buffered] income. CPI-U is an indirect measure of inflation. It's pretty good at measuring inflation over longer periods of time, but on a small scale on charts, it exhibits a volatility that isn't really felt in real life.

Here's what happens when we average CPI-U over 12 months:

...

So, here it is, finally, the chart of inflation-adjusted [buffered] income derived from monthly VPW withdrawals at age 65 from a 50/50 stocks/bonds \$1,000,000 portfolio (without taking into account any non-portfolio income), using 12-months-average inflation:

...
This last chart would have exhibited "small-scale" volatility (which wasn't exhibited by nominal monthly income*) if it had been adjusted to inflation instead of 12-month-average inflation.

* Side note: \$4,000/month = \$48,000/year.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

The August 2019 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -0.25%.

I'm also taking note of the returns of the four (US/International Stocks/Bond) markets represented by the NAV returns of VTI (-2.02%), VXUS (-2.30%), BND (2.73%), and BNDX (2.06%) for a post later this month.
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retiringwhen
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Location: New Jersey, USA

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

RE: Average Inflation.

After playing around with the average approach you take vs. my default 12 mos. moving average, I found out that monthly numbers are much noisier than I had expected, making your approach obviously superior. In the past, I have not used CPI in a moving average type environment and hadn't realized just how noisy it was. Thanks.

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

Portfolio balance as of August 31, 2019

We use account balances as of July 31, 2019 and apply August 2019 investment growth and savings interest.

Note that the annual percentage yield (APY) of the Ally savings account holding the withdrawal cushion has dropped to 1.90% during the month of August. We use this new lower rate in our calculations.
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): (\$965,709.95 X (1 + -0.25%)) = \$963,295.68
• Withdrawal Cushion (at Ally Bank): (\$26,812.42 X ((1 + 1.90%)^(1 / 12))) = \$26,854.51
Total Portfolio Balance: \$990,150.19
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Forward test as of August 31, 2019

We continue our forward test. Here's a link to the previous entry.

As of August 31, 2019, the retiree's portfolio is composed of:
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): \$963,295.68
• Withdrawal Cushion (Ally savings account): \$26,854.51
Total Portfolio Balance: \$990,150.19

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).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

The VPW Worksheet suggests to take a \$5,315 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
• Adjusted withdrawal amount: ((\$5,315 + \$26,854.51) / 6) = \$5,362
• Adjustment: (\$5,362 - \$5,315) = \$47
The retiree transfers \$47 out of the Ally savings account and combines it with the \$5,315 withdrawal and the \$1,000 September work pension payment for a total retirement income of \$6,362 available to pay taxes and expenses in September 2019.

After withdrawal and transfer, (\$963,295.68 - \$5,315) = \$957,980.68 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and (\$26,854.51 - \$47) = \$26,807.51 is left in the withdrawal cushion, for a total portfolio balance of \$984,788.19 at the end of August 2019.

The Ally savings account carries an annual percentage yield (APY) of 1.90%.

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.

September 2019 total retirement income is \$6,362 and on the morning of September 1, 2019, the total portfolio balance is \$984,788.19.

Historical Annual Retirement Income
• 2019: \$76,320 (annualized) -- \$19,080, 3 months, starting retirement in July
Edited on October 30, 2019 to fix the "previous entry" link.
Last edited by longinvest on Wed Oct 30, 2019 6:45 pm, edited 1 time in total.
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retiringwhen
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

So, I am playing along at home, I think the final August Portfolio balance is off a bit. Shouldn't it be \$984,882.19?

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

retiringwhen wrote:
Sat Sep 07, 2019 1:43 pm
So, I am playing along at home, I think the final August Portfolio balance is off a bit. Shouldn't it be \$984,882.19?
I've provided the detailed calculations in my post. Feel free to identify any specific calculation error.

I get the following total: (\$957,980.68 + \$26,807.51) = \$984,788.19.
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retiringwhen
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

longinvest wrote:
Sat Sep 07, 2019 4:56 pm
retiringwhen wrote:
Sat Sep 07, 2019 1:43 pm
So, I am playing along at home, I think the final August Portfolio balance is off a bit. Shouldn't it be \$984,882.19?
I've provided the detailed calculations in my post. Feel free to identify any specific calculation error.

As far as I know, (\$957,980.68 + \$26,807.51) = \$984,788.19.
Ugh, I was off by 94 (that is 47 * 2), add instead of subtract the buffer draw.... never mind I made a tab in a spreadsheet to track the history. I am using your data as the start, but I will probably start one that is a pre-test for my real portfolio as "practice" before we retire (and get a feel for the actual behavior of the VPW model in the wild.)

As an aside, the VPW model with a reality/balance check from an annually recalculated SWR are going to likely be our guide posts.

Topic Author
longinvest
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Joined: Sat Aug 11, 2012 8:44 am

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

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested \$5,315 portfolio withdrawal at the end of August 2019.

The retiree will get \$2,000/month Social Security payments in 5 years. That's \$24,000/year. The percentage for a 5-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 21.5% (age 95 in the table). As a consequence, (\$24,000 / 21.5%) = \$111,628 is kept aside (on paper) for Social Security bridge withdrawals.

The \$1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual (\$1,000 X 12 X (100% - 65.7%)) = \$4,116 is invested into the portfolio.

The retiree has a \$990,150 portfolio, but \$111,628 is kept aside (on paper) for Social Security bridge withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This results into a ((\$990,150 - \$111,628) X 5.0%) = \$43,926 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw \$24,000 in replacement of future Social Security payments, to invest \$4,116 to dampen the ravages of inflation on the fixed work pension, and to take a \$43,926 VPW withdrawal. This sums up to (\$24,000 - \$4,116 + \$43,926) = \$63,810 and results into a (\$63,810 / 12) = \$5,318 portfolio withdrawal at the end of August 2019. The small \$3 difference with the VPW Worksheet's suggested amount is due to rounding.

Note that Total Retirement Income also includes the monthly \$1,000 work pension payment for a total of (\$63,810 + (12 X \$1,000)) = \$75,810/year (\$6,318/month) available for taxes and expenses.

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stocks allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X \$990,150) = -\$297,045 portfolio loss, reducing the portfolio to (\$990,150 - \$297,045) = \$693,105 after the loss. This implies a ((\$24,000 - \$4,116 + ((\$693,105 - \$111,628) X 5.0%)) / 12) = \$4,080 monthly portfolio withdrawal which represents a (\$4,080 - \$5,318) = -\$1,238 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -\$1,238/month because stocks could easily lose -50% of their value within a short time period. In other words, at least \$1,238 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test:

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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bck63
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Seems complicated. How about taking what you have, dividing by, say, 30 (years), and taking that out each year (If you retire at say, 65 or later). With earlier retirements, the number of years you divide by will have to be higher. Do the math each year, minus a year.

I plan to have no plan for retirement withdrawals other than that. I guess the only other thing I'll plan for is to have 15 years of fixed income as part of my portfolio.

We tend to complicate simple things. Keep it simple.

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

bck63 wrote:
Sat Sep 21, 2019 6:01 pm
Seems complicated. How about taking what you have, dividing by, say, 30 (years), and taking that out each year (If you retire at say, 65 or later). With earlier retirements, the number of years you divide by will have to be higher. Do the math each year, minus a year.
Bck63, if I understand you correctly, instead of starting with \$76,272/year for taxes and expenses using this thread's approach, you're proposing that the retiree should have started retirement with ((\$1,000,000 / 30) + (12 X \$1,000) = \$45,333/year using your approach. That's -\$30,939/year less at age 65. That's significantly less money (-40%) in the earlier and usually healthier years of retirement.

Also, should the retiree use your approach and still be alive at age 95, the retiree would be left with only \$30,624/year* or less for taxes and expenses, because of the erosive effects of inflation on the fixed pension, without any additional liquidity due to a depleted portfolio.

* 30 years of 2% inflation reduces the buying power of the monthly \$1,000 pension to \$552. Combined with the monthly \$2,000 Social Security payment results into \$30,624/year.

The VPW retirement plan illustrated in this thread is simple, especially when using the VPW Accumulation And Retirement Worksheet. It's also sensible. It takes into account current and future pensions (with and without cost-of-living adjustments), and it addresses longevity concerns (see How to use variable percentage withdrawals during retirement in our wiki for details).
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for August 2019.

We're interested to calculate an average CPI-U to associate with our forward test at the end of August 2019. Here were the last 12 CPI-U values as of August 2019:

Code: Select all

`````` Month   CPI-U
09/2018 252.439
10/2018 252.885
11/2018 252.038
12/2018 251.233
01/2019 251.712
02/2019 252.776
03/2019 254.202
04/2019 255.548
05/2019 256.092
06/2019 256.143
07/2019 256.571
08/2019 256.558
``````
We take note that the average CPI-U for the last 12 months at the end of August 2019 was 254.016.

Here were the last 12 CPI-U values as of August 2018:

Code: Select all

`````` Month   CPI-U
09/2017 246.819
10/2017 246.663
11/2017 246.669
12/2017 246.524
01/2018 247.867
02/2018 248.991
03/2018 249.554
04/2018 250.546
05/2018 251.588
06/2018 251.989
07/2018 252.006
08/2018 252.146
``````
The average CPI-U for the last 12 months at the end of August 2018 was 249.280.

The trailing 1-year average inflation at the end of August 2019 was ((254.016 / 249.280) - 1) = 1.90%.

The chosen Ally savings account has a 1.90% APY. It's equal to trailing average inflation.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in August 2019 dollars:

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

Portfolio balance as of September 30, 2019

The September 2019 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.05% and the annual percentage yield (APY) of the Ally savings account was 1.90%.

We use account balances as of August 31, 2019 and apply September 2019 growth on investments and interest on savings.
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): (\$957,980.68 X (1 + 1.05%)) = \$968,039.48
• Withdrawal cushion (at Ally Bank): (\$26,807.51 X ((1 + 1.90%)^(1 / 12))) = \$26,849.59
Total Portfolio Balance: \$994,889.07
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Forward test as of September 30, 2019

We continue our forward test. Here's a link to the previous entry.

As of September 30, 2019, the retiree's portfolio is composed of:
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): \$968,039.48
• Withdrawal cushion (at Ally Bank): \$26,849.59
Total Portfolio Balance: \$994,889.07

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).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

The VPW Worksheet suggests to take a \$5,335 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
• Adjusted withdrawal amount: ((\$5,335 + \$26,849.59) / 6) = \$5,364
• Adjustment: (\$5,364 - \$5,335) = \$29
The retiree transfers \$29 out of the Ally savings account and combines it with the \$5,335 withdrawal and the \$1,000 October work pension payment for a total retirement income of \$6,364 available to pay taxes and expenses in October 2019.

After withdrawal and transfer, (\$968,039.48 - \$5,335) = \$962,704.48 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and (\$26,849.59 - \$29) = \$26,820.59 is left in the withdrawal cushion, for a total portfolio balance of \$989,525.07 at the end of September 2019.

The Ally savings account carries an annual percentage yield (APY) of 1.90%.

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.

October 2019 total retirement income is \$6,364 and on the morning of October 1, 2019, the total portfolio balance is \$989,525.07.

Historical Annual Retirement Income
• 2019: \$76,332 (annualized) -- \$25,444, 4 months, starting retirement in July
Edited on October 30, 2019 to fix the "previous entry" link.
Last edited by longinvest on Wed Oct 30, 2019 6:43 pm, edited 1 time in total.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested \$5,335 portfolio withdrawal at the end of September 2019.

The retiree will get \$2,000/month Social Security payments in 5 years. That's \$24,000/year. The percentage for a 5-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 21.5% (age 95 in the table). As a consequence, (\$24,000 / 21.5%) = \$111,628 is kept aside (on paper) for Social Security bridge withdrawals.

The \$1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual (\$1,000 X 12 X (100% - 65.7%)) = \$4,116 is invested into the portfolio.

The retiree has a \$994,889 portfolio, but \$111,628 is kept aside (on paper) for Social Security bridge withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This results into a ((\$994,889 - \$111,628) X 5.0%) = \$44,163 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw \$24,000 in replacement of future Social Security payments, to invest \$4,116 to dampen the ravages of inflation on the fixed work pension, and to take a \$44,163 VPW withdrawal. This sums up to (\$24,000 - \$4,116 + \$44,163) = \$64,047 and results into a (\$64,047 / 12) = \$5,337 portfolio withdrawal. The small \$2 difference with the VPW Worksheet's suggested amount is due to rounding.

Note that Total Retirement Income also includes the monthly \$1,000 work pension payment for a total of (\$64,047 + (12 X \$1,000)) = \$76,047/year (\$6,337/month) available for taxes and expenses.

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stocks allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X \$994,889) = -\$298,467 portfolio loss, reducing the portfolio to (\$994,889 - \$298,467) = \$696,422 after the loss. This implies a ((\$24,000 - \$4,116 + ((\$696,422 - \$111,628) X 5.0%)) / 12) = \$4,094 monthly portfolio withdrawal which represents a (\$4,094 - \$5,337) = -\$1,243 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -\$1,243/month because stocks could easily lose -50% of their value within a short time period. In other words, at least \$1,243 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

The annual percentage yield (APY) of the Ally savings account holding the withdrawal cushion has dropped to 1.80% as of October 10, 2019. This was first reported on this thread.

Edited on October 30, 2019 to fix the link.
Last edited by longinvest on Wed Oct 30, 2019 6:41 pm, edited 1 time in total.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test:

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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Topic Author
longinvest
Posts: 4090
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for September 2019.

We're interested to calculate an average CPI-U to associate with our forward test at the end of September 2019. Here were the last 12 CPI-U values:

Code: Select all

`````` Month   CPI-U
10/2018 252.885
11/2018 252.038
12/2018 251.233
01/2019 251.712
02/2019 252.776
03/2019 254.202
04/2019 255.548
05/2019 256.092
06/2019 256.143
07/2019 256.571
08/2019 256.558
09/2019 256.759
``````
We take note that the average CPI-U for the last 12 months at the end of September 2019 was 254.376.

Here were the last 12 CPI-U values as of September 2018 (one year ago):

Code: Select all

`````` Month   CPI-U
10/2017 246.663
11/2017 246.669
12/2017 246.524
01/2018 247.867
02/2018 248.991
03/2018 249.554
04/2018 250.546
05/2018 251.588
06/2018 251.989
07/2018 252.006
08/2018 252.146
09/2018 252.439
``````
The average CPI-U for the last 12 months at the end of September 2018 was 249.749.

The trailing 1-year average inflation at the end of September 2019 was ((254.376 / 249.749) - 1) = 1.85%.

The chosen Ally savings account has a 1.80% APY. It's 0.05% below trailing average inflation.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in September 2019 dollars:

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

Portfolio balance as of October 31, 2019

The October 2019 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.54% and the annual percentage yield (APY) of the Ally savings account was 1.80%.

We use account balances as of September 30, 2019 and apply October 2019 growth on investments and interest on savings.
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): (\$962,704.48 X (1 + 1.54%)) = \$977,530.13
• Withdrawal cushion (at Ally Bank): (\$26,820.59 X ((1 + 1.80%)^(1 / 12))) = \$26,860.49
Total Portfolio Balance: \$1,004,390.62
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Forward test as of October 31, 2019

We continue our forward test. Here's a link to the previous entry.

As of October 31, 2019, the retiree's portfolio is composed of:
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): \$977,530.13
• Withdrawal cushion (at Ally Bank): \$26,860.49
Total Portfolio Balance: \$1,004,390.62

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).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

The VPW Worksheet suggests to take a \$5,375 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
• Adjusted withdrawal amount: ((\$5,375 + \$26,860.49) / 6) = \$5,373
• Adjustment: (\$5,373 - \$5,375) = -\$2
The retiree transfers \$2 of withdrawal money to the Ally savings account and combines the remaining \$5,373 with the \$1,000 November work pension payment for a total retirement income of \$6,373 available for taxes and expenses in November 2019.

After withdrawal and transfer, (\$977,530.13 - \$5,375) = \$972,155.13 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and (\$26,860.49 + \$2) = \$26,862.49 is left into the withdrawal cushion, for a total portfolio balance of \$999,017.62 at the end of October 2019.

The Ally savings account currently carries an annual percentage yield (APY) of 1.80%.

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.

November 2019 total retirement income is \$6,373 and on the morning of November 1, 2019, the total portfolio balance is \$999,017.62.

Historical Annual Retirement Income
• 2019: \$76,361 (annualized) -- \$31,817 in 5 months, starting retirement in July
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bck63
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

How about if a retiree, well, just took out a little bit at a time. I think that's a good formula. Maybe a bit more in good years, and a bit less in bad years.

Does it really have to be so overwhelming and complicated?

Topic Author
longinvest
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Joined: Sat Aug 11, 2012 8:44 am

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

The illustrated method is very simple. I can summarize the last three monthly forward test entries as follows:

At the end of August, the retiree sold \$5,315 of the LifeStrategy Moderate Growth fund and withdrew \$47 from the withdrawal cushion. With the work pension, \$6,362 was available for taxes and expenses.

At the end of September, the retiree sold \$5,335 of the LifeStrategy Moderate Growth fund and withdrew \$29 from the withdrawal cushion. With the work pension, \$6,364 was available for taxes and expenses.

At the end of October, the retiree sold \$5,375 of the LifeStrategy Moderate Growth fund and deposited \$2 into the withdrawal cushion. With the work pension, \$6,373 was available for taxes and expenses.

There's only one sell transaction and one small money transfer per month.

Many workers get a regular salary despite that their expenses vary from month to month. Employers don't reduce the salary in months with lower expenses and increase it in months with higher expenses. Workers use basic budgeting techniques to deal with the mismatch. Retirees can do the same.
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goblue100
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

bck63 wrote:
Sat Nov 02, 2019 10:29 pm
How about if a retiree, well, just took out a little bit at a time. I think that's a good formula. Maybe a bit more in good years, and a bit less in bad years.

Does it really have to be so overwhelming and complicated?
I appreciate this back test, as getting a "paycheck" from a retirement portfolio is a bit of a hot topic right now, and one that many retiree's struggle with. Your "little bit at a time" strategy is probably one that a lot of people use, but isn't one that optimizes their time left on this earth with the amount of money they have. Sure, under spending a portfolio isn't a tragedy, but many people are afraid to spend an amount they could spend. And over spending a portfolio can have real consequences.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

bck63
Posts: 824
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

goblue100 wrote:
Sun Nov 03, 2019 8:30 am
bck63 wrote:
Sat Nov 02, 2019 10:29 pm
How about if a retiree, well, just took out a little bit at a time. I think that's a good formula. Maybe a bit more in good years, and a bit less in bad years.

Does it really have to be so overwhelming and complicated?
I appreciate this back test, as getting a "paycheck" from a retirement portfolio is a bit of a hot topic right now, and one that many retiree's struggle with. Your "little bit at a time" strategy is probably one that a lot of people use, but isn't one that optimizes their time left on this earth with the amount of money they have. Sure, under spending a portfolio isn't a tragedy, but many people are afraid to spend an amount they could spend. And over spending a portfolio can have real consequences.
goblue -- I agree. And OP's post just above yours makes it more understandable. Sometimes it just gets hard to think about this stuff. I do wonder if I will carry over my worries about saving enough into worries about spending too much. Maybe an objective plan would help.

As an aside, with regard to your signature, is it true that we have an 82 percent chance of being dead before we're retired 30 years? I'm about ten years from retirement.

NearlyRetired
Posts: 106
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

bck63 wrote:
Sun Nov 03, 2019 8:54 am
goblue100 wrote:
Sun Nov 03, 2019 8:30 am
bck63 wrote:
Sat Nov 02, 2019 10:29 pm
How about if a retiree, well, just took out a little bit at a time. I think that's a good formula. Maybe a bit more in good years, and a bit less in bad years.

Does it really have to be so overwhelming and complicated?
I appreciate this back test, as getting a "paycheck" from a retirement portfolio is a bit of a hot topic right now, and one that many retiree's struggle with. Your "little bit at a time" strategy is probably one that a lot of people use, but isn't one that optimizes their time left on this earth with the amount of money they have. Sure, under spending a portfolio isn't a tragedy, but many people are afraid to spend an amount they could spend. And over spending a portfolio can have real consequences.
goblue -- I agree. And OP's post just above yours makes it more understandable. Sometimes it just gets hard to think about this stuff. I do wonder if I will carry over my worries about saving enough into worries about spending too much. Maybe an objective plan would help.

As an aside, with regard to your signature, is it true that we have an 82 percent chance of being dead before we're retired 30 years? I'm about ten years from retirement.
Hi bck63 take a look at this
To err is to be human, to really mess up, use a computer

goblue100
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

bck63 wrote:
Sun Nov 03, 2019 8:54 am

As an aside, with regard to your signature, is it true that we have an 82 percent chance of being dead before we're retired 30 years? I'm about ten years from retirement.
It is based on a 65 year old, but yes, it's true. A 65 year old man only has an average life expectancy of 17 years. If you get to 82, your expectancy changes to 7 years.

https://www.ssa.gov/oact/STATS/table4c6.html

https://scottburns.com/live-long-spend-freely/
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

bck63
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Thank you and thank you.

Topic Author
longinvest
Posts: 4090
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested \$5,375 portfolio withdrawal at the end of October 2019.

The retiree will get \$2,000/month Social Security payments in 5 years. That's \$24,000/year. The percentage for a 5-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 21.5%. As a consequence, (\$24,000 / 21.5%) = \$111,628 is kept aside (on paper) for Social Security bridge withdrawals.

The \$1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual (\$1,000 X 12 X (100% - 65.7%)) = \$4,116 is invested into the portfolio.

The retiree has a \$1,004,391 portfolio, but \$111,628 is kept aside (on paper) for Social Security bridge withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This results into a ((\$1,004,391 - \$111,628) X 5.0%) = \$44,638 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw \$24,000 in replacement of future Social Security payments, to invest \$4,116 to dampen the ravages of inflation on the fixed work pension, and to take a \$44,638 VPW withdrawal. This sums up to (\$24,000 - \$4,116 + \$44,638) = \$64,522 and results into a (\$64,522 / 12) = \$5,377 portfolio withdrawal. The small \$2 difference with the VPW Worksheet's suggested amount is due to rounding.

Note that Total Retirement Income also includes the monthly \$1,000 work pension payment for a total of (\$64,522 + (12 X \$1,000)) = \$76,522/year (\$6,377/month) available for taxes and expenses.

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stocks allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X \$1,004,391) = -\$301,317 portfolio loss, reducing the portfolio to (\$1,004,391 - \$301,317) = \$703,074 after the loss. This implies a ((\$24,000 - \$4,116 + ((\$703,074 - \$111,628) X 5.0%)) / 12) = \$4,121 monthly portfolio withdrawal which represents a (\$4,121 - \$5,377) = -\$1,256 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -\$1,256/month because stocks could easily lose -50% of their value within a short time period. In other words, at least \$1,256 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Gnirk wrote:
Tue Nov 12, 2019 6:12 pm
Just received a notice from Ally that they are reducing the interest on savings accounts from 1.80% to 1.70 % effective Nov 13th.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test:

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for October 2019.

We're interested to calculate an average CPI-U to associate with our forward test at the end of October 2019. Here were the last 12 CPI-U values:

Code: Select all

`````` Month   CPI-U
11/2018 252.038
12/2018 251.233
01/2019 251.712
02/2019 252.776
03/2019 254.202
04/2019 255.548
05/2019 256.092
06/2019 256.143
07/2019 256.571
08/2019 256.558
09/2019 256.759
10/2019 257.346
``````
We take note that the average CPI-U for the last 12 months at the end of October 2019 was 254.748.

Here were the last 12 CPI-U values as of October 2018 (one year ago):

Code: Select all

`````` Month   CPI-U
11/2017 246.669
12/2017 246.524
01/2018 247.867
02/2018 248.991
03/2018 249.554
04/2018 250.546
05/2018 251.588
06/2018 251.989
07/2018 252.006
08/2018 252.146
09/2018 252.439
10/2018 252.885
``````
The average CPI-U for the last 12 months at the end of October 2018 was 250.267.

The trailing 1-year average inflation at the end of October 2019 was ((254.748 / 250.267) - 1) = 1.79%.

The chosen Ally savings account has a 1.70% APY. It's 0.09% below trailing average inflation.
Last edited by longinvest on Sat Dec 28, 2019 9:06 am, edited 2 times in total.
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Topic Author
longinvest
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in October 2019 dollars:

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

This is great. I stumbled cross this thread and found it interesting, and much simpler than I expected from reading the first post (it took me a minute to realize I didn't need to understand or manually do all of the calculations). I'm the type who would over save/under spend for fear of running out of money, so I like the concept of adjusting withdrawals monthly to never run out of money.

One thing I don't understand. I get that we just need to update the portfolio balance every month and excel does the rest. What I don't get is how excel knows what the updated cpi-u and ally bank interest rate are?

Thanks!

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

Sat Nov 30, 2019 12:15 pm
What I don't get is how excel knows what the updated cpi-u and ally bank interest rate are?
CrazyCatLady, Excel doesn't get any of this data!

The method is extremely simple. Every month the retiree (1) updates the Portfolio Balance cell and any other cells which needs updating (like age and pension amounts which need updating once a year) in the worksheet, (2) makes the suggested withdrawal, (3) makes a small transfer to or from the withdrawal cushion savings account, and (4) then goes back enjoying retirement.

There's a single "action post" per month, in this thread, like this post and this post. Each one links directly to the previous one. The additional posts of this threads explain what's happening and how the methods actually works.

CPI, portfolio returns, and bank rates are only things that we, readers and participants of this thread, look at to (1) calculate the hypothetical investment and savings account balances and (2) make sense over time of the withdrawal amounts by charting them adjusted to inflation. The retiree doesn't have to care about any of this.
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

longinvest wrote:
Sat Nov 30, 2019 12:52 pm
Sat Nov 30, 2019 12:15 pm
What I don't get is how excel knows what the updated cpi-u and ally bank interest rate are?
CrazyCatLady, Excel doesn't get any of this data!

The method is extremely simple. Every month the retiree (1) updates the Portfolio Balance cell and any other cells which needs updating (like age and pension amounts which need updating once a year) in the worksheet, (2) makes the suggested withdrawal, (3) makes a small transfer to or from the withdrawal cushion savings account, and (4) then goes back enjoying retirement.

There's a single "action post" per month, in this thread, like this post and this post. Each one links directly to the previous one. The additional posts of this threads explain what's happening and how the methods actually works.

CPI, portfolio returns, and bank rates are only things that we, readers and participants of this thread, look at to (1) calculate the hypothetical investment and savings account balances and (2) make sense over time of the withdrawal amounts by charting them adjusted to inflation. The retiree doesn't have to care about any of this.
Thanks, that makes so much more sense! You are looking at the cpi-u and interest rate to keep the hypothetical realistic, but I retire would use actual numbers and not worry about those.

I'm looking forward to following this thread (and hoping for a large drop so I can see how the portfolio reacts!

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

Sat Nov 30, 2019 1:24 pm
I'm looking forward to following this thread (and hoping for a large drop so I can see how the portfolio reacts!
There's no need to wait for that to get an idea. Here's an inflation-adjusted chart that I've shown in the main VPW thread. Note that it's more volatile (in terms of relative drops) than what the retiree of this thread would have experienced, despite the 50/50 stocks/bonds allocation, because it's a chart of monthly buffered income derived from VPW withdrawals without any pension income. It's a hypothetical backtest using the historical returns of three vanguards funds (VTSMX for 25% US stocks, VGTSX for 25% international stocks, and VBMFX for 50% domestic bonds, rebalanced monthly). Anyway, here it is:
longinvest wrote:
Sat Jun 29, 2019 11:58 pm
...
So, here it is, finally, the chart of inflation-adjusted [buffered] income derived from monthly VPW withdrawals at age 65 from a 50/50 stocks/bonds \$1,000,000 portfolio (without taking into account any non-portfolio income), using 12-months-average inflation:

...
We see that, overall, monthly buffered income oscillated around \$4,000/month. In other words, the method extracted approximately (\$4,000 X 12) = \$48,000 per year on average from an initial (inflation-adjusted) \$1,000,000 portfolio over a period of time which included two major bear markets.

Had a person retired at the top of the bull market, in 2000, with an identical \$1,000,000 portfolio, the average amount would have been lower, probably close to \$40,000/year. We just don't know in advance what's in reserve for us. Luckily, the method of this thread automatically adapts to market returns.
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### Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

longinvest wrote:
Sat Nov 30, 2019 1:39 pm
Sat Nov 30, 2019 1:24 pm
I'm looking forward to following this thread (and hoping for a large drop so I can see how the portfolio reacts!
There's no need to wait for that to get an idea. Here's an inflation-adjusted chart that I've shown in the main VPW thread. Note that it's more volatile (in terms of relative drops) than what the retiree of this thread would have experienced, despite the 50/50 stocks/bonds allocation, because it's a chart of monthly buffered income derived from VPW withdrawals without any pension income. It's a hypothetical backtest using the historical returns of three vanguards funds (VTSMX for 25% US stocks, VGTSX for 25% international stocks, and VBMFX for 50% domestic bonds, rebalanced monthly). Anyway, here it is:
longinvest wrote:
Sat Jun 29, 2019 11:58 pm
...
So, here it is, finally, the chart of inflation-adjusted [buffered] income derived from monthly VPW withdrawals at age 65 from a 50/50 stocks/bonds \$1,000,000 portfolio (without taking into account any non-portfolio income), using 12-months-average inflation:

...
We see that, overall, monthly buffered income oscillated around \$4,000/month. In other words, the method extracted approximately (\$4,000 X 12) = \$48,000 per year on average from an initial (inflation-adjusted) \$1,000,000 portfolio over a period of time which included two major bear markets.

Had a person retired at the top of the bull market, in 2000, with an identical \$1,000,000 portfolio, the average amount would have been lower, probably close to \$40,000/year. We just don't know in advance what's in reserve for us. Luckily, the method of this thread automatically adapts to market returns.
Thanks! I was expecting bigger drops, so that was interesting.

A related question. I downloaded the accumulation and retirement worksheet and plugged in my numbers. It told me I am saving about \$15,000 a year more than I need to (I'm okay with oversaving) and on the withdrawal side it has me withdrawing about \$7,000 month from my estimated portfolio at retirement. The problem is that I don't expect to need anywhere near that. I'm assuming it is based on my current income, but I save a little over 50% of my gross income, so I don't need to replace more than half in retirement. Is there a way to deal with that? Should I lower my income in the spreadsheet for calculation purposes or just plan on moving the extra money each month to a separate "slush fund" I create in retirement?

I spent an hour or so reading through the VPW threads and wow, you have clearly spent a lot of time and effort fine tuning this. Thanks for sharing!

goblue100
Posts: 1107
Joined: Sun Dec 01, 2013 10:31 am

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

Sun Dec 01, 2019 12:14 pm
longinvest wrote:
Sat Nov 30, 2019 1:39 pm

We see that, overall, monthly buffered income oscillated around \$4,000/month. In other words, the method extracted approximately (\$4,000 X 12) = \$48,000 per year on average from an initial (inflation-adjusted) \$1,000,000 portfolio over a period of time which included two major bear markets.

Had a person retired at the top of the bull market, in 2000, with an identical \$1,000,000 portfolio, the average amount would have been lower, probably close to \$40,000/year. We just don't know in advance what's in reserve for us. Luckily, the method of this thread automatically adapts to market returns.
Thanks! I was expecting bigger drops, so that was interesting.

A related question. I downloaded the accumulation and retirement worksheet and plugged in my numbers. It told me I am saving about \$15,000 a year more than I need to (I'm okay with oversaving) and on the withdrawal side it has me withdrawing about \$7,000 month from my estimated portfolio at retirement. The problem is that I don't expect to need anywhere near that. I'm assuming it is based on my current income, but I save a little over 50% of my gross income, so I don't need to replace more than half in retirement. Is there a way to deal with that? Should I lower my income in the spreadsheet for calculation purposes or just plan on moving the extra money each month to a separate "slush fund" I create in retirement?

I spent an hour or so reading through the VPW threads and wow, you have clearly spent a lot of time and effort fine tuning this. Thanks for sharing!
I'm not longinvest, but I am planning on some version of the VPW when I retire in the next year, or so.
My .02 is going from \$4500 in 2001'ish to \$3600 a month would probably have been more concerning than it looks on that chart. We would have had to have some faith that it wouldn't get worse, always easier after the fact.

I don't think the spread sheet takes into account what you say you need, but living on less that what you have is better than needing more. I will point out that you also have a finite amount of time, as well as a finite amount of money. Time is trickier since we don't know the exact amount, but you are spending it just as surely as you spend money. Make sure you make good use of it!
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

Topic Author
longinvest
Posts: 4090
Joined: Sat Aug 11, 2012 8:44 am

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

goblue100 wrote:
Mon Dec 02, 2019 12:21 pm
Sun Dec 01, 2019 12:14 pm
longinvest wrote:
Sat Nov 30, 2019 1:39 pm
Sat Nov 30, 2019 1:24 pm
I'm looking forward to following this thread (and hoping for a large drop so I can see how the portfolio reacts!
There's no need to wait for that to get an idea. Here's an inflation-adjusted chart that I've shown in the main VPW thread. Note that it's more volatile (in terms of relative drops) than what the retiree of this thread would have experienced, despite the 50/50 stocks/bonds allocation, because it's a chart of monthly buffered income derived from VPW withdrawals without any pension income. It's a hypothetical backtest using the historical returns of three vanguards funds (VTSMX for 25% US stocks, VGTSX for 25% international stocks, and VBMFX for 50% domestic bonds, rebalanced monthly). Anyway, here it is:
longinvest wrote:
Sat Jun 29, 2019 11:58 pm
...
So, here it is, finally, the chart of inflation-adjusted [buffered] income derived from monthly VPW withdrawals at age 65 from a 50/50 stocks/bonds \$1,000,000 portfolio (without taking into account any non-portfolio income), using 12-months-average inflation:

...
We see that, overall, monthly buffered income oscillated around \$4,000/month. In other words, the method extracted approximately (\$4,000 X 12) = \$48,000 per year on average from an initial (inflation-adjusted) \$1,000,000 portfolio over a period of time which included two major bear markets.

Had a person retired at the top of the bull market, in 2000, with an identical \$1,000,000 portfolio, the average amount would have been lower, probably close to \$40,000/year. We just don't know in advance what's in reserve for us. Luckily, the method of this thread automatically adapts to market returns.
Thanks! I was expecting bigger drops, so that was interesting.

A related question. I downloaded the accumulation and retirement worksheet and plugged in my numbers. It told me I am saving about \$15,000 a year more than I need to (I'm okay with oversaving) and on the withdrawal side it has me withdrawing about \$7,000 month from my estimated portfolio at retirement. The problem is that I don't expect to need anywhere near that. I'm assuming it is based on my current income, but I save a little over 50% of my gross income, so I don't need to replace more than half in retirement. Is there a way to deal with that? Should I lower my income in the spreadsheet for calculation purposes or just plan on moving the extra money each month to a separate "slush fund" I create in retirement?

I spent an hour or so reading through the VPW threads and wow, you have clearly spent a lot of time and effort fine tuning this. Thanks for sharing!
I'm not longinvest, but I am planning on some version of the VPW when I retire in the next year, or so.
My .02 is going from \$4500 in 2001'ish to \$3600 a month would probably have been more concerning than it looks on that chart. We would have had to have some faith that it wouldn't get worse, always easier after the fact.

I don't think the spread sheet takes into account what you say you need, but living on less that what you have is better than needing more. I will point out that you also have a finite amount of time, as well as a finite amount of money. Time is trickier since we don't know the exact amount, but you are spending it just as surely as you spend money. Make sure you make good use of it!
Here's some perspective. The retiree had additional income from Social Security (and possibly a pension). The above chart only illustrates portfolio withdrawals, not total income. Also, the reduction in withdrawals was within the normal range of fluctuations and shouldn't have affected the retiree's comfort. Only "optional discretionary spending" should have been affected.

The VPW Worksheet is quite explicit about the required flexibility to face the withdrawal reduction caused by stocks losing half of their value in a short time without affecting the retiree's comfort. Of course, if stocks were to lose more, the retiree's comfort could start to be affected. A -50% stock loss is normal; it shouldn't be a source of concern or discomfort.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

goblue100
Posts: 1107
Joined: Sun Dec 01, 2013 10:31 am

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

longinvest wrote:
Mon Dec 02, 2019 7:57 pm

The VPW Worksheet is quite explicit about the required flexibility to face the withdrawal reduction caused by stocks losing half of their value in a short time without affecting the retiree's comfort. Of course, if stocks were to lose more, the retiree's comfort could start to be affected. A -50% stock loss is normal; it shouldn't be a source of concern or discomfort.
To be clear, I was not criticizing the spread sheet or VPW. And when I say I plan to implement some version of VPW, it is this one. And I know we have to be flexible based on market conditions.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

Topic Author
longinvest
Posts: 4090
Joined: Sat Aug 11, 2012 8:44 am

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

Portfolio balance as of November 30, 2019

The November 2019 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.59% and the annual percentage yield (APY) of the Ally savings account was 1.70%.

We use account balances as of October 31, 2019 and apply November 2019 growth on investments and interest on savings.
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): (\$972,155.13 X (1 + 1.59%)) = \$987,612.40
• Withdrawal cushion (at Ally Bank): (\$26,862.49 X ((1 + 1.70%)^(1 / 12))) = \$26,900.25
Total Portfolio Balance: \$1,014,512.65
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

Topic Author
longinvest
Posts: 4090
Joined: Sat Aug 11, 2012 8:44 am

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

Forward test as of November 30, 2019

We continue our forward test. Here's a link to the previous entry.

As of November 30, 2019, the retiree's portfolio is composed of:
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): \$987,612.40
• Withdrawal cushion (at Ally Bank): \$26,900.25
Total Portfolio Balance: \$1,014,512.65

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).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

The VPW Worksheet suggests to take a \$5,417 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
• Adjusted withdrawal amount: ((\$5,417 + \$\$26,900.25) / 6) = \$5,386
• Adjustment: (\$5,386 - \$5,417) = -\$31
The retiree transfers \$31 of withdrawal money to the Ally savings account and combines the remaining \$5,386 with the \$1,000 December work pension payment for a total retirement income of \$6,386 available for taxes and expenses in December 2019.

After withdrawal and transfer, (\$987,612.40 - \$5,417) = \$982,195.40 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and (\$26,900.25 + \$31) = \$26,931.25 is left into the withdrawal cushion, for a total portfolio balance of \$1,009,126.65 at the end of November 2019.

The Ally savings account currently carries an annual percentage yield (APY) of 1.70%.

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.

December 2019 total retirement income is \$6,386 and on the morning of December 1, 2019, the total portfolio balance is \$1,009,126.65.

Historical Annual Retirement Income
• 2019: \$76,406 (annualized) -- \$38,203 in 6 months, starting retirement in July
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW