VPW too aggressive?

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balbrec2
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VPW too aggressive?

Post by balbrec2 »

Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
Marseille07
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Re: VPW too aggressive?

Post by Marseille07 »

I'm not a big fan of VPW personally, but it's not aggressive because it is self-correcting based on the AA and your retirement horizon.
Last edited by Marseille07 on Sun Apr 11, 2021 1:16 pm, edited 2 times in total.
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Re: VPW too aggressive?

Post by vineviz »

“Overly aggressive” is kind of a subjective description.

But it is always the case that a higher starting withdrawal rate will correspond to a greater likelihood of needing to reduce that withdrawal rate at some point.

Certainly having a good idea about how tolerable such a reduction would be is crucial is setting an appropriate starting withdrawal rate.
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Re: VPW too aggressive?

Post by David Jay »

Note that 4% is constant in inflation adjusted value. There are costs to achieving this (sequence of returns, etc.) and inflation is built into the 4% number, which is why the VPW percentages are much higher.

One could take 6% of remaining portfolio every year with a very high likelihood of good results. I looked at some Paul Merriman research that backed that up. I chose not to follow that plan, the issue for me was the variable nature of the withdrawal...
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Re: VPW too aggressive?

Post by iamblessed »

David Jay wrote: Sun Apr 11, 2021 1:14 pm Note that 4% is constant in inflation adjusted value. There are costs to achieving this (sequence of returns, etc.) and inflation is built into the 4% number, which is why the VPW percentages are much higher.

One could take 6% of remaining portfolio every year with a very high likelihood of good results. I looked at some Paul Merriman research that backed that up. I chose not to follow that plan, the issue for me was the variable nature of the withdrawal...
I have seen results on a 90/10 fund starting in 2000 until 2020 with more money than they started with at a 5% VPW. I think it had about 25% more than it started with. I was amazed.
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Ben Mathew
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Re: VPW too aggressive?

Post by Ben Mathew »

balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
Yes, since VPW is using raw historical returns as the expected future return, it is too aggressive if you expect future returns to be lower than the past. This has been discussed in the thread on Amortization Based Withdrawal. You can easily modify the VPW strategy by inputting a lower expected return in the ABW calculators provided in the wiki. Many choose to use the earnings yield (i.e. 1/ PE ratio) of the stock market as their preferred estimate. But you can use whatever estimate you think best.

VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
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Ben Mathew
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Re: VPW too aggressive?

Post by Ben Mathew »

Marseille07 wrote: Sun Apr 11, 2021 1:10 pm I'm not a big fan of VPW personally, but it's not aggressive because it is self-correcting based on the AA and your retirement horizon.
VPW is self-correcting, and therefore better than a fixed dollar withdrawal that can eventually fall off a cliff. VPW keeps adjusting and will never run out of funds. The problem with an overly optimistic estimate of future returns will be that withdrawals decline over time instead of staying flat. So you will have consumed too much earlier and will be left with too little later on.

Overestimating portfolio growth by 1% will lead to a 1% decline in withdrawals over time, which can compound to a significant amount over time. If you schedule withdrawals of $50K per year at age 65, the actual withdrawal by age 95 will have dwindled to

- $37K if you overestimated expected growth by 1% per year
- $27K if you overestimated expected growth by 2% per year
- $20K if you overestimated expected growth by 3% per year
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Marseille07
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Re: VPW too aggressive?

Post by Marseille07 »

Ben Mathew wrote: Sun Apr 11, 2021 5:31 pm
Marseille07 wrote: Sun Apr 11, 2021 1:10 pm I'm not a big fan of VPW personally, but it's not aggressive because it is self-correcting based on the AA and your retirement horizon.
VPW is self-correcting, and therefore better than a fixed dollar withdrawal that can eventually fall off a cliff. VPW keeps adjusting and will never run out of funds. The problem with an overly optimistic estimate of future returns will be that withdrawals decline over time instead of staying flat. So you will have consumed too much earlier and will be left with too little later on.

Overestimating portfolio growth by 1% will lead to a 1% decline in withdrawals over time, which can compound to a significant amount over time. If you schedule withdrawals of $50K per year at age 65, the actual withdrawal by age 95 will have dwindled to

- $37K if you overestimated expected growth by 1% per year
- $27K if you overestimated expected growth by 2% per year
- $20K if you overestimated expected growth by 3% per year
Thank you. Yes, overestimating future returns is a big issue with VPW. I believe ABW addresses some of that by allowing us to define how much we want to leave on the table.
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Re: VPW too aggressive?

Post by b4real »

VPW presumes you can cut back your spending by 50% if necessary. If the need to tighten your belt does not materialize or until it does, you can enjoy a higher level of spending.
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Ben Mathew
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Re: VPW too aggressive?

Post by Ben Mathew »

Marseille07 wrote: Sun Apr 11, 2021 5:39 pm
Ben Mathew wrote: Sun Apr 11, 2021 5:31 pm
Marseille07 wrote: Sun Apr 11, 2021 1:10 pm I'm not a big fan of VPW personally, but it's not aggressive because it is self-correcting based on the AA and your retirement horizon.
VPW is self-correcting, and therefore better than a fixed dollar withdrawal that can eventually fall off a cliff. VPW keeps adjusting and will never run out of funds. The problem with an overly optimistic estimate of future returns will be that withdrawals decline over time instead of staying flat. So you will have consumed too much earlier and will be left with too little later on.

Overestimating portfolio growth by 1% will lead to a 1% decline in withdrawals over time, which can compound to a significant amount over time. If you schedule withdrawals of $50K per year at age 65, the actual withdrawal by age 95 will have dwindled to

- $37K if you overestimated expected growth by 1% per year
- $27K if you overestimated expected growth by 2% per year
- $20K if you overestimated expected growth by 3% per year
Thank you. Yes, overestimating future returns is a big issue with VPW. I believe ABW addresses some of that by allowing us to define how much we want to leave on the table.
Yes, and also by allowing you to input your own more conservative return estimate instead of the historical estimate hardcoded into VPW.
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Re: VPW too aggressive?

Post by iamblessed »

American funds used a 5% VPW as an example for many years. I doubt it is to aggressive.
SnowBog
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Re: VPW too aggressive?

Post by SnowBog »

Take a look at the "forward test", thus far I've been very impressed: viewtopic.php?t=284519.

We are several years away from retirement, but the plan is to follow VPW to set an "upper spend limit". We likely won't spend that amount every year, but we have "permission" to safely do so.

I've not found anything simpler (so spouse can continue to follow if I'm not around), just update age (set to a formula in our copy) and portfolio balance - very easy.

And I've been shocked at the consistency and results of the "forward test".
Last edited by SnowBog on Sun Apr 11, 2021 9:27 pm, edited 1 time in total.
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Re: VPW too aggressive?

Post by AlohaJoe »

balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
The VPW spreadsheet lets you put in whatever estimate of future returns you want. If you don't like the default then change it.
SnowBog
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Re: VPW too aggressive?

Post by SnowBog »

Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm
balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
Yes, since VPW is using raw historical returns as the expected future return, it is too aggressive if you expect future returns to be lower than the past. This has been discussed in the thread on Amortization Based Withdrawal. You can easily modify the VPW strategy by inputting a lower expected return in the ABW calculators provided in the wiki. Many choose to use the earnings yield (i.e. 1/ PE ratio) of the stock market as their preferred estimate. But you can use whatever estimate you think best.

VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Hopefully this doesn't derail the original post... But I'm not following how ABW is supposed to be better than VPW...

My - perhaps naive as I haven't read all 15+ pages of the thread - understanding of the original TVM/ABW post was it required someone to make a lot of "future predictions" (CAPE, etc.).

But I didn't see those (other than a more basic "return" assumption which seemed to follow the VPW model) in siamonds calculator.

But what I did find was a far more complicated spreadsheet, one that I could never expect to leave behind for my heirs to follow. Which seemed to be confirmed by early posts by both the OP of the TVM/ABW thead and siamond basically saying their instruction to their surviving spouse was to NOT use TVM/ABW - but instead switch to a fixed % approach.

So why would APW be better HERE [than VPW]? From what I've seen, VPW seems to be a very good model, simple enough to use and leave behind for surviving spouse to use. And used "as intended" with some form of social security/pension (or if needed annuity purchased around 80) to provide "lifetime income", it should be a very reliable model - especially if one can adjust to fluctuations in their income/expenses (like most of us do in our working years).
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Ben Mathew
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Re: VPW too aggressive?

Post by Ben Mathew »

SnowBog wrote: Sun Apr 11, 2021 10:24 pm
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm
balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
Yes, since VPW is using raw historical returns as the expected future return, it is too aggressive if you expect future returns to be lower than the past. This has been discussed in the thread on Amortization Based Withdrawal. You can easily modify the VPW strategy by inputting a lower expected return in the ABW calculators provided in the wiki. Many choose to use the earnings yield (i.e. 1/ PE ratio) of the stock market as their preferred estimate. But you can use whatever estimate you think best.

VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Hopefully this doesn't derail the original post... But I'm not following how ABW is supposed to be better than VPW...

My - perhaps naive as I haven't read all 15+ pages of the thread - understanding of the original TVM/ABW post was it required someone to make a lot of "future predictions" (CAPE, etc.).

But I didn't see those (other than a more basic "return" assumption which seemed to follow the VPW model) in siamonds calculator.

But what I did find was a far more complicated spreadsheet, one that I could never expect to leave behind for my heirs to follow. Which seemed to be confirmed by early posts by both the OP of the TVM/ABW thead and siamond basically saying their instruction to their surviving spouse was to NOT use TVM/ABW - but instead switch to a fixed % approach.

So why would APW be better HERE [than VPW]? From what I've seen, VPW seems to be a very good model, simple enough to use and leave behind for surviving spouse to use. And used "as intended" with some form of social security/pension (or if needed annuity purchased around 80) to provide "lifetime income", it should be a very reliable model - especially if one can adjust to fluctuations in their income/expenses (like most of us do in our working years).
VPW is not simpler than ABW. VPW is a special case of ABW where future return is assumed to equal historical return. You don't have to make an assumption about future returns in VPW only because someone else has made the assumption for you. That doesn't make it a simpler strategy. Just one where a key assumption has been made for you.

It's the user's responsibility to think about whether that assumption makes sense to them. If you think it's a good assumption, then there's no problem. If you don't think it's a good assumption, then you should change it. It's not hard to change.

See Estimating the Expected Return section of the ABW wiki for some alternate sources of expected future returns.

And take a look at the basic ABW calculator in the wiki. You might be surprised at how simple it is.
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Re: VPW too aggressive?

Post by 4nursebee »

Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm
balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
Yes, since VPW is using raw historical returns as the expected future return, it is too aggressive if you expect future returns to be lower than the past. This has been discussed in the thread on Amortization Based Withdrawal. You can easily modify the VPW strategy by inputting a lower expected return in the ABW calculators provided in the wiki. Many choose to use the earnings yield (i.e. 1/ PE ratio) of the stock market as their preferred estimate. But you can use whatever estimate you think best.

VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
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Re: VPW too aggressive?

Post by Schlabba »

balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
Not to derail a discussion on VPW, but the given "Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline" is not really given. In fact, because of low inflation, some might say we're up to a 5% SWR: https://www.fa-mag.com/news/choosing-th ... ection=131
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Re: VPW too aggressive?

Post by Ben Mathew »

4nursebee wrote: Mon Apr 12, 2021 3:18 am
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
The VPW amortization schedules a flat withdrawal (g=0 in the ABW calculator). This means that if actual return equals expected return then withdrawal will constant. If actual return is higher than expected return, withdrawal increases. If it's lower, then withdrawal decreases.

The issue with this is that if the scheduled withdrawal is $50,000 per year, the current year withdrawal is safe at $50,000. But next year's withdrawal will be $50,000 +/- $3,000. The year after will be $50,000+/- $5,000. Thirty years from now it may be something like $50,000 +/- $20,000. So your withdrawals are getting more and more uncertain. But there is no compensating increase in the scheduled withdrawal. So things are looking pretty scary in late retirement.

The alternative is to set scheduled withdrawals to increase over time (g>0 in the ABW calculator). Then this year's consumption may be something lower like $40,000. But next year's is $42,000 +/- $3,000. The year after will be $45,000 +/- $ 5,000. Thirty years from now it may be $60,000 +/- $20000. The increase in scheduled withdrawals is helping ensure that the low outcomes are not so bad. This "precautionary savings" is a natural instinct. It can also be formally derived from a utility maximization model. Only a risk neutral investor can dispense with precautionary saving.

This is not to say that people shouldn't allocate more $ in early retirement to fund extra travel and so on. But the "general expense" category that remains after funding such extra spending would ideally have more dollars in later retirement to combat the increased uncertainty. Such a rising withdrawal schedule can be gotten by setting g>0 in the ABW calculator.
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Re: VPW too aggressive?

Post by withrye »

Ben Mathew wrote: Mon Apr 12, 2021 10:20 am
4nursebee wrote: Mon Apr 12, 2021 3:18 am
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
The VPW amortization schedules a flat withdrawal (g=0 in the ABW calculator). This means that if actual return equals expected return then withdrawal will constant. If actual return is higher than expected return, withdrawal increases. If it's lower, then withdrawal decreases.

The issue with this is that if the scheduled withdrawal is $50,000 per year, the current year withdrawal is safe at $50,000. But next year's withdrawal will be $50,000 +/- $3,000. The year after will be $50,000+/- $5,000. Thirty years from now it may be something like $50,000 +/- $20,000. So your withdrawals are getting more and more uncertain. But there is no compensating increase in the scheduled withdrawal. So things are looking pretty scary in late retirement.

The alternative is to set scheduled withdrawals to increase over time (g>0 in the ABW calculator). Then this year's consumption may be something lower like $40,000. But next year's is $42,000 +/- $3,000. The year after will be $45,000 +/- $ 5,000. Thirty years from now it may be $60,000 +/- $20000. The increase in scheduled withdrawals is helping ensure that the low outcomes are not so bad. This "precautionary savings" is a natural instinct. It can also be formally derived from a utility maximization model. Only a risk neutral investor can dispense with precautionary saving.

This is not to say that people shouldn't allocate more $ in early retirement to fund extra travel and so on. But the "general expense" category that remains after funding such extra spending would ideally have more dollars in later retirement to combat the increased uncertainty. Such a rising withdrawal schedule can be gotten by setting g>0 in the ABW calculator.
This is off-topic, but by coincidence I just posted a concern I had regarding the volatility of VPW withdrawals when market returns are historically bad (e.g. 1966 start date): viewtopic.php?f=10&t=345900

It seems like "precautionary saving" with increased scheduled withdrawals may be a way to reduce the stress of very low withdrawals? One concern I have is that the worst years for the 1966 retiree don't actually start until around a decade into retirement (1979-1985). Can precautionary savings in ABW adequately hedge against poor performance popping up in the middle third of retirement? If so, I'll have to look into that method some more (or find a way to modify the VPW worksheet to perform a similar task).
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Re: VPW too aggressive?

Post by SnowBog »

Ben Mathew wrote: Sun Apr 11, 2021 11:30 pm VPW is not simpler than ABW. VPW is a special case of ABW where future return is assumed to equal historical return. You don't have to make an assumption about future returns in VPW only because someone else has made the assumption for you. That doesn't make it a simpler strategy. Just one where a key assumption has been made for you.

It's the user's responsibility to think about whether that assumption makes sense to them. If you think it's a good assumption, then there's no problem. If you don't think it's a good assumption, then you should change it. It's not hard to change.

See Estimating the Expected Return section of the ABW wiki for some alternate sources of expected future returns.

And take a look at the basic ABW calculator in the wiki. You might be surprised at how simple it is.
OK, while the underlying models may have similar complexity, more specifically the "calculator" for VPW - in my humble opinion - is vastly simplier. I think my spouse would have no problem using it.

The ABW "basic" model, while simple, is not adequate for our use, as we have meaningful income to account for (SS and pensions) - which I didn't see an option for in the "basic" model. I did also populate the "advanced" ABW model, which does account for future income streams, but again that's not something I can see my spouse taking over someday...

Don't get me wrong, I like the conceptual model behind ABM - and if you can get past all the "predictions" one is supposed to make - its fairly intuitive. By contrast, I'm not sure I fully understand the VPW model despite hours spent reading the wiki and threads. But IMHO is a simpler to manage (given the "calculators" available), and I've been very impressed with the "future test" thread results. If those continue for the next several years (leading up to our retirement), I'll have the full confidence in the model to make that be our plan.
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Re: VPW too aggressive?

Post by Ben Mathew »

withrye wrote: Mon Apr 12, 2021 10:31 am
Ben Mathew wrote: Mon Apr 12, 2021 10:20 am
4nursebee wrote: Mon Apr 12, 2021 3:18 am
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
The VPW amortization schedules a flat withdrawal (g=0 in the ABW calculator). This means that if actual return equals expected return then withdrawal will constant. If actual return is higher than expected return, withdrawal increases. If it's lower, then withdrawal decreases.

The issue with this is that if the scheduled withdrawal is $50,000 per year, the current year withdrawal is safe at $50,000. But next year's withdrawal will be $50,000 +/- $3,000. The year after will be $50,000+/- $5,000. Thirty years from now it may be something like $50,000 +/- $20,000. So your withdrawals are getting more and more uncertain. But there is no compensating increase in the scheduled withdrawal. So things are looking pretty scary in late retirement.

The alternative is to set scheduled withdrawals to increase over time (g>0 in the ABW calculator). Then this year's consumption may be something lower like $40,000. But next year's is $42,000 +/- $3,000. The year after will be $45,000 +/- $ 5,000. Thirty years from now it may be $60,000 +/- $20000. The increase in scheduled withdrawals is helping ensure that the low outcomes are not so bad. This "precautionary savings" is a natural instinct. It can also be formally derived from a utility maximization model. Only a risk neutral investor can dispense with precautionary saving.

This is not to say that people shouldn't allocate more $ in early retirement to fund extra travel and so on. But the "general expense" category that remains after funding such extra spending would ideally have more dollars in later retirement to combat the increased uncertainty. Such a rising withdrawal schedule can be gotten by setting g>0 in the ABW calculator.
This is off-topic, but by coincidence I just posted a concern I had regarding the volatility of VPW withdrawals when market returns are historically bad (e.g. 1966 start date): viewtopic.php?f=10&t=345900

It seems like "precautionary saving" with increased scheduled withdrawals may be a way to reduce the stress of very low withdrawals? One concern I have is that the worst years for the 1966 retiree don't actually start until around a decade into retirement (1979-1985). Can precautionary savings in ABW adequately hedge against poor performance popping up in the middle third of retirement? If so, I'll have to look into that method some more (or find a way to modify the VPW worksheet to perform a similar task).
Consumption risk under a flat amortization schedule like VPW uses is low in early retirement, medium in mid retirement and high in late retirement. Precautionary savings with a rising amortization schedule means spending less in early retirement so you'll have more in late retirement to combat the high risk of late retirement. So middle retirement years is not much impacted in terms of scheduled consumption. The benefit to precautionary savings is in late retirement, and the cost is in early retirement.

Still, with a rising amortization schedule you will arrive at middle retirement with a larger portfolio. Though the extra funds is earmarked for late retirement, you may derive some psychological comfort in middle retirement knowing that you won't be in terrible shape in late retirement even if the market crashes again. I know that would be important to me.
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Re: VPW too aggressive?

Post by Ben Mathew »

SnowBog wrote: Mon Apr 12, 2021 11:30 am
Ben Mathew wrote: Sun Apr 11, 2021 11:30 pm VPW is not simpler than ABW. VPW is a special case of ABW where future return is assumed to equal historical return. You don't have to make an assumption about future returns in VPW only because someone else has made the assumption for you. That doesn't make it a simpler strategy. Just one where a key assumption has been made for you.

It's the user's responsibility to think about whether that assumption makes sense to them. If you think it's a good assumption, then there's no problem. If you don't think it's a good assumption, then you should change it. It's not hard to change.

See Estimating the Expected Return section of the ABW wiki for some alternate sources of expected future returns.

And take a look at the basic ABW calculator in the wiki. You might be surprised at how simple it is.
OK, while the underlying models may have similar complexity, more specifically the "calculator" for VPW - in my humble opinion - is vastly simplier. I think my spouse would have no problem using it.

The ABW "basic" model, while simple, is not adequate for our use, as we have meaningful income to account for (SS and pensions) - which I didn't see an option for in the "basic" model. I did also populate the "advanced" ABW model, which does account for future income streams, but again that's not something I can see my spouse taking over someday...

Don't get me wrong, I like the conceptual model behind ABM - and if you can get past all the "predictions" one is supposed to make - its fairly intuitive. By contrast, I'm not sure I fully understand the VPW model despite hours spent reading the wiki and threads. But IMHO is a simpler to manage (given the "calculators" available), and I've been very impressed with the "future test" thread results. If those continue for the next several years (leading up to our retirement), I'll have the full confidence in the model to make that be our plan.
Thank you for your feedback. At some point I may try to create an online ABW calculator that will make the more advanced functions easier to use.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: VPW too aggressive?

Post by 4nursebee »

Ben Mathew wrote: Mon Apr 12, 2021 10:20 am
4nursebee wrote: Mon Apr 12, 2021 3:18 am
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
The VPW amortization schedules a flat withdrawal (g=0 in the ABW calculator). This means that if actual return equals expected return then withdrawal will constant. If actual return is higher than expected return, withdrawal increases. If it's lower, then withdrawal decreases.

The issue with this is that if the scheduled withdrawal is $50,000 per year, the current year withdrawal is safe at $50,000. But next year's withdrawal will be $50,000 +/- $3,000. The year after will be $50,000+/- $5,000. Thirty years from now it may be something like $50,000 +/- $20,000. So your withdrawals are getting more and more uncertain. But there is no compensating increase in the scheduled withdrawal. So things are looking pretty scary in late retirement.

The alternative is to set scheduled withdrawals to increase over time (g>0 in the ABW calculator). Then this year's consumption may be something lower like $40,000. But next year's is $42,000 +/- $3,000. The year after will be $45,000 +/- $ 5,000. Thirty years from now it may be $60,000 +/- $20000. The increase in scheduled withdrawals is helping ensure that the low outcomes are not so bad. This "precautionary savings" is a natural instinct. It can also be formally derived from a utility maximization model. Only a risk neutral investor can dispense with precautionary saving.

This is not to say that people shouldn't allocate more $ in early retirement to fund extra travel and so on. But the "general expense" category that remains after funding such extra spending would ideally have more dollars in later retirement to combat the increased uncertainty. Such a rising withdrawal schedule can be gotten by setting g>0 in the ABW calculator.
You might be right but you are writing with too much fancy stuff for me to comprehend.
I find VPW really really simple. The VPW tables clearly are not advocating for flat withdrawals, they say to withdraw a percent of assets based upon age and asset skew. The percent grows as one ages. Nothing about the amount withdrawn is flat, clearly it is variable.

https://www.bogleheads.org/wiki/Variabl ... withdrawal

Something with the name of variable, structured as variable, is by definition not a flat withdrawal method.
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Re: VPW too aggressive?

Post by 4nursebee »

withrye wrote: Mon Apr 12, 2021 10:31 am
Ben Mathew wrote: Mon Apr 12, 2021 10:20 am
4nursebee wrote: Mon Apr 12, 2021 3:18 am
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
The VPW amortization schedules a flat withdrawal (g=0 in the ABW calculator). This means that if actual return equals expected return then withdrawal will constant. If actual return is higher than expected return, withdrawal increases. If it's lower, then withdrawal decreases.

The issue with this is that if the scheduled withdrawal is $50,000 per year, the current year withdrawal is safe at $50,000. But next year's withdrawal will be $50,000 +/- $3,000. The year after will be $50,000+/- $5,000. Thirty years from now it may be something like $50,000 +/- $20,000. So your withdrawals are getting more and more uncertain. But there is no compensating increase in the scheduled withdrawal. So things are looking pretty scary in late retirement.

The alternative is to set scheduled withdrawals to increase over time (g>0 in the ABW calculator). Then this year's consumption may be something lower like $40,000. But next year's is $42,000 +/- $3,000. The year after will be $45,000 +/- $ 5,000. Thirty years from now it may be $60,000 +/- $20000. The increase in scheduled withdrawals is helping ensure that the low outcomes are not so bad. This "precautionary savings" is a natural instinct. It can also be formally derived from a utility maximization model. Only a risk neutral investor can dispense with precautionary saving.

This is not to say that people shouldn't allocate more $ in early retirement to fund extra travel and so on. But the "general expense" category that remains after funding such extra spending would ideally have more dollars in later retirement to combat the increased uncertainty. Such a rising withdrawal schedule can be gotten by setting g>0 in the ABW calculator.
This is off-topic, but by coincidence I just posted a concern I had regarding the volatility of VPW withdrawals when market returns are historically bad (e.g. 1966 start date): viewtopic.php?f=10&t=345900

It seems like "precautionary saving" with increased scheduled withdrawals may be a way to reduce the stress of very low withdrawals? One concern I have is that the worst years for the 1966 retiree don't actually start until around a decade into retirement (1979-1985). Can precautionary savings in ABW adequately hedge against poor performance popping up in the middle third of retirement? If so, I'll have to look into that method some more (or find a way to modify the VPW worksheet to perform a similar task).
My workaround for the issue of a bad market is to have two years of expenses readily available. It also helps to have more assets than needed.
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Re: VPW too aggressive?

Post by Raspberry-503 »

withrye wrote: Mon Apr 12, 2021 10:31 am
Ben Mathew wrote: Mon Apr 12, 2021 10:20 am
4nursebee wrote: Mon Apr 12, 2021 3:18 am
Ben Mathew wrote: Sun Apr 11, 2021 5:24 pm VPW may also be too aggressive in another way that has been underappreciated. By allocating a flat withdrawal amount over remaining years, it's placing more risk in late retirement years than in early retirement years (discussed in this post). This can be addressed by scheduling increasing withdrawals (g>0) in the ABW calculator. This is basically "precautionary savings." You are saving not because you necessarily want to consume more in late retirement, but to mitigate the increased risk of late retirement.
Flat withdrawal rate over remaining years? Not my read of things. I thought the rate gets calculated each year.
The VPW amortization schedules a flat withdrawal (g=0 in the ABW calculator). This means that if actual return equals expected return then withdrawal will constant. If actual return is higher than expected return, withdrawal increases. If it's lower, then withdrawal decreases.

The issue with this is that if the scheduled withdrawal is $50,000 per year, the current year withdrawal is safe at $50,000. But next year's withdrawal will be $50,000 +/- $3,000. The year after will be $50,000+/- $5,000. Thirty years from now it may be something like $50,000 +/- $20,000. So your withdrawals are getting more and more uncertain. But there is no compensating increase in the scheduled withdrawal. So things are looking pretty scary in late retirement.

The alternative is to set scheduled withdrawals to increase over time (g>0 in the ABW calculator). Then this year's consumption may be something lower like $40,000. But next year's is $42,000 +/- $3,000. The year after will be $45,000 +/- $ 5,000. Thirty years from now it may be $60,000 +/- $20000. The increase in scheduled withdrawals is helping ensure that the low outcomes are not so bad. This "precautionary savings" is a natural instinct. It can also be formally derived from a utility maximization model. Only a risk neutral investor can dispense with precautionary saving.

This is not to say that people shouldn't allocate more $ in early retirement to fund extra travel and so on. But the "general expense" category that remains after funding such extra spending would ideally have more dollars in later retirement to combat the increased uncertainty. Such a rising withdrawal schedule can be gotten by setting g>0 in the ABW calculator.
This is off-topic, but by coincidence I just posted a concern I had regarding the volatility of VPW withdrawals when market returns are historically bad (e.g. 1966 start date): viewtopic.php?f=10&t=345900

It seems like "precautionary saving" with increased scheduled withdrawals may be a way to reduce the stress of very low withdrawals? One concern I have is that the worst years for the 1966 retiree don't actually start until around a decade into retirement (1979-1985). Can precautionary savings in ABW adequately hedge against poor performance popping up in the middle third of retirement? If so, I'll have to look into that method some more (or find a way to modify the VPW worksheet to perform a similar task).
old thread but I am rediscovering it as I look at alternatives to VPW, not because I don't like VPW, but because I want to understand the arguments for and and against it as well as the drawbacks other tools try to resolve. I find the backtesting spreadsheet (link in the wiki) to be very useful in understanding how VPW would have behaved for a year like 1966. I also ended up making my version of the spreadsheet mostly so that it could import values from other tabs in the spreadsheet.

In my case between TIPS ladder and SS, I have just below 75% of my "aspirational comfortable lifestyle" covered outside of the portfolio, with the that floor providing basic expenses with minor comfort (not travel remodel or fancy purchases, but no rice and beans either). Running the backtest for 1966 shows that the median withdrawal would have exceeded my "aspirational comfortable lifestyle", so more years above target than not, and the worse year would be only -25% from the median, so not that far from target, with an upside of up to +30% above median, in this case mostly in the later years. Ir reinforces what longinvest has been saying all along: VPW is great when you have other income sources and can adapt to wide variations in the VPW withdrawal, including figuring it out how to spend it when the market is great (I made up that last part, not longinvest).

If I had applied the 4% rule blindly, I would have ran out of money after 15 years rather than enjoying more comfort in late life or passing on something to my heirs. Nobody(?) applies the 4% rule blindly, but the VPW provides a framework on where to start rather than guess.

I think all the amortization method have similar characteristics to VPW, and maybe they are safer if your income floor is really low or retirement really long, but so far, VPW seems to be hitting the sweet spot for my case. You can also modulate your AA over time to address some of the risks later in life.
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Re: VPW too aggressive?

Post by GaryA505 »

I think we're in a similar situation. I have ruled out the "4% rule" and am looking at other methods like VPW, ABW, RMD+. I have an atypical scenario due to a large age difference between me and my wife. Ideally we would have a higher DW rate while I'm still alive. Our RMD will be a little whacky, as there will probably be a few years between my departure and start of my wife's RMD.

I need a plan that I an older me and my widow can execute without too much trouble. I'm thinking of creating my own WD percentage table using VPW as a reference. I use New Retirement which also gives me an idea of what the percentages should be. For tax-deferred they need to be RMD or higher.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: VPW too aggressive?

Post by dcabler »

GaryA505 wrote: Thu Feb 08, 2024 5:12 pm I think we're in a similar situation. I have ruled out the "4% rule" and am looking at other methods like VPW, ABW, RMD+. I have an atypical scenario due to a large age difference between me and my wife. Ideally we would have a higher DW rate while I'm still alive. Our RMD will be a little whacky, as there will probably be a few years between my departure and start of my wife's RMD.

I need a plan that I an older me and my widow can execute without too much trouble. I'm thinking of creating my own WD percentage table using VPW as a reference. I use New Retirement which also gives me an idea of what the percentages should be. For tax-deferred they need to be RMD or higher.
I've settled on my own version of ABW, but I don't rebalance between stocks and bonds
Stocks: Very ABW like in that I amortize and I just use 1/CAPE as a rough estimate of future real returns for the rate parameter in the Excel PMT function. There are plenty of other sources for estimated returns such as what is published on Research Affiliates - it has many different assets with estimated future returns.

Bonds: Here I'm duration matching using 2 TIPS funds at a time. I'm also using TMV concepts based on future SS streams which allows for higher withdrawals from my TIPS funds while I'm younger. The additional withdrawals will cease once SS starts. Or, rather the additional withdrawals will step down when my DW starts and then step down again when I start. From that point forward TIPS will last until we're in our mid 90's and, when combined with SS will form a fairly solid income floor. Sometime in the next few 1's of years I'll likely switch our duration matched TIPS funds into ladders (SS bridge + steady state) in order for income from that source to be more hands-free, especially for my DW.

Longer term.
When we get to our 80's, if we're still kicking and if it looks like that we're in good health, we'll consider converting some of the TIPS to a SPIA.
Also one of the things about amortization is that, at least in backtesting, the portfolio value tends to move around a mean until the last few 1's of years, when it then starts to deplete - assuming you are targetting a terminal value of $0. Again, once we get into our 80's, both to avoid depletion and to simplify things, we'll likely transition to a fixed % of portfolio value for stock withdrawals.

Cheers.
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Re: VPW too aggressive?

Post by 4nursebee »

balbrec2 wrote: Sun Apr 11, 2021 1:05 pm Given todays low interest rate environment and the calling into question the previously
thought safe 4% withdrawal guideline, are the withdrawal rates specified in the VPW chart
possibly overly aggressive? Looked for a thread on this but couldn't find anything that really
addressed this specifically. Thanks in advance for your thoughts.
OP,
have you reached a conclusion on this?
Can you explain your opinion of this being related to low interest rates and 4% guideline?
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