You're lucky* that I was subscribed to the other thread, so I got notice of your reply.
* If you didn't notice, I am taking a leave from the Bogleheads forums, except for answering questions on some subscribed threads, when I get notice of a post.
In another thread:
First of all, thank you for answering my question in the VPW thread, didn't want to thank you there and further clutter the thread.
You're welcome. It would be worse to scatter answers about VPW in other threads. So, I am replying here.
Isn't building either a TIPS ladder or CD the same as increasing bond exposure of the overall portfolio which you have shown reduces jitteriness on VPW withdrawal? I understand you don't recommend VPW as a stand alone retirement income strategy, and CD/TIPS ladder will be beneficial in that sense, but adding those just to smooth out WR is the same as increasing bond allocation to smooth it out, no?
No, it is not the same. I am proposing to use a non-rolling CD (or TIPS) ladder to build a predictable** income stream
over a very specific time frame. While the non-rolling CD ladder carries some inflation risk, over the typical 7 years*** (from age 62 to 69) when it serves to fill the gap in delayed Social Security payments until age 70, the cumulative risk of inflation is low enough. The non-rolling CD ladder is very easy to build (easier than a non-rolling TIPS ladder) and it's often possible to find higher yielding CDs.
The role of the ladder is to deliver specific amounts of money on specific dates during a specific time period. It's effectively a do-it-yourself term-certain SPIA
(Single Premium Immediate Annuity); it is not
meant as the equivalent of a bond fund in a portfolio.
Like a SPIA, this income stream is not affected by stock or bond market fluctuations. While bond market fluctuations (or yields across the curve, if you prefer) affect the marked-to-market value of the non-rolling ladder, they don't affect the income stream, as there is no reinvestment risk whatsoever.
** The CD ladder allows for a predictable nominal income stream of increasing payments, hopefully matching inflation or beating it. A TIPS ladder would allow for a predictable real income stream.
*** Of course, the money for first year of the 8 missing Social Security payments is not put into the ladder; it is put into a savings account to be spent during the first year.
How about if the objective is to maximize withdrawal for the first 10 years of of a 40 year retirement. Which is different from the objectives laid out here or with VPW.
Future returns, specially those of each of the next 10 years, are impossible to predict for total-market bond and stock index funds. (See The Futility of Predicting Future Returns for an actual proof of this)
. Furthermore, VPW cannot guarantee an income floor. All it mathematically guarantees is that it won't prematurely deplete the portfolio, regardless of future returns.
So, trying to tweak VPW's percentages to front-load withdrawals is an exercise in futility. Of course one could easily increase the likelihood of higher initial withdrawals by increasing the internal rate, but this could easily leave the retiree in an undesirable financial position later on.
Also, we just don't know if markets won't decide to crash just after the day we retire
. And if they do, we just don't know when they'll recover.
Principle #1 of our Philosophy
tells us to Develop a workable plan
. We must have a plan which will work even if markets crash at an inopportune time.
So, to guarantee that one will not only have enough, but actually have more during an initial 10-year period, the best way is to buy an income stream which is unaffected by markets for the additional spending in that initial period. This can be done using a non-rolling CD (or TIPS) ladder or a term-certain inflation-indexed SPIA.
Let me take a step back. Here's my workable
plan for when I retire (far in the future):
1- I will delay government pensions (OAS and QPP, in Canada, equivalent to U.S. Social Security) until age 70 to maximize this lifelong non-portfolio inflation-indexed income base.
2- I will fill the gap in the above payments between retirement and age 70 using a non-rolling ladder.
3- I will have a sizeable non-indexed pension which will provide additional lifelong but decreasing base income (in real terms) unaffected by markets.
4- I will have a huge pot of money (a balanced portfolio) from which I will safely withdraw using VPW.
5- Around age 80, assuming I'm still alive, I will use enough of the remaining pot of money to insure my wife and myself a sufficient
lifelong inflation-indexed income floor
(taking into account government pensions). The idea is that even if the portfolio gets down to zero, this floor should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
6- I will continue depleting the remaining pot of money using VPW, but I might adjust the last withdrawal age, based on our specific circumstances. It's too early to say.
What I was suggesting, earlier, is to add an additional 10-year income stream to such a plan to take care of additional spending during the initial 10-year period. This should be simple enough.
Kitces had shown the first 10 years of poor market performance as the biggest influence in the success of a SAFEMAX withdrawal and thus the SWR needs to be unnecessarily conservative for this potential to happen, dampening the potential spending, which would have been unnecessary in majority of the cases.
Any study based on using SWR as an actual withdrawal method during retirement is meaningless. I won't waste my time discussing such a study.
Reminder: The goal of the Trinity study was not
to to promote 4% SWR as an actual
withdrawal method, it was to discredit the 8% and more withdrawal rates that some financial advisers were suggesting at the time based on stocks returning as much. Look for Nisiprius' request for clarification and the author's answer in our Wiki's Safe withdrawal rates
I have to of course keep track of SWR rate by keeping tally of what I would have withdrawn each year adjusted for inflation on a separate sheet (the actual balance via VPW will be different than this theoretical pathway if I decided to follow SAFEMAX from the start).
SWR is a dumb withdrawal method which lets most of its retirees die as the richest people in the graveyard, while bankrupting most of its remaining retirees. I don't understand why anyone would ever consider using such brainless method. By the way, you just don't know what SAFEMAX is, and nobody will know, until the day you die. Not very useful, if you ask me.
If you want my opinion, it's this: forget about SWR during retirement; it's a rough planning tool to help answer: how much do I approximately need to retire. If you want a stable
income stream, just go and buy one. For lifelong income, SPIAs do exist and can be bought, including inflation-indexed ones. For time-limited income, one can easily build a non-rolling CD ladder. Of course, a stable income stream is more expensive than a fluctuating one. With some flexibility, one can afford to complement a base stable income with fluctuating income. A balanced portfolio along with VPW can provide such a complementary income while keeping fluctuations at a manageable level.
OK, it took a long time to write this post; I'm way over my Bogleheads time allocation. I just hope my post will help you design your own workable
plan. Just try to stay away from anything that relies on guessing future returns; we just don't know, so it's not workable.
Bogleheads investment philosophy |
Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term bonds |