## Variable Percentage Withdrawal -> Before retirement Age

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Topic Author
KlangFool
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### Variable Percentage Withdrawal -> Before retirement Age

Folks,

My apology ahead of time if this is addressed in the Wiki. I need an example to understand this.

Let's assume the portfolio is 1.5 million and the full retirement age for social security is 67 years old.

A) The annual expense is 60K

B) And, the social security income with a couple = 30K at 67 years old.

This couple retires at 57 years old.

My understanding is (10 years X 60K = ) 600K will be kept as CD or something safe from 57 years old to 67 years old. The portfolio for VPW standpoint is 1.5 million - 600K = 900K. So, the person should use VPW table starting at 67 years old with a portfolio size of 900K.

Am I correct?

KlangFool

VictoriaF
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### Re: Variable Percentage Withdrawal -> Before retirement Age

That's what i am doing, except that I will start taking the Social Security at the age of 70.

I have cash-equivalent assets to pay for my expenses between now and the age of 70. When I use the VPW spreadsheet, I subtract this cash amount from my total assets, and I use the spreadsheet as if I were already 70.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

Topic Author
KlangFool
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### Re: Variable Percentage Withdrawal -> Before retirement Age

VictoriaF wrote:
Thu Sep 07, 2017 8:27 pm
That's what i am doing, except that I will start taking the Social Security at the age of 70.

I have cash-equivalent assets to pay for my expenses between now and the age of 70. When I use the VPW spreadsheet, I subtract this amount of this cash from my total assets, and I use the spreadsheet as if I were already 70.

Victoria
Victoria,

As per my example, when would the person start using the VPW spreadsheet? 57 years old or 67 years old?

Thanks.

KlangFool

VictoriaF
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### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool wrote:
Thu Sep 07, 2017 8:35 pm
VictoriaF wrote:
Thu Sep 07, 2017 8:27 pm
That's what i am doing, except that I will start taking the Social Security at the age of 70.

I have cash-equivalent assets to pay for my expenses between now and the age of 70. When I use the VPW spreadsheet, I subtract this amount of this cash from my total assets, and I use the spreadsheet as if I were already 70.

Victoria
Victoria,

As per my example, when would the person start using the VPW spreadsheet? 57 years old or 67 years old?

Thanks.

KlangFool
KlangFool,

The person can use the spreadsheet today to check his future withdrawals. The input into the spreadsheet will be 67 years old and \$900,000 in assets.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

curmudgeon
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### Re: Variable Percentage Withdrawal -> Before retirement Age

I think the intent here would be to use the CDs for a basic constant withdrawal, and the VPW on the remaining portfolio. It seems to me that in the example indicated, you would use \$900K and age 57 for the initial withdrawal. Then adjust each year based on the new portfolio balance (still ignoring the CDs and SS). But I haven't looked very closely at VPW.

VictoriaF
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### Re: Variable Percentage Withdrawal -> Before retirement Age

curmudgeon wrote:
Thu Sep 07, 2017 8:59 pm
I think the intent here would be to use the CDs for a basic constant withdrawal, and the VPW on the remaining portfolio. It seems to me that in the example indicated, you would use \$900K and age 57 for the initial withdrawal. Then adjust each year based on the new portfolio balance (still ignoring the CDs and SS). But I haven't looked very closely at VPW.
Age 57 will not work, because:
1) between the ages of 57 and 67 the person in the example does not have Social Security yet
2) between the ages of 57 and 67 the person in the example does not need to withdraw any money from his \$900,000 portfolio, because he has \$600,000 specifically dedicated to the living expenses during this period.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

curmudgeon
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### Re: Variable Percentage Withdrawal -> Before retirement Age

VictoriaF wrote:
Thu Sep 07, 2017 9:16 pm
curmudgeon wrote:
Thu Sep 07, 2017 8:59 pm
I think the intent here would be to use the CDs for a basic constant withdrawal, and the VPW on the remaining portfolio. It seems to me that in the example indicated, you would use \$900K and age 57 for the initial withdrawal. Then adjust each year based on the new portfolio balance (still ignoring the CDs and SS). But I haven't looked very closely at VPW.
Age 57 will not work, because:
1) between the ages of 57 and 67 the person in the example does not have Social Security yet
2) between the ages of 57 and 67 the person in the example does not need to withdraw any money from his \$900,000 portfolio, because he has \$600,000 specifically dedicated to the living expenses during this period.

Victoria
This is one of those cases where even something straightforward-looking is subject to misinterpretation. If the CDs are to replace a 2 x 30,000 SS income, then in your example, it seems like the person never withdraws from his portfolio at all; prior to 67 he uses the CDs, after he uses SS. Alternately, if 30,000 is the total SS benefit, then it is not clear why %600K is being set aside instead of \$300K.

Assuming the \$30K total SS benefit, my inclination would be to draw \$30K from CDs from age 57 to 67, plus a VPW amount from the remaining portfolio each year starting at age 57. The alternative would be saying you want/need a completely fixed income from age 57 to 67, but can live with the variation later in life. If you want to use VPW, I'm not sure there is a point in delaying (if you had a mortgage or college bills, you would match that with CDs).

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### Re: Variable Percentage Withdrawal -> Before retirement Age

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).

The wiki article is here: Variable percentage withdrawal
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Johnnie
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### Re: Variable Percentage Withdrawal -> Before retirement Age

curmudgeon wrote:
Thu Sep 07, 2017 9:42 pm
...Assuming the \$30K total SS benefit, my inclination would be to draw \$30K from CDs from age 57 to 67, plus a VPW amount from the remaining portfolio each year starting at age 57.
I think that is the intent. That's pretty much what I'm looking at for the bridge years between leaving work and starting to take SS at 70. The goal is to safely take more early when you have the energy and health to do expensive fun things, without overdoing it and running out money before you run out of life later.

The CDs or cash equivalent provide about the same amount in the bridge years that social security will later, and because your VPW (or SWR) is based on only the amount left in the portfolio after separating all that cash your annual portfolio withdrawals are smaller.

I'm looking at the non-rolling CDs + distributions based on a smaller portfolio device as both a carburetor and "governor," like on a motor. It lets you balance the pre- and post social security cash flow, feeding the right amount of "gas" (annual income) but not too much in both phases.
"I know nothing."

VictoriaF
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### Re: Variable Percentage Withdrawal -> Before retirement Age

curmudgeon wrote:
Thu Sep 07, 2017 9:42 pm
VictoriaF wrote:
Thu Sep 07, 2017 9:16 pm
curmudgeon wrote:
Thu Sep 07, 2017 8:59 pm
I think the intent here would be to use the CDs for a basic constant withdrawal, and the VPW on the remaining portfolio. It seems to me that in the example indicated, you would use \$900K and age 57 for the initial withdrawal. Then adjust each year based on the new portfolio balance (still ignoring the CDs and SS). But I haven't looked very closely at VPW.
Age 57 will not work, because:
1) between the ages of 57 and 67 the person in the example does not have Social Security yet
2) between the ages of 57 and 67 the person in the example does not need to withdraw any money from his \$900,000 portfolio, because he has \$600,000 specifically dedicated to the living expenses during this period.

Victoria
This is one of those cases where even something straightforward-looking is subject to misinterpretation. If the CDs are to replace a 2 x 30,000 SS income, then in your example, it seems like the person never withdraws from his portfolio at all; prior to 67 he uses the CDs, after he uses SS. Alternately, if 30,000 is the total SS benefit, then it is not clear why %600K is being set aside instead of \$300K.
As I understood KlangFool's example, \$30k is the total Social Security benefit for the couple.

\$600k is set aside because in the example the couple's expenses are \$60k/year and they need to cover 10 years of expenses.
curmudgeon wrote:
Thu Sep 07, 2017 9:42 pm
Assuming the \$30K total SS benefit, my inclination would be to draw \$30K from CDs from age 57 to 67, plus a VPW amount from the remaining portfolio each year starting at age 57.
In this case, what would you input into the model for the Social Security? \$30k starting at the age of 57? The back-testing part of the VPW spreadsheet assumes that Social Security payments change every year.
curmudgeon wrote:
Thu Sep 07, 2017 9:42 pm
The alternative would be saying you want/need a completely fixed income from age 57 to 67, but can live with the variation later in life. If you want to use VPW, I'm not sure there is a point in delaying (if you had a mortgage or college bills, you would match that with CDs).
In my own case, it's easier to assume fixed income before the age of 70, and after 70 to use the VPW for whatever is left. Now, I am making Roth conversions and spending money on paying taxes on conversions. I also have allocated a fairly high annual budget so that I don't have to deny myself anything before I turn 70. At the age of 70, I will enter a new phase: all my income will be known (SS and pensions), all my tax-deferred accounts will be converted into Roth, my tax liabilities will become stable after I stop Roth conversions, and I will know the exact amount of my remaining assets. At that time, I may also re-think my asset allocation.

With all critical information known at the age of 70, using VPW will be more meaningful.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

victw
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### Re: Variable Percentage Withdrawal -> Before retirement Age

curmudgeon wrote:
Thu Sep 07, 2017 9:42 pm
VictoriaF wrote:
Thu Sep 07, 2017 9:16 pm
curmudgeon wrote:
Thu Sep 07, 2017 8:59 pm
I think the intent here would be to use the CDs for a basic constant withdrawal, and the VPW on the remaining portfolio. It seems to me that in the example indicated, you would use \$900K and age 57 for the initial withdrawal. Then adjust each year based on the new portfolio balance (still ignoring the CDs and SS). But I haven't looked very closely at VPW.
Age 57 will not work, because:
1) between the ages of 57 and 67 the person in the example does not have Social Security yet
2) between the ages of 57 and 67 the person in the example does not need to withdraw any money from his \$900,000 portfolio, because he has \$600,000 specifically dedicated to the living expenses during this period.

Victoria
This is one of those cases where even something straightforward-looking is subject to misinterpretation. If the CDs are to replace a 2 x 30,000 SS income, then in your example, it seems like the person never withdraws from his portfolio at all; prior to 67 he uses the CDs, after he uses SS. Alternately, if 30,000 is the total SS benefit, then it is not clear why %600K is being set aside instead of \$300K.

Assuming the \$30K total SS benefit, my inclination would be to draw \$30K from CDs from age 57 to 67, plus a VPW amount from the remaining portfolio each year starting at age 57. The alternative would be saying you want/need a completely fixed income from age 57 to 67, but can live with the variation later in life. If you want to use VPW, I'm not sure there is a point in delaying (if you had a mortgage or college bills, you would match that with CDs).
This is actually how we plan on doing it - put the the SS equivalent to the side for the years before SS - in our case it also overs about half our expenses. And then we will do some combination of VPW/SWR from the remainder.

I think KlangFool's plan is more conservative - and I think ours is slightly riskier. But I also have a threshold amount that we will not withdraw under - in other words - back to work.

Well actually this is how I would like to do it - but I'm not sure myself and SO will be in agreement - we still have 2 to 4 years to figure it out.

Vic

MikeG62
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### Re: Variable Percentage Withdrawal -> Before retirement Age

Seems awfully conservative to hold 40% of ones portfolio in cash (\$600K/\$1,500) for such a long period of time. I get one or two years expenses in cash. Then a diversified portfolio for the remainder (something like 50% stocks and 50% bonds) seems appropriate.
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Topic Author
KlangFool
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### Re: Variable Percentage Withdrawal -> Before retirement Age

MikeG62 wrote:
Fri Sep 08, 2017 7:51 am
Seems awfully conservative to hold 40% of ones portfolio in cash (\$600K/\$1,500) for such a long period of time. I get one or two years expenses in cash. Then a diversified portfolio for the remainder (something like 50% stocks and 50% bonds) seems appropriate.
MikeG62,

1) This thread is focused on the process and procedure to use VPW. And, how to fund the years before social security withdrawal. It is not a generic AA discussion.

2) I could change the 900K portfolio into 90/10 instead of 60/40. That would not change my question a bit.

KlangFool

Hyperborea
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### Re: Variable Percentage Withdrawal -> Before retirement Age

So, why are you putting twice the social security amount per year into the CDs? If you want to replicate the SS payments you would only put \$300K (\$30K x 10) in CDs. What's the other \$300K for?
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Topic Author
KlangFool
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### Re: Variable Percentage Withdrawal -> Before retirement Age

Hyperborea wrote:
Fri Sep 08, 2017 3:04 pm
So, why are you putting twice the social security amount per year into the CDs? If you want to replicate the SS payments you would only put \$300K (\$30K x 10) in CDs. What's the other \$300K for?
Hyperborea,

My annual expense is 60K. This is part of the question. Do I duplicate the social security income before I withdraw the social security or do I need the full amount as per the annual expense?

KlangFool

Hyperborea
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### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool wrote:
Fri Sep 08, 2017 3:16 pm
Hyperborea wrote:
Fri Sep 08, 2017 3:04 pm
So, why are you putting twice the social security amount per year into the CDs? If you want to replicate the SS payments you would only put \$300K (\$30K x 10) in CDs. What's the other \$300K for?
Hyperborea,

My annual expense is 60K. This is part of the question. Do I duplicate the social security income before I withdraw the social security or do I need the full amount as per the annual expense?

KlangFool
It sounds then that you want to put only \$300K into the CDs to replicate the SS for 10 years and then take from the remainder of the portfolio, \$1.2 million, whatever the withdrawal strategy suggests. \$30K from \$1.2M is only 2.5% which is super conservative. At 57 VPW suggests that you can withdraw between 3.7% and 5.1% depending on the asset allocation.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Topic Author
KlangFool
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### Re: Variable Percentage Withdrawal -> Before retirement Age

Hyperborea wrote:
Fri Sep 08, 2017 3:25 pm
KlangFool wrote:
Fri Sep 08, 2017 3:16 pm
Hyperborea wrote:
Fri Sep 08, 2017 3:04 pm
So, why are you putting twice the social security amount per year into the CDs? If you want to replicate the SS payments you would only put \$300K (\$30K x 10) in CDs. What's the other \$300K for?
Hyperborea,

My annual expense is 60K. This is part of the question. Do I duplicate the social security income before I withdraw the social security or do I need the full amount as per the annual expense?

KlangFool
It sounds then that you want to put only \$300K into the CDs to replicate the SS for 10 years and then take from the remainder of the portfolio, \$1.2 million, whatever the withdrawal strategy suggests. \$30K from \$1.2M is only 2.5% which is super conservative. At 57 VPW suggests that you can withdraw between 3.7% and 5.1% depending on the asset allocation.
Hyperborea,

<<At 57 VPW suggests that you can withdraw between 3.7% and 5.1% depending on the asset allocation.>>

That is the question. If I follow the VPW methodology, how do I cover the years before 67 years old?

A) Allocate 30K per year between 57 to 67 and start using VPW at 57. Reserve 300K. VPW portfolio = 1.2 million

B) Allocate 60K per year between 57 to 67 and start using VPW at 67. VPW portfolio = 900K.

In this case, the number works out. Even for (A), VPW provides more than 60K per year. What is that is not true, then what? VPW is not possible if the portfolio is too small?

KlangFool

freebeer
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### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool wrote:
Fri Sep 08, 2017 3:31 pm
...If I follow the VPW methodology, how do I cover the years before 67 years old?

A) Allocate 30K per year between 57 to 67 and start using VPW at 57. Reserve 300K. VPW portfolio = 1.2 million
...
Option A is sensible. BUT, it is a bit conservative to assume 0% real return over the 10 years. It would seem to make sense to reserve something less than \$300K. You can use PV function in Excel to calculate this. More info: http://www.investopedia.com/terms/p/pre ... nnuity.asp . For that matter you could buy a 10-year period certain annuity that paid \$30K/year for less than \$300K.

To be fair though I model this variant of my own "retirement readiness" calculation without any such NPV discount. But that is mainly to be intentionally conservative. If I was modeling based on feasibility I would apply NPV discont.

Hyperborea
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### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool wrote:
Fri Sep 08, 2017 3:31 pm
Hyperborea,

<<At 57 VPW suggests that you can withdraw between 3.7% and 5.1% depending on the asset allocation.>>

That is the question. If I follow the VPW methodology, how do I cover the years before 67 years old?

A) Allocate 30K per year between 57 to 67 and start using VPW at 57. Reserve 300K. VPW portfolio = 1.2 million

B) Allocate 60K per year between 57 to 67 and start using VPW at 67. VPW portfolio = 900K.

In this case, the number works out. Even for (A), VPW provides more than 60K per year. What is that is not true, then what? VPW is not possible if the portfolio is too small?

KlangFool
If you are going to use the VPW method at some point then you need to believe that it will work otherwise you need to find another system. You are either using it now or at 67. If you don't feel comfortable doing so when you reach 67 what will you do?

The downside to waiting to 67 is that you are tying up a high percentage of your portfolio in something that will almost assuredly lose out to inflation. Even \$300K over 10 years will lose out so that the final \$30K even with CD level interest will be worth less than \$30K real but with the VPW withdrawals being higher than your needs that should make up for the loss.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Topic Author
KlangFool
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### Re: Variable Percentage Withdrawal -> Before retirement Age

Hyperborea wrote:
Fri Sep 08, 2017 4:54 pm
KlangFool wrote:
Fri Sep 08, 2017 3:31 pm
Hyperborea,

<<At 57 VPW suggests that you can withdraw between 3.7% and 5.1% depending on the asset allocation.>>

That is the question. If I follow the VPW methodology, how do I cover the years before 67 years old?

A) Allocate 30K per year between 57 to 67 and start using VPW at 57. Reserve 300K. VPW portfolio = 1.2 million

B) Allocate 60K per year between 57 to 67 and start using VPW at 67. VPW portfolio = 900K.

In this case, the number works out. Even for (A), VPW provides more than 60K per year. What is that is not true, then what? VPW is not possible if the portfolio is too small?

KlangFool
If you are going to use the VPW method at some point then you need to believe that it will work otherwise you need to find another system. You are either using it now or at 67. If you don't feel comfortable doing so when you reach 67 what will you do?

The downside to waiting to 67 is that you are tying up a high percentage of your portfolio in something that will almost assuredly lose out to inflation. Even \$300K over 10 years will lose out so that the final \$30K even with CD level interest will be worth less than \$30K real but with the VPW withdrawals being higher than your needs that should make up for the loss.
Hyperborea,

My question is if I am following the system, do I choose (A) or (B)? Is the answer = (A)? I do not understand the system. Hence, I started this topic.

I cannot know whether the system will work. I need to know what the system is in the first place.

KlangFool

Hyperborea
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### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool wrote:
Fri Sep 08, 2017 5:19 pm
Hyperborea,

My question is if I am following the system, do I choose (A) or (B)? Is the answer = (A)? I do not understand the system. Hence, I started this topic.

I cannot know whether the system will work. I need to know what the system is in the first place.

KlangFool
I wouldn't follow any system, withdrawal or otherwise, that I didn't fully understand.

VPW is a system for telling you how to withdraw from your portfolio. You need to decide when to start withdrawing. VPW doesn't seem to me to dictate either (A) or (B). Choice (A) puts you in a position similar to what you would be in if you started SS now with \$30K / year. With a 50/50 portfolio, VPW would have you take 4.4% of your current portfolio value at age 57 and even if the equities dropped by 50% you would still be able to withdraw nearly \$40K / year. That's more than your required \$30K / year top up.

So, even if things are bad as a 50% drop in equities then choice (A) also gives you more money in your early years of retirement when you are still healthy and can enjoy it. If things aren't that bad then you get even more to spend on activities you won't be able to do as you age.

"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

curmudgeon
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### Re: Variable Percentage Withdrawal -> Before retirement Age

The key point is that you are allowing for a variable withdrawal with this system. This means that not just the percentage of your portfolio which you withdraw, but also the dollar amount each year will be variable. If you can't handle some variation in the yearly income, then the system won't work for you.

Having a fixed base income (SS at 67 and CDs before) reduces the amount of variation in your yearly income incurred by using VPW on the remainder. It can make it easier to understand that your portfolio has reached a sustainable level.

When SS is a significant part of your retirement income, creating a "pre-SS" income stream for early retirement makes it easier to model the rest of the portfolio. If you do the "pre-SS" with \$300K, then getting \$30K/year out of the remaining \$1.2M portfolio is only a 2.5% withdrawal rate in the SWR model. If you want to spend more, but still need that \$60K floor, then you can probably play with the VPW spreadsheet and see if there are any circumstances where VPW, starting with your age and \$1.2M, would give you less than that \$30K withdrawal.

Stang70
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### Re: Variable Percentage Withdrawal -> Before retirement Age

This discussion has a similar approach.
viewtopic.php?f=10&t=102609

Would this approach, coupled with VPW, work for you, KlangFool?

Topic Author
KlangFool
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### Re: Variable Percentage Withdrawal -> Before retirement Age

Stang70 wrote:
Fri Sep 08, 2017 7:28 pm
This discussion has a similar approach.
viewtopic.php?f=10&t=102609

Would this approach, coupled with VPW, work for you, KlangFool?
Stang70,

It should work. I am studying the difference between SWR and VPW approach.

Thanks.

KlangFool

longinvest
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### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool,
KlangFool wrote:
Thu Sep 07, 2017 8:23 pm
Let's assume the portfolio is 1.5 million and the full retirement age for social security is 67 years old.

A) The annual expense is 60K

B) And, the social security income with a couple = 30K at 67 years old.

This couple retires at 57 years old.

My understanding is (10 years X 60K = ) 600K will be kept as CD or something safe from 57 years old to 67 years old. The portfolio for VPW standpoint is 1.5 million - 600K = 900K. So, the person should use VPW table starting at 67 years old with a portfolio size of 900K.

Am I correct?
Short answer: This isn't what our wiki's "How to use variable-percentage withdrawals during retirement" suggests.

VPW is a method for taking variable annual withdrawals from a portfolio until age 99. VPW is mathematically guaranteed to never prematurely deplete the portfolio.

VPW was designed to be used as a tool within a larger retirement plan.

What our wiki suggests is to construct a retirement plan which combines two independent sources of money during every year of retirement:
1. lifelong non-portfolio stable inflation-indexed income
2. variable portfolio withdrawals
In this light, I'll revisit the proposed example, but I'll assume a single person (instead of a couple, to avoid discussing some issues) retiring at age 57 with a 1.5 million portfolio who will get a \$30,000 Social Security (SS) pension starting at age 67.

1) The retiree would set aside (\$30,000 X (67 - 57)) = \$300,000 in a high-interest savings account and CDs, at age 57, which will be used to replace the missing annual \$30,000 SS payments from age 57 to age 66. This money will be permanently gone by age 67.

2) The portfolio balance at age 57 is thus (\$1,500,000 - \$300,000) = \$1,200,000. Assuming a 50/50 stocks/bonds allocation for the upcoming year, the VPW table indicates a 4.4% percentage at age 57. Multiplying this percentage by the current portfolio balance results into (4.4% X \$1,200,000) = \$52,800. As a consequence, the retiree withdraws \$52,800 from the portfolio and rebalances it to its target 50/50 allocation.

So, during year 1 of retirement the retiree gets \$30,000 from the SS bridge as non-portfolio stable income and \$52,800 from the portfolio as variable withdrawal for a total income of \$82,800.

Unfortunately, the total income will vary each year of retirement due to the variable portfolio withdrawals. Sometimes it will vary up, sometimes it will vary down. Luckily, the 50% allocation to bonds will dampen withdrawal fluctuations and the stable \$30,000 income base will further dampen the impact of these fluctuations on total income.

How low can VPW withdrawals get in the worst case, during retirement? If we had a crystal ball we could answer, but we don't. Investigating the past with the VPW backtesting spreadsheet provides us with two rules of thumb, for a retirement at age 57 with a 50/50 portfolio:
1. There's a possibility that the median* withdrawal could be as low as 4% of the initial portfolio in inflation-adjusted terms, for an unlucky retirement.
2. There's also small possibility that withdrawals could temporarily drop down to as low as 50% of the initial withdrawal for a few years in inflation-adjusted terms, during a very unlucky retirement.
* The median withdrawal is such that there were as many years when the withdrawals were higher than there were years when the withdrawals were lower during retirement.

These are prudent guidelines, representing what would have happened in some of the most awful historical retirement scenarios such as retiring in 1906 (living through two world wars) or 1966 (living through high-inflation in the 1970s).

Sometimes, an image helps understanding. Here's a simulation of a hypothetical retirement at age 57 with a 50/50 portfolio in 1966 (one of the worst historical retirement years):

The red line, which represents VPW withdrawals in inflation-adjusted terms, would have gradually dropped 50% before recovering. The median withdrawal, in this case, was 4.5% of the initial portfolio, higher than our 4% rule of thumb for an unlucky retirement. The yellow line represents total income (combining VPW withdrawals from a 1.2M portfolio and \$30K SS income). The addition of stable income to variable withdrawals clearly dampens total-income fluctuations.

Let's apply these two rule of thumb stress tests to our scenario:
1. We must consider that median total income, over all retirement years, could possibly be as low as (\$30,000 + (\$1,200,000 X 4%)) = \$78,000.
2. We must also consider a small possibility of total income temporarily dropping as low as (\$30,000 + (\$52,800 / 2)) = \$56,400.
In other words, assuming very unlucky returns during retirement, median total income would still be comfortably higher that the \$60,000 objective in annual expenses (including taxes). But, there is a possibility that total income could temporarily miss the \$60,000 target by \$3,600 for a few years during retirement. Let me repeat: this is a rule of thumb analysis, not a 100% guaranteed worst-case scenario for the future. We don't possess a crystal ball.

Is the retiree flexible enough to cut pre-tax expenses by \$3,600 below the \$60,000 target for one year or, maybe, a few years during retirement, in a very bad scenario? If yes, I would consider that we have a good-enough plan.

Pre-tax withdrawals will possibly be well over \$78,000 for most years of retirement. But, it's generally a bad idea to set our hopes up. It's much better to set them low, but to enjoy whatever VPW actually delivers when higher than what we hoped.

Note that it is crucial to revise the plan at age 80. Two things happen at that age:
1. An inflation-indexed Single Premium Immediate Annuity (SPIA) has a payout that competes with VPW's withdrawal percentage, and
2. the number of years left until portfolio depletion has dropped below 20.
As a consequence, it is a good time at 80, if one is still in good-enough health (e.g. breathing), to use part of the remaining portfolio to buy enough inflation-indexed SPIA, but no more than strictly necessary, so that the sum of all lifelong non-portfolio income is sufficient in itself to live comfortably. It is important to keep a portfolio, though; it provides flexibility and freedom.

Once the inflation-indexed SPIA is bought, at age 80, VPW withdrawals can resume, but I would cap the withdrawal percentage at 20% when reaching age 95 to avoid complete portfolio depletion in case of survival beyond age 100, again to preserve some minimal flexibility and freedom.

The VPW wiki page might not be as detailed as this post about the overall retirement plan because its objective is to present the VPW withdrawal method. We possibly need a separate wiki page about how to build a retirement plan which uses VPW as a tool.
Last edited by longinvest on Thu Apr 12, 2018 6:51 am, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic / international) stocks / (nominal / inflation-indexed) bonds | VCN/VXC/VLB/ZRR

Topic Author
KlangFool
Posts: 11216
Joined: Sat Oct 11, 2008 12:35 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

longinvest wrote:
Sat Sep 09, 2017 9:19 am
KlangFool,
KlangFool wrote:
Thu Sep 07, 2017 8:23 pm
Let's assume the portfolio is 1.5 million and the full retirement age for social security is 67 years old.

A) The annual expense is 60K

B) And, the social security income with a couple = 30K at 67 years old.

This couple retires at 57 years old.

My understanding is (10 years X 60K = ) 600K will be kept as CD or something safe from 57 years old to 67 years old. The portfolio for VPW standpoint is 1.5 million - 600K = 900K. So, the person should use VPW table starting at 67 years old with a portfolio size of 900K.

Am I correct?
Short answer: This isn't what our wiki's "How to use variable-percentage withdrawals during retirement" suggests.

VPW is a method for taking variable annual withdrawals from a portfolio until age 99. VPW is mathematically guaranteed to never prematurely deplete the portfolio.

VPW was designed to be used as a tool within a larger retirement plan.

What our wiki suggests is to construct a retirement plan which combines two independent sources of money during every year of retirement:
1. lifelong non-portfolio stable inflation-indexed income
2. variable portfolio withdrawals
In this light, I'll revisit the proposed example, but I'll assume a single person (instead of a couple, to avoid discussing some issues) retiring at age 57 with a 1.5 million portfolio who will get a \$30,000 Social Security (SS) pension starting at age 67.

1) The retiree would set aside (\$30,000 X (67 - 57)) = \$300,000 in a high-interest savings account and CDs, at age 57, which will be used to replace the missing annual \$30,000 SS payments from age 57 to age 66. This money will be permanently gone by age 67.

2) The portfolio balance at age 57 is thus (\$1,500,000 - \$300,000) = \$1,200,000. Assuming a 50/50 stocks/bonds allocation for the upcoming year, the VPW table indicates a 4.4% percentage at age 57. Multiplying this percentage by the current portfolio balance results into (4.4% X \$1,200,000) = \$52,800. As a consequence, the retiree withdraws \$52,800 from the portfolio and rebalances it to its target 50/50 allocation.

So, during year 1 of retirement the retiree gets \$30,000 from the SS bridge as non-portfolio stable income and \$52,800 from the portfolio as variable withdrawal for a total income of \$82,800.

Unfortunately, the total income will vary each year of retirement due to the variable portfolio withdrawals. Sometimes it will vary up, sometimes it will vary down. Luckily, the 50% allocation to bonds will dampen withdrawal fluctuations and the stable \$30,000 income base will further dampen the impact of these fluctuations on total income.

How low can VPW withdrawals get in the worst case, during retirement? If we had a crystal ball we could answer, but we don't. Investigating the past with the VPW backtesting spreadsheet provides us with two rules of thumb, for a retirement at age 57 with a 50/50 portfolio:
1. There's a possibility that the median* withdrawal could be as low as 4% of the initial portfolio in inflation-adjusted terms, for an unlucky retirement.
2. There's also small possibility that withdrawals could temporarily drop down to as low as 50% of the initial withdrawal for a few years in inflation-adjusted terms, during a very unlucky retirement.
* The median withdrawal is such that there were as many years when the withdrawals were higher than there were years when the withdrawals were lower during retirement.

These are prudent guidelines, representing what would have happened in some of the most awful historical retirement scenarios such as retiring in 1906 (living through two world wars) or 1966 (living through high-inflation in the 1970s).

Sometimes, an image helps understanding. Here's a simulation of a hypothetical retirement at age 57 with a 50/50 portfolio in 1966 (one of the worst historical retirement years):

The red line, which represents VPW withdrawals in inflation-adjusted terms, would have gradually dropped 50% before recovering. The median withdrawal, in this case, was 4.5% of the initial portfolio, higher than our 4% rule of thumb for an unlucky retirement. The yellow line represents total income (combining VPW withdrawals from a 1.2M portfolio and \$30K SS income). The addition of stable income to variable withdrawals clearly dampens total-income fluctuations.

Let's apply these two rule of thumb stress tests to our scenario:
1. We must consider that median total income, over all retirement years, could possibly be as low as (\$30,000 + (\$1,200,000 X 4%)) = \$78,000.
2. We must also consider a small possibility of total income temporarily dropping as low as (\$30,000 + (\$52,800 / 2)) = \$56,400.
In other words, assuming very unlucky returns during retirement, median total income would still be comfortably higher that the \$60,000 objective in annual expenses (including taxes). But, there is a possibility that total income could temporarily miss the \$60,000 target by \$3,600 for a few years during retirement. Let me repeat: this is a rule of thumb analysis, not a 100% guaranteed worst-case scenario for the future. We don't possess a crystal ball.

Is the retiree flexible enough to cut pre-tax expenses by \$3,600 below the \$60,000 target for one year or, maybe, a few years during retirement, in a very bad scenario? If yes, I would consider that we have a good-enough plan.

Pre-tax withdrawals will possibly be well over \$78,000 for most years of retirement. But, it's generally a bad idea to set our hopes up. It's much better to set them low, but to enjoy whatever VPW actually delivers when higher than what we hoped.

Note that it is crucial to revise the plan at age 80. Two things happen at that age:
1. An inflation-indexed Single Premium Immediate Annuity (SPIA) has a payout that competes with VPW's withdrawal percentage, and
2. the number of years left until portfolio depletion has dropped below 20.
As a consequence, it is a good time at 80, if one is still in good-enough health (e.g. breathing), to use part of the remaining portfolio to buy enough inflation-indexed SPIA, but no more than strictly necessary, so that the sum of all lifelong non-portfolio income is sufficient in itself to live comfortably. It is important to keep a portfolio, though; it provides flexibility and freedom.

Once the inflation-indexed SPIA is bought, at age 80, VPW withdrawals can resume, but I would cap the withdrawal percentage at 20% when reaching age 95 to avoid complete portfolio depletion in case of survival beyond age 100, again to preserve some minimal flexibility and freedom.

The VPW wiki page might not be as detailed as this post about the overall retirement plan because its objective is to present the VPW withdrawal method. We possibly need a separate wiki page about how to build a retirement plan which uses VPW as a tool.
longinvest,

Thanks. I think I got it. I probably look into using VPW plus some kind of smoothing function. Put all excess money into an account and use the last 3 years average for actual spending.

KlangFool

Hyperborea
Posts: 761
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

### Re: Variable Percentage Withdrawal -> Before retirement Age

A further twist would be to delay SS until 70. That would give you a higher floor of \$37,200 per year (\$30K * 1.24) and so increase the potential lowest annual incomes. It would also reduce the potential upside because you would need to put aside more money into fixed income to make up for the larger SS for a longer time period. It's not something that I would do but you seem to be excessively worried about variability and uncertainty. This would reduce that to some degree.

SS replacement stash = \$37.2K / year * 13 years = \$483.6K = ~\$500K

Remaining investment portfolio = ~\$1M

If we take longinvest's numbers above and scale by 1/1.2 (portfolio ratios) we get this:
median total income, over all retirement years, could possibly be as low as (\$30,000 + (\$1,200,000 X 4%)) = \$78,000
small possibility of total income temporarily dropping as low as (\$30,000 + (\$52,800 / 2)) = \$56,400
turning into this:

median total income, over all retirement years, could possibly be as low as (\$37,200 + (\$1,000,000 X 4%)) = \$77,200
small possibility of total income temporarily dropping as low as (\$37,200 + (\$44,000 / 2)) = \$59,200
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Topic Author
KlangFool
Posts: 11216
Joined: Sat Oct 11, 2008 12:35 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

Hyperborea wrote:
Sat Sep 09, 2017 12:40 pm
A further twist would be to delay SS until 70. That would give you a higher floor of \$37,200 per year (\$30K * 1.24) and so increase the potential lowest annual incomes. It would also reduce the potential upside because you would need to put aside more money into fixed income to make up for the larger SS for a longer time period. It's not something that I would do but you seem to be excessively worried about variability and uncertainty. This would reduce that to some degree.

SS replacement stash = \$37.2K / year * 13 years = \$483.6K = ~\$500K

Remaining investment portfolio = ~\$1M

If we take longinvest's numbers above and scale by 1/1.2 (portfolio ratios) we get this:
median total income, over all retirement years, could possibly be as low as (\$30,000 + (\$1,200,000 X 4%)) = \$78,000
small possibility of total income temporarily dropping as low as (\$30,000 + (\$52,800 / 2)) = \$56,400
turning into this:

median total income, over all retirement years, could possibly be as low as (\$37,200 + (\$1,000,000 X 4%)) = \$77,200
small possibility of total income temporarily dropping as low as (\$37,200 + (\$44,000 / 2)) = \$59,200
Hyperborea,

Thanks for the information. My actual retirement /FI situation is still not settled yet.

1) My wife is starting a 10K per year part-time job with full health benefit. She probably continues working after 57 years old.

2) My portfolio is increasing about 100K per year.

I am just collecting information on various withdrawal strategies at the moment.

KlangFool

SGM
Posts: 2809
Joined: Wed Mar 23, 2011 4:46 am

### Re: Variable Percentage Withdrawal -> Before retirement Age

I have found that I am having more difficulty interpreting the written word and attribute it to increased smart phone use and currently the smart phone is shut off but on my desk. The presence of a smartphone, even if turned off, lowers available cognitive capacity, based on new psychological research.

You are proposing taking a 4% withdrawal rate for ten years until claiming your SS and all of the withdrawals will come from CDs. You are younger than 57 and the \$900k that is not in CDs is what you expect to have at age 67 not at 57. At 67 you will start to take variable withdrawals from the \$900k which is invested according to your chosen allocation. A variable withdrawal rate on the balance would likely work.

My personal plan was to convert tax deferred to a Roth after going part time and then retiring, and to delay SS until 70. 70 is the new 65? More people are delaying SS because DB plans are being replaced with DC plans.

Topic Author
KlangFool
Posts: 11216
Joined: Sat Oct 11, 2008 12:35 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

SGM wrote:
Sun Sep 10, 2017 5:02 pm
I have found that I am having more difficulty interpreting the written word and attribute it to increased smart phone use and currently the smart phone is shut off but on my desk. The presence of a smartphone, even if turned off, lowers available cognitive capacity, based on new psychological research.

You are proposing taking a 4% withdrawal rate for ten years until claiming your SS and all of the withdrawals will come from CDs. You are younger than 57 and the \$900k that is not in CDs is what you expect to have at age 67 not at 57. At 67 you will start to take variable withdrawals from the \$900k which is invested according to your chosen allocation. A variable withdrawal rate on the balance would likely work.

My personal plan was to convert tax deferred to a Roth after going part time and then retiring, and to delay SS until 70. 70 is the new 65? More people are delaying SS because DB plans are being replaced with DC plans.
SGM,

I have a simple question. If I choose to use VPW at age 57 but withdrawing social security at 67 years, what am I suppose to do in term of the fixed amount between 57 and 67?

A) Do I fund the social security amount aka 30K?

Or

B) The full annual expense aka 60K?

The answer for VPW is (A).

KlangFool

SGM
Posts: 2809
Joined: Wed Mar 23, 2011 4:46 am

### Re: Variable Percentage Withdrawal -> Before retirement Age

Mike Piper states it well in today's blog on "The Oblivious Investor", "there is no perfect spending strategy, but there are many perfectly fine spending strategies".

Posts: 1506
Joined: Mon Oct 27, 2014 12:35 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

longinvest wrote:
Sat Sep 09, 2017 9:19 am
KlangFool,
KlangFool wrote:
Thu Sep 07, 2017 8:23 pm
Let's assume the portfolio is 1.5 million and the full retirement age for social security is 67 years old.

A) The annual expense is 60K

B) And, the social security income with a couple = 30K at 67 years old.

This couple retires at 57 years old.

My understanding is (10 years X 60K = ) 600K will be kept as CD or something safe from 57 years old to 67 years old. The portfolio for VPW standpoint is 1.5 million - 600K = 900K. So, the person should use VPW table starting at 67 years old with a portfolio size of 900K.

Am I correct?
Short answer: This isn't what our wiki's "How to use variable-percentage withdrawals during retirement" suggests.

VPW is a method for taking variable annual withdrawals from a portfolio until age 99. VPW is mathematically guaranteed to never prematurely deplete the portfolio.

VPW was designed to be used as a tool within a larger retirement plan.

What our wiki suggests is to construct a retirement plan which combines two independent sources of money during every year of retirement:
1. lifelong non-portfolio stable inflation-indexed income
2. variable portfolio withdrawals
In this light, I'll revisit the proposed example, but I'll assume a single person (instead of a couple, to avoid discussing some issues) retiring at age 57 with a 1.5 million portfolio who will get a \$30,000 Social Security (SS) pension starting at age 67.

1) The retiree would set aside (\$30,000 X (67 - 57)) = \$300,000 in a high-interest savings account and CDs, at age 57, which will be used to replace the missing annual \$30,000 SS payments from age 57 to age 66. This money will be permanently gone by age 67.

2) The portfolio balance at age 57 is thus (\$1,500,000 - \$300,000) = \$1,200,000. Assuming a 50/50 stocks/bonds allocation for the upcoming year, the VPW table indicates a 4.4% percentage at age 57. Multiplying this percentage by the current portfolio balance results into (4.4% X \$1,200,000) = \$52,800. As a consequence, the retiree withdraws \$52,800 from the portfolio and rebalances it to its target 50/50 allocation.

So, during year 1 of retirement the retiree gets \$30,000 from the SS bridge as non-portfolio stable income and \$52,800 from the portfolio as variable withdrawal for a total income of \$82,800.

Unfortunately, the total income will vary each year of retirement due to the variable portfolio withdrawals. Sometimes it will vary up, sometimes it will vary down. Luckily, the 50% allocation to bonds will dampen withdrawal fluctuations and the stable \$30,000 income base will further dampen the impact of these fluctuations on total income.

How low can VPW withdrawals get in the worst case, during retirement? If we had a crystal ball we could answer, but we don't. Investigating the past with the VPW backtesting spreadsheet provides us with two rules of thumb, for a retirement at age 57 with a 50/50 portfolio:
1. There's a possibility that the median* withdrawal could be as low as 4% of the initial portfolio in inflation-adjusted terms, for an unlucky retirement.
2. There's also small possibility that withdrawals could temporarily drop down to as low as 50% of the initial withdrawal for a few years in inflation-adjusted terms, during a very unlucky retirement.
* The median withdrawal is such that there were as many years when the withdrawals were higher than there were years when the withdrawals were lower during retirement.

These are prudent guidelines, representing what would have happened in some of the most awful historical retirement scenarios such as retiring in 1906 (living through two world wars) or 1966 (living through high-inflation in the 1970s).

Sometimes, an image helps understanding. Here's a simulation of a hypothetical retirement at age 57 with a 50/50 portfolio in 1966 (one of the worst historical retirement years):

The red line, which represents VPW withdrawals in inflation-adjusted terms, would have gradually dropped 50% before recovering. The median withdrawal, in this case, was 4.5% of the initial portfolio, higher than our 4% rule of thumb for an unlucky retirement. The yellow line represents total income (combining VPW withdrawals from a 1.2M portfolio and \$30K SS income). The addition of stable income to variable withdrawals clearly dampens total-income fluctuations.

Let's apply these two rule of thumb stress tests to our scenario:
1. We must consider that median total income, over all retirement years, could possibly be as low as (\$30,000 + (\$1,200,000 X 4%)) = \$78,000.
2. We must also consider a small possibility of total income temporarily dropping as low as (\$30,000 + (\$52,800 / 2)) = \$56,400.
In other words, assuming very unlucky returns during retirement, median total income would still be comfortably higher that the \$60,000 objective in annual expenses (including taxes). But, there is a possibility that total income could temporarily miss the \$60,000 target by \$3,600 for a few years during retirement. Let me repeat: this is a rule of thumb analysis, not a 100% guaranteed worst-case scenario for the future. We don't possess a crystal ball.

Is the retiree flexible enough to cut pre-tax expenses by \$3,600 below the \$60,000 target for one year or, maybe, a few years during retirement, in a very bad scenario? If yes, I would consider that we have a good-enough plan.

Pre-tax withdrawals will possibly be well over \$78,000 for most years of retirement. But, it's generally a bad idea to set our hopes up. It's much better to set them low, but to enjoy whatever VPW actually delivers when higher than what we hoped.

Note that it is crucial to revise the plan at age 80. Two things happen at that age:
1. An inflation-indexed Single Premium Immediate Annuity (SPIA) has a payout that competes with VPW's withdrawal percentage, and
2. the number of years left until portfolio depletion has dropped below 20.
As a consequence, it is a good time at 80, if one is still in good-enough health (e.g. breathing), to use part of the remaining portfolio to buy enough inflation-indexed SPIA, but no more than strictly necessary, so that the sum of all lifelong non-portfolio income is sufficient in itself to live comfortably. It is important to keep a portfolio, though; it provides flexibility and freedom.

Once the inflation-indexed SPIA is bought, at age 80, VPW withdrawals can resume, but I would cap the withdrawal percentage at 20% when reaching age 95 to avoid complete portfolio depletion in case of survival beyond age 100, again to preserve some minimal flexibility and freedom.

The VPW wiki page might not be as detailed as this post about the overall retirement plan because its objective is to present the VPW withdrawal method. We possibly need a separate wiki page about how to build a retirement plan which uses VPW as a tool.
Does this VPW strategy assume (and therefore calculate based on that assumption) that the portfolio is/should be totally depleted by Age 95 (or whatever)? If so, how are the calculations made if one does NOT want to deplete all their assets? For example, let's say I put a floor of \$400k that I want to leave in an estate. Clearly I'm not going to put aside that much in Tbills or CDs and not touch it for 40 years, so I then need to somehow account for returns and VPW rate that will leave my estate with about this much money.

Right? How is that done?

2015
Posts: 2429
Joined: Mon Feb 10, 2014 2:32 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

Mon Sep 11, 2017 11:28 am
longinvest wrote:
Sat Sep 09, 2017 9:19 am
KlangFool,
KlangFool wrote:
Thu Sep 07, 2017 8:23 pm
Let's assume the portfolio is 1.5 million and the full retirement age for social security is 67 years old.

A) The annual expense is 60K

B) And, the social security income with a couple = 30K at 67 years old.

This couple retires at 57 years old.

My understanding is (10 years X 60K = ) 600K will be kept as CD or something safe from 57 years old to 67 years old. The portfolio for VPW standpoint is 1.5 million - 600K = 900K. So, the person should use VPW table starting at 67 years old with a portfolio size of 900K.

Am I correct?
Short answer: This isn't what our wiki's "How to use variable-percentage withdrawals during retirement" suggests.

VPW is a method for taking variable annual withdrawals from a portfolio until age 99. VPW is mathematically guaranteed to never prematurely deplete the portfolio.

VPW was designed to be used as a tool within a larger retirement plan.

What our wiki suggests is to construct a retirement plan which combines two independent sources of money during every year of retirement:
1. lifelong non-portfolio stable inflation-indexed income
2. variable portfolio withdrawals
In this light, I'll revisit the proposed example, but I'll assume a single person (instead of a couple, to avoid discussing some issues) retiring at age 57 with a 1.5 million portfolio who will get a \$30,000 Social Security (SS) pension starting at age 67.

1) The retiree would set aside (\$30,000 X (67 - 57)) = \$300,000 in a high-interest savings account and CDs, at age 57, which will be used to replace the missing annual \$30,000 SS payments from age 57 to age 66. This money will be permanently gone by age 67.

2) The portfolio balance at age 57 is thus (\$1,500,000 - \$300,000) = \$1,200,000. Assuming a 50/50 stocks/bonds allocation for the upcoming year, the VPW table indicates a 4.4% percentage at age 57. Multiplying this percentage by the current portfolio balance results into (4.4% X \$1,200,000) = \$52,800. As a consequence, the retiree withdraws \$52,800 from the portfolio and rebalances it to its target 50/50 allocation.

So, during year 1 of retirement the retiree gets \$30,000 from the SS bridge as non-portfolio stable income and \$52,800 from the portfolio as variable withdrawal for a total income of \$82,800.

Unfortunately, the total income will vary each year of retirement due to the variable portfolio withdrawals. Sometimes it will vary up, sometimes it will vary down. Luckily, the 50% allocation to bonds will dampen withdrawal fluctuations and the stable \$30,000 income base will further dampen the impact of these fluctuations on total income.

How low can VPW withdrawals get in the worst case, during retirement? If we had a crystal ball we could answer, but we don't. Investigating the past with the VPW backtesting spreadsheet provides us with two rules of thumb, for a retirement at age 57 with a 50/50 portfolio:
1. There's a possibility that the median* withdrawal could be as low as 4% of the initial portfolio in inflation-adjusted terms, for an unlucky retirement.
2. There's also small possibility that withdrawals could temporarily drop down to as low as 50% of the initial withdrawal for a few years in inflation-adjusted terms, during a very unlucky retirement.
* The median withdrawal is such that there were as many years when the withdrawals were higher than there were years when the withdrawals were lower during retirement.

These are prudent guidelines, representing what would have happened in some of the most awful historical retirement scenarios such as retiring in 1906 (living through two world wars) or 1966 (living through high-inflation in the 1970s).

Sometimes, an image helps understanding. Here's a simulation of a hypothetical retirement at age 57 with a 50/50 portfolio in 1966 (one of the worst historical retirement years):

The red line, which represents VPW withdrawals in inflation-adjusted terms, would have gradually dropped 50% before recovering. The median withdrawal, in this case, was 4.5% of the initial portfolio, higher than our 4% rule of thumb for an unlucky retirement. The yellow line represents total income (combining VPW withdrawals from a 1.2M portfolio and \$30K SS income). The addition of stable income to variable withdrawals clearly dampens total-income fluctuations.

Let's apply these two rule of thumb stress tests to our scenario:
1. We must consider that median total income, over all retirement years, could possibly be as low as (\$30,000 + (\$1,200,000 X 4%)) = \$78,000.
2. We must also consider a small possibility of total income temporarily dropping as low as (\$30,000 + (\$52,800 / 2)) = \$56,400.
In other words, assuming very unlucky returns during retirement, median total income would still be comfortably higher that the \$60,000 objective in annual expenses (including taxes). But, there is a possibility that total income could temporarily miss the \$60,000 target by \$3,600 for a few years during retirement. Let me repeat: this is a rule of thumb analysis, not a 100% guaranteed worst-case scenario for the future. We don't possess a crystal ball.

Is the retiree flexible enough to cut pre-tax expenses by \$3,600 below the \$60,000 target for one year or, maybe, a few years during retirement, in a very bad scenario? If yes, I would consider that we have a good-enough plan.

Pre-tax withdrawals will possibly be well over \$78,000 for most years of retirement. But, it's generally a bad idea to set our hopes up. It's much better to set them low, but to enjoy whatever VPW actually delivers when higher than what we hoped.

Note that it is crucial to revise the plan at age 80. Two things happen at that age:
1. An inflation-indexed Single Premium Immediate Annuity (SPIA) has a payout that competes with VPW's withdrawal percentage, and
2. the number of years left until portfolio depletion has dropped below 20.
As a consequence, it is a good time at 80, if one is still in good-enough health (e.g. breathing), to use part of the remaining portfolio to buy enough inflation-indexed SPIA, but no more than strictly necessary, so that the sum of all lifelong non-portfolio income is sufficient in itself to live comfortably. It is important to keep a portfolio, though; it provides flexibility and freedom.

Once the inflation-indexed SPIA is bought, at age 80, VPW withdrawals can resume, but I would cap the withdrawal percentage at 20% when reaching age 95 to avoid complete portfolio depletion in case of survival beyond age 100, again to preserve some minimal flexibility and freedom.

The VPW wiki page might not be as detailed as this post about the overall retirement plan because its objective is to present the VPW withdrawal method. We possibly need a separate wiki page about how to build a retirement plan which uses VPW as a tool.
Does this VPW strategy assume (and therefore calculate based on that assumption) that the portfolio is/should be totally depleted by Age 95 (or whatever)? If so, how are the calculations made if one does NOT want to deplete all their assets? For example, let's say I put a floor of \$400k that I want to leave in an estate. Clearly I'm not going to put aside that much in Tbills or CDs and not touch it for 40 years, so I then need to somehow account for returns and VPW rate that will leave my estate with about this much money.

Right? How is that done?
What I did was simply extend the end date out from Age 95 to Age 115. I used the 1966 backtesting year (one of the worst years to retire into) to get an idea---not a projection--of what my ending PF balance could look like at age 95. I was satisfied with that idea. My intention is to monitor the PF throughout its life and make adjustments accordingly. Personally, even using the 1966 backtesting poor performance as an idea, I can't fathom myself spending much of what the tool suggests I spend. The tool is flexible, adaptable, and simple, and fits my needs as a result.

Posts: 1506
Joined: Mon Oct 27, 2014 12:35 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

2015 wrote:
Mon Sep 11, 2017 11:39 am

What I did was simply extend the end date out from Age 95 to Age 115. I used the 1966 backtesting year (one of the worst years to retire into) to get an idea---not a projection--of what my ending PF balance could look like at age 95. I was satisfied with that idea. My intention is to monitor the PF throughout its life and make adjustments accordingly. Personally, even using the 1966 backtesting poor performance as an idea, I can't fathom myself spending much of what the tool suggests I spend. The tool is flexible, adaptable, and simple, and fits my needs as a result.
Ah, that worked, thanks!

Rob Bertram
Posts: 807
Joined: Mon May 05, 2014 12:15 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

KlangFool wrote:
Fri Sep 08, 2017 3:31 pm
That is the question. If I follow the VPW methodology, how do I cover the years before 67 years old?

A) Allocate 30K per year between 57 to 67 and start using VPW at 57. Reserve 300K. VPW portfolio = 1.2 million

B) Allocate 60K per year between 57 to 67 and start using VPW at 67. VPW portfolio = 900K.
May I offer a modified version of option A? It starts exactly the same.

Approach:
Create a "bucket" to replace SS income between age 57 to 67 (or 70), say \$30k/year. Put the remainder into your full retirement "bucket". (I say bucket in quotes as they can be virtual.) Use VPW to determine your max annual withdrawal from BOTH buckets, using separate spreadsheets for each. You can keep the same asset allocation. Why make it any more complicated than it needs to be?

So here is how it will be implemented:
• First bucket: We will set aside 10 years x \$30k/year = \$300k.
• The second bucket will be for everything else: \$1.5m - \$0.3m = \$1.2m.
• Create a VPW spreadsheet for the first bucket -- SS replacement income. Enter start age as 57, end age as 66 (assuming that SS will begin for age 67), starting balance of \$300k. The suggested maximum withdrawal for the first year from this bucket is \$35,100.
• Create a VPW spreadsheet for the second bucket -- retirement income. Enter start age as 57, end age as 99 (or whatever age you choose), starting balance of \$1.2m. The suggested maximum withdrawal for the first year from this bucket is \$54,000.
• Take out as much as \$89,100 the first year.

Topic Author
KlangFool
Posts: 11216
Joined: Sat Oct 11, 2008 12:35 pm

### Re: Variable Percentage Withdrawal -> Before retirement Age

Rob Bertram wrote:
Mon Sep 11, 2017 5:05 pm
KlangFool wrote:
Fri Sep 08, 2017 3:31 pm
That is the question. If I follow the VPW methodology, how do I cover the years before 67 years old?

A) Allocate 30K per year between 57 to 67 and start using VPW at 57. Reserve 300K. VPW portfolio = 1.2 million

B) Allocate 60K per year between 57 to 67 and start using VPW at 67. VPW portfolio = 900K.
May I offer a modified version of option A? It starts exactly the same.

Approach:
Create a "bucket" to replace SS income between age 57 to 67 (or 70), say \$30k/year. Put the remainder into your full retirement "bucket". (I say bucket in quotes as they can be virtual.) Use VPW to determine your max annual withdrawal from BOTH buckets, using separate spreadsheets for each. You can keep the same asset allocation. Why make it any more complicated than it needs to be?

So here is how it will be implemented:
• First bucket: We will set aside 10 years x \$30k/year = \$300k.
• The second bucket will be for everything else: \$1.5m - \$0.3m = \$1.2m.
• Create a VPW spreadsheet for the first bucket -- SS replacement income. Enter start age as 57, end age as 66 (assuming that SS will begin for age 67), starting balance of \$300k. The suggested maximum withdrawal for the first year from this bucket is \$35,100.
• Create a VPW spreadsheet for the second bucket -- retirement income. Enter start age as 57, end age as 99 (or whatever age you choose), starting balance of \$1.2m. The suggested maximum withdrawal for the first year from this bucket is \$54,000.
• Take out as much as \$89,100 the first year.
Rob Bertram,

Thanks for the suggestion. I will look into this.

KlangFool