tadamsmar wrote: ↑
Sat Apr 14, 2018 8:27 pm
If you run the 2007-2008 scenario on that table you can't estimate next year's spending within a 40% range in some cases.
What?!!! Is there an assumption, in that statement, that the retiree had a high-stock portfolio
and no Social Security
, no pension
, and no inflation-indexed SPIA
A 2008 retiree with a $1,000,000 balanced portfolio
allocated 25% US stocks, 25% International stocks, and 50% bonds with a $1,667/month Social Security (SS) pension (e.g. $20,000/year SS), would have experienced the following, in inflation-adjusted dollars
Code: Select all
All calculations are in Inflation-adjusted dollars (using CPI-U)
Age VPW Year Portfolio Withdrawal Social Security Total Income
65 4.8% 2008 $1,000,000 $48,000 $20,000 $68,000
66 4.9% 2009 $782,210 $38,328 $20,000 $58,328
67 4.9% 2010 $864,103 $42,341 $20,000 $62,341
68 5.0% 2011 $892,742 $44,637 $20,000 $64,637
69 5.1% 2012 $826,834 $42,169 $20,000 $62,169
70 5.2% 2013 $853,162 $44,364 $20,000 $64,364
71 5.3% 2014 $884,224 $46,864 $20,000 $66,864
72 5.4% 2015 $872,024 $47,089 $20,000 $67,089
73 5.5% 2016 $811,836 $44,651 $20,000 $64,651
So, the pre-tax
income dropped by only 14%
(from $68,000 to $58,328) in 2009, after a horrible year for stocks. International stocks dropped even more than US stocks. After taxes, the drop would have been smaller, thanks to progressive tax rates.
If a retiree can't afford a 14% drop in income, he is not ready to retire. He needs a bigger portfolio!
Anyway, the alleged 40% drop of a high-stock portfolio with no non-portfolio income scenario has nothing to do with the type of retirement plan I linked to in my previous post:
longinvest wrote: ↑
Sun Sep 03, 2017 10:43 am
Here's a post (and follow ups) I've written to illustrate how to build a workable retirement plan using VPW:
longinvest wrote: ↑
Sun Sep 03, 2017 9:10 am
... snip ...
One approach to build a workable
retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income
and (ii) variable portfolio withdrawals
. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income
around age 80, when the payout of an inflation-indexed
Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.
Such a plan can use our Wiki's Variable Percentage Withdrawal
(VPW) method, a withdrawal method which adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never
prematurely deplete the portfolio.
So, here's an example of a workable plan
- Delay Social Security (SS) until age 70 to maximize this lifelong non-portfolio inflation-indexed income.
- Fill the gap in Social Security payments between retirement and age 70 using a non-rolling TIPS ladder. It is important to exclude this non-rolling ladder from the portfolio used for variable withdrawals; this non-rolling ladder is part of the lifelong non-portfolio stable inflation-indexed income. Forum member #Cruncher has developed an awesome tool for this; the link is at the end of the following post:
Re: How should I build a TIPS income ladder?.
- Those without a defined benefit pension can buy a small inflation-indexed SPIA at retirement as a supplement to the above SS & gap-ladder income.
- At the beginning of every retirement year, lookup the appropriate percentage according to (i) the age of the retiree (or spouse, the lowest of the two) and (ii) the asset allocation of the portfolio* in the VPW table. Multiply this percentage by the current portfolio balance. Withdraw the resulting amount from the portfolio while rebalancing it.
- Around age 80, assuming one is still alive, use enough of the remaining portfolio to buy an inflation-indexed SPIA which will provide sufficient lifelong non-portfolio stable inflation-indexed income, when combined with existing non-portfolio income, in case of survival beyond age 100**. The idea is that even if the portfolio gets down to zero, total income should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
- Continue depleting the remaining portfolio using VPW, but cap the withdrawal percentage at 20% (at age 95 and beyond).
* It is important to apply VPW on a balanced portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals.
** VPW plans for a last withdrawal at age 99.
This is a simple, but extremely robust plan. It tries to balance the amount of stable non-portfolio income with the amount of liquidity kept under the retiree's control in the portfolio. It is anxiety repellent, as a workable
plan should be.
It is a very affordable plan for long-time Bogleheads who lived below their means
and retire in their 60s. The plan is more expensive for people who want to retire in their early 40s, due in part to the cost of the non-rolling TIPS ladder to cover the gap in Social Security payments for almost 30 years, but mostly
due to the very high cost of the necessary
supplemental inflation-indexed SPIA at retirement, as Social Security payments are lower for people with a shorter work history.
Later I wrote:
longinvest wrote: ↑
Mon Sep 04, 2017 2:59 pm
I could have suggested to use of a CD ladder or an even simpler high-interest savings account, in point 2, as has been suggested in Delay Social Security to age 70 and Spend more money at 62, except that on this particular thread, some members have been discussing retirement in their 30s and 40s, which would expose the gap money to an excessive amount of inflation risk.
Within the same thread, I provided elements
which could help select the balance between stable non-portfolio income and variable portfolio withdrawals, and choose an appropriate asset allocation for the portfolio:
longinvest wrote: ↑
Sun Sep 03, 2017 1:15 pm
VictoriaF wrote: ↑
Sun Sep 03, 2017 11:31 am
Closer to the end you state "It is important to apply VPW on a balanced
portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals." Do you assume or recommend any particular asset allocation for this portfolio?
Asset allocation is a hot subject which could spawn an anxious discussion. So, I'll try to remain as factual as possible.
The plan I presented combines stable inflation-indexed income with portfolio withdrawals; as a result, the volatility of total income is reduced proportionally to the ratio of non-portfolio income. So, a retiree with more non-portfolio income could use a more volatile portfolio than another retiree with less non-portfolio income, yet both retirees could experience similar total income volatility.
matter more, to a retiree, is the volatility of his total after-tax
income. As the marginal tax on the last dollars of income is higher than the average tax rate of the retiree, total pre-tax income fluctuations usually* translate into somewhat milder
* This obviously doesn't apply to Roth IRA withdrawals, which aren't taxed.
Finally, VPW withdrawals will be as smooth or volatile as the portfolio they are taken from. I'm confident most readers are aware that stocks volatility can be dampened with bonds; nominal volatility will be dampened by nominal bonds, and inflation-adjusted volatility will be dampened by inflation-indexed bonds.
Putting all this together allows for trying to select an appropriate asset allocation depending on one's particular circumstances.
In our wiki, the VPW table
presents withdrawal percentages for allocations ranging from 20/80 to 80/20 stocks/bonds. These are extremes. A 80/20 portfolio will be quite volatile, and VPW withdrawals will be similar. A 20/80 stocks/bonds portfolio will be smooth but will struggle to grow sufficiently. Let's say that I wouldn't recommend to go beyond the ranges of 30/70 to 70/30 stocks/bonds. But, as I said, it all depends on one's particular circumstances. Someone with sufficient non-portfolio income to cover all of her needs
and part of her wants
might be more tolerant of volatility on excess income than someone who's non-portfolio income only covers part of her needs
One last thing, though. One's retirement can span over decades. I think that it is important to include inflation-indexed bonds (TIPS) within one's bond allocation, especially when the bond allocation represents 50% or more of the portfolio, to dampen the potential ravages of inflation.
As shown in my signature, my very personal preference is for an equal split between stocks and bonds, where stocks are evenly split between domestic and international, and bonds are all domestic but evenly split between nominal and inflation indexed. It's a boring portfolio built using four cap-weighted total-market index ETFs. It was heavily inspired by Talyor Larimore's Three-Fund Portfolio to which I added inflation-indexed bonds.
Bogleheads investment philosophy |
Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds |