Accumulation-Dynamic Decumulation Strategy

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Ms.Fortuna
Posts: 15
Joined: Tue Dec 26, 2017 11:12 pm

Re: Accumulation-Dynamic Decumulation Strategy

icetrap wrote:
Wed Mar 21, 2018 1:48 pm

Step 0 : Create a 25% fund reserve; Out of 1 million, put 250,000\$ in reserve fund; put 750,000\$ in regular fund
Step 1 : Smooth the Market Value
Step 2: Cap regular withdrawal (115% prior retirement, 108% at retirement, 105% after retirement)
Step 3: Withdraw money from regular + withdraw money from reserve (if regular withdrawal below 90% threshold)
Repeat 1-3 each year

The step-by step are pretty much the same as ADD using CPW, but add a twist using the VPW rates.

Ex using 95% protection and 140% VPW :
Background Data: A few years into retirement.
Total fund value : 419,483\$
- Regular fund value : 261,174\$
-- Smoothed Regular Fund: 277,363\$
- Reserve fund value : 158,309\$
Last year withdrawal : 16,498\$
This was not due to the increase cap.
Greatest previous withdrawal : 19,618\$

Total withdrawal : 18,637\$ = 17,323\$ + 1,314\$
Regular withdrawal : 17,323\$ = Min (19,277 ; 17,323\$)
Smoothed withdrawal prescribed : 24,038\$ = 8.67% * 277,363\$
[Parameter] ADD+VPW withdrawal rate : look at VPW recommended withdrawal % * 140% (ex= 6.5%)
This drives the “prescribed withdrawal rate” to 8.67% = 6.5%/(75%). The
Increase Cap: 17,323\$ = 16,498\$ * (105% + 0%)
• [Parameter] Increase Cap: 105%.
• [Parameter] Increase Cap is augmented if prior year was cap: +0%.
Reserve withdrawal : 1,314\$ = Min(18,637\$ - 17,323\$; 31,662\$)
 Maximum covered withdrawal : 18,637\$ = 95% * 19,618\$
• [Parameter] Reserve protected : 95%
• [Parameter] Reserve maximum withdrawal rate : 20%
o Maximum withdrawal: 31,662\$ = 20%* 158,309\$
• No adjustment required since last years and current year reserve fund =158,309/419,483 = 38% > 20%
• In fact, the reserve exceeds the 30% threshold and will return back to the regular fund the excess 158,309 - 30%*419,483= 32,464. This can be though as a regular contribution.
Hi icetrap, I’ve played with your ADD tool and not certain how some values are calculated. And I actually have a question on the above example, I think if I clear that, the tool calcs will make more sense..
In the example above, where does 19,277 come from? Also, why don’t we use 24,038? I thought the text description reads that regular withdrawal is calculated as the smaller btw smoothed withdrawal prescribed (24,038) and 105% of the previous year withdrawal, i.e Min (24,038;17,325)?

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

Ms.Fortuna wrote:
Sun Apr 08, 2018 4:21 pm

Hi icetrap, I’ve played with your ADD tool and not certain how some values are calculated. And I actually have a question on the above example, I think if I clear that, the tool calcs will make more sense..
In the example above, where does 19,277 come from? Also, why don’t we use 24,038? I thought the text description reads that regular withdrawal is calculated as the smaller btw smoothed withdrawal prescribed (24,038) and 105% of the previous year withdrawal, i.e Min (24,038;17,325)?

Yes you are entirely right. It should have been 24,038. I'll fix the original post. This Min can be found for instance under BackTesting tab under Regular Withdrawal column (M)

Ms.Fortuna
Posts: 15
Joined: Tue Dec 26, 2017 11:12 pm

Re: Accumulation-Dynamic Decumulation Strategy

Thanks, another question..in the excel tool, tab Back Testing, column J. I tried to re-calculate smoothed withdrawal by multiplying the smoothed regular balance (column H) by VPW rate*140% / 0.75 (which is "prescribed rate" in your above example). However, it appears that column J is calculated as smoothed balance * VPW rate*140%.

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

Ms.Fortuna wrote:
Mon Apr 09, 2018 1:24 pm
Thanks, another question..in the excel tool, tab Back Testing, column J. I tried to re-calculate smoothed withdrawal by multiplying the smoothed regular balance (column H) by VPW rate*140% / 0.75 (which is "prescribed rate" in your above example). However, it appears that column J is calculated as smoothed balance * VPW rate*140%.
Thanks for catching this. I've fixed the Spread sheet to do VPW*Increase/(1-reserve). This makes more sense. However, I should have rather used an increase of 105% than 140% (105%*1/(1-25%)). If you want to get a closer result with VPW, it may be usefull to let the increase after retirement be 110%(Advanced Parameters/Cap After Retirement) and let the reserve give back more quickly ie 30% (Advanced Parameters/Maximum reserve %).

I've also added a few graphics, a comparison with the Guyton-Klinger withdrawal method and included other income.

I hope it may convince a few that ADD decrease the risk of decrease in withdrawal of a decumulation method.

Ms.Fortuna
Posts: 15
Joined: Tue Dec 26, 2017 11:12 pm

Re: Accumulation-Dynamic Decumulation Strategy

thanks for the update! however, I feel like I am fundamentally missing something here. So looking at the latest version excel tool (not changing any parameters), tab "Back Testing" (which is year 1965) we retire with an initial withdrawal 82,701 (Bal. 1,617,434) which is ~5.1% (I know the rate is not very relevant but just to get an idea where we start). In year 16 (for example), we can withdraw only 33,194 real which is like 40% of our initial withdrawal of 82k. Where do soft and hard targets (95% and 85%) come into place? Sorry for the dumb question, I must be misunderstanding the concept entirely.. I thought the withdrawals were supposed to be in a range more or less without fluctuating too widely.

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

Ms.Fortuna wrote:
Tue Apr 10, 2018 2:58 pm
thanks for the update! however, I feel like I am fundamentally missing something here. So looking at the latest version excel tool (not changing any parameters), tab "Back Testing" (which is year 1965) we retire with an initial withdrawal 82,701 (Bal. 1,617,434) which is ~5.1% (I know the rate is not very relevant but just to get an idea where we start). In year 16 (for example), we can withdraw only 33,194 real which is like 40% of our initial withdrawal of 82k. Where do soft and hard targets (95% and 85%) come into place? Sorry for the dumb question, I must be misunderstanding the concept entirely.. I thought the withdrawals were supposed to be in a range more or less without fluctuating too widely.
The Soft Risk Target determine the volatility in nominal \$ that you can handle. This directly change the Reserve Protection parameter. Thus if you change it to 90%, you will expect nominal \$ to drop by 90% any year.
The Hard Risk Target is for now only for display purposes. This is the maximum withdrawal volatility risk that a person is willing to face. Using this hard risk target, we can show how many time this hard target is breach using historical results. The Hard Target currently change the Risk metrics on 'backtesting' spreadsheet. I'll eventually try to get some reasonable Parameters to fit the matrix Soft to Hard Target. If you are able/willing to face 80% drop in the withdrawal, than the method can look like more VPW and allow for reward and less protection.

ADD in this current form only protects the nominal \$ . This is why in 1965+16=1981 (high inflation years), the ADD do not adjust since on nominal term, we are ok . In this scenario, the reserve is quite substantial in those years(>34%). So for this case, it would be easy for a retiree to adjust and just use the reserve to protect against this high inflation. I will add in option to try to modestly (or totally) protect against inflation in a future version (ie : protect up to x% of inlation or inflation above x% or always allow for increase to keep up with past inflation). Perhaps I can auto change default parameter to boost the increase cap after retirement if ADD+VPW is selected. This increase \$ at 1981 to 42k (about 51% real drop; less worse, in-line with VPW).

Personally, I feel that inflation is less of a worry now, even a good thing. Both the Bank of Canada and the US Federal Bank have both issued policies to have future inflation at about 2%. Canada have been able to do this for the past 25 years with +/-1% range. US have been able to manage inflation for the past 5 years (https://www.federalreserve.gov/newseven ... 70926a.htm). For a standard retiree, this level of inflation is more or less in-line with the expected decrease in needs due to old age.

In the end, following blindly inflation seems ill fated as the 4% rule face ruined for a 1965 retiree 31 years after retirement. However between 1973-1989, it surpass all the other withdrawal methods substantially in nominal term.

longinvest
Posts: 3109
Joined: Sat Aug 11, 2012 8:44 am

Re: Accumulation-Dynamic Decumulation Strategy

Icetrap,
icetrap wrote:
Wed Apr 11, 2018 10:16 am
Personally, I feel that inflation is less of a worry now, even a good thing. Both the Bank of Canada and the US Federal Bank have both issued policies to have future inflation at about 2%. Canada have been able to do this for the past 25 years with +/-1% range. US have been able to manage inflation for the past 5 years (https://www.federalreserve.gov/newseven ... 70926a.htm). For a standard retiree, this level of inflation is more or less in-line with the expected decrease in needs due to old age.
It would be a mistake to assume that the monetary policies of the U.S. and Canada are identical; they're not.

What is an acceptable level of inflation? -- U.S. Federal Reserve
What is an acceptable level of inflation?

The Federal Reserve has not established a formal inflation target, but policymakers generally believe that an acceptable inflation rate is around 2 percent or a bit below.

Four times per year, Federal Open Market Committee (FOMC) participants--that is, the members of the Board of Governors and the presidents of the Federal Reserve Banks--make projections for how they expect the prices of goods and services purchased by individuals (known as personal consumption expenditures, or PCE) to change over the longer run. The longer-run inflation projection is the rate of inflation that the FOMC believes is most consistent with stable prices in the longer term. The FOMC can then implement monetary policy to help maintain an acceptable inflation rate; that is, a rate that is neither too high nor too low. If inflation is too low, the economy might be in danger of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if the economy weakens.

As of June 22, 2011, FOMC participants' PCE inflation projections for the longer run ranged from 1.5 percent to 2.0 percent.
Monetary Policy -- Bank of Canada
The Objective

The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable. This allows Canadians to make spending and investment decisions with more confidence, encourages longer-term investment in Canada's economy, and contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living.

Canada’s monetary policy framework consists of two key components that work together: the inflation-control target and the flexible exchange rate. This framework helps make monetary policy actions readily understandable, and enables the Bank to demonstrate its accountability to Canadians.

The Inflation-Control Target

At the heart of Canada’s monetary policy framework is the inflation-control target, which is two per cent, the midpoint of a 1 to 3 per cent target range. First introduced in 1991, the target is set jointly by the Bank of Canada and the federal government and reviewed every five years. However, the day-to-day conduct of monetary policy is the responsibility of the Bank’s Governing Council. The inflation-control target guides the Bank’s decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term. The Bank announces its policy rate settings on fixed announcement dates eight times a year.
Ever since 1991, when the Bank of Canada has adopted the inflation-control target and the flexible exchange rate as framework for its monetary policy, Canadian inflation has remained near its 2% target, within a 1% to 3% range. From 1991 to 2018, Canadian inflation has been 1.79% (source: Inflation Calculator - Bank of Canada).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

Ms.Fortuna wrote:
Tue Apr 10, 2018 2:58 pm
thanks for the update! however, I feel like I am fundamentally missing something here. So looking at the latest version excel tool (not changing any parameters), tab "Back Testing" (which is year 1965) we retire with an initial withdrawal 82,701 (Bal. 1,617,434) which is ~5.1% (I know the rate is not very relevant but just to get an idea where we start). In year 16 (for example), we can withdraw only 33,194 real which is like 40% of our initial withdrawal of 82k. Where do soft and hard targets (95% and 85%) come into place? Sorry for the dumb question, I must be misunderstanding the concept entirely.. I thought the withdrawals were supposed to be in a range more or less without fluctuating too widely.
I've implemented the inflation protected withdrawal using ADD. For a full protection with small withdrawal volatility risk, you would need to reduce heavily the initial withdrawal rate to about 3.5%(ADD+CDW) or about 80% of VPW. You can select Inflation Protection ="on" in the Data sheet for this. Using VPW, you would see that the 1965 still gets a 86% reduction, but this reduction prevents the ruin that CDW faces.

In the end, it comes to delays reward vs immediate rewards. It is a matter of personal preference and risk tolerance. I doubt there's a right answer. On the upside, ADD+VPW with inflation protection would have enjoy more than CDW if faced with good economic times (1950, 1980) retirees. Still that would have been far less than ADD+VPW without inflation protection.

I've also fix a variety of small calculation error .

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

longinvest wrote:
Wed Apr 11, 2018 10:40 am
It would be a mistake to assume that the monetary policies of the U.S. and Canada are identical; they're not.
Very true, they are not identical. I was just pointing that both U.S. and Canada seems to have policy in place that will lead to low inflation in the future. I find that a high number of people seems to still use 3%-4% inflation expectation. However, most expert seems to agree that a much lower (around 2%) is to be expected.

I'm more confortable to lose 2% than 4% each year due to inflation.

Posts: 49280
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Re: Accumulation-Dynamic Decumulation Strategy

Do you have any interest to create a dedicated wiki article for your spreadsheet? We can create an article for both the Bogleheads (US) and Financial Wisdom Forum (Canada) wikis.

For example: Variable percentage withdrawal - Bogleheads

and: Variable percentage withdrawal - finiki, the Canadian financial wiki

If there is an interest, there are several wiki editors (including myself) who can collaborate on this project.

If you would like to become a wiki editor and create this article yourself, please send me a Private Message. (I am also a wiki administrator.)
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Ms.Fortuna
Posts: 15
Joined: Tue Dec 26, 2017 11:12 pm

Re: Accumulation-Dynamic Decumulation Strategy

icetrap wrote:
Mon Apr 16, 2018 12:04 pm

I've implemented the inflation protected withdrawal using ADD. For a full protection with small withdrawal volatility risk, you would need to reduce heavily the initial withdrawal rate to about 3.5%(ADD+CDW) or about 80% of VPW. You can select Inflation Protection ="on" in the Data sheet for this. Using VPW, you would see that the 1965 still gets a 86% reduction, but this reduction prevents the ruin that CDW faces.

In the end, it comes to delays reward vs immediate rewards. It is a matter of personal preference and risk tolerance. I doubt there's a right answer. On the upside, ADD+VPW with inflation protection would have enjoy more than CDW if faced with good economic times (1950, 1980) retirees. Still that would have been far less than ADD+VPW without inflation protection.

I've also fix a variety of small calculation error .
Thanks! I like the result . The tool helps to smooth out withdrawals now. I personally used 90% for VPW to arrive at acceptable results (using 1965 as the worst year) and will continue to play with the parameters to see various outcomes. Is 40 y.o. duration the longest the tool has?
Also, would it be too much trouble to add 100% stock option as well?

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

Ms.Fortuna wrote:
Tue Apr 17, 2018 2:24 pm
Is 40 y.o. duration the longest the tool has?
I've updated the tool to be able to get you 70 years projection, but only in the Backtesting sheet as data(A24-BP53). I hope this helps. On a 70 years, there's not a lot data path (we only have data up from 1871).
Ms.Fortuna wrote:
Tue Apr 17, 2018 2:24 pm
Also, would it be too much trouble to add 100% stock option as well?
Yes, this was already in place. Just select 0% Bonds under Asset Allocation in the Data screen.

I've also inclued a few setting guidance that may be usefull under Advance Parameters. While they appear set in stone and precise, we should not look at them as such. Only as helping guidance.

Ms.Fortuna
Posts: 15
Joined: Tue Dec 26, 2017 11:12 pm

Re: Accumulation-Dynamic Decumulation Strategy

icetrap wrote:
Mon Apr 23, 2018 3:30 pm
Ms.Fortuna wrote:
Tue Apr 17, 2018 2:24 pm
Also, would it be too much trouble to add 100% stock option as well?
Yes, this was already in place. Just select 0% Bonds under Asset Allocation in the Data screen.
Thank you! I was not sure whether 100% stock option was incorporated in the worksheet because the table in tab "VPW" doesn't have a column for 100% stock, the table ends at 80%stock.

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Re: Accumulation-Dynamic Decumulation Strategy

icetrap has created a dedicated wiki article. See: Accumulation-dynamic decumulation
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

icetrap
Posts: 74
Joined: Mon Nov 06, 2017 12:30 pm

Re: Accumulation-Dynamic Decumulation Strategy

I've updated the strategy files in the wiki. I have included a light version if you just want to have a quick comparison for any previous year between ADD and the other decumulation stategy. It is way quicker to load.

I have also included some guidance considering various inflation goal (full inflation protection, partial protection, no inflation protection) and various risk tolerance. You are able to get out 3.5% withdrawals if you want full inflation protection. If you tolerate moderate withdrawal reduction due to inflation, you can go to 4%-4.5% withdrawals. If you go all with no inflation protection, you can go for 5.5%-6% withdrawals. Note that your specifics (retirement date, assumptions used and fund) may change somewhat these. To be on the prudent side, you should be a bit more conservative since the future may bring worse outcome.

I have also included some comparison versus the Constant Dollar Withdrawals(CDW) and Variable Percentage Witdrawal(VPW). As expected, ADD allows for 30-40% more on average withdrawals than CDW at 3.5% level. For VPW without ADD, it faces high withdrawals volatility if you don't include social security or other income or inflation protected asset. VPW without ADD using a conservative portfolio of 50% equity, faces 63% reduction in nominal terms and 47% in real terms at the worst point. VPW with ADD with this conservative portfolio, faces 95% reduction nominal terms. In real terms, it faces the same 45% reduction. You need to reduce the VPW by 87% in order to face only 95% reduction in real reductions.

Otherwise, I have also fixed some small issues, included a new feature to test directly all years against the Constant Dollar Withdrawal strategy,