Variable Percentage Withdrawal (VPW)

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AlohaJoe
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Re: Variable Percentage Withdrawal (VPW)

Post by AlohaJoe » Mon Feb 04, 2019 9:50 pm

RoxieII wrote:
Mon Feb 04, 2019 3:30 pm
Do you mind if I ask, do I understand VPW? :) It seems like such an outlier. Maybe this is too simple but is this really the inverse of the Taylor method?
It isn't the inverse of the Taylor method simply because there is no such thing as the Taylor method. It is a garbled bunch of nonsense with no definition. Taylor's method is "withdraw whatever you feel like". If the market goes down 20% how much do you reduce withdrawals? "Whatever you feel like." If the market goes up 20% how much do you increase withdrawals? "Whatever you feel like." The Taylor method is not a plan, it is mumbo jumbo. If he took the same approach to asset allocation -- "invest in whatever you want and adjust in up or down whenever you feel like it based on no analysis and just your gut feeling" -- he'd be laughed off of Bogleheads -- even though it has been amply demonstrated that withdrawal rates are vastly more important than asset allocation.

The actual Taylor method is: have so much money that the amount you withdraw is meaningless, that way you can adjust it up and down when you feel like it with no ill effects. After all, Taylor retired in the single best year to retire in US history. Based on the portfolio he had then, and the returns since then, he could withdraw the current equivalent of over $200,000 a year and still not run out.

Anyway, I can't really understand your chart. There is no "multiple" when talking about VPW, so I don't know what that 48 is or why you think the asset needed is higher than for "4% old CDW theory".
VPW is start higher and drop back as needed and the Taylor method is start lower and increase if market increases. (My words, not his!)
No, VPW does not start meaningfully higher. There is no actual difference between withdrawing $42,000 and $40,000 at age 65. (The numbers come from your screenshot.)

The difference is in what happens when the market crashes by 50% -- as it did in 2008. How much do you reduce withdrawals under the Taylor method?

The difference is in what happens when the market is okay but inflation is 10% for 10 years -- as happened in the 1970s. The Taylor method says nothing about what happens in this situation.

2015
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Re: Variable Percentage Withdrawal (VPW)

Post by 2015 » Mon Feb 04, 2019 10:40 pm

AlohaJoe wrote:
Mon Feb 04, 2019 9:50 pm
RoxieII wrote:
Mon Feb 04, 2019 3:30 pm
Do you mind if I ask, do I understand VPW? :) It seems like such an outlier. Maybe this is too simple but is this really the inverse of the Taylor method?
It isn't the inverse of the Taylor method simply because there is no such thing as the Taylor method. It is a garbled bunch of nonsense with no definition. Taylor's method is "withdraw whatever you feel like". If the market goes down 20% how much do you reduce withdrawals? "Whatever you feel like." If the market goes up 20% how much do you increase withdrawals? "Whatever you feel like." The Taylor method is not a plan, it is mumbo jumbo. If he took the same approach to asset allocation -- "invest in whatever you want and adjust in up or down whenever you feel like it based on no analysis and just your gut feeling" -- he'd be laughed off of Bogleheads -- even though it has been amply demonstrated that withdrawal rates are vastly more important than asset allocation.

Well then I guess I could be "laughed off Bogleheads" because I view much of what passes as "analysis" here as no more than human narrative and muddled mumbo jumbo, with people talking past each other in circular debates. Can both "sides" possibly be right?? Same goes for the ongoing sewage pipeline break of financial "information," with its Sisyphean revisions to studies, papers, predictions, and the 800th edition of "The Only Guide You'll Ever Need", etc. At least when I throw my chicken bones they only give me one answer, as opposed to "read my complexity blog again tomorrow to help me monetize it."

The actual Taylor method is: have so much money that the amount you withdraw is meaningless, that way you can adjust it up and down when you feel like it with no ill effects. After all, Taylor retired in the single best year to retire in US history. Based on the portfolio he had then, and the returns since then, he could withdraw the current equivalent of over $200,000 a year and still not run out.
...
Without knowing the totality of Taylor's complete circumstances and choice over the years, isn't this conjecture at best?
No, VPW does not start meaningfully higher. There is no actual difference between withdrawing $42,000 and $40,000 at age 65. (The numbers come from your screenshot.)

The difference is in what happens when the market crashes by 50% -- as it did in 2008. How much do you reduce withdrawals under the Taylor method?

The difference is in what happens when the market is okay but inflation is 10% for 10 years -- as happened in the 1970s. The Taylor method says nothing about what happens in this situation.
I take the Taylor Method to encompass flexibility, which could include anything from going back to work to annuitization to other strategies in response to market changes. Unlike some, I am not pathologically obsessed with false precision, as opposed to being tyrannized by never ending Fake News Financial "Analysis." I find the study of the nature of risk (and risk mitigation) to be more valuable than anything I could gain as a "student of investing."

megabad
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Re: Variable Percentage Withdrawal (VPW)

Post by megabad » Thu Feb 07, 2019 12:27 am

longinvest wrote:
Sun Jan 27, 2019 4:39 pm
I have uploaded version 2.1 of the VPW backtesting spreadsheet.
Big thanks for the updates over the years. I always freaking loved the spreadsheet for the backtesting and how easy VPW is to explain.

smectym
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Re: Variable Percentage Withdrawal (VPW)

Post by smectym » Sat Apr 20, 2019 1:41 am

Agree VPW is conclusively superior to too brittle methods (such as constant 4%) on the one hand, and too conservative approaches (such as mimicking RMD) on the other. I would add that “not that interested in the nuts-and-bolts of SWR theory” spouse is intuitively attracted to the common-sense flexibility of VPW. Since spouse is likely to live on after the obsessive one (me) has died, that’s a huge plus. Thanks to longinvest and all others on these strings.

Smectym

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 5:34 am

I've created a VPW Accumulation And Retirement Worksheet which calculates portfolio contributions, during accumulation, and portfolio withdrawals, during retirement, while taking into account pensions with and without cost of living adjustments. It contains two separate sheets:
  • Accumulation: This sheet calculates a (monthly, semimonthly, or biweekly) portfolio contribution amount, taking into account age, salary, portfolio balance and allocation, retirement age, and future pensions with and without cost of living adjustments.
  • Retirement: This sheet calculates an (annual, quarterly, or monthly) portfolio withdrawal amount, taking into account current age, portfolio balance and allocation, and future pensions with and without cost of living adjustments.
Every year, one must enter new information (new age, new portfolio balance, etc.) into the worksheet so that it calculates a new portfolio contribution amount during accumulation, or a new withdrawal amount during retirement.

The spreadsheet can be used online or downloaded.

The links can be found on the Boglehead wiki VPW page: VPW Accumulation And Retirement Worksheet.

Here's a screenshot of the Retirement sheet:

Image

I've kept the worksheet interface simple so that it's easy to use by a spouse who doesn't care about calculation details.

Here are some details for those who care about them.

At age 60, with a 60/40 stocks/bonds allocation, the VPW percentage is 4.7%, which multiplied by the $386,180 balance would imply a $18,150 withdrawal. But, the retiree will receive a $23,736 annually as Social Security payments in 10 years at age 70. The worksheet takes this future pension into account and finds that the retiree can withdraw $32,379 this year.

The worksheet also estimates the flexibility that the retiree must have to hold 60% in stocks while taking VPW withdrawals and delaying Social Security. It assumes that stocks could easily lose 50% of their value in a short time, and calculates that the impact a 30% portfolio loss would be an annual -$5,441 reduction in withdrawals, or 17%.

The Accumulation spreadsheet is similarly simple. It's derived from the recent variable savings rate spreadsheet and it's meant to replace it.

The Accumulation spreadsheet is seeks to determine portfolio contributions such that:
  • (annual salary - annual pension contributions - annual portfolio contributions) = (future annual pensions payments + future annual portfolio withdrawals)
As the portfolio fluctuates, contributions fluctuate with it. The spreadsheet estimates the flexibility that the accumulating investor must have to hold 60% in stocks while saving for retirement. It assumes that stocks could easily lose 50% of their value in a short time, and calculates the impact on portfolio contributions.

Comments are welcome.

Enjoy!
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

kelage
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Re: Variable Percentage Withdrawal (VPW)

Post by kelage » Tue Jun 11, 2019 6:53 am

Thank you.

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 7:11 am

^^^
You're welcome.

Here's a screenshot of the Accumulation sheet:

Image
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sandramjet
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Re: Variable Percentage Withdrawal (VPW)

Post by sandramjet » Tue Jun 11, 2019 11:38 am

I downloaded the excel sheet and tried the "retirement" page ... but I get nothing but a lot of #N/A errors, and I see that there are functions in cell B6 that don't seem to be supported ??
Also, if I set my inputs to no pensions, I get lots of DIV/0 errors. Suppose I don't have any pensions?

LSLover
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Re: Variable Percentage Withdrawal (VPW)

Post by LSLover » Tue Jun 11, 2019 12:08 pm

longinvest wrote:
Tue Jun 11, 2019 7:11 am
^^^
You're welcome.

Here's a screenshot of the Accumulation sheet:

Image
Longinvest,

I am currently 80% stocks/20% bonds in my asset allocation. Any way of modeling that in the spreadsheet?

abner kravitz
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Re: Variable Percentage Withdrawal (VPW)

Post by abner kravitz » Tue Jun 11, 2019 12:44 pm

longinvest wrote:
Tue Jun 11, 2019 5:34 am


At age 60, with a 60/40 stocks/bonds allocation, the VPW percentage is 4.7%, which multiplied by the $386,180 balance would imply a $18,150 withdrawal. But, the retiree will receive a $23,736 annually as Social Security payments in 10 years at age 70. The worksheet takes this future pension into account and finds that the retiree can withdraw $32,379 this year.


Thanks for this spreadsheet, I really like the VPW stuff. I have an issue, though. In the example above, my download is showing an initial withdrawal of $8,643. Also, when I put in my numbers then added pensions, my withdrawals went down with each additional pension/SS.

Any thoughts on what is happening? I am using EXCEL for MAC circa 2011.

Thanks

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 12:47 pm

OK. There's a bug in the spreadsheet. I'll fix it later today. Thanks for alerting me about it.
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kd2008
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Re: Variable Percentage Withdrawal (VPW)

Post by kd2008 » Tue Jun 11, 2019 2:15 pm

longinvest wrote:
Tue Jun 11, 2019 12:47 pm
OK. There's a bug in the spreadsheet. I'll fix it later today. Thanks for alerting me about it.
In the retirement tab, when the pension bridge cost is zero (B50 through B53 are all zero), the pension bridge funding ratio formula: 1 - B57/SUM(B50:B53) ends up having a division by zero. That formula needs protection so that this does not happen.

indyfish
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Re: Variable Percentage Withdrawal (VPW)

Post by indyfish » Tue Jun 11, 2019 2:25 pm

Also - in the Defined Benefit Pension parts - if the Pension is already started, but the Start Age is the same as the Age of the Retiree ($B$8) - then it shows a validation error.

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 3:03 pm

indyfish wrote:
Tue Jun 11, 2019 2:25 pm
Also - in the Defined Benefit Pension parts - if the Pension is already started, but the Start Age is the same as the Age of the Retiree ($B$8) - then it shows a validation error.
This one is normal. When the pension is started, the "Start Age" is replaced with "---" and the cell must be left empty.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 3:36 pm

I have uploaded version 1.3 of the VPW Accumulation And Retirement Worksheet.

Changes:
  • Added 80/20 and 90/10 risky (concentrated in stocks) allocations (outside of the Benjamin Graham's 75/25 to 25/75 stocks/bonds range) at the request of LSLover.
  • Solved bugs reported by sandramjet and kd2008. Thanks to both!
As usual, feel free to comment.

Enjoy!
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 3:45 pm

abner kravitz wrote:
Tue Jun 11, 2019 12:44 pm
Thanks for this spreadsheet, I really like the VPW stuff. I have an issue, though. In the example above, my download is showing an initial withdrawal of $8,643. Also, when I put in my numbers then added pensions, my withdrawals went down with each additional pension/SS.

Any thoughts on what is happening? I am using EXCEL for MAC circa 2011.
Abner, can you try version 1.3? When you download the spreadsheet and open it, it should show the same numbers as in the images of this post (Retirement sheet) and this post (Accumulation sheet). If it doesn't we'll need the help of people with MACs. In the meantime, if you don't want to upload your data to an online spreadsheet, maybe you could install LibreOffice and use that version?
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

sandramjet
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Re: Variable Percentage Withdrawal (VPW)

Post by sandramjet » Tue Jun 11, 2019 4:49 pm

Thanks, that did solve the problems I was seeing. But now I have another (or user error).
For grins I was just testing how things look as I change the age. If I put in an age of say 80, and SS starting at 70, it shows an error (I set "already started" to yes). In fact it seems like anytime I started the SS input it shows error, and then shows current year income for that pension as 0. Is there something else that needs to be done?

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 4:53 pm

sandramjet wrote:
Tue Jun 11, 2019 4:49 pm
Thanks, that did solve the problems I was seeing. But now I have another (or user error).
For grins I was just testing how things look as I change the age. If I put in an age of say 80, and SS starting at 70, it shows an error (I set "already started" to yes). In fact it seems like anytime I started the SS input it shows error, and then shows current year income for that pension as 0. Is there something else that needs to be done?
A pension cannot start in the past. It must be marked as already started causing the "Start Age" heading to disappear. As a result, the cell must remain empty. It's like that by design.

I don't want users to confuse VPW withdrawals with constant withdrawals. All yellow cells must be update every year. Social Security payments, in particular, change every year (they're indexed to inflation). So, when a delayed pension becomes a current pension, it's important that the user updates the spreadsheet accordingly. I've just made sure the spreadsheet complains if the Start Age isn't removed.
Last edited by longinvest on Tue Jun 11, 2019 5:04 pm, edited 2 times in total.
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sandramjet
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Re: Variable Percentage Withdrawal (VPW)

Post by sandramjet » Tue Jun 11, 2019 4:59 pm

Ok, that was not clear that you have to change 2 cells, not just mark it as "Already Started". It would seem more intuitive to me if it is marked as "already started" that would automatically clear the "start age" cell if that is needed. Or at least indicate that in the instructions.

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Tue Jun 11, 2019 6:40 pm

sandramjet wrote:
Tue Jun 11, 2019 4:59 pm
Ok, that was not clear that you have to change 2 cells, not just mark it as "Already Started". It would seem more intuitive to me if it is marked as "already started" that would automatically clear the "start age" cell if that is needed. Or at least indicate that in the instructions.
OK. You've got your wish. I've uploaded version 1.4 that relaxes the validations rules for pension Start Age. For a current pension, it can be left empty or contain a value smaller or equal to the retiree's age.

Is that simpler?
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

abner kravitz
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Re: Variable Percentage Withdrawal (VPW)

Post by abner kravitz » Tue Jun 11, 2019 8:13 pm

longinvest wrote:
Tue Jun 11, 2019 3:45 pm
abner kravitz wrote:
Tue Jun 11, 2019 12:44 pm
Thanks for this spreadsheet, I really like the VPW stuff. I have an issue, though. In the example above, my download is showing an initial withdrawal of $8,643. Also, when I put in my numbers then added pensions, my withdrawals went down with each additional pension/SS.

Any thoughts on what is happening? I am using EXCEL for MAC circa 2011.
Abner, can you try version 1.3? When you download the spreadsheet and open it, it should show the same numbers as in the images of this post (Retirement sheet) and this post (Accumulation sheet). If it doesn't we'll need the help of people with MACs. In the meantime, if you don't want to upload your data to an online spreadsheet, maybe you could install LibreOffice and use that version?
Whatever you did seems to have done the trick. Thanks very much.

SpaceCowboy
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Re: Variable Percentage Withdrawal (VPW)

Post by SpaceCowboy » Fri Jun 14, 2019 12:18 am

Thanks @longinvest
Appreciate you including the PV calculation of both real and nominal pensions in the VPW calculation. I'd been doing this tweak manually for SS.
Appreciate all your efforts in building this useful tool and improving it.

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Fri Jun 14, 2019 7:32 am

SpaceCowboy wrote:
Fri Jun 14, 2019 12:18 am
Appreciate you including the PV calculation of both real and nominal pensions in the VPW calculation. I'd been doing this tweak manually for SS.
Appreciate all your efforts in building this useful tool and improving it.
Thanks for the feedback.

The objective is for the new VPW worksheet to be simple enough so that a surviving spouse with little interest in financial calculations can easily use it.

The new worksheet hides the complexity of calculations to deal with delayed Social Security and a fixed pension while also keeping a single unified portfolio. During accumulation, it presents a simple amount (that changes every year of accumulation) to contribute to the portfolio. During retirement, it presents a simple amount (that changes every year of retirement) to withdraw from the portfolio. In both cases, it details current year income and the required flexibility to keep in the budget in the form of potential future additional savings (during accumulation) or withdrawal reduction (during retirement) in case of significant stock market losses.

For accumulating investors, it eliminates the illogical idea to aim for a specific number (like $1,000,000) or a specific simplistic multiple (like 25 times expenses). Instead, it gets the accumulating investor into the habit of adapting savings (and thus spending) to market returns and to always consider the impact of potential severe stocks losses on the entire retirement plan and future retirement savings, given the chosen asset allocation.
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fourniks
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Re: Variable Percentage Withdrawal (VPW)

Post by fourniks » Sat Jun 15, 2019 7:56 am

Longinvest - I'll echo what others have said and love the simplicity of the original and new spreadsheets.

Question - In the case of my wife, if she takes her pension early, she gets a yearly "bonus" distribution until she turns 62, at which time the pension is "reduced" to its normal amount for the remainder of payout term (life). Her pension is COLA'd. In Firecalc, this can be handled by a recurring COLA'd "payment" (deduction) starting at 62. I was wondering if there was any way to accommodate this in the spreadsheet?

Four

gjlynch17
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Re: Variable Percentage Withdrawal (VPW)

Post by gjlynch17 » Sun Jun 16, 2019 8:11 am

longinvest wrote:
Fri Jul 20, 2018 8:43 pm
cap396 wrote:
Tue Jul 17, 2018 9:42 am
Question: On the "Table" tab of the VPW document, the Long-Term Real Growth Trends is set to 5.0% for stocks and 1.8% for bonds, and there is a note that this is based on data from Credit Suisse Global Investment Returns Yearbook 2016. When I look at the Credit Suisse Global Investment Returns Yearbook 2018, the numbers have been updated to 5.2% and 2.0% respectively. Should those values be changed on the "Table" tab? Doing this changes the withdrawal rates (slightly).

Sorry if I'm totally off here; I'm still learning how all of this works.

(I'm looking at page 37 of this document: https://www.credit-suisse.com/media/ass ... y-2018.pdf)
It's only is a wild-ass guess such that good returns are higher and bad returns are lower. So, I see no need to constantly change it. See this earlier post for a more detailed explanation.

There's no need for false precision. Changes in annualized historical returns over a period starting in 1900 and spanning more than a century are tiny. Updating the trends from year to year would mainly affect the rounding of percentages in the VPW table and lead to minor changes. For one thing, I don't want to give people the impression that the table changes over time. For another, I don't want them to think that the table is of high precision; it's not.

I insist: the table isn't meant to be used with ultimate precision. If the VPW table indicates 4.8%, taking 5% won't lead to premature portfolio depletion, and taking 4.5% won't lead to dying with a gigantic pile of unspent money. The percentages are the result of a calculation based on a wild-ass guess; they inherit the "wild-ass guess" property. So, they should be used as a guide to indicate approximately how much of the portfolio should be withdrawn today to pay taxes and fund the upcoming year's expenses given the current portfolio balance, the target asset allocation for the upcoming year, and the current age of the retiree.

Whether the specific percentage in the VPW table is 4.8% or 4.9% isn't important. These are rounded values resulting from a calculation based on a wild-ass guess. What's important is to understand that it wouldn't be sustainable to withdraw 7% or 8% instead of 4.8%, and keep over-withdrawing like that regularly. I've kept one decimal of precision (after being rightfully chastised by forum member Rodc, early in this thread, for the false precision of using the default two decimals of Microsoft Excel/Libreoffice Calc) so that annual percentage adjustments remain small. The difference between 4% and 5% of a portfolio is big; the difference between 4.4% and 4.5% is much smaller and leads to a more reasonable annual adjustment.

On a technical level, in the past, Credit Suisse Global Investment Returns Yearbooks provided a "growth of 1$" value since 1900. The newer free Summary editions since year 2017 don't provide this anymore. The cell's formula (based on the last of the older yearbooks) takes the 116th root of final growth value (e.g. $300 for stocks) minus one as (stocks) growth trend.

I have no strong opinion about whether to update the spreadsheet's trends based on the latest Credit Suisse Yearbook Summary or not, except that I want users to know that they can take a single copy of the VPW table and use it all retirement long.

A compromise would be to update the trends every 5 years (in 2020, 2025, etc) just to reinforce the idea of stability; that there's no need to update the VPW table yearly (or ever). Would that be more intellectually satisfying than using stale values from 2016?
Longinvest (and other contributors) thank you for all of your work in creating and describing the Variable Withdrawal Rate. I am late to the discussion as I am at the stage of beginning to consider early retirement (currently age 50). While we appear to be close to being able to retire based on our investment assets and spending, the thought of going without a consistent paycheck is something I am still trying to grips with psychologically. As you indicate above, there is simply no certainty or predictability with any withdrawal strategy given the enormous number of variables and potential outcomes. However, the VWR does seem like a prudent approach of balancing the two extremes of either being too conservative and too aggressive early in retirement.

With that said, the VWR seems to be overly optimistic in that I understand it relies on historical real returns from the Credit Suisse Yearbook Summary going back to 1900. I have been strongly influenced by Bernstein, Ilmanen, Schiller and others that it is dangerous to rely on historical returns to project future returns and that the starting point for any investment or withdrawal strategy should be a realistic assessment of potential future returns. Simply put, with the 10-year treasury yielding 2.10%, I do not believe it is realistic to assume 1.8% real returns on bonds and 5% real returns on equities (although as I believe that may be realistic for international equities but not U.S. equities). If I understand your advanced spreadsheet (and admittedly I may not fully understand that or the VWR strategy), adjusting the CS historical real returns of equities and bonds from 5% and 1.8% to 3.5% and 0.5%, respectively would reduce my VWR from 4.3% to 3.3%. As you indicate above, this is a fairly significant difference. You do have a very helpful sensitivity analysis in the spreadsheet for a 50% immediate drop in equities (which would in turn likely increase expected future returns), but this does not account for the scenario of no immediate drop but future low returns.

You clearly state your returns in your spreadsheet "A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return. It's not a prediction of future returns from now. It is fixed and must never be updated. At the top of a bubble, it is likely to overestimate future returns. At the bottom of a crash it is likely to underestimate future returns. The wild-ass guesses, below, are based on the global (world) long-term growth of $1 from 1900 to 2015 according to the Credit Suisse Global Investment Returns Yearbook 2016." My question is why start with historical returns rather than an estimate of future returns? Granted, future returns are merely a WAG, but it seems like it would be a more accurate WAG to use some consensus of expected future returns based on current interest rates and valuations rather than historical returns that were achieved at different valuations and interest rates.

Thanks again for all of your efforts and contributions on the VWR as it has been very helpful in understanding the factors and nuances in attempting to achieve a realistic withdrawal strategy and connecting it with other income sources such as social security and pension.

dcabler
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Re: Variable Percentage Withdrawal (VPW)

Post by dcabler » Sun Jun 16, 2019 9:13 am

gjlynch17 wrote:
Sun Jun 16, 2019 8:11 am
longinvest wrote:
Fri Jul 20, 2018 8:43 pm
cap396 wrote:
Tue Jul 17, 2018 9:42 am
Question: On the "Table" tab of the VPW document, the Long-Term Real Growth Trends is set to 5.0% for stocks and 1.8% for bonds, and there is a note that this is based on data from Credit Suisse Global Investment Returns Yearbook 2016. When I look at the Credit Suisse Global Investment Returns Yearbook 2018, the numbers have been updated to 5.2% and 2.0% respectively. Should those values be changed on the "Table" tab? Doing this changes the withdrawal rates (slightly).

Sorry if I'm totally off here; I'm still learning how all of this works.

(I'm looking at page 37 of this document: https://www.credit-suisse.com/media/ass ... y-2018.pdf)
It's only is a wild-ass guess such that good returns are higher and bad returns are lower. So, I see no need to constantly change it. See this earlier post for a more detailed explanation.

There's no need for false precision. Changes in annualized historical returns over a period starting in 1900 and spanning more than a century are tiny. Updating the trends from year to year would mainly affect the rounding of percentages in the VPW table and lead to minor changes. For one thing, I don't want to give people the impression that the table changes over time. For another, I don't want them to think that the table is of high precision; it's not.

I insist: the table isn't meant to be used with ultimate precision. If the VPW table indicates 4.8%, taking 5% won't lead to premature portfolio depletion, and taking 4.5% won't lead to dying with a gigantic pile of unspent money. The percentages are the result of a calculation based on a wild-ass guess; they inherit the "wild-ass guess" property. So, they should be used as a guide to indicate approximately how much of the portfolio should be withdrawn today to pay taxes and fund the upcoming year's expenses given the current portfolio balance, the target asset allocation for the upcoming year, and the current age of the retiree.

Whether the specific percentage in the VPW table is 4.8% or 4.9% isn't important. These are rounded values resulting from a calculation based on a wild-ass guess. What's important is to understand that it wouldn't be sustainable to withdraw 7% or 8% instead of 4.8%, and keep over-withdrawing like that regularly. I've kept one decimal of precision (after being rightfully chastised by forum member Rodc, early in this thread, for the false precision of using the default two decimals of Microsoft Excel/Libreoffice Calc) so that annual percentage adjustments remain small. The difference between 4% and 5% of a portfolio is big; the difference between 4.4% and 4.5% is much smaller and leads to a more reasonable annual adjustment.

On a technical level, in the past, Credit Suisse Global Investment Returns Yearbooks provided a "growth of 1$" value since 1900. The newer free Summary editions since year 2017 don't provide this anymore. The cell's formula (based on the last of the older yearbooks) takes the 116th root of final growth value (e.g. $300 for stocks) minus one as (stocks) growth trend.

I have no strong opinion about whether to update the spreadsheet's trends based on the latest Credit Suisse Yearbook Summary or not, except that I want users to know that they can take a single copy of the VPW table and use it all retirement long.

A compromise would be to update the trends every 5 years (in 2020, 2025, etc) just to reinforce the idea of stability; that there's no need to update the VPW table yearly (or ever). Would that be more intellectually satisfying than using stale values from 2016?
Longinvest (and other contributors) thank you for all of your work in creating and describing the Variable Withdrawal Rate. I am late to the discussion as I am at the stage of beginning to consider early retirement (currently age 50). While we appear to be close to being able to retire based on our investment assets and spending, the thought of going without a consistent paycheck is something I am still trying to grips with psychologically. As you indicate above, there is simply no certainty or predictability with any withdrawal strategy given the enormous number of variables and potential outcomes. However, the VWR does seem like a prudent approach of balancing the two extremes of either being too conservative and too aggressive early in retirement.

With that said, the VWR seems to be overly optimistic in that I understand it relies on historical real returns from the Credit Suisse Yearbook Summary going back to 1900. I have been strongly influenced by Bernstein, Ilmanen, Schiller and others that it is dangerous to rely on historical returns to project future returns and that the starting point for any investment or withdrawal strategy should be a realistic assessment of potential future returns. Simply put, with the 10-year treasury yielding 2.10%, I do not believe it is realistic to assume 1.8% real returns on bonds and 5% real returns on equities (although as I believe that may be realistic for international equities but not U.S. equities). If I understand your advanced spreadsheet (and admittedly I may not fully understand that or the VWR strategy), adjusting the CS historical real returns of equities and bonds from 5% and 1.8% to 3.5% and 0.5%, respectively would reduce my VWR from 4.3% to 3.3%. As you indicate above, this is a fairly significant difference. You do have a very helpful sensitivity analysis in the spreadsheet for a 50% immediate drop in equities (which would in turn likely increase expected future returns), but this does not account for the scenario of no immediate drop but future low returns.

You clearly state your returns in your spreadsheet "A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return. It's not a prediction of future returns from now. It is fixed and must never be updated. At the top of a bubble, it is likely to overestimate future returns. At the bottom of a crash it is likely to underestimate future returns. The wild-ass guesses, below, are based on the global (world) long-term growth of $1 from 1900 to 2015 according to the Credit Suisse Global Investment Returns Yearbook 2016." My question is why start with historical returns rather than an estimate of future returns? Granted, future returns are merely a WAG, but it seems like it would be a more accurate WAG to use some consensus of expected future returns based on current interest rates and valuations rather than historical returns that were achieved at different valuations and interest rates.

Thanks again for all of your efforts and contributions on the VWR as it has been very helpful in understanding the factors and nuances in attempting to achieve a realistic withdrawal strategy and connecting it with other income sources such as social security and pension.
This idea of using expected returns with a PMT based withdrawal method instead of fixed expected returns is discussed in this thread: viewtopic.php?t=263790

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Sun Jun 16, 2019 3:03 pm

fourniks wrote:
Sat Jun 15, 2019 7:56 am
Longinvest - I'll echo what others have said and love the simplicity of the original and new spreadsheets.

Question - In the case of my wife, if she takes her pension early, she gets a yearly "bonus" distribution until she turns 62, at which time the pension is "reduced" to its normal amount for the remainder of payout term (life). Her pension is COLA'd. In Firecalc, this can be handled by a recurring COLA'd "payment" (deduction) starting at 62. I was wondering if there was any way to accommodate this in the spreadsheet?

Four
Four, your wife's yearly bonus until age 62 is meant to smooth her lifelong income while assuming that she'll claim Social Security at age 62. I'd suggest doing exactly that: taking her pension when she retires, and claiming Social Security at age 62.

In the Accumulation worksheet (in the years before retirement), she would enter her pension without the bonus, and enter her projected Social Security payment when claimed at age 62 but use her pension start age as Social Security start age.

During retirement, she would enter enter in the Retirement worksheet her pension without the bonus, and enter her bonus as current Social Security payment in the years before age 62, and her actual Social Security payment (updated every year) thereafter. Actually, when reaching age 62, she could reassess and decided if she claims Social Security or delays it to age 70.
Last edited by longinvest on Sun Jun 16, 2019 5:27 pm, edited 2 times in total.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Sun Jun 16, 2019 4:00 pm

Gjlynch17, the new VPW Accumulation And Retirement Worksheet states:
  • A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return.
  • Its role is to distinguish between a high annual return and a low annual return.
  • It's not a prediction of future returns. It is fixed and must never be changed.
  • At the top of a bubble, it is likely to be higher than future returns. At the bottom of a crash it is likely to lower than future returns.
  • The selected growth trends are based on the long-term returns of world stocks and bonds from 1900 to 2018 according the Summary Edition of the Credit Suisse Global Investment Returns Yearbook 2019.

gjlynch17 wrote:
Sun Jun 16, 2019 8:11 am
My question is why start with historical returns rather than an estimate of future returns? Granted, future returns are merely a WAG, but it seems like it would be a more accurate WAG to use some consensus of expected future returns based on current interest rates and valuations rather than historical returns that were achieved at different valuations and interest rates.
The VPW method is a Bogleheads method that never tries to time the market.

Many pundits like to make 10-year return predictions to gain media exposure. The financial media loves such predictions. Yet, it's safe enough for pundits; almost nobody will remember their predictions in 10 years. Do you really remember a prediction made by a pundit 10 years ago?

Let's do a mental exercise. Let's assume, for a second, that we had a perfect return prediction for the next 10 years. Remember that the growth trend distinguishes between high and low returns. The thing is this: even if the future return of next 10 years is low, it still doesn't make sense to use it as growth trend. The growth trend isn't a future return prediction.

It's important to think ahead of time about the consequences of one's choices. Decreasing withdrawals (because future returns are low) when the portfolio is up and increasing withdrawals (because future returns are high) when the portfolio is down is a "sell less high, sell more low" approach to portfolio withdrawals. It's a form of "buy high, sell low", a counterproductive investing approach. It wouldn't be a good idea to do that.

The VPW method sensibly ignores all future return predictions.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

gjlynch17
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Re: Variable Percentage Withdrawal (VPW)

Post by gjlynch17 » Sun Jun 16, 2019 7:57 pm

dcabler wrote:
Sun Jun 16, 2019 9:13 am
This idea of using expected returns with a PMT based withdrawal method instead of fixed expected returns is discussed in this thread: viewtopic.php?t=263790
Dcabler, thank you for the link. Very helpful.
longinvest wrote:
Sun Jun 16, 2019 4:00 pm
The VPW method sensibly ignores all future return predictions.
Longinvest, thank you for your response. Even though we disagree on the merits of this decision, I appreciate that your Advanced User spreadsheet, makes it possible to adjust for expected returns.

Overall, I really like your spreadsheet and analysis. One question I have on the Advanced Spreadsheet relates to the calculation of future Social Security and pension benefits. In my specific situation, I am currently Age 50 and hope to retire at Age 55. I hope to defer taking social security and a modest COLA pension until Age 70. The advanced user spreadsheet accurately calculates the PV of future Social Security and pension benefits on the right columns (Cells E26, E27, E33, E34) but for the planning scenarios at retirement, it uses the FV of the Social Security and pension benefits (Cells B51 and B52 are tied to the Future Values in B15 and B17) even though they will not kick it for another 15 years after beginning of retirement in my case (Age 70). It seems one should do the PV calculation at the applicable retirement date (hopefully Age 55 for me). I appreciate your thoughts and those of others if I am missing something, which is certainly possible.

Thanks again for all of your efforts on this.

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest » Sun Jun 16, 2019 8:53 pm

Gjlynch17, none of the VPW spreadsheets contains a return prediction (or "expected return"). The VPW for advanced users spreadsheet has its own separate discussion thread.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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