A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

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Metx
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Sat Jul 06, 2019 10:19 pm

longinvest wrote:
Sat Jul 06, 2019 5:48 pm
...
In other words, mathematically, the correct solution is B. I think that the two charts in this post illustrate this quite clearly. But sometimes the correct mathematical solution introduces more complexity than a simpler solution. That's why I'm asking forum members for help choosing how to proceed.

One argument in favor of A is "intuitiveness", as it doesn't take a series of posts to try explaining the principle.

One argument in favor of B is also "intuitiveness", as the total portfolio includes both the LifeStrategy fund and the cash buffer which could be sitting into a money market fund scattered across many investment accounts. Many investors prefer using a money market fund to chasing external high-interest savings accounts.

Actually, so far, when I asked for help selecting an appropriate savings account, I got a single feedback from forum member retiringwhen suggesting that "Vanguard Federal Money Market VMFXX..... as the settlement account for the brokerage holding the LS fund would more than sufficient for this effort". Maybe I should forget about the Ally savings account and use VMFXX instead, in this forward test. Feedback about this is still welcome, despite my initial reluctance to money-market funds.
Thanks for the very clear reply. Now with my unwitting help everyone can see why B is the right choice. :)

For my savings I use Marcus, Goldman Sachs' online bank. Up post you mentioned that an advantage of a savings account over a MM is having a "known-in-advance interest rate." In my experience a good savings account adjusts with the prevailing rate, in my case going from 2.05% to 2.25% back down to 2.24% APY over the course of this year. So the advantage over a MM may be negligible.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by cjking » Sun Jul 07, 2019 5:29 am

Assuming we limit discussion to people with non-trivial funds to devote to discretionary spending, even people with completely smooth incomes have a savings balance, because spending isn't smooth. My experience of early semi-retirement is that spending is far more variable than variable withdrawals from 100% stocks. It's also more variable than it was in accumulation, as my balances are higher now, and I can afford to spend on large random items in a way I didn't when I didn't know I was going to have enough.

A savings balance can do the job of acting as a shock-absorber, decoupling spending from income. An increase in income volatility could cause some people to want a larger savings balance, I suppose, but my experience is that spending variability is so much larger that income volatility makes little difference to the size of the buffer that feels comfortable.

I think rule-based short-term smoothing of income is pointless, it's duplicating a part of the job the savings balance will do anyway, without rendering it obsolete, or even making much of a difference to its size.

The savings balance doesn't need to be planned for, nor does it need rules to govern it. The balance will arise as a result of natural caution when making discretionary spending decisions. Its size will be a side-effect of nuanced decisions about the pros and cons of spending now versus leaving money for spending later. These decisions will take into account more information than any rule-based system could.

Edited to insert a definition: Savings is a pot of unspent income. Where the income is the output of a withdrawal algorithm, it does not make sense to include it in the balance the withdrawal algorithm is applied to. The withdrawal algorithm is an intelligent valve that governs the flow of assets from the pot we can't spend to one we can. Savings is the pot we can spend all of at any time, even though natural caution means we probably won't.
Last edited by cjking on Sun Jul 07, 2019 5:37 am, edited 1 time in total.

3-20Characters
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by 3-20Characters » Sun Jul 07, 2019 5:36 am

longinvest wrote:
Sat Jul 06, 2019 5:48 pm

Actually, so far, when I asked for help selecting an appropriate savings account, I got a single feedback from forum member retiringwhen suggesting that "Vanguard Federal Money Market VMFXX..... as the settlement account for the brokerage holding the LS fund would more than sufficient for this effort". Maybe I should forget about the Ally savings account and use VMFXX instead, in this forward test. Feedback about this is still welcome, despite my initial reluctance to money-market funds.
I use ally savings and 11 month no penalty cd plus VMMXX (Vanguard Prime Money Market Fund). I have no opinion on what to use for this experiment as I don’t give that part of my portfolio much thought past what is “good enough” and expedient.

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siamond
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by siamond » Sun Jul 07, 2019 4:30 pm

cjking wrote:
Sun Jul 07, 2019 5:29 am
A savings balance can do the job of acting as a shock-absorber, decoupling spending from income. An increase in income volatility could cause some people to want a larger savings balance, I suppose, but my experience is that spending variability is so much larger that income volatility makes little difference to the size of the buffer that feels comfortable.

I think rule-based short-term smoothing of income is pointless, it's duplicating a part of the job the savings balance will do anyway, without rendering it obsolete, or even making much of a difference to its size. [...]
Yup, agreed. This is part of what I tried to convey in this post. I just added the key point that as long as you properly monitor your average monthly spending, this does the job of making sure you stay in line with withdrawal goals for the year. Those of us with actual retirement experience probably perceive such matters more clearly than people who are still in the workforce, but there is really little point trying to recreate a monthly income model in retirement if one tracks monthly spending.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 08, 2019 7:42 am

Most retirees seem happy to receive monthly Social Security payments instead of annual payments.

Anyway, the VPW Accumulation And Retirement Worksheet lets the retiree choose between annual, quarterly, and monthly withdrawals.

This forward test uses monthly VPW withdrawals with a dampening savings account. It's a simple approach that delivers regular monthly income and should feel familiar to many people.

There are various investment-related advantages to monthly withdrawals. Making monthly withdrawals and (indirectly) averaging them using a dampening savings account reduces the (good or bad) luck involved due to making a withdrawal on a specific good or bad market day. With annual withdrawals, the impact of trading on a particularly bad day or month of the year has a lasting 12 months impact. Annual withdrawals can lead to a noticeable monthly income change, every 12 months. Monthly withdrawals with a dampening savings account deliver smoother gradual monthly income changes. Making smaller monthly transactions, instead of 12-times bigger annual transactions, can also reduce the impact of human mistakes.

There are other advantages.

In many couples, one spouse is mostly responsible for managing finances. A monthly withdrawal schedule could open the opportunity to train the other spouse about the withdrawal method. Repeating a process monthly is more likely to stick to memory than doing it once a year.
Last edited by longinvest on Mon Jul 08, 2019 8:07 am, edited 4 times in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by azanon » Mon Jul 08, 2019 7:48 am

I admit I haven't played with the new spreadsheet (largely because I'm 48), but the original VPW (the annual withdraw) made/makes more sense to me, because it is my opinion (and a widely agreed-up one) that money intended to be spent in less than one year does not belong in the stock market. When I do get there, I don't anticipate dividing that annual withdrawal by 12, for monthly deposits into a checking account, to be a very difficult task.

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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 08, 2019 7:55 am

azanon wrote:
Mon Jul 08, 2019 7:48 am
I admit I haven't played with the new spreadsheet (largely because I'm 48), but the original VPW (the annual withdraw) made/makes more sense to me, because it is my opinion (and a widely agreed-up one) that money intended to be spent in less than one year does not belong in the stock market. When I do get there, I don't anticipate dividing that annual withdrawal by 12, for monthly deposits into a checking account, to be a very difficult task.
Monthly withdrawals with a dampening savings account containing 5 to 6 months of withdrawals keep a similar amount in cash, on average, as annual withdrawals. I've explained this earlier in this thread.

I've provided some advantages to monthly withdrawals in my previous post just above yours.

If you prefer annual VPW withdrawals, the new VPW Accumulation And Retirement Worksheet has an option for annual withdrawals.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by azanon » Mon Jul 08, 2019 8:09 am

longinvest wrote:
Mon Jul 08, 2019 7:55 am
azanon wrote:
Mon Jul 08, 2019 7:48 am
I admit I haven't played with the new spreadsheet (largely because I'm 48), but the original VPW (the annual withdraw) made/makes more sense to me, because it is my opinion (and a widely agreed-up one) that money intended to be spent in less than one year does not belong in the stock market. When I do get there, I don't anticipate dividing that annual withdrawal by 12, for monthly deposits into a checking account, to be a very difficult task.
Monthly withdrawals with a dampening savings account containing 5 to 6 months of withdrawals keep a similar amount in cash, on average, as annual withdrawals. I've explained this earlier in this thread.

I've provided some advantages to monthly withdrawals in my previous post just above yours.

If you prefer annual VPW withdrawals, the new VPW Accumulation And Retirement Worksheet has an option for annual withdrawals.
Yeah I read the post above. Yeah I get there could be an big impact with a 60% equity retirement portfolio by making an annual withdrawal on a bad day. But to summarize our exchange earlier, that's addressing a problem I personally wouldn't have. If I change my mind and go with an equity-dominated portfolio, it'll be because I decided upon a strategy that's intended to maintain the inflation-adjusted principle.

FWIW, I don't think my view is an outlier, reference Vanguard Target Retirement "Income" (30%), Wellesley "income" (~ 35-40%), and Lifestrategy Income (20%). If those were bad ideas for retirees, those funds wouldn't exist. VPW and those funds are matches made in heaven, IMO.

Greg in Idaho
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Greg in Idaho » Mon Jul 08, 2019 8:15 am

Thanks a bunch for this...and to show no good deed goes unpunished(uncriticized?)...

no Roth???

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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 08, 2019 8:20 am

azanon wrote:
Mon Jul 08, 2019 8:09 am
longinvest wrote:
Mon Jul 08, 2019 7:55 am
azanon wrote:
Mon Jul 08, 2019 7:48 am
I admit I haven't played with the new spreadsheet (largely because I'm 48), but the original VPW (the annual withdraw) made/makes more sense to me, because it is my opinion (and a widely agreed-up one) that money intended to be spent in less than one year does not belong in the stock market. When I do get there, I don't anticipate dividing that annual withdrawal by 12, for monthly deposits into a checking account, to be a very difficult task.
Monthly withdrawals with a dampening savings account containing 5 to 6 months of withdrawals keep a similar amount in cash, on average, as annual withdrawals. I've explained this earlier in this thread.

I've provided some advantages to monthly withdrawals in my previous post just above yours.

If you prefer annual VPW withdrawals, the new VPW Accumulation And Retirement Worksheet has an option for annual withdrawals.
Yeah I read the post above. Yeah I get there could be an big impact with a 60% equity retirement portfolio by making an annual withdrawal on a bad day. But to summarize our exchange earlier, that's addressing a problem I personally wouldn't have. If I change my mind and go with an equity-dominated portfolio, it'll be because I decided upon a strategy that's intended to maintain the inflation-adjusted principle.

FWIW, I don't think my view is an outlier, reference Vanguard Target Retirement "Income" (30%), Wellesley "income" (~ 35-40%), and Lifestrategy Income (20%). If those were bad ideas for retirees, those funds wouldn't exist. VPW and those funds are matches made in heaven, IMO.
A 30/70 stocks/bonds portfolio could easily lose 15% during a 12 months period due to stocks losing 50%. Along with a Social Security pension, this could represent a 10% total retirement income drop between December and January, once the new VPW withdrawal is taken. A monthly withdrawal schedule (with a dampening savings account) from the same 30/70 stocks/bonds portfolio would deliver smoother 1% or 2% monthly income changes, or smaller changes, instead.
Last edited by longinvest on Mon Jul 08, 2019 10:01 am, edited 7 times in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 08, 2019 8:24 am

Greg in Idaho wrote:
Mon Jul 08, 2019 8:15 am
no Roth???
For simplicity, the distribution of the LifeStrategy Moderate Growth Fund investment (and accompanying dampening savings account) across various accounts (IRA, 401K, Roth, taxable, etc.) has been kept out the scope of the forward test. Mainly, it is assumed that the money is spread across various accounts and the retiree will manage to pay taxes appropriately when taking monthly income.

It might be helpful to readers to discuss the main lines of how to manage withdrawals/monthly income across various accounts. But, we should keep in mind that this isn't a tax-planning thread.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by azanon » Mon Jul 08, 2019 11:27 am

longinvest wrote:
Mon Jul 08, 2019 8:20 am
azanon wrote:
Mon Jul 08, 2019 8:09 am
longinvest wrote:
Mon Jul 08, 2019 7:55 am
azanon wrote:
Mon Jul 08, 2019 7:48 am
I admit I haven't played with the new spreadsheet (largely because I'm 48), but the original VPW (the annual withdraw) made/makes more sense to me, because it is my opinion (and a widely agreed-up one) that money intended to be spent in less than one year does not belong in the stock market. When I do get there, I don't anticipate dividing that annual withdrawal by 12, for monthly deposits into a checking account, to be a very difficult task.
Monthly withdrawals with a dampening savings account containing 5 to 6 months of withdrawals keep a similar amount in cash, on average, as annual withdrawals. I've explained this earlier in this thread.

I've provided some advantages to monthly withdrawals in my previous post just above yours.

If you prefer annual VPW withdrawals, the new VPW Accumulation And Retirement Worksheet has an option for annual withdrawals.
Yeah I read the post above. Yeah I get there could be an big impact with a 60% equity retirement portfolio by making an annual withdrawal on a bad day. But to summarize our exchange earlier, that's addressing a problem I personally wouldn't have. If I change my mind and go with an equity-dominated portfolio, it'll be because I decided upon a strategy that's intended to maintain the inflation-adjusted principle.

FWIW, I don't think my view is an outlier, reference Vanguard Target Retirement "Income" (30%), Wellesley "income" (~ 35-40%), and Lifestrategy Income (20%). If those were bad ideas for retirees, those funds wouldn't exist. VPW and those funds are matches made in heaven, IMO.
A 30/70 stocks/bonds portfolio could easily lose 15% during a 12 months period due to stocks losing 50%. Along with a Social Security pension, this could represent a 10% total retirement income drop between December and January, once the new VPW withdrawal is taken. A monthly withdrawal schedule (with a dampening savings account) from the same 30/70 stocks/bonds portfolio would deliver smoother 1% or 2% monthly income changes, or smaller changes, instead.
Oh yeah, I know! That's a great point, and certainly just goes to further support the point I just made (that those funds still have plenty of risk and are Vanguard's recommendation for "retirement income"). Vanguard rates it risk level 2 (on a 5 scale), point being it certainly isn't 1!

I wouldn't be happy about a 10% cut for sure, but I could probably live with it especially given that VPW has no sequencing of return risk. I'll be withdrawing less when the portfolio is down, which is the most important point. And to be fair/full disclosure, my SS/Pension will be considerably higher than your example given that I'm a married, GS-13 fed, so in my personal case, it'd be less than 10%.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by retiringwhen » Mon Jul 08, 2019 12:32 pm

RE: the TD Income fund.

Those funds are intended to be used as an all in one fund. They can only be compared to the entire portfolio in the VPW model. They are NOT cash type funds and are not intended to fill the cash portion of a more complex portfolio.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by 2pedals » Mon Jul 08, 2019 1:27 pm

siamond wrote:
Sun Jul 07, 2019 4:30 pm
cjking wrote:
Sun Jul 07, 2019 5:29 am
A savings balance can do the job of acting as a shock-absorber, decoupling spending from income. An increase in income volatility could cause some people to want a larger savings balance, I suppose, but my experience is that spending variability is so much larger that income volatility makes little difference to the size of the buffer that feels comfortable.

I think rule-based short-term smoothing of income is pointless, it's duplicating a part of the job the savings balance will do anyway, without rendering it obsolete, or even making much of a difference to its size. [...]
Yup, agreed. This is part of what I tried to convey in this post. I just added the key point that as long as you properly monitor your average monthly spending, this does the job of making sure you stay in line with withdrawal goals for the year. Those of us with actual retirement experience probably perceive such matters more clearly than people who are still in the workforce, but there is really little point trying to recreate a monthly income model in retirement if one tracks monthly spending.
I am a recent retiree (8 months) and trying understand the best way to handle lumpy expenses. I have a significant pension that will cover about 80%-90% of non discretionary spending. Already, I had some lumpy expenses (1040ES for Roth conversions), property taxes, travel and home improvement expenses. After about 6 months I figured out that I needed to understand and track my spending like I never did before so I started to track expense categories with Moneydance. I expect to see even more lumpy expenses in the future, i.e. kitchen remodel, European cruise, new auto, etc. What am I struggling to understand at this point how much cash I should have in my savings and checking accounts on hand. I think need some buffer in the checking and saving account (maybe about 3 months of expenses) to withdraw the money prior to expected lumpy and/or when my buffer in savings and checking account drop below about 1 or 2 months of expenses. For me it is turning out to be exercise how much do I have in my account and how much will I need in a 1-3 months. After about 6 months review my spending with pension plus VPW or pension plus McClung's enhanced mortality (EM) approach to see how far off I am. We are spending a lot less. We need to do better somehow. I expected this was going to be a problem since we are averse to spending. In my case I need a way to promote discretionary spending. So I plan to keep track on how much we are under spending and try to assign funds to discretionary spending sprees. I am not worried about smoothing the monthly income the pension already has done that for me in my case.
Last edited by 2pedals on Mon Jul 08, 2019 4:57 pm, edited 1 time in total.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 08, 2019 3:14 pm

2pedals wrote:
Mon Jul 08, 2019 1:27 pm
I am a recent retiree (8 months) and trying understand the best way to handle lumpy expenses.
They can simply be handled similarly to how they were handled during accumulation. One can save in advance out of regular retirement income for discretionary expenses like travel, one can use a low-interest loan like a home equity line of credit (HELOC) for a kitchen remodel or a low-rate promotional car loan for a new car, or one can exceptionally withdraw the money from the portfolio (if the amount is relatively insignificant) and acknowledge the impact on future portfolio withdrawals. This last one is a cool feature of VPW; it automatically adjusts future withdrawals after an extra withdrawal due to an unplanned expense (like repairing a leaky roof) or an unexpected portfolio contribution due to a windfall (like inheriting money).
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by siamond » Mon Jul 08, 2019 4:18 pm

2pedals wrote:
Mon Jul 08, 2019 1:27 pm
siamond wrote:
Sun Jul 07, 2019 4:30 pm
[...] This is part of what I tried to convey in this post.
I am a recent retiree (8 months) and trying understand the best way to handle lumpy expenses. I have a significant pension that will cover about 80%-90% of non discretionary spending. Already, I had some lumpy expenses (1040ES for Roth conversions), property taxes, travel and home improvement expenses. After about 6 months I figured out that I needed to understand and track my spending like I never did before so I started to track expense categories with Moneydance. I expect to see even more lumpy expenses in the future, i.e. kitchen remodel, European cruise, new auto, etc. What am I struggling to understand at this point how much cash I should have in my savings and checking accounts on hand. I think need some buffer in the checking and saving account (maybe about 3 months of expenses) to withdraw the money prior to expected lumpy and/or when my buffer in savings and checking account drop below about 1 or 2 months of expenses.[...]
I guess this is sidetracking a bit from the OP's original intent, but since you quoted me, I'll answer. I explained the general approach I settled on in the post I linked to above. This fundamentally relies on rigorous tracking of expenses, which I do anyway for multiple reasons. To be slightly more specific, I keep roughly a month of expenses in our checking account and up to 3 to 4 months in the savings account. I set up automated online alerts with my bank, and when either account gets low, I replenish it. I do not do anything special for mid-size lump sums (e.g. property taxes, short vacations, small home improvements) besides watching our average monthly spending, and tightening the belt on the discretionary stuff when needs be, so that by the end of the year, we're roughly on track with our annual budget. So far, we converged fairly easily.

The only issue is the bigger stuff (e.g. we upgraded our heating system and pipes and set up new radiators, cost us an arm and a leg!) that needs to be amortized over a couple of years. Personally, I am conversant enough with spreadsheets that I just use a simple PMT() formula to simulate a loan to myself. But well, you can make it simpler for short durations, just divide the amount by N months, and 'spread' the expense over such duration in your tracker. Or, as longinvest suggested, you take a real short-term loan (note that some credit cards have free or low-cost loans that could be handy - just pay close attention to the fine print and pay on time!), interest rates are still quite low nowadays, so why not (this is what I did for my new car in 2016).

More questions about my strategy, please PM me, I don't want to sidetrack the OP's thread any further.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Tue Jul 09, 2019 7:31 am

retiringwhen wrote:
Mon Jul 08, 2019 12:32 pm
RE: the TD Income fund.

Those funds are intended to be used as an all in one fund. They can only be compared to the entire portfolio in the VPW model. They are NOT cash type funds and are not intended to fill the cash portion of a more complex portfolio.
Retiringwhen, could you clarify the context of your post? I don't remember seeing any suggestion to use Vanguard's Target Retirement Income Fund for the dampening savings account.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by retiringwhen » Tue Jul 09, 2019 7:38 am

longinvest wrote:
Tue Jul 09, 2019 7:31 am
retiringwhen wrote:
Mon Jul 08, 2019 12:32 pm
RE: the TD Income fund.

Those funds are intended to be used as an all in one fund. They can only be compared to the entire portfolio in the VPW model. They are NOT cash type funds and are not intended to fill the cash portion of a more complex portfolio.
Retiringwhen, could you clarify the context of your post? I don't remember seeing any suggestion to use Vanguard's Target Retirement Income Fund for the dampening savings account.
I originally thought the suggestion / back and forth about Wellesley and Target Retirement was in the context of the cash portion of the VPW portfolio, Looking back it was probably reading comprehension error on my part, my apologies.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 10, 2019 5:18 pm

3-20Characters wrote:
Sun Jul 07, 2019 5:36 am
longinvest wrote:
Sat Jul 06, 2019 5:48 pm
Actually, so far, when I asked for help selecting an appropriate savings account, I got a single feedback from forum member retiringwhen suggesting that "Vanguard Federal Money Market VMFXX..... as the settlement account for the brokerage holding the LS fund would more than sufficient for this effort". Maybe I should forget about the Ally savings account and use VMFXX instead, in this forward test. Feedback about this is still welcome, despite my initial reluctance to money-market funds.
I use ally savings and 11 month no penalty cd plus VMMXX (Vanguard Prime Money Market Fund). I have no opinion on what to use for this experiment as I don’t give that part of my portfolio much thought past what is “good enough” and expedient.
Thank you. For now, I'll stick with the Ally savings account with its 2.10% APY which is slightly higher than the Federal Reserve's 2% inflation target. If the rate drops, I'll ask for help identifying another savings account (hopefully with a rate above 2%) where to move the money.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 11, 2019 6:37 am

longinvest wrote:
Sat Jul 06, 2019 9:29 am
I'd like to ask forum members for help choosing the proper amount on which to determine the next monthly withdrawal.

More precisely, I'd like to get their vote on which amount we should put into the VPW Worksheet as "Portfolio Balance":

Image

We have two choices:
  1. use the investment portfolio balance (LifeStrategy Fund balance) on July 31, 2019, or
  2. use the total portfolio balance (LifeStrategy Fund balance + Ally savings account balance) on July 31, 2019.
...
Here's a monthly income comparison of the underlying withdrawal models of annual VPW withdrawals (blue) and monthly withdrawals (red) with a dampening savings account, using the investment portfolio balance excluding the savings account as basis for monthly withdrawals:
Image
...
Here's a similar comparison, but using the investment portfolio balance including the savings account as basis for monthly withdrawals:
Image
...
You have until July 15 to cast (and change) your vote. I will disclose my own vote on July 16 along with the final decision.
Only 5 days left to cast your vote.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Eagle33 » Thu Jul 11, 2019 3:55 pm

I vote choice B with savings included. IMHO if money is in savings account it was not spent so still part of the portfolio. Just moved money from tax advantaged to taxable category.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 13, 2019 7:46 am

Eagle33 wrote:
Thu Jul 11, 2019 3:55 pm
I vote choice B with savings included. IMHO if money is in savings account it was not spent so still part of the portfolio. Just moved money from tax advantaged to taxable category.
Thanks for your vote.

For simplicity, this thread doesn't detail how the money is distributed across different accounts. But, the dampening cash buffer, like the LifeStrategy investment, could potentially be spread across multiple accounts with different tax treatment.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by siriusblack » Sat Jul 13, 2019 1:42 pm

OP -- LOVE the spreadsheet. Thanks so much for this post. Super helpful and easy-to-use tool. I really like the concept of varying withdrawals based on portfolio value.

Question: On the accumulation worksheet, how can you see the expected portfolio value at retirement (so you can then plug that number into the retirement worksheet to see the withdrawals side of it)?

Just out of curiosity, I plugged in my numbers on the retirement worksheet with current age, portfolio value, and estimated social security timeline. In the past I've always used the 4% rule in a very rough way in my calculations as an estimate of my target number ... but looking at this tool it's clear my target number may actually be quite a bit lower. It's great that it factors in social security (allowing withdrawal rate pre-SS to be higher than post-SS). Unexpectedly, this sheet is telling me I could theoretically retire TODAY ... WOO HOO! However, it would be sort of a "ramen noodles" retirement, so I guess I'll keep working. :)

Thanks again-- really great spreadsheet!

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jul 14, 2019 9:45 am

siriusblack wrote:
Sat Jul 13, 2019 1:42 pm
OP -- LOVE the spreadsheet. Thanks so much for this post. Super helpful and easy-to-use tool. I really like the concept of varying withdrawals based on portfolio value.
Thanks for the feedback.
siriusblack wrote:
Sat Jul 13, 2019 1:42 pm
Question: On the accumulation worksheet, how can you see the expected portfolio value at retirement (so you can then plug that number into the retirement worksheet to see the withdrawals side of it)?
To prevent behavioral biases such as anchoring, the Accumulation sheet doesn't calculate a projected portfolio value at retirement.

But this value isn't needed. The Accumulation sheet already provides two projections for total retirement income, a normal projection and a projection based on a 50% stock loss. Projected income is broken into pension payments (or bridging withdrawals) and projected VPW withdrawals. It looks like this:

Image
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 15, 2019 7:12 am

Today's the last day to cast your vote on the proper amount on which to determine the next monthly withdrawal. See this post for details.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by goblue100 » Mon Jul 15, 2019 2:29 pm

I vote for A. If I understand it correctly it leads to slightly lower withdrawals to start off with, which eventually will correct. As I'm pretty conservative by nature, I likely would choose the lower withdrawals in the beginning.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 15, 2019 2:30 pm

goblue100 wrote:
Mon Jul 15, 2019 2:29 pm
If I understand it correctly it leads to slightly lower withdrawals to start off with, which eventually will correct.
Effectively.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Tue Jul 16, 2019 8:06 am

longinvest wrote:
Sat Jul 06, 2019 9:29 am
We have two choices:
  1. use the investment portfolio balance (LifeStrategy Fund balance) on July 31, 2019, or
  2. use the total portfolio balance (LifeStrategy Fund balance + Ally savings account balance) on July 31, 2019.
[...]
You have until July 15 to cast (and change) your vote. I will disclose my own vote on July 16 along with the final decision.
I vote for B because it's the logical solution, even though it's slightly more complex requiring an additional arithmetic operation (adding two amounts).

Here are the votes for A:

- Metx (changed to B)
- FiveK
- goblue100

Here are the votes for B:

- Tyler Aspect
- 3-20Characters
- retiringwhen
- Metx (was initially A)
- Eagle33
- longinvest

Option B has the majority vote and will be selected for this forward test.

Thanks to all voters.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 17, 2019 7:43 am

Here's how the VPW Accumulation And Retirement Worksheet got to its suggestion of a $5,356 monthly withdrawal at the end of June 2019.

Mainly, the VPW worksheet is doing three calculations: a calculation for the delayed $2,000 Social Security pension, a calculation for the fixed $1,000 pension, and a VPW withdrawal calculation. Let's do that:

Social Security

The retiree will get $2,000/month in 5 years. That's $24,000/year. The VPW Table tells us that the percentage for a 5-year withdrawal with a 60/40 stocks/bonds scenario (e.g. age 95) is 21.5%.

So, we need to put aside (on paper) ($24,000 / 21.5%) = $111,628 for Social Security bridge withdrawals.

Fixed Pension

The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent and the rest (34.3%) is invested into the portfolio. That's ($1,000 X 12 X 34.3%) = $4,116/year.

To understand how the 65.7% was determined, I've explained the calculation process in this post. The simpler formula used in the spreadsheet was derived by forum member #Cruncher and is stated in this post.

VPW Withdrawal

The retiree has a $1,000,000 portfolio, but we've put aside (on paper) $111,628 as bridge for Social Security. So, we're left with $888,372 for VPW withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This gives us ($888,372 X 5.0%) = $44,419.

Putting It All Together

On an annual basis, the retiree plans to withdraw $24,000 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $44,419 VPW withdrawal. This sums up to ($24,000 - $4,116 + $44,419) = $64,303. On a monthly basis, this is ($64,303 / 12) = $5,358.

The small $2 difference with the VPW Worksheet's suggested $5,356 is due to rounding.

Note that total retirement income also includes the $1,000 work pension payment for a total of ($64,303 + (12 X $1,000)) = $76,303 on an annual basis available for taxes and expenses.
Last edited by longinvest on Sat Jul 20, 2019 10:12 am, edited 1 time in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Wed Jul 17, 2019 9:40 pm

longinvest wrote:
Wed Jul 17, 2019 7:43 am
...
So, we need to put aside (on paper) ($24,000 / 21.5%) = $111,628 for Social Security bridge withdrawals.
...
The retiree has a $1,000,000 portfolio, but we've put aside (on paper) $111,628 as bridge for Social Security. So, we're left with $888,372 for VPW withdrawals.
This is an exercise, but if it were for real, wouldn't it be prudent to put that SS bridge amount in something like T-Notes and CDs?

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Jul 18, 2019 5:43 am

Metx wrote:
Wed Jul 17, 2019 9:40 pm
wouldn't it be prudent to put that SS bridge amount in something like T-Notes and CDs?
The prudence of the VPW Worksheet is in informing the retiree about the impact of a 50% stock loss on the overall plan. I'll show the detailed calculations tomorrow.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by CyclingDuo » Thu Jul 18, 2019 7:03 am

longinvest wrote:
Sun Jun 30, 2019 10:37 am
Retirement funding can be simple. It's sufficient to combine income from Social Security (possibly delayed to age 70) and a pension (if any) with portfolio withdrawals from a balanced Bogleheads portfolio using a sensible approach.

This thread will illustrate a simple Bogleheads retirement approach by doing what we call a forward test, which is a simulation starting today (June 30, 2019) with a well-defined plan but unknown future portfolio returns. We'll simply look, month after month, at how the reality unfolds.

In particular, this thread will document portfolio returns and monthly retirement income of a hypothetical person who retires on July 1st, 2019 at age 65 with a $1,000,000 globally-diversified balanced portfolio. The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars)*.

* A plausible scenario of the retiree's accumulation journey is shown in this post.

This will be a pure Bogleheads Retirement simulation. No market timing, no concentration into any asset, no investment into alternative assets, no modulation of asset allocation or withdrawals based on guru prognostications or metrics.

The plan is laid out in advance in this post, written on June 30, 2019, on the eve of the simulated retirement date. It will be boringly and rigorously followed.

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a globally-diversified 60/40 stocks/bonds all-in-one index fund which internally invests:
  • 36% into Vanguard Total Stock Market Index Fund Investor Shares (VTSMX): 3,599 domestic stocks
  • 28% into Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX): 8,238 domestic bonds
  • 24% into Vanguard Total International Stock Index Fund Investor Shares (VGTSX): 6,414 international stocks
  • 12% into Vanguard Total International Bond Index Fund Investor Shares (VTIBX): 5,885 international bonds
That's broad global diversification across a total of 24,136 securities with automatic rebalancing for a small 0.13% expense ratio (including the expense ratios of underlying funds).

The simulated retirement is based on our wiki's Variable percentage withdrawal (VPW) method which allows 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.

Monthly portfolio withdrawal amounts will be determined using the new VPW Accumulation And Retirement Worksheet which takes into account current and future pensions (like delayed Social Security), with and without cost-of-living adjustments. Portfolio withdrawals will be taken on the last day of the month and their short-term fluctuations will be dampened using a savings account containing a few months worth of withdrawals.

The dampening savings account will accrue interest based on the rates of high-interest online savings accounts (like an Ally savings account which currently pays 2.10%).

Monthly total retirement income will consist of:
  1. Monthly $1,000 payment from work pension.
  2. The monthly VPW withdrawal slightly adjusted up or down using a money transfer from or to the dampening savings account.
  3. Eventually, starting at age 70 in July 2024, a $2,000 monthly payment from Social Security. This amount will be updated appropriately (with the help of knowledgeable forum members) according to Social Security cost-of-living-adjustment rules.
In preparation for retirement, an initial withdrawal is hypothetically taken today from the $1,000,000 portfolio, exceptionally equal to 6 monthly VPW withdrawals, to provide income for July 2019 and pre-fill the dampening savings account with an additional 5 months worth of withdrawals.

OK. Let's start.

We enter the retiree's information into the Retirement sheet of the VPW Accumulation And Retirement Worksheet and we get:

Image

The VPW Worksheet suggests to take a $5,356 withdrawal and tells us that total annual retirement income is currently estimated at $76,276. In case of unfavorable market returns where stocks would lose 50%, the portfolio would lose -$300,000 and retirement income would be reduced by -20% to $61,286. The retiree is OK with that.

As income for July 2019 and to pre-fill the dampening savings account, the retiree exceptionally withdraws 6 times the suggested amount. That's (6 X $5,356) = $32,136. This leaves ($1,000,000 - $32,136) = $967,864 invested into the Vanguard LifeStrategy Moderate Growth Fund at the end of June 2019.

After making the withdrawal, the retiree deposits (5 X $5,356) = $26,780 into the dampening savings account, and combines the remaining $5,356 with the $1,000 July work pension payment for a total income of $6,356 available to pay taxes and expenses in July 2019.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

July 2019 total retirement income is ($1,000 work pension + $5,356 VPW withdrawal) = $6,356. Tomorrow morning, on July 1, 2019, total portfolio balance will be ($967,864 LifeStrategy Moderate Growth Fund + $26,780 dampening savings account) = $994,644.

Image

Note that to get the red line to show, I had to enter a portfolio balance for the morning of June 1st, 2019. So, given that Vanguard LifeStrategy Moderate Growth Fund had a 4.39% return in June 2019, I temporarily entered a ($1,000,000 / (1 + 4.39%)) = $957,946.16 balance for that date. In order to preserve strict forward testing, this initial amount will be removed from future monthly charts.


Historical Annual Retirement Income
  • 2019: $76,272 (annualized) -- $6,356, 1 month, starting retirement in July

This post has been modified on July 4, 2019 to simplify its income dampening approach. The original June 30, 2019 post (with minor modifications) has been copied here.
Thanks for the leg work you are doing on this and providing the hypothetical illustration. Our household will have the traditional three legged stool of income streams in retirement (pension, SS, and risk portfolio), so we will be watching this thread with interest in our planning.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Fri Jul 19, 2019 6:48 am

In an earlier post, I've explained how the VPW Accumulation And Retirement Worksheet got to its suggestion of a $5,356 monthly withdrawal at the end of June 2019.

The VPW worksheet also calculates a "Required Flexibility" that must be maintained by the retiree. To do so, it first applies a -50% loss to the stocks allocation and then repeats its withdrawal calculations.

The total portfolio balance at the end of June was $1,000,000 and its asset allocation was 60/40 stocks bonds. A -50% stock loss results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $1,000,000) = -$300,000 portfolio loss, reducing the portfolio to ($1,000,000 - $300,000) = $700,000 after the loss.

Some of the previous calculations remain unchanged:
longinvest wrote:
Wed Jul 17, 2019 7:43 am
Mainly, the VPW worksheet is doing three calculations: a calculation for the delayed $2,000 Social Security pension, a calculation for the fixed $1,000 pension, and a VPW withdrawal calculation. Let's do that:

Social Security

The retiree will get $2,000/month in 5 years. That's $24,000/year. The VPW Table tells us that the percentage for a 5-year withdrawal with a 60/40 stocks/bonds scenario (e.g. age 95) is 21.5%.

So, we need to put aside (on paper) ($24,000 / 21.5%) = $111,628 for Social Security bridge withdrawals.

Fixed Pension

The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent and the rest (34.3%) is invested into the portfolio. That's ($1,000 X 12 X 34.3%) = $4,116/year.

To understand how the 65.7% was determined, I've explained the calculation process in this post. The simpler formula used in the spreadsheet was derived by forum member #Cruncher and is stated in this post.
VPW Withdrawal

The retiree has a $700,000 portfolio, but we've put aside (on paper) $111,628 as bridge for Social Security. So, we're left with $588,372 for VPW withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This gives us ($588,372 X 5.0%) = $29,419.

Putting It All Together

On an annual basis, the retiree plans to withdraw $24,000 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $29,419 withdrawal. This sums up to ($24,000 - $4,116 + $29,419) = $49,303. On a monthly basis, this is ($49,303 / 12) = $4,109 which is ($4,109 - 5,358) = -$1,249 smaller than the previously calculated (without applying a stock loss) withdrawal amount.

Note that total retirement income also includes the $1,000 work pension payment for a total of ($49,303 + (12 X $1,000)) = $61,303 on an annual basis available for taxes and expenses after the loss.

The retiree must maintain the flexibility to easily cut expenses by up to approximately -$1,250/month because stocks could easily lose 50% of their value within a short term period. In other words, at least $1,250 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
Last edited by longinvest on Sat Jul 20, 2019 10:12 am, edited 1 time in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Fri Jul 19, 2019 8:03 pm

longinvest wrote:
Fri Jul 19, 2019 6:48 am
...
The total portfolio balance at the end of June was $1,000,000 and its asset allocation was 60/40 stocks bonds. A -50% stock loss results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $1,000,000) = -$300,000 portfolio loss, reducing the portfolio to ($1,000,000 - $300,000) = $700,000 after the loss.

...
VPW Withdrawal

The retiree has a $700,000 portfolio, but we've put aside (on paper) $111,628 as bridge for Social Security. So, we're left with $588,372 for VPW withdrawals. At age 65 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.0%. This gives us ($588,372 X 5.0%) = $29,419.
If there were such a steep loss in stocks does this system take rebalancing for granted, so the 60/40 split is maintained?

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 20, 2019 7:23 am

Metx wrote:
Fri Jul 19, 2019 8:03 pm
longinvest wrote:
Fri Jul 19, 2019 6:48 am
...
The total portfolio balance at the end of June was $1,000,000 and its asset allocation was 60/40 stocks bonds. A -50% stock loss results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $1,000,000) = -$300,000 portfolio loss, reducing the portfolio to ($1,000,000 - $300,000) = $700,000 after the loss.
If there were such a steep loss in stocks does this system take rebalancing for granted, so the 60/40 split is maintained?
The portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which maintains a 60/40 stocks/bonds allocation.

When it comes to investing, our mind often plays tricks on us. After a 50% stock loss, we tend to think of the harm done to the portfolio. Yet, in other areas of our life, we rejoice when prices go down. We much prefer to buy things on rebate than at full price. Applying this thinking to investing would reveal the deal of a lifetime: the opportunity to buy companies like Microsoft and Nestle at half the current price.

Anyway, with an all-in-one fund, the hypothetical retiree won't have to deal with such mundane things as rebalancing the portfolio. Vanguard will take care of it. :D
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Jul 20, 2019 8:01 am

I think that it's important to track inflation to properly document this forward test. We live in a nominal world but prices generally tend to increase over time.

Note that a retiree using VPW during retirement wouldn't need to do this. We're simply doing it to make sense of monetary amounts calculated at different times.

Variations in the consumer price index for all urban consumers (CPI-U), published monthly by the Bureau of Labor Statistics, are often used to measure inflation. This is an excellent measure of inflation over periods of time spanning multiple years or decades. Unfortunately, CPI-U is relatively volatile from month to month; it's certainly more volatile than the balance of a savings account with no contributions or withdrawals (only interest payments). As a result, tracking inflation using variations in CPI-U from month to month results into a relatively volatile estimate of inflation.

Our goal isn't to measure the volatility of inflation but simply to keep track of the decaying purchase power of our nominal dollars over time. So, in this thread, we will calculate the average CPI-U over the last 12 months and use variations in average CPI-U as a measure of inflation.

The Bureau of Labor Statistics has published the CPI-U for June 2019 a few days ago. In our case, we're interested to calculate an average CPI-U to associate with our forward test at the end of June 2019. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
07/2018 252.006
08/2018 252.146
09/2018 252.439
10/2018 252.885
11/2018 252.038
12/2018 251.233
01/2019 251.712
02/2019 252.776
03/2019 254.202
04/2019 255.548
05/2019 256.092
06/2019 256.143
We take note that the average CPI-U for the last 12 months at the end of June 2019 was 253.268.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Jul 21, 2019 10:17 am

azanon wrote:
Wed Jul 03, 2019 6:31 pm
I guess what I'm getting at, is that it might be easier just adjusting to a little bit lower lifestyle to begin with where a lower equity portfolio would reduce the VPW withdrawal rate, but then because of a conservative portfolio along with SS/Pension, the chance of a major shock is going to be pretty low. The portfolio I suggested probably cuts that same estimate stock market hit to around ~ -10%. That's going to feel a lot better.
Azanon, in another thread I've shown how selecting a 30/70 stocks/bonds allocation would change the calculations for the hypothetical retiree of this thread's forward test. Here's the link to my post.

The choice of asset allocation involves a trade off between a higher initial total income with a bigger potential income reduction in case of unfavorable market returns, or a lower initial total income with a smaller potential income reduction in case of unfavorable market returns. I think that it's normal for different people to choose differently based on their own preferences.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 24, 2019 5:31 pm

In a previous post, we started keeping track of 12-month average CPI-U to properly document this forward test.*

* Note that a retiree using VPW during retirement wouldn't need to do this. We're simply doing it to make sense of monetary amounts calculated at different times.

It could be fun to also keep track of trailing 1-year average inflation to compare it with the interest rate of the dampening savings account.

The idea is that if cash keeps earning an interest rate equal or superior to this trailing average inflation, it will generally keep up with inflation. This could provide some intellectual satisfaction. Unfortunately, we can't force any bank to pay us as much as trailing average inflation. Wouldn't that be fun?** :wink:

** Series I Savings Bonds (I-Bonds) exist, but they're not appropriate for our dampening savings account.

To calculate trailing 1-year average inflation, we need to calculate the average CPI-U of June 2018. Here were the last 12 CPI-U values as of June 2018:

Code: Select all

 Month   CPI-U
07/2017	244.786
08/2017	245.519
09/2017	246.819
10/2017	246.663
11/2017	246.669
12/2017	246.524
01/2018	247.867
02/2018	248.991
03/2018	249.554
04/2018	250.546
05/2018	251.588
06/2018	251.989
Average CPI-U for the last 12 months at the end of June 2018 was 248.126.

Using the average CPI-U of the previous post, we calculate that the trailing 1-year average inflation at the end of June 2019 was ((253.268 / 248.126) - 1) = 2.07%.

The chosen Ally savings account has a 2.10% APY. It's just above trailing average inflation.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by hoops777 » Wed Jul 24, 2019 5:41 pm

In all honesty the plan seems fine but you should delete the word simple from the title,unless you are only addressing very sophisticated do it yourself investors.
K.I.S.S........so easy to say so difficult to do.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 24, 2019 5:59 pm

hoops777 wrote:
Wed Jul 24, 2019 5:41 pm
In all honesty the plan seems fine but you should delete the word simple from the title,unless you are only addressing very sophisticated do it yourself investors.
Hoops777, so far the retiree has (1) filled a few cells in a spreadsheet, (2) made a portfolio withdrawal, and (3) put some money into a savings account. That's it. (Actually, we assume that the retiree is spending money and enjoying life during the month).

This was very simple and is fully documented in the second part of the first post.

The additional posts are simply discussing the underlying calculations of the worksheet, inflation, and other related topics, to explain how VPW works and provide appropriate information to make sense of the forward test to interested readers. They're just commentary. There will only be a single action post per month due to the selected monthly withdrawal schedule. It would have been even more boring to use an annual withdrawal schedule!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by 3-20Characters » Wed Jul 24, 2019 7:08 pm

hoops777 wrote:
Wed Jul 24, 2019 5:41 pm
In all honesty the plan seems fine but you should delete the word simple from the title,unless you are only addressing very sophisticated do it yourself investors.
Don’t be fooled by longinvest’s explanations of the spreadsheet and calculations. You don’t need to follow along to use the spreadsheet. It took me all of 5 minutes to look up our projected SS and fill in the cells. This is an excellent spreadsheet for me because, while I have many of the same calculations in my own spreadsheet, it does not take into account what we can withdraw today accounting for SS down the road to replenish the portfolio.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Mon Jul 29, 2019 5:44 pm

Simplicity is a key part of the proposed investing approach. Using a single globally-diversified balanced index fund (LifeStrategy Moderate Growth) and an Ally savings account for dampening withdrawal fluctuations is pretty much as simple as it could be.

But, it's likely that the retiree would also have at least one other Ally savings account used for a different purpose (house renovation fund, cash reserve, etc.). It's important to use an intuitive label for the dampening savings account to clearly identify it.

I suggest to start using the name "withdrawal cushion savings account" to describe the dampening savings account. This new name would provide an intuitive "Withdrawal Cushion" label for the online savings account.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Wed Jul 31, 2019 9:02 am

As of June 30, 2019, Vanguard LifeStrategy Moderate Growth Fund (VSMGX) indirectly held 3,637 US stocks (36.3%), 7,074 international stocks (24.1%), 8,566 US bonds (27.7%), and 5,897 (11.9%) international bonds. That's 10,711 stocks and 14,463 bonds for a total of 25,174 securities. VSMGX had a 60.4%/39.6% stocks/bonds allocation.

The price/book ratio of the stock allocation was 2.2x. The 10 largest stock holdings were Microsoft Corp., Apple Inc., Amazon.com Inc., Alphabet Inc., Facebook Inc., Berkshire Hathaway Inc., Johnson & Johnson, JPMorgan Chase & Co., Exxon Mobil Corp., and Visa Inc. representing 6.9% of VSMGX.

VSMGX held bonds with a credit rating of Baa or more. Most of the bond allocation (80%) actually had a credit rating of A or more. The average duration was 6.6 years and the average maturity was 8.7 years.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Thu Aug 01, 2019 9:38 am

The July 2019 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 0.33%.

I'm also taking note of the returns of the four (US/International Stocks/Bond) markets represented by the NAV returns of VTI (1.45%), VXUS (-1.92%), BND (0.27%), and BNDX (1.39%) for a later post this month.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Aug 03, 2019 11:22 am

Portfolio balance as of July 31, 2019

We'll use the account balances as of June 30, 2019 and apply the July 2019 investment growth and cash interest:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($967,864.00 X (1 + 0.33%)) = $971,057.95
  • Withdrawal Cushion (at Ally Bank): ($26,780.00 X ((1 + 2.10%)^(1 / 12))) = $26,826.42
Total Portfolio Balance: $997,884.37
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sat Aug 03, 2019 2:42 pm

Forward test as of July 31, 2019

We continue our forward test. Here's a link to the previous entry.

As of July 31, 2019, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $971,057.95
  • Withdrawal Cushion (Ally savings account): $26,826.42
Total Portfolio Balance: $997,884.37

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,000 per month (in 2019 dollars).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $5,348 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,348 + $26,826.42) / 6) = $5,362
  • Adjustment: ($5,362 - $5,348) = $14
The retiree transfers $14 out of the Ally savings account and combines it with the $5,348 withdrawal and the $1,000 August work pension payment for a total retirement income of $6,362 available to pay taxes and expenses in August 2019.

After withdrawal and transfer, ($971,057.95 - $5,348) = $965,709.95 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($26,826.42 - $14) = $26,812.42 is left in the withdrawal cushion, for a total portfolio balance of $992,522.37 at the end of July 2019.

The Ally savings account is still carrying an annual percentage yield (APY) of 2.10%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

August 2019 total retirement income is $6,362 and on the morning of August 1, 2019, the total portfolio balance is $992,522.37.

Image

Historical Annual Retirement Income
  • 2019: $76,308 (annualized) -- $12,718, 2 months, starting retirement in July
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TimeRunner
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by TimeRunner » Sat Aug 03, 2019 5:25 pm

longinvest wrote:
Sat Aug 03, 2019 2:42 pm
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,348 + $26,826.42) / 6) = $5,362
  • Adjustment: ($5,362 - $5,348) = $14
The retiree transfers $14 out of the Ally savings account and combines it with the $5,348 withdrawal and the $1,000 August work pension payment for a total retirement income of $6,362 available to pay taxes and expenses in August 2019.

After withdrawal and transfer, ($971,057.95 - $5,348) = $965,709.95 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($26,826.42 - $14) = $26,812.42 is left in the withdrawal cushion, for a total portfolio balance of $992,522.37 at the end of July 2019.
Does it make sense to simply put these calcs and the savings account balance in the spreadsheet itself, since it's going to be an every-month process? (Yes, every user can roll their own too.)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Sun Aug 04, 2019 7:05 am

TimeRunner wrote:
Sat Aug 03, 2019 5:25 pm
longinvest wrote:
Sat Aug 03, 2019 2:42 pm
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,348 + $26,826.42) / 6) = $5,362
  • Adjustment: ($5,362 - $5,348) = $14
The retiree transfers $14 out of the Ally savings account and combines it with the $5,348 withdrawal and the $1,000 August work pension payment for a total retirement income of $6,362 available to pay taxes and expenses in August 2019.
Does it make sense to simply put these calcs and the savings account balance in the spreadsheet itself, since it's going to be an every-month process? (Yes, every user can roll their own too.)
That's an interesting idea. But...

In real life, the retiree is likely to have made the withdrawal during July to simplify budgeting. The $5,348 (or similar amount) would have been withdrawn and transferred to the withdrawal cushion, requiring no calculation. On August 1st, the retiree would have needed to divide the withdrawal cushion balance (which includes interest paid on July 31st) by 6 and transfer the money out.

So, there would only be a single calculation involved in such a case: dividing the withdrawal cushion balance by 6.

The Retirement Worksheet allows for various withdrawal frequencies. Annual withdrawals don't involve a withdrawal cushion. It's definitely not obvious, to me, how to add this to the worksheet without making it more complex and less intuitive.

Maybe passing the "divide by 6" challenge could be a test as to whether a spouse or a caretaker has the ability to manage the portfolio or not?

I'm really unsure about adding this. What do others think?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Metx » Sun Aug 04, 2019 4:58 pm

longinvest wrote:
Sun Aug 04, 2019 7:05 am
...
The Retirement Worksheet allows for various withdrawal frequencies. Annual withdrawals don't involve a withdrawal cushion. It's definitely not obvious, to me, how to add this to the worksheet without making it more complex and less intuitive.

...
I'm really unsure about adding this. What do others think?
I see the worksheet as a general purpose resource, while this thread is a 'living' illustration of one way to use it, and a place to reflect on how it responds to future events. I don't think it's worth it to add in features to the worksheet just to further simplify this illustration.

If anything, this thread has already shown how simple it is to use the worksheet as is.

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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest » Tue Aug 06, 2019 4:30 pm

The annual percentage yield (APY) of the Ally savings account holding the withdrawal cushion has dropped to 1.90%.
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