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

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

Post by travelintime » Sat Jul 04, 2020 1:45 pm

Longinvest,

Thanks for all your work on this project. I have a question regarding the 12 month effect of the dampening account.

The dampening account smooths out the month to month withdrawal amounts. What effect does it have for the twelve month total. Meaning, at the end of twelve months how might these two total withdrawal amounts compare:

A) The total dollar amount of twelve monthly withdrawals using a dampening account

B) The total dollar amount of twelve monthly withdrawals without a dampening account

Would the dollar amount at the finish line be similar, but "A" provides a smoother ride along the way, or would the dollar amounts be significantly different?

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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 Jul 04, 2020 2:26 pm

travelintime wrote:
Sat Jul 04, 2020 1:45 pm
...
Travelintime, I've answered your interesting theory question in this post of the main VPW thread.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

Investor9904678
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Investor9904678 » Tue Jul 07, 2020 7:16 pm

Effective 7/8/20, the APY for Ally savings will be 1.00% (reduced from 1.10%).

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

Post by longinvest » Tue Jul 07, 2020 7:25 pm

Investor9904678 wrote:
Tue Jul 07, 2020 7:16 pm
Effective 7/8/20, the APY for Ally savings will be 1.00% (reduced from 1.10%).
Thanks for the report, Investor9904678.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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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 Jul 11, 2020 8:21 am

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,444 portfolio withdrawal at the end of June 2020.

The retiree will get $2,032/month Social Security payments in 5 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.

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 (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.

The retiree has a $981,253 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($981,253 - $92,364) X 5.1%) = $45,333 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw $24,384 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 $45,333 VPW withdrawal. This sums up to ($24,384 - $4,116 + $45,333) = $65,601 and results into a ($65,601 / 12) = $5,467 portfolio withdrawal. The $23 difference with the VPW Worksheet's suggested amount is due to rounding.

Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($65,601 + (12 X $1,000)) = $77,601/year ($6,467/month) available for taxes and expenses.

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 calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $981,253) = -$294,376 portfolio loss, reducing the portfolio to ($981,253 - $294,376) = $686,877 after the loss. This implies a (($24,384 - $4,116 + (($686,877 - $92,364) X 5.1%)) / 12) = $4,216 monthly portfolio withdrawal which represents a ($4,216 - $5,467) = -$1,251 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,251/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,251 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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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 Jul 18, 2020 3:58 pm

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stock/bond target allocation which, as of June 30, 2020, is spread across 3,531 US stocks, 7,334 international stocks, 9,658 US bonds, and 6,262 international bonds for a total of 26,785 global securities.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until June 30, 2020:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

Image
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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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 Jul 25, 2020 6:41 am

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for June 2020.

We're interested to calculate an average CPI-U to associate with our forward test at the end of June 2020. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
07/2019 256.571
08/2019 256.558
09/2019 256.759
10/2019 257.346
11/2019 257.208
12/2019 256.974
01/2020 257.971
02/2020 258.678
03/2020 258.115
04/2020 256.389
05/2020 256.394
06/2020 257.797
We take note that the average CPI-U for the last 12 months at the end of June 2020 was 257.230.

Last year, we calculated that the average CPI-U for the last 12 months at the end of June 2019 was 253.268.

The trailing 1-year average inflation at the end of June 2020 was ((257.230 / 253.268) - 1) = 1.56%.

The chosen Ally savings account has an annual percentage yield (APY) of 1.00%. It's 0.56% below trailing average inflation.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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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 Jul 25, 2020 6:45 am

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in June 2020 dollars:

Image
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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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 01, 2020 1:35 pm

The month of August 2020 has five weekends. I'm taking advantage of the extra weekend to summarize the content of this thread for new readers joining us. I'll resume my regular weekly posts next weekend.

This thread illustrates a simple Bogleheads retirement approach by doing what we call a forward test. It's an ongoing live simulation which was started on June 30, 2019 with a well-defined plan but unknown future portfolio returns (see this post).

The simulated hypothetical retirement started at age 65 with a $1,000,000 portfolio ($1,015,642 in June 2020 dollars) and a fixed $1,000 per month work pension ($1,016 in June 2020 dollars) while delaying Social Security to age 70 to receive $2,000 per month in 2019 dollars ($2,032 in 2020 dollars).

Except for a small withdrawal cushion kept into an Ally Bank savings account, representing approximately 5 months of withdrawals, the portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a globally-diversified low-cost automatically-rebalanced all-in-one 60/40 stock/bond index fund. It's a One-Fund Portfolio which approximates the Market Portfolio, the portfolio of all investment-grade stocks and bonds of the world, adapted for U.S. investors with a moderate home bias (see this post for detailed explanations).

Portfolio withdrawals amounts are determined, monthly, using the Retirement sheet of the VPW Accumulation And Retirement Worksheet which implements an accumulation and retirement plan based on our wiki's sensible Variable percentage withdrawal (VPW) method. VPW 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.

The approach is really simple. Each month:
  1. The retiree updates the Portfolio Balance cell. (The Age and Social Security Monthly Payment cells must also be updated once a year.)
  2. The retiree withdraws the amount suggested in the Monthly Portfolio Withdrawal cell from the Vanguard LifeStrategy Moderate Growth Fund investment.
  3. The retiree adds the withdrawn money into the withdrawal cushion (increasing it to approximately 6 months of withdrawals).
  4. The retiree takes out one sixth (1/6) of the withdrawal cushion (leaving approximately 5 months of withdrawals) and combines it with with the $1,000 work pension as retirement income for the month (available for taxes and expenses).*
That's it!**

Here's an inflation-adjusted chart of this forward test, so far, expressed in June 2020 dollars. Retirement income has averaged $76,858/year, fluctuating between $6,302/month (min, June 2020) and $6,455/month (max, July 2019).

Image

THREAD STRUCTURE

The regular posts of this forward test thread are of two types: one action post per month, and additional explanation posts which document and explain what's happening and the underlying calculations in details. There are additional irregular posts by forum members to discuss the forward test.

USEFUL TRICK

It's easy to navigate the action posts of this thread in reverse, back to the first action post, by starting with the latest action post (currently this post) and clicking on the previous entry link in each post.

THEORY DISCUSSIONS AND SUPPORT FOR PERSONAL SITUATIONS

Members who wish to discuss the underlying theory of the approach are invited to do so in the main VPW thread.

For getting support with personal situations, it's best to start a new thread in the Personal Investments forum and post a link to it in the main VPW thread to attract attention.

* In practice, steps 3 and 4 are combined resulting into a single much smaller withdrawal cushion transfer.
** To be accurate, that's almost all of it. At age 70, the retiree will start receiving Social Security payments and the size of the withdrawal cushion will need to be consequently reduced. At age 80, the Retirement sheet will provide an estimate of the retiree's Income Floor After Age 100. The retiree will be invited to consider buying an inflation-indexed (e.g. 2%-indexed) SPIA*** with part (but not all) of the remaining portfolio to increase this floor, if necessary to live comfortably (but no more) independently from portfolio withdrawals. This is to dampen the financial risk associated with long life as VPW will have mostly (but not entirely) depleted the investment portfolio by age 100 if the retiree is still alive.
*** Single Premium Immediate Annuity.
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Dodgerdiehard
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Dodgerdiehard » Tue Aug 04, 2020 1:41 pm

Great work long invest! Love the idea of simplicity and making retirement withdrawals less of a mystery. I did have a question about the bridge in the current version of the spreadsheet. If the bridge funds are not invested in the Life Strategy Fund, and portfolio withdrawals are from the Life Strategy Fund, what is the bridge used for? Is it held as a reserve fund? Is it later to be invested in the Life Strategy Fund after reaching the optimal Social Security age? In the early version I believe the bridge was actually used to make up the income for the delayed Social Security payments.
Thanks in advance for your help!

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

Post by longinvest » Tue Aug 04, 2020 10:41 pm

Dodgerdiehard wrote:
Tue Aug 04, 2020 1:41 pm
Great work long invest! Love the idea of simplicity and making retirement withdrawals less of a mystery. I did have a question about the bridge in the current version of the spreadsheet. If the bridge funds are not invested in the Life Strategy Fund, and portfolio withdrawals are from the Life Strategy Fund, what is the bridge used for? Is it held as a reserve fund? Is it later to be invested in the Life Strategy Fund after reaching the optimal Social Security age? In the early version I believe the bridge was actually used to make up the income for the delayed Social Security payments.
Thanks in advance for your help!
Thanks Dodgerdiehard and welcome to the forum! In this forward test, there is no bridge portfolio. There's a single retirement portfolio, all invested into LifeStrategy Moderate Growth (except for a small withdrawal cushion at Ally Bank representing approximately 5 months of withdrawals). The spreadsheet does all the calculations to handle the work pension (which has no cost-of-living adjustments) and to fill the income gap until Social Security payments start at age 70. The spreadsheet's calculations are explained in this post and this post.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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