How do I know what withdrawal rate to use?

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longinvest
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Re: How do I know what withdrawal rate to use?

Post by longinvest »

midareff wrote: Sun Aug 09, 2020 6:41 am I like the VPW as a guideline with a small change in that I use the application of the average of the three prior years portfolio balance for smoothing year to year undulations. You could give it a try with or without that change and see if it suits you. Just plug in your data and see what it provides for you.
Midareff, unfortunately smoothing withdrawals hurts a portfolio in bad times. I've got an alternative approach to propose.

In the VPW thread, I've written a post to explaining how to smooth income from portfolio withdrawals without smoothing withdrawals. The resulting composition of annual income isn't exactly 1/3 current year withdrawals, 1/3 last year withdrawals, and 1/3 two years ago withdrawals, but it's close enough: 33% current year withdrawals, 36% previous year withdrawals, and 31% withdrawals from earlier years.
longinvest wrote: Fri Aug 28, 2020 6:21 pm [...]
Unfortunately, smoothing portfolio withdrawals (e.g. taking a withdrawal from the portfolio which is bigger than what the plain VPW calculation indicates when the portfolio is down in value) hurts the portfolio, especially during a severe bear market. It's something to avoid.

It can be useful to distinguish the concept of portfolio withdrawal from the concept of income from portfolio withdrawals. It's easy to deliver smoothed income without smoothing portfolio withdrawals by ... Continue reading here.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
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midareff
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Re: How do I know what withdrawal rate to use?

Post by midareff »

longinvest wrote: Fri Aug 28, 2020 6:38 pm
midareff wrote: Sun Aug 09, 2020 6:41 am I like the VPW as a guideline with a small change in that I use the application of the average of the three prior years portfolio balance for smoothing year to year undulations. You could give it a try with or without that change and see if it suits you. Just plug in your data and see what it provides for you.
Midareff, unfortunately smoothing withdrawals hurts a portfolio in bad times. I've got an alternative approach to propose.

In the VPW thread, I've written a post to explaining how to smooth income from portfolio withdrawals without smoothing withdrawals. The resulting composition of annual income isn't exactly 1/3 current year withdrawals, 1/3 last year withdrawals, and 1/3 two years ago withdrawals, but it's close enough: 33% current year withdrawals, 36% previous year withdrawals, and 31% withdrawals from earlier years.
longinvest wrote: Fri Aug 28, 2020 6:21 pm [...]
Unfortunately, smoothing portfolio withdrawals (e.g. taking a withdrawal from the portfolio which is bigger than what the plain VPW calculation indicates when the portfolio is down in value) hurts the portfolio, especially during a severe bear market. It's something to avoid.

It can be useful to distinguish the concept of portfolio withdrawal from the concept of income from portfolio withdrawals. It's easy to deliver smoothed income without smoothing portfolio withdrawals by ... Continue reading here.
Thanks, I'll give it a read when I get some time.
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UKFred
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Re: How do I know what withdrawal rate to use?

Post by UKFred »

siamond wrote: Thu Aug 27, 2020 10:37 am
UKFred wrote: Sun Aug 09, 2020 6:32 amSo, I am leaning towards a modified (or at least a simplified) form of Guyton-Klinger rules as my preferred withdrawal strategy. [...]
A few years before my own early retirement, I studied withdrawal methods at length, including extensive backtesting (here is one thread where I discusses some results). I needed a plan, winging it was NOT the way to go. A simplified form of Guyton-Klinger rules did come out as one of the strongest contenders. It is both adaptive (upwards and downwards as market conditions evolve) and realistic (doesn't make you change your budget on a whim, e.g. due to a market hiccup). All in all, it is not perfect, but it is an excellent pragmatic compromise.

Guardrail rules are the true core of this approach, which are extremely simple to implement, very intuitive when you think about it, and that's really all you need. No need for this weird play on inflation-adjustment or not (I believe Guyton himself admitted later on this was unnecessary). As an option, stopping to adjust spending downwards after you turn 80 seems reasonable.

As to the initial withdrawal rate, 5% is a decent rule of thumb. It probably should be a reasonable estimate of expected returns (in the probabilistic sense) over your entire retirement period, in real terms. Which is a bit of a crystal ball guess. But using historical numbers, if your AA is X% stocks and Y% bonds, X% * 5% + Y% * 2% isn't a bad guess-timate, based on historical returns (worldwide) for stocks and bonds. Note that it should NOT be a 'safe' value (ala SWR), as the point is to pick a happy medium and then let it oscillate up and down. Now if you plan to spend more in early retirement and less in your twilight years, you may want to beef up the initial rate by half a point or a full point, this tends to create a downward skew over time (in the midst of market vagaries).
@Siamond, I don’t think I thanked you for this thoughtful post. It aligns with my thinking as well, which is a bonus!
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4nursebee
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Re: How do I know what withdrawal rate to use?

Post by 4nursebee »

Can’t comment on gk.

To answer the question what rate to use I think one has to look at, investigate all the methods, write down pros and cons of each, read more, then decide for oneself.

For us, VPW made sense, especially with a large cushion. We expect 5 percent or better per year with heavy stock portfolio.
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