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

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

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

longinvest wrote: Sat Jan 04, 2020 11:38 am Social Security projection (2020)

The retiree is delaying Social Security to age 70.

Forum member FiveK entered the retiree's earnings record into the personal finance toolbox. He reported an estimated \$2,032 monthly Social Security payment at age 70, expressed in 2020 dollars.
With the recent announcement of a 1.3% COLA, the age 70 estimate in 2021 dollars is now \$2,059/mo.
Topic Author
longinvest
Posts: 4428
Joined: Sat Aug 11, 2012 8:44 am

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

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested \$5,584 portfolio withdrawal at the end of September 2020.

The retiree will get \$2,032/month Social Security payments in 4 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 \$1,014,299 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 ((\$1,014,299 - \$92,364) X 5.1%) = \$47,019 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 \$47,019 VPW withdrawal. This sums up to (\$24,384 - \$4,116 + \$47,019) = \$67,287 and results into a (\$67,287 / 12) = \$5,607 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 (\$67,287 + (12 X \$1,000)) = \$79,287/year (\$6,607/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 \$1,014,299) = -\$304,290 portfolio loss, reducing the portfolio to (\$1,014,299 - \$304,290) = \$710,009 after the loss. This implies a ((\$24,384 - \$4,116 + ((\$\$710,009 - \$92,364) X 5.1%)) / 12) = \$4,314 monthly portfolio withdrawal which represents a (\$4,314 - \$5,607) = -\$1,293 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -\$1,293/month because stocks could easily lose -50% of their value within a short time period. In other words, at least \$1,293 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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