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

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

Post by FiveK »

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

Post by longinvest »

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