## 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)

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
Posts: 4447
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.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Topic Author
longinvest
Posts: 4447
Joined: Sat Aug 11, 2012 8:44 am

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

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 September 30, 2020, was spread across 3,566 U.S. stocks, 7,531 international stocks, 9,908 US bonds, and 6,315 international bonds for a total of 27,320 global securities. (See this post for more details).

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 September 30, 2020:

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

Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Topic Author
longinvest
Posts: 4447
Joined: Sat Aug 11, 2012 8:44 am

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

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

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

Code: Select all

`````` Month   CPI-U
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
07/2020 259.101
08/2020 259.918
09/2020 260.280
``````
We take note that the average CPI-U for the last 12 months at the end of September 2020 was 258.014.

Last year, we calculated that the average CPI-U for the last 12 months at the end of September 2019 was 254.376.

The trailing 1-year average inflation at the end of September 2020 was ((258.014 / 254.376) - 1) = 1.43%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.60%. It's 0.83% below trailing average inflation.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Topic Author
longinvest
Posts: 4447
Joined: Sat Aug 11, 2012 8:44 am

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

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

Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
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longinvest
Posts: 4447
Joined: Sat Aug 11, 2012 8:44 am

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

Portfolio balance as of October 31, 2020

The October 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -1.41% and the annual percentage yield (APY) of the Ally savings account was 0.60%.

We use account balances as of September 30, 2020 and apply October 2020 growth on investments and interest on savings.
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): (\$981,581.97 X (1 + -1.41%)) = \$967,741.66
• Withdrawal cushion (at Ally Bank): (\$27,264.39 X ((1 + 0.60%)^(1 / 12))) = \$27,277.98
Total Portfolio Balance: \$995,019.64
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Topic Author
longinvest
Posts: 4447
Joined: Sat Aug 11, 2012 8:44 am

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

Forward test as of October 31, 2020

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

As of October 31, 2020, the retiree's portfolio is composed of:
• Vanguard LifeStrategy Moderate Growth Fund (VSMGX): \$967,741.66
• Withdrawal cushion (at Ally Bank): \$27,277.98
Total Portfolio Balance: \$995,019.64

The retiree has a fixed \$1,000 per month pension and is delaying Social Security to age 70 to receive \$2,032 per month (in 2020 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:

The VPW Worksheet suggests to take a \$5,502 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
• Adjusted withdrawal amount: ((\$5,502 + \$27,277.98) / 6) = \$5,463
• Adjustment: (\$5,463 - \$5,502) = -\$39
The retiree transfers \$39 of withdrawal money to the Ally savings account and combines the remaining \$5,463 with the \$1,000 Novemer 2020 work pension payment for a total retirement income of \$6,463 available for taxes and expenses in November 2020.

After withdrawal and transfer, (\$967,741.66 - \$5,502) = \$962,239.66 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and (\$27,277.98 + \$39) = \$27,316.98 is left into the withdrawal cushion for a total portfolio balance of \$989,556.64 at the end of October 2020.

The Ally savings account currently carries an annual percentage yield (APY) of 0.60%.

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.

November 2020 total retirement income is \$6,463 and on the morning of November 1, 2020, the total portfolio balance is \$989,556.64.

Historical Annual Retirement Income
• 2019: \$76,406 (annualized) -- \$38,203 in 6 months, starting retirement in July
• 2020: \$76,606 (annualized) -- \$70,222 in 11 months
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
Topic Author
longinvest
Posts: 4447
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 \$5,502 portfolio withdrawal at the end of October 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 \$995,020 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 ((\$995,020 - \$92,364) X 5.1%) = \$46,035 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 \$46,035 VPW withdrawal. This sums up to (\$24,384 - \$4,116 + \$46,035) = \$66,303 and results into a (\$66,303 / 12) = \$5,525 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 (\$66,303 + (12 X \$1,000)) = \$78,303/year (\$6,525/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 \$995,020) = -\$298,506 portfolio loss, reducing the portfolio to (\$995,020 - \$298,506) = \$696,514 after the loss. This implies a ((\$24,384 - \$4,116 + ((\$696,514 - \$92,364) X 5.1%)) / 12) = \$4,257 monthly portfolio withdrawal which represents a (\$4,257 - \$5,525) = -\$1,268 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -\$1,268/month because stocks could easily lose -50% of their value within a short time period. In other words, at least \$1,268 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
Topic Author
longinvest
Posts: 4447
Joined: Sat Aug 11, 2012 8:44 am

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

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 October 31, 2020, was spread across 3,590 U.S. stocks, 7,486 international stocks, 9,976 U.S. bonds, and 6,329 international bonds for a total of 27,381 global securities. (See this post for more details).

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 October 31, 2020:

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

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