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

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

Post by SnowBog »

motiv8ed wrote: Thu Feb 10, 2022 9:18 pm
rookie87 wrote: Thu Feb 10, 2022 11:23 am If the worksheet doesn't know my wife's age it calculates the years to SS based on mine. When it combines the two bridge to SS costs the number is greater than allowed for the portfolio to be 100% funded. If this is the case I guess i simply disregard the warning?
Since everything in the spreadsheet is indexed to my age, I account for this by entering my wife's SS amounts starting at the age that I will be when she starts to collect. I use "Defined Benefit Pension #3" entry for when she will file for her own benefits and "Defined Benefit Pension #4" for when she will file for spousal benefits.

Guess I'll learn from the rest of the thread whether that's correct or not! :confused


motiv8ed
That's essentially what I do as well. The spreadsheet isn't designed for two different ages - just a single age.

I believe the "recommendation" I saw once was to use the younger spouses age, and adjust accordingly.

The younger of us is 45, that's the age we use. They'll take SS at 70, that's the age we use.

The older is 46. Currently, we are modeling them taking SS at 70 - but we enter 69 (the age the younger spouse is when that starts).
rookie87
Posts: 29
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by rookie87 »

motiv8ed wrote: Thu Feb 10, 2022 9:18 pm
rookie87 wrote: Thu Feb 10, 2022 11:23 am If the worksheet doesn't know my wife's age it calculates the years to SS based on mine. When it combines the two bridge to SS costs the number is greater than allowed for the portfolio to be 100% funded. If this is the case I guess i simply disregard the warning?
Since everything in the spreadsheet is indexed to my age, I account for this by entering my wife's SS amounts starting at the age that I will be when she starts to collect. I use "Defined Benefit Pension #3" entry for when she will file for her own benefits and "Defined Benefit Pension #4" for when she will file for spousal benefits.

Guess I'll learn from the rest of the thread whether that's correct or not! :confused


motiv8ed
Great idea, makes perfect sense. Thanks
Also, I apologize for asking these questions in this thread, I now realize I should have been in the original VPW thread, sorry.....thats why I'm Rookie :happy
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longinvest
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Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

rookie87 wrote: Thu Feb 10, 2022 10:30 pm Also, I apologize for asking these questions in this thread, I now realize I should have been in the original VPW thread, sorry.....thats why I'm Rookie :happy
Rookie87, thanks for noticing this.
rookie87 wrote: Thu Feb 10, 2022 9:37 am Thanks all for the VPW worksheet and associated posts.
You're welcome.
rookie87 wrote: Thu Feb 10, 2022 9:37 am As I enter my first year of retirement using this tool (and seeing the 3+ years of real world data that accompanies it) has eased my mind when it comes to making withdrawals after a lifetime of accumulation .

My question, and I apologize if it has been answered somewhere else (if it has I have not been able to find it), When entering data into the VPW spreadsheet is only possible to enter Pension information for one person? i.e. can I only enter my social security info and not my wife's ? When I try to enter a second social Security data set I get a warning that my funding is below 100%.

Thanks again!
I've replied to your post in the main VPW thread.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Joined: Sat Aug 11, 2012 8:44 am

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 $6,137 portfolio withdrawal at the end of January 2022.

Detailed calculations are provided in the lower part of the Retirement sheet:

Image

The retiree will get $2,180/month Social Security payments in 3 years. That's ($2,180 X 12) = $26,160/year. The percentage for a 3-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 34.6% (called [G] above). As a consequence, ($26,160 / 34.6%) = $75,670 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% (called [B] above) of the pension payment is spent (see this post). That's ($1,000 X 12 X 65.7%) = $7,887/year.

At age 67 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1% (called [A] above).

Image

The retiree has a $1,078,408 portfolio, but $75,670 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($1,078,408 - $75,670) = $1,002,738 available for VPW and results into a ($1,002,738 X 5.1%) = $51,601 VPW withdrawal. Adding ($26,160 + $7,887) = $34,047 of (bridged and adjusted) pension income results into a total annual retirement income of ($51,601 + $34,047) = $85,648.

The monthly target is ($85,648 / 12) = $7,137 in total retirement income. The work pension provides $1,000. The difference, ($7,137 - $1,000) = $6,137, is withdrawn from the portfolio. That's the suggested withdrawal amount at the end of January 2022.

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 stock 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 $1,078,408) = -$323,522 portfolio loss, reducing the portfolio to ($1,078,408 - $323,522) = $754,886 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $68,999, representing a reduction of (($68,999 - $85,648) / 12) = -$1,387/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,387/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,387 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
JS-Elcano
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by JS-Elcano »

I love this thread! Started playing with the retirement sheet in the excel workbook, but sometimes I get "WARNING: Funding Ratio below 100% in "Calculations After Loss" What does this mean? I don't think I entered my expenses anywhere, so what does the funding ratio refer to?
furwut
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by furwut »

JS-Elcano wrote: Wed Feb 16, 2022 12:37 pm I love this thread! Started playing with the retirement sheet in the excel workbook, but sometimes I get "WARNING: Funding Ratio below 100% in "Calculations After Loss" What does this mean? I don't think I entered my expenses anywhere, so what does the funding ratio refer to?
See this post in the main VPW thread and you can ask any further questions there. :happy
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

JS-Elcano wrote: Wed Feb 16, 2022 12:37 pm I love this thread! Started playing with the retirement sheet in the excel workbook, but sometimes I get "WARNING: Funding Ratio below 100% in "Calculations After Loss" What does this mean? I don't think I entered my expenses anywhere, so what does the funding ratio refer to?
furwut wrote: Wed Feb 16, 2022 12:47 pm See this post in the main VPW thread and you can ask any further questions there. :happy
JS-Elcano, there's also this post of the main VPW thread which explains the "funding ratio". I agree with Furwut about using main VPW thread for further questions.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
JS-Elcano
Posts: 573
Joined: Wed Jun 10, 2020 7:29 pm

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

Post by JS-Elcano »

longinvest wrote: Wed Feb 16, 2022 6:21 pm
JS-Elcano wrote: Wed Feb 16, 2022 12:37 pm I love this thread! Started playing with the retirement sheet in the excel workbook, but sometimes I get "WARNING: Funding Ratio below 100% in "Calculations After Loss" What does this mean? I don't think I entered my expenses anywhere, so what does the funding ratio refer to?
furwut wrote: Wed Feb 16, 2022 12:47 pm See this post in the main VPW thread and you can ask any further questions there. :happy
JS-Elcano, there's also this post of the main VPW thread which explains the "funding ratio". I agree with Furwut about using main VPW thread for further questions.
Thank you and to furwut for the links. I am already studying the new thread and will post there if I have further questions :beer
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

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 stocks/bonds target allocation which, as of January 31, 2022, was spread across 4,136 U.S. stocks, 7,717 international stocks, 10,167 U.S. bonds, and 6,509 international bonds for a total of 28,529 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

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 January 31, 2022:

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
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for January 2022.

We're interested to calculate an average CPI-U to associate with our forward test at the end of January 2022. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
02/2021 263.014
03/2021 264.877
04/2021 267.054
05/2021 269.195
06/2021 271.696
07/2021 273.003
08/2021 273.567
09/2021 274.310
10/2021 276.589
11/2021 277.948
12/2021 278.802
01/2022 281.148
We take note that the average CPI-U for the last 12 months at the end of January 2022 was 272.600.

Last year, we calculated that the average CPI-U for the last 12 months at the end of January 2021 was 259.112.

The trailing 1-year average inflation at the end of January 2022 was ((272.600 / 259.112) - 1) = 5.21%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -4.71% below trailing average inflation.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in January 2022 dollars:

Image
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of February 28, 2022

The February 2022 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -2.10% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of January 31, 2022 and apply February 2022 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,041,570.36 X (1 + -2.10%)) = $1,019,697.38
  • Withdrawal cushion (at Ally Bank): ($30,697.15 X ((1 + 0.50%)^(1 / 12))) = $30,709.91
Total Portfolio Balance: $1,050,407.29
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of February 28, 2022

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

As of February 28, 2022, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,019,697.38
  • Withdrawal cushion (at Ally Bank): $30,709.91
Total Portfolio Balance: $1,050,407.29

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,180 per month (in 2022 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:

Image

The VPW Worksheet suggests to take a $6,017 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($6,017 + $30,709.91) / 6) = $6,121
  • Adjustment: ($6,121 - $6,017) = $104
The retiree transfers $104 out of the Ally savings account and combines it with the $6,017 withdrawal and the $1,000 March 2022 work pension payment for a total retirement income of $7,121 available for taxes and expenses in March 2022.

After withdrawal and transfer, ($1,019,697.38 - $6,017) = $1,013,680.38 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($30,709.91 - $104) = $30,605.91 is left into the withdrawal cushion for a total portfolio balance of $1,044,286.29 at the end of February 2022.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

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.

March 2022 total retirement income is $7,121 and on the morning of March 1, 2022, the total portfolio balance is $1,044,286.29.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $85,596 (annualized) -- $21,399 in 3 months
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

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 $6,017 portfolio withdrawal at the end of February 2022.

Detailed calculations are provided in the lower part of the Retirement sheet:

Image

Image

The retiree will get $2,180/month Social Security payments in 3 years. That's ($2,180 X 12) = $26,160/year. The percentage for a 3-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 34.6% (called [G] above). As a consequence, ($26,160 / 34.6%) = $75,670 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% (called [B] above) of the pension payment is spent (see this post). That's ($1,000 X 12 X 65.7%) = $7,887/year.

At age 67 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1% (called [A] above).

Image

The retiree has a $1,050,407 portfolio, but $75,670 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($1,050,407 - $75,670) = $974,737 available for VPW and results into a ($974,737 X 5.1%) = $50,160 VPW withdrawal. Adding ($26,160 + $7,887) = $34,047 of (bridged and adjusted) pension income results into a total annual retirement income of ($50,160 + $34,047) = $84,207.

The monthly target is ($84,207 / 12) = $7,017 in total retirement income. The work pension provides $1,000. The difference, ($7,017 - $1,000) = $6,017, is withdrawn from the portfolio. That's the suggested withdrawal amount at the end of February 2022.

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 stock 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 $1,050,407) = -$315,122 portfolio loss, reducing the portfolio to ($1,050,407 - $315,122) = $735,285 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $67,991, representing a reduction of (($67,991 - $84,207) / 12) = -$1,351/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,351/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,351 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

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 stocks/bonds target allocation which, as of February 28, 2022, was spread across 4,070 U.S. stocks, 7,754 international stocks, 10,127 U.S. bonds, and 6,537 international bonds for a total of 28,488 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

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 February 28, 2022:

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
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for February 2022.

We're interested to calculate an average CPI-U to associate with our forward test at the end of February 2022. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
03/2021 264.877
04/2021 267.054
05/2021 269.195
06/2021 271.696
07/2021 273.003
08/2021 273.567
09/2021 274.310
10/2021 276.589
11/2021 277.948
12/2021 278.802
01/2022 281.148
02/2022 283.716
We take note that the average CPI-U for the last 12 months at the end of February 2022 was 274.325.

Last year, we calculated that the average CPI-U for the last 12 months at the end of February 2021 was 259.473.

The trailing 1-year average inflation at the end of February 2022 was ((274.325 / 259.473) - 1) = 5.72%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -5.22% below trailing average inflation.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in February 2022 dollars:

Image
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

Portfolio balance as of March 31, 2022

The March 2022 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 0.00% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of February 28, 2022 and apply March 2022 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,013,680.38 X (1 + 0.00%)) = $1,013,680.38
  • Withdrawal cushion (at Ally Bank): ($30,605.91 X ((1 + 0.50%)^(1 / 12))) = $30,618.63
Total Portfolio Balance: $1,044,299.01
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

Forward test as of March 31, 2022

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

As of March 31, 2022, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,013,680.38
  • Withdrawal cushion (at Ally Bank): $30,618.63
Total Portfolio Balance: $1,044,299.01

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,180 per month (in 2022 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:

Image

The VPW Worksheet suggests to take a $5,991 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,991 + $30,618.63) / 6) = $6,102
  • Adjustment: ($6,102 - $5,991) = $111
The retiree transfers $111 out of the Ally savings account and combines it with the $5,991 withdrawal and the $1,000 April 2022 work pension payment for a total retirement income of $7,102 available for taxes and expenses in April 2022.

After withdrawal and transfer, ($1,013,680.38 - $5,991) = $1,007,689.38 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($30,618.63 - $111) = $30,507.63 is left into the withdrawal cushion for a total portfolio balance of $1,038,197.01 at the end of March 2022.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total monthly 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.

April 2022 total retirement income is $7,102 and on the morning of April 1, 2022, the total portfolio balance is $1,038,197.01.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $85,503 (annualized) -- $28,501 in 4 months
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

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 $5,991 portfolio withdrawal at the end of March 2022.

Detailed calculations are provided in the lower part of the Retirement sheet:

Image

Image

The retiree will get $2,180/month Social Security payments in 3 years. That's ($2,180 X 12) = $26,160/year. The percentage for a 3-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 34.6% (called [G] above). As a consequence, ($26,160 / 34.6%) = $75,670 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% (called [B] above) of the pension payment is spent (see this post and this post for detailed explanations). That's ($1,000 X 12 X 65.7%) = $7,887/year.

At age 67 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1% (called [A] above).

Image

The retiree has a $1,044,299 portfolio, but $75,670 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($1,044,299 - $75,670) = $968,629 available for VPW and results into a ($968,629 X 5.1%) = $49,845 VPW withdrawal. Adding ($26,160 + $7,887) = $34,047 of (bridged and adjusted) pension income results into a total annual retirement income of ($49,845 + $34,047) = $83,892.

Image

The monthly income target is ($83,892 / 12) = $6,991. The work pension provides $1,000. The difference, ($6,991 - $1,000) = $5,991, is withdrawn from the portfolio.

Image

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 stock 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 $1,044,299) = -$313,290 portfolio loss, reducing the portfolio to ($1,044,299 - $313,290) = $731,009 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $67,771, representing a reduction of (($67,771 - $83,892) / 12) = -$1,343/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,343/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,343 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

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 stocks/bonds target allocation which, as of March 31, 2022, was spread across 4,124 U.S. stocks, 7,896 international stocks, 10,153 U.S. bonds, and 6,556 international bonds for a total of 28,729 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

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 March 31, 2022:

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
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for March 2022.

We're interested to calculate an average CPI-U to associate with our forward test at the end of March 2022. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
04/2021 267.054
05/2021 269.195
06/2021 271.696
07/2021 273.003
08/2021 273.567
09/2021 274.310
10/2021 276.589
11/2021 277.948
12/2021 278.802
01/2022 281.148
02/2022 283.716
03/2022 287.504
We take note that the average CPI-U for the last 12 months at the end of March 2022 was 276.211.

Last year, we calculated that the average CPI-U for the last 12 months at the end of March 2021 was 260.037.

The trailing 1-year average inflation at the end of March 2022 was ((276.211 / 260.037) - 1) = 6.22%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -5.72% below trailing average inflation.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in March 2022 dollars:

Image
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
mtmingus
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by mtmingus »

Does this model assume no change in fixed income while a 50% drop in equity for “flexibility”?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

mtmingus wrote: Sat Apr 30, 2022 8:48 am Does this model assume no change in fixed income while a 50% drop in equity for “flexibility”?
Mtmingus, for context, I explained last week that the retiree's portfolio is entirely invested into an automatically-rebalanced all-in-one globally-diversified balanced index fund. The worksheet's detailed calculations were presented two weeks ago in this post.

The "V" in VPW stands for "Variable". The VPW model assumes that stock and bond markets fluctuate. While not frequent, it isn't unusual for stocks to lose -50% of their value and for bonds to fluctuate too, but significantly less than stocks. The worksheet calculates the impact of stocks immediately losing -50% while restricting asset allocation to include at least 30% in stocks, thus testing at least a -15% portfolio loss for a bond-heavy portfolio. This isn't a prediction that stocks will lose exactly -50% and bonds will remain perfectly stable. It's just a simple calculation that can easily be replicated without using a spreadsheet to help the retiree plan for the possibility of bad future returns. These bad returns could be due to stocks, to bonds, or both. Losses could be immediate, later, or spread over time. Losses could be worse, forcing the retiree to adapt. Losses might never happen. We simply don't know. Note that proper use of VPW requires accompanying stable lifelong income like a pension or Social Security (possibly delayed to start later), dampening the impact of portfolio losses on total retirement income.

This thread is specifically about the forward test. If you wish to further discuss the VPW approach, please do so on the main thread.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of April 30, 2022

The April 2022 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -6.16% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of March 31, 2022 and apply April 2022 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,007,689.38 X (1 + -6.16%)) = $945,615.71
  • Withdrawal cushion (at Ally Bank): ($30,507.63 X ((1 + 0.50%)^(1 / 12))) = $30,520.31
Total Portfolio Balance: $976,136.02
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of April 30, 2022

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

As of April 30, 2022, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $945,615.71
  • Withdrawal cushion (at Ally Bank): $30,520.31
Total Portfolio Balance: $976,136.02

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,180 per month (in 2022 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:

Image

The VPW Worksheet suggests to take a $5,699 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,699 + $30,520.31) / 6) = $6,037
  • Adjustment: ($6,037 - $5,699) = $338
The retiree transfers $338 out of the Ally savings account and combines it with the $5,699 withdrawal and the $1,000 May 2022 work pension payment for a total retirement income of $7,037 available for taxes and expenses in May 2022.

After withdrawal and transfer, ($945,615.71 - $5,699) = $939,916.71 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($30,520.31 - $338) = $30,182.31 is left into the withdrawal cushion for a total portfolio balance of $970,099.02 at the end of April 2022.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total monthly 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.

May 2022 total retirement income is $7,037 and on the morning of May 1, 2022, the total portfolio balance is $970,099.02.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $85,291 (annualized) -- $35,538 in 5 months
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
RubyTuesday
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by RubyTuesday »

longinvest wrote: Sat Apr 30, 2022 8:22 am Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in March 2022 dollars:
Thanks for this great thread longinvest!

Question regarding expressing these charts in “current” e.g. this post March 2022 dollars, next in April dollars, etc. Apologies if you’ve explained and I missed it or if I just need coffee before bogleheads, but would it be more useful to express in constant 2019 dollars so that we can see how spending power evolves from beginning of forward test?
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

RubyTuesday wrote: Sat May 07, 2022 6:25 am Question regarding expressing these charts in “current” e.g. this post March 2022 dollars, next in April dollars, etc. Apologies if you’ve explained and I missed it or if I just need coffee before bogleheads, but would it be more useful to express in constant 2019 dollars so that we can see how spending power evolves from beginning of forward test?
RubyTuesday, we're not in 2019 anymore. The inflation-adjusted chart illustrates the evolution of purchase power over time using today's dollars so that numbers are meaningful to today's readers.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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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 $5,699 portfolio withdrawal at the end of April 2022.

Detailed calculations are provided in the lower part of the Retirement sheet:

Image

Image

The retiree will get $2,180/month Social Security payments in 3 years. That's ($2,180 X 12) = $26,160/year. The percentage for a 3-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 34.6% (called [G] above). As a consequence, ($26,160 / 34.6%) = $75,670 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% (called [B] above) of the pension payment is spent (see this post and this post for detailed explanations). That's ($1,000 X 12 X 65.7%) = $7,887/year.

At age 67 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1% (called [A] above).

Image

The retiree has a $976,136 portfolio, but $75,670 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($976,136 - $75,670) = $900,466 available for VPW and results into a ($900,466 X 5.1%) = $46,338 VPW withdrawal. Adding ($26,160 + $7,887) = $34,047 of (bridged and adjusted) pension income results into a total annual retirement income of ($46,338 + $34,047) = $80,385.

Image

The monthly income target is ($80,385 / 12) = $6,699. The work pension provides $1,000. The difference, ($6,699 - $1,000) = $5,699, is withdrawn from the portfolio.

Image

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 stock 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 $976,136) = -$292,841 portfolio loss, reducing the portfolio to ($976,136 - $292,841) = $683,295 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $65,315, representing a reduction of (($65,315 - $80,385) / 12) = -$1,256/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,256/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,256 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

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 stocks/bonds target allocation which, as of April 30, 2022, was spread across 4,112 U.S. stocks, 7,881 international stocks, 10,176 U.S. bonds, and 6,639 international bonds for a total of 28,808 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

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 April 30, 2022:

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
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
smectym
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

longinvest wrote: Sat May 07, 2022 5:26 am Forward test as of April 30, 2022

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

As of April 30, 2022, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $945,615.71
  • Withdrawal cushion (at Ally Bank): $30,520.31
Total Portfolio Balance: $976,136.02

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,180 per month (in 2022 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:

Image

>>The VPW Worksheet suggests to take a $5,699 withdrawal. The retiree withdraws the suggested amount<<

longinvest, reiterated thanks for this important simulation, and fascinating to observe as we have entered a real stress scenario.

So I noticed that the suggested withdrawal is a couple of hundred bucks less than the previous month’s.

My question is, how important is it that withdrawals adjust MONTHLY in response to portfolio balance changes due to market conditions, rather than, say, ANNUALLY. Is MONTHLY in your view (A) clearly necessary to ensure long-term portfolio integrity, or (B) a matter of nuance; perhaps you selected monthly fluctuation just to attain greater precision for analytical purposes.

Thanks for any insight on this. Right now, in our own portfolios, we respond (much) more slowly than monthly in terms of adjusting withdrawals based on portfolio balance changes due to market exigencies.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

smectym wrote: Sat May 21, 2022 10:06 pm longinvest, reiterated thanks for this important simulation, and fascinating to observe as we have entered a real stress scenario.

So I noticed that the suggested withdrawal is a couple of hundred bucks less than the previous month’s.

My question is, how important is it that withdrawals adjust MONTHLY in response to portfolio balance changes due to market conditions, rather than, say, ANNUALLY. Is MONTHLY in your view (A) clearly necessary to ensure long-term portfolio integrity, or (B) a matter of nuance; perhaps you selected monthly fluctuation just to attain greater precision for analytical purposes.

Thanks for any insight on this. Right now, in our own portfolios, we respond (much) more slowly than monthly in terms of adjusting withdrawals based on portfolio balance changes due to market exigencies.
Smectym, a total retirement income of $7,102 was available for taxes and expenses in April 2022 (see March 31 entry) and a total retirement income of $7,037 was available for taxes and expenses in May 2022 (see April 30 entry). That's ($7,037 - $7,102) = -$65 less in May than in April.

As for monthly vs annual portfolio withdrawals, here's what I wrote about it in the early days of this thread:
longinvest wrote: Mon Jul 08, 2019 7:42 am Most retirees seem happy to receive monthly Social Security payments instead of annual payments.

Anyway, the VPW Accumulation And Retirement Worksheet lets the retiree choose between annual, quarterly, and monthly withdrawals.

This forward test uses monthly VPW withdrawals with a dampening savings account. It's a simple approach that delivers regular monthly income and should feel familiar to many people.

There are various investment-related advantages to monthly withdrawals. Making monthly withdrawals and (indirectly) averaging them using a dampening savings account reduces the (good or bad) luck involved due to making a withdrawal on a specific good or bad market day. With annual withdrawals, the impact of trading on a particularly bad day or month of the year has a lasting 12 months impact. Annual withdrawals can lead to a noticeable monthly income change, every 12 months. Monthly withdrawals with a dampening savings account deliver smoother gradual monthly income changes. Making smaller monthly transactions, instead of 12-times bigger annual transactions, can also reduce the impact of human mistakes.

There are other advantages.

In many couples, one spouse is mostly responsible for managing finances. A monthly withdrawal schedule could open the opportunity to train the other spouse about the withdrawal method. Repeating a process monthly is more likely to stick to memory than doing it once a year.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
smectym
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

longinvest wrote: Sun May 22, 2022 9:07 am
smectym wrote: Sat May 21, 2022 10:06 pm longinvest, reiterated thanks for this important simulation, and fascinating to observe as we have entered a real stress scenario.

So I noticed that the suggested withdrawal is a couple of hundred bucks less than the previous month’s.

My question is, how important is it that withdrawals adjust MONTHLY in response to portfolio balance changes due to market conditions, rather than, say, ANNUALLY. Is MONTHLY in your view (A) clearly necessary to ensure long-term portfolio integrity, or (B) a matter of nuance; perhaps you selected monthly fluctuation just to attain greater precision for analytical purposes.

Thanks for any insight on this. Right now, in our own portfolios, we respond (much) more slowly than monthly in terms of adjusting withdrawals based on portfolio balance changes due to market exigencies.
Smectym, a total retirement income of $7,102 was available for taxes and expenses in April 2022 (see March 31 entry) and a total retirement income of $7,037 was available for taxes and expenses in May 2022 (see April 30 entry). That's ($7,037 - $7,102) = -$65 less in May than in April.

As for monthly vs annual portfolio withdrawals, here's what I wrote about it in the early days of this thread:
longinvest wrote: Mon Jul 08, 2019 7:42 am Most retirees seem happy to receive monthly Social Security payments instead of annual payments.

Anyway, the VPW Accumulation And Retirement Worksheet lets the retiree choose between annual, quarterly, and monthly withdrawals.

This forward test uses monthly VPW withdrawals with a dampening savings account. It's a simple approach that delivers regular monthly income and should feel familiar to many people.

There are various investment-related advantages to monthly withdrawals. Making monthly withdrawals and (indirectly) averaging them using a dampening savings account reduces the (good or bad) luck involved due to making a withdrawal on a specific good or bad market day. With annual withdrawals, the impact of trading on a particularly bad day or month of the year has a lasting 12 months impact. Annual withdrawals can lead to a noticeable monthly income change, every 12 months. Monthly withdrawals with a dampening savings account deliver smoother gradual monthly income changes. Making smaller monthly transactions, instead of 12-times bigger annual transactions, can also reduce the impact of human mistakes.

There are other advantages.

In many couples, one spouse is mostly responsible for managing finances. A monthly withdrawal schedule could open the opportunity to train the other spouse about the withdrawal method. Repeating a process monthly is more likely to stick to memory than doing it once a year.
Got it. My question was not whether the schedule for withdrawing funds should occur monthly, vs. quarterly or annually; but rather, whether *changes* to the withdrawal *amount* based on VPW criteria should occur every month, or less frequently. However, in substance, you’ve answered my question, and thanks again.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for April 2022.

We're interested to calculate an average CPI-U to associate with our forward test at the end of April 2022. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
05/2021 269.195
06/2021 271.696
07/2021 273.003
08/2021 273.567
09/2021 274.310
10/2021 276.589
11/2021 277.948
12/2021 278.802
01/2022 281.148
02/2022 283.716
03/2022 287.504
04/2022 289.109
We take note that the average CPI-U for the last 12 months at the end of April 2022 was 278.049.

Last year, we calculated that the average CPI-U for the last 12 months at the end of April 2021 was 260.926.

The trailing 1-year average inflation at the end of April 2022 was ((278.049 / 260.926) - 1) = 6.56%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.75%. It's -5.81% below trailing average inflation.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in April 2022 dollars:

Image
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of May 31, 2022

The May 2022 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 0.34% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of April 30, 2022 and apply May 2022 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($939,916.71 X (1 + 0.34%)) = $943,112.43
  • Withdrawal cushion (at Ally Bank): ($30,182.31 X ((1 + 0.50%)^(1 / 12))) = $30,194.86
Total Portfolio Balance: $973,307.29
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of May 31, 2022

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

As of May 31, 2022, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $943,112.43
  • Withdrawal cushion (at Ally Bank): $30,194.86
Total Portfolio Balance: $973,307.29

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,180 per month (in 2022 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:

Image

The VPW Worksheet suggests to take a $5,687 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,687 + $30,194.86) / 6) = $5,980
  • Adjustment: ($5,980 - $5,687) = $293
The retiree transfers $293 out of the Ally savings account and combines it with the $5,687 withdrawal and the $1,000 June 2022 work pension payment for a total retirement income of $6,980 available for taxes and expenses in June 2022.

After withdrawal and transfer, ($943,112.43 - $5,687) = $937,425.43 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($30,194.86 - $293) = $29,901.86 is left into the withdrawal cushion for a total portfolio balance of $967,327.29 at the end of May 2022.

The Ally savings account currently carries an annual percentage yield (APY) of 0.75%.

Chart

Here's a chart of total monthly 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.

June 2022 total retirement income is $6,980 and on the morning of June 1, 2022, the total portfolio balance is $967,327.29.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $85,036 (annualized) -- $42,518 in 6 months
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Exchme
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Exchme »

longinvest wrote: Sat Jun 04, 2022 6:26 am Historical Annual Retirement Income
2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
2020: $76,743
2021: $82,388
2022: $85,036 (annualized) -- $42,518 in 6 months
Thanks for all the work you are putting into this, it's a very interesting method and doing a live long running forward test is pretty amazing. I realize that the spreadsheet must deal with nominal $, but for the historical comparison, would it make sense to add an inflation correction? If inflation keeps raging, it's going to be harder and harder to meaningfully compare nominal numbers over time.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Exchme wrote: Sat Jun 04, 2022 6:48 am Thanks for all the work you are putting into this, it's a very interesting method and doing a live long running forward test is pretty amazing. I realize that the spreadsheet must deal with nominal $, but for the historical comparison, would it make sense to add an inflation correction? If inflation keeps raging, it's going to be harder and harder to meaningfully compare nominal numbers over time.
Exchme, the May 2022 consumer price index for all urban consumers (CPI-U) hasn't yet been published by the Bureau of Labor Statistics. Later this month, after it's published, I'll post an inflation-adjusted chart of the forward test (in May 2022 dollars), like I did last month and previous months.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
espressofreak
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by espressofreak »

Hi longinvest,

During May, the Ally Savings interest rate increased to 0.60%, and now to 0.75%, as of 27 May.

Shouldn't have much of an effect on May, but will matter going forward (a 50% increase! :-)# ).

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

Post by Tamarind »

Thanks for this valuable resource! The Ally savings interest rate increased to 0.90% effective June 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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,687 portfolio withdrawal at the end of May 2022.

Detailed calculations are provided in the lower part of the Retirement sheet:

Image

Image

The retiree will get $2,180/month Social Security payments in 3 years. That's ($2,180 X 12) = $26,160/year. The percentage for a 3-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 34.6% (called [G] above). As a consequence, ($26,160 / 34.6%) = $75,670 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 its purchasing power due to inflation, only 65.7% (called [B] above) of the pension payment is spent (see this post and this post for detailed explanations). That's ($1,000 X 12 X 65.7%) = $7,887/year.

At age 67 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1% (called [A] above).

Image

The retiree has a $973,307 portfolio, but $75,670 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($973,307 - $75,670) = $897,637 available for VPW and results into a ($897,637 X 5.1%) = $46,192 VPW withdrawal. Adding ($26,160 + $7,887) = $34,047 of (bridged and adjusted) pension income results into a total annual retirement income of ($46,192 + $34,047) = $80,239.

Image

The monthly income target is ($80,239 / 12) = $6,687. The work pension provides $1,000. The difference, ($6,687 - $1,000) = $5,687, is withdrawn from the portfolio.

Image

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 stock 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 $973,307) = -$291,992 portfolio loss, reducing the portfolio to ($973,307 - $291,992) = $681,315 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $65,213, representing a reduction of (($65,213 - $80,239) / 12) = -$1,252/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,252/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,252 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Tamarind wrote: Fri Jun 10, 2022 2:26 pm The Ally savings interest rate increased to 0.90% effective June 10.
Tamarind, thanks for the information.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

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 stocks/bonds target allocation which, as of May 31, 2022, was spread across 4,100 U.S. stocks, 7,871 international stocks, 10,173 U.S. bonds, and 6,627 international bonds for a total of 28,771 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

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 May 31, 2022:

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
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
bog007
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by bog007 »

should be more us stocks than international in your description of fund
If I had a dollar for every time I heard something was on sale I'd be rich.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

bog007 wrote: Wed Jun 22, 2022 4:10 am should be more us stocks than international in your description of fund
Bog007, you can verify the numbers in my post on Vanguard's web site:
  • Vanguard Total Stock Market ETF (VTI): Number of stocks 4100 (portfolio composition as of 05/31/2022)
  • Vanguard Total International Stock ETF (VXUS): Number of stocks 7871 (portfolio composition as of 05/31/2022)
Vanguard's LifeStrategy Moderate Growth Fund (VSMGX) has a fixed target allocation:
  • U.S. stocks: 36%
  • Global ex U.S. stocks: 24%
  • U.S. bonds: 28%
  • Global ex U.S. bonds: 12%
Internally, each of the four components is capitalization weighted, but the relative weights of the four components within VSMGX are anchored to the fixed allocation target. A detailed analysis of the moderate home bias as of June 30, 2020 (two years ago) was provided in this post of the linked "One-Fund Portfolio" thread:
longinvest wrote: Mon Jul 20, 2020 5:05 pm [...]
With this information, we can calculate the approximate deviation of the LifeStrategy Moderate Growth Fund (VSMGX) from the Market Portfolio.
  • It has a 13% bias towards stocks, because if we mix 13% of global stocks with 87% of the Market Portfolio we get a (13% + (87% X 54%)) = 60% allocation to stocks.
  • It has a 7% home bias in stocks, because if we mix 7% of U.S. stocks with 93% of global stocks within the 60% stock allocation we get a (60% X (7% + (93% X 57%))) = 36% allocation to U.S. stocks.
  • It has a 38% home bias in bonds, because if we mix 38% of U.S. bonds with 62% of global bonds within the 40% bond allocation we get a (40% X (38% + (62% X 51%))) = 28% allocation to U.S. bonds.
These biases are small or moderate (the bias towards domestic bonds is below 50%). [...]
As market weights fluctuate over time, biases of the fixed target allocation change accordingly.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
espressofreak
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by espressofreak »

Once again, Ally is raising the rate on their savings, as of 25 June, from 0.9% to 1.0%.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

espressofreak wrote: Thu Jun 23, 2022 3:10 pm Once again, Ally is raising the rate on their savings, as of 25 June, from 0.9% to 1.0%.
Thanks Espressofreak.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for May 2022.

We're interested to calculate an average CPI-U to associate with our forward test at the end of May 2022. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
06/2021 271.696
07/2021 273.003
08/2021 273.567
09/2021 274.310
10/2021 276.589
11/2021 277.948
12/2021 278.802
01/2022 281.148
02/2022 283.716
03/2022 287.504
04/2022 289.109
05/2022 292.296
We take note that the average CPI-U for the last 12 months at the end of May 2022 was 279.974.

Last year, we calculated that the average CPI-U for the last 12 months at the end of May 2021 was 261.992.

The trailing 1-year average inflation at the end of May 2022 was ((279.974 / 261.992) - 1) = 6.86%.

The chosen Ally savings account has an annual percentage yield (APY) of 1.00%. It's -5.86% below trailing average inflation.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
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