Variable Percentage Withdrawal (VPW)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Marseille07
Posts: 10100
Joined: Fri Nov 06, 2020 1:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Lastrun wrote: Thu Jun 09, 2022 6:04 am
Marseille07 wrote: Wed Jun 08, 2022 11:52 pm Huh? Where does the separate portfolio come from? Are you supposed to have been running it for decades alongside VPW?
Separate portfolios are not a "huh?" question in withdrawal planning.

See for example a liability matching portfolio (LMP) versus the risk portfolio.

But perhaps I did not understand your question.
Well my understanding is that CCRC is quite expensive. In order to accommodate CCRC at age 80 (or whenever you need), you have to have a big portfolio, run separately from VPW, and perhaps very aggressively (100% stocks), for decades.

Instead of busting out "what about that extra 2 million you're supposed to be growing on the side for decades," it's more honest to simply say "it'd be challenging for VPW users to finance CCRC at age 80." VPW has its place but it is no panacea.
US & FM (5% seed) | 300K Cash
SlingerlandLite
Posts: 3
Joined: Tue Jun 21, 2022 12:21 pm

VPW Questions - Temporary Income

Post by SlingerlandLite »

Long time lurker here, newly registered.

I retired at the beginning of 2021 at the age of 62.5, and my wife retired in June of 2021 at the age of 63.

We took early SS, have no pensions, our only debt is a small remaining balance on our home. We had saved a reasonable amount (not big enough, but that is what it is, as the saying goes) and our normal expenses are somewhat more than our SS income each month. My wife has a small part-time job that pays her a flat monthly fee but the company is a little shaky, so that may not last,

Most of our investments are in a Vanguard fund with AA = 60/40, but since my wife still holds some money in a 401k that isn't 60/40, I try to keep them all in total as close to 60/40 as I can (right now the AA = 63/37).

I discovered the VPW method and spreadsheet somewhere along the way, and we have been trying to use it to manage our retirement savings withdrawals, and I think that, for the most part, we understand the VPW concept, but I do have a few questions that I am hoping someone can answer or clarify for me?

I have a question about the Temporary Income portion of the spreadsheet:

When I enter my wife's temporary income, of course I know when it started, but have no idea when it might end, so what ages should I enter there?

Entering temporary income with a start age of 63 and an end age of 65 reduces the monthly withdrawal by a very large amount. Given that, I do not understand what the temporary income is doing in the calculations? I searched the forums but it isn't clearly explained anywhere.

Thanks for any help.
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

SlingerlandLite wrote: Tue Jun 21, 2022 5:45 pm Long time lurker here, newly registered.

I retired at the beginning of 2021 at the age of 62.5, and my wife retired in June of 2021 at the age of 63.

We took early SS, have no pensions, our only debt is a small remaining balance on our home. We had saved a reasonable amount (not big enough, but that is what it is, as the saying goes) and our normal expenses are somewhat more than our SS income each month. My wife has a small part-time job that pays her a flat monthly fee but the company is a little shaky, so that may not last,

Most of our investments are in a Vanguard fund with AA = 60/40, but since my wife still holds some money in a 401k that isn't 60/40, I try to keep them all in total as close to 60/40 as I can (right now the AA = 63/37).

I discovered the VPW method and spreadsheet somewhere along the way, and we have been trying to use it to manage our retirement savings withdrawals, and I think that, for the most part, we understand the VPW concept, but I do have a few questions that I am hoping someone can answer or clarify for me?

I have a question about the Temporary Income portion of the spreadsheet:

When I enter my wife's temporary income, of course I know when it started, but have no idea when it might end, so what ages should I enter there?

Entering temporary income with a start age of 63 and an end age of 65 reduces the monthly withdrawal by a very large amount. Given that, I do not understand what the temporary income is doing in the calculations? I searched the forums but it isn't clearly explained anywhere.

Thanks for any help.
SlingerlandLite, I suggest reading this post of the forward test. The linked post explains the bottom part (the grey areas) of the Retirement sheet which provides detailed calculations.

After reading the linked post, I suggest going back to your own worksheet to look at its detailed calculations part. Things should become clearer.

The answer to your question is this: Instead of making a VPW withdrawal based on portfolio balance followed by a portfolio contribution to spread the temporary 2-year income over the entire retirement, the worksheet subtracts the portfolio contribution amount from the planned withdrawal amount. This is mathematically equivalent and simpler for the retiree. The sum of the temporary salary and the smaller withdrawal is available for taxes and expenses.

In other words, if the temporary annual income is $30,000 for 2 years, the worksheet might project that this could support (a fluctuating) $2,866 annual income over the entire retirement. That is, $27,134 of this year's temporary income should be contributed to the portfolio. If the worksheet also projects that the current portfolio could support (a fluctuating) $70,000 income (without considering the temporary income), we get that the retiree would have ($70,000 + $2,866) = $72,866 available for taxes and expenses this year. This could be achieved 2 ways:
  1. withdraw $70,000 (assuming Social Security hasn't started) from the portfolio and then contribute $27,134 to the portfolio, or
  2. just withdraw ($70,000 - $27,134) = $42,866, which is equivalent and simpler. (That's what the worksheet suggests).
In either case, the amount available for taxes and expenses is $72,866.
Last edited by longinvest on Wed Jun 22, 2022 8:35 am, edited 1 time in total.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
dknightd
Posts: 3075
Joined: Wed Mar 07, 2018 11:57 am

Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

The vow method is very useful. But you need to have flexibility. I use it as useful guidance
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum.
SlingerlandLite
Posts: 3
Joined: Tue Jun 21, 2022 12:21 pm

Re: VPW Questions - Temporary Income

Post by SlingerlandLite »

longinvest wrote: Tue Jun 21, 2022 6:51 pm
SlingerlandLite, I suggest reading this post of the forward test. The linked post explains the bottom part (the grey areas) of the Retirement sheet which provides detailed calculations.

After reading the linked post, I suggest going back to your own worksheet to look at its detailed calculations part. Things should become clearer.

The answer to your question is this: Instead of making a VPW withdrawal based on portfolio balance followed by a portfolio contribution to spread the temporary 2-year income over the entire retirement, the worksheet subtracts the portfolio contribution amount from the planned withdrawal amount. This is mathematically equivalent and simpler for the retiree. The sum of the temporary salary and the smaller withdrawal is available for taxes and expenses.

In other words, if the temporary annual income is $30,000 for 2 years, the worksheet might project that this could support (a fluctuating) $2,866 annual income over the entire retirement. That is, $27,134 of this year's temporary income should be contributed to the portfolio. If the worksheet also projects that the current portfolio could support (a fluctuating) $70,000 income (without considering the temporary income), we get that the retiree would have ($70,000 + $2,866) = $72,866 available for taxes and expenses this year. This could be achieved 2 ways:
  1. withdraw $70,000 (assuming Social Security hasn't started) from the portfolio and then contribute $27,134 to the portfolio, or
  2. just withdraw ($70,000 - $27,134) = $42,866, which is equivalent and simpler. (That's what the worksheet suggests).
In either case, the amount available for taxes and expenses is $72,866.
I have read through all of the posts in the forward test thread and check in each month to see the latest calculation. Thanks for all of the hard work on this.

I understand your explanation above and will go back and review my sheet with my numbers so I can get the temp income concept firmly embedded in my head.

A further question arises: What is the basis for the assumption that temp income should be contributed to the portfolio over the 30 year lifespan?

After further review edited to add:

I think that what your explanation above does not make clear (at least to me) is the underlying assumption that if I can meet my expenses and taxes with the combination of my SS and calculated VPW income with no temp income, then the temp income simply replaces a calculated portion of what the VPW would have been without the temp income.

The VPW is reduced accordingly and the reduced amount is then added to the temp income (which is NOT deposited into the investment account, but is just spent) and to the SS income to get the total available to pay expenses and taxes. The sum of SS+redVPW+Tempinc ends up close to the same as the VPW without the temp income. This squares with the math examples.

What confused the issue for me was the talk of investing the temp income into the portfolio, which then leaves only the reduced VPW for monthly expenses and taxes. The way I understood what you wrote (as opposed to the math examples) seemed to me that you were saying to invest the temp income AND leave it in the account through the reduced VPW. I could not square that with the math examples.

That being said, I have not been able to see anything like the above temp income explanation anywhere in the forward test thread including in the linked post, hence my question.

Thanks again.
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

SlingerlandLite wrote: Tue Jun 21, 2022 8:31 pm I have read through all of the posts in the forward test thread and check in each month to see the latest calculation. Thanks for all of the hard work on this.

I understand your explanation above and will go back and review my sheet with my numbers so I can get the temp income concept firmly embedded in my head.

A further question arises: What is the basis for the assumption that temp income should be contributed to the portfolio over the 30 year lifespan?

After further review edited to add:

I think that what your explanation above does not make clear (at least to me) is the underlying assumption that if I can meet my expenses and taxes with the combination of my SS and calculated VPW income with no temp income, then the temp income simply replaces a calculated portion of what the VPW would have been without the temp income.

The VPW is reduced accordingly and the reduced amount is then added to the temp income (which is NOT deposited into the investment account, but is just spent) and to the SS income to get the total available to pay expenses and taxes. The sum of SS+redVPW+Tempinc ends up close to the same as the VPW without the temp income. This squares with the math examples.

What confused the issue for me was the talk of investing the temp income into the portfolio, which then leaves only the reduced VPW for monthly expenses and taxes. The way I understood what you wrote (as opposed to the math examples) seemed to me that you were saying to invest the temp income AND leave it in the account through the reduced VPW. I could not square that with the math examples.

That being said, I have not been able to see anything like the above temp income explanation anywhere in the forward test thread including in the linked post, hence my question.

Thanks again.
SlingerlandLite,

SPREADING INCOME OVER TIME

Questions: Why not fully spend the temporary income today? Actually, why not spend the entire portfolio today too, while at it?
Answer: Prudent investors also care about tomorrow, not only about today. That's why.

The principles guiding the worksheet's calculations to spread income over time are explained in this thread about the Accumulation sheet. Calculations for temporary income are based on the same principles. In short, the worksheet aims to equalize the amount available for taxes and expenses during accumulation and retirement (subject to market fluctuations).

SINGLE FINANCES

When an early retiree is single, it's usually a bad idea to withdraw money from the portfolio and then contribute back part of temporary income, because of tax consequences. Portfolio withdrawals might trigger taxes (realizing gains in a taxable account, taxes on IRA withdrawal, etc.) and temporary income is usually taxed. Reducing the planned portfolio withdrawal amount (based on portfolio balance) by the planned portfolio contribution (due to temporary income) is usually more tax-efficient than taking the full withdrawal and then making a contribution.

COUPLE FINANCES

Things can get more complicated when a couple is involved, depending on how the couple manages its finances. There are a wide variety of situations. A couple might have met later in life, for example, and prefer keeping relatively separate finances due to consequences on bequests to children from an earlier union.

In particular, the case where one spouse is retired and the other still works can expose delicate issues.

If one Retirement sheet is used for the couple, the worksheet will suggest to spend the temporary income first before taking any portfolio withdrawal. Depending on how the couple manages its finances, this could make working spouse feel that the more the spouse works, the less the other spouse financially contributes to the household. Using a separate sheet for each spouse might be a better approach in this case. Also, the working spouse could use the Accumulation sheet (instead of the Retirement sheet), if working full-time.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
SlingerlandLite
Posts: 3
Joined: Tue Jun 21, 2022 12:21 pm

Re: Variable Percentage Withdrawal (VPW)

Post by SlingerlandLite »

longinvest wrote: Wed Jun 22, 2022 8:14 am
SlingerlandLite wrote: Tue Jun 21, 2022 8:31 pm I have read through all of the posts in the forward test thread and check in each month to see the latest calculation. Thanks for all of the hard work on this.

I understand your explanation above and will go back and review my sheet with my numbers so I can get the temp income concept firmly embedded in my head.

A further question arises: What is the basis for the assumption that temp income should be contributed to the portfolio over the 30 year lifespan?

After further review edited to add:

I think that what your explanation above does not make clear (at least to me) is the underlying assumption that if I can meet my expenses and taxes with the combination of my SS and calculated VPW income with no temp income, then the temp income simply replaces a calculated portion of what the VPW would have been without the temp income.

The VPW is reduced accordingly and the reduced amount is then added to the temp income (which is NOT deposited into the investment account, but is just spent) and to the SS income to get the total available to pay expenses and taxes. The sum of SS+redVPW+Tempinc ends up close to the same as the VPW without the temp income. This squares with the math examples.

What confused the issue for me was the talk of investing the temp income into the portfolio, which then leaves only the reduced VPW for monthly expenses and taxes. The way I understood what you wrote (as opposed to the math examples) seemed to me that you were saying to invest the temp income AND leave it in the account through the reduced VPW. I could not square that with the math examples.

That being said, I have not been able to see anything like the above temp income explanation anywhere in the forward test thread including in the linked post, hence my question.

Thanks again.
SlingerlandLite,

SPREADING INCOME OVER TIME

Questions: Why not fully spend the temporary income today? Actually, why not spend the entire portfolio today too, while at it?
Answer: Prudent investors also care about tomorrow, not only about today. That's why.

The principles guiding the worksheet's calculations to spread income over time are explained in this thread about the Accumulation sheet. Calculations for temporary income are based on the same principles. In short, the worksheet aims to equalize the amount available for taxes and expenses during accumulation and retirement (subject to market fluctuations).

SINGLE FINANCES

When an early retiree is single, it's usually a bad idea to withdraw money from the portfolio and then contribute back part of temporary income, because of tax consequences. Portfolio withdrawals might trigger taxes (realizing gains in a taxable account, taxes on IRA withdrawal, etc.) and temporary income is usually taxed. Reducing the planned portfolio withdrawal amount (based on portfolio balance) by the planned portfolio contribution (due to temporary income) is usually more tax-efficient than taking the full withdrawal and then making a contribution.

COUPLE FINANCES

Things can get more complicated when a couple is involved, depending on how the couple manages its finances. There are a wide variety of situations. A couple might have met later in life, for example, and prefer keeping relatively separate finances due to consequences on bequests to children from an earlier union.

In particular, the case where one spouse is retired and the other still works can expose delicate issues.

If one Retirement sheet is used for the couple, the worksheet will suggest to spend the temporary income first before taking any portfolio withdrawal. Depending on how the couple manages its finances, this could make working spouse feel that the more the spouse works, the less the other spouse financially contributes to the household. Using a separate sheet for each spouse might be a better approach in this case. Also, the working spouse could use the Accumulation sheet (instead of the Retirement sheet), if working full-time.
Thanks for the follow up.
NiddHogg
Posts: 2
Joined: Sun Jun 19, 2022 9:51 am

Re: Variable Percentage Withdrawal (VPW)

Post by NiddHogg »

Hello everyone! I’ve been playing around with VPW and can say that it has been great so far!

I found that VPW allows to dynamically calibrate the withdrawals based on market performance and investor behavior. Using VPW enables investor to be flexible in their spending, increasing the investment balance at any point, spending less or more.

However, one of the downsides of VPW I found is that sometimes the withdrawals may go down too much, possibly forcing the investor to downsize their lifestyle. A lot of investors seek freedom of mind and peace during their retirement. Due to that, the community introduced minimum withdrawal amount, adjusting it to inflation.

The issue is that by introducing minimum withdrawal, the method got same disadvantages as simple inflation adjusted spending plan (example: 4% rule).
The same questions arise as with constant inflation-adjusted withdrawal: how can I be flexible with minimum withdrawal?
If I add extra amount to the balance, how does minimum withdrawal change? What if I am lucky enough and my balance goes x4, can I increase minimum withdrawal?

Image

I came up with a solution being able to safely dynamically adjust the minimum withdrawal amount.
You begin with a particular minimum withdrawal amount (backtesting on 30, 50 and 70 year periods has shown 3% to be safe bet)
Each year if new minimum withdrawal amount (again, based on same min. percentage of current balance) is higher than the previous one then you set it to be new minimum withdrawal amount.
If not, we adjust the previous minimum withdrawal by inflation, same as with static withdrawal.

Thanks to that we can now recalculate our withdrawal as well as minimum withdrawal rate every year, being flexible with the portfolio balance. The method allows the minimum withdrawal rate to rise, if that is 'allowed' by the market performance. That enables for better spending planning which brings peace of mind. I call it VPW with Rising Minimum Withdrawal (RMW), or VPW-RMW.

While the main feature is being able to dynamically calculate minimum withdrawal, there is another benefit in form of possible rising minimum withdrawal amount.

Image
In 1937-1987 period, it provided higher withdrawal at the beginning. Also provided peace of mind during huge drop from 1969 to 1975.

Image
In 1950-2020 period, it provided good stability after huge rise and consistent drop.
Here we can see how rising feature increases minimum withdrawal from $30.000 to $78.000 (inflation adjusted).

One interesting property of this method I found is that rising feature does not require decreasing minimum withdrawal rate, so the percentage stays the same as in static inflation-adjusted minimum withdrawal spending plan.

To summarize the benefits:
Flexibility - recalculate at any year
Peace of mind - minimum withdrawal that may be rising

I have changed the backtesting spreadsheet accordingly, adding some new sheets for better visualization so you can play around with it.
Backtesting

Once again, huge thanks to longinvest and community for all the work done!

What do you think about VPW with Rising Minimum Withdrawal?
Last edited by NiddHogg on Thu Jun 23, 2022 9:59 pm, edited 2 times in total.
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

NiddHogg wrote: Thu Jun 23, 2022 9:16 pm What do you think about VPW with Rising Minimum Withdrawal?
NiddHogg, welcome to the forum.

Such a proposal has been repeatedly rejected earlier in this thread for good reasons:
  1. If you want guaranteed base income, just buy it. It's called an inflation-indexed SPIA*.
  2. Adding any floor to VPW breaks one of its fundamental features by introducing the possibility of premature portfolio depletion, which is obviously unacceptable.
* SPIA = Single Premium Immediate Annuity. While a SPIA indexed to the CPI-U might be difficult to find, a SPIA with a fixed 2% annual increment is easy to find and it matches promised inflation (see Why does the Federal Reserve aim for inflation of 2 percent over the longer run?).

VPW is based on mathematical principles so that, regardless of what asset returns might be in the future, the important features of VPW will stand. VPW will never prematurely deplete the portfolio.

It simply makes no sense to plan to take constant inflation-adjusted withdrawals from a portfolio of fluctuating assets regardless of market returns (even if only starting to do so after a downturn).

Most people understand that they can't spend more than what their financial situation allows for. It would obviously be illogical for a 25 years old person just out of school, with no portfolio and only making a $40,000 annual salary, to buy a $10,000,000 house and then go see their employer to ask for a raise so that they can afford to pay the ongoing expenses for that house (including mortgage payment, taxes, and maintenance). Yet, we continuously see, on internet forums, some people seeking to do something similar during their planned retirement by hoping to match specific expenses with portfolio withdrawals regardless of portfolio balance and performance.

If you're young, what would you do, tomorrow, if you lost your job and were only able to find a new job that paid 50% of your current salary? Would you maintain your current level of spending with no modification whatsoever? Maybe you've determined "floor expenses" you don't want to get below of. Yet, if your new salary can't support these floor expenses, will you still continue spending at least that amount, or will you seek to reduce your expenses to match your new lower financial abilities, while allowing for a sufficient margin so that you can also save and invest for retirement?

The VPW approach to accumulation and retirement is about accepting market returns, whatever they might be, and about accepting that one can only spend according to what one's current financial situation allows for. Income determines how high expenses can go, not the reverse.

Talking of accumulation, I suggest looking at the 1966 VPW retiree's financial situation in this post** in relation to the accumulation period that lead to it. It wasn't a bad situation, despite all the gloom and doom about it on internet forums. That's unlike the 1966 SWR retiree who ends up with only $20,784/year*** in late retirement due to premature portfolio depletion. The chart takes into account salary and savings during accumulation as well as portfolio withdrawals and Social Security during retirement. Enjoy!

** The setup is explained in this post.
*** The chart is inflation-adjusted and expressed in 2019 dollars.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
NiddHogg
Posts: 2
Joined: Sun Jun 19, 2022 9:51 am

Re: Variable Percentage Withdrawal (VPW)

Post by NiddHogg »

Hello longinvest and thank you for the reply!

I do understand that adding any floor may lead to premature portfolio depletion. This also applies to SWR.
I didn’t mean that the change I introduced should be added to original VPW. In fact it shouldn’t. it’s an alternative - a blend of spending strategies. It’s not ‘better’ - it mixes pros and cons of both strategies (VPW and SWR).

What we should take into account is psychological effect. There are two risks here.
First is premature portfolio depletion.
Second is having so little monthly income during retirement that you would need to downsize your lifestyle a lot. Not just to stop having wild parties but actually not being able to pay mortgage for your house, etc.

People using SWR fear the second one more, that’s why they stick to it. I don’t like SWR for not being flexible enough and having huge chance of leaving large amounts after death. But I still want to know that there’s some minimum I can most likely rely on - it’s my peace of mind and important for budgeting. It provides the feeling of more control over my life and brings psychological fruition. My chances of dying before portfolio depletes seem to be order of magnitude higher, especially with conservative minimum withdrawal rate. And I still want to shine during the times when market goes up. Nor SWR nor VPW can provide both expected minimum withdrawals AND enjoy bull markets.

Nowadays people live in debt. We get financed to buy things. We lease things. And such purchases lead to years of monthly payments. Will I be able to pay interest on my house? Will I afford my current car’s monthly payments? These are ‘fears’ of people sticking to SWR. And over life people get used to rising (or at least constant) income, which VPW-RMW provides. People are not used to having their salary going up and down similar to the market. This is important psychological aspect we should not ignore. Loss aversion is an important factor. I want to adjust tools to my psychological needs and not vice versa.

In fact premature portfolio depletion did not happen before (with 3% initial minimum withdrawal) based on backtesting. While ‘past performance does not guarantee future results’, it’s anyway useful information - the chances seem to be actually quite small. One could introduce a margin of safety and use 2.7% for minimum withdrawal rate as an example. SPIA may deplete either thus, again, not achieving the minimum withdrawal, sometimes needed psychologically.

So, to summarize.
VPW-RMW is a mixed spending strategy. From SWR it takes stability and peace of mind. From VPW it takes the benefits of increasing possible spending during bull markets as well as flexibility. The downside is that it indeed adds some risk of premature portfolio depletion (similar to SWR). However, one should not ignore the psychological effect of the risks on particular investor.
User avatar
canadianbacon
Posts: 486
Joined: Sun Nov 10, 2019 10:04 pm

Re: Variable Percentage Withdrawal (VPW)

Post by canadianbacon »

NiddHogg wrote: Fri Jun 24, 2022 10:50 am I do understand that adding any floor may lead to premature portfolio depletion. This also applies to SWR.
I didn’t mean that the change I introduced should be added to original VPW. In fact it shouldn’t. it’s an alternative - a blend of spending strategies. It’s not ‘better’ - it mixes pros and cons of both strategies (VPW and SWR).
I wonder if it would be better in a separate thread, in that case.

That said, I have personally explored something similar to what you mention. The way I did it was that I took my desired minimum spending level, which was 30% below my current spending level, and plugged that into the rich/broke/dead calculator as spending flexibility, along with my current recommended VPW withdrawal amount. It gave me a 0% chance of going broke, which tells me that, at least at a 50,000 foot view, such an approach could have potential.

Would I actually do it? To be honest, I think I will defer that decision until it actually happens.
Bulls make money, bears make money, pigs get slaughtered.
Marseille07
Posts: 10100
Joined: Fri Nov 06, 2020 1:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

NiddHogg wrote: Fri Jun 24, 2022 10:50 am People using SWR fear the second one more, that’s why they stick to it. I don’t like SWR for not being flexible enough and having huge chance of leaving large amounts after death. But I still want to know that there’s some minimum I can most likely rely on - it’s my peace of mind and important for budgeting. It provides the feeling of more control over my life and brings psychological fruition. My chances of dying before portfolio depletes seem to be order of magnitude higher, especially with conservative minimum withdrawal rate. And I still want to shine during the times when market goes up. Nor SWR nor VPW can provide both expected minimum withdrawals AND enjoy bull markets.
Some people do what's called "ratcheting up" where your base strategy is SWR but you withdraw 4% of remaining balance should it be higher than CPI adjustment. This solves some of the "huge chance of leaving large amounts after death" issue. Of course, it might mean you now run out of money when you otherwise would not.
US & FM (5% seed) | 300K Cash
SnowBog
Posts: 3147
Joined: Fri Dec 21, 2018 11:21 pm

Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

canadianbacon wrote: Fri Jun 24, 2022 1:37 pm
NiddHogg wrote: Fri Jun 24, 2022 10:50 am I do understand that adding any floor may lead to premature portfolio depletion. This also applies to SWR.
I didn’t mean that the change I introduced should be added to original VPW. In fact it shouldn’t. it’s an alternative - a blend of spending strategies. It’s not ‘better’ - it mixes pros and cons of both strategies (VPW and SWR).
I wonder if it would be better in a separate thread, in that case.

That said, I have personally explored something similar to what you mention. ...

Would I actually do it? To be honest, I think I will defer that decision until it actually happens.
+1

For myself, I'm also exploring a "floor" concept - although it aligns more with what longinvest suggested:
longinvest wrote: Fri Jun 24, 2022 7:08 am ...
If you want guaranteed base income, just buy it. It's called an inflation-indexed SPIA*.
In our case, I'm looking at things a bit in reverse. We'll have "enough" with social security (and "more than enough" with pensions) to cover essential expenses (and then some) - aka an "income floor" - when those income streams kick in near 70. If we didn't, we'd buy a SPIA as longinvest suggested...

Our "problem" is how to have an "income floor" between when we retire (potentially early 50's) and around 70 when social security + pensions kick in. Not sure an SPIA for a 50-year-old is the best idea...

So, we are building an income floor view EE Bonds (which are a great DIY alternative to an SPIA - see my EE Bond Manifesto here: viewtopic.php?t=358793) and using I Bonds to fill in for missed years (and provide some inflation protection). This is similar to a Liability Matching Portfolio (LMP) - but we are only doing it for a portion of our "income" (aka expenses) needs - again enough to align with the concept of an "income floor" (which aligns fairly well with our social security amount).

As it relates to the VPW Worksheet, here's how I handle it:
  • Include our EE Bonds as "Temporary Retirement Income" starting when the first one hits 20 year (doubling point) and ending when the last one hits 20 years, providing $1,667/month (1/12 of $20k - assuming a $10k EE Bond purchased)
  • For our "Portfolio Balance" - we exclude the EE Bonds (as they are covered above), but include I Bonds (as part of our fixed income)
I'll close by noting one of the primary benefits I see with VPW is its simplicity (with much credit to longinvest for the spreadsheet). My spouse is not interested in finances. But I'm reasonably certain they can update their age and our current portfolio balance in VPW, and follow its guidance to spend no more (inclusive of taxes) as the amount it reports. And if they make a mistake one year, or overspend one year, the dynamic nature of VPW will "self-correct" once its updated again (with accurate data). That to me was the final "selling point" on VPW - and the spreadsheet that longinvest created. It's simple enough for my spouse, is based on mathematic principles (not assumptions or projections), and masks the complexity of different income streams with different start dates (and some with end dates such as EE Bonds).
nigel_ht
Posts: 4162
Joined: Tue Jan 01, 2019 10:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Fri Jun 24, 2022 7:08 am

* SPIA = Single Premium Immediate Annuity. While a SPIA indexed to the CPI-U might be difficult to find, a SPIA with a fixed 2% annual increment is easy to find and it matches promised inflation (see Why does the Federal Reserve aim for inflation of 2 percent over the longer run?).
Lol, perhaps this part of the cut and paste should be updated…
nigel_ht
Posts: 4162
Joined: Tue Jan 01, 2019 10:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Fri Jun 24, 2022 7:08 am
That's unlike the 1966 SWR retiree who ends up with only $20,784/year*** in late retirement due to premature portfolio depletion. The chart takes into account salary and savings during accumulation as well as portfolio withdrawals and Social Security during retirement.
When you add in Social Security to SWR like you do for VPW then there is no premature portfolio depletion when you keep expenses to $40K a year (adjusted for inflation)…SS pretty much makes 4% bullet proof for portfolios under $2M…

Figuring $20K of SS that 1966 SWR retiree ends up with $40,784/year.

I know you hate anyone talking about SWR but since you bring it up…
nigel_ht
Posts: 4162
Joined: Tue Jan 01, 2019 10:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

SnowBog wrote: Fri Jun 24, 2022 5:45 pm
For myself, I'm also exploring a "floor" concept…
That’s because budgeting floors make sense in retirement planning…
Marseille07
Posts: 10100
Joined: Fri Nov 06, 2020 1:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

nigel_ht wrote: Sat Jun 25, 2022 4:11 pm That’s because budgeting floors make sense in retirement planning…
I'm not sure if it does. VPW until age 80 then SPIA might not be a terrible idea, since the payout seems reasonable at that age.

You can have a spending floor, but given how VPW works, chances are it lets you spend way above the floor anyway.
US & FM (5% seed) | 300K Cash
nigel_ht
Posts: 4162
Joined: Tue Jan 01, 2019 10:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Marseille07 wrote: Sun Jun 26, 2022 8:55 pm
nigel_ht wrote: Sat Jun 25, 2022 4:11 pm That’s because budgeting floors make sense in retirement planning…
I'm not sure if it does. VPW until age 80 then SPIA might not be a terrible idea, since the payout seems reasonable at that age.

You can have a spending floor, but given how VPW works, chances are it lets you spend way above the floor anyway.
Nominal cases and better you can do pretty much anything you want. Even most bad cases you can do whatever and succeed.

It’s the P10 scenarios where I don’t want my plans to fail because generally by the time you realize it’s not a normal bad scenario your resources are diminished….
Marseille07
Posts: 10100
Joined: Fri Nov 06, 2020 1:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

nigel_ht wrote: Mon Jun 27, 2022 1:19 am
Marseille07 wrote: Sun Jun 26, 2022 8:55 pm
nigel_ht wrote: Sat Jun 25, 2022 4:11 pm That’s because budgeting floors make sense in retirement planning…
I'm not sure if it does. VPW until age 80 then SPIA might not be a terrible idea, since the payout seems reasonable at that age.

You can have a spending floor, but given how VPW works, chances are it lets you spend way above the floor anyway.
Nominal cases and better you can do pretty much anything you want. Even most bad cases you can do whatever and succeed.

It’s the P10 scenarios where I don’t want my plans to fail because generally by the time you realize it’s not a normal bad scenario your resources are diminished….
VPW is very fine at P10: https://www.cfiresim.com/19099bca-f833- ... 099246bd7e

Total withdrawals amount is higher than SWR 4% even at P10. Of course, the challenge is to choose N wisely so that you don't outlive your portfolio.
US & FM (5% seed) | 300K Cash
eddie_money
Posts: 16
Joined: Thu Sep 03, 2020 3:10 am

Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Just a quick question on VPW.

Say I am 99.99% positive I will be dead at the age of 85. And I simply don't care to plan for the 0.01% chance that I'm still there.

Is the theory and math behind VPW still sound if I would adjust the VPW table for that lower end age instead of the default of 100?
Marseille07
Posts: 10100
Joined: Fri Nov 06, 2020 1:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

eddie_money wrote: Fri Jul 01, 2022 2:13 pm Just a quick question on VPW.

Say I am 99.99% positive I will be dead at the age of 85. And I simply don't care to plan for the 0.01% chance that I'm still there.

Is the theory and math behind VPW still sound if I would adjust the VPW table for that lower end age instead of the default of 100?
Well I thought the recommendation was to buy SPIA when you reach N - 10; so if N gets you to 85 then you reach N - 10 at 75 years old.

The point I'm making is that after 75 years old, you'd be on SPIA + SS indefinitely rather than VPW.
US & FM (5% seed) | 300K Cash
Topic Author
longinvest
Posts: 5028
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

eddie_money wrote: Fri Jul 01, 2022 2:13 pm Say I am 99.99% positive I will be dead at the age of 85. And I simply don't care to plan for the 0.01% chance that I'm still there.
Eddie_money,

VPW is designed to deal with real life where uncertainty reigns. We don't know when we'll die; it's best to accept it and plan accordingly.

The VPW approach to retirement deals with uncertainty by always preserving some liquidity no matter how long the retiree lives. Here's how:
  • Percentages in the VPW Table are calibrated for a last withdrawal at age 99. See the last part of this post for details on how they can be calculated using a simple calculator.
  • If still alive at age 80, the retiree is invited to consider using part (but not all) of the remaining portfolio to buy an inflation-indexed SPIA* **, if necessary, so that total non-portfolio income (including Social Security, pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals. This dampens financial risks associated with living past age 100. See this post for details.
  • When using the VPW Accumulation And Retirement Worksheet, the withdrawal percentage stops growing when reaching 10%. Those using the VPW Table without a spreadsheet are similarly invited to limit the withdrawal percentage to no more than 10%. This cap is reached when nearing 90 years old. See the last part of this post for details.
As explained in the linked post of the second bullet, the choice of last withdrawal age to calibrate the table goes along with the assumption that financial risks associated with longevity will be dampened around age 80. The 10% percentage, in old age, reduces the residual portfolio and withdrawals by approximately half every 10 years (within the theoretical model, before applying market returns), preserving some liquidity all lifelong. The result is a robust financial approach to retirement.

* Single Premium Immediate Annuity.
** A SPIA indexed to the CPI-U is difficult to find, but SPIA with a fixed 2% annual increment dampens inflation risk and is easy to find; it matches promised inflation (see Why does the Federal Reserve aim for inflation of 2 percent over the longer run?).
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
eddie_money
Posts: 16
Joined: Thu Sep 03, 2020 3:10 am

Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Thank you @longinvest for pointing that out.

Another question I am sitting on for a while and wanted to ask you, is how to interpret the 'suggested withdrawal' as mentioned in the VPW sheet.

If I was not to spend fully the suggested amount by VPW, what would be the 'better' choice:

Fully withdraw the suggested amount and saving the surplus. This feels the most intuitive to me. And also seems practical; sometimes you need save up some cash for a big expense (like a new car), or you could use some of that saved cash for riding out a market crash (or at least lowering future withdrawals if needed).

Or, only withdraw what you actually need. This leaves more money in the investment portfolio, which in return will be able to grow even larger.

Did you ever do a calculation on both of these options?
dbr
Posts: 41363
Joined: Sun Mar 04, 2007 9:50 am

Re: Variable Percentage Withdrawal (VPW)

Post by dbr »

eddie_money wrote: Fri Jul 01, 2022 4:12 pm Thank you @longinvest for pointing that out.

Another question I am sitting on for a while and wanted to ask you, is how to interpret the 'suggested withdrawal' as mentioned in the VPW sheet.

If I was not to spend fully the suggested amount by VPW, what would be the 'better' choice:

Fully withdraw the suggested amount and saving the surplus. This feels the most intuitive to me. And also seems practical; sometimes you need save up some cash for a big expense (like a new car), or you could use some of that saved cash for riding out a market crash (or at least lowering future withdrawals if needed).

Or, only withdraw what you actually need. This leaves more money in the investment portfolio, which in return will be able to grow even larger.

Did you ever do a calculation on both of these options?
One answer is that wherever you save the surplus is supposed to be part of the portfolio. If you save it you haven't withdrawn it. I would grant you that putting the money in a short term pool for a car is a legitimately different "portfolio" but the other two are just withdrawing less and leaving it in the portfolio. Not, as they say, that there is anything wrong with that. Technically what you have done is slightly change the asset allocation to increase the allocation to cash of some kind.
SnowBog
Posts: 3147
Joined: Fri Dec 21, 2018 11:21 pm

Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

eddie_money wrote: Fri Jul 01, 2022 4:12 pm Thank you @longinvest for pointing that out.

Another question I am sitting on for a while and wanted to ask you, is how to interpret the 'suggested withdrawal' as mentioned in the VPW sheet.

If I was not to spend fully the suggested amount by VPW, what would be the 'better' choice:
For myself, I look at things a bit more simplistically I guess... I'm currently in my working years, and not dissimilar to VPW, my income in any given year will vary between $X and $Y - based on performance metrics, etc. Whatever my income is for a given year is the starting point, from that we pay taxes and "essential" expenses. Anything left over ends up split between savings and "discretionary" expenses - as we feel appropriate. But if we needed/wanted to - we can choose to spend more than our income in a given year - knowing that it simply eats into our savings (or stated differently reduces the amount of expenses/savings we can do in future years to make up for things).

I expect we'll use VPW similarly. We'll pay required taxes and "essential" expenses. And with anything left, we'll choose between "discretionary" expenses or not spending it (aka "save" it). I can't see us "inflating" our expenses - just to hit the amount VPW "recommends" every year.

That said, the whole point of VPW is to enjoy your savings, and not die with the biggest bank account. And in our personal case, we tend to do things in a cyclical fashion, such as have a "nice" trip every few years. So, I imagine any "extra" we don't spend regularly will probably get used up when that next trip cycle comes around, maybe a longer trip, nicer hotel, better seats on the plane, etc. Likewise, if our portfolio is growing quicker than we are spending it, we'll probably move up some of any "inheritance" - making annual gifts to family/friends/etc.

So, I guess in a way, my view isn't entirely dissimilar to longinvest's view... With the exception that I believe they encourage you to "use" the money (in some form) every year. Here's one of their most recent posts to a similar question.
longinvest wrote: Mon Jun 06, 2022 7:36 am One of the goals of VPW is to allow deferred spending to actually happen. When I save money, today, it isn't with the objective of dying with the biggest possible portfolio; it's because I am deferring spending I could do today to later.

...

So, we're back to square one: what to do with the excess money? I say: either spend it, gift it, or earmark it for future specific near-term spending (appropriately leaving it in a savings account).

Here are some ideas:
  • Provide gifts to children, grandchildren, and favorite charities while alive, taken from excess money that VPW withdrawals provide and that the retiree doesn't need. Take the opportunity to check that the money is properly used or managed before giving additional gifts.
  • For major donations, build a separate portfolio (possibly managed by the receiving charity organization) and regularly add to it when VPW provides excess money over the retiree's needs.
I think that it's logical to withdraw the amount suggested by the VPW worksheet and use any excess money, not needed by the retiree (after paying taxes), for something fun or meaningful which will increase the retiree's happiness. Isn't it for exactly this that the money was saved and invested decades earlier?
Post Reply