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?
I came up with a solution being able to safely dynamically adjust the minimum withdrawal
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.
In 1937-1987 period, it provided higher withdrawal at the beginning. Also provided peace of mind during huge drop from 1969 to 1975.
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.
Once again, huge thanks to longinvest and community for all the work done!
What do you think about VPW with Rising Minimum Withdrawal?