## Variable Percentage Withdrawal (VPW)

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nigel_ht
Posts: 4372
Joined: Tue Jan 01, 2019 10:14 am

### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Thu Aug 04, 2022 5:30 pm To help readers seeing the harshness of feeding the initial "Portfolio Balance After Loss" (red cell) as "Portfolio Balance" (yellow input cell) in the retirement worksheet, here is a simulation of what this implies in the worksheet's static model (where returns are constant, except for initial losses).

Two hypothetical retirees of age 65 each have a \$1,000,000 60/40 stocks/bonds portfolio from which they'll take withdrawal (in addition to receiving Social Security, which isn't shown in the simulation). Both die on their 88th birthday. The first retiree uses VPW to determine withdrawal amounts. The second retiree has full faith in the 4% SWR method and, consequently, withdraws \$40,000 from the portfolio regardless of portfolio performance.
Social Security changes the equation...I guess we assume neither has it.
Just before the first withdrawal, stocks drop -75% (two -50% drops with rebalancing in between). Given the 60/40 allocation, this means two consecutive -30% portfolio losses, resulting into a (\$1.000,000 X 70% X 70%) = \$490,000 portfolio (before withdrawal).
I guess rebalance bands in this scenario suck lol...
The VPW retiree adjusts the initial withdrawal accordingly. The SWR retiree, on the other hand, fully trusts the portfolio to recover and 4% SWR to work "as it did in the past" (in some markets)...
If you haven't taken your first withdrawal you likely wouldn't use the original \$1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The VPW retiree gets a little more than \$24,000/year and leaves behind almost quarter of a million dollars. The SWR retiree gets \$40,000/year for the first 15 years, a little less during the 16th year, and then gets \$0 for the remaining 7 years before death at age 88, having depleted the portfolio at age 80.
Well, yes. You're withdrawing far above SWR because of the way you set up the scenario.
This test is really harsh, much worse than a U.S. Great Depression back test. I think (I'm not sure; it's been many years since I've read about it) that it was a Japanese investor who faced portfolio depletion in as little as 16 years using 4% SWR.
Well, I guess it's success if you can live on \$24,000 a year and stack the deck against SWR with a very strange initial starting condition...
willthrill81
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Location: USA

### Re: Variable Percentage Withdrawal (VPW)

nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original \$1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The fatal flaw, IMHO, of all these comparisons to a 'SWR' is that they assume that someone is deciding on day 1 of retirement how much they will withdraw from their portfolio in inflation-adjusted dollars every year for the next 30 years without ever glancing at their portfolio. Literally nobody does that, nor should they as that would be utterly ridiculous and foolish.

Rather, everyone makes adjustments to their withdrawals as they go, especially when their portfolio is suffering. Nobody is blithely draining their portfolio because of robotic adherence to predetermined 'rules'.

In hindsight, the SWR is a reasonably good metric to indicate how much retirement income could have been withdrawn from an invested portfolio. But it's not a withdrawal strategy that anyone is using, nor should anyone do so.
nigel_ht
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Joined: Tue Jan 01, 2019 10:14 am

### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Thu Aug 04, 2022 5:53 pm Before anybody asks, here's what would have happened if the 4% SWR retiree of this post had decided, instead, to withdraw according the initial after-loss portfolio balance:

Without any surprise, this SWR retiree who failed to trust in the 4% SWR got less than \$20,000/year, that's -20% less than the VPW retiree, and died with more than \$400,000, almost as much as the initial after-loss \$490,000 portfolio balance.
\$24K vs \$19.6K is an improvement...and VPW tends to get to withdraw more.

This isn't a failure to trust SWR but correctly apply it. I'm also not sure you can assume that a SWR developed through backtesting historical data works in artificial scenarios.

You certainly can compute a SWR for any scenario though...if the worst historical case was a 75% drop followed by 3.76% constant returns over the next 20 years the computed SWR would provide you the largest WR for that scenario as the worst case.
SnowBog
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### Re: [YouTube] Rob Berger's opinion of Variable Percentage Withdrawal (VPW)

nigel_ht wrote: Thu Aug 04, 2022 6:13 pm
SnowBog wrote: Thu Aug 04, 2022 3:52 pm Except edge cases (like the 1966 example for 4% SWR, where again it was more likely you'd be dead than broke), nearly all of these retirement methods are going to work out just fine the vast majority of the time. You are just making trade-offs in the assumptions you prefer and the risks you are trying to manage.
Lol, in any year but 2022 considering 1966 as a remote edge case would likely be accepted without comment...
Maybe "edge case" was the wrong choice... But I used 1966 as that is what the recent YouTube video critiquing VPW used. And I think its notable that the oft cited "4% rule" failed while VPW didn't (again with the expectation that the retiree could scale back their expenses).
nigel_ht wrote: Thu Aug 04, 2022 6:13 pm
SnowBog wrote: Thu Aug 04, 2022 3:52 pm Likewise, if we are able to, I'd much rather give to our heirs/charities while we are alive then to leave them a big pile of unspent cash they get when we die (which may be far less impactful on their lives at that point in time).
That's up to you but the step up in basis is a huge benefit.
Depends on where your assets are when you die...

Instead of working until it's impossible for us to ever fail... We are looking at the possibility of retiring in our early 50's. That gives us maybe 18 years of "no income" years (delayed pensions and social security), giving us options of doing TGH in the 0% bracket and/or aggressive Roth conversions (in the lowest tax brackets we'll likely see the rest of our lives).

Doing so we'll shift from what's currently a roughly 50% taxable and 50% tax-advantaged balance, to what I'm projecting will be closer to 0% taxable, 20% tax-deferred, and 80% Roth by the time we are 70, and moving towards 100% Roth as RMD's deplete the tax-deferred.

As such, other than on our house, there really won't be any "step-up" in basis for our heirs. So that's not really a factor for us...

But I should also add that our goal is not [currently] to leave a sizable inheritance for our heirs. It's highly likely we will, but not our goal. If it were, I might reconsider "ear marking" some of the taxable holdings for such a purpose - to maximize the step-up in basis. But doing so also carries the added risk that the step-up in basis continues to exist for the next 30+ years...

And again, VPW works nicely for us in this model. It accounts for our delayed pensions and social security, and guides us in how much we can spend (including taxes which will gate our TGH and/or Roth conversions) in those early ("no income") retirement years, and adjusts as our portfolio grows or shrinks with the markets, as well as when our individual income streams start kicking in.

I've yet to have someone explain in simple terms that my non-financially inclined spouse could follow how we'd use a different withdrawal method... (Other than the "just wing it" method... )
nigel_ht
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### Re: [YouTube] Rob Berger's opinion of Variable Percentage Withdrawal (VPW)

SnowBog wrote: Thu Aug 04, 2022 7:22 pm I've yet to have someone explain in simple terms that my non-financially inclined spouse could follow how we'd use a different withdrawal method... (Other than the "just wing it" method... )
Well, you simply need to save enough money to say "Honey, don't worry about it...every year make sure you log in and push this button to automagically rebalance the portfolio. It's set up to put dividends into our bank account. Just spend that."

VTI dividend yield is like 1.46%. That's \$73K from a \$5M VTI stash.

Easy peasy to manage. You just need a lot of money...
nigel_ht
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### Re: Variable Percentage Withdrawal (VPW)

willthrill81 wrote: Thu Aug 04, 2022 6:58 pm
nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original \$1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The fatal flaw, IMHO, of all these comparisons to a 'SWR' is that they assume that someone is deciding on day 1 of retirement how much they will withdraw from their portfolio in inflation-adjusted dollars every year for the next 30 years without ever glancing at their portfolio. Literally nobody does that, nor should they as that would be utterly ridiculous and foolish.

Rather, everyone makes adjustments to their withdrawals as they go, especially when their portfolio is suffering. Nobody is blithely draining their portfolio because of robotic adherence to predetermined 'rules'.

In hindsight, the SWR is a reasonably good metric to indicate how much retirement income could have been withdrawn from an invested portfolio. But it's not a withdrawal strategy that anyone is using, nor should anyone do so.
SWR gives you a reasonably good planning metric to minimize the need to derail your early retirement plans if SORR hits. Even more so if you build in contingency and management reserves into your SWR planning process.

Variable methods, by their nature, will cut back spending during downturns and most of the time it won't be necessary to do so.

It's true that you won't know until much later if you happen to be in a worse than historical worst case for a while...so you have to choose where you accept increased risk.

So to me the outcomes are this:

SORR hits.

SWR allows me to keep my early retirement plans. If it's worse than the historical worst case and my management reserve can't cover it...then I have to re-plan the remainder of the retirement once I realize its worse than the historical worst case. But this is the less likely outcome.

Variable methods probably require that I scale back. The majority of the time the outcome is not as bad as the historical worst case so I've unnecessarily scaled back and lost a few of my healthier years not doing stuff that I planned.

SORR doesn't hit.

SWR allows me to keep my early retirement plans.

Variable methods would have allowed me to spend even more...which would be nice but if I'm satisfied with my SWR based spending plans...eh...I'd rather guard against the SORR scenario.
Topic Author
longinvest
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### Re: Variable Percentage Withdrawal (VPW)

nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original \$1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The worksheet implements a slightly-worse than worst possible sequence of returns for the loss by making it happen just before the first withdrawal, instead of just after.

A slightly-less harsh test would be to make the loss happen just after the first withdrawal:

This time, the VPW retiree gets additional money in the first year, but the same withdrawal amount as last time for all other years (dying at age 88 with the same portfolio balance as last time, too).

The SWR retiree gets \$40,000 for 16 years, slightly less for the 17th year, and \$0 for the remaining 6 years, dying at age 88 having depleted the portfolio years earlier at age 81.

The previous test was slightly harsher.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
nigel_ht
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### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Thu Aug 04, 2022 8:22 pm
nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original \$1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The VPW worksheet implements a slightly-worse than worst possible sequence of returns for the -75% stock loss by making it happen just before the first withdrawal, instead of just after.

A slightly-less harsh test would be to make the loss happen just after the first withdrawal:

You have a math error...if you withdraw \$49.966 the first year then you will not end up with \$483,020 on year two.

You end up with \$950,034. Which then ends up as 465,516.66.

With a 5.1% WR that leaves you with \$23,741,35 available year 2.

This means it's harder, not easier for VPW to make the crash happen just after you take out money for the first year. It's a wash for SWR.
This time, the VPW retiree gets additional money in the first year, but the same withdrawal amount as last time for all other years (dying at age 88 with the same portfolio balance as last time, too).
Like I said, if you can live on \$24K a year that's great and you are assuming inflation is 0%. If you can't live on \$24K a year then you're screwed on year 2.

Your flexibility test isn't based on a 75% reduction but a 50% one. A VPW user with the minimum required flexibility has a spending floor of around \$35,000. Which means they run out of money at age 84...

If the minimum spend is \$24K then if the SWR user capitulates before age 72 (seven years) the money also lasts until age 88.

With 2% inflation the last full year of payout for SWR is age 77. For VPW your spending power is down to \$14,917.59 by age 88.
With 2% deflation the last full year of payout for SWR is age 84. For VPW your spending power is up to \$37,437.17 by age 88.

With 3\$ inflation the last full year of payout for SWR is age 76. For VPW your spending power is down to \$11,782.81 by age 88.
With 3% deflation the last full year of payout for SWR is age 88. For VPW your spending power is up to \$46,854.92 by age 88.
The SWR retiree gets \$40,000 for 16 years, slightly less for the 17th year, and \$0 for the remaining 6 years, dying at age 88 having depleted the portfolio years earlier at age 81.

The previous test was slightly harsher.
Again,it's not slightly harsher...it's actually easier for VPW because you get to change to a lower WR earlier. SWR always takes out \$40K regardless.
Topic Author
longinvest
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### Re: Variable Percentage Withdrawal (VPW)

nigel_ht wrote: Thu Aug 04, 2022 9:14 pm You have a math error...if you withdraw \$49.966 the first year then you will not end up with \$483,020 on year two.

You end up with \$950,034. Which then ends up as 465,516.66.
The initial portfolio is \$1,000,000 before withdrawal. \$49,966 (5.0%) is withdrawn, leaving (\$1,000,000 - \$49,966) = \$950,034 in the portfolio just after withdrawal. Just then, the portfolio loses -30% twice in a row, resulting into a (\$950,034 X 70% X 70%) = \$465,517 portfolio just after withdrawal and loss, at the beggining of the first year. During the first year (like all subsequent years), the portfolio grows by 3.76% to (\$465,517 X (1 + 3.76%)) = \$483,020.

My calculations are correct.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
nigel_ht
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### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Thu Aug 04, 2022 9:26 pm
nigel_ht wrote: Thu Aug 04, 2022 9:14 pm You have a math error...if you withdraw \$49.966 the first year then you will not end up with \$483,020 on year two.

You end up with \$950,034. Which then ends up as 465,516.66.
The initial portfolio is \$1,000,000 before withdrawal. \$49,966 (5.0%) is withdrawn, leaving (\$1,000,000 - \$49,966) = \$950,034 in the portfolio just after withdrawal. Just then, the portfolio loses -30% twice in a row, resulting into a (\$950,034 X 70% X 70%) = \$465,517 portfolio just after withdrawal and loss, at the beggining of the first year. During the first year (like all subsequent years), the portfolio grows by 3.76% to (\$465,517 X (1 + 3.76%)) = \$483,020.

My calculations are correct.
Well that's interesting...you have the exact same number as the prior chart which is why that caught my eye. Is 5% of \$490,000 not \$24,500 rather than \$24,483? And 5% of \$1M is \$50K and not \$49,966.

Hmmm...it appears I wasn't paying attention at all...for year three the VPW portfolio is \$475,778 and the VPW percentage is still 5.1%. Why is the withdrawal still \$24,483 and not \$24,264?

In any case, the primary point is that if you need more than \$24K a year to live on then VPW failed on year 2.
Topic Author
longinvest
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### Re: Variable Percentage Withdrawal (VPW)

nigel_ht wrote: Thu Aug 04, 2022 9:55 pm In any case, the primary point is that if you need more than \$24K a year to live on then VPW failed on year 2.
And, my point (reusing some of your words) is that if you need any money at all (e.g. more than \$0 a year) to live on after portfolio depletion, then SWR failed for the rest of your life.

This thread is about VPW, a sensible appraoch which adapts withdrawal amounts to the retiree’s retirement horizon, asset allocation, and portfolio returns during retirement. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

If VPW isn't your thing and you prefer SWR, you're free to ignore this 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
nigel_ht
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### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Thu Aug 04, 2022 11:16 pm
nigel_ht wrote: Thu Aug 04, 2022 9:55 pm In any case, the primary point is that if you need more than \$24K a year to live on then VPW failed on year 2.
And, my point (reusing some of your words) is that if you need any money at all (e.g. more than \$0 a year) to live on after portfolio depletion, then SWR failed for the rest of your life.
SWR fails in worse than historical worst cases…this is pretty well understood.

It’s also pretty well understood that worse than historical worst cases are rare.

SWR therefore rarely fails and when it does in the future it will be quite noteworthy.
"Fear sells" they say. I think that SWR is the perfect selling tool for financial advisory firms and insurance companies. Fear of premature portfolio depletion helps convincing clients to aim for lower and lower "safe withdrawal rates".

I can only imagine sales people salivating at seeing their clients save, save, and save, working longer and longer, or, more probably, buying expensive investment and insurance products that are supposed to "solve" this possibility of financial ruin.
I have no idea what the relevance is to this discussion.

In any case Bengen has argued for higher rather than lower SWRs so the drive toward lower SWR isn’t universal…although in an interview with Rob Berger I recall he says that SWRs may be falling because inflation is the driving factor.

Which is correct…so 1929 is less scary than 1966 for retirees…regardless of what withdrawal method you use.

Which is an area that backtesting can expose while a static 75% drop test may not.
To me, this is just ridiculous. No human would ever ignore portfolio performance and continue taking constant inflation-adjusted withdrawals in the midst of a prolonged severe market downturn.
SWR is a ceiling and not a floor. In a prolonged market downturn you can of course pull out less just like you can pull out less than the recommended VPW value.

All it says is that for a given duration, in a given country using a specific AA and set of assumptions the historical safe withdrawal rate is X%. If you withdraw below X%, historically you didn’t run out of money.

This is useful if you don’t want to pull out less in a downturn that isn’t likely to be worse than historical.

VPW is a useful tool among many.
SWR is a useful tool among many.
ABW is a useful tool among many.

All have pros and cons.
This thread is about VPW, a sensible appraoch which adapts withdrawal amounts to the retiree’s retirement horizon, asset allocation, and portfolio returns during retirement. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
With the trade off that it can produce insufficient withdrawals to meet expenses.

If you have “sufficient flexibility” this trade off is worthwhile…but it still exists.
If VPW isn't your thing and you prefer SWR, you're free to ignore this thread and go on with your life.
Nobody was really talking about SWR except in passing because the focus was on Rob Berger‘s video.

Snowbog brought it up on page 34 but even then it was mostly ignored because SWR wasn’t all that relevant to the discussion.

/shrug

It wasn’t and still isn’t.

All I said was backtesting is better than the 75% test because 1929 dropped 86% and 15 years was a pretty long recovery. We then took a little side trip down the SWR lane but it wasn’t necessary to discuss the value of backtests…
Zeno
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### Re: Variable Percentage Withdrawal (VPW)

longinvest, thank you for everything you do and have done.
Last edited by Zeno on Sun Aug 07, 2022 8:15 pm, edited 1 time in total.
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### Re: Variable Percentage Withdrawal (VPW)

willthrill81 wrote: Thu Aug 04, 2022 6:40 pm
Wrench wrote: Thu Aug 04, 2022 6:37 pmWhen I run SIMBA's backtest from 1900 to 2021 with 60/40 asset allocation the largest drawdown was ~41% in 1932. with recovery in 4 years. Where is your 89% or 75% coming from?
100% stocks, not a 60/40.
Then it's not a good-faith argument, because VPW is not designed to be used with 100% equities. Someone doing this is following their own method that leads to more volatility than the actual method, and then saying "boy that is volatile." Well no kidding.
Bulls make money, bears make money, pigs get slaughtered.
furwut
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### Re: Variable Percentage Withdrawal (VPW)

Zeno wrote: Fri Aug 05, 2022 2:30 am longinvest, thank you for everything you do and have done. VPW is an awesome tool. I can’t fathom the effort you have put — and continue to put — into it. I am still amazed it is offered up to humanity for free. It is tools like VPW that make forum participation worthwhile. I feel the same about the TPAW (Ben) and related threads, too. Developers like you that prepare these tools deserve accolocades.
1000 percent!

I’m put off by some of the constant sniping that goes on in this thread. I’ve watched the Rob Berger video twice now. It’s a quick glancing overview and not a substitute for reading this thread and the resources in the Wiki.

For those who want a better understanding of how to evaluate VPW in contrast with other retirement spending methodologies I recommend going thru anything/everything written by Dirk Cotton on The Retirement Cafe blog. And the links and comments are valuable as well.
Topic Author
longinvest
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### Re: Variable Percentage Withdrawal (VPW)

I have uploaded version 2.7 of the VPW Accumulation And Retirement Worksheet.

Here's the main change:
• Improve warning messages when the portfolio is too small to fully bridge pensions.

Enjoy!
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
Escapevelocity
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### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Wed Aug 10, 2022 12:55 pm I have uploaded version 2.7 of the VPW Accumulation And Retirement Worksheet.

Here's the main change:
• Improve warning messages when the portfolio is too small to fully bridge pensions.

Enjoy!
Thanks longinvest! Can I assume you’re using the word pensions above to include also social security?
Topic Author
longinvest
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### Re: Variable Percentage Withdrawal (VPW)

Escapevelocity wrote: Wed Aug 10, 2022 1:13 pm
longinvest wrote: Wed Aug 10, 2022 12:55 pm I have uploaded version 2.7 of the VPW Accumulation And Retirement Worksheet.

Here's the main change:
• Improve warning messages when the portfolio is too small to fully bridge pensions.

Enjoy!
Thanks longinvest! Can I assume you’re using the word pensions above to include also social security?
Escapevelocity, the specific name of a defined benefit pension (such as "Social Security", "Work pension", "Military pension", etc.) is entered by the retiree into a yellow cell of the worksheet. By "pensions", in my previous post, I meant all of the defined benefit pensions (#1 to #4) of the worksheet.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet
psychodoc
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### Re: Variable Percentage Withdrawal (VPW)

Thanks, longinvest. I'll echo the many appreciative comments throughout this thread: comprehendible, comprehensive, reasonable, and very helpful!
Topic Author
longinvest
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### Re: Variable Percentage Withdrawal (VPW)

psychodoc wrote: Wed Aug 10, 2022 1:49 pm Thanks, longinvest. I'll echo the many appreciative comments throughout this thread: comprehendible, comprehensive, reasonable, and very helpful!
Psychodoc, thanks for the nice comments.
All-in-one global balanced index ETF | Variable Percentage Withdrawal (VPW) https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#VPW_Accumulation_And_Retirement_Worksheet