## Variable Percentage Withdrawal (VPW)

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TheOtherGuy
Posts: 2
Joined: Sun Aug 06, 2017 6:58 pm

### Re: Variable Percentage Withdrawal (VPW)

Hi! I'm playing "What if we retire now?" with this spreadsheet. I put our numbers in and get a suggested withdrawal well above our living expenses. Yay!

I play with the Allocation mix and note the changes to Required Flexibility. Wow! It's very educational to see those numbers!

One thing I don't understand: Our inputs include a pension from a previous employer (no COLA) that has already started. If I remove that pension input, the Suggested Withdrawal goes up.

Why would this happen? Removing an income stream means we can withdraw more?
Topic Author
longinvest
Posts: 5742
Joined: Sat Aug 11, 2012 8:44 am

### Re: Variable Percentage Withdrawal (VPW)

TheOtherGuy wrote: Tue Jun 11, 2024 12:08 am Hi! I'm playing "What if we retire now?" with this spreadsheet. I put our numbers in and get a suggested withdrawal well above our living expenses. Yay!

I play with the Allocation mix and note the changes to Required Flexibility. Wow! It's very educational to see those numbers!

One thing I don't understand: Our inputs include a pension from a previous employer (no COLA) that has already started. If I remove that pension input, the Suggested Withdrawal goes up.

Why would this happen? Removing an income stream means we can withdraw more?
TheOtherGuy, thanks for the feedback.

The VPW worksheet invests back part of each no-COLA* pension payment back into the portfolio to dampen the erosive impact of inflation on purchase power. The worksheet does the calculation to eliminate the need to make both a VPW withdrawal and an inflation dampening contribution:
• (VPW withdrawal - inflation dampening contribution) = portfolio withdrawal.
* COLA = cost of living adjustments.

The important number that matters to the retiree is "(Monthly, Quarterly, or Annual) Income for 2024", available for taxes and expenses. This amount goes up when a no-COLA pension is added.

Detailed calculations are displayed in the lower part of the Retirement sheet. I recently went though these detailed calculations, including those related to inflation dampening (with links to mathematical justifications), in this post of the forward test thread:
longinvest wrote: Sat May 11, 2024 12:19 pm ...
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.
...
Raspberry-503
Posts: 1045
Joined: Sat Oct 03, 2020 6:42 am

### Re: Variable Percentage Withdrawal (VPW)

longinvest wrote: Sat Sep 16, 2023 9:03 am I wrote, above, that a -50% loss is a normal thing for stocks, even if it's infrequent. As a consequence, such a loss shouldn't affect the retiree's comfort when the retiree has adequately planned retirement with the help of the VPW worksheet. This implies that required flexibility amounts, at the start of retirement, should be sufficient for the retiree to live in ample comfort.

A simple yet very harsh stress test for the plan, using the VPW worksheet, is to feed the initial "Portfolio Balance After Loss" (red cell) as "Portfolio Balance" (yellow input cell), and look at the resulting required flexibility estimate. This represents two consecutive -50% losses for stocks, or cumulative -75% losses (with rebalancing in between losses) at the worst of times, at the start of retirement immediately before first withdrawal. These are Great Depression types of losses without any quick recovery after losses. In such a situation, the retiree's comfort is most probably affected, yet, assuming that retirement was properly planned, the retiree is likely to be doing better financially than many others in society.
I've always taken this rule of thumb for granted, expect your stock to be halved at least once in your lifetime, and two successive halving is "as bad as it gets". Today I finally decided to check:

Yup close enough.
Fireishere
Posts: 127
Joined: Thu May 27, 2021 4:48 am

### Re: Variable Percentage Withdrawal (VPW)

I found this critic article about VPW https://www.michaeljamesonmoney.com/202 ... e.html?m=1
loghound
Posts: 385
Joined: Thu May 09, 2019 7:01 pm

### Re: Variable Percentage Withdrawal (VPW)

Fireishere wrote: Fri Jun 14, 2024 8:44 am I found this critic article about VPW https://www.michaeljamesonmoney.com/202 ... e.html?m=1
I think he mostly complains that you need to be willing to spend flexibly and in the event of market down turns you get to withdraw less money.

That is a feature not a bug and is pretty clearly spelled out (including the name, that's what the "V" stands for).

@longinvests spreadsheet also clearly shows that possibility in the 'required flexibility' portion.

so his complaint is VPW does exactly the thing it was designed to do which sort of feels like a nonsense argument.
I would have written a shorter letter, but I did not have the time. | - Blaise Pascal
Posts: 1222
Joined: Sat Jul 07, 2018 12:14 am

### Re: Variable Percentage Withdrawal (VPW)

Fireishere wrote: Fri Jun 14, 2024 8:44 am I found this critic article about VPW https://www.michaeljamesonmoney.com/202 ... e.html?m=1
Weird hit job. Misrepresents VPW method.
Raspberry-503
Posts: 1045
Joined: Sat Oct 03, 2020 6:42 am

### Re: Variable Percentage Withdrawal (VPW)

Maybe it's simply me noticing then more, but I seem to have ran into a number of articles/videos lately that tout the "RMD" method of withdrawing.
It's very similar to VPW, mostly a different way to calculate the curve, they're all along the lines of amortization-based withdrawal strategy.

One could have exceptions with the exact details of VPW itself (I don't), but the family of Variable withdrawals exactly has the properties it advertises. Whether those work for you or not depends on your situation. longinvest does a good job in how many posts at pointing out that the flexibility is not optional. If you can't take the low number, then this is not for you. In 1929-type market, where the market gets cut in half twice back-to-back, the money you're supposed to withdraw will be quite tiny. You better have SS, a pension, an annuity or TIPS ladder as an income floor below your portfolio to make sure your basic needs are met.
Fireishere
Posts: 127
Joined: Thu May 27, 2021 4:48 am

### Re: Variable Percentage Withdrawal (VPW)

loghound wrote: Fri Jun 14, 2024 11:31 am
Fireishere wrote: Fri Jun 14, 2024 8:44 am I found this critic article about VPW https://www.michaeljamesonmoney.com/202 ... e.html?m=1
I think he mostly complains that you need to be willing to spend flexibly and in the event of market down turns you get to withdraw less money.

That is a feature not a bug and is pretty clearly spelled out (including the name, that's what the "V" stands for).

@longinvests spreadsheet also clearly shows that possibility in the 'required flexibility' portion.

so his complaint is VPW does exactly the thing it was designed to do which sort of feels like a nonsense argument.
That’s my conclusion too. I’m still learning more about VPW method so I’m not an expert to say more. He also complains about VPW’s bond yield being too high but the article was written in 2020 so that didn’t age well.
bbrock
Posts: 1582
Joined: Mon Nov 23, 2009 7:55 pm
Location: CA

### Re: Variable Percentage Withdrawal (VPW)

Fireishere wrote: Fri Jun 14, 2024 12:49 pm
loghound wrote: Fri Jun 14, 2024 11:31 am
Fireishere wrote: Fri Jun 14, 2024 8:44 am I found this critic article about VPW https://www.michaeljamesonmoney.com/202 ... e.html?m=1
I think he mostly complains that you need to be willing to spend flexibly and in the event of market down turns you get to withdraw less money.

That is a feature not a bug and is pretty clearly spelled out (including the name, that's what the "V" stands for).

@longinvests spreadsheet also clearly shows that possibility in the 'required flexibility' portion.

so his complaint is VPW does exactly the thing it was designed to do which sort of feels like a nonsense argument.
That’s my conclusion too. I’m still learning more about VPW method so I’m not an expert to say more. He also complains about VPW’s bond yield being too high but the article was written in 2020 so that didn’t age well.
Longinvest's VPW spreadsheet rocks! It is a simpler, which by all means does not imply it is less reliable, then most of the other current withdrawal methods. I am so grateful to Longinvest for VPW and all the continuous work you do to maintain your related threads on the matter. Thanks!

And congrats on retirement. I know we joked that I'd beat you by a month, but in fact you have beat me as I have not left yet. Soon... very soon.
bbrock
bbrock
Posts: 1582
Joined: Mon Nov 23, 2009 7:55 pm
Location: CA

### Re: Variable Percentage Withdrawal (VPW)

Raspberry-503 wrote: Fri Jun 14, 2024 12:03 pm Maybe it's simply me noticing then more, but I seem to have ran into a number of articles/videos lately that tout the "RMD" method of withdrawing.
It's very similar to VPW, mostly a different way to calculate the curve, they're all along the lines of amortization-based withdrawal strategy.

One could have exceptions with the exact details of VPW itself (I don't), but the family of Variable withdrawals exactly has the properties it advertises. Whether those work for you or not depends on your situation. longinvest does a good job in how many posts at pointing out that the flexibility is not optional. If you can't take the low number, then this is not for you. In 1929-type market, where the market gets cut in half twice back-to-back, the money you're supposed to withdraw will be quite tiny. You better have SS, a pension, an annuity or TIPS ladder as an income floor below your portfolio to make sure your basic needs are met.
I too have come across this. I think I first learned about it in Piper's great 2023 edition of his "Can I Retire?" https://www.amazon.com/gp/product/19509 ... UTF8&psc=1

It is a simple method as well. My first thought though with this method is that it can leave one under-withdrawing. But as far as methodology, it seems easy to implement.
bbrock
Raspberry-503
Posts: 1045
Joined: Sat Oct 03, 2020 6:42 am

### Re: Variable Percentage Withdrawal (VPW)

I'll be honest though, I don't fully understand the 1.9% for bonds and 5% for stock numbers. I've read multiple pots by longinvest, many of them saying the same thing in the same way, so unfortunately if I don't understand one, I don't understand the others. longinvest tries to explain why the 5% is not a true expected return of stock and why it should not be adjusted with "better" predictions but I'm just too dumb to get it.

I did build my own backtest spreadsheet for VPW so I could enter my own numbers, and look at the results every which way, and I will say that 1966 suck, but it sucks regardless of which withdrawal method you used. it's what drags the 4% rule down. On the other hand I look at the results and accept that that my retirement would not be as golden as I would love to, but I can also live with the numbers, the reduced withdrawals, in big part because I have a solid SS floor (and a TIPS ladder to bride it before 70). In the same way I look at 1980 and wish the system let me spend even more money early...
Raspberry-503
Posts: 1045
Joined: Sat Oct 03, 2020 6:42 am

### Re: Variable Percentage Withdrawal (VPW)

when James refers to the RRIF table, I think it's the equivalent of the RMD table for Canada, but my understanding is that the curve is not the same.