Variable Percentage Withdrawal (VPW)

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Niwashikun
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Re: Variable Percentage Withdrawal (VPW)

Post by Niwashikun »

tj wrote: Fri Oct 25, 2024 12:06 am I would think you either include it as expected income, or you ignore it.
I thought of counting the 401k contribution and match amounts from the bonus as salary and, perhaps, a fraction of the rest that makes sense. Then treating the rest as a “windfall”. Although that gets more complicated because the bonus is combined with salary on the w-2 and the YTD info on ADP’s website.

That, plus what you wrote, are the three options I could come up with.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Niwashikun wrote: Thu Oct 24, 2024 4:56 pm -Accumulation sheet, “Age” = younger (and working) spouse’s current age
-Accumulation sheet, “Retirement Age” = younger spouse’s current age at 2nd spouse’s retirement → younger (and working) spouse's planned retirement age
Niwashikun, as the younger spouse works and the older spouse is retired, separate sheets are needed: an Accumulation sheet for the working spouse and a Retirement sheet for the retired spouse.

Here's an example. Spouse 1 is 50 years old and plans to retire at age 55. Spouse 2 is 59 years old and is already retired.
- An Accumulation sheet is used for Spouse 1, entering 50 as Age and 55 as Retirement Age. Spouse 1's salary and future pensions are added into this sheet.
- A Retirement sheet is used for Spouse 2, entering 50 as Age. Spouse 2's current and future pensions are added into this sheet using younger spouse ages as start and stop ages (when applicable).
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm
longinvest wrote: Sun Oct 20, 2024 12:54 pm For discounting retirement contributions outside of traditional accounts (401K, IRA, etc.) during accumulation, using a somewhat "too low" average tax rate (based on "taxes / total salary") results into bigger net contributions, a prudent approach especially if the money is to be invested into a taxable account (instead of a Roth) where it will continuously be exposed to taxes for the remaining years of accumulation.
Ah, I see, that makes sense. So if it’s going into a Roth account then using the less conservative rate (tax / taxable income) still makes sense, right?
The marginal tax rate during employment is often higher than during the period between retirement and age 70 (assuming Social Security is delayed until that age). As a result, it's often a good idea to contribute money into a traditional (401k, IRA, etc.) account during employment and then use the period between retirement and the start of Social Security to make Roth conversions at a lower marginal tax rate. This isn't specific to VPW. Further discussion is best held on a different thread.
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm Speaking of equivalent testing. I also used the VPW sheets to compare pension strategies. I used both sheets to compare receiving two SS and a non-COLA pension at different times. I won’t get into all the details but I discovered many interesting things. Headline - The commonly stated tactic (higher earner @70, lower earner @62) indeed won.
Different objectives lead to different preferences. An inflation-indexed pension is generally very valuable. In case of an (unplanned) divorce, spouses get to keep higher lifelong Social Security payments if both defer to age 70. Again, this isn't specific to VPW. Further discussion is best held on a different thread.
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm I understand this should include the 401k company match. Is this Gross Salary + 401k Match? Should it include company G.T.L. payment? Should it include Cafe 125 and other pre-tax deductions? I can guess (or try to reason) at these but it would be nice to have a clear authoritative answer.
There are a wide variety of things that can appear on a pay slip. For accumulation sheet purpose, salary is (usually, I can't know all situations) the sum of all amounts paid by employer (base salary, 401k match, employer's insurance premium contribution, etc.). When discounting contributions outside of traditional (401k, IRA, etc.) accounts, taxes should (usually) be the sum of all amounts sent to governments, except for OASI taxes which are considered as a contribution to the Social Security pension. As for other deductions, they're usually considered as part of expenses, so they aren't needed by the Accumulation sheet or for adjusting (if needed) its suggested portfolio contribution.

This is a general theory thread. If you need help with your personal situation, it's best to start a new thread in the Personal Finance (Not Investing) forum where members who are knowledgeable about human resources acronyms and tax-related names will gladly help you.
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm I know you’ve stated bonuses shouldn’t be included and instead, treated as windfalls. In our case the bonus is pretty much guaranteed and the amount is within a guessable range. In fact there have been years with a 0% raise yet with a full bonus. We also take a 401k contribution from the bonus which is matched. The bonus money is used both for living expenses and also as “extra”. We could survive without the bonus, so it's definitely padding our "Income", and it seems to be overly-inflating the "Suggested Portfolio Contribution", but it seems way to complicated to untangle all the elements. Any thoughts?
Various approaches can be chosen based on personal preferences. For example, unexpected money can be invested into the portfolio like a windfall, used for optional discretionary spending, or a combination of both.

Bonuses, in particular, are often paid at year end, and can end up bigger or smaller than hoped for. A safe approach to include a year end bonus as part of salary, if the investor wants to do that, is to include it as part of next year's salary, instead of this year. This way, the bonus amount included in (next year's) salary is final. It can't change, because the bonus has already been paid. A savings account can be used (if necessary to avoid liquidity problems) to spread the money over the upcoming 12 months.

In my household, we didn't include bonuses as part of salary for accumulation worksheet* purpose. We simply contributed the money into the portfolio like a windfall.

* We mostly used earlier unpublished versions.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
ch4au2
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Re: Variable Percentage Withdrawal (VPW)

Post by ch4au2 »

I have recently decided to add a deferred income annuity to my portfolio. I don't have any pensions or other income outside of SS when I turn 70, it all comes from my portfolio. This will make it less stressful to use the VPW spreadsheet as my main withdrawal calculation for the rest of my portfolio.

As such, in the VPW spreadsheet, I have tried using it two different ways.

1 - Put in my SS and my annuity in the defined benefit section and the rest of my portfolio in the information section and let it run it's calcs. Essentially the way the spreadsheet was intended to be used as I understand it.

2 - ONLY put in my portfolio in the information section and let it run it's calcs.

The reason for the 2nd way is that after my SS and Annuity kick in, then what I really need to calculate is how much to withdraw from my portfolio. The other amounts are already being deposited into my checking account monthly.

However, when I did the two calcs, I expected that if I added my SS + annuity to the amount produced by (2), it would be the same as the amount from (1). But it wasn't and it was off by enough that it seemed as if something wasn't right. The 2nd way gave me almost 15% more.

There are some things that aren't apples-apples in the two. The 1st method correctly calculates the "bridge" years as there are still 5 years before I take SS and the annuity. The 2nd method doesn't do that as those items are not included in the calc.

It's not a huge issue for me as both numbers are ok. But it brings up my primary question, which is "how would you use the spreadsheet for doing this?" Is it better to put the SS and Annuity in the spreadsheet and back out those amounts to calculate how much to transfer from my portfolio? Or is it better to leave them out and just use the resulting calc to set up the transfers?
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Raspberry-503
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Re: Variable Percentage Withdrawal (VPW)

Post by Raspberry-503 »

The second method (ignore SS in the calc) only working you will have SS for your entire retirement starting this year. Otherwise you will draw more during the bridge years, leaving less to be added on top of SS.
ch4au2
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Re: Variable Percentage Withdrawal (VPW)

Post by ch4au2 »

Raspberry-503 wrote: Tue Oct 29, 2024 9:11 am The second method (ignore SS in the calc) only working you will have SS for your entire retirement starting this year. Otherwise you will draw more during the bridge years, leaving less to be added on top of SS.
Yea, I think the best method for using it, at least for me and my pea brain is to include the benefits in the spreadsheet BEFORE they kick in, noting the "starting year" correctly. And then to remove them AFTER they kick in. That way the spreadsheet always calculates the amounts I need to transfer from my portfolio to my checking account.

So at the present time, age 65, it includes all the SS and annuity benefits. At age 70, I'll remove my SS and the annuity benefits, but leave my wife's SS. And when she starts taking her SS, at my age 72, I'll remove that from the spreadsheet.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

ch4au2 wrote: Tue Oct 29, 2024 9:04 am I have recently decided to add a deferred income annuity to my portfolio. I don't have any pensions or other income outside of SS when I turn 70, it all comes from my portfolio. This will make it less stressful to use the VPW spreadsheet as my main withdrawal calculation for the rest of my portfolio.

As such, in the VPW spreadsheet, I have tried using it two different ways.

1 - Put in my SS and my annuity in the defined benefit section and the rest of my portfolio in the information section and let it run it's calcs. Essentially the way the spreadsheet was intended to be used as I understand it.
Ch4au2, effectively, pensions (including Social Security and annuities) should be entered into the VPW worksheet. Social Security must be marked as having cost of living adjustments. A nominal deferred annuity should be marked as not having cost of living adjustments.
ch4au2 wrote: Tue Oct 29, 2024 9:04 am It's not a huge issue for me as both numbers are ok. But it brings up my primary question, which is "how would you use the spreadsheet for doing this?" Is it better to put the SS and Annuity in the spreadsheet and back out those am]ounts to calculate how much to transfer from my portfolio? Or is it better to leave them out and just use the resulting calc to set up the transfers?
Pensions (and temporary retirement income, if any) should be entered into the worksheet for the proper calculations to happen. In particular:
- The worksheet provides for missing payments between retirement and the start pensions (delayed Social Security and deferred annuity) as part of the suggested withdrawal amount.
- The worksheet includes special adjustments to portfolio withdrawal amounts to account for the loss of purchase power of nominal annuity payments over time (including between retirement and the start of payments, and after the start of payments).
- The worksheet displays, among other things, both a suggested portfolio withdrawal amount, and a projected total retirement income available for taxes and expenses.
- The worksheet assumes that pension payments are spent along with the suggested withdrawal amount (on taxes and expenses).

To clarify the last point, we can look at the latest forward test entry where the retiree has two already-started pensions, one with cost of living adjustments (Social Security) and the other without (work pension). Part of Social Security (21%) is assumed to stop in 8 years.

Image

In the "Detailed Annual Income for 2024, the entire Social Security pension (the two parts, 79% and 21%) as well as the entire work pension (12 X $1,000) are included in projected annual income available for taxes and expenses. The $44,467 portfolio withdrawal is calibrated to account for the lack of cost of living adjustments of work pension payments and for 21% of Social Security stopping in 8 years.

This can easily be verified. The VPW Table percentage at age 70 for a 60/40 stocks/bonds portfolio is 5.4% (rounded). Multiplying the portfolio balance ($968,048) by 5.4% gives $52,393 (when using a non-rounded 5.41...% percentage). The worksheet's calculated $44,467 portfolio withdrawal amount is smaller because:
- It reduces the withdrawal amount by $4,113 to dampen the loss of purchase power of the $12,000 pension.
- It reduces the withdrawal amount by another $3,813 to dampen the impact of 21% of Social Security ($6,168) stopping in 8 years.
- Verification: $52,393 - $4,113 - $3,813 = $44,467.
Note that detailed explanations, presenting calculations differently, are provided in this post.

In the forward test, the worksheet is configured for monthly withdrawals. Consequently, the suggested portfolio withdrawal amount at the end of September 2024 was ($44,467 / 12) = $3,706 in green cells. Total monthly income, in grey cells, includes pension payments ($2,446 Social Security and $1,000 work pension). It's ($2,446 + $1,000 + $3,706) = $7,152.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
ch4au2
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Re: Variable Percentage Withdrawal (VPW)

Post by ch4au2 »

longinvest wrote: Tue Oct 29, 2024 10:19 am
In the "Detailed Annual Income for 2024, the entire Social Security pension (the two parts, 79% and 21%) as well as the entire work pension (12 X $1,000) are included in projected annual income available for taxes and expenses. The $44,467 portfolio withdrawal is calibrated to account for the lack of cost of living adjustments of work pension payments and for 21% of Social Security stopping in 8 years.

This can easily be verified. The VPW Table percentage at age 70 for a 60/40 stocks/bonds portfolio is 5.4% (rounded). Multiplying the portfolio balance ($968,048) by 5.4% gives $52,393 (when using a non-rounded 5.41...% percentage). The worksheet's calculated $44,467 portfolio withdrawal amount is smaller because:
- It reduces the withdrawal amount by $4,113 to dampen the loss of purchase power of the $12,000 pension.
- It reduces the withdrawal amount by another $3,813 to dampen the impact of 21% of Social Security ($6,168) stopping in 8 years.
- Verification: $52,393 - $4,113 - $3,813 = $44,467.
Note that detailed explanations, presenting calculations differently, are provided in this post.

In the forward test, the worksheet is configured for monthly withdrawals. Consequently, the suggested portfolio withdrawal amount at the end of September 2024 was ($44,467 / 12) = $3,706 in green cells. Total monthly income, in grey cells, includes pension payments ($2,446 Social Security and $1,000 work pension). It's ($2,446 + $1,000 + $3,706) = $7,152.
Ah right! I never actually focused on the "Detailed Annual Income" box! That gives me everything and your explanation is perfect.

You've thought of everything! Which is why I'm using it! Thank you so much for all your hard work and efforts and also for supporting it via this thread!
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

ch4au2 wrote: Tue Oct 29, 2024 10:30 am Thank you so much for all your hard work and efforts and also for supporting it via this thread!
Thanks for the nice comments!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Niwashikun
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Re: Variable Percentage Withdrawal (VPW)

Post by Niwashikun »

Hi Longinvest,

I really appreciate you trying to answer my questions.
To be honest though, your last reply seems to have confused me more.
You seem to misunderstand my questions, I assume because of the way I write them.
I’d like to try again because I’d really like to feel comfortable using VPW and, obviously you have the most knowledge about it.
The only main questions I have left are about the age entries and # of VPW spreadsheets.

Ages and Sheets:
-Preamble (questions below)
longinvest wrote: Sun Oct 27, 2024 6:53 pm
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm -Accumulation sheet, “Age” = younger (and working) spouse’s current age
-Accumulation sheet, “Retirement Age” = younger spouse’s current age at 2nd spouse’s retirement → younger (and working) spouse's planned retirement age
Niwashikun, as the younger spouse works and the older spouse is retired, separate sheets are needed: an Accumulation sheet for the working spouse and a Retirement sheet for the retired spouse.

I began asking my questions, holding 2 first principles:
  1. The youngest spouse’s age should always be used for the sheets.
  2. A couple can either use a single sheet or separate sheets.
First Principle #1: This is mentioned in the VPW Wiki. However, you edited my example (above) with a qualifier (“and working”) which logically would mean that if the younger spouse has never worked, or is retired, their age should not be entered in the Accumulation Sheet “Age” and “Retirement Age” entries. Otherwise there’s no need for the qualifier.

First Principle #2: You stated that separate sheets are needed because the younger spouse works and the older spouse is retired. Yet, I recall at least two instances in the VPW thread, where you told couples, with similar age differences as the example, they could use a single VPW Sheet. My wife and I have been using a single sheet and would prefer to do that. However, I did try using two separate sheets and could not see why there would be a need to do that.

My original question was about a “General Rule of Thumb” for entering ages, in terms of rounding up or down.
(ex. Person turning 59 in June who retires the following April. Do they use 59 or 60 in the Retirement Age entry.)
(Note: You did provide a very helpful version of this answer, later, to a different question regarding Start and Stop ages for pensions, although that was not what my pension question was about. More evidence that my questions are not clear. :oops: )

I then took your answer and tried to write a “General Rule,” which is what you edited, above. However you seemed to combine my “General Rule” with the example I gave later.
You then gave an example, which was almost identical to the one I gave, leading me to think that my original understanding was correct.

Here’s my example:
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm To be sure I understand, here’s a fictitious example:

Younger spouse’s birthday is 2/1/1980.
Filling out sheets on 2/5/2030.
Older spouse is already retired.
Younger spouse’s planned retirement is 1/25/2040.

Accumulation Sheet, “Age” - enter 50.
Accumulation Sheet, “Retirement Age” - enter 59.
Retirement Sheet, “Age” - enter 59.

Are these correct?
And here is your example:
longinvest wrote: Sun Oct 27, 2024 6:53 pm Here's an example. Spouse 1 is 50 years old and plans to retire at age 55. Spouse 2 is 59 years old and is already retired.
- An Accumulation sheet is used for Spouse 1, entering 50 as Age and 55 as Retirement Age. Spouse 1's salary and future pensions are added into this sheet.
- A Retirement sheet is used for Spouse 2, entering 50 as Age. Spouse 2's current and future pensions are added into this sheet using younger spouse ages as start and stop ages (when applicable).

The only difference is the retirement age of the younger spouse and that you say to use separate sheets for each spouse, but the age entries are the same (relative to the two examples).

(I just realized that my use of the phrase "2nd spouse's retirement" in my "General Rule" might have been part of the confusion. Since I was using "younger spouse" and "older spouse" as signifiers, "2nd spouse's retirement" meant the second retirement chronologically, regardless of which spouse it belonged to. Perhaps, since you were using "Spouse 1" and "Spouse 2" as signifiers you thought the phrase was tied to a specific spouse, which in your example would have been the older spouse. Perhaps? :? )

So I guess we should start at the beginning.

Age Questions Redux:
  1. Should the “Age” and “Retirement Age” always be the younger spouse’s age?
  2. Does a couple, in any of the four combinations of working and retired (eight combinations if a spouse who never worked is distinguished from one who is retired), need to use separate sheets? If so, why?
  3. Is there a “General” Rule” as to rounding the entered age up or down based on how close it is to either their birthday or retirement date?

Excess “Suggested Contributions”:
longinvest wrote: Sun Oct 27, 2024 6:53 pm
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm Ah, I see, that makes sense. So if it’s going into a Roth account then using the less conservative rate (tax / taxable income) still makes sense, right?
The marginal tax rate during employment is often higher than during the period between retirement and age 70 (assuming Social Security is delayed until that age). As a result, it's often a good idea to contribute money into a traditional (401k, IRA, etc.) account during employment and then use the period between retirement and the start of Social Security to make Roth conversions at a lower marginal tax rate. This isn't specific to VPW. Further discussion is best held on a different thread.
I know and agree with what you wrote but this wasn’t my question, which may be why you thought it wasn’t related to VPW. My question was in the context of the VPW Sheet suggesting a contribution which exceeds the traditional accounts’ limits, thus the excess needing to be put into either a taxable or Roth account. I was specifically asking for clarification about the answer you gave to me about the advice you gave in this thread to a previous person’s question. I realize that discounting a contribution made to a non-traditional account isn’t specific to VPW but given my previous sentence it seemed strange not to include the question here.


Testing SS scenarios with the VPW Sheet(s):
longinvest wrote: Sun Oct 27, 2024 6:53 pm
Niwashikun wrote: Thu Oct 24, 2024 4:56 pm Thu Oct 24, 2024 4:56 pm
Speaking of equivalent testing. I also used the VPW sheets to compare pension strategies. I used both sheets to compare receiving two SS and a non-COLA pension at different times. I won’t get into all the details but I discovered many interesting things. Headline - The commonly stated tactic (higher earner @70, lower earner @62) indeed won.
Different objectives lead to different preferences. An inflation-indexed pension is generally very valuable. In case of an (unplanned) divorce, spouses get to keep higher lifelong Social Security payments if both defer to age 70. Again, this isn't specific to VPW. Further discussion is best held on a different thread.

In this case I was making two main points:
  1. In addition to being a great retirement withdrawal tool, the VPW Sheet can also be used to test different pension strategies, which seems pretty specific to VPW. Pat yourself on the back. :sharebeer
  2. An attempt to exemplify “equivalent” comparisons, addressing your concern raised earlier in the thread.

    I was not recommending a particular strategy.
    I’m not sure why you started talking about a pension’s value or divorce. :confused Both of which I agree are not specific to VPW.

    (Note: Divorced retirees can still get spousal and survivor benefits, assuming they meet the requirements. So, if the spousal benefit is larger than the age-70 benefit it would likely be better to take benefits at 67, for the lower wage spouse, depending on the specifics of their situation.)



    Annual Salary Entry:
    longinvest wrote: Sun Oct 27, 2024 6:53 pm
    Niwashikun wrote: Thu Oct 24, 2024 4:56 pm Thu Oct 24, 2024 4:56 pm
    I understand this should include the 401k company match. Is this Gross Salary + 401k Match? Should it include company G.T.L. payment? Should it include Cafe 125 and other pre-tax deductions? I can guess (or try to reason) at these but it would be nice to have a clear authoritative answer.
    There are a wide variety of things that can appear on a pay slip. For accumulation sheet purpose, salary is (usually, I can't know all situations) the sum of all amounts paid by employer (base salary, 401k match, employer's insurance premium contribution, etc.). When discounting contributions outside of traditional (401k, IRA, etc.) accounts, taxes should (usually) be the sum of all amounts sent to governments, except for OASI taxes which are considered as a contribution to the Social Security pension. As for other deductions, they're usually considered as part of expenses, so they aren't needed by the Accumulation sheet or for adjusting (if needed) its suggested portfolio contribution.
    This is a general theory thread. If you need help with your personal situation, it's best to start a new thread in the Personal Finance (Not Investing) forum where members who are knowledgeable about human resources acronyms and tax-related names will gladly help you.

    Again, I was not asking about my personal situation. I was asking about a “General Rule” for what to include/exclude in the “Salary” entry, as the word “salary” is rather vague and my brain was getting tired trying to think through all the different ramifications of including or excluding each item.

    Your answer was actually very helpful. It seems that it is Gross Salary + 401k match. Things like company G.T.L. payments can probably be left out, unless the person would pay for it in absence of the company providing it.

    Bonuses:

    Your answer about bonuses was also helpful. I now realize that they shouldn’t always be treated as a windfall as it depends on the situation. In our case the bonus comes mid-year so we can include it in the current year. I’ll probably try to split it into two parts- Part 1 for the VPW spreadsheet includeing 401k contributions, company match, and the $$ we use for more regular expenses and Part 2, which is more like a windfall and just gets added to the portfolio without including it in the VPW sheet.

    Accumulation Sheet “Retirement Age” and SS “Start Age” conflict:

    I didn’t really get an answer to my question about the SS starting before the retirement age (and thus getting an error message), but, from all the info I did get, I think changing the SS Start Age to match the retirement age and just putting the SS payments into the portfolio like a windfall would be the way to go.


    So if we can just nail down those “Age”/“Retirement Age” questions, you’ve answered all my questions.


    Thanks again for your time and effort, both on the VPW sheets and with our questions.
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