Instead of SWR, why don't we do what endowments do (5% withdrawal from time-averaged portfolio value)?

[dcabler]

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment).

This is effectively amortization based withdrawal (ABW) with an amortization rate of 5% and an infinite horizon. An infinite horizon may be appropriate for endowments, but doesn't make sense for individuals. Individuals should amortize the portfolio over their remaining lifetimes, with an adjustment for legacy goals if desired.

3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

Using an average of the portfolio balance over the last five years is a way to delay the needed spending adjustment. You can delay spending adjustments in many ways including for example by simply capping adjustments. But however you do it, the cost of delaying spending adjustments is that it increases the chance of a more severe spending cut eventually. This increases overall spending risk. The lowest spending risk is achieved by a full and immediate adjustment in response to portfolio performance. So it's a tradeoff—adjust quickly or adjust more.

Exactly - when I first started looking at amortization based methods, long before TPAW, I looked at various ways to "smooth" the short term withdrawals. It usually involved limiting the change in withdrawals, in real percentage terms, between each withdrawal. You pretty quickly see a "pay me now or pay me later" tradeoff where the depth of the trough of withdrawals is limited, but the recovery time is extended (yeah, I'm talking about you 1970's). Algorithm complexity then ensues by looking at fast-attack/slow-decay types of algorithms and you quickly have something unwieldy.

If one doesn't like the lack of short term smoothness, there are a few things that one can do.
- I'm in the "more than enough" category. I make my calculations, but consider them to only be a "max" withdrawal. I keep what I don't need invested. This should reduce the effect of future market shocks.
- I know some in the same boat I'm in, but they make the full withdrawal regardless and keep the excess in a money market or other short/ultra short term product, where it's available for some future rainy day or discretionary spending.
- Finally, I know some that use a bucket-ish approach. They make a withdrawal from their stock/bond fund AA, and then push it into a shorter term safer instrument and make their spending withdrawals from that. The safer instrument is usually initially set up to cover some N number of years/quarters/months of spending. If I were to do this, I would likely choose either a short TIPS fund or maybe a fixed ratio short/intermediate TIPS fund combination, depending on how many years I want the smoothing bucket to cover. My own backtests a long time ago seem to show this works, but there is the cost of setting up the smoothing bucket in the first place when you transition from accumulation to decumulation. I have no plans to do this, however.

Cheers.

[exodusing]

- Finally, I know some that use a bucket-ish approach. They make a withdrawal from their stock/bond fund AA, and then push it into a shorter term safer instrument and make their spending withdrawals from that. The safer instrument is usually initially set up to cover some N number of years/quarters/months of spending. If I were to do this, I would likely choose either a short TIPS fund or maybe a fixed ratio short/intermediate TIPS fund combination, depending on how many years I want the smoothing bucket to cover. My own backtests a long time ago seem to show this works, but there is the cost of setting up the smoothing bucket in the first place when you transition from accumulation to decumulation. I have no plans to do this, however.

If you're just selling stock/bond funds and pushing to shorter term safer instruments and spending from there in short order, that doesn't seem much different from spending from stock/bond funds directly. To make it different from that, you'd need some rule about when to build up the short term fund (refill the bucket), such as sell when stocks/bonds are high and spend down the bucket when they are low (needing a definition of high and low), unless I'm missing something.

[dcabler]

- Finally, I know some that use a bucket-ish approach. They make a withdrawal from their stock/bond fund AA, and then push it into a shorter term safer instrument and make their spending withdrawals from that. The safer instrument is usually initially set up to cover some N number of years/quarters/months of spending. If I were to do this, I would likely choose either a short TIPS fund or maybe a fixed ratio short/intermediate TIPS fund combination, depending on how many years I want the smoothing bucket to cover. My own backtests a long time ago seem to show this works, but there is the cost of setting up the smoothing bucket in the first place when you transition from accumulation to decumulation. I have no plans to do this, however.

If you're just selling stock/bond funds and pushing to shorter term safer instruments and spending from there in short order, that doesn't seem much different from spending from stock/bond funds directly. To make it different from that, you'd need some rule about when to build up the short term fund (refill the bucket), such as sell when stocks/bonds are high and spend down the bucket when they are low (needing a definition of high and low), unless I'm missing something.

It would be the same if you were using something like SWR which, by definition, always has the same withdrawals. What I failed to mention is that these same folks are amortizing and trading off volatility of withdrawals in order for the portfolio to last exactly as long as they plan for it to last. The separate smoothing account then takes some of the volatility out. In practice the people I know who are doing this are staying 100% stock in their non smoothing account.

Cheers.

[exodusing]

If you're just selling stock/bond funds and pushing to shorter term safer instruments and spending from there in short order, that doesn't seem much different from spending from stock/bond funds directly. To make it different from that, you'd need some rule about when to build up the short term fund (refill the bucket), such as sell when stocks/bonds are high and spend down the bucket when they are low (needing a definition of high and low), unless I'm missing something.

It would be the same if you were using something like SWR which, by definition, always has the same withdrawals. What I failed to mention is that these same folks are amortizing and trading off volatility of withdrawals in order for the portfolio to last exactly as long as they plan for it to last. The separate smoothing account then takes some of the volatility out. In practice the people I know who are doing this are staying 100% stock in their non smoothing account.

Cheers.

Right, but you have to do something to smooth, such as moving many periods to the safe account at once or having some rule for when and how much to sell (as I indicated above), else you're not doing much if any smoothing.

[dcabler]

It would be the same if you were using something like SWR which, by definition, always has the same withdrawals. What I failed to mention is that these same folks are amortizing and trading off volatility of withdrawals in order for the portfolio to last exactly as long as they plan for it to last. The separate smoothing account then takes some of the volatility out. In practice the people I know who are doing this are staying 100% stock in their non smoothing account.

Cheers.

Right, but you have to do something to smooth, such as moving many periods to the safe account at once or having some rule for when and how much to sell (as I indicated above), else you're not doing much if any smoothing.

Example:
Smoothing account was originally set up for 2 years (24 months) of spending at the beginning.
Each month, withdraw the full monthly amount calculated by amortization and deposit it into the smoothing account.
Withdraw 1/24th of the smoothing account's new total value (or, better yet, amortize to calculate the withdrawal). Reality is that you combine the deposit and withdrawal step.

VPW does something similar, except the smoothing account original setup is for a much shorter spending period and uses money market funds.

Cheers.