Variable Percentage Withdrawal (VPW)

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mrb09
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Re: Variable Percentage Withdrawal (VPW)

Post by mrb09 »

First, huge thanks to longinvest for this effort.

My experience with VPW backtest:

I plan to retire next year at 63. I'll take social security at 70, I have a deferred comp payout for age 63-78. I'd like to have extra travel money for at least the first nine years of retirement, and I need some extra money for ACA for the first two years. I have some Roth conversions that are planned for legacy bequest only. Most of my money is in deferred accounts, but I have some EFTs in a taxable account.

I'm treating my Roth as more of an expense than account transfer. If VPW said I can take more than I need for spending, I'll use the extra for Roth conversions. My "required flexibility" is cutting my Roth conversions first, my extra travel money second, and my core expenses if needed. I have a small emergency fund that I didn't count, but can tap if needed (enough to not require an immediate deep cut to my core expenses).

I entered this in the VPW spreadsheet, using the defined benefit pension start/stop age for my deferred comp payout, and I modeled my scenario retiring in 2000, 2008 and 2009. I used portfolio visualizer for inflation and returns for a 50/10/40 (US stock/international stock/bond) portfolio for my tax deferred accounts, my taxable EFTs liquidated to cash, and I updated VPW for each simulated year. I used a spreadsheet table for taxes.

VPW worked really well for this. For the most part, my VPW recommendation was more than needed, so I used the rest for Roth conversions. I picked a target IRA withdrawal and mostly stuck with it (around 3.2% of my starting tax deferred account), and used the cash in my taxable for the variable portion. I bumped up the IRA withdrawal for the two years between deferred comp ending at 68 and SS starting at 70

In the 2000 and 2008 scenarios, there were only one or two years where I had to cut back my extra travel money, but I could easily absorb that.

In the 2009 scenario, I cut my starting accounts as if I had just experienced 2008, and my first year was just enough for extra travel without a Roth conversion. In all likelyhood, I would have worked another year if I was planning on retiring in 2009 and had just experienced the big drop in 2008. But even so, the gains from 2009 onwards quickly brought my account levels back up and I was able to do a fair number of Roth conversions.

In all scenarios, when I reached 72 my social security + RMDs exceeded my core expenses, and my taxable money was gone, either spent for travel or used to fund Roth conversions. And I had some money in my Roth which I'm not planning on using, but was there if absolutely needed. I could be more aggressive about Roth conversions, but this makes it really simple and easy to do something, even if it isn't completely optimal.

I've tried lots of planning tools, but I'm really happy with VPW. It is simple to use and understand, and handles my variable income streams really well with buffering. For those that do have "required flexibility", it strikes a good balance between preserving capital vs. spending it.
Escapevelocity
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Re: Variable Percentage Withdrawal (VPW)

Post by Escapevelocity »

I am 55 and retiring in a few months.

I'm looking for advice on how to model a known reduction in future non-discretionary expenses. When I turn 62, I will receive 3 free years of retiree health insurance whereas prior to that I will be paying for that out of my portfolio withdrawals each month. Would it be correct or appropriate to model this decrease in future expenses as a temporary income stream in the model since effectively it will be similar to that saved money coming in as income relative to my starting situation?

If this is the right way to do it, I would also consider doing the same thing in temporary income #2 area of the model for anticipated future decrease in travel expense.
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Escapevelocity wrote: Wed Feb 02, 2022 1:25 pm I am 55 and retiring in a few months.

I'm looking for advice on how to model a known reduction in future non-discretionary expenses. When I turn 62, I will receive 3 free years of retiree health insurance whereas prior to that I will be paying for that out of my portfolio withdrawals each month. Would it be correct or appropriate to model this decrease in future expenses as a temporary income stream in the model since effectively it will be similar to that saved money coming in as income relative to my starting situation?

If this is the right way to do it, I would also consider doing the same thing in temporary income #2 area of the model for anticipated future decrease in travel expense.
Escapevelocity, short answer: Temporary retirement income entries are really meant for such income, like a bridge benefit (extra payment) from a work pension that stops at age 62 when retiring early. Variations in expenses should be handled using normal budgeting techniques.

Long answer: The VPW accumulation and retirement worksheet is a tool to generate retirement income (in the form of pensions, possibly delayed, and portfolio withdrawals). This is similar to how working for an employer is a way to generate income (in the form of salary and bonuses).

The employee doesn't ask for a temporary one-year rise in salary for paying cash for a new car, or for a reduction in salary because a child has finally left the nest. The fact that the employee's expenses fluctuate isn't the employer's concern and has no impact on salary and bonuses. Good old budgeting techniques take care of the employee's fluctuation in expenses.

Budgeting technique and tools also work during retirement.

I've never had direct control on my salary. Had it been possible, I would have asked my employers to pay me billions of dollars per year to work one or two hours per year. Why not, if I had control? I have put the effort to acquire marketable skills so that employers would hire me. This was something I had direct control of. But, the negotiation margin for salary was limited to be within the reasonable value of my skills in the job market.

All of my life, I've lived within the means allowed by my salary, not the other way around. I've learned to use personal finance tricks and tools, like budgeting, low-cost debt when necessary, saving for upcoming expenses, etc. I'll continue to use these techniques during retirement.

Let's consider the hypothetical situation described in the VPW forward test. A few weeks ago, it was estimated that total retirement income could easily drop by -$17,199 in a short time period, from $87,518 to $70,319. That's similar to the situation of an employee with a $70,000 salary who might get a $17,000 (or bigger, or smaller, or not at all) bonus, which is unpredictable in advance. Would this employee ask the employer to increase salary by a small amount for the next 7 years, then reduce it for the following 3 years, and then increase it back until retirement, because the employee anticipates a temporary 3-years drop in expenses in 7 years? Would the employer agree to such a request? Why not, instead, plan to replace an older car in 10 years, taking advantage of the planned reduction in expenses in 7 years to save the money for it during the three-year period?

(If I misunderstood your post and it's just an extra health insurance expense for the next 7 years, why not simply put the money aside in a savings account?)

It could be risky to plan for a drop in expenses, too. These expenses could easily be replaced by new, unanticipated ones. It's best to have sufficient budget flexibility for normal market fluctuations (up to a -50% stock loss) not to have an impact on the retiree's comfort. Deeper losses, if they happen, might start reducing comfort, but if there's ample comfort after the initial -50% stock loss, the retiree will remain in better financial shape than many others in society. In other words, the retiree should have a plan for spending excess money during good retirement years.* The money could, for example, be used for enjoyable activities with loved ones or for making a positive differences in the lives of others.

* VPW aims to allow the retiree to spend most of the portfolio during retirement, instead of letting the retiree die of old age with a gigantic unspent portfolio when markets are generous.

Markets will make fun of any attempt at precisely shaping the future multi-decades withdrawal stream from a portfolio of fluctuating assets, when using a method that mathematically guarantees no premature depletion.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Escapevelocity wrote: Wed Feb 02, 2022 1:25 pm Would it be correct or appropriate to model this decrease in future expenses as a temporary income stream in the model since effectively it will be similar to that saved money coming in as income relative to my starting situation?
Escapevelocity, my previous post addressed high-level issues. This post will address lower-level issues.

For safety concerns, the worksheet handles a future temporary income in two steps. It first estimates what portion of this income should be invested into the portfolio as to (theoretically, in the model) get withdrawals equal to (income - savings) from the (on paper) newly accumulated portfolio, once the temporary income stops. In a second step, the worksheet handles the (income - savings) amount as a future pension, bridging it with the current portfolio (while applying safety precautions, like not using more than 50% of the portfolio for pension bridges).

Is reducing a withdrawal amount $W by ($X - savings) equivalent to getting an income of $X and investing part of it into the portfolio while taking the full $W withdrawal? No, it isn't when $W < ($X - savings). The worksheet cannot create returns that markets don't deliver. In contrast, there's never a problem to invest part of a current (pension or work) temporary income $X into the portfolio. This is why the VPW worksheet allows for future temporary and permanent income, but not for future temporary or permanent portfolio withdrawal reduction by a specific constant inflation-indexed amount.
Last edited by longinvest on Thu Feb 03, 2022 11:01 am, edited 2 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Wed Feb 02, 2022 5:50 pm
Long answer: The VPW accumulation and retirement worksheet is a tool to generate retirement income (in the form of pensions, possibly delayed, and portfolio withdrawals). This is similar to how working for an employer is a way to generate income (in the form of salary and bonuses).

The employee doesn't ask for a temporary one-year rise in salary for paying cash for a new car, or for a reduction in salary because a child has finally left the nest. The fact that the employee's expenses fluctuate isn't the employer's concern and has no impact on salary and bonuses. Good old budgeting techniques take care of the employee's fluctuation in expenses.
Most peoples salaries won’t vary as much as VPW can so this is an odd argument to make. Only 33% of employers offer year end bonuses.

https://www.zippia.com/advice/average-bonus-statistics/

SWR approximates salary a lot more than variable methods.

$10K temporary new income and $10K temporary reduced spending is essentially the same thing (ignoring taxes)…especially if you believe Ben Franklin (a penny saved is a penny earned).

Either way the portfolio is $10K more than it would have been and the market does whatever the market does after that point.

The odds are his 3 years of free insurance benefit is taxed based on whatever the premiums are so it likely is income.
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

nigel_ht wrote: Thu Feb 03, 2022 5:09 am SWR approximates salary a lot more than variable methods.
Nigel_ht, the first principle of the Bogleheads investment philosophy is to Develop a workable plan. One of the best features of a workable plan is that it helps us relax.

Threads about the so-called "safe" withdrawal rate method (SWR) seem to exhibit a lot of anxiety. I think that this is because SWR does not qualify as a workable retirement withdrawal plan.

SWR is a withdrawal method which lets most of its adopters die as the richest people in the graveyard, while bankrupting most of the rest. Its risk of failure includes not only the possibility of premature portfolio depletion, but also the possibility of excessive underspending.

Flying by the seat of one's pants to decide how much to cut withdrawals during a crisis, to avoid premature portfolio depletion, is definitely not a workable plan.
  • Beyond the odds of hitting a rough patch, there are the consequences of loss to consider.
    -- Prof. Zvi Bodie, Risk Less and Prosper, 2012.
In the above citation, Prof. Bodie was right. Consequences are important. When SWR fails (in the traditional sense, through premature depletion), it completely fails. It leaves the retiree bankrupt. It's no wonder that even the smallest probability of failure generates so much anxiety.

Anyway, this whole concept of probabilistic success rate analysis is illogical from a single retiree point of view. Let me explain. My goal isn't to maximize the number of retirements where I don't end up bankrupt, living under a bridge eating cat food, over a hypothetical future 1,000 lives! I've got a single life and a single retirement to hopefully enjoy. I just can't afford to mess it up.

I must elaborate a workable plan, one which will work even if markets are uncooperative or crash at an inopportune time in the future.

One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.

Such a plan can use our Wiki's Variable Percentage Withdrawal (VPW) method, a withdrawal method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It allows the retiree to spend most of the portfolio during retirement using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

The text of this post is based on a previous post.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Thu Feb 03, 2022 6:41 am
nigel_ht wrote: Thu Feb 03, 2022 5:09 am SWR approximates salary a lot more than variable methods.
Nigel_ht, the first principle of the Bogleheads investment philosophy is to Develop a workable plan. One of the best features of a workable plan is that it helps us relax.

Threads about the so-called "safe" withdrawal rate method (SWR) seem to exhibit a lot of anxiety. I think that this is because SWR does not qualify as a workable retirement withdrawal plan.
Repeated assertion does not an argument make.
SWR is a withdrawal method which lets most of its adopters die as the richest people in the graveyard, while bankrupting most of the rest. Its risk of failure includes not only the possibility of premature portfolio depletion, but also the possibility of excessive underspending.
And VPW has the risk of not meeting retirement expenses and also the possibility of excessive underspending like the 2000 cohort.

Folks pick which risks they prefer.

Regardless, SWR more closely replicates a salary with an annual COLA increase.
Flying by the seat of one's pants to decide how much to cut withdrawals during a crisis, to avoid premature portfolio depletion, is definitely not a workable plan.
There is no need to cut expenses unless the scenario is worse than historical worst cases. Hence the word "Safe" in the text.

Also a 4% has certain margins built into it given that SAFEMAX was actually like 4.15% and Social Security is not part of the original SWR equation. With a standard SS the total income is around 4.4%...depends on assumptions but you can plug the same SS numbers assumed in VPW into something like FireCalc and see what the max withdrawal rates were.

Meaning premature portfolio depletion is extremely remote and therefore very "workable". Whether being the "richest person in the graveyard" is a problem is personal consideration.

From my perspective if I happen to be the richest guy in the graveyard it just means my wife can buy into a better CCRC...given that can cost millions I don't view this as a significant issue.
In the above citation, Prof. Bodie was right. Consequences are important. When SWR fails (in the traditional sense, through premature depletion), it completely fails. It leaves the retiree bankrupt. It's no wonder that even the smallest probability of failure generates so much anxiety.
Nope. There may be anxiety but it's largely caused by folks spreading FUD about how it's not "workable" or at high risk of premature depletion.

For SWR to fail you have to have a worse than 1929 scenario or 1966 scenario that is sufficiently worse that it overwhelms the value of Social Security income. That would be far worse than your 50% market drop scenario.

In fact if you can't meet expenses using the 1929 scenario with VPW you are at MORE risk than you would be from market drop than with SWR. Your 50% flexibility test is significantly less severe than the actual historical worst case.
Anyway, this whole concept of probabilistic success rate analysis is illogical from a single retiree point of view. Let me explain. My goal isn't to maximize the number of retirements where I don't end up bankrupt, living under a bridge eating cat food, over a hypothetical future 1,000 lives! I've got a single life and a single retirement to hopefully enjoy. I just can't afford to mess it up.

I must elaborate a workable plan, one which will work even if markets are uncooperative or crash at an inopportune time in the future.
VPW fails when it can't provide the minimum required expenses. If you have the "flexibility" to use VPW your probability of SWR failing are very remote.

Again, back to the original comment:

SWR replicates the stability of an annual salary with a cost of living adjustment much better than VPW if that's a goal.
dknightd
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Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Da5id
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

nigel_ht wrote: Thu Feb 03, 2022 8:17 am
longinvest wrote: Thu Feb 03, 2022 6:41 am Threads about the so-called "safe" withdrawal rate method (SWR) seem to exhibit a lot of anxiety. I think that this is because SWR does not qualify as a workable retirement withdrawal plan.
Repeated assertion does not an argument make.
A common statement in threads discussing SWR is that it isn't a plan normal people actually would follow. It is good as an estimation of how much money you need to retire. It shows in a simple single number what historically worked. But realistically most people won't blindly stick to that fixed inflation adjusted spending level if things are going badly early in retirement and their savings are taking a big hit. They will adjust their spending downwards. I know *I* wouldn't stick to SWR personally. VPW has a mechanism to adjust spending, which at least IMO makes it adjust to that reality. Not saying VPW is a cure-all or perfect, I don't use it actually. But I'd be more comfortable using VPW than SWR if I had to pick one.
Last edited by Da5id on Thu Feb 03, 2022 8:27 am, edited 1 time in total.
Da5id
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

dknightd wrote: Thu Feb 03, 2022 8:25 am When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Wait, does VPW control your RMDs, or just your actual spending? Why would VPW specify an RMD, is it leading to a spending level higher than you feel you need?
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Da5id wrote: Thu Feb 03, 2022 8:25 am
nigel_ht wrote: Thu Feb 03, 2022 8:17 am
longinvest wrote: Thu Feb 03, 2022 6:41 am Threads about the so-called "safe" withdrawal rate method (SWR) seem to exhibit a lot of anxiety. I think that this is because SWR does not qualify as a workable retirement withdrawal plan.
Repeated assertion does not an argument make.
A common statement in threads discussing SWR is that it isn't a plan normal people actually would follow. It is good as an estimation of how much money you need to retire. It shows in a simple single number what historically worked. But realistically most people won't blindly stick to that fixed inflation adjusted spending level if things are going badly early in retirement and their savings are taking a big hit. They will adjust their spending downwards.
What they choose to do and what they need to do are two different things.

Folks require a certain amount of discipline to buy and hold as well in dark times.
I know *I* wouldn't stick to SWR personally. VPW has a mechanism to adjust spending, which at least IMO makes it adjust to that reality. Not saying VPW is a cure-all or perfect, I don't use it actually. But I'd be more comfortable using VPW than SWR if I had to pick one.
A preference for one or another option does not make the other option "unworkable".

Given the prevalence of 4% rule in retirement literature I suspect more folks use vanilla SWR than bogleheads think. That SWR is often tailored doesn't make it not SWR-based any more than folks tinkering with 3-fund AA variations makes them not BH style based passive investing.
Da5id
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

nigel_ht wrote: Thu Feb 03, 2022 8:37 am Given the prevalence of 4% rule in retirement literature I suspect more folks use vanilla SWR than bogleheads think.
I don't believe it. You may "suspect" it though. I suspect most people don't have much of a plan beyond the one often cited by Taylor Larimore, "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.".

To think most people will mechanically spend the SWR amount as their balance falls off a cliff is, IMO, entirely unrealistic. You seem to disagree, so OK believe as you like. It doesn't follow from that that VPW the *correct* plan to use, but at least by having a mechanism for figuring out how to adjust to bad times it comports to what I think of as reality when compared to vanilla SWR.
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Da5id wrote: Thu Feb 03, 2022 8:44 am
nigel_ht wrote: Thu Feb 03, 2022 8:37 am Given the prevalence of 4% rule in retirement literature I suspect more folks use vanilla SWR than bogleheads think.
I don't believe it. You may "suspect" it though. I suspect most people don't have much of a plan beyond the one often cited by Taylor Larimore, "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.".

To think most people will mechanically spend the SWR amount as their balance falls off a cliff is, IMO, entirely unrealistic. You seem to disagree, so OK believe as you like. It doesn't follow from that that VPW the *correct* plan to use, but at least by having a mechanism for figuring out how to adjust to bad times it comports to what I think of as reality when compared to vanilla SWR.
Given that SWR is a ceiling and not a floor then just making sure you don't exceed the SWR amount (4% original + COLA) in any given year meets the requirements for using SWR. There is NO need to "mechanically spend the SWR amount" ever.

All SWR says is that historically you didn't need to reduce spending below the SWR rate for your portfolio to survive to the end of your retirement period. If you choose to economize because it makes you feel better...go for it. The SWR police don't exist.

The sad reality is that most folks probably need to spend more than 4% to meet expenses until social security kicks in.
Da5id
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

nigel_ht wrote: Thu Feb 03, 2022 8:51 am
Da5id wrote: Thu Feb 03, 2022 8:44 am
nigel_ht wrote: Thu Feb 03, 2022 8:37 am Given the prevalence of 4% rule in retirement literature I suspect more folks use vanilla SWR than bogleheads think.
I don't believe it. You may "suspect" it though. I suspect most people don't have much of a plan beyond the one often cited by Taylor Larimore, "We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.".

To think most people will mechanically spend the SWR amount as their balance falls off a cliff is, IMO, entirely unrealistic. You seem to disagree, so OK believe as you like. It doesn't follow from that that VPW the *correct* plan to use, but at least by having a mechanism for figuring out how to adjust to bad times it comports to what I think of as reality when compared to vanilla SWR.
Given that SWR is a ceiling and not a floor then just making sure you don't exceed the SWR amount (4% original + COLA) in any given year meets the requirements for using SWR. There is NO need to "mechanically spend the SWR amount" ever.

All SWR says is that historically you didn't need to reduce spending below the SWR rate for your portfolio to survive to the end of your retirement period. If you choose to economize because it makes you feel better...go for it. The SWR police don't exist.

The sad reality is that most folks probably need to spend more than 4% to meet expenses until social security kicks in.
"Vanilla SWR" is in fact mechanically spending the the SWR amount through thick and thin, no? That is how most probably would interpret it, certainly I do. Which is why many people would say that "Vanilla SWR" is not a real spending plan.

And once one introduces the idea of varying spending, I think it is better to have a plan for how to do that. Again, I don't believe a significant percentage of people who say they are using SWR will maintain their spending level if there is a 50% slide in the stock market in their first few years of retirement. This isn't to say that VPW has the plan right, just that having a strategy of some sort for how to deal seems to me to be worthwhile.
dknightd
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Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

Da5id wrote: Thu Feb 03, 2022 8:26 am
dknightd wrote: Thu Feb 03, 2022 8:25 am When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Wait, does VPW control your RMDs, or just your actual spending? Why would VPW specify an RMD, is it leading to a spending level higher than you feel you need?
I think the secret is to not need all of the RMD. I think VPW is useless once you have to take money out. It does perhaps provide a maximum, if you want to end up with nothing.

edit: I've looked at the tables. VPW is always above RMD.
Last edited by dknightd on Thu Feb 03, 2022 9:13 am, edited 1 time in total.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Da5id
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

dknightd wrote: Thu Feb 03, 2022 9:07 am
Da5id wrote: Thu Feb 03, 2022 8:26 am
dknightd wrote: Thu Feb 03, 2022 8:25 am When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Wait, does VPW control your RMDs, or just your actual spending? Why would VPW specify an RMD, is it leading to a spending level higher than you feel you need?
I think the secret is to not need all of the RMD. I think VPW is useless once you have to take money out. It does perhaps provide a maximum, if you want to end up with nothing.
I'm not understanding what your point is. I don't actually use VPW, but from what I understand of it your RMD (which is what the government mandates) is not directly related to VPW. Where the money comes from to spend for VPW is not really critical? Are you using "withdrawal/RMD" and "spending" as synonyms?
Lastrun
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Re: Variable Percentage Withdrawal (VPW)

Post by Lastrun »

Da5id wrote: Thu Feb 03, 2022 9:09 am
dknightd wrote: Thu Feb 03, 2022 9:07 am
Da5id wrote: Thu Feb 03, 2022 8:26 am
dknightd wrote: Thu Feb 03, 2022 8:25 am When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Wait, does VPW control your RMDs, or just your actual spending? Why would VPW specify an RMD, is it leading to a spending level higher than you feel you need?
I think the secret is to not need all of the RMD. I think VPW is useless once you have to take money out. It does perhaps provide a maximum, if you want to end up with nothing.
I'm not understanding what your point is. I don't actually use VPW, but from what I understand of it your RMD (which is what the government mandates) is not related to VPW. Where the money comes from to spend for VPW is not really critical? Are you using "withdrawal/RMD" and "spending" as synonyms?
I don't understand the point either. RMD withdrawals are a tax issue not a spending issue, meaning you must remove the RMD from the tax deferred account. You don't have to spend the money.
dknightd
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Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

Da5id wrote: Thu Feb 03, 2022 9:09 am
dknightd wrote: Thu Feb 03, 2022 9:07 am
Da5id wrote: Thu Feb 03, 2022 8:26 am
dknightd wrote: Thu Feb 03, 2022 8:25 am When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Wait, does VPW control your RMDs, or just your actual spending? Why would VPW specify an RMD, is it leading to a spending level higher than you feel you need?
I think the secret is to not need all of the RMD. I think VPW is useless once you have to take money out. It does perhaps provide a maximum, if you want to end up with nothing.
I'm not understanding what your point is. I don't actually use VPW, but from what I understand of it your RMD (which is what the government mandates) is not directly related to VPW. Where the money comes from to spend for VPW is not really critical? Are you using "withdrawal/RMD" and "spending" as synonyms?
It is pretty simple. RMD are required. If you compare VPW rates to RMD rates, the VPW rates are almost always higher. Both are based on what you have today. Government required RMD is less than then what what VPW would suggest you can take out. I assume that is because the government decides you will live longer than average?
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Da5id
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

dknightd wrote: Thu Feb 03, 2022 9:33 am
Da5id wrote: Thu Feb 03, 2022 9:09 am
dknightd wrote: Thu Feb 03, 2022 9:07 am
Da5id wrote: Thu Feb 03, 2022 8:26 am
dknightd wrote: Thu Feb 03, 2022 8:25 am When I'm 72 I will be subject to RMD. So I will have to withdraw that. The VPW withdrawal rate is very agressive.
Wait, does VPW control your RMDs, or just your actual spending? Why would VPW specify an RMD, is it leading to a spending level higher than you feel you need?
I think the secret is to not need all of the RMD. I think VPW is useless once you have to take money out. It does perhaps provide a maximum, if you want to end up with nothing.
I'm not understanding what your point is. I don't actually use VPW, but from what I understand of it your RMD (which is what the government mandates) is not directly related to VPW. Where the money comes from to spend for VPW is not really critical? Are you using "withdrawal/RMD" and "spending" as synonyms?
It is pretty simple. RMD are required. If you compare VPW rates to RMD rates, the VPW rates are almost always higher. Both are based on what you have today. Government required RMD is less than then what what VPW would suggest you can take out. I assume that is because the government decides you will live longer than average?
That assumes that one's money is all in 401k/IRAs? Because VPW spending allowance can presumably be met through any mixture of money from 401k/IRA, Roth, taxable, HSA, whatever?
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Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

Da5id wrote: Thu Feb 03, 2022 9:38 am
That assumes that one's money is all in 401k/IRAs? Because VPW spending allowance can presumably be met through any mixture of money from 401k/IRA, Roth, taxable, HSA, whatever?
Yep
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

dknightd wrote: Thu Feb 03, 2022 9:07 am I think the secret is to not need all of the RMD. I think VPW is useless once you have to take money out. It does perhaps provide a maximum, if you want to end up with nothing.

edit: I've looked at the tables. VPW is always above RMD.
That's how the methodology works though. The aim is to end up with nothing after N years because you can't take $ to the afterlife. RMD works similarly but starts much later; VPW helps you plan much earlier, like in your 40s / 50s.
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Da5id wrote: Thu Feb 03, 2022 9:06 am "Vanilla SWR" is in fact mechanically spending the the SWR amount through thick and thin, no? That is how most probably would interpret it, certainly I do. Which is why many people would say that "Vanilla SWR" is not a real spending plan.

And once one introduces the idea of varying spending, I think it is better to have a plan for how to do that. Again, I don't believe a significant percentage of people who say they are using SWR will maintain their spending level if there is a 50% slide in the stock market in their first few years of retirement. This isn't to say that VPW has the plan right, just that having a strategy of some sort for how to deal seems to me to be worthwhile.
I don't follow why Vanilla SWR is not a real spending plan.

Constant-dollar provides very stable withdrawals. You choose this method when you want to be able to stably withdraw the same amount annually. It's nonsensical to turn around and say that's not realistic, because in that case you don't have to choose constant-dollar methodologies at all.

Percentage-based methods fare much better against the SORR.
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

Marseille07 wrote: Thu Feb 03, 2022 10:50 am
Da5id wrote: Thu Feb 03, 2022 9:06 am "Vanilla SWR" is in fact mechanically spending the the SWR amount through thick and thin, no? That is how most probably would interpret it, certainly I do. Which is why many people would say that "Vanilla SWR" is not a real spending plan.

And once one introduces the idea of varying spending, I think it is better to have a plan for how to do that. Again, I don't believe a significant percentage of people who say they are using SWR will maintain their spending level if there is a 50% slide in the stock market in their first few years of retirement. This isn't to say that VPW has the plan right, just that having a strategy of some sort for how to deal seems to me to be worthwhile.
I don't follow why Vanilla SWR is not a real spending plan.
It is very simple. Plans are executed by humans. IMO most humans will have trouble clinging to the faith that "4% worked in the past and therefore it will work in the future" if faced with a significant drawdown early in their retirement.
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Re: Variable Percentage Withdrawal (VPW)

Post by Escapevelocity »

@longinvest,
Thanks for the detailed and thoughtful replies as well as all your time spent to make this tool available to the public.

You have caused me to challenge my own thinking which is a good thing. Regarding the earlier question, I am thinking of that particular and temporary decline in future expenses similarly to an income stream primarily because it is coming out of my essential expenses and not out of the portion of my expenses that can be cut after a downturn. At the same time, you are spot on when you say it could be replaced by some unanticipated future expense. Lastly, I will definitely not model the 2nd of the two "savings" in future spending in VPW model which is the concept that we will decrease travel spending in our 70's. I will leave that one out for sure.
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Da5id wrote: Thu Feb 03, 2022 10:56 am It is very simple. Plans are executed by humans. IMO most humans will have trouble clinging to the faith that "4% worked in the past and therefore it will work in the future" if faced with a significant drawdown early in their retirement.
Sure, and if they can't stick with stable withdrawals then they ought to be using a percentage-based method.

It's like saying "I want stable withdrawals!" then "Never mind, I cut back," which follows why not choose a method that cuts back in the first place.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Da5id wrote: Thu Feb 03, 2022 10:56 am
Marseille07 wrote: Thu Feb 03, 2022 10:50 am
Da5id wrote: Thu Feb 03, 2022 9:06 am "Vanilla SWR" is in fact mechanically spending the the SWR amount through thick and thin, no? That is how most probably would interpret it, certainly I do. Which is why many people would say that "Vanilla SWR" is not a real spending plan.

And once one introduces the idea of varying spending, I think it is better to have a plan for how to do that. Again, I don't believe a significant percentage of people who say they are using SWR will maintain their spending level if there is a 50% slide in the stock market in their first few years of retirement. This isn't to say that VPW has the plan right, just that having a strategy of some sort for how to deal seems to me to be worthwhile.
I don't follow why Vanilla SWR is not a real spending plan.
It is very simple. Plans are executed by humans. IMO most humans will have trouble clinging to the faith that "4% worked in the past and therefore it will work in the future" if faced with a significant drawdown early in their retirement.
Do you dump your stocks in a downturn or follow your IPS?

That's no different than sticking to the plan with SWR...a plan that survives 1929 is going to do fine against a run of the mill drawdown. When you hit 70+% drawdown maybe you want to consider it might end up worse than 1929 and you still have a bit or margin to go.

The biggest risk is stagflation, not an early drawdown.
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Re: Variable Percentage Withdrawal (VPW)

Post by Da5id »

nigel_ht wrote: Thu Feb 03, 2022 11:50 am
Da5id wrote: Thu Feb 03, 2022 10:56 am
Marseille07 wrote: Thu Feb 03, 2022 10:50 am
Da5id wrote: Thu Feb 03, 2022 9:06 am "Vanilla SWR" is in fact mechanically spending the the SWR amount through thick and thin, no? That is how most probably would interpret it, certainly I do. Which is why many people would say that "Vanilla SWR" is not a real spending plan.

And once one introduces the idea of varying spending, I think it is better to have a plan for how to do that. Again, I don't believe a significant percentage of people who say they are using SWR will maintain their spending level if there is a 50% slide in the stock market in their first few years of retirement. This isn't to say that VPW has the plan right, just that having a strategy of some sort for how to deal seems to me to be worthwhile.
I don't follow why Vanilla SWR is not a real spending plan.
It is very simple. Plans are executed by humans. IMO most humans will have trouble clinging to the faith that "4% worked in the past and therefore it will work in the future" if faced with a significant drawdown early in their retirement.
Do you dump your stocks in a downturn or follow your IPS?

That's no different than sticking to the plan with SWR...a plan that survives 1929 is going to do fine against a run of the mill drawdown. When you hit 70+% drawdown maybe you want to consider it might end up worse than 1929 and you still have a bit or margin to go.

The biggest risk is stagflation, not an early drawdown.
I've been investing since the 80s, never have sold stocks in a downturn. In fact I most recently bought a fair bit in March 2020 when I hit a rebalancing point when things were looking (transiently as it turned out, but who knew then?) very shaky.

But to me, and I expect to many others, that is *very* different than going about a spending plan and for example continuing taking expensive vacations and such (within my "4%" of course) while ones portfolio rapidly dwindles early in retirement. Obviously you feel they are equivalent. I feel differently.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Da5id wrote: Thu Feb 03, 2022 12:26 pm
nigel_ht wrote: Thu Feb 03, 2022 11:50 am
Da5id wrote: Thu Feb 03, 2022 10:56 am
Marseille07 wrote: Thu Feb 03, 2022 10:50 am
Da5id wrote: Thu Feb 03, 2022 9:06 am "Vanilla SWR" is in fact mechanically spending the the SWR amount through thick and thin, no? That is how most probably would interpret it, certainly I do. Which is why many people would say that "Vanilla SWR" is not a real spending plan.

And once one introduces the idea of varying spending, I think it is better to have a plan for how to do that. Again, I don't believe a significant percentage of people who say they are using SWR will maintain their spending level if there is a 50% slide in the stock market in their first few years of retirement. This isn't to say that VPW has the plan right, just that having a strategy of some sort for how to deal seems to me to be worthwhile.
I don't follow why Vanilla SWR is not a real spending plan.
It is very simple. Plans are executed by humans. IMO most humans will have trouble clinging to the faith that "4% worked in the past and therefore it will work in the future" if faced with a significant drawdown early in their retirement.
Do you dump your stocks in a downturn or follow your IPS?

That's no different than sticking to the plan with SWR...a plan that survives 1929 is going to do fine against a run of the mill drawdown. When you hit 70+% drawdown maybe you want to consider it might end up worse than 1929 and you still have a bit or margin to go.

The biggest risk is stagflation, not an early drawdown.
I've been investing since the 80s, never have sold stocks in a downturn. In fact I most recently bought a fair bit in March 2020 when I hit a rebalancing point when things were looking (transiently as it turned out, but who knew then?) very shaky.

But to me, and I expect to many others, that is *very* different than going about a spending plan and for example continuing taking expensive vacations and such (within my "4%" of course) while ones portfolio rapidly dwindles early in retirement. Obviously you feel they are equivalent. I feel differently.
Running out of time is as much a danger as running out of money.

Why should I forego travel in early retirement if the "worse than 1929 scenario" is actually very remote? It is very unlikely that I will run into 1929 and Great Depression during my retirement. It is 100% certain that at some point in my retirement I won't be able or want to do certain types of travel anymore.

If the 1929 happens again verbatim SWR folks will be fine without reducing spending while VPW folks with only 50% downturn flexibility will start seeing very low withdrawals.

Again, there is a difference in what you HAVE to do and what you WANT to do. If skipping expensive vacations makes you SWAN then do that. But to assert that nobody can stick to SWR is simply wrong. Even IF you reduce spending you are STILL implementing SWR since it's a ceiling and not a floor.
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

For what it's worth, much "ink" has been spilled with nigel_ht on VPW vs. SWR across numerous threads. One of which is their thread here: viewtopic.php?t=353481

If I recall, it started out asking if "VPW was frugal", as in their mind since it might have a higher initial withdrawal % than SWR, so it wasn't frugal... That morphed into "is VPW safer", which to paraphrase nigel_ht, their view is picking an SWR that has never failed as most inherently be the "safest" option.

IMHO they continue to miss the bigger picture...

They are convinced that SWR is superior, and IMHO will not listen to the perspectives of others who may disagree. They will most likely end up picking a low enough SWR that they'll almost be guaranteed to be rich when they die, and they are fine with that.

I'm sure they think the same about me (or others) that are convinced SWR is inferior. But I'm trying to enjoy my one-life, not work longer then needed (to save more to hit an arbitrary SWR number), trust my ability to adapt spending as I've done throughout my life, and benefit from the simplicity of VPW for my spouse (if I die first).

Personally, I've chosen to not engage nigel_ht further on anything related to VPW or SWR.

Just posting this so others know what they are getting into.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

SnowBog wrote: Thu Feb 03, 2022 1:50 pm For what it's worth, much "ink" has been spilled with nigel_ht on VPW vs. SWR across numerous threads. One of which is their thread here: viewtopic.php?t=353481

If I recall, it started out asking if "VPW was frugal", as in their mind since it might have a higher initial withdrawal % than SWR, so it wasn't frugal... That morphed into "is VPW safer", which to paraphrase nigel_ht, their view is picking an SWR that has never failed as most inherently be the "safest" option.

IMHO they continue to miss the bigger picture...

They are convinced that SWR is superior, and IMHO will not listen to the perspectives of others who may disagree. They will most likely end up picking a low enough SWR that they'll almost be guaranteed to be rich when they die, and they are fine with that.

I'm sure they think the same about me (or others) that are convinced SWR is inferior. But I'm trying to enjoy my one-life, not work longer then needed (to save more to hit an arbitrary SWR number), trust my ability to adapt spending as I've done throughout my life, and benefit from the simplicity of VPW for my spouse (if I die first).

Personally, I've chosen to not engage nigel_ht further on anything related to VPW or SWR.

Just posting this so others know what they are getting into.
I'm only here because VPW folks keep claiming SWR is "unworkable". I personally have nothing against VPW, I'm sure it works great for many folks.

Both methods have pluses and minuses and neither is intrinsically better (or inferior) than the other.
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Re: Variable Percentage Withdrawal (VPW)

Post by margaritaville »

SnowBog wrote: Thu Feb 03, 2022 1:50 pm
Personally, I've chosen to not engage nigel_ht further on anything related to VPW or SWR.

Just posting this so others know what they are getting into.
Yes. It seems that most of the folks arguing the deficiencies of VPW fail to acknowledge the conditions that Longinvest and others have stressed are key conditions for whether or not VPW is a good fit:

- VPW is best used in conjunction with guaranteed base income

- VPW is a good fit if you have flexibility in your spending (discretionary goals)

- You prefer to spend your assets versus leaving them behind

Doing an "apples to apples" comparison with SWR isn't really informative as you will always have to choose variables that will favor one approach or the another.

If you populate the VPW spreadsheet and find that the recommended withdrawal for the year based on the "Income after loss" section doesn't meet your needs, then VPW isn't for you.
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Re: Variable Percentage Withdrawal (VPW)

Post by Escapevelocity »

It doesn't seem worthwhile to get worked up or evangelize on this SWR vs VPW debate. I think the only important aspect is to educate and understand the principles and assumptions being used so each person can follow the approach they personally relate to behaviorally and believe in.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

margaritaville wrote: Thu Feb 03, 2022 2:26 pm
Doing an "apples to apples" comparison with SWR isn't really informative as you will always have to choose variables that will favor one approach or the another.
If you choose the same variables to include for both there may be a bias but it’s far more fair than to add SS to one but not the other.

It’s also a different thing to claim that X is “unworkable” because you try choose specific things to try to make it work less well.

My constant refrain is that SWR doesn’t have to be made to look bad for VPW to look good.

Nor do you have to make stuff up about VPW.

For example this recent exchange is because I noted that VPW isn’t like accumulation salaries because only around 30% of folks have variable income where bonuses makes a large fraction of their income.

Constant dollar approaches with inflation adjustments look a lot more like salaries.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

SnowBog wrote: Thu Feb 03, 2022 1:50 pm
Personally, I've chosen to not engage nigel_ht further on anything related to VPW or SWR.

Just posting this so others know what they are getting into.
The context is this kind of post scattered across the forum (this is just one I randomly googled):
longinvest wrote: Sun Jan 12, 2020 4:48 pm I think that SWR is a broken portfolio withdrawal method. I think that it's a mistake to base one's financial plan on such an illogical method.

I suggest to consider our wiki's sensible Variable Percentage Withdrawal (VPW) method, instead.
VPW is a great method for many folks but the thread that SnowBog is referring to is an offshoot of a similar post…
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Re: Variable Percentage Withdrawal (VPW)

Post by margaritaville »

nigel_ht wrote: Thu Feb 03, 2022 2:34 pm
If you choose the same variables to include for both there may be a bias but it’s far more fair than to add SS to one but not the other.

It’s also a different thing to claim that X is “unworkable” because you try choose specific things to try to make it work less well.

My constant refrain is that SWR doesn’t have to be made to look bad for VPW to look good.
Fair enough. I can see where a data driven person might want to do a head to head comparison of the approaches. I just don't believe there's a good way to do it that will be applicable to a broad audience. Everyone's situation is going to be slightly different based on account sizes, pensions or not, debt, etc. As they say, personal finance is personal and you have to determine for your own situation which approach is the better fit.

There's plenty of blame on both sides of the equation, but I really wish this thread could have stayed on topic and educated folks on the VPW approach instead of heading off into a SWR vs. VPW battle.
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Re: Variable Percentage Withdrawal (VPW)

Post by willthrill81 »

nigel_ht wrote: Thu Feb 03, 2022 2:34 pm My constant refrain is that SWR doesn’t have to be made to look bad for VPW to look good.
:thumbsup

There is no such thing as a universally perfect withdrawal method. All of them have objective drawbacks, and this is aside from the behavioral considerations that can easily sway an investor from one method to another.
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Re: Variable Percentage Withdrawal (VPW)

Post by Escapevelocity »

willthrill81 wrote: Thu Feb 03, 2022 3:33 pm
nigel_ht wrote: Thu Feb 03, 2022 2:34 pm My constant refrain is that SWR doesn’t have to be made to look bad for VPW to look good.
:thumbsup

There is no such thing as a universally perfect withdrawal method. All of them have objective drawbacks, and this is aside from the behavioral considerations that can easily sway an investor from one method to another.
At the end of the day, all of these tools are just guide posts not rigid protocols.
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Escapevelocity wrote: Fri Feb 04, 2022 10:07 am At the end of the day, all of these tools are just guide posts not rigid protocols.
I don't agree. It is perfectly fine to *underspend*, but the ceiling must be rigidly followed.

If you retire on 1M@4%, you better not spend 50K in Year 1 for example. Spending 30K is fine.
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Re: Variable Percentage Withdrawal (VPW)

Post by Escapevelocity »

Marseille07 wrote: Fri Feb 04, 2022 8:09 pm
Escapevelocity wrote: Fri Feb 04, 2022 10:07 am At the end of the day, all of these tools are just guide posts not rigid protocols.
I don't agree. It is perfectly fine to *underspend*, but the ceiling must be rigidly followed.

If you retire on 1M@4%, you better not spend 50K in Year 1 for example. Spending 30K is fine.
I disagree with your disagreement. At the end of the day, each individual is free to make whatever choices they wish to. What I meant is that the tools are there as guideposts to hopefully make better decisions and won't realistically be followed or employed in the same way by various individuals. If I am using VPW as a tool, I may use the information that it spits out and decide to overspend the recommended amount knowing the dangers of that.
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Escapevelocity wrote: Fri Feb 04, 2022 8:40 pm I disagree with your disagreement. At the end of the day, each individual is free to make whatever choices they wish to. What I meant is that the tools are there as guideposts to hopefully make better decisions and won't realistically be followed or employed in the same way by various individuals. If I am using VPW as a tool, I may use the information that it spits out and decide to overspend the recommended amount knowing the dangers of that.
OK, I guess we agree to disagree then.

I don't plan on using VPW but if I do, I will treat the recommended amount as the ceiling and *never* overspend. The thing is, given how it works the ceiling would be too high anyway, suggesting that I can spend 200K and such. But the point is I won't go over it by a dime.
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

Marseille07 wrote: Fri Feb 04, 2022 8:42 pm
Escapevelocity wrote: Fri Feb 04, 2022 8:40 pm I disagree with your disagreement. At the end of the day, each individual is free to make whatever choices they wish to. What I meant is that the tools are there as guideposts to hopefully make better decisions and won't realistically be followed or employed in the same way by various individuals. If I am using VPW as a tool, I may use the information that it spits out and decide to overspend the recommended amount knowing the dangers of that.
OK, I guess we agree to disagree then.

I don't plan on using VPW but if I do, I will treat the recommended amount as the ceiling and *never* overspend. The thing is, given how it works the ceiling would be too high anyway, suggesting that I can spend 200K and such. But the point is I won't go over it by a dime.
As food for thought...

VPW can't distinguish between over spending by say $20k versus the markets dropping by $20k. Both will reduce the future amount available, likely reducing your "recommended withdrawal amount".

Provided you retain the required flexibility to cut back on spending, things work out the same.

Obviously, if you continously over spend, you don't have the required flexibility, and VPW will fail for you... Obviously the "best practice" is to stay below the recommended withdrawal.

But just like I do now, if I need to exceed my budget in a month, I simply cut back in other months. I don't see that being different with VPW, especially since it withdrawal amount adjusts anyway. In fact, that's one of the things I like about VPW!
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

SnowBog wrote: Fri Feb 04, 2022 10:03 pm As food for thought...

VPW can't distinguish between over spending by say $20k versus the markets dropping by $20k. Both will reduce the future amount available, likely reducing your "recommended withdrawal amount".

Provided you retain the required flexibility to cut back on spending, things work out the same.

Obviously, if you continously over spend, you don't have the required flexibility, and VPW will fail for you... Obviously the "best practice" is to stay below the recommended withdrawal.

But just like I do now, if I need to exceed my budget in a month, I simply cut back in other months. I don't see that being different with VPW, especially since it withdrawal amount adjusts anyway. In fact, that's one of the things I like about VPW!
Yeah, I mean if some emergency event happens and you inevitably go over, that's not a problem so long as you make it up after the emergency. You're still treating the ceiling as rigidly as you can.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

SnowBog wrote: Fri Feb 04, 2022 10:03 pm
Provided you retain the required flexibility to cut back on spending, things work out the same.
That’s a big proviso that hides many sins.
But just like I do now, if I need to exceed my budget in a month, I simply cut back in other months. I don't see that being different with VPW, especially since it withdrawal amount adjusts anyway. In fact, that's one of the things I like about VPW![/i]
The difference between VPW and a salary during accumulation is that for the majority of folks, unless they lose their jobs, their incomes don’t fluctuate in a downturn.

They may not get their COLA increase so the lose against inflation but their nominal income doesn’t crater like it might with VPW.

In a big enough downturn you may have to exceed your VPW budget for many months that in the extreme case lead to a death spiral where the allowed withdrawal amount continues to drop until you hit portfolio depletion.

VPW example have a 50% reduction in equities test for “flexibility” whereas historically the worst case was 89% reduction in equities.
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

Marseille07 wrote: Fri Feb 04, 2022 10:11 pm
SnowBog wrote: Fri Feb 04, 2022 10:03 pm As food for thought...

VPW can't distinguish between over spending by say $20k versus the markets dropping by $20k. Both will reduce the future amount available, likely reducing your "recommended withdrawal amount".

Provided you retain the required flexibility to cut back on spending, things work out the same.

Obviously, if you continously over spend, you don't have the required flexibility, and VPW will fail for you... Obviously the "best practice" is to stay below the recommended withdrawal.

But just like I do now, if I need to exceed my budget in a month, I simply cut back in other months. I don't see that being different with VPW, especially since it withdrawal amount adjusts anyway. In fact, that's one of the things I like about VPW!
Yeah, I mean if some emergency event happens and you inevitably go over, that's not a problem so long as you make it up after the emergency. You're still treating the ceiling as rigidly as you can.
Since VPW adapts, and maybe since it's likely we'll under spend most years...

But I'm less "strict" in my view of VPW as an unbreakable ceiling.

If an emergency comes up, I'll deal with it.

Likewise, let's say that we have an opportunity to cross something off our bucket list. Maybe a once-in-a-lifetime around the world cruise that would cause us to exceed the "recommended" amount. (And let's assume markets are doing decently...) I'd very much consider that as well!
Marseille07
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

SnowBog wrote: Fri Feb 04, 2022 10:59 pm Since VPW adapts, and maybe since it's likely we'll under spend most years...

But I'm less "strict" in my view of VPW as an unbreakable ceiling.

If an emergency comes up, I'll deal with it.

Likewise, let's say that we have an opportunity to cross something off our bucket list. Maybe a once-in-a-lifetime around the world cruise that would cause us to exceed the "recommended" amount. (And let's assume markets are doing decently...) I'd very much consider that as well!
The thing is, those cruises can be budgeted in advance.

It's not like you must go on a cruise tomorrow. It's perfectly fine to go 6 months later, for example. That gives you plenty of time to properly budget it without exceeding the VPW.

In my mind, it doesn't make a huge difference between planning now and executing later vs spend-it-now and make-it-up later. But I prefer the former because we should budget in advance where we can instead of spending carelessly then having to make up later.

Emergencies can and do come up but world cruise ain't one of them.
SnowBog
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

Marseille07 wrote: Sat Feb 05, 2022 12:16 am
SnowBog wrote: Fri Feb 04, 2022 10:59 pm Since VPW adapts, and maybe since it's likely we'll under spend most years...

But I'm less "strict" in my view of VPW as an unbreakable ceiling.

If an emergency comes up, I'll deal with it.

Likewise, let's say that we have an opportunity to cross something off our bucket list. Maybe a once-in-a-lifetime around the world cruise that would cause us to exceed the "recommended" amount. (And let's assume markets are doing decently...) I'd very much consider that as well!
The thing is, those cruises can be budgeted in advance.

It's not like you must go on a cruise tomorrow. It's perfectly fine to go 6 months later, for example. That gives you plenty of time to properly budget it without exceeding the VPW.
True, but I think you are splitting hairs...

Again, the beauty of VPW is the "variable".

It's simple math - the target spend is a % (which varies based on age) of whatever amount of money is in the portfolio. If the portfolio goes up, so can my spending. If the portfolio goes down, so should my spending.

If we happen to over spend in a particular year, for an emergency, for a last minute bucket list, or even if it was accidental - the "variable" adapts. Again, VPW can't distinguish between spending more than we should have versus markets decreasing, the net result is a smaller portfolio which results in a lower "recommended withdrawal" for the next cycle.

I'm not saying one can safely ignore the VPW recommendation... You can't!

But a core characteristic of VPW is flexibility. If we choose to spend more than the "recommended amount", we are knowingly trading income today which will be offset by reduced spending later.

If the recommended amount is way more than we normally spend, and our essential expenses are well below the "required flexibility" threshold, what's the risk? In that situation we have more than "enough". Even if it was a permanent reduction in future spending, it wouldn't impact us.

Obviously, that would not be true for someone who's numbers barely worked. But if the numbers barely work, they likely lack the required flexibility anyway...
Marseille07
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

SnowBog wrote: Sat Feb 05, 2022 12:41 am True, but I think you are splitting hairs...

Again, the beauty of VPW is the "variable".

It's simple math - the target spend is a % (which varies based on age) of whatever amount of money is in the portfolio. If the portfolio goes up, so can my spending. If the portfolio goes down, so should my spending.

If we happen to over spend in a particular year, for an emergency, for a last minute bucket list, or even if it was accidental - the "variable" adapts. Again, VPW can't distinguish between spending more than we should have versus markets decreasing, the net result is a smaller portfolio which results in a lower "recommended withdrawal" for the next cycle.

I'm not saying one can safely ignore the VPW recommendation... You can't!

But a core characteristic of VPW is flexibility. If we choose to spend more than the "recommended amount", we are knowingly trading income today which will be offset by reduced spending later.

If the recommended amount is way more than we normally spend, and our essential expenses are well below the "required flexibility" threshold, what's the risk? In that situation we have more than "enough". Even if it was a permanent reduction in future spending, it wouldn't impact us.

Obviously, that would not be true for someone who's numbers barely worked. But if the numbers barely work, they likely lack the required flexibility anyway...
Well, percentage-based methods do not carry "risk" as in running out of money.

However, the VPW percentage table year after year doesn't really change because of how much you spent a year prior. If you retire on 1M and the VPW says 45K this year but you spent 500K instead, the damage is quite big. Sure, the next year the VPW might say "4.5%" and that might be 22.5K because it "adapts," but your retirement picture is now a lot different than simply withdrawing 45K the first year and still having 950K instead of 500K.

This is why we should treat the ceiling as rigidly, and should make it up in case of running into emergencies that top the ceiling temporarily. This is not a tall order.
SnowBog
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

Marseille07 wrote: Sat Feb 05, 2022 12:56 am
SnowBog wrote: Sat Feb 05, 2022 12:41 am True, but I think you are splitting hairs...

Again, the beauty of VPW is the "variable".

It's simple math - the target spend is a % (which varies based on age) of whatever amount of money is in the portfolio. If the portfolio goes up, so can my spending. If the portfolio goes down, so should my spending.

If we happen to over spend in a particular year, for an emergency, for a last minute bucket list, or even if it was accidental - the "variable" adapts. Again, VPW can't distinguish between spending more than we should have versus markets decreasing, the net result is a smaller portfolio which results in a lower "recommended withdrawal" for the next cycle.

I'm not saying one can safely ignore the VPW recommendation... You can't!

But a core characteristic of VPW is flexibility. If we choose to spend more than the "recommended amount", we are knowingly trading income today which will be offset by reduced spending later.

If the recommended amount is way more than we normally spend, and our essential expenses are well below the "required flexibility" threshold, what's the risk? In that situation we have more than "enough". Even if it was a permanent reduction in future spending, it wouldn't impact us.

Obviously, that would not be true for someone who's numbers barely worked. But if the numbers barely work, they likely lack the required flexibility anyway...
Well, percentage-based methods do not carry "risk" as in running out of money.

However, the VPW percentage table year after year doesn't really change because of how much you spent a year prior. If you retire on 1M and the VPW says 45K this year but you spent 500K instead, the damage is quite big. Sure, the next year the VPW might say "4.5%" and that might be 22.5K because it "adapts," but your retirement picture is now a lot different than simply withdrawing 45K the first year and still having 950K instead of 500K.

This is why we should treat the ceiling as rigidly, and should make it up in case of running into emergencies that top the ceiling temporarily. This is not a tall order.
And now I think you are citing extremes...

To use a more realistic example, if VPW says you can spend $45k - but instead you spend $50k ($5k more) in a particular year - the "damage" is minimal - and indistinguishable from a $5k "loss" in the markets. Especially if your "normal" expenses are say $40k, and your essential expenses are $15k. Your expenses are well within the "upper" and "lower" boundaries.

I'm not implying people should be reckless... They shouldn't... I'm not implying that people can "ignore" the VPW recommendation... They can't. But if someone spends a little more on a very rare occasion, I don't think the world implodes...
Marseille07
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

SnowBog wrote: Sat Feb 05, 2022 1:21 am And now I think you are citing extremes...

To use a more realistic example, if VPW says you can spend $45k - but instead you spend $50k ($5k more) in a particular year - the "damage" is minimal - and indistinguishable from a $5k "loss" in the markets. Especially if your "normal" expenses are say $40k, and your essential expenses are $15k. Your expenses are well within the "upper" and "lower" boundaries.

I'm not implying people should be reckless... They shouldn't... I'm not implying that people can "ignore" the VPW recommendation... They can't. But if someone spends a little more on a very rare occasion, I don't think the world implodes...
Going over by 5K one-time is certainly not a big deal. No disagreements there.

My point is, staying under the limit is *easy*, especially when you're withdrawing monthly. You know right there and then that your budget is 5K and you spent 8K for example, then next month you make an adjustment. Again, this is not a tall ask.
SnowBog
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

Marseille07 wrote: Sat Feb 05, 2022 1:25 am
SnowBog wrote: Sat Feb 05, 2022 1:21 am And now I think you are citing extremes...

To use a more realistic example, if VPW says you can spend $45k - but instead you spend $50k ($5k more) in a particular year - the "damage" is minimal - and indistinguishable from a $5k "loss" in the markets. Especially if your "normal" expenses are say $40k, and your essential expenses are $15k. Your expenses are well within the "upper" and "lower" boundaries.

I'm not implying people should be reckless... They shouldn't... I'm not implying that people can "ignore" the VPW recommendation... They can't. But if someone spends a little more on a very rare occasion, I don't think the world implodes...
Going over by 5K one-time is certainly not a big deal. No disagreements there.

My point is, staying under the limit is *easy*, especially when you're withdrawing monthly. You know right there and then that your budget is 5K and you spent 8K for example, then next month you make an adjustment. Again, this is not a tall ask.
Just to point it out - if your "limit" was $5k and you spent $8k - then you broke your "limit"... Even if you spend $2k the following month ($3k lower to offset the $3k higher) - you still broke the "limit" for the one month... But does it matter? You initially said it did... Now it sounds like you agree with me - it doesn't...

And that was my point - I don't view VPW as some inflexible - "though shall never spend more than the "recommended amount" - approach. The point of being "variable" is it will self-adjust if you over/under spend (within reason), just as it does as markets increase/decrease. And people who use VPW are supposed to understand - and have - a level of flexibility (aka a reasonable amount of discretionary spending they can reduce when needed) such that if they were to go over a given month (or year) they can leverage that flexibility to reduce/adapt as needed.

It's all about being reasonable.
Last edited by SnowBog on Sat Feb 05, 2022 2:01 am, edited 1 time in total.
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