The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

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longinvest
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The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Fri Nov 16, 2018 9:20 am

NOTE

The VSR spreadsheet is now part of the VPW Accumulation And Retirement Worksheet.

INSTRUCTIONS

See this post.

LINKS

The spreadsheet can be used online or downloaded.

The links can be found on the Boglehead wiki VPW page: VPW Accumulation And Retirement Worksheet.

SCREENSHOT

Image


A frequent question, in our forums, is "How much should I save?" A good answer to this is "As much as you can, but not so much as to live like a pauper." But, this is imprecise.

In a recent thread, I proposed an interesting calculation that leads to a variable savings rate which adapts to the saver's situation, retirement horizon, and current portfolio balance. Here's a copy the main parts of my post.

Let's pick a family with two earners making $31,000 each, for a household income of $62,000. That's the approximate US median household income.

In their 20s, they pay down debt, accumulate a down payment, and buy a modest house at the end of their 20s with a 30-year mortgage. They don't start saving and investing before the age of 30. Then, they work, live below their means, save, and invest from age 30 to 64. At age 65, they retire. Each would qualify for a annual $15,500 Social Security pension at age 66, but they decide that one of them will claim at age 65 and get $14,000 and the other will delay until 70 to get $20,000.

We'll assume, for simplicity, that their expenses are relatively level all along. Their mortgage is modest, and once it's paid, an equivalent HELOC is used to spread the cost of maintenance (kitchen remodel, roof, etc.).

How much should they save to retire with dignity? I'll use a similar calculation to what I've shown in the post The Mathematics of Retirement Investing.

One of the spouses likes aggressive investing, but the other is risk averse. They compromise to holding a 50/50 stocks/bonds portfolio (with stocks subdivided between domestic and international, and bonds subdivided between nominal and inflation-indexed) all life long, during both work years and retirement. They know that market returns fluctuate, but, for planning purpose, they use a real 3.5% growth trend for such a balanced portfolio.

To retire with dignity, they'll need to:
  • Accumulate ($20,000 X 5) = $100,000 to fill the gap in Social Security payments from age 65 to 69.
  • Save and invest enough in a tax-deferred accounts to equalize ($62,000 - savings) with ($14,000 + $20,000 + portfolio withdrawals).
At a real 3.5% growth rate, investing $1000 per year for 35 years, from age 30 to 64, would grow to a total of $66,674 at age 65. Accumulating $100,000 requires $1,500 in annual savings and investing. At age 65 with a 50/50 portfolio, the VPW table allows for a 4.8% withdrawal percentage. Multiplying $66,674 by 4.8% gives $3,200. In other words, each additional $1,000 in annual savings would project into portfolio withdrawals fluctuating from $3,200 in retirement; that's 3.2 times the annual savings.

So we want to find the additional savings such that ($62,000 - $1,500 - additional savings) = ($14,000 + $20,000 + 3.2 X additional savings).

Code: Select all

S = additional savings
$62,000 - $1,500 - S = $14,000 + $20,000 + 3.2 S
$60,500 - S = $34,000 + 3.2 S
$60,500 - $34,000 = 3.2 S + S
$26,500 = 4.2 S
S = $26,500 / 4.2 = $6,310
So, the household must save ($1,500 + $6310) = $7,810 annually into a tax-deferred account, from 30 to 64, living on the equivalent of a ($62,000 - $7,810) = $54,190 pre-tax income to preserve a relatively similar (but fluctuating) standard of living in retirement.

What the calculations above are suggesting is a dynamic savings rate. It projects variable percentage withdrawals back into accumulation years. Similar to VPW, it requires annual calculations without taking the past into account. Let me illustrate this.

At age 30, starting with a $0 portfolio, according to the above calculations, they need to save $7,810, or $300/bi-weekly pay, into a tax-deferred account. That's a 12.6% savings rate.

Every year, they redo the above calculations based on their current portfolio balance and current income, using an updated investment horizon. At age 35, for example, maybe they've been unlucky and their portfolio has only grown to $37,500 (inflation-adjusted) . The household income is still $62,000. Let's do the calculations, keeping the constant real 3.5% portfolio growth trend but for a 30 year investment horizon from age 35 to 64.

In 30 years, $37,500 would grow to $105,255. This would cover the Social Security gap and allow for an additional ($5,255 X 4.8%) = $252 VPW portfolio withdrawal. In 30 years, investing $1000 per year would grow to a total of $51,623 and allow for a ($51,623 X 4.8%) = $2,478 VPW withdrawal.

We want to find the additional savings such that ($62,000 - additional savings) = ($14,000 + $20,000 + $252 + 2.478 X additional savings).

Code: Select all

S = additional savings
$62,000 - S = $14,000 + $20,000 + $252 + 2.478 S
$62,000 - S = $34,252 + 2.478 S
$62,000 - $34,252 = 2.478 S + S
$27,748 = 3.478 S
S = $27,748 / 3.478 = $7,978
So, the household must save $7,978, or $307/bi-weekly pay, at age 35 into a tax-deferred account, living on the equivalent of a ($62,000 - $7,978) = $54,022 pre-tax income. That's a 12.9% savings rate.

See how the savings rate fluctuates according to market returns. Lower market returns lead to a slightly higher savings rate, naturally letting them buy slightly more investment assets when they're down. Higher market returns would lead to a slightly lower savings rate, naturally letting them buy slightly less investment assets when they're up.

Note that there's no need to predict future returns. Instead, I suggest using VPW's growth trend. It's actually important to use a constant growth trend. Saving more when markets are high, and less when they're low (as would happen if one used "good" future return predictions*) wouldn't be a smart thing to do!

* I personally don't believe that anybody is able to make good future return predictions.

Of course, many will consider it generally imprudent to target a retirement age of 65, because one or both spouses could lose their job before that, or they could wish to retire earlier. That's fine. One could easily redo the above calculations with an earlier target retirement age. Note, too, that the above calculations determine a minimal savings rate. One could save more, too, but this would be a choice of targeting a higher standard of living in retirement than when working.
Last edited by longinvest on Tue Jun 11, 2019 7:47 am, edited 11 times in total.
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Fri Nov 16, 2018 10:59 am

Of course, the above calculations apply to a single person too. Also, the above couple could have chosen to skip on home ownership and simply rented all lifelong. This would have allowed them to start saving and investing in their twenties, instead of putting all the money on the house down payment.
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Svensk Anga
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by Svensk Anga » Fri Nov 16, 2018 2:01 pm

Your example supports the fairly common recommendation to save about 12%. Nice.

I see a couple possible tweaks:

Your example couple gets a raise in after-tax income upon retirement for two reasons. 1.) FICA taxes stop along with earned income. 2.) Their SS income should be at least partially tax-free. So a somewhat lower savings rate is possible if after-tax income is to be held constant.

I would have accelerated the savings rate when the mortgage was paid off. (In fact, I did.) But it is understandable if they have deferred spending desires that they can now satisfy in their remaining working years and into retirement. The example has some lifestyle inflation when the house down payment saving and mortgage payments stop. This lifestyle inflation is likely significant for the median income couple paying off a house, but maybe not so much for higher earners who were satisfied with modest house.

The example given works for the median income couple (or single). For those of us well beyond the second SS bend point, SS will replace less of the former salary and so the saving rate will have to be higher.

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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Fri Nov 16, 2018 7:10 pm

Svensk Anga wrote:
Fri Nov 16, 2018 2:01 pm
The example given works for the median income couple (or single). For those of us well beyond the second SS bend point, SS will replace less of the former salary and so the saving rate will have to be higher.
The method is meant to adapt to the couple's situation over time. Every year, they redo the calculations using their current salaries and portfolio balance, and get a new savings rate. So, if their salaries increase (faster than inflation), their savings rate will increase accordingly.

It's true that the method is conservative. Equating gross salary minus tax-deferred savings to retirement income will possibly lead to a higher net income in retirement, but the volatility of market returns makes fun of any attempt at false precision. I think that the calculations are good enough.

The important thing is that it's simple and adaptive. If one spouse unexpectedly loses his job, VSR will determine a new savings rate and result into a smaller spending budget. When a new job is found, VSR will provide a new appropriate savings rate, taking into account the updated salaries and portfolio balance.
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Fri May 24, 2019 11:41 pm

I have uploaded version 1.0 of the Variable Savings Rate spreadsheet.

It is available online and to download from the links in the first post.

Main changes:
  • Initial version.
As usual, comments are welcome.

Enjoy!
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 8:01 am

The Variable savings rate (VSR) spreadsheet is easy to use:

Each year of accumulation:
  1. The following data must be provided:
    • Age, salary, as well as portfolio balance and stock allocation.
    • Desired retirement age.
    • Defined Benefit Pension #1: Social Security annual contribution (OASI tax), start age of payments, and monthly payment amount, all of which can be estimated using Neurosphere's Social Security Estimator.
    • Optional: Defined Benefit Pensions #2 and #3 information.
    • Savings frequency: Monthly, semimonthly, or biweekly.
  2. The VSR spreadsheet calculates:
    1. The amount that the investor must systematically add to the portfolio on the selected frequency (monthly, semimonthly, or biweekly).
    2. The required flexibility that the investor must exhibit given the current asset allocation. In particular, the spreadsheet calculates:
      • The impact, on the portfolio, of a 50% loss in stocks.
      • The additional savings that the investor must be able to do (e.g. implying a reduction in spending budget) after a market downturn.
    3. The projected annual retirement income (before and after loss).
Every year, a new savings amount is calculated, based on the evolving situation of the investor such as age, salary, and portfolio balance.

It is important for the investor to consider the required flexibility information provided in the spreadsheet, and keep enough room in the spending budget to easily reduce expenses by the suggested amount in the future, after a market downturn.

Calculations must imperatively be repeated every year, as well as everytime a significant change happens to the investor's situation (like an increase in salary).

Here's a screenshot:

Image

We see that the spreadsheet suggests, in the illustrated case, to save and invest in the portfolio $556 per month. This represents a (($556 X 12) / $40,000) = 17% savings rate. The spreadsheet also suggests to keep enough flexibility in the budget to easily reduce spending and increase savings by $25 per month.

The spreadsheet also provides a projected annual retirement income: $31,213. This is the equilibrium income. It's equal to the projected retirement income composed of Social Security and variable portfolio withdrawals. It's also the effective income available this year after removing savings and Social Security tax: ($40,000 - ($556 X 12) - $2,120).

Note that $31,213 is a pre-tax income. Part of this income will be used to pay taxes. What remains can be used for other expenses. During accumulation, it is assumed that savings are invested within a tax-deferred account, such as a 401K or an IRA account.

Additional assumptions:
  • It is assumed that asset allocation remains unchanged during accumulation and retirement.
  • During retirement, it is assumed that the investor will use the Variable-percentage withdrawal (VPW) method to take withdrawals from the stocks/bonds portfolio.
Lastly, it's the opinion of the author of these lines that a US investor could consider adopting a very simple, yet robust strategy: (1) invest all savings into a globally diversified all-in-one balanced index fund or ETF (60/40 stocks/bonds) like Vanguard's LifeStrategy Moderate Growth Fund, (2) use the VSR spreadsheet once a year to determine the new amount of regular savings, and (3) set automatic contributions to retirement accounts on payday accordingly. As our mentor Jack Bogle used to say: "When there are multiple solutions to a problem, choose the simplest one."

Links to the VSR spreadsheet are found in this post.

I invite forum members to try it and provide their feedback on this thread.
Last edited by longinvest on Sun May 26, 2019 11:56 pm, edited 2 times in total.
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AlohaJoe
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by AlohaJoe » Sat May 25, 2019 9:53 am

I think it is a good approach. I am always somewhat disappointed how little good guidance there is for savers. As you say, it is usually vague advice like "as much as you can but not too much".

I have a similar-ish spreadsheet I've been creating.

https://docs.google.com/spreadsheets/d/ ... sp=sharing

My main motivation for it was to include a few things that I felt simpler suggestions often lacked: Couples can have different ages, different retirement dates, different incomes, different Social Security amounts, and different Social Security claiming dates.

I said mine "similar-ish" because there are a few points where I took a different approach:
  • I use the current TIPS 30-year real yield for the discount rate (it is pulled dynamically from the Treasury website in cell A35).
  • I rely on annuity pricing (cell A20) rather than VPW
There's a "cake chart" to help readers visualise the sources of income each year (i.e. the layers of the cake). There's also a simulation tab showing how thing would have historically played out for someone following the advice of the spreadsheet.

This is an example of what the "cake chart" looks like:

Image

And a prototypical case is:
  • Person A retires, while Person B decides to keep working a few more years. Person A does not claim Social Security yet. Bridge #1 is required to make up the income shortfall from Person A no longer having a salary.
  • Person B also retires. Neither one is claiming Social Security yet, so Bridge #2 is required to make up the full income shortfall.
  • Person B claims Social Security; Person A continues to defer. Bridge #3 is required to make up the shortfall between one Social Security payment and the full income desired.
  • Finally, Person A also claims Social Security. This is "steady state" and I assume they buy an annuity to make up the income shortfall between their two Social Security payments and their desired income.
While I assume the entire portfolio is in TIPS & annuities, it is important that readers keep in mind you don't have to invest in those things. But the spreadsheet is telling you the risk-free cost of retirement. If you want to take on risk -- by saving less or investing in riskier things -- that's perfectly fine. One secondary goal of the spreadsheet was to help make more explicit how much risk someone is taking when the embark on a savings plan. If the spreadsheet says "you need to save $14,000 this year to avoid risk in your retirement plan" and you only save $12,000 then you know you are saying "I hope the market bails me out for that extra $2,000!"

Conversely, it also shows how expensive it is to remove risk. Being risk-free is very expensive!

Readers may notice that my spreadsheet gives fairly high savings rates: $16,000 a year at age 23 (albeit with a goal of early retirement at age 55). I added a Simulation tab that shows those kinds of numbers are actually pretty plausible, even when invested in a 60/40 portfolio (i.e. they do not result in dramatic oversaving).

I was mostly playing around with the spreadsheet for my own edification. But I discovered/realised how much complexity there is even in my simplified scenario. What happens if Person A doesn't retire entirely but continues to work part-time? What happens if there are pensions involved? What if one person is adjusted by inflation and the other isn't? What happens if expenses are much higher for the first few years of retirement and then drop off? (Maybe that is showing the shift from paying expensive private health insurance to qualifying for Medicare. Maybe that shows the last few years of paying off a mortgage or college education for children.)

It also, for me, drove home how financially challenging it is to retire early or to ignore Social Security in one's planning. It is easy to say those kind of things when a family is making $150,000 or $250,000 a year. It is much harder even on $80,000 a year.

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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 10:08 am

Aloha,
AlohaJoe wrote:
Sat May 25, 2019 9:53 am
I said mine "similar-ish" because there are a few points where I took a different approach:
  • I use the current TIPS 30-year real yield for the discount rate (it is pulled dynamically from the Treasury website in cell A35).
  • I rely on annuity pricing (cell A20) rather than VPW
If you invest your money into fluctuating assets and want to use "future return predictions" as discount rate, you have to predict their future returns over your various horizons which can easily span over more than 50 or 60 years. Nobody can do that. Even the longest-maturity TIPS is limited to 30 years, and its total real return isn't known (even within a tax-sheltered account) because of the uncertainty of coupon reinvestment rates. As for annuity prices, they fluctuate over decades.

The VSR and VPW approach is to (1) acknowledge that future returns are uncertain and make no attempt at predicting them, (2) use a "not too bad" but constant growth trend, which is a wild-ass guess (WAG) of a middle-of-the-road portfolio return (higher than low returns, lower than high returns) to calibrate savings or withdrawals, and (3) simply adjust savings or withdrawals yearly as events unfold.

In the new VSR spreadsheet, I've included an estimate of the short-term budget flexibility required due to the investor's asset allocation choice. It's impossible to accurately predict long-term flexibility requirements. Anyway, humans have the ability to adapt over time.

If you wish to explain your method and spreadsheet in details, I invite you to start a new thread about it (you can link to it from this thread, of course). I'd like to keep this thread targeted at helping users of the VSR spreadsheet and improving it.

Cheers,

longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 11:09 am

AlohaJoe wrote:
Sat May 25, 2019 9:53 am
I was mostly playing around with the spreadsheet for my own edification. But I discovered/realised how much complexity there is even in my simplified scenario. What happens if Person A doesn't retire entirely but continues to work part-time? What happens if there are pensions involved? What if one person is adjusted by inflation and the other isn't? What happens if expenses are much higher for the first few years of retirement and then drop off? (Maybe that is showing the shift from paying expensive private health insurance to qualifying for Medicare. Maybe that shows the last few years of paying off a mortgage or college education for children.)
I haven't addressed, so far, the problem of retirement planning for couples in the VSR and VPW spreadsheet, other than suggest, in our wiki, to use the younger's spouse age to determine VPW withdrawal rates.

Planning for couples is challenging. For one thing, there's always the possibility of separation of spouses due to health issues (one spouse ending up in a long-term care facility), or divorce. Such an adverse event can't be efficiently planned for; insurance companies don't sell "divorce insurance" that replaces the ex-spouse's financial contribution. One must simply acknowledge the risk and plan to adapt by reducing spending if it ever happens. It would be inefficient for a couple to live on the equivalent of a post-divorce single budget just so that spouses don't experience a financial loss if it happens.

The other difficulty is that Social Security is not perfectly similar to a joint-life annuity; on the death of one spouse, one of the two Social Security pensions is lost. Luckily, the survivor gets to keep the highest of the two pensions. So, it might make sense for the spouse with the higher Social Security payment to delay it, and for the other to claim it as early as possible. Yet, financial planning should account for the drop in income on the death of one spouse. Just to make matters worse, all income will now be taxed into the hand of a single person, which might further reduce after-tax income available for spending.

The current solution we use in my couple is to make two separate calculations, one for each spouse, and not plan for the "single-life" part of future pensions (e.g. not bridge the gap in income between retirement and start of a single-life pension, consider as if it didn't exist). When we get the unplanned money, we'll use it as "extra, unplanned for" spending for the couple. We won't use it for regular spending (unless, maybe, its an expense we know the surviving spouse will stop). My wife and I are aware that, because of taxes, net income will be lower. But, there will be one less mouth to feed, and the surviving spouse could always downsize the home.

In other words, we only need to maintain two copies of the VSR spreadsheet, one per spouse, and fill them appropriately to exclude single-life pensions (or part of pensions that are partly joint-life). It's simple enough and it works for us.

For a US couple, each spouse could put 50% of the higher of the two Social Security pensions into her personal VSR spreadsheet.
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by Horton » Sat May 25, 2019 2:28 pm

The discount rate is an interesting topic. I prefer to use risk free current market assumptions, rather than historical averages. Sounds like this is the approach AlohaJoe uses. It’s consistent with the lifecycle model and is the approach ESPlanner / MaxiFi use. The latter tools are not free but do permit a lot of flexibility when modeling: Social Security, pensions, annuities, ages of spouse / children, college savings, longevity of couples, asset allocation, etc.

That said, I can attest that there is a steep learning curve when using ESPlanner / MaxiFi, and the VSR may be a more straightforward tool for many to gauge progress.
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 2:39 pm

Horton wrote:
Sat May 25, 2019 2:28 pm
The discount rate is an interesting topic. I prefer to use risk free current market assumptions, rather than historical averages.
If your goal is to delay spending from younger and healthier years to older years, using a so-called "risk-free" rate is a good method. It's also a good way to hoard money and an awesome approach for financial advisers to keep Assets Under Management (AUM) as big as possible for the longest time possible. Keeping as much AUM as possible is also why we continue to hear about taking constant inflation-adjusted withdrawals from a portfolio of fluctuating assets regardless of market returns. It's also why we always hear that future returns in all markets will be low and that one should pick a very low SWR to be "safe".

I know of nobody who can predict stocks, bonds, TIPS, savings accounts, and other financial assets total returns over my hopefully multi-decades investment horizons (yes, it isn't a single horizon, but hundreds of horizons).

Good luck!
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 2:50 pm

longinvest wrote:
Sat May 25, 2019 2:39 pm
Horton wrote:
Sat May 25, 2019 2:28 pm
The discount rate is an interesting topic. I prefer to use risk free current market assumptions, rather than historical averages.
If your goal is to delay spending from younger and healthier years to older years, using a so-called "risk-free" rate is a good method. It's also a good way to hoard money and an awesome approach for financial advisers to keep Assets Under Management (AUM) as big as possible for the longest time possible. Keeping as much AUM as possible is also why we continue to hear about taking constant inflation-adjusted withdrawals from a portfolio of fluctuating assets regardless of market returns. It's also why we always hear that future returns in all markets will be low and that one should pick a very low SWR to be "safe".

I know of nobody who can predict stocks, bonds, TIPS, savings accounts, and other financial assets total returns over my hopefully multi-decades investment horizons (yes, it isn't a single horizon, but hundreds of horizons).

Good luck!
Let me add that using a changing rate, like the so-called "risk-free" rate, leads to a very bad investing approach. When the rate is low, one saves more and "buys more" highly-priced assets. When the rate increases (and asset prices deflate), one saves less and "buys less" low-priced assets. "buy more high, buy less low" is a form of "buy high, sell low", the worst investing method ever.

It pays to think ahead of time about the consequences of one's choices. The choice of using a constant internal growth trend, in VPW and VSR, is fundamental to the approach; it isn't an arbitrary choice.
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by Horton » Sat May 25, 2019 3:03 pm

longinvest wrote:
Sat May 25, 2019 2:39 pm
Horton wrote:
Sat May 25, 2019 2:28 pm
The discount rate is an interesting topic. I prefer to use risk free current market assumptions, rather than historical averages.
If your goal is to delay spending from younger and healthier years to older years, using a so-called "risk-free" rate is a good method. It's also a good way to hoard money and an awesome approach for financial advisers to keep Assets Under Management (AUM) as big as possible for the longest time possible. Keeping as much AUM as possible is also why we continue to hear about taking constant inflation-adjusted withdrawals from a portfolio of fluctuating assets regardless of market returns. It's also why we always hear that future returns in all markets will be low and that one should pick a very low SWR to be "safe".

I know of nobody who can predict stocks, bonds, TIPS, savings accounts, and other financial assets total returns over my hopefully multi-decades investment horizons (yes, it isn't a single horizon, but hundreds of horizons).

Good luck!
Actually, by using MaxiFi and similar methods supported by the lifecycle theory, I’ve come to discover in the last year that I can (a) spend more now and (b) invest less aggressively while still being able to retire when I want.

I anticipate that VSR/VPW would tell me something similar as well. Perhaps it would paint an even more optimistic picture, but I know that I’m risk averse. In any event, this is a big improvement over the “4% rule.”

Again, I think your tool is useful and apologize if you took my comments as criticism. VPW at least has been labeled as “developed by the Bogleheads”, so I just wanted to throw out another perspective for those who use the tool.

Thanks again for all your hard work!
"You must know that there is nothing higher and stronger and more wholesome and good for life in the future than some good memory, especially a memory of childhood, of home." - Dostoyevsky

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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by Horton » Sat May 25, 2019 3:11 pm

longinvest wrote:
Sat May 25, 2019 2:50 pm
longinvest wrote:
Sat May 25, 2019 2:39 pm
Horton wrote:
Sat May 25, 2019 2:28 pm
The discount rate is an interesting topic. I prefer to use risk free current market assumptions, rather than historical averages.
If your goal is to delay spending from younger and healthier years to older years, using a so-called "risk-free" rate is a good method. It's also a good way to hoard money and an awesome approach for financial advisers to keep Assets Under Management (AUM) as big as possible for the longest time possible. Keeping as much AUM as possible is also why we continue to hear about taking constant inflation-adjusted withdrawals from a portfolio of fluctuating assets regardless of market returns. It's also why we always hear that future returns in all markets will be low and that one should pick a very low SWR to be "safe".

I know of nobody who can predict stocks, bonds, TIPS, savings accounts, and other financial assets total returns over my hopefully multi-decades investment horizons (yes, it isn't a single horizon, but hundreds of horizons).

Good luck!
Let me add that using a changing rate, like the so-called "risk-free" rate, leads to a very bad investing approach. When the rate is low, one saves more and "buys more" highly-priced assets. When the rate increases (and asset prices deflate), one saves less and "buys less" low-priced assets. "buy more high, buy less low" is a form of "buy high, sell low", the worst investing method ever.

It pays to think ahead of time about the consequences of one's choices. The choice of using a constant internal growth trend, in VPW and VSR, is fundamental to the approach; it isn't an arbitrary choice.
When rates are low, your liability (retirement spending) is high. That’s why you need to save more.

What happens if rates do not rise to historical levels? You may wind up having to save more later in your career or delay retirement.
"You must know that there is nothing higher and stronger and more wholesome and good for life in the future than some good memory, especially a memory of childhood, of home." - Dostoyevsky

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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 3:29 pm

Horton wrote:
Sat May 25, 2019 3:03 pm
I anticipate that VSR/VPW would tell me something similar as well. Perhaps it would paint an even more optimistic picture, but I know that I’m risk averse. In any event, this is a big improvement over the “4% rule.”
Horton, if you're very risk averse, I suggest that you investigate VSR and VPW using a conservative portfolio. I would be careful, though, not to try too much to avoid one type of risk, because one can often unawarely be loading up on other harmful risks by avoiding a specific risk. It's often best to mitigate risks, instead of trying to completely avoid them. Anyway, that's the approach I take.
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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 3:33 pm

Horton wrote:
Sat May 25, 2019 3:11 pm
longinvest wrote:
Sat May 25, 2019 2:50 pm
Let me add that using a changing rate, like the so-called "risk-free" rate, leads to a very bad investing approach. When the rate is low, one saves more and "buys more" highly-priced assets. When the rate increases (and asset prices deflate), one saves less and "buys less" low-priced assets. "buy more high, buy less low" is a form of "buy high, sell low", the worst investing method ever.

It pays to think ahead of time about the consequences of one's choices. The choice of using a constant internal growth trend, in VPW and VSR, is fundamental to the approach; it isn't an arbitrary choice.
When rates are low, your liability (retirement spending) is high. That’s why you need to save more.

What happens if rates do not rise to historical levels? You may wind up having to save more later in your career or delay retirement.
Horton, the math is what it is. Using a changing risk-free rate to drive a savings method or a withdrawal method, like VSR and VPW, leads to counterproductive investing behavior. It just cannot be otherwise.

Future market total-returns are uncertain. It's probably best to learn to deal with it.
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abracadabra11
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by abracadabra11 » Sat May 25, 2019 4:23 pm

Are you taking requests for the spreadsheet?

If so, can you expand the available retirement age selections to include 40?

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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sat May 25, 2019 5:20 pm

abracadabra11 wrote:
Sat May 25, 2019 4:23 pm
Are you taking requests for the spreadsheet?

If so, can you expand the available retirement age selections to include 40?
Abra Cadabra,

Can you explain the magic that allowed you to become so highly efficient at what you do to generate so much wealth that you're able to contemplate retirement at age 40, while at the same time, you're hoping to quit at 40?

I can't imagine my preferred idols (movie stars, artists, business leaders, and so many others) quitting at 40 and depriving humanity of their talents!

This spreadsheet is meant as a Bogleheads tool. It shouldn't be a tool that discourages average young savers by letting them think that targeting retirement at 40 is normal. I wouldn't want to encourage, either, young over-enthusiasts to deprive their spouse and children from the pleasures money is meant to buy. Life's about the journey, not about the grim final destination.

If you let me in on your magic, I'll let you in on my trick to modify the spreadsheet yourself.
:sharebeer
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abracadabra11
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by abracadabra11 » Sun May 26, 2019 4:27 pm

longinvest wrote:
Sat May 25, 2019 5:20 pm
abracadabra11 wrote:
Sat May 25, 2019 4:23 pm
Are you taking requests for the spreadsheet?

If so, can you expand the available retirement age selections to include 40?
Abra Cadabra,

Can you explain the magic that allowed you to become so highly efficient at what you do to generate so much wealth that you're able to contemplate retirement at age 40, while at the same time, you're hoping to quit at 40?

I can't imagine my preferred idols (movie stars, artists, business leaders, and so many others) quitting at 40 and depriving humanity of their talents!

This spreadsheet is meant as a Bogleheads tool. It shouldn't be a tool that discourages average young savers by letting them think that targeting retirement at 40 is normal. I wouldn't want to encourage, either, young over-enthusiasts to deprive their spouse and children from the pleasures money is meant to buy. Life's about the journey, not about the grim final destination.

If you let me in on your magic, I'll let you in on my trick to modify the spreadsheet yourself.
:sharebeer
There's no magic. 42 is my planned retirement. High savings rate + military pension make for a pretty easy formula. For some members, retiring at 38 is even a possibility.

Will I do other activities after 42? Absolutely, but I have no intention on relying on them to support my family's spending.

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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sun May 26, 2019 4:31 pm

abracadabra11 wrote:
Sun May 26, 2019 4:27 pm
longinvest wrote:
Sat May 25, 2019 5:20 pm
If you let me in on your magic, I'll let you in on my trick to modify the spreadsheet yourself.
There's no magic. 42 is my planned retirement. High savings rate + military pension make for a pretty easy formula.
Thanks. I'm sending you a private message.
:sharebeer
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Sun May 26, 2019 11:59 pm

I have uploaded version 1.2 of the Variable Savings Rate spreadsheet.

It is available online and to download from the links in the first post.

Main changes:
  • Add support for defined benefit pensions with and without cost of living adjustments.
As usual, comments are welcome.

Enjoy!
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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Tue Jun 11, 2019 7:52 am

I've announced on the VPW thread the release of a VPW Accumulation And Retirement Worksheet that includes both an Accumulation sheet and a Retirement sheet. The VSR spreadsheet is now part of this new worksheet.

Enjoy!
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azanon
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by azanon » Tue Jun 11, 2019 8:05 am

So just skimming over this, is this technique a way of implementing "Consumption Smoothing", which i've read about from time to time? one link to a definition: https://www.investopedia.com/terms/c/co ... othing.asp

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longinvest
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Re: The Variable Savings Rate (VSR) -- an accumulation-time prelude to VPW

Post by longinvest » Tue Jun 11, 2019 8:19 am

azanon wrote:
Tue Jun 11, 2019 8:05 am
So just skimming over this, is this technique a way of implementing "Consumption Smoothing", which i've read about from time to time? one link to a definition: https://www.investopedia.com/terms/c/co ... othing.asp
Your question is somewhat similar to asking if VPW is a way of implementing SWR (for which the answer is no, because VPW delivers fluctuating withdrawals and never prematurely depletes the portfolio).

Consumption smoothing has a predictive aspect to it and has sequence of return problems. VSR doesn't.

VSR is about trying to estimate a reasonable level of savings, while staying flexible and reassessing the situation every year. After low returns, savings are somewhat adjusted up. After high returns, savings are somewhat adjusted down. The idea is not to over-save or under-save too much. It's very similar to VPW, but it applies to portfolio contributions, instead of portfolio withdrawals.

The nice thing is that it eliminates the use of a "Target Number" for retirement planning (like seeking a $1,000,000 portfolio or 25 times expenses). Instead, it lets its user choose a retirement age and adjusts savings (and, therefore spending) accordingly*, subject to annual adjustments. Among its features is informing its user of the required flexibility to face a 50% stocks crash with the chosen asset allocation and retirement plan.

* Taking into account the user's current age, salary, portfolio balance and allocation, planned retirement age, and future pensions like Social Security.
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