Variable Percentage Withdrawal (VPW)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

VPW is a "1/N" method, the user needs to be aware of its characteristics. While "premature depletion" doesn't happen, it will deplete the portfolio after year X.
Ckprocker
Posts: 64
Joined: Thu Apr 12, 2018 10:12 am

Re: Variable Percentage Withdrawal (VPW)

Post by Ckprocker »

Longinvest:

I've used the backtesting spreadsheet 2.3 and it's a great tool for research and planning, thanks!

On the new Retirement worksheet version 1.5, I don't see any place to adjust the ending year.
For example, if I start at 65 and want to end the process at 95, is there a way to adjust the end date of the spreadsheet?
Did I miss something in this spreadsheet version 1.5 to make this adjustment?

Thanks for your help
JasonFIRE
Posts: 21
Joined: Fri Sep 18, 2020 9:30 pm

Re: Variable Percentage Withdrawal (VPW)

Post by JasonFIRE »

Quoting from this link:
longinvest wrote: Sat Oct 12, 2019 2:35 pm The retiree will get $2,000/month Social Security payments in 5 years. That's $24,000/year. The percentage for a 5-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 21.5% (age 95 in the table). As a consequence, ($24,000 / 21.5%) = $111,628 is kept aside (on paper) for Social Security bridge withdrawals.
Question about the pension bridge cost calculation and portfolio depletion:

Given the above quote, from what I can tell, this calculation is done by taking the expected yearly pension amount and multiplying it by the appropriate percentage in the VPW table. It seems the current portfolio value is not included in the pension bridge calculation and hence is not considered in that calculation.

Now, consider the notion that VPW is claimed to be mathematically impossible to deplete the portfolio.

If the portfolio were to drop so much that pension bridge amount becomes larger than the portfolio value and the portfolio value stays depressed, then it is conceivable that the portfolio could be depleted.

I have not seen that raised as a concern. Is that because the back testing has shown that such a scenario is unlikely? Is it because the odds of running into that scenario are very low if one is using a "safe" starting portfolio value?

To that end, is there a “safe” portfolio value-to-pension ratio that survives back testing?
User avatar
Zardoz
Posts: 140
Joined: Thu Sep 24, 2020 12:25 am

Re: Variable Percentage Withdrawal (VPW)

Post by Zardoz »

longinvest wrote: Sun May 30, 2021 8:00 am There has never been a version of VPW (in terms of retirement approach) where we ignore pensions or don't plan to replace missing payments for a delayed pension. There has never been a version of VPW where it wasn't combined with sufficient stable lifelong inflation-indexed guaranteed income. There has never been a version of VPW where the retiree assumed that there is a floor on how low withdrawals from a portfolio of fluctuating assets can get. There has never been a version of VPW where the retiree didn't live like most humans adapting spending to available income.
This makes a lot of sense to me, and I appreciate all of the patient explanations (and re-explanations) that you've contributed on this topic. There's a important detail here as well though - VPW never assumes there is a floor on how low withdrawals from a portfolio of fluctuating assets can go. But as you have pointed out many times, VPW can be used in conjunction with a floor built upon inflation-indexed assets such as TIPS.

And the Worksheet, as you have also explained many times, takes a different approach - it sets aside an amount of any pensions and social security to be dedicated to matching the future floor during pre-pension years, and then applies the VPW variable withdrawal strategy to the remaining portion of the overall portfolio.

I hope I have stated this correctly. I consider myself an intermediate in terms of depth of studying retirement withdrawal methods, and I have gotten comfortable enough with VPW to now consider it my top choice for how I will manage the withdrawal phase when I early-retire next year.

Since I've found VPW to be very helpful, I was just wondering if there are any ways to refine the presentation of the strategy so that it is more easily understood by more people (and perhaps relieve you of some of the burden of re-explaining the key concepts). One idea that came to mind was to refine the terminology, e.g. perhaps introduce separate names for:

1. The VPW formula for determining withdrawals from a portfolio of fluctuating assets
2. The VPW usage strategy suggested in the description of how to use the table (sometimes referred to as the "old way"), using a stable floor of CDs/TIPS, etc.
3. The VPW usage strategy implemented by the Worksheet (sometimes referred to as the "new way")

Right now it seems that when we use the name "VPW" we could be referring to any one of these three things. I think this may cause confusion sometimes?
JasonFIRE wrote: Sun May 30, 2021 9:53 am Are we suggesting there is something OUTSIDE the VPW worksheet that one needs to consider? Is the VPW worksheet not being consistent?

To say it another way, if I am a 40 year old and I am comfortable with the “annual income after loss” number (and of course any drops below that given market performance), then irrespective of my portfolio amount, I would consider my retirement adequately funded, knowing that I might need to be flexible with my spending given market performance, which can go below the “annual income after loss” number. It does not matter what is my portfolio value and age; if I am comfortable with the numbers, then the outcome of my withdrawals will match what the worksheet is telling me, right?

To me, “adequately funded” with respect to VPW means “I am comfortable with the income after loss amount and any market-performance-based reductions below that.”

Am I missing something?

There is no hidden gotcha here, right? Something like “if age is below x, then worksheet is not accurate?” Nothing like that?
No hidden gotchas that I can see - the Worksheet is a very useful tool and it does what it says it does. Where I have seen some confusion arising is when people also start using the Backtesting spreadsheet, which is a very helpful tool to show us the variability of VPW withdrawals from a portfolio of fluctuating assets based on past market performance.

The small "problem" I have observed has to do with the possibility that some of us may inadvertently misunderstand how VPW as recommended will perform: since the Backtesting spreadsheet only shows the withdrawals from the fluctuating assets within a portfolio, it can lead to interpreting the results in a way that actually overstates the variability of the total withdrawals that would occur when VPW is used in conjunction with pensions / social security in the way that is recommended by using the table or as implemented by the Worksheet.
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
JasonFIRE
Posts: 21
Joined: Fri Sep 18, 2020 9:30 pm

Re: Variable Percentage Withdrawal (VPW)

Post by JasonFIRE »

JasonFIRE wrote: Sun May 30, 2021 12:42 pm Quoting from this link:
longinvest wrote: Sat Oct 12, 2019 2:35 pm The retiree will get $2,000/month Social Security payments in 5 years. That's $24,000/year. The percentage for a 5-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 21.5% (age 95 in the table). As a consequence, ($24,000 / 21.5%) = $111,628 is kept aside (on paper) for Social Security bridge withdrawals.
Question about the pension bridge cost calculation and portfolio depletion:

Given the above quote, from what I can tell, this calculation is done by taking the expected yearly pension amount and multiplying it by the appropriate percentage in the VPW table. It seems the current portfolio value is not included in the pension bridge calculation and hence is not considered in that calculation.

Now, consider the notion that VPW is claimed to be mathematically impossible to deplete the portfolio.

If the portfolio were to drop so much that pension bridge amount becomes larger than the portfolio value and the portfolio value stays depressed, then it is conceivable that the portfolio could be depleted.

I have not seen that raised as a concern. Is that because the back testing has shown that such a scenario is unlikely? Is it because the odds of running into that scenario are very low if one is using a "safe" starting portfolio value?

To that end, is there a “safe” portfolio value-to-pension ratio that survives back testing?
Apologies if this seemed like a dumb or pedantic question. I thought about it some more and looked at the social security bridge calculation in the VPW spreadsheet. It seems like the calculation therein is basically using a PV function with the WAG as the rate and the expected yearly social security amount as the amount, which seems as reasonable as it can get.

The whole VPW thing really does seem like the best way to manage all of these variables and the related uncertainty. As longinvest often reminds us, nothing is certain; we have to be flexible.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

JasonFIRE wrote: Mon May 31, 2021 11:42 am The whole VPW thing really does seem like the best way to manage all of these variables and the related uncertainty. As longinvest often reminds us, nothing is certain; we have to be flexible.
Be sure to understand the characteristics of "1/N" withdrawal methods. I'm not saying VPW is bad or anything, but there's a cost of withdrawing 4%+ early on and going higher.
JasonFIRE
Posts: 21
Joined: Fri Sep 18, 2020 9:30 pm

Re: Variable Percentage Withdrawal (VPW)

Post by JasonFIRE »

Marseille07 wrote: Mon May 31, 2021 11:48 am
JasonFIRE wrote: Mon May 31, 2021 11:42 am The whole VPW thing really does seem like the best way to manage all of these variables and the related uncertainty. As longinvest often reminds us, nothing is certain; we have to be flexible.
Be sure to understand the characteristics of "1/N" withdrawal methods. I'm not saying VPW is bad or anything, but there's a cost of withdrawing 4%+ early on and going higher.
Yes, it is important to consider that; however, it seems like the main way to address that is via purchasing an annuity at age 80, and the reasons for that are conspicuously documented the VPW materials.

Is there something else I am missing?
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

JasonFIRE wrote: Mon May 31, 2021 12:01 pm
Marseille07 wrote: Mon May 31, 2021 11:48 am
JasonFIRE wrote: Mon May 31, 2021 11:42 am The whole VPW thing really does seem like the best way to manage all of these variables and the related uncertainty. As longinvest often reminds us, nothing is certain; we have to be flexible.
Be sure to understand the characteristics of "1/N" withdrawal methods. I'm not saying VPW is bad or anything, but there's a cost of withdrawing 4%+ early on and going higher.
Yes, it is important to consider that; however, it seems like the main way to address that is via purchasing an annuity at age 80, and the reasons for that are conspicuously documented the VPW materials.

Is there something else I am missing?
I don't think so. It's just a difference of opinions where I prefer a methodology that perhaps requires a lot of money up front and not much withdrawals, but very unlikely to require an annuity later.
SnowBog
Posts: 4700
Joined: Fri Dec 21, 2018 10:21 pm

Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

Marseille07 wrote: Mon May 31, 2021 12:06 pm
JasonFIRE wrote: Mon May 31, 2021 12:01 pm
Marseille07 wrote: Mon May 31, 2021 11:48 am
JasonFIRE wrote: Mon May 31, 2021 11:42 am The whole VPW thing really does seem like the best way to manage all of these variables and the related uncertainty. As longinvest often reminds us, nothing is certain; we have to be flexible.
Be sure to understand the characteristics of "1/N" withdrawal methods. I'm not saying VPW is bad or anything, but there's a cost of withdrawing 4%+ early on and going higher.
Yes, it is important to consider that; however, it seems like the main way to address that is via purchasing an annuity at age 80, and the reasons for that are conspicuously documented the VPW materials.

Is there something else I am missing?
I don't think so. It's just a difference of opinions where I prefer a methodology that perhaps requires a lot of money up front and not much withdrawals, but very unlikely to require an annuity later.
For clarity, VPW - especially longinvest's calculator (which caps at 10%) - are not 1/N based. Perhaps you are thinking of the APW method (which is 1/N based).

And again, nothing about VPW is "forcing" you to spend more. VPW simply says that - if you have the required flexibility to cut spending in bad markets - you have the ability (not requirement) to spend more in normal years.

I expect our spending to be below what VPW says we can spend. I don't see any conflict there... And we likely will never need to buy an annuity (social security with small pension are expected to cover the majority of our essential expenses, especially if our expenses show down as we age [wild cars being medical obviously]). Again, no conflict...
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

SnowBog wrote: Tue Jun 01, 2021 1:58 pm For clarity, VPW - especially longinvest's calculator (which caps at 10%) - are not 1/N based. Perhaps you are thinking of the APW method (which is 1/N based).

And again, nothing about VPW is "forcing" you to spend more. VPW simply says that - if you have the required flexibility to cut spending in bad markets - you have the ability (not requirement) to spend more in normal years.

I expect our spending to be below what VPW says we can spend. I don't see any conflict there... And we likely will never need to buy an annuity (social security with small pension are expected to cover the majority of our essential expenses, especially if our expenses show down as we age [wild cars being medical obviously]). Again, no conflict...
A table of percentages looking like this is 1/N (see the last 3 rows): https://www.bogleheads.org/w/images/6/65/VPW.jpg.

Capping at 10% doesn't change the classification or intrinsic characteristics of a method. Agreed on other points, VPW is the upper limit and no one says you must spend fully every year.
Lastrun
Posts: 1512
Joined: Wed May 03, 2017 6:46 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Lastrun »

Marseille07 wrote: Tue Jun 01, 2021 2:15 pm
SnowBog wrote: Tue Jun 01, 2021 1:58 pm For clarity, VPW - especially longinvest's calculator (which caps at 10%) - are not 1/N based. Perhaps you are thinking of the APW method (which is 1/N based).

A
A table of percentages looking like this is 1/N (see the last 3 rows): https://www.bogleheads.org/w/images/6/65/VPW.jpg.

Capping at 10% doesn't change the classification or intrinsic characteristics of a method. Agreed on other points, VPW is the upper limit and no one says you must spend fully every year.
I am confused by both of your responses, but correct me if I am wrong:

The 1/N method has two variables, portfolio value and the number of years selected. See https://www.bogleheads.org/wiki/Withdrawal_methods

VPW has three variables, portfolio value, being one true variable and two others that the VPW method fixes: years and WAG (expected return).

ABW has three basic variables: portfolio value, expected return and years.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Lastrun wrote: Tue Jun 01, 2021 5:09 pm
Marseille07 wrote: Tue Jun 01, 2021 2:15 pm
SnowBog wrote: Tue Jun 01, 2021 1:58 pm For clarity, VPW - especially longinvest's calculator (which caps at 10%) - are not 1/N based. Perhaps you are thinking of the APW method (which is 1/N based).

A
A table of percentages looking like this is 1/N (see the last 3 rows): https://www.bogleheads.org/w/images/6/65/VPW.jpg.

Capping at 10% doesn't change the classification or intrinsic characteristics of a method. Agreed on other points, VPW is the upper limit and no one says you must spend fully every year.
I am confused by both of your responses, but correct me if I am wrong:

The 1/N method has two variables, portfolio value and the number of years selected. See https://www.bogleheads.org/wiki/Withdrawal_methods

VPW has three variables, portfolio value, being one true variable and two others that the VPW method fixes: years and WAG (expected return).

ABW has three basic variables: portfolio value, expected return and years.
VPW withdraws such a way that it *will* deplete after X years by withdrawing 1/N. In the picture I posted above, Year 32 says 26% withdrawal, Year 33 34%, Year 34 50% then Year 35 100% - this is because we're looking at 1/4, 1/3, 1/2 then eventually 1/1.

The above poster says cap the withdrawal at 10% - which is fine, but that doesn't change the fact that VPW is still a 1/N variant.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Such a debate about semantics is better held on an independent thread, instead of this official VPW thread. Thanks.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Variable Percentage Withdrawal (VPW)

Post by dcabler »

Lastrun wrote: Tue Jun 01, 2021 5:09 pm
Marseille07 wrote: Tue Jun 01, 2021 2:15 pm
SnowBog wrote: Tue Jun 01, 2021 1:58 pm For clarity, VPW - especially longinvest's calculator (which caps at 10%) - are not 1/N based. Perhaps you are thinking of the APW method (which is 1/N based).

A
A table of percentages looking like this is 1/N (see the last 3 rows): https://www.bogleheads.org/w/images/6/65/VPW.jpg.

Capping at 10% doesn't change the classification or intrinsic characteristics of a method. Agreed on other points, VPW is the upper limit and no one says you must spend fully every year.
I am confused by both of your responses, but correct me if I am wrong:

The 1/N method has two variables, portfolio value and the number of years selected. See https://www.bogleheads.org/wiki/Withdrawal_methods

VPW has three variables, portfolio value, being one true variable and two others that the VPW method fixes: years and WAG (expected return).

ABW has three basic variables: portfolio value, expected return and years.
Very early on in the VPW discussions this was brought up. VPW only becomes 1/N when you change the future returns for stocks and bonds to both 0% in the VPW spreadsheet instead of using the default 5% (stock) and 3.9% (bond). RMD calculations also aren't 1/N. The one thing they all have in common is a monotonically increasing withdrawal percentage but the math that goes into those calculations are different. Somebody mentioned APW but I couldn't find mention of it in the forum - perhaps they meant ABW? It's also not 1/N and the details can be searched for in the forum.

A wiki page of withdrawal methods which specifically puts 1/N in its own category: https://www.bogleheads.org/wiki/Withdrawal_methods
VPW's wiki which also briefly mentions 1/N - https://www.bogleheads.org/wiki/Variabl ... withdrawal

Cheers.
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Variable Percentage Withdrawal (VPW)

Post by withrye »

Zardoz wrote: Sun May 30, 2021 2:45 am One potential source of confusion I see with the current VPW documentation and examples is that the Backtesting spreadsheet doesn't use the "set-aside" bridge mechanism that the Worksheet uses. If I understand it correctly, this means the Backtesting spreadsheet's withdrawal rates will show greater variability than what would be recommended by the Worksheet (for those who have a pension or Social Security).
Would it be possible to include Social Security or other COLA pensions in the backtesting spreadsheet?

I was able to cobble together a solution when I was creating my own backtesting spreadsheet that tried to replicate what a "year-by-year" simulation of what the Retirement Worksheet would produce as outputs for a given portfolio size, allocation, age, and SS income.

The formula I ended up using looked something like this:

((Portfolio Balance - Pension Bridge Cost) * (VPW Withdrawal Percentage)) + Pension Amount = VPW Recommended Income

In terms of an Excel input, it looked like this:

Code: Select all

=([Portfolio Balance]+PV([Portfolio Growth WAG], [Pension Start Age]-[Current Age], [Pension Amount], 0, 1))*MIN(0.1, PMT([Portfolio Growth WAG], 100-[Current Age], -1, 0, 1))+[Pension Amount]
The Pension Bridge Cost is calculated by the PV formula using the portfolio growth WAG, years to pension, and pension amount.
The VPW Withdrawal Percentage is the minimum of 10% or the PMT formula using the portfolio growth WAG and years to death.
By subtracting the Pension Bridge Cost from the Portfolio Balance you get the portion to which you should apply the VPW Withdrawal Percentage, and then you add back the Pension Amount to get to the total VPW Recommended Income for the year.

If this approach is successfully integrated with the Backtesting Spreadsheet, it would harmonize results between the Backtesting Spreadsheet and the Retirement Worksheet used by someone planning on collecting Social Security or some other COLA pension.

I'm sure I did not find the optimal approach for calculating these results, but it worked for my limited needs. Given the complexity of the conditional coding to "drop" the Pension Bridge Cost once the Pension Age is reached, etc. I can see that this wouldn't be a trivial addition to the Backtesting Spreadsheet, but if it is feasible I think it would be a great addition to the tool.

Edited for minor typos.
GoneCamping
Posts: 86
Joined: Mon Mar 01, 2021 5:45 pm

Re: Variable Percentage Withdrawal (VPW)

Post by GoneCamping »

So, I'm experimenting with VPW and want to make sure I have this right.

1) VPW aims to deplete the portfolio by age 100
2) VPW calculates a bridge amount to cover SS until the time SS payments begin (essentially to safely provide that amount in the interim).
3) The idea is to put the bridge funds in safe investments (CDs, TIPS, iBonds, Savings, etc.)
3) Total withdrawal amount is the annual bridge amt. + remaining portfolio wd VPW calculates based on the tables

Assuming these are correct I'm curious about the bridge part. It seems like the amount one will receive in SS benefits is meaningless when it comes to calculating withdrawals from a portfolio in the interim. What's the point of the bridge and reasoning behind it? I'm guessing it's to smooth totals such that the annual amount available (total WD + bridge or, later total WD + SS) doesn't rise or drop significantly once SS kicks in? What if one doesn't care about the SS bridge and instead just wants to calculate a safe WD from their portfolio?
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Variable Percentage Withdrawal (VPW)

Post by withrye »

GoneCamping wrote: Tue Jun 01, 2021 6:36 pm So, I'm experimenting with VPW and want to make sure I have this right.

1) VPW aims to deplete the portfolio by age 100
2) VPW calculates a bridge amount to cover SS until the time SS payments begin (essentially to safely provide that amount in the interim).
3) The idea is to put the bridge funds in safe investments (CDs, TIPS, iBonds, Savings, etc.)
3) Total withdrawal amount is the annual bridge amt. + remaining portfolio wd VPW calculates based on the tables

Assuming these are correct I'm curious about the bridge part. It seems like the amount one will receive in SS benefits is meaningless when it comes to calculating withdrawals from a portfolio in the interim. What's the point of the bridge and reasoning behind it? I'm guessing it's to smooth totals such that the annual amount available (total WD + bridge or, later total WD + SS) doesn't rise or drop significantly once SS kicks in? What if one doesn't care about the SS bridge and instead just wants to calculate a safe WD from their portfolio?
If you're discussing what the VPW Retirement Worksheet does (e.g. the "new way"), it's a little different than you describe.

1) The Retirement Worksheet assumes the portfolio needs to last to age 100, but caps withdrawals at 10% (functionally, around age 88). As a result, the portfolio may not be exhausted by age 100.

2) Yes, it calculates a bridge amount using a Present Value formula. Essentially, what amount invested right now would provide the same income stream between now and when the pension starts? Notably, the growth rate used for this portion of the portfolio is the same as the overall invested portfolio.

3) The Retirement Worksheet assumes the bridge funds are invested the same way as the rest of the portfolio (see above regarding the growth assumption). This is the main difference from the "old" way where the bridge truly was explicitly set aside and invested in something safe. It's worth noting that the "new" method results in a lower bridge amount, because the growth rate used in the calculation is higher than the growth rate implied by a completely safe investment ladder such as TIPS (currently negative real rates).

4) Total withdrawal is the pension amount (if a COLA pension) plus the portfolio minus bridge multiplied by the VPW withdrawal percentage for that year.

The bridge harmonizes the portfolio withdrawals before and after the pension starts. A fundamental but unstated assumption of the VPW Accumulation and Retirement Worksheets is that the user wishes to smooth consumption in accumulation, retirement before pension, and retirement after pension. In effect, why should your spending needs be different before or after the pension kicks in?

It has the effect of dampening volatility of the portfolio withdrawal before the pension is drawn, but because the bridge amount remains invested in the overall portfolio it does not dampen it as much as after the pension withdrawals are started (also, not as much as a truly set aside bridge such as a TIPS ladder would dampen).

I suppose if one did not care about the bridge amount one could remove the pension from the Retirement Worksheet and only add it once the pension starts. I have not investigated what effect this has on portfolio volatility and whether the expected portfolio withdrawal is substantially higher after the "unexpected" pension kicks in (which would be in violation of the consumption smoothing principle, but that is neither here nor there if the user does not see value in that principle).
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

GoneCamping wrote: Tue Jun 01, 2021 6:36 pm So, I'm experimenting with VPW and want to make sure I have this right.
...
Dear GoneCamping,

Many of your assumptions are incorrect. Our wiki provides clear and simple instructions about how to use the VPW Retirement Worksheet:

How to use variable percentage withdrawals during retirement
How to use variable percentage withdrawals during retirement

VPW is best used in conjunction with guaranteed base income from Social Security, a pension (if any), and (if necessary) an inflation-indexed Single Premium Immediate Annuity (SPIA).
Steps
  1. Open the worksheet.
  2. Click on the Instructions tab and read its content.
  3. Click on the Retirement tab and:
    1. Each year:
      1. Enter (or update) your Age (or, for a couple, the age of the younger spouse), Portfolio Balance, Portfolio Allocation, and the desired withdrawal frequency (annual, quarterly, or monthly).
        • Note that it is important to update the Age and Portfolio Balance, every year of retirement, as they change.
      2. Enter (or update) the Monthly Payment of all current and future pensions, including Social Security.
        • Note that it is important to update monthly pension payments every year when they change due to cost-of-living adjustments.
      3. On the chosen frequency, withdraw the suggested amount and, once during the year, rebalance your portfolio.
        • Note that the suggested withdrawal amount changes every year as soon as the age and portfolio balance are updated.
    2. Every few years, you should review your overall retirement plan.
    3. At age 80, if you're still alive, it's important to consider using part (but not all) of your remaining portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA), so that the estimated Income Floor After 100 is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risks associated with living past age 100.
    4. The withdrawal percentage stops growing when it reaches 10%.
I think that the implications of 3.3 and 3.4 are pretty clear.

I suggest to read all of my posts in the VPW forward test thread. That thread illustrates in details how to use the VPW approach during retirement while providing many explanations. In particular, I suggest to pay a special attention to detailed calculations posts such as this post.

I've also provided ample explanations in the current thread about VPW and how it deals with various risks, including the financial risks associated with living beyond age 100. I suggest to take the time to read them.

Best regards,

longinvest
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
GoneCamping
Posts: 86
Joined: Mon Mar 01, 2021 5:45 pm

Re: Variable Percentage Withdrawal (VPW)

Post by GoneCamping »

longinvest wrote: Wed Jun 02, 2021 7:16 am Dear GoneCamping,

Many of your assumptions are incorrect. Our wiki provides clear and simple instructions about how to use the VPW Retirement Worksheet:

How to use variable percentage withdrawals during retirement
How to use variable percentage withdrawals during retirement

VPW is best used in conjunction with guaranteed base income from Social Security, a pension (if any), and (if necessary) an inflation-indexed Single Premium Immediate Annuity (SPIA).
...
I will look more closely into that thread and the specific post you reference. I had only skimmed through that thread and hadn't seen these points addressed. A thorough read is in order. It looks like VPW doesn't necessarily aim to deplete the portfolio by age 100 (which I had read here somewhere) but rather assumes it is needed until 100.

I had read through the Wiki and the instructions but still wasn't clear on a few things as you can see. It's not so much how to use the tool, that is pretty straightforward, but gaining a greater understanding of the underlying calculations and reasoning behind them, such as the SS bridge. I'm still confused about the bridge, why it matters, how it's used, etc. In the post above by withrye he states with the new VPW approach the bridge isn't set aside or treated differently so I'm struggling to understand why it even matters. And again, what we will collect in SS seems, to me at least, to have no bearing on what can/should be withdrawn from a portfolio in the interim. So it seems that at least my assumption about it being used to smooth consumption is accurate.
Lastrun
Posts: 1512
Joined: Wed May 03, 2017 6:46 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Lastrun »

GoneCamping wrote: Wed Jun 02, 2021 9:37 am I'm still confused about the bridge, why it matters, how it's used, etc. I
Perhaps this thread will help, perhaps not. viewtopic.php?t=318599
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Variable Percentage Withdrawal (VPW)

Post by withrye »

GoneCamping wrote: Wed Jun 02, 2021 9:37 amAnd again, what we will collect in SS seems, to me at least, to have no bearing on what can/should be withdrawn from a portfolio in the interim. So it seems that at least my assumption about it being used to smooth consumption is accurate.
Consider the simpler case of the retiree who plans on taking a constant-dollar withdrawal (e.g. 4% of the initial portfolio balance) each year, adjusting for inflation. This is the approach taken in the SWR literature made famous by the Trinity Study.

If the retiree has a Social Security benefit they aren't eligible for yet, it'd be reasonable for the retiree to withdraw slightly more than 4% between retirement and the SS benefit, and once the benefit payments start have those replace some of the portfolio income. In this way, SS benefits are a future income stream that can be accessed in the present by accounting for the present value of that income stream.

The VPW method reproduces that general result, either with an explicit set-aside bridge ("old way”) or with an internally set-aside bridge ("new way" in the Retirement Worksheet).
azanon
Posts: 3142
Joined: Mon Nov 07, 2011 9:34 am

Re: Variable Percentage Withdrawal (VPW)

Post by azanon »

Still hoping an "End Age" for Defined Pensions makes version 1.6. The accumulation worksheet really doesn't work for me because I have a pension that ends. I understand that's not an uncommon scenario. I get it though - maybe the math/formula just gets too complex to do that easily?
SnowBog
Posts: 4700
Joined: Fri Dec 21, 2018 10:21 pm

Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

azanon wrote: Tue Jun 22, 2021 9:18 am Still hoping an "End Age" for Defined Pensions makes version 1.6. The accumulation worksheet really doesn't work for me because I have a pension that ends. I understand that's not an uncommon scenario. I get it though - maybe the math/formula just gets too complex to do that easily?
This could also help anyone with EE Bonds.

Personally, that's how I try to treat EE Bonds (where I can) - as a term limited annuity. Each $10k of EE Bonds purchased is basically a $20k annuity (no COLA) with a start date of the first year purchased and an end date of 20 years after the last purchase.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

azanon wrote: Tue Jun 22, 2021 9:18 am Still hoping an "End Age" for Defined Pensions makes version 1.6. The accumulation worksheet really doesn't work for me because I have a pension that ends. I understand that's not an uncommon scenario. I get it though - maybe the math/formula just gets too complex to do that easily?
The mathematics are simple enough (but there were modeling issues to tackle); what's mostly missing is time.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
SnowBog
Posts: 4700
Joined: Fri Dec 21, 2018 10:21 pm

Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

longinvest wrote: Tue Jun 22, 2021 5:52 pm
azanon wrote: Tue Jun 22, 2021 9:18 am Still hoping an "End Age" for Defined Pensions makes version 1.6. The accumulation worksheet really doesn't work for me because I have a pension that ends. I understand that's not an uncommon scenario. I get it though - maybe the math/formula just gets too complex to do that easily?
The mathematics are simple enough (but there were modeling issues to tackle); what's mostly missing is time.
If you are willing to give me a rough outline of the math formula - I'm willing to take a stab at updating the VPW to include it... (I'm decent with Excel, but don't fully understand the math behind how VPW is/was created.)
Beardog
Posts: 116
Joined: Thu Mar 22, 2007 10:38 pm
Location: Arkansas

Re: Variable Percentage Withdrawal (VPW)

Post by Beardog »

Hey Longinvest, I want to thank you for your hard work and continued diligence in maintaining the continued VPW information/threads here at BH!

I have spent many hours reading countless VPW posts, as well as the WIKI VPW page.

VPW seems like an excellent choice for retirees who have a good Social Security income which they can defer until 70 years of age, and even better if one also has a pension of some type (unfortunately, neither myself or my wife will have a pension). For those of us who have no desire (or need) to leave behind a sizable legacy, the ability to spend as much of one's portfolio as possible, based on the remaining balance each and every year of life, and in a reasonably safe manner, is very alluring.

Is anyone aware of any previous BH discussions about tax planning strategies when using the VPW method? I would be interested in knowing how different ones plan (or already implement) how they are going to spend down brokerage account/cash accounts vs.tax deferred account(s) over time. And also, how different ones might feel about Roth conversions in years immediately after retirement, but prior to drawing SS and forced RMDs, specifically in consideration of doing VPW, with no real desire to leave a legacy or optimize possible tax burdens on heirs.

I don't want to hijack any of the current long-running threads, so I am happy to create a thread with my questions. I just thought that perhaps there is already lots of info on tax planning strategies for VPW users, and I have just been too digitally challenged to find it! :oops:

Thanks for any links or suggestions!
Beardog
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Beardog wrote: Thu Jul 08, 2021 12:25 pm Is anyone aware of any previous BH discussions about tax planning strategies when using the VPW method? I would be interested in knowing how different ones plan (or already implement) how they are going to spend down brokerage account/cash accounts vs.tax deferred account(s) over time. And also, how different ones might feel about Roth conversions in years immediately after retirement, but prior to drawing SS and forced RMDs, specifically in consideration of doing VPW, with no real desire to leave a legacy or optimize possible tax burdens on heirs.

I don't want to hijack any of the current long-running threads, so I am happy to create a thread with my questions. I just thought that perhaps there is already lots of info on tax planning strategies for VPW users, and I have just been too digitally challenged to find it! :oops:
Beardog, the VPW approach to retirement income isn't concerned with taxes because it assumes that they're an expense like food, housing, utilities, transportation, clothing, medical, and others. I'm not aware of an existing thread addressing tax planning during retirement when specifically using VPW.

You're welcome to start a new thread about it and post a link to it on this thread, if you really think that there's something special about tax planning, when using VPW, which isn't already addressed in the numerous existing general tax planning threads.

Here's a short (off-topic for this thread) summary of my personal take on the subject. I could elaborate a little more within a dedicated thread.

Instead of seeking optimal solutions (which can't be known in advance as the future is uncertain), I seek good enough solutions. I think that the biggest lifelong tax advantage is tax-free growth as provided by traditional and Roth retirement accounts (trad. IRA, Roth IRA, trad. 401(k), Roth 401(k), etc.). This advantage dominates other tax advantages because it compounds over the investor's lifetime (assuming withdrawals are spread over the entire retirement period). Other advantages often have a much smaller lifelong impact (when properly analyzed over lifelong after-tax cash flows), or they might be more uncertain. As a consequence, I make it a priority to take advantage of retirement account contribution space. Beyond that, I only plan for simple tax strategies (that seem sensible) during accumulation and retirement.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Beardog
Posts: 116
Joined: Thu Mar 22, 2007 10:38 pm
Location: Arkansas

Re: Variable Percentage Withdrawal (VPW)

Post by Beardog »

Thanks for the reply, longinvest.

I had pretty much intuitively deduced everything that you so succinctly said. I read one study that showed how much effort can go into a "perfect plan", in order to save an admittedly significant amount of taxes over a lifetime. But yet, it only resulted in perhaps 1% more cashflow over the same lifetime. When so much is unknown about the future, it is impossible to determine (and then successfully implement) the 'best case scenario" with respect to both optimizing cashflow and minimizing taxes. Only in retrospect can that be known. I will probably ruminate on all this for a bit before asking any more questions.

Best regards, Beardog
Beardog
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

In another thread, forum member StillGoing made an unfair comparison of VPW to 4% SWR:
StillGoing wrote: Sat Jul 17, 2021 3:16 am Although quite long, I’m not sure this post will address the OP’s question about frugality, but the results did help answer some of my own questions. The results of some historical backtests for a 30 year retirement using the Shiller dataset (http://www.econ.yale.edu/~shiller/data.htm), a portfolio consisting of 60% stocks and 40% nominal bonds for a number of cases are given in the table below. Withdrawals and rebalancing have been done on a monthly basis and all calculations have been done in real dollars. Fees, taxes, and other sources of income have been ignored.

Code: Select all

	Initial		Nmonths<x withdrawal	Mean withdrawal	FPV	
	Withdrawal	<2.0	<2.5	<3.0	Min	Median	Min	Max
...
Fixed	4.0		103	103	103	2.9	4	0	652
VPW(a)	5.4		82	126	203	3.3	5.7	15	80
...
The second column is the initial withdrawal (% of initial portfolio value, IPV), columns 3 to 5 are the number of months for which the withdrawal was below 2.0, 2.5, and 3.0% real in the worst case, in columns 6 and 7 the mean withdrawal is calculated for each start date (in real % of IPV) and the minimum and median values presented, the last two columns show minimum and maximum real final portfolio value (FPV) as a % of IPV (i.e. 100 means having the same number of real dollars at the end as at the start).

The effect of the portfolio value (PV) going to zero can be seen for the two fixed real withdrawal cases where, for a real withdrawal of 4%, the worst case mean withdrawal (in the 1960s) was 2.9% and there were 103 months where there was no withdrawal (all of which occur consecutively at the end of the 30 year retirement). Also noteworthy that the maximum FPV is over 6 times greater than the IPV.

The historical performance of vanilla VPW (as described in the wiki at https://www.bogleheads.org/wiki/Variabl ... withdrawal, i.e. with no withdrawal exceeding 10% of the current PV*, no buffer, etc.), is given in the table as VPW (a). In the worst case (again, 1960s), there were 82 months where the withdrawal was less than 2.0% real, 126 months less than 2.5% and 203 months where it was less than 3.0% real (note that these are not necessarily consecutive months). ...
* Limiting VPW withdrawals to 10% when comparing to SWR over a 30-year time frame couldn't be more unfair! The 10% cap is only applied, in a VPW retirement plan, after the retiree has entirely covered comfortable expenses (including taxes) with lifelong inflation-indexed stable non-portfolio income, independently of portfolio withdrawals. The goal is to preserve liquidity all lifelong, even if the retiree lives to age 115.


It's unfair to compare a 30-year VPW withdrawal with no base income and no plan to buy an annuity. It's unfair not to consider the portfolio balance along the way. It's also unfair to ignore the nominal retirement path (which is what the retiree sees on investment and bank statements). See the series of posts starting with this post for a detailed discussion.

Here's a fairer comparison of "plain VPW" (as it should never be used, e.g. without base income and lifelong plan) to SWR (which should probably never be used, either, as it's an illogical withdrawal method) over a period of 30 years, starting in 1966 with a 60/40 U.S. stocks/bonds portfolio. This comparison was generated using the VPW backtesting spreadsheet with the following setup:

Image

Here are two charts, properly showing portfolio withdrawals and portfolio balances in both nominal and real terms:

Image

Here are the detailed annual numbers (nominal and inflation-adjusted):

Image

We can see that, in inflation-adjusted terms:
  • Initial withdrawal amount:
    • 4% SWR: $40,000
    • VPW: $54,000
  • Lowest withdrawal amount:
    • 4% SWR: $0 Nothing !!!
    • VPW: $26,085
  • Number of years with a withdrawal < $20,000:
    • 4% SWR: 2
    • VPW: 0
  • Number of years with a withdrawal < $25,000:
    • 4% SWR: 2
    • VPW: 0
  • Number of years with a withdrawal < $30,000:
    • 4% SWR: 2
    • VPW: 5
During each of the first 8 years of retirement, the VPW retiree got to spend more than the SWR retiree, for a total of $383,406 (VPW) instead of $320,000 (SWR). That's 20% more during the younger and healthier part of the retiree's retirement.

Here's the interesting thing, though. In 1975, after only 9 years of retirement, the SWR retiree notices, before withdrawal, that the portfolio has already shrunk by -54% (in inflation-adjusted terms). Yet, we are supposed to believe that this retiree was able to anticipate that Federal Reserve Chairman Paul Volcker would be nominated in 1979 and would succeed to tame inflation and open the door to the 1982 recovery and subsequent high returns of a balanced portfolio.

This isn't plausible. No sane human would have ever considered, in 1975 while living through the consequences of the Oil Shock, continuing to take an inflation-adjusted $40,000 withdrawal from a $458,335 portfolio.

That wasn't the end of it. A few years later, in 1982, before withdrawal, the SWR portfolio was down to $274,873 in inflation-adjusted terms and we're supposed to believe that the retiree ignored inflation and portfolio balance to go ahead and take an inflation-adjusted $40,000 withdrawal.

Meanwhile, the VPW investor remained flexible, adapting expenses to available money. In nominal terms, withdrawals grew or remained relatively stable most years, except for 1974 (-12%) and 1975 (-18%), with a quick recovery in 1976 (+21%) and 1977 (+19%). Over the late 1970s and early 1980s, the VPW retiree felt the bite of inflation, as did the rest of society. The retiree had to cut on travel and extravagant expenses, but there was enough money to put food on the table. VPW withdrawal amounts were consistent with the remaining portfolio balance, given the retirement horizon.

In 1982, the VPW retiree took a 9% withdrawal while the SWR retiree took a 15% withdrawal from a smaller portfolio! It's no surprise that the SWR portfolio wasn't able to recover and wasn't able to deliver the last two $40,000 withdrawals in 1994 and 1995 due to premature depletion.


It's also important to consider the overall lifelong context. A 1966 retiree enjoyed high returns in the years leading to retirement. I've illustrated the comparative inflation-adjusted paths of a flexible VPW accumulation and retirement plan, to a an inflexible fixed percentage saving plan and SWR retirement in an earlier post:
longinvest wrote: Mon Jun 17, 2019 11:55 am And, here's the retirement in 1966 scenario:

Image

Note that the person using the VPW worksheet stopped portfolio contributions during the last decade of work, from 1956 to 1965, except for a $1,392 contribution in 1958.
Looking at the solid lines, representing available income, we see that the 1966 SWR retiree, using inflexible fixed-savings during accumulation, and fixed inflation-indexed portfolio withdrawals (until it became impossible to do so) during retirement, had fixed available income of around $50,000 during accumulation and partially-fixed available income of around $60,000 during retirement until available income dropped to around $20,000 (Social Security) once the portfolio was prematurely depleted.

In contrast, the VPW accumulator had around $50,00 in available income (after savings) until the mid-1950s, then available income grew to $57,000 (that's $60,000 minus $3,000 for Social Security contributions, no savings required thanks to the bull market) until the the mid-1960s. At retirement in 1966, available income jumped to $70,000. Available income eventually dropped back to $50,000 (which we know had to be sufficient to live comfortably, as the accumulator lived comfortably on as much during most of accumulation). Between the mid 1970s and early 1980s, available income dropped a few times below this to around $45,000; that's only -10% less than what was considered comfortable during accumulation.

The illustrated flexible VPW accumulation plan used the Accumulation sheet of our wiki's VPW Accumulation And Retirement Worksheet. Here's a screenshot.
Last edited by longinvest on Sat Jan 13, 2024 3:24 pm, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
StillGoing
Posts: 360
Joined: Mon Nov 04, 2019 3:43 am
Location: U.K.

Re: Variable Percentage Withdrawal (VPW)

Post by StillGoing »

longinvest wrote: Sat Jul 17, 2021 8:55 am In another thread, forum member StillGoing made an unfair comparison of VPW to 4% SWR:

* Limiting VPW withdrawals to 10% when comparing to SWR over a 30-year time frame couldn't be more unfair! The 10% cap is only applied, in a VPW retirement plan, after the retiree has entirely covered comfortable expenses (including taxes) with lifelong inflation-indexed stable non-portfolio income, independently of portfolio withdrawals. The goal is to preserve liquidity all lifelong, even if the retiree lives to age 115.


It's unfair to compare a 30-year VPW withdrawal with no base income and no plan to buy an annuity. It's unfair not to consider the portfolio balance along the way. It's also unfair to ignore the nominal retirement path (which is what the retiree sees on investment and bank statements). See the series of posts starting with this post for a detailed discussion.
Thank you for your detailed commentary on the results I presented, I'm not sure that there is anything substantial in what you say that I disagree with. Yes, not imposing the 10% cap at the end of the retirement period significantly reduces the number of months that VPW produces small withdrawals as you have in the results you have presented, but at the expense of exhausting the portfolio at the end of 30 years (just as CDW does for this case).

Please accept that there was no intention on my part to unfairly compare VPW to SWR - the results were part of my own planning, where all of my essential expenses are covered by other sources of income, and may be influenced by that mind set.

cheers
StillGoing
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Sat Jul 17, 2021 8:55 am
It's unfair to compare a 30-year VPW withdrawal with no base income and no plan to buy an annuity.
How is this unfair? The analysis is whether or not in extremely poor SORR outcome if VPW withdrawals drop below a minimum spend amount.

If I have a “lifelong inflation-indexed stable non-portfolio income” that “entirely covered comfortable expenses (including taxes)” I can spend whatever the heck I want to out of the remainder of my portfolio with or without any withdrawal strategy.

If that’s the entry criteria for ”proper” VPW why bother?
We can see that, in inflation-adjusted terms:
  • Initial withdrawal amount:
    • 4% SWR: $40,000
    • VPW: $54,000
  • Lowest withdrawal amount:
    • 4% SWR: $0 Nothing !!!
    • VPW: $26,085
  • Number of years with a withdrawal < $20,000:
    • 4% SWR: 2
    • VPW: 0
  • Number of years with a withdrawal < $25,000:
    • 4% SWR: 2
    • VPW: 0
  • Number of years with a withdrawal < $30,000:
    • 4% SWR: 2
    • VPW: 5
So we know that SWR fails at 4% for certain time periods so that you get 2 failures is not surprising.

The discussion in the other thread assumes $30K minimum spend after you cut everything even vaguely discretionary and the question is how often VPW fails to meet your absolute minimum spend.

We can compute the maximum SWR percentage for any time series and we also know that 3% SWR will historically provide $30K inflation adjusted.
During each of the first 8 years of retirement, the VPW retiree got to spend more than the SWR retiree, for a total of $383,406 (VPW) instead of $320,000 (SWR). That's 20% more during the younger and healthier part of the retiree's retirement.
Yes, this is the primary advantage of VPW.

<the usual canard that the SWR investor must always withdraw 4% snipped out>

Meanwhile, the VPW investor remained flexible,
There is nothing explicit in SWR that says that a SWR user has to take out and spend the entire withdrawal amount.

The implicit assumption has been that the SWR user MUST spend this amount because it’s their minimum spend rate. If this is a true statement then it must equally apply to VPW.

SWR tells you the maximum you can historically take out for portfolio survival, not that you MUST take out. If things look bad and you have $10K of discretionary within the SWR ceiling you can elect to not spend it.
adapting expenses to available money. … Over the late 1970s and early 1980s, the VPW retiree felt the bite of inflation, as did the rest of society. The retiree had to cut on travel and extravagant expenses, but there was enough money to put food on the table. VPW withdrawal amounts were consistent with the remaining portfolio balance, given the retirement horizon.
If $30K was your minimum spend to pay for mandatory expenses then VPW dropping below $30K means something important was not being covered.
In 1982, the VPW retiree took a 9% withdrawal while the SWR retiree took a 15% withdrawal from a smaller portfolio! It's no surprise that the SWR portfolio wasn't able to recover and wasn't able to deliver the last two $40,000 withdrawals in 1994 and 1995 due to premature depletion.
There are charts that tell us what SWR has 100% success rate for different periods and asset allocations using historical data.

Again, we know that 4% failed in this series.

Also, if the SWR investor had cut $10K from their 4% SWR and dropped to their minimum spend requirements and “cut on travel and extravagant expenses” it would have worked out.

What your analysis shows is that for this time series that my minimum spend shouldn’t be higher $26K.

Which is fine but for a SWR retiree that translates into a 2.6% SWR. A 3.5% SWR gives me an annual surplus of $9K for discretionary spending.

Alternatively, and this is what I’m doing, is pre-allocating 10% of my portfolio for extra travel in the first decade of retirement and baselining a 3.25% SWR on the remainder that covers my desired expenses with the ability to trim more (down to around 3%) before we have to make hard decisions about food vs health insurance.

That first 10% block is all bonds with we will spend down which will move our AA from around 60/40 back up to 90/10 over 8-10 years. So by the end of the decade, unless SORR hits, we’ll get to overspend on travel and automatically glide path our AA to the long term AA while using a fixed SWR for annual budgeting.

Or, if we can create “lifelong inflation-indexed stable non-portfolio income” that “entirely covered comfortable expenses (including taxes)” we can just spend whatever the heck we like, when we like, from the remainder of the portfolio without needing either SWR or VPW.

That would be ideal. My goal with a WR strategy isn’t to spend to $0 but to make sure I:

A) never drop below our estimated minimum expenses in any year
B) never deplete the portfolio

SWR is a simple way to achieve both if I can match the SWR percentage to the minimum expenses amount. If I can’t then historically I haven’t saved enough to be FI. If I can save this amount I can (not should) retire.

If my SWR can fulfill my desired (not just minimum) spending amount that’s the retirement goal amount. I’m FI+. If I can save this amount I should retire if that was my goal. There’s no need for “one more year” if I’m hating my job.

If just part of the portfolio can meet my desired spending amount with a SWR then that’s even better…FI++…the rest is discretionary. I’m only working because I still love it.

I can dump a third into a DAF and blow a third and still have a third as additional reserves.

Withdrawal strategy is mostly important only when my portfolio is questionable relative to my minimum spend.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

It's most interesting to take a lifelong view of accumulation and retirement. Here's the last part of an earlier post where I did so:
longinvest wrote: Mon Jun 17, 2019 11:16 am Here's a chart of available income during work years (salary minus Social Security cost and portfolio contribution) and during retirement (Social Security pension plus portfolio withdrawal) for both strategies on the left axis. The chart also shows portfolio balances for both strategies on the right axis. All amounts are in inflation-adjusted dollars. (I'll provide the detailed data in tabular form in my next post).

Image

The person using the VPW worksheet adapts savings during accumulation and portfolio withdrawals during retirement to market returns. During the 1950s until the mid 1960s, the portfolio grows fast, leading to smaller savings. From 1966 to the early 1980s, the portfolio barely grows $55,000 from $375,000 to $430,000 despite increased savings due to bad market returns. The transition from accumulation to retirement at age 65 is smooth. During retirement, withdrawals increase with market returns until 2000 when they start declining. Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

The person using fixed 10% savings and fixed 4% withdrawals indexed to inflation gets a steady inflation-indexed available income during accumulation of ($60,000 - $3,180 - $6,000) = $50,820. At age 65, the transition to retirement is not smooth. Available income drops 26% to ($20,784 Social Security + (4% X $422,251)) = $37,674 and remain steady in inflation-adjusted dollars during retirement. Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.
Looking at that lifelong backtest of the above post and at the two lifelong backtests of posts that followed it here and here, we can see how SWR lead the 1982 and the 1989 retirees to significantly underspend during retirement and die with gigantic unspent portfolios, while leading the 1966 retiree to overspend during retirement and die in near misery due to a prematurely-depleted portfolio. In contrast, VPW lead the three retirees to adapt their spending to their portfolios and die with modest undepleted portfolios, regardless of their accumulation and retirement paths.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Sun Jul 18, 2021 10:49 am while leading the 1966 retiree to overspend during retirement and die in near misery.
While it’s good to be an advocate of VPW this sort of hyperbole detracts from your arguments. SWR does not lead you to “die in near misery” as the SWR amount is known to be lower than 4% for 100% historical success rate.

If you pick a 95% historical success rate SWR value then yes, sometimes it fails in the historical data set…by definition 5% of the time.

The advantage of SWR is that if your minimum spending requirements are below the historical 100% successful SWR amount then so long as your retirement period is no worse than the worst case historically you wont “die in near misery”. Hence the “safe” in SWR.

That most SWR cohorts will underspend over a lifetime is true and an advantage of VPW.

But the point is that SWR doesn’t have to be terrible for VPW to be good. To state that SWR leads to “dying in near misery” is FUD.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

― Upton Sinclair

This quote, in itself, probably explains why we still continuously hear on our forums about SWR, the most senseless of withdrawal methods, a method which is almost guaranteed to give unsatisfactory results, leading most of its adopters to die with gigantic unspent portfolios while bankrupting most of the rest.

"Seat of the pants" withdrawal, based on starting with 4% indexed to inflation but modified based on emotions isn't 4% SWR.

This thread is about VPW, a logical accumulation and withdrawal method which doesn't need to be modified to work. A method which naturally adapts the amount available for taxes and expenses, after savings during accumulation and including pensions during retirement, to the investor's evolving financial situation.

Those who don't like VPW can simply ignore it and use other accumulation and withdrawal methods.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Sun Jul 18, 2021 11:28 am “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

― Upton Sinclair
I’m not selling a product. Are you?
This quote, in itself, probably explains why we still continuously hear on our forums about SWR, the most senseless of withdrawal methods, a method which is almost guaranteed to give unsatisfactory results, leading most of its adopters to die with gigantic unspent portfolios while bankrupting most of the rest.



This thread is about VPW, a logical accumulation and withdrawal method which doesn't need to be modified to work. A method which naturally adapts the amount available for taxes and expenses, after savings during accumulation and including pensions during retirement, to the investor's evolving financial situation.

Those who don't like VPW can simply ignore it and use other accumulation and withdrawal methods.
If you don’t want to hear about SWR in this thread don’t make unwarranted assertions about it and no one will comment about SWR right?

Seems like you’re trying to “sell” folks on the superiority of VPW.

SWR is discussed on the forums because it’s the most commonly used planning mechanism and seen in the majority of retirement planning articles.

I only came to this thread after you commented about how terribly unfair an analysis of VPW was made on a different thread I had started on which was more “frugal”.

But now that I’m here perhaps you can explain why is vanilla VPW supposedly “safer” if it can drop below your minimum spending requirements when a SWR strategy won’t?
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

An interesting aspect of the VPW accumulation and retirement approach is that it leads to good investing behavior. It leads an accumulating investor to contribute somewhat more to the portfolio when assets are cheaper (e.g. markets are down) and to contribute somewhat less when assets are more expensive (e.g. markets are up). It also leads a retiree to withdraw less when assets are cheaper (e.g. markets are down), and to withdraw more when assets are more expensive (e.g. markets are up). It's somewhat of a "buy low, sell high" type of good investing behavior. We can observe this in the post I recently quoted:
longinvest wrote: Mon Jun 17, 2019 11:16 am Image

The person using the VPW worksheet adapts savings during accumulation and portfolio withdrawals during retirement to market returns. During the 1950s until the mid 1960s, the portfolio grows fast, leading to smaller savings. From 1966 to the early 1980s, the portfolio barely grows $55,000 from $375,000 to $430,000 despite increased savings due to bad market returns. The transition from accumulation to retirement at age 65 is smooth. During retirement, withdrawals increase with market returns until 2000 when they start declining. Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

The person using fixed 10% savings and fixed 4% withdrawals indexed to inflation gets a steady inflation-indexed available income during accumulation of ($60,000 - $3,180 - $6,000) = $50,820. At age 65, the transition to retirement is not smooth. Available income drops 26% to ($20,784 Social Security + (4% X $422,251)) = $37,674 and remain steady in inflation-adjusted dollars during retirement. Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.
For interested readers, the accumulation worksheet is explained and discussed in this thread.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Sun Jul 18, 2021 2:30 pm VPW Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

Fixed: Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.
So what you’re saying is I can spend $3.1M over my lifetime, which seems pretty sweet, AND still leave behind $1.9M to charities using a fixed accumulation and withdrawals. Good living AND generosity. Awesome!

VPW I get to spend $1M more on myself but leave behind little.

That’s not bad either if that’s your thing.
ososnilknarf
Posts: 210
Joined: Mon Feb 18, 2019 6:08 pm

Re: Variable Percentage Withdrawal (VPW)

Post by ososnilknarf »

nigel_ht wrote: Sun Jul 18, 2021 6:06 pm
longinvest wrote: Sun Jul 18, 2021 2:30 pm VPW Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

Fixed: Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.
So what you’re saying is I can spend $3.1M over my lifetime, which seems pretty sweet, AND still leave behind $1.9M to charities using a fixed accumulation and withdrawals. Good living AND generosity. Awesome!

VPW I get to spend $1M more on myself but leave behind little.

That’s not bad either if that’s your thing.
VPW doesn't specify what you spend withdrawals on. You can give as much of that extra 1M to charity as you want during your lifetime, rather than after you're dead.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

ososnilknarf wrote: Mon Jul 19, 2021 6:42 pm
nigel_ht wrote: Sun Jul 18, 2021 6:06 pm
longinvest wrote: Sun Jul 18, 2021 2:30 pm VPW Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

Fixed: Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.
So what you’re saying is I can spend $3.1M over my lifetime, which seems pretty sweet, AND still leave behind $1.9M to charities using a fixed accumulation and withdrawals. Good living AND generosity. Awesome!

VPW I get to spend $1M more on myself but leave behind little.

That’s not bad either if that’s your thing.
VPW doesn't specify what you spend withdrawals on. You can give as much of that extra 1M to charity as you want during your lifetime, rather than after you're dead.
You actually can't, because that extra 1M spreads across 30 years (or whatever). It's much more realistic to donate 1M out of 1.9M that SWR left behind.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

An explicit objective of VPW is "to allow the retiree to spend most of the portfolio" (see the first paragraph of our wiki's VPW page).

Withdrawal methods (or living on Social Security alone) aiming to maximize portfolio size at death are best discussed on other threads.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Lastrun
Posts: 1512
Joined: Wed May 03, 2017 6:46 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Lastrun »

Marseille07 wrote: Mon Jul 19, 2021 6:52 pm You actually can't, because that extra 1M spreads across 30 years (or whatever). It's much more realistic to donate 1M out of 1.9M that SWR left behind.
I think you can with a few approaches. Assume a desired $1,000,000 legacy.

1. Somewhere up thread I remember Longinvest suggesting removal of the legacy amount from the VPW calculations and have that amount segregated and use an endowment approach on this amount.

2. I think what was being suggested is investing some of the VPW amount over time to achieve the desired legacy.

3. Using an ABW approach, the method allows for computing a terminal value.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

Lastrun wrote: Mon Jul 19, 2021 7:05 pm
Marseille07 wrote: Mon Jul 19, 2021 6:52 pm You actually can't, because that extra 1M spreads across 30 years (or whatever). It's much more realistic to donate 1M out of 1.9M that SWR left behind.
I think you can with a few approaches. Assume a desired $1,000,000 legacy.

1. Somewhere up thread I remember Longinvest suggesting removal of the legacy amount from the VPW calculations and have that amount segregated and use an endowment approach on this amount.

2. I think what was being suggested is investing some of the VPW amount over time to achieve the desired legacy.

3. Using an ABW approach, the method allows for computing a terminal value.
Sure, I think leaving some legacy or donating to charity is possible with VPW. I guess my main counter was to the poster who made it sound like VPW lets you do that while SWR leaves no room but to pass with a pile of money unused.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

ososnilknarf wrote: Mon Jul 19, 2021 6:42 pm VPW doesn't specify what you spend withdrawals on. You can give as much of that extra 1M to charity as you want during your lifetime, rather than after you're dead.
Ososnilknarf, thanks for your sensible comment.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Marseille07 wrote: Mon Jul 19, 2021 6:52 pm
ososnilknarf wrote: Mon Jul 19, 2021 6:42 pm
nigel_ht wrote: Sun Jul 18, 2021 6:06 pm
longinvest wrote: Sun Jul 18, 2021 2:30 pm VPW Overall, the person gets a lifetime available income of $4,100,000 (for taxes and expenses) and leaves a $255,000 portfolio behind.

Fixed: Overall, the person gets a lifetime available income of $3,165,000 (for taxes and expenses) and leaves a $1,940,000 portfolio behind.
So what you’re saying is I can spend $3.1M over my lifetime, which seems pretty sweet, AND still leave behind $1.9M to charities using a fixed accumulation and withdrawals. Good living AND generosity. Awesome!

VPW I get to spend $1M more on myself but leave behind little.

That’s not bad either if that’s your thing.
VPW doesn't specify what you spend withdrawals on. You can give as much of that extra 1M to charity as you want during your lifetime, rather than after you're dead.
You actually can't, because that extra 1M spreads across 30 years (or whatever). It's much more realistic to donate 1M out of 1.9M that SWR left behind.
You can give over time but often you make a bigger impact with a larger lump sum even if the totals are the same. Sometimes you find a bigger fish willing to match a lump sum from smaller donors vs smaller recurring donations.

Big and small being relative…
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

nigel_ht wrote: Mon Jul 19, 2021 9:47 pm You can give over time but often you make a bigger impact with a larger lump sum even if the totals are the same. Sometimes you find a bigger fish willing to match a lump sum from smaller donors vs smaller recurring donations.

Big and small being relative…
Right. It's *technically* possible but practically very difficult to do. Say you're 50 yo just retired and do you really tell your family you'd be donating 30K/year for the next 30 years?

Setting aside 1M is also *possible*, but not practical for the same reason.
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Variable Percentage Withdrawal (VPW)

Post by withrye »

Marseille07 wrote: Mon Jul 19, 2021 10:18 pm Right. It's *technically* possible but practically very difficult to do. Say you're 50 yo just retired and do you really tell your family you'd be donating 30K/year for the next 30 years?
This is off topic, but the charitable giving does not have to come as a shock to the family at the time of retirement. Our family donates an amount proportional to our income right now, and we plan to continue in retirement based on our income year by year.

I don't think we'll be so fortunate (read: wait so long to retire) as to have it amount to 30k/yr, but it will be a decent chunk each year (as it is now).
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

withrye wrote: Tue Jul 20, 2021 4:13 am
Marseille07 wrote: Mon Jul 19, 2021 10:18 pm Right. It's *technically* possible but practically very difficult to do. Say you're 50 yo just retired and do you really tell your family you'd be donating 30K/year for the next 30 years?
This is off topic, but the charitable giving does not have to come as a shock to the family at the time of retirement. Our family donates an amount proportional to our income right now, and we plan to continue in retirement based on our income year by year.

I don't think we'll be so fortunate (read: wait so long to retire) as to have it amount to 30k/yr, but it will be a decent chunk each year (as it is now).
You can't single out my comment and call it off topic. Posters are replying to this comment: viewtopic.php?p=6128658#p6128658

to which longinvest said "sensible": viewtopic.php?p=6128789#p6128789

And you are missing the point - no one is saying you can't donate post retirement. What we're saying is, donation (a chunk or lump sum) doesn't depend on your withdrawal method. The original poster above made it sound like VPW can let you do chunks but SWR can only do lump sum when you pass. I was arguing against that point.
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Variable Percentage Withdrawal (VPW)

Post by withrye »

Marseille07 wrote: Tue Jul 20, 2021 9:39 am
withrye wrote: Tue Jul 20, 2021 4:13 am
Marseille07 wrote: Mon Jul 19, 2021 10:18 pm Right. It's *technically* possible but practically very difficult to do. Say you're 50 yo just retired and do you really tell your family you'd be donating 30K/year for the next 30 years?
This is off topic, but the charitable giving does not have to come as a shock to the family at the time of retirement. Our family donates an amount proportional to our income right now, and we plan to continue in retirement based on our income year by year.

I don't think we'll be so fortunate (read: wait so long to retire) as to have it amount to 30k/yr, but it will be a decent chunk each year (as it is now).
You can't single out my comment and call it off topic. Posters are replying to this comment: viewtopic.php?p=6128658#p6128658

to which longinvest said "sensible": viewtopic.php?p=6128789#p6128789

And you are missing the point - no one is saying you can't donate post retirement. What we're saying is, donation (a chunk or lump sum) doesn't depend on your withdrawal method. The original poster above made it sound like VPW can let you do chunks but SWR can only do lump sum when you pass. I was arguing against that point.
I was saying that *my* post was off topic (the topic being VPW, and this current side topic being explicitly that charitable giving is independent of withdrawal method).
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

withrye wrote: Tue Jul 20, 2021 11:45 am I was saying that *my* post was off topic (the topic being VPW, and this current side topic being explicitly that charitable giving is independent of withdrawal method).
My apologies. I thought you were calling my post off topic.
StillGoing
Posts: 360
Joined: Mon Nov 04, 2019 3:43 am
Location: U.K.

Re: Variable Percentage Withdrawal (VPW)

Post by StillGoing »

longinvest wrote: Sat Jul 17, 2021 8:55 am In another thread, forum member StillGoing made an unfair comparison of VPW to 4% SWR:
StillGoing wrote: Sat Jul 17, 2021 3:16 am Although quite long, I’m not sure this post will address the OP’s question about frugality, but the results did help answer some of my own questions. The results of some historical backtests for a 30 year retirement using the Shiller dataset (http://www.econ.yale.edu/~shiller/data.htm), a portfolio consisting of 60% stocks and 40% nominal bonds for a number of cases are given in the table below. Withdrawals and rebalancing have been done on a monthly basis and all calculations have been done in real dollars. Fees, taxes, and other sources of income have been ignored.

Code: Select all

	Initial		Nmonths<x withdrawal	Mean withdrawal	FPV	
	Withdrawal	<2.0	<2.5	<3.0	Min	Median	Min	Max
...
Fixed	4.0		103	103	103	2.9	4	0	652
VPW(a)	5.4		82	126	203	3.3	5.7	15	80
...
The second column is the initial withdrawal (% of initial portfolio value, IPV), columns 3 to 5 are the number of months for which the withdrawal was below 2.0, 2.5, and 3.0% real in the worst case, in columns 6 and 7 the mean withdrawal is calculated for each start date (in real % of IPV) and the minimum and median values presented, the last two columns show minimum and maximum real final portfolio value (FPV) as a % of IPV (i.e. 100 means having the same number of real dollars at the end as at the start).

The effect of the portfolio value (PV) going to zero can be seen for the two fixed real withdrawal cases where, for a real withdrawal of 4%, the worst case mean withdrawal (in the 1960s) was 2.9% and there were 103 months where there was no withdrawal (all of which occur consecutively at the end of the 30 year retirement). Also noteworthy that the maximum FPV is over 6 times greater than the IPV.

The historical performance of vanilla VPW (as described in the wiki at https://www.bogleheads.org/wiki/Variabl ... withdrawal, i.e. with no withdrawal exceeding 10% of the current PV*, no buffer, etc.), is given in the table as VPW (a). In the worst case (again, 1960s), there were 82 months where the withdrawal was less than 2.0% real, 126 months less than 2.5% and 203 months where it was less than 3.0% real (note that these are not necessarily consecutive months). ...
* Limiting VPW withdrawals to 10% when comparing to SWR over a 30-year time frame couldn't be more unfair! The 10% cap is only applied, in a VPW retirement plan, after the retiree has entirely covered comfortable expenses (including taxes) with lifelong inflation-indexed stable non-portfolio income, independently of portfolio withdrawals. The goal is to preserve liquidity all lifelong, even if the retiree lives to age 115.


It's unfair to compare a 30-year VPW withdrawal with no base income and no plan to buy an annuity. It's unfair not to consider the portfolio balance along the way. It's also unfair to ignore the nominal retirement path (which is what the retiree sees on investment and bank statements). See the series of posts starting with this post for a detailed discussion.
A few further comments, for VPW without the 10% cap the number of months <2.0=1, <2.5=41, and <3.0=102. I note that in my original post I said
In the worst case (again, 1960s), there were 1 month where the withdrawal was less than 2.0% real, 41 months less than 2.5% and 102 months where it was less than 3.0% real (note that these are not necessarily consecutive months). Whether this matters depends on the value of the essential budget (i.e. that required for housing, food, clothes etc.) and the relative value of other sources of income. For example if your essential budget is 3% of your IPV then using VPW would have proved difficult with nearly 8.5 years where, in the historical worst case, the portfolio would not have supported your income requirements. However, if your essential spending is 2% of your IPV then, in the worst case, you would have only had to survive on marginal income for 1 month.
bold for emphasis or where changes have been made to the numbers to reflect removing the cap

Ignoring annuities for the moment, if the retiree is in receipt of social security from the outset then the amount will have a bearing, e.g. if SS is 1% of the initial portfolio value (IPV) then with essential spending at 3% (i.e. made up of 1% SS and 2% from VPW) this would easily have been supported. Unfortunately, my wording was imprecise and would have been improved by "then solely using VPW would have proved difficult".

As for annuities, I note that the real balance remaining in your table in 1981 (ages 80, assuming was 65 at start) is around $340k (by coincidence in this case this is the similar for both VPW and 4% CDW). If essential spending was really 3% then another 2% needs to be found from the annuity (i.e., 1% for SS and 2% for annuity). If the entire remaining pot was to be annuitized (which I note is not recommended) this would require a rate of 5.88% - in the UK currently annuities with RPI taken at age 75 have rates ~5% (see https://www.hl.co.uk/retirement/annuiti ... -buy-rates - is there an equivalent site that lists 'best buys' for the US) they'd be a somewhat higher at 80.

cheers
StillGoing
Post Reply