Here's how the
VPW Accumulation And Retirement Worksheet calculated its
suggested $6,248 portfolio withdrawal at the end of
June 2021.
The retiree will get $2,059/month Social Security payments in 3 years. That's $24,708/year. The percentage for a 3-year withdrawal schedule with a 60/40 stocks/bonds allocation in the
VPW Table is 34.6%. As a consequence,
($24,708 / 34.6%) = $71,410 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see
this post) and an annual
($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $1,128,324 portfolio, but $71,410 is kept aside (on paper) for Social Security bridge withdrawals. At age 67 with a 60/40 stocks/bonds allocation, the percentage in the
VPW Table is 5.1%. This results into a
(($1,128,324 - $71,410) X 5.1%) = $53,903 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,708 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $53,903 VPW withdrawal. This sums up to
($24,708 - $4,116 + $53,903) = $74,495 and results into a
($74,495 / 12) = $6,208 portfolio withdrawal. The
-$40 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that
Total Retirement Income also includes the monthly $1,000 work pension payment for a total of
($74,495 + (12 X $1,000)) = $86,495/year (
$7,208/month) available for taxes and expenses.
The VPW worksheet also calculates a
Required Flexibility that must be maintained by the retiree. To do so, it first applies a
-50% loss to the stocks allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a
(-50% X 60%) = -30% portfolio loss. That's a
(-30% X $1,128,324) = -$338,497 portfolio loss, reducing the portfolio to
($1,128,324 - $338,497) = $789,827 after the loss. This implies a
(($24,708 - $4,116 + (($789,827 - $71,410) X 5.1%)) / 12) = $4,769 monthly portfolio withdrawal which represents a
($4,769 - $6,208) = -$1,439 reduction after the loss.
The retiree must maintain the flexibility to
easily cut spending by up to
-$1,439/month because stocks could easily lose
-50% of their value within a short time period. In other words, at least $1,439 must be budgeted for
optional discretionary spending that could be eliminated
without affecting the retiree's comfort.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)