A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for February 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of February 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
03/2020 258.115
04/2020 256.389
05/2020 256.394
06/2020 257.797
07/2020 259.101
08/2020 259.918
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
02/2021 263.014
We take note that the average CPI-U for the last 12 months at the end of February 2021 was 259.473.

Last year, we calculated that the average CPI-U for the last 12 months at the end of February 2020 was 256.671.

The trailing 1-year average inflation at the end of February 2021 was ((259.473 / 256.671) - 1) = 1.09%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -0.59% below trailing average inflation.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in February 2021 dollars:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of March 31, 2021

The March 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.29% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of February 28, 2021 and apply March 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,051,908.26 X (1 + 1.29%)) = $1,065,477.88
  • Withdrawal cushion (at Ally Bank): ($28,438.43 X ((1 + 0.50%)^(1 / 12))) = $28,450.25
Total Portfolio Balance: $1,093,928.13
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of March 31, 2021

We continue our forward test. Here's a link to the previous entry.

As of March 31, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,065,477.88
  • Withdrawal cushion (at Ally Bank): $28,450.25
Total Portfolio Balance: $1,093,928.13

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $5,942 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,942 + $28,450.25) / 6) = $5,732
  • Adjustment: ($5,732 - $5,942) = -$210
The retiree transfers $210 of withdrawal money to the Ally savings account and combines the remaining $5,732 with the $1,000 April 2021 work pension payment for a total retirement income of $6,732 available for taxes and expenses in April 2021.

After withdrawal and transfer, ($1,065,477.88 - $5,942) = $1,059,535.88 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($28,450.25 + $210) = $28,660.25 is left into the withdrawal cushion for a total portfolio balance of $1,088,196.13 at the end of March 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

April 2021 total retirement income is $6,732 and on the morning of April 1, 2021, the total portfolio balance is $1,088,196.13.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $79,956 (annualized) -- $26,652 in 4 months
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,942 portfolio withdrawal at the end of March 2021.

The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4%. As a consequence, ($24,708 / 26.4%) = $93,591 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 $1,093,928 portfolio, but $93,591 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1%. This results into a (($1,093,928 - $93,591) X 5.1%) = $51,017 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 $51,017 VPW withdrawal. This sums up to ($24,708 - $4,116 + $51,017) = $71,609 and results into a ($71,609 / 12) = $5,967 portfolio withdrawal. The $25 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 ($71,609 + (12 X $1,000)) = $83,609/year ($6,967/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 $1,093,928) = -$328,178 portfolio loss, reducing the portfolio to ($1,093,928 - $328,178) = $765,750 after the loss. This implies a (($24,708 - $4,116 + (($765,750 - $93,591) X 5.1%)) / 12) = $4,573 monthly portfolio withdrawal which represents a ($4,573 - $5,967) = -$1,394 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,394/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,394 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)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of March 31, 2021, was spread across 3,755 U.S. stocks, 7,510 international stocks, 10,118 U.S. bonds, and 6,320 international bonds for a total of 27,703 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until March 31, 2021:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for March 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of March 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
04/2020 256.389
05/2020 256.394
06/2020 257.797
07/2020 259.101
08/2020 259.918
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
02/2021 263.014
03/2021 264.877
We take note that the average CPI-U for the last 12 months at the end of March 2021 was 260.037.

Last year, we calculated that the average CPI-U for the last 12 months at the end of March 2020 was 256.997.

The trailing 1-year average inflation at the end of March 2021 was ((260.037 / 256.997) - 1) = 1.18%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -0.68% below trailing average inflation.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in March 2021 dollars:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
EnjoyIt
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by EnjoyIt »

I just wanted to chime and and thank you longinvest for the work you put together and keeping up this thread.
Last edited by EnjoyIt on Sat Apr 24, 2021 4:12 pm, edited 1 time in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by dogagility »

I just wanted to chime and and thank you, longinvest for the work you put together and keeping up this thread.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The month of May 2021 has five weekends. I'll continue with the forward test next weekend.

This weekend, I'll simply cite a 2011 post by forum member Nisiprius which elegantly summarizes the philosophy of the VPW retirement approach:
nisiprius wrote: Fri Apr 22, 2011 6:24 am In reality, we spend our preretirement lives dealing with fluctuating incomes and fluctuating expenses, and we adapt our lifestyle to our income. At age 30, we don't sit down with some Monte Carlo simulator and say "based on the statistical average of all careers in the United States, there's a 94.3% chance that I can spend $3141.59 a month, indexed by inflation, and never overdraw my checking account."

I don't see why things should change in retirement. We're counting more on our adaptability than on the predictability of our investment returns.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of April 30, 2021

The April 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 2.73% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of March 31, 2021 and apply April 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,059,535.88 X (1 + 2.73%)) = $1,088,461.21
  • Withdrawal cushion (at Ally Bank): ($28,660.25 X ((1 + 0.50%)^(1 / 12))) = $28,672.16
Total Portfolio Balance: $1,117,133.37
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of April 30, 2021

We continue our forward test. Here's a link to the previous entry.

As of April 30, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,088,461.21
  • Withdrawal cushion (at Ally Bank): $28,672.16
Total Portfolio Balance: $1,117,133.37

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $6,040 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($6,040 + $28,672.16) / 6) = $5,785
  • Adjustment: ($5,785 - $6,040) = -$255
The retiree transfers $255 of withdrawal money to the Ally savings account and combines the remaining $5,785 with the $1,000 May 2021 work pension payment for a total retirement income of $6,785 available for taxes and expenses in May 2021.

After withdrawal and transfer, ($1,088,461.21 - $6,040) = $1,082,421.21 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($28,672.16 + $255) = $28,927.16 is left into the withdrawal cushion for a total portfolio balance of $1,111,348.37 at the end of April 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

May 2021 total retirement income is $6,785 and on the morning of May 1, 2021, the total portfolio balance is $1,111,348.37.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $80,249 (annualized) -- $33,437 in 5 months
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mtmingus
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by mtmingus »

What is "withdrawal cushion" and how is it generated? Cannot found it in the Instruction sheet.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SnowBog »

mtmingus wrote: Mon May 10, 2021 9:47 am What is "withdrawal cushion" and how is it generated? Cannot found it in the Instruction sheet.
See the first post in the thread. But basically the first withdrawal was 6 months vs. 1 month to build up the "cushion". Then subsequent withdrawals leverage that "cushion" to dampen the month-to-month variablity (as you effectively then have a 6 month rolling average you are working with instead).
longinvest wrote: Sun Jun 30, 2019 10:37 am ...
Monthly portfolio withdrawal amounts will be determined using the new VPW Accumulation And Retirement Worksheet which takes into account current and future pensions (like delayed Social Security), with and without cost-of-living adjustments. Portfolio withdrawals will be taken on the last day of the month and their short-term fluctuations will be dampened using a savings account containing a few months worth of withdrawals.

The dampening savings account will accrue interest based on the rates of high-interest online savings accounts (like an Ally savings account which currently pays 2.10%).

...

The VPW Worksheet suggests to take a $5,356 withdrawal and tells us that total annual retirement income is currently estimated at $76,276. In case of unfavorable market returns where stocks would lose 50%, the portfolio would lose -$300,000 and retirement income would be reduced by -20% to $61,286. The retiree is OK with that.

As income for July 2019 and to pre-fill the dampening savings account, the retiree exceptionally withdraws 6 times the suggested amount. That's (6 X $5,356) = $32,136. This leaves ($1,000,000 - $32,136) = $967,864 invested into the Vanguard LifeStrategy Moderate Growth Fund at the end of June 2019.

After making the withdrawal, the retiree deposits (5 X $5,356) = $26,780 into the dampening savings account, and combines the remaining $5,356 with the $1,000 July work pension payment for a total income of $6,356 available to pay taxes and expenses in July 2019.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $6,040 portfolio withdrawal at the end of April 2021.

The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4%. As a consequence, ($24,708 / 26.4%) = $93,591 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 $1,117,133 portfolio, but $93,591 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1%. This results into a (($1,117,133 - $93,591) X 5.1%) = $52,201 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 $52,201 VPW withdrawal. This sums up to ($24,708 - $4,116 + $52,201) = $72,793 and results into a ($72,793 / 12) = $6,066 portfolio withdrawal. The $26 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 ($72,793 + (12 X $1,000)) = $84,793/year ($7,066/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 $1,117,133) = -$335,140 portfolio loss, reducing the portfolio to ($1,117,133 - $335,140) = $781,993 after the loss. This implies a (($24,708 - $4,116 + (($781,993 - $93,591) X 5.1%)) / 12) = $4,642 monthly portfolio withdrawal which represents a ($4,642 - $6,066) = -$1,424 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,424/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,424 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)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of April 30, 2021, was spread across 3,781 U.S. stocks, 7,554 international stocks, 10,156 U.S. bonds, and 6,332 international bonds for a total of 27,823 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until April 30, 2021:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for April 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of April 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
05/2020 256.394
06/2020 257.797
07/2020 259.101
08/2020 259.918
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
02/2021 263.014
03/2021 264.877
04/2021 267.054
We take note that the average CPI-U for the last 12 months at the end of April 2021 was 260.926.

Last year, we calculated that the average CPI-U for the last 12 months at the end of April 2020 was 257.067.

The trailing 1-year average inflation at the end of April 2021 was ((260.926 / 257.067) - 1) = 1.50%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -1.00% below trailing average inflation.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in April 2021 dollars:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of May 31, 2021

The May 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.03% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of April 30, 2021 and apply May 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,082,421.21 X (1 + 1.03%)) = $1,093,570.15
  • Withdrawal cushion (at Ally Bank): ($28,927.16 X ((1 + 0.50%)^(1 / 12))) = $28,939.19
Total Portfolio Balance: $1,122,509.34
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of May 31, 2021

We continue our forward test. Here's a link to the previous entry.

As of May 31, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,093,570.15
  • Withdrawal cushion (at Ally Bank): $28,939.19
Total Portfolio Balance: $1,122,509.34

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $6,062 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($6,062 + $28,939.19) / 6) = $5,834
  • Adjustment: ($5,834 - $6,062) = -$228
The retiree transfers $228 of withdrawal money to the Ally savings account and combines the remaining $5,834 with the $1,000 June 2021 work pension payment for a total retirement income of $6,834 available for taxes and expenses in June 2021.

After withdrawal and transfer, ($1,093,570.15 - $6,062) = $1,087,508.15 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($28,939.19 + $228) = $29,167.19 is left into the withdrawal cushion for a total portfolio balance of $1,116,675.34 at the end of May 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

June 2021 total retirement income is $6,834 and on the morning of June 1, 2021, the total portfolio balance is $1,116,675.34.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $80,542 (annualized) -- $40,271 in 6 months
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Barkingsparrow
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Barkingsparrow »

Why update the yellow cells once a year, rather than say, the start of a month?
SnowBog
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SnowBog »

Barkingsparrow wrote: Sat Jun 05, 2021 11:43 am Why update the yellow cells once a year, rather than say, the start of a month?
It's unlikely anything but the portfolio balance actually changes month to month.

In this forward test, they are using a single fund that maintains AA. And their SS/pension estimate isn't going to change monthly. Neither is their age.
ososnilknarf
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by ososnilknarf »

SnowBog wrote: Sat Jun 05, 2021 1:26 pm
Barkingsparrow wrote: Sat Jun 05, 2021 11:43 am Why update the yellow cells once a year, rather than say, the start of a month?
It's unlikely anything but the portfolio balance actually changes month to month.

In this forward test, they are using a single fund that maintains AA. And their SS/pension estimate isn't going to change monthly. Neither is their age.
Ah, I think I might see why user Barkingsparrow was asking this. Because at the top of the VPW spreadsheet, the instructions say to update the yellow cells every year of retirement. Since this is a monthly withdraw scenario, it should really be updated each month when you draw from the portfolio.
SnowBog
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SnowBog »

ososnilknarf wrote: Sat Jun 05, 2021 9:57 pm
SnowBog wrote: Sat Jun 05, 2021 1:26 pm
Barkingsparrow wrote: Sat Jun 05, 2021 11:43 am Why update the yellow cells once a year, rather than say, the start of a month?
It's unlikely anything but the portfolio balance actually changes month to month.

In this forward test, they are using a single fund that maintains AA. And their SS/pension estimate isn't going to change monthly. Neither is their age.
Ah, I think I might see why user Barkingsparrow was asking this. Because at the top of the VPW spreadsheet, the instructions say to update the yellow cells every year of retirement. Since this is a monthly withdraw scenario, it should really be updated each month when you draw from the portfolio.
One could argue the "instructions" should say "update as needed every Portfolio Withdrawal Period", to be more precise if people use different withdrawal periods.

Regardless, the other values don't change monthly (unless you have some unique pension which pays or differently every month). Things like SS/pension/age only change once a year, so that frequency makes sense (to me anyway).
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $6,062 portfolio withdrawal at the end of May 2021.

The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4%. As a consequence, ($24,708 / 26.4%) = $93,591 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 $1,122,509 portfolio, but $93,591 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1%. This results into a (($1,122,509 - $93,591) X 5.1%) = $52,475 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 $52,475 VPW withdrawal. This sums up to ($24,708 - $4,116 + $52,475) = $73,067 and results into a ($73,067 / 12) = $6,089 portfolio withdrawal. The $27 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 ($73,067 + (12 X $1,000)) = $85,067/year ($7,089/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 $1,122,509) = -$336,753 portfolio loss, reducing the portfolio to ($1,122,509 - $336,753) = $785,756 after the loss. This implies a (($24,708 - $4,116 + (($785,756 - $93,591) X 5.1%)) / 12) = $4,658 monthly portfolio withdrawal which represents a ($4,658 - $6,089) = -$1,431 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,431/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,431 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of May 31, 2021, was spread across 3,791 U.S. stocks, 7,576 international stocks, 10,110 U.S. bonds, and 6,290 international bonds for a total of 27,767 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until May 31, 2021:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

Image
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for May 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of May 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
06/2020 257.797
07/2020 259.101
08/2020 259.918
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
02/2021 263.014
03/2021 264.877
04/2021 267.054
05/2021 269.195
We take note that the average CPI-U for the last 12 months at the end of May 2021 was 261.992.

Last year, we calculated that the average CPI-U for the last 12 months at the end of May 2020 was 257.092.

The trailing 1-year average inflation at the end of May 2021 was ((261.992 / 257.092) - 1) = 1.91%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -1.41% below trailing average inflation.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in May 2021 dollars:

Image
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The month of July 2021 has five weekends. This weekend, I'll explain in details the small (($27 / $6,062) < 1%) difference between the withdrawal amount calculated with the retirement worksheet and the amount manually calculated using the VPW Table (like in this post). I'll get back to regular forward test posts next weekend.

For simplicity and to avoid false precision, percentages in the VPW Table are limited to a single decimal of precision after dot (as in 26.4%). These percentages are the result of a simple calculation, as explained in this post:
longinvest wrote: Sun Sep 20, 2020 1:57 am Here's a simple way to reconstruct the 60/40 stocks/bonds column of the VPW Table with simple arithmetic operations.

Let's assume that we want to withdraw $1 per year from our portfolio on our birthday, during retirement, until age 99 when our portfolio gets depleted. We also assume that the annual return of the portfolio is exactly 3.76% each year of retirement.

Upon reaching age 99, we make our last $1 withdrawal and deplete our portfolio. Obviously our portfolio balance, before withdrawal, was exactly $1. We withdrew $1 / $1 = 100.0% of our portfolio at age 99.

This implies that at age 98, just after making our $1 withdrawal, we had $1 / (1 + 3.76%) = $0.963762528 portfolio balance. (Check: If we let $0.963762528 grow by 3.76% during our 98th year, we get a $1 portfolio balance at age 99 before withdrawal). Before making our withdrawal at age 98 we necessarily had $1.963762528. We withdrew $1 / $1.963762528 = 50.9% (rounded) of our portfolio at age 98.

We repeat the calculation for age 97 and get $1 + ($1.963762528 / (1 + 3.76%)) = $2.892600741, implying a $1 / $2.892600741 = 34.6% withdrawal.

We repeat the calculation for age 96 and get $1 + ($2.892600741 / (1 + 3.76%)) = $3.787780205, implying a $1 / $3.787780205 = 26.4% withdrawal.

And so on for ages 96, 95, ..., and 40.
There would be no simplicity benefit to rounding such percentages within the calculations of the VPW Accumulation And Retirement Worksheet.

When I repeat the calculations of this post explaining last month's suggested withdrawal amount without rounding percentages and intermediate results, I get:
  • The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4006871%. As a consequence, ($24,708 / 26.4006871%) = $93,588.47331 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 65.72525363% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.72525363%)) = $4,112.969564 is invested into the portfolio.

    The retiree has a $1,122,509 portfolio, but $93,588.47331 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.068812416%. This results into a (($1,122,509 - $93,588.47331) X 5.068812416%) = $52,154.05141 annual VPW withdrawal.

    So, on an annual basis the retiree plans to withdraw $24,708 in replacement of future Social Security payments, to invest $4,112.969564 to dampen the ravages of inflation on the fixed work pension, and to take a $52,154.05141 VPW withdrawal. This sums up to ($24,708 - $4,112.969564 + $52,154.05141) = $72,749.08185 and results into a ($72,749.08185 / 12) = $6,062.423487 portfolio withdrawal.
Rounding this last number gives $6,062 which exactly matches the retirement worksheet's amount (see this post).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of June 30, 2021

The June 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.07% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of May 31, 2021 and apply June 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,087,508.15 X (1 + 1.07%)) = $1,099,144.49
  • Withdrawal cushion (at Ally Bank): ($29,167.19 X ((1 + 0.50%)^(1 / 12))) = $29,179.32
Total Portfolio Balance: $1,128,323.81
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of June 30, 2021

We continue our forward test. Here's a link to the previous entry.

As of June 30, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,099,144.49
  • Withdrawal cushion (at Ally Bank): $29,179.32
Total Portfolio Balance: $1,128,323.81

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

The retiree's age has increased by one to 67. We update the Age cell and the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $6,248 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($6,248 + $29,179.32) / 6) = $5,905
  • Adjustment: ($5,905 - $6,248) = -$343
The retiree transfers $343 of withdrawal money to the Ally savings account and combines the remaining $5,905 with the $1,000 July 2021 work pension payment for a total retirement income of $6,905 available for taxes and expenses in July 2021.

After withdrawal and transfer, ($1,099,144.49 - $6,248) = $1,092,896.49 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($29,179.32 + $343) = $29,522.32 is left into the withdrawal cushion for a total portfolio balance of $1,122,418.81 at the end of June 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

July 2021 total retirement income is $6,905 and on the morning of July 1, 2021, the total portfolio balance is $1,122,418.81.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $80,873 (annualized) -- $47,176 in 7 months
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Siaigi
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Siaigi »

Good morning and thank you so much to share these spreadsheets! I greatly appreciate your efforts! :sharebeer

One question please.

actually I use every month the Return Spreadsheet for Bogleheads and in a couple of months I’ll retire.

Therefore, I think to start using the VPW Retirement worksheet.

About the Portfolio Balance in VPW, do you recommend me to use the value I’ll copy from the Return Spreadsheets for Bogleheads?
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

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.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of June 30, 2021, was spread across 3,908 U.S. stocks, 7,526 international stocks, 10,138 U.S. bonds, and 6,294 international bonds for a total of 27,866 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until June 30, 2021:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

Image
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for June 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of June 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
07/2020 259.101
08/2020 259.918
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
02/2021 263.014
03/2021 264.877
04/2021 267.054
05/2021 269.195
06/2021 271.696
We take note that the average CPI-U for the last 12 months at the end of June 2021 was 263.151.

Last year, we calculated that the average CPI-U for the last 12 months at the end of June 2020 was 257.230.

The trailing 1-year average inflation at the end of June 2021 was ((263.151 / 257.230) - 1) = 2.30%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -1.80% below trailing average inflation.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in June 2021 dollars:

Image
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of July 31, 2021

The July 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 0.83% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of June 30, 2021 and apply July 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,092,896.49 X (1 + 0.83%)) = $1,101,967.53
  • Withdrawal cushion (at Ally Bank): ($29,522.32 X ((1 + 0.50%)^(1 / 12))) = $29,534.59
Total Portfolio Balance: $1,131,502.12
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of July 31, 2021

We continue our forward test. Here's a link to the previous entry.

As of July 31, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,101,967.53
  • Withdrawal cushion (at Ally Bank): $29,534.59
Total Portfolio Balance: $1,131,502.12

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $6,262 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($6,262 + $29,534.59) / 6) = $5,966
  • Adjustment: ($5,966 - $6,262) = -$296
The retiree transfers $296 of withdrawal money to the Ally savings account and combines the remaining $5,966 with the $1,000 August 2021 work pension payment for a total retirement income of $6,966 available for taxes and expenses in August 2021.

After withdrawal and transfer, ($1,101,967.53 - $6,262) = $1,095,705.53 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($29,534.59 + $296) = $29,830.59 is left into the withdrawal cushion for a total portfolio balance of $1,125,536.12 at the end of July 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

August 2021 total retirement income is $6,966 and on the morning of August 1, 2021, the total portfolio balance is $1,125,536.12.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $81,213 (annualized) -- $54,142 in 8 months
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FalconMan
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by FalconMan »

I've been looking for something like this for a while. Thanks!
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $6,262 portfolio withdrawal at the end of July 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 $1,131,502 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 (($1,131,502 - $71,410) X 5.1%) = $54,065 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 $54,065 VPW withdrawal. This sums up to ($24,708 - $4,116 + $54,065) = $74,657 and results into a ($74,657 / 12) = $6,221 portfolio withdrawal. The -$41 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 ($74,657 + (12 X $1,000)) = $86,657/year ($7,221/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 $1,131,502) = -$339,451 portfolio loss, reducing the portfolio to ($1,131,502 - $339,451) = $792,051 after the loss. This implies a (($24,708 - $4,116 + (($792,051 - $71,410) X 5.1%)) / 12) = $4,779 monthly portfolio withdrawal which represents a ($4,779 - $6,221) = -$1,442 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,442/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,442 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of July 31, 2021, was spread across 3,935 U.S. stocks, 7,597 international stocks, 10,099 U.S. bonds, and 6,361 international bonds for a total of 27,992 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until July 31, 2021:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

Image
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for July 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of July 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
08/2020 259.918
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
02/2021 263.014
03/2021 264.877
04/2021 267.054
05/2021 269.195
06/2021 271.696
07/2021 273.003
We take note that the average CPI-U for the last 12 months at the end of July 2021 was 264.309.

Last year, we calculated that the average CPI-U for the last 12 months at the end of July 2020 was 257.441.

The trailing 1-year average inflation at the end of July 2021 was ((264.309 / 257.441) - 1) = 2.67%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -2.17% below trailing average inflation.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in July 2021 dollars:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
longratio
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longratio »

longinvest wrote: Sat Aug 28, 2021 2:45 pm Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in July 2021 dollars:

Any chance to also add the "Historical Annual Retirement Income" list expressed in July 2021 dollars? Like the one on the beginning of the month posts. Anyway many thanks of doing all these write ups, its really interesting.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Portfolio balance as of August 31, 2021

The August 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.33% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of July 31, 2021 and apply August 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,095,705.53 X (1 + 1.33%)) = $1,110,278.41
  • Withdrawal cushion (at Ally Bank): ($29,830.59 X ((1 + 0.50%)^(1 / 12))) = $29,842.99
Total Portfolio Balance: $1,140,121.40
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of August 31, 2021

We continue our forward test. Here's a link to the previous entry.

As of August 31, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,110,278.41
  • Withdrawal cushion (at Ally Bank): $29,842.99
Total Portfolio Balance: $1,140,121.40

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $6,299 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($6,299 + $29,842.99) / 6) = $6,024
  • Adjustment: ($6,024 - $6,299) = -$275
The retiree transfers $275 of withdrawal money to the Ally savings account and combines the remaining $6,024 with the $1,000 September 2021 work pension payment for a total retirement income of $7,024 available for taxes and expenses in September 2021.

After withdrawal and transfer, ($1,110,278.41 - $6,299) = $1,103,979.41 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($29,842.99 + $275) = $30,117.99 is left into the withdrawal cushion for a total portfolio balance of $1,134,097.40 at the end of August 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

Chart

Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

September 2021 total retirement income is $7,024 and on the morning of September 1, 2021, the total portfolio balance is $1,134,097.40.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $81,555 (annualized) -- $61,166 in 9 months
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
smectym
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

We’re doing the VPW methodology w spouses IRA (I’m not withdrawing yet) and (I) find this thread of absorbing interest, echo the thanks of others on this board. Learning a lot
retiringwhen
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by retiringwhen »

smectym wrote: Sat Sep 04, 2021 5:15 pm We’re doing the VPW methodology w spouses IRA (I’m not withdrawing yet) and (I) find this thread of absorbing interest, echo the thanks of others on this board. Learning a lot
I too want to thank longinvest for this long-term effort. In 2019, back tested to 1/1/2018, I started a real-time simulation very similar to this regular report, but using actual portfolio returns (our actual portfolio balance change % each month) while simulating withdrawals against the 1/1/2018 starting balance. It has helped me understand how the variable part of the method works much better and prepare me for the potential vicissitudes of returns in retirement hopefully in 2022!

Edit: I use longinvest's BogleHeads Return Spreadsheet to calculate that monthly return so it does not have "Beardstown ladies" fallacious return calculations too! :happy
smectym
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

It’s pretty interesting that the simulation has already been through quite a stress test, with the pandemic crash etc. And so far, so good. Is the plan for the simulated investor to live to 110?
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