Is VPW a safer retirement strategy than SWR?

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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

Da5id wrote: Sun Jul 25, 2021 3:42 pm
nigel_ht wrote: Sun Jul 25, 2021 3:32 pm I don’t really care about who “wins”…
Not how it comes across to me?

I don't have a dog in this fight, I think VPW is fine but I'm not using it. Mind you I'm at below 2% spending with flexibility to go lower so I'm confident whatever I do will work unless the swans are getting quite dark.

As to the colorful table, ERN rates VPW much more highly than SWR overall. Mind you he also rates CAPE based methods most highly, about which I'm a bit dubious. I just like the way he breaks out (in his opinions) the pluses and minuses of each strategy.
This started out just talking about the “frugality” of approaches which resulted in a rebuttal on the main VPW thread which morphed into a separate thread that was merged back into the frugality thread.

Which was a lot of work for the mods who are much appreciated around here.

But if it seems like I’m against VPW I’m not.

I did choose to defend SWR against mischaracterization and I don’t believe that for VPW to be good or useful for other withdrawal strategies to be bad or useless.

Like everyone else, I look for tools that work for me. There are some elements of VPW that are attractive and with caps I think it may work out better than just doing a baseline 3% SWR on 80% of the portfolio and reserving the other 20% to blow on the first decade of retirement.

Or not.

There’s a certain simplicity with SWR that’s nice and coupled with having a large play budget allows a lot of spending flexibility.

Even more so because the play budget will be in bonds and we’ll spend that down first so we automagically ramp our AA back up to 80/20.
longinvest
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by longinvest »

David Jay wrote: Sun Jul 25, 2021 3:38 pm
longinvest wrote: Sat Jul 24, 2021 1:10 pmGuaranteed income can be bought, it's called an inflation-indexed SPIA* (joint life, for a couple).
Longinvest:

The Principal has discontinued their inflation-indexed SPIA a few years ago, they were the last insurance company that I know of that offered inflation-indexed SPIAs. Are you aware of another insurer who issues these policies?
David, it is possible to buy a SPIA indexed to "promised inflation", in other words, a 2%-indexed SPIA which will increase by 2% each year of retirement in line with the Federal Reserve's inflation target.** This is likely to be good enough and, from the retiree's point of view, it might look more predictable than a CPI-indexed SPIA as we live in a nominal world and CPI is quite volatile over short periods (as I've partly illustrated here).

I am aware that a 2%-indexed SPIA won't protect the retiree as well as a CPI-indexed SPIA if future long-term inflation happens to be significantly higher, but I invite you to read the linked Federal Reserve text** which explains why the Federal Reserve is taking active steps to keep inflation anchored on a 2% inflation target: "When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy" and "By seeking inflation that averages 2 percent over time, the FOMC will help to ensure longer-run inflation expectations remain well anchored at 2 percent".

* Single Premium Immediate Annuity.
** Source: Why does the Federal Reserve aim for inflation of 2 percent over the longer run?, Federal Reserve web site.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by David Jay »

longinvest wrote: Sun Jul 25, 2021 4:10 pm
David Jay wrote: Sun Jul 25, 2021 3:38 pm
longinvest wrote: Sat Jul 24, 2021 1:10 pmGuaranteed income can be bought, it's called an inflation-indexed SPIA* (joint life, for a couple).
Longinvest:

The Principal has discontinued their inflation-indexed SPIA a few years ago, they were the last insurance company that I know of that offered inflation-indexed SPIAs. Are you aware of another insurer who issues these policies?
David, it is possible to buy a SPIA indexed to "promised inflation", in other words, a 2%-indexed SPIA which will increase by 2% each year of retirement in line with the Federal Reserve's inflation target.** This is likely to be good enough and, from the retiree's point of view, it might look more predictable than a CPI-indexed SPIA as we live in a nominal world and CPI is quite volatile over short periods (as I've partly illustrated here).

I am aware that a 2%-indexed SPIA won't protect the retiree as well as a CPI-indexed SPIA if future long-term inflation happens to be significantly higher, but I invite you to read the linked Federal Reserve text** which explains why the Federal Reserve is taking active steps to keep inflation anchored on a 2% inflation target: "When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy" and "By seeking inflation that averages 2 percent over time, the FOMC will help to ensure longer-run inflation expectations remain well anchored at 2 percent".

* Single Premium Immediate Annuity.
** Source: Why does the Federal Reserve aim for inflation of 2 percent over the longer run?, Federal Reserve web site.
I was referencing your statement above. To me, a fixed annual escalator is not that same thing as an inflation-indexed product.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by longinvest »

David Jay wrote: Sun Jul 25, 2021 5:22 pm
longinvest wrote: Sun Jul 25, 2021 4:10 pm
David Jay wrote: Sun Jul 25, 2021 3:38 pm
longinvest wrote: Sat Jul 24, 2021 1:10 pmGuaranteed income can be bought, it's called an inflation-indexed SPIA* (joint life, for a couple).
Longinvest:

The Principal has discontinued their inflation-indexed SPIA a few years ago, they were the last insurance company that I know of that offered inflation-indexed SPIAs. Are you aware of another insurer who issues these policies?
David, it is possible to buy a SPIA indexed to "promised inflation", in other words, a 2%-indexed SPIA which will increase by 2% each year of retirement in line with the Federal Reserve's inflation target.** This is likely to be good enough and, from the retiree's point of view, it might look more predictable than a CPI-indexed SPIA as we live in a nominal world and CPI is quite volatile over short periods (as I've partly illustrated here).

I am aware that a 2%-indexed SPIA won't protect the retiree as well as a CPI-indexed SPIA if future long-term inflation happens to be significantly higher, but I invite you to read the linked Federal Reserve text** which explains why the Federal Reserve is taking active steps to keep inflation anchored on a 2% inflation target: "When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy" and "By seeking inflation that averages 2 percent over time, the FOMC will help to ensure longer-run inflation expectations remain well anchored at 2 percent".

* Single Premium Immediate Annuity.
** Source: Why does the Federal Reserve aim for inflation of 2 percent over the longer run?, Federal Reserve web site.
I was referencing your statement above. To me, a fixed annual escalator is not that same thing as an inflation-indexed product.
David, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.

One could also contact The Principal and ask if it would be willing to sell a CPI-indexed SPIA. I guess that it stopped publicly marketing such SPIAs due to lack of demand.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

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longinvest wrote: Sun Jul 25, 2021 5:36 pmDavid, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.
:shock:
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by nigel_ht »

David Jay wrote: Sun Jul 25, 2021 5:47 pm
longinvest wrote: Sun Jul 25, 2021 5:36 pmDavid, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.
:shock:
Yah. That’s a surprising claim to call reasonable…
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Re: Is VPW a safer retirement strategy than SWR?

Post by randomguy »

Marseille07 wrote: Sun Jul 25, 2021 1:15 pm
randomguy wrote: Sun Jul 25, 2021 1:12 pm The 4% rule isn't designed to give an income floor or have your money last forever either. It is designed to pay out 4% for as long as possible and then 0 dollars. You might not like that but it isn't a flaw. It is a trade off that one accepts when using a fixed SWR.
It is designed to give an income floor. The 4% SWR is 4% of your portfolio balance when you started the adventure, plus CPI for inflation. Unless we're talking about deflationary periods, your spending plan per year rises over time. This is why SWR is called "constant-dollar."

EDIT to clarify: in a way, SWR provides the ceiling and the floor at the same time. If you need 40K/year and amassed 1M, you can spend 40K/year + CPI as the floor (and the ceiling, otherwise you're overspending). VPW doesn't really have this assurance.
You are missing the point. The 4% rule provides an income stream just like VPW provides an income stream. It is up to you if that stream is considered a failure case or not. Normally we say under 40k is failure but we have changed that to now any income is acceptable (i.e. no income floor). So the 4% rule never fails since income going to 0 is not considered failure anymore. Not having an income floor is sort of absurd which is why we get this result but for some people it makes sense.

Think of it this way. If you have covered your expenses with SPIA, SS, and pensions, why are you cutting expenses in retirement? At worst you go broke and live on the basic stuff when your 90. Isn't that a lot better than scrimping on spending during your prime retirement years just to be the richest guy in the nursing home? Obviously you have to decide that based on what you want. And the good news is the odds of any of use facing these type of choices is very low. You got to be pretty unlucky to pick the worst year or two in a 50 year period to retire...
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

randomguy wrote: Sun Jul 25, 2021 5:56 pm
You are missing the point. The 4% rule provides an income stream just like VPW provides an income stream. It is up to you if that stream is considered a failure case or not. Normally we say under 40k is failure but we have changed that to now any income is acceptable (i.e. no income floor). So the 4% rule never fails since income going to 0 is not considered failure anymore. Not having an income floor is sort of absurd which is why we get this result but for some people it makes sense.
It’s been hard to get folks to agree to an apples to apples comparison…
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by longinvest »

David Jay wrote: Sun Jul 25, 2021 5:47 pm
longinvest wrote: Sun Jul 25, 2021 5:36 pmDavid, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.
:shock:
David, are you looking for perfection in our imperfect world?

I think that a SPIA indexed to the Federal Reserve's 2% inflation target, while imperfect, is a lot better than a flat SPIA which will lose lose 2% more per year in purchase power if inflation turns out superior to 2%. It's a good enough complement (when necessary) to add to Social Security delayed to age 70 (to maximize this "true" inflation-indexed pension).

Actually, even a "true" inflation-indexed pension isn't perfect. For perfection, one would need a SPIA indexed to the retiree's specific future currently-unknown financial needs. Unfortunately, such a SPIA is difficult to find. :wink:
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by David Jay »

longinvest wrote: Sun Jul 25, 2021 6:23 pm
David Jay wrote: Sun Jul 25, 2021 5:47 pm
longinvest wrote: Sun Jul 25, 2021 5:36 pmDavid, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.
:shock:
David, are you looking for perfection in our imperfect world?
No, but I lived through the 70s.

I had hoped you would agree that “2% annual escalator” != “inflation-indexed”. “Indexed” has a specific meaning, especially around BH”

“I manage a large cap, active, high turnover mutual fund which is (practically) indexed to the SP500.”
Last edited by David Jay on Sun Jul 25, 2021 6:58 pm, edited 2 times in total.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by longinvest »

David Jay wrote: Sun Jul 25, 2021 6:39 pm
longinvest wrote: Sun Jul 25, 2021 6:23 pm
David Jay wrote: Sun Jul 25, 2021 5:47 pm
longinvest wrote: Sun Jul 25, 2021 5:36 pmDavid, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.
:shock:
David, are you looking for perfection in our imperfect world?
No, but I lived through the 70s.

I had hoped you would agree that “2% annual escalator” != “inflation-indexed”. “Indexed” has a specific meaning, especially around BH.
Federal Reserve Chairman Paul Volcker conquered inflation.

This is derailing this thread. I'll stop here.
Last edited by longinvest on Sun Jul 25, 2021 6:45 pm, edited 1 time in total.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by David Jay »

longinvest wrote: Sun Jul 25, 2021 6:42 pm Federal Reserve Chairman Paul Volcker conquered inflation.
There ya’ go. No worries…

/s
Last edited by David Jay on Sun Jul 25, 2021 6:59 pm, edited 1 time in total.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by retiringwhen »

David Jay wrote: Sun Jul 25, 2021 6:44 pm
longinvest wrote: Sun Jul 25, 2021 6:42 pm Federal Reserve Chairman Paul Volcker conquered inflation.
There ya’ go. No worries…
Unfortunately, Paul went to meet his maker and at least one of his students and later Fed Chairman rejected his message, telling Congress that if necessary he'd throw cash from helicopters. Only time will tell if Paul or Ben's primary concerns will rule the next decade. I personally expect more deflation.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

The nice thing about using historical data is that it told us that inflation really sucks for retirees…even if conditions won’t be identical the fact that certain withdrawal amounts managed to survive periods of high inflation with out failure is reassuring that folks may not need to exceed their maximum flexibility…even without inflation indexed SPIAs.

Or not. This time could be a lot worse.
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Re: Is VPW a safer retirement strategy than SWR?

Post by Marseille07 »

randomguy wrote: Sun Jul 25, 2021 5:56 pm Think of it this way. If you have covered your expenses with SPIA, SS, and pensions, why are you cutting expenses in retirement? At worst you go broke and live on the basic stuff when your 90. Isn't that a lot better than scrimping on spending during your prime retirement years just to be the richest guy in the nursing home? Obviously you have to decide that based on what you want. And the good news is the odds of any of use facing these type of choices is very low. You got to be pretty unlucky to pick the worst year or two in a 50 year period to retire...
I don't have pensions, but if you do & can afford SPIA, by all means. VPW works fine in that case.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by reln »

Nestegg_User wrote: Sat Jul 24, 2021 10:37 pm
reln wrote: Sat Jul 24, 2021 9:12 pm
FactualFran wrote: Sat Jul 24, 2021 8:49 pm
NearlyRetired wrote: Sat Jul 24, 2021 2:18 pm The 4% "rule" is based on historical analysis (which BTW only considers investment performance and must be adjusted for fees and inflation). This is a backward looking calculation and assumes that the past describes a likely future. This may, or may not, be accurate
The "4% rule" is based on the analysis of historical returns and inflation. There is no need for an additional adjustment for inflation. The recent fees of index funds have been very small relative to the index returns that were used in the analysis. Such index funds were not available during the earlier years of the historical returns that were used in the analysis.

There is no overall assumption that the past describes a likely future. However, someone who uses an initial withdrawal rate equal to the maximum rate that did not deplete a portfolio using historical inflation-adjusted returns is depending on future sequences of inflation-adjusted returns being no worse than the worst sequence in the historical returns.
The 4% rule failed in most developed countries. It only worked in USA and Canada, historically. A more global "x% rule" would be closer to 2.8%, historically.

We just happen to refer only too "the worst sequence in the historical returns" of the *most successful* stock market in the historical returns. IMO, that violates the presumptive "conservative assumptions" the 4% rule is based on.

VPW based on assets and life expectancy makes more sense.
you might want to correct that__see Estrada (2018) J of Retirement, "Maximum Withdrawal Rates: An Empirical and Global Perspective" wherein most of those involved in the WW2 conflict (invaded or were invaded) had low P5 withdrawal rates (5% probably of failure, (i'm quoting only the same rate as the 4% rule) for a 60/40 portfolio) whereas others had equal or close to the 4% level [Australia 3.7%, Canada 4.1%, Denmark 4.0% (surprisingly), Netherlands 3.6% (also surprisingly), New Zealand 4.0%, South Africa 3.9%... but then there's Sweden 3.3%, Switzerland 3.0% (surprisingly), and with the UK down at 3.4%]. These certainly are well above your 2.8%... but you are probably looking at countries that weren't as well developed, like Portugal or Ireland which neither had a strong economy in earlier years. (Estrada had another paper that basically showed that the level you are thinking about is closer to 3.5%, so indeed lower than 4% but not by as large of a variance. That's why, in part, that we use a 3.5% value in our planning (now in our retirement, still use it)...as it places less importance on "US exceptionalism". )
I was referring to the original 4% rule (Bengen) which isn't based on 5% chance of failure (Trinity).
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by reln »

nigel_ht wrote: Sat Jul 24, 2021 11:43 pm
reln wrote: Sat Jul 24, 2021 8:30 pm
nigel_ht wrote: Sat Jul 24, 2021 2:25 pm
reln wrote: Sat Jul 24, 2021 1:42 pm Researchers generally agree that a VPW is better than constant (real or nominal) withdrawals. A further improvement also takes into account life expectancy.

All withdrawal methods can fail but constant spending methods are more likely to fail than VPWs.
Only if you assume there is no minimum spending.

Which is an incorrect assertion.
You're incorrect. Even if there is no minimum spending set in the withdrawal method (if breached, the scenario fails), the VPWs are superior to constant spending. In other words VPWs have better outcomes over more scenarios. This doesn't mean VPW has a better outcome in every scenario. You just happen to find 1 scenario in which it fails and constant spending succeeds; and you have extrapolated too far from that 1 example.
Since you know I’m incorrect it should be simple to show me how often minimum spending amounts are breached, for how long, etc.

How does VPW have a better outcome over more scenarios when SWR percentages are the maximum safe amount to withdraw historically? A SWR value isn’t really “safe” unless the historical failure rate is 0…for a 30 year that has been 3.8%.

I showed only one example because the backtest spreadsheet doesn’t appear to make it easy to evaluate every 30 cohort in one pass. Given you know I’m wrong presumably you can show me the results for every 30 year period from 1871 onward…
Many papers already show this. Google them.

You're historical only approach is limited because history only gave us 1 sequence. A sample size of 1 is too small in science.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by nigel_ht »

reln wrote: Mon Jul 26, 2021 7:20 pm
Nestegg_User wrote: Sat Jul 24, 2021 10:37 pm
reln wrote: Sat Jul 24, 2021 9:12 pm
FactualFran wrote: Sat Jul 24, 2021 8:49 pm
NearlyRetired wrote: Sat Jul 24, 2021 2:18 pm The 4% "rule" is based on historical analysis (which BTW only considers investment performance and must be adjusted for fees and inflation). This is a backward looking calculation and assumes that the past describes a likely future. This may, or may not, be accurate
The "4% rule" is based on the analysis of historical returns and inflation. There is no need for an additional adjustment for inflation. The recent fees of index funds have been very small relative to the index returns that were used in the analysis. Such index funds were not available during the earlier years of the historical returns that were used in the analysis.

There is no overall assumption that the past describes a likely future. However, someone who uses an initial withdrawal rate equal to the maximum rate that did not deplete a portfolio using historical inflation-adjusted returns is depending on future sequences of inflation-adjusted returns being no worse than the worst sequence in the historical returns.
The 4% rule failed in most developed countries. It only worked in USA and Canada, historically. A more global "x% rule" would be closer to 2.8%, historically.

We just happen to refer only too "the worst sequence in the historical returns" of the *most successful* stock market in the historical returns. IMO, that violates the presumptive "conservative assumptions" the 4% rule is based on.

VPW based on assets and life expectancy makes more sense.
you might want to correct that__see Estrada (2018) J of Retirement, "Maximum Withdrawal Rates: An Empirical and Global Perspective" wherein most of those involved in the WW2 conflict (invaded or were invaded) had low P5 withdrawal rates (5% probably of failure, (i'm quoting only the same rate as the 4% rule) for a 60/40 portfolio) whereas others had equal or close to the 4% level [Australia 3.7%, Canada 4.1%, Denmark 4.0% (surprisingly), Netherlands 3.6% (also surprisingly), New Zealand 4.0%, South Africa 3.9%... but then there's Sweden 3.3%, Switzerland 3.0% (surprisingly), and with the UK down at 3.4%]. These certainly are well above your 2.8%... but you are probably looking at countries that weren't as well developed, like Portugal or Ireland which neither had a strong economy in earlier years. (Estrada had another paper that basically showed that the level you are thinking about is closer to 3.5%, so indeed lower than 4% but not by as large of a variance. That's why, in part, that we use a 3.5% value in our planning (now in our retirement, still use it)...as it places less importance on "US exceptionalism". )
I was referring to the original 4% rule (Bengen) which isn't based on 5% chance of failure (Trinity).
His point is that the historical average is likely higher than what you posted based on the 2018 Estrada paper.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by nigel_ht »

reln wrote: Mon Jul 26, 2021 7:24 pm
nigel_ht wrote: Sat Jul 24, 2021 11:43 pm
reln wrote: Sat Jul 24, 2021 8:30 pm
nigel_ht wrote: Sat Jul 24, 2021 2:25 pm
reln wrote: Sat Jul 24, 2021 1:42 pm Researchers generally agree that a VPW is better than constant (real or nominal) withdrawals. A further improvement also takes into account life expectancy.

All withdrawal methods can fail but constant spending methods are more likely to fail than VPWs.
Only if you assume there is no minimum spending.

Which is an incorrect assertion.
You're incorrect. Even if there is no minimum spending set in the withdrawal method (if breached, the scenario fails), the VPWs are superior to constant spending. In other words VPWs have better outcomes over more scenarios. This doesn't mean VPW has a better outcome in every scenario. You just happen to find 1 scenario in which it fails and constant spending succeeds; and you have extrapolated too far from that 1 example.
Since you know I’m incorrect it should be simple to show me how often minimum spending amounts are breached, for how long, etc.

How does VPW have a better outcome over more scenarios when SWR percentages are the maximum safe amount to withdraw historically? A SWR value isn’t really “safe” unless the historical failure rate is 0…for a 30 year that has been 3.8%.

I showed only one example because the backtest spreadsheet doesn’t appear to make it easy to evaluate every 30 cohort in one pass. Given you know I’m wrong presumably you can show me the results for every 30 year period from 1871 onward…
Many papers already show this. Google them.
Google didn't show any papers for vpw.
You're historical only approach is limited because history only gave us 1 sequence. A sample size of 1 is too small in science.
As you can see in the follow up posts if you don't have 25% flexibility then you have a risk of failure.

With only 10% flexibility VPW has a 15% failure rate (defined as portfolio depletion) without SS. 19 out of 121 years ran out of money.

https://calculator.ficalc.app?additiona ... gyName=vpw
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by reln »

nigel_ht wrote: Tue Jul 27, 2021 8:39 am
reln wrote: Mon Jul 26, 2021 7:20 pm
Nestegg_User wrote: Sat Jul 24, 2021 10:37 pm
reln wrote: Sat Jul 24, 2021 9:12 pm
FactualFran wrote: Sat Jul 24, 2021 8:49 pm
The "4% rule" is based on the analysis of historical returns and inflation. There is no need for an additional adjustment for inflation. The recent fees of index funds have been very small relative to the index returns that were used in the analysis. Such index funds were not available during the earlier years of the historical returns that were used in the analysis.

There is no overall assumption that the past describes a likely future. However, someone who uses an initial withdrawal rate equal to the maximum rate that did not deplete a portfolio using historical inflation-adjusted returns is depending on future sequences of inflation-adjusted returns being no worse than the worst sequence in the historical returns.
The 4% rule failed in most developed countries. It only worked in USA and Canada, historically. A more global "x% rule" would be closer to 2.8%, historically.

We just happen to refer only too "the worst sequence in the historical returns" of the *most successful* stock market in the historical returns. IMO, that violates the presumptive "conservative assumptions" the 4% rule is based on.

VPW based on assets and life expectancy makes more sense.
you might want to correct that__see Estrada (2018) J of Retirement, "Maximum Withdrawal Rates: An Empirical and Global Perspective" wherein most of those involved in the WW2 conflict (invaded or were invaded) had low P5 withdrawal rates (5% probably of failure, (i'm quoting only the same rate as the 4% rule) for a 60/40 portfolio) whereas others had equal or close to the 4% level [Australia 3.7%, Canada 4.1%, Denmark 4.0% (surprisingly), Netherlands 3.6% (also surprisingly), New Zealand 4.0%, South Africa 3.9%... but then there's Sweden 3.3%, Switzerland 3.0% (surprisingly), and with the UK down at 3.4%]. These certainly are well above your 2.8%... but you are probably looking at countries that weren't as well developed, like Portugal or Ireland which neither had a strong economy in earlier years. (Estrada had another paper that basically showed that the level you are thinking about is closer to 3.5%, so indeed lower than 4% but not by as large of a variance. That's why, in part, that we use a 3.5% value in our planning (now in our retirement, still use it)...as it places less importance on "US exceptionalism". )
I was referring to the original 4% rule (Bengen) which isn't based on 5% chance of failure (Trinity).
His point is that the historical average is likely higher than what you posted based on the 2018 Estrada paper.
Historical average returns don't matter.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by reln »

nigel_ht wrote: Tue Jul 27, 2021 11:00 am
reln wrote: Mon Jul 26, 2021 7:24 pm
nigel_ht wrote: Sat Jul 24, 2021 11:43 pm
reln wrote: Sat Jul 24, 2021 8:30 pm
nigel_ht wrote: Sat Jul 24, 2021 2:25 pm

Only if you assume there is no minimum spending.

Which is an incorrect assertion.
You're incorrect. Even if there is no minimum spending set in the withdrawal method (if breached, the scenario fails), the VPWs are superior to constant spending. In other words VPWs have better outcomes over more scenarios. This doesn't mean VPW has a better outcome in every scenario. You just happen to find 1 scenario in which it fails and constant spending succeeds; and you have extrapolated too far from that 1 example.
Since you know I’m incorrect it should be simple to show me how often minimum spending amounts are breached, for how long, etc.

How does VPW have a better outcome over more scenarios when SWR percentages are the maximum safe amount to withdraw historically? A SWR value isn’t really “safe” unless the historical failure rate is 0…for a 30 year that has been 3.8%.

I showed only one example because the backtest spreadsheet doesn’t appear to make it easy to evaluate every 30 cohort in one pass. Given you know I’m wrong presumably you can show me the results for every 30 year period from 1871 onward…
Many papers already show this. Google them.
Google didn't show any papers for vpw.
You're historical only approach is limited because history only gave us 1 sequence. A sample size of 1 is too small in science.
As you can see in the follow up posts if you don't have 25% flexibility then you have a risk of failure.

With only 10% flexibility VPW has a 15% failure rate (defined as portfolio depletion) without SS. 19 out of 121 years ran out of money.

https://calculator.ficalc.app?additiona ... gyName=vpw
Vanguard has a good paper on withdrawal methods. MorningStar also has a great one.
Finance professors have published on this topic also.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by nigel_ht »

reln wrote: Tue Jul 27, 2021 11:28 am
Historical average returns don't matter.
These are not historical average returns but are the real behavior of stock markets for over 100 years in different economic (boom and bust, inflation and stagnation) and political conditions (peacetime and war, etc).

I used to support aviation flight tests (on the modsim side of the house) which are a big part of qualification of something ready to fly.

Flight tests can't cover every known scenario or failure condition but they are sufficient to qualify an aircraft as safe for use. When a crash happens on the range or in the real world then engineers go out there to figure out why and the body of knowledge increases. You much prefer these to happen in testing rather than the real world because when the NTSB are involved typically there are fatalities.

So if your airplane can't pass the existing flight test regimen then it more likely to fail when encountering known real world failure conditions.

Likewise, if your withdrawal strategy fails against backtesting then it is more likely to fail when encountering known real world failure conditions.

So backtesting matters a great deal. They aren't compete but certainly do provide a greater understanding of weaknesses in your strategy.

And you don't want to cheat on them.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by nigel_ht »

reln wrote: Tue Jul 27, 2021 11:31 am
nigel_ht wrote: Tue Jul 27, 2021 11:00 am
reln wrote: Mon Jul 26, 2021 7:24 pm
nigel_ht wrote: Sat Jul 24, 2021 11:43 pm
reln wrote: Sat Jul 24, 2021 8:30 pm You're incorrect. Even if there is no minimum spending set in the withdrawal method (if breached, the scenario fails), the VPWs are superior to constant spending. In other words VPWs have better outcomes over more scenarios. This doesn't mean VPW has a better outcome in every scenario. You just happen to find 1 scenario in which it fails and constant spending succeeds; and you have extrapolated too far from that 1 example.
Since you know I’m incorrect it should be simple to show me how often minimum spending amounts are breached, for how long, etc.

How does VPW have a better outcome over more scenarios when SWR percentages are the maximum safe amount to withdraw historically? A SWR value isn’t really “safe” unless the historical failure rate is 0…for a 30 year that has been 3.8%.

I showed only one example because the backtest spreadsheet doesn’t appear to make it easy to evaluate every 30 cohort in one pass. Given you know I’m wrong presumably you can show me the results for every 30 year period from 1871 onward…
Many papers already show this. Google them.
Google didn't show any papers for vpw.
You're historical only approach is limited because history only gave us 1 sequence. A sample size of 1 is too small in science.
As you can see in the follow up posts if you don't have 25% flexibility then you have a risk of failure.

With only 10% flexibility VPW has a 15% failure rate (defined as portfolio depletion) without SS. 19 out of 121 years ran out of money.

https://calculator.ficalc.app?additiona ... gyName=vpw
Vanguard has a good paper on withdrawal methods. MorningStar also has a great one.
Finance professors have published on this topic also.
They've published about VPW and minimum spending? Please provide a link with "how often minimum spending amounts are breached, for how long, etc." for VPW. It will be an interesting read.

And before you retort that I should do the Google YOU are the one that asserts they are plentiful. Your assertion...your burden of proof.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

Actually, are there any scenarios where VPW ends up safer than SWR in an apples to apples comparison?

Apples to apples in any scenario that VPW doesn't prematurely deplete the portfolio and SWR does when the SWR amount is the same as the VPW minimum spend?

Not like the scenarios where SWR is forced to use 4% while VPW's minimum is set to 3%.

I think mathematically there are none.
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Re: Is VPW a safer retirement strategy than SWR?

Post by HootingSloth »

It seems obvious that VPW (or ABW) is a better fit for individuals who are willing and able to be flexible in response to changed circumstances while a constant withdrawal rate is a better fit for individuals who are unwilling or unable to be flexible in this way and, instead, wish to rest their plan on an assumption that future returns over their remaining investment horizon will look similar to the returns experienced by the US in the past 150 years. The demand for some kind of "apples-to-apples" comparison where arbitrary constraints are imposed--unrelated to the goals of the people that actually follow these strategies--seems misplaced. They are doing different things for people who want different things.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

HootingSloth wrote: Tue Jul 27, 2021 2:29 pm The demand for some kind of "apples-to-apples" comparison where arbitrary constraints are imposed--unrelated to the goals of the people that actually follow these strategies--seems misplaced. They are doing different things for people who want different things.
There are no “arbitrary constraints” to an apples to apples comparison.

Only that the scenario provides both cases with the same limitations and assets. In other words you have to give both methods the same starting assets, the same non-portfolio incomes (ie pension and social security) and the same flexibility.

I don’t think this is terribly “arbitrary” or “misplaced”.

An individual investor has an existing portfolio, expected pension and social security on the plus side of the ledger and expected desired and required financial needs on the negative side of the ledger. This is the starting point of any evaluation and a fair evaluation uses the same values for every methodology being considered and not wildly different ones.

Only when you do an apples to apples comparison can you tell how well or poorly a strategy fits your needs whatever they are with as little bias as you can manage.
instead, wish to rest their plan on an assumption that future returns over their remaining investment horizon will look similar to the returns experienced by the US in the past 150 years.
This is a mischaracterization of folks that use historical data in analysis.

There is no expectation that historical outcomes will actually look similar…only that if the method under test survives then as long as the actual retirement years aren’t worst than the worst historical cases the income side of the equation will likely work out okay.

The assumption is that the future will eventually be worse than the past and new failure scenarios will be found that otherwise looked benign. If not, we’ll have to adjust.

As a side note, being flexible in SWR isn’t a failure if it stays above your minimum spend amount and below your SWR spending limit. SWR is a ceiling for spending just like VPW and not a required spend unless SWR = minimum required spending.
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Re: Is VPW a safer retirement strategy than SWR?

Post by HootingSloth »

nigel_ht wrote: Tue Jul 27, 2021 4:09 pm
HootingSloth wrote: Tue Jul 27, 2021 2:29 pm The demand for some kind of "apples-to-apples" comparison where arbitrary constraints are imposed--unrelated to the goals of the people that actually follow these strategies--seems misplaced. They are doing different things for people who want different things.
There are no “arbitrary constraints” to an apples to apples comparison.

Only that the scenario provides both cases with the same limitations and assets. In other words you have to give both methods the same starting assets, the same non-portfolio incomes (ie pension and social security) and the same flexibility.

I don’t think this is terribly “arbitrary” or “misplaced”.

An individual investor has an existing portfolio, expected pension and social security on the plus side of the ledger and expected desired and required financial needs on the negative side of the ledger. This is the starting point of any evaluation and a fair evaluation uses the same values for every methodology being considered and not wildly different ones.

Only when you do an apples to apples comparison can you tell how well or poorly a strategy fits your needs whatever they are with as little bias as you can manage.
Yes, everyone should do this for their own facts, and not try to find some one-size-fits-all answer about what is "safer." It is obvious that the answer to the general question is "It depends." I have done this kind of analysis for my situation, and VPW is superior. Others can do so for theirs, and may find that something else is superior.
instead, wish to rest their plan on an assumption that future returns over their remaining investment horizon will look similar to the returns experienced by the US in the past 150 years.
This is a mischaracterization of folks that use historical data in analysis.

There is no expectation that historical outcomes will actually look similar…only that if the method under test survives then as long as the actual retirement years aren’t worst than the worst historical cases the income side of the equation will likely work out okay.

The assumption is that the future will eventually be worse than the past and new failure scenarios will be found that otherwise looked benign. If not, we’ll have to adjust.

As a side note, being flexible in SWR isn’t a failure if it stays above your minimum spend amount and below your SWR spending limit. SWR is a ceiling for spending just like VPW and not a required spend unless SWR = minimum required spending.
I would only modify what you have said by saying "the worst historical cases in the last 150 years in the United States." It is up to an individual investor how comforting they find that.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

HootingSloth wrote: Tue Jul 27, 2021 4:13 pm Yes, everyone should do this for their own facts, and not try to find some one-size-fits-all answer about what is "safer."
Assertions have been made regarding the overall “safety” of VPW vs SWR by VPW advocates using very uneven scenarios.

While you don’t want one size fits all answers you do want fair assessments.

You can also characterize when solutions behave poorly relative to other solutions.

VPW will work well for many folks here on BH although arguably they are in the rather elite position of having significant spending flexibility relative to portfolio size…

In comparison many 4% SWR users are likely closer to the $500K average or $15K median with less spending flexibility.

https://dqydj.com/retirement-savings-by-age/

Using VPW with a spending cap may allow them to have a little more spending early in retirement without increasing risk.
I would only modify what you have said by saying "the worst historical cases in the last 150 years in the United States." It is up to an individual investor how comforting they find that.
If you don’t live in the US probably not very comforting at all. For the US retiree, unless this really is the roaring 20s with an even worse Great Depression ahead probably reasonably comfortable. The 2000 cohort was looking pretty grim but the market has been kind.
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Re: Is VPW a safer retirement strategy than SWR?

Post by HootingSloth »

nigel_ht wrote: Tue Jul 27, 2021 5:07 pm
HootingSloth wrote: Tue Jul 27, 2021 4:13 pm Yes, everyone should do this for their own facts, and not try to find some one-size-fits-all answer about what is "safer."
Assertions have been made regarding the overall “safety” of VPW vs SWR by VPW advocates using very uneven scenarios.

While you don’t want one size fits all answers you do want fair assessments.

You can also characterize when solutions behave poorly relative to other solutions.

VPW will work well for many folks here on BH although arguably they are in the rather elite position of having significant spending flexibility relative to portfolio size…

In comparison many 4% SWR users are likely closer to the $500K average or $15K median with less spending flexibility.

https://dqydj.com/retirement-savings-by-age/

Using VPW with a spending cap may allow them to have a little more spending early in retirement without increasing risk.
I agree that many Americans will have very little saved before retirement. They will depend almost entirely on Social Security, Medicare, a paid off home, and possibly other social support, either from family members, or charitable organizations, or various means-tested government programs.

These amounts will have to serve to cover their minimum spending amount. Trying to simulate covering spending by some low withdrawal rate on a portfolio with at most a few hundred thousand dollars (and, for the median American, well less than $100k) does not seem realistic. If the median retiree has about $32,550.00 in assets (as your link suggests, and does not seem unreasonable to me), then a 4% withdrawal rate is $108.50 per month. This will not be the source of their minimum spending amount. In contrast, the average Social Security benefit for a couple (both receiving benefits) is roughly $2,500 per month. The value of Medicare benefits may be roughly $2,000 per month. The value of a paid off mortgage may be roughly $1,000 per month.

It seems unlikely that either VPW or a constant withdrawal rate strategy will make sense for spending the remainder of their assets. In practice, they will be pushed into using an ad hoc withdrawal method to cover lumpy and unexpected expenses, such as a roof repair, as and when they arise.
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Re: Is VPW a safer retirement strategy than SWR?

Post by Nestegg_User »

nigel_ht wrote: Tue Jul 27, 2021 5:07 pm
VPW will work well for many folks here on BH although arguably they are in the rather elite position of having significant spending flexibility relative to portfolio size…

In comparison many 4% SWR users are likely closer to the $500K average or $15K median with less spending flexibility.

https://dqydj.com/retirement-savings-by-age/
I think that your link's numbers are a bit low for them to be 99% levels...(it would put us there, and I think we're at best in the 92-4% level, which is what I would think their values are at (not 99%)). {...and in BH-world, we're probably just above average :( ...(like others in Lake Wobegon)}
Last edited by Nestegg_User on Tue Jul 27, 2021 7:49 pm, edited 1 time in total.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

HootingSloth wrote: Tue Jul 27, 2021 5:49 pm
I agree that many Americans will have very little saved before retirement. They will depend almost entirely on Social Security, Medicare, a paid off home, and possibly other social support, either from family members, or charitable organizations, or various means-tested government programs.

These amounts will have to serve to cover their minimum spending amount. Trying to simulate covering spending by some low withdrawal rate on a portfolio with at most a few hundred thousand dollars (and, for the median American, well less than $100k) does not seem realistic. If the median retiree has about $32,550.00 in assets (as your link suggests, and does not seem unreasonable to me), then a 4% withdrawal rate is $108.50 per month.

This will not be the source of their minimum spending amount. In contrast, the average Social Security benefit for a couple (both receiving benefits) is roughly $2,500 per month. The value of Medicare benefits may be roughly $2,000 per month. The value of a paid off mortgage may be roughly $1,000 per month.
True, 50th percentile with $32k won’t use either. 85-90th percentile have $400K-$750K or $16K-$30K @ 4% a year would be in that zone where looking at withdrawal strategies makes sense. Maybe. With $400K ad hoc might still be the right choice.

So essentially VPW applies only to the rarefied 10th percentile of retirees…
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

Nestegg_User wrote: Tue Jul 27, 2021 7:28 pm
nigel_ht wrote: Tue Jul 27, 2021 5:07 pm
VPW will work well for many folks here on BH although arguably they are in the rather elite position of having significant spending flexibility relative to portfolio size…

In comparison many 4% SWR users are likely closer to the $500K average or $15K median with less spending flexibility.

https://dqydj.com/retirement-savings-by-age/
I think that your link's numbers are a bit low for them to be 99% levels...(it would put us there, and I think we're at best in the 95% level, which is what I would think their values are at (not 99%)). {...and in BH-world, we're probably just above average :( ...(like others in Lake Wobegon)}
Here’s another to try…

https://personalfinancedata.com/retirem ... 00#results

Seems like a lot of what we obsess about on BH is stuff really the only 90th to 99th percentile care about. Everyone else either has too little money to make a difference or so much money it doesn’t much matter.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by JaneyLH »

nigel_ht wrote: Sun Jul 25, 2021 3:42 pm
JaneyLH wrote: Sun Jul 25, 2021 3:18 pm
59Gibson wrote: Wed Jul 14, 2021 11:14 am 12 years of a raging bull mkt hides many of VPW flaws. It does allow higher spend when the market is soaring, but the knife cuts both ways. Market drops the allowed spend can drop precipitously. VPW is not magical.
VPW IS magical for those who have a robust portfolio coupled with additional income from pensions or social security. In my case, I have been on the VPW scheme for 7 years. I have never spent the amount that VPW says I can spend, but it encourages me continually to try harder. :D So I am doing things like replacing a car at 110 K instead of 200 K, indulging in top of the line equipment to support my hobby, and taking Crystal and Viking cruises instead of Carnival. Also putting in new carpeting in my 15 year-old home and planning to refinish cabinetry.

I'm waiting until age 70 to take my full social security of nearly $4k/month, so that's there to cushion any impact of a future bear market. I have nearly a $5M investment portfolio at 50/50 asset allocation. I own my home and live in a low cost-of-living area. No children or need to leave an estate to anyone else. Have a LTC insurance policy with Hartford and plan to keep it.

Given this scenario, why not maximize spending now while I can still walk and have my own teeth?

If I could only barely live on my VPW numbers in today's economic climate, I wouldn't advocate the use of this methodology as a long-term strategy.
With a $5M portfolio and a conservative 3% SWR your baseline budget would be $150K a year. How much above this are you spending?

The other thing is that if you did 3% SWR on $4M you could have a baseline spend of $120K per year and have $1M set aside to spend on Viking cruises, cars, top end equipment and teeth.

I think having $5M might make any withdrawal strategy seem pretty magical…
In year 6 of my VPW spreadsheet, the amount it says to take in January to spend through the year is $226,000 at the amount of my account balance at the end of 2020, or 5.1%. I like the idea of spending that instead of $100,000 less each year if I have the choice of doing either. I grew up really poor (dad was marginallly employed and died when I was young, mom had mental illness and couldn't work so I was a Social Security kid). My innate financial conservatism learned at a young age stayed with me my whole life, even when my earnings and stock options took me to a place I couldn't even imagined. So now at age 67 and in relatively good health I have reached a place where I have no direct heirs to provide for, have covered the risk of end-of-life nursing home care, and really want to spend what I've accumulated. VPW seems to be a much safer and well-thought-out way to do this than to pick an arbitrary withdrawal rate and an arbitrary rainy day account amount.

Oh yes... so far I'm lagging behind every year in what I "should" be able to spend. So far I'm $513K behind. So perhaps that's my "set aside". :D I have a young relative who is now impacted by long haul Covid. He's been a Boglehead since he was 17 when I funded his first account in Vanguard and gave him William Bernstein's book "The Investor's Manifesto". At that young age his brain clicked in, especially when he observed what a great time my husband and I are having in retirement. He got a really good job out of college and bought a duplex after two years in the workforce. He rented out half, and got a roommate for the half he lives in. He has maxed out his 401K at work and has started a Roth account. He is saving 90% of his last raise. He was searching for more investment real estate when he got Covid last October, and is now barely able to hang onto his job. He is very sick and doesn't seem to be improving. I'll be happy to help him have a secure future if it turns out that this disease doesn't go away.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by Charon »

nigel_ht wrote: Wed Jul 14, 2021 6:46 pm Lol…okay but the folks can’t claim it’s “safer” than SWR as a retirement strategy.
Holy cow what is going on in this thread? I started reading because I'm interested in VPW vs. SWR, and all I see is the OP repeating over and over that everyone is saying VPW is "safer". No one in this thread is doing that. I haven't seen people in other threads doing that either. OP is very confused and apparently thinks "safe" is a single dimension, despite myriad people in this thread alone explaining how that's not true.

For the last time, VPW is "safer" in the sense that it won't deplete the portfolio, and SWR is "safer" in the sense that it has a spending floor. And both are in practice very sensitive to the markets, which cannot be predicted.

Backtesting shows the only way to be completely safe (have enough money every year to live on, for a long life) is to retire with way more money than you'll need on average. That way you can have a very low withdrawal percentage (if using SWR) or you can live with a much reduced withdrawal (if using VPW). I prefer VPW because it will allow you to spend that extra money, at some point, if you live as long as expected. SWR won't, but could be preferred by those who want to leave a large inheritance.

End of story, OP.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by nigel_ht »

Charon wrote: Thu Jul 29, 2021 3:44 pm
nigel_ht wrote: Wed Jul 14, 2021 6:46 pm Lol…okay but the folks can’t claim it’s “safer” than SWR as a retirement strategy.
Holy cow what is going on in this thread? I started reading because I'm interested in VPW vs. SWR, and all I see is the OP repeating over and over that everyone is saying VPW is "safer". No one in this thread is doing that.
This thread is missing parts of other discussions.
I haven't seen people in other threads doing that either. OP is very confused and apparently thinks "safe" is a single dimension, despite myriad people in this thread alone explaining how that's not true.

For the last time, VPW is "safer" in the sense that it won't deplete the portfolio, and SWR is "safer" in the sense that it has a spending floor. And both are in practice very sensitive to the markets, which cannot be predicted.
SWR isn't safer because it has a spending floor but because historically it won't deplete with that spending ceiling. You can spend up to the SWR percentage and expect the portfolio to survive.

Hence the name. Safe Withdrawal Rate.

VPW CAN deplete if you are forced to withdraw more than it say you can. Knowing how common depletion is under those circumstances should interest any VPW user.
Backtesting shows the only way to be completely safe (have enough money every year to live on, for a long life) is to retire with way more money than you'll need on average. That way you can have a very low withdrawal percentage (if using SWR) or you can live with a much reduced withdrawal (if using VPW). I prefer VPW because it will allow you to spend that extra money, at some point, if you live as long as expected. SWR won't, but could be preferred by those who want to leave a large inheritance.
Your preference is perfectly reasonable. On the other hand, it's not hard to spend extra money. Being flexible when you have too much is much easier than being flexible when you have too little.
End of story, OP.
Sorry, nope.

In any case, if you were actually interested in VPW vs SWR then you would have found the thread interesting as you would have learned that if you use a cap you can spend a little more under VPW with the same success rate as SWR. You would also seen how much flexibility you might have and what the failure rate would be if you don't turn out to have that level of flexibility.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by margaritaville »

nigel_ht wrote: Thu Jul 29, 2021 4:14 pm
VPW CAN deplete if you are forced to withdraw more than it say you can. Knowing how common depletion is under those circumstances should interest any VPW user.
Of course VPW will potentially fail if you "withdraw more than it say you can". Isn't this true of any withdrawal strategy? If you violate the tenets of the strategy, you are no longer operating within the rails of the strategy. Just like with SWR, If you increase your withdrawal rate above the safe withdrawal rate, it too has the potential to fail. VPW is "safe" and allows people to spend a larger portion of their savings earlier in retirement so long as they have spending flexibility and follow the approach. They are different methods with different principles and requirements. I personally don't see the value in an "apples to apples" comparison. Once you've set the four corners of the test equally, you've given advantages to one method while handicapping the other.

It seems like you're making the argument that VPW isn't a good fit for people without a moderate amount of flexibility in their spending. Or people without pensions or SS. If so, I think Longinvest very clearly addressed these caveats in his explanation of the strategy. But maybe I'm missing the point . . .
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Re: Is VPW/ABW a frugal retirement strategy?

Post by nigel_ht »

margaritaville wrote: Thu Jul 29, 2021 5:00 pm
nigel_ht wrote: Thu Jul 29, 2021 4:14 pm
VPW CAN deplete if you are forced to withdraw more than it say you can. Knowing how common depletion is under those circumstances should interest any VPW user.
Of course VPW will potentially fail if you "withdraw more than it say you can". Isn't this true of any withdrawal strategy? If you violate the tenets of the strategy, you are no longer operating within the rails of the strategy. Just like with SWR, If you increase your withdrawal rate above the safe withdrawal rate, it too has the potential to fail. VPW is "safe" and allows people to spend a larger portion of their savings earlier in retirement so long as they have spending flexibility and follow the approach.
With SWR there are many tables that give you an idea of how often SWR will fail if you bump up the spending amount. 4% isn't actually historically "safe" but has a 5% failure rate.

This table for example.

Image

75/25 AA and a 5% WR gives you a 83% historical success rate over 30 years. You can make an informed decision to go 5% and take the risk of depletion.

No corresponding table exists for VPW. Instead you're told that VPW can't deplete.

So if you are using VPW and you have unexpected expenses and must exceed your VPW withdrawal rate you don't have the information to make an informed assessment of how much risk of portfolio depletion you're adding.
I personally don't see the value in an "apples to apples" comparison. Once you've set the four corners of the test equally, you've given advantages to one method while handicapping the other.
If you've given unfair advantages to one method then it isn't "apples to apples". If you don't believe that methods should be compared on a realistic level playing field then you're pretty much picking based on the sales pitch of the inventor.

It's not like I'm making up esoteric criteria. People in retirement have minimum expenses. We go through some level of effort to make estimates of what these expenses will be. Any withdrawal method should be able to tell you whether it reliably provided for those expenses in the past and if not how often it failed to do so. It should also tell you, based on your expenses, how often it would have historically depleted.

Whatever those answers are you should know them before you pick the method.

For SWR the data is there.

My expenses require withdrawing 3% of the original portfolio. Historically that has a 100% success rate with a 75/25 portfolio over 30, 40, 50 and 60 years.

Oh no...10 years later I need to start withdrawing 5% of the original portfolio! But hey, for a 20 year period 5% still has a 90% success rate. Okay, that's not as good as 100% but I can still sleep well at night.
It seems like you're making the argument that VPW isn't a good fit for people without a moderate amount of flexibility in their spending. Or people without pensions or SS. If so, I think Longinvest very clearly addressed these caveats in his explanation of the strategy. But maybe I'm missing the point . . .
So what does a VPW user do if circumstances force them "violate the tenets of the strategy" and 10 years in they become "people without a moderate amount of flexibility in their spending"? Don't you want to know before you pick that strategy?

Yeah, I think you're missing the point and for whatever reason it seems VPW proponents don't want to know and claim it doesn't matter because "VPW is flexible". :confused
Marseille07
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Re: Is VPW/ABW a frugal retirement strategy?

Post by Marseille07 »

nigel_ht wrote: Thu Jul 29, 2021 9:28 pm It's not like I'm making up esoteric criteria. People in retirement have minimum expenses. We go through some level of effort to make estimates of what these expenses will be. Any withdrawal method should be able to tell you whether it reliably provided for those expenses in the past and if not how often it failed to do so. It should also tell you, based on your expenses, how often it would have historically depleted.
I agree. If "running out of money" is failure for SWR, we need something else to measure the success rate of VPW since it technically never runs out of money the same way SWR would. Breaching minimum spend is a reasonable one; if the VPW camp doesn't like it then please suggest what should be used.
stan1
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Re: Is VPW/ABW a frugal retirement strategy?

Post by stan1 »

nigel_ht wrote: Thu Jul 29, 2021 9:28 pm
So what does a VPW user do if circumstances force them "violate the tenets of the strategy" and 10 years in they become "people without a moderate amount of flexibility in their spending"? Don't you want to know before you pick that strategy?
Since its been around for decades now I'd wonder what percentage of actual retirees are dogmatically following a 4% SWR strategy? I'd guess very, very few have their investment accounts set up to push 4% per year to checking and it gets spent no matter what. What people actually do is collect their bills and figure out how to pay them each month, first from income like SS, side gig, pension, RMDs, interest, gifts from kids, and dividends. If they have some extra they book a cruise or charge it to credit card and pay it off over time. Only after that do they say I'm going to sell some securities and withdraw. I know plenty of seniors who live off SS and leave whatever investment accounts they have for heirs. Plenty of so called early retirees seem to have employment income of some kind when pressed or will say that being a landlord is managing an investment not employment.

What anyone does when they run out of money is pretty straight forward. They live on Social Security, go live with their families, get remarried, or if eligible go live in a Medicaid nursing home after depleting assets. They do what millions of other seniors do.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by nigel_ht »

stan1 wrote: Thu Jul 29, 2021 9:59 pm
nigel_ht wrote: Thu Jul 29, 2021 9:28 pm
So what does a VPW user do if circumstances force them "violate the tenets of the strategy" and 10 years in they become "people without a moderate amount of flexibility in their spending"? Don't you want to know before you pick that strategy?
Since its been around for decades now I'd wonder what percentage of actual retirees are dogmatically following a 4% SWR strategy? I'd guess very, very few have their investment accounts set up to push 4% per year to checking and it gets spent no matter what.
I don’t know when this fallacy was invented but there’s nothing in the SWR method that says you MUST spend 4%.

Instead SWR tells you that you can ONLY spend UP TO 4% and still expect a 95% historical success rate.

The whole concept that VPW is flexible but SWR is fixed is flawed. SWR is no less flexible than VPW in that you could always spend less.

Why would SWR force me to spend 4% when 3% covers everything? It doesn’t. I’m also not breaking the 4% rule by only spending 3%. I only “break” the 4% rule by spending more than 4%.
margaritaville
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Re: Is VPW/ABW a frugal retirement strategy?

Post by margaritaville »

nigel_ht wrote: Thu Jul 29, 2021 4:14 pm
Instead you're told that VPW can't deplete.
You're told it can't deplete "if you follow the approach" . . . If you don't and withdraw more that the recommended amount, it can deplete of course.
nigel_ht wrote: Thu Jul 29, 2021 4:14 pm
So if you are using VPW and you have unexpected expenses and must exceed your VPW withdrawal rate you don't have the information to make an informed assessment of how much risk of portfolio depletion you're adding.
I don't understand the criticism of VPW based on a hypothetical need to exceed the VPW rate. If you don't have the flexibility in your annual spend to make VPW a viable approach, then VPW probably isn't for you. Everyone has to make that assessment and decide whether or not they have spending flexibility and what their risk of incurring large, unforeseen expenses might be.
nigel_ht wrote: Thu Jul 29, 2021 4:14 pm
If you've given unfair advantages to one method then it isn't "apples to apples". If you don't believe that methods should be compared on a realistic level playing field then you're pretty much picking based on the sales pitch of the inventor.
All I'm saying is that I personally don't think the methods can be fairly compared at a broad level using a notional set of assumptions. It has to be done based on an individual's unique set of circumstances. The approaches by nature require different going in assumptions (fixed, inflation adjusted rate vs. variable, portfolio based rate; limited spending flexibility vs. moderate flexibility; need for pension income to soften the blow of portfolio losses; risk of unexpected expenses; etc.).

It's akin to trying to compare health plans on a level playing field. You can do it by making a bunch of assumptions related to things like pre-existing conditions, number of visits to a practitioner a year, need for specialty care, tolerance for deductibles, risk tolerance for unforeseen events, etc.). I would think that you must see that the assumptions you make will provide advantages for some plans vs. others and that the comparison isn't really helpful unless the assumptions match your circumstances pretty closely.
nigel_ht wrote: Thu Jul 29, 2021 4:14 pm
It's not like I'm making up esoteric criteria. People in retirement have minimum expenses. We go through some level of effort to make estimates of what these expenses will be. Any withdrawal method should be able to tell you whether it reliably provided for those expenses in the past and if not how often it failed to do so. It should also tell you, based on your expenses, how often it would have historically depleted.

Whatever those answers are you should know them before you pick the method.
Does the VPW backtesting spreadsheet not provide enough insight into potential successes/failures because it doesn't account for something that the
SWR analyses do? I'd like to understand this better.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by Marseille07 »

margaritaville wrote: Fri Jul 30, 2021 11:08 am You're told it can't deplete "if you follow the approach" . . . If you don't and withdraw more that the recommended amount, it can deplete of course.
The thing you need to understand is there may be years where "the recommended amount" fall below your minimal spend. It's not that people go on a spending spree and run out of money. The problem arises when the portfolio goes down or depletes so much that the recommended amount cannot finance your minimum spend. Those are the "failure" scenarios for VPW that we want to measure.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by margaritaville »

Marseille07 wrote: Fri Jul 30, 2021 11:18 am The thing you need to understand is there may be years where "the recommended amount" falls below your minimal spend. It's not that people go on a spending spree and run out of money. The problem arises when the portfolio goes down or depletes so much that the recommended amount cannot finance your minimum spend. Those are the "failure" scenarios for VPW that we want to measure.
The VPW spreadsheet conveniently provides the required flexibility needed to make the approach viable (estimated based on a 50% market crash and a chosen asset allocation). If the amount shown in the "required flexibility" cells don't meet your minimum spend, I wouldn't see VPW as being a viable withdrawal strategy.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by Marseille07 »

margaritaville wrote: Fri Jul 30, 2021 11:29 am
Marseille07 wrote: Fri Jul 30, 2021 11:18 am The thing you need to understand is there may be years where "the recommended amount" falls below your minimal spend. It's not that people go on a spending spree and run out of money. The problem arises when the portfolio goes down or depletes so much that the recommended amount cannot finance your minimum spend. Those are the "failure" scenarios for VPW that we want to measure.
The VPW spreadsheet conveniently provides the required flexibility needed to make the approach viable (estimated based on a 50% market crash and a chosen asset allocation). If the amount shown in the "required flexibility" cells don't meet your minimum spend, I wouldn't see VPW as being a viable withdrawal strategy.
This is a good point. Maybe
nigel_ht wrote: Fri Jul 30, 2021 12:30 am
might want to look at the flexibility column to explore if VPW is viable before embarking.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by nigel_ht »

longinvest wrote: Sun Jul 25, 2021 6:42 pm
David Jay wrote: Sun Jul 25, 2021 6:39 pm
longinvest wrote: Sun Jul 25, 2021 6:23 pm
David Jay wrote: Sun Jul 25, 2021 5:47 pm
longinvest wrote: Sun Jul 25, 2021 5:36 pmDavid, if inflation gravitates closely around a 2% target and the payments of a SPIA increase by 2% per year, I think that it's reasonable to claim that payments are (practically) indexed to inflation.
:shock:
David, are you looking for perfection in our imperfect world?
No, but I lived through the 70s.

I had hoped you would agree that “2% annual escalator” != “inflation-indexed”. “Indexed” has a specific meaning, especially around BH.
Federal Reserve Chairman Paul Volcker conquered inflation.
Lol...this post didn't age well I think. Perhaps it's still just "transitory".
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

[Discussion merged into here starting from: Re: Variable Percentage Withdrawal (VPW) --admin LadyGeek]
nigel_ht wrote: Fri Dec 17, 2021 10:29 am Thinking about it more it strikes me that for a 2020/2021 retiree that VPW isn't very safe.

ERN's preferred Variable CAPE method has your initial year withdrawals around 2.6%, SWR is 3.5% but VPW is much higher. With future inflation and market performance questionable someone who retired with a 2% SPIA in 2020 or early 2021 is facing a lot more required flexibility than average.
I'm not in the VPW camp, but VPW is actually safe even though the WR is higher.

Remember Snowbog asking upthread that VPW says "you can spend 200K" but they don't spend that much, what to do?

This is basically the key. Unless you jump the gun at 1.6M doing 4.5% or something, most people have accumulated 25x or more; which means they end up underspending than what VPW says you can spend. IOW your effective WR is lower than what VPW says; which makes this method safer.
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Variable CAPE vs VPW vs SWR during current conditions

Post by nigel_ht »

Given current inflation and valuations are high it strikes me that the situation has changed even relative to March 2021 which we couldn't have known in March or even early July when the Fed was saying that inflation was transitory.

Re-reading ERN and using cFIRESim to make some quick and dirty analysis right now his favorite withdrawal strategy based on Variable CAPE has a 2020 retiree starting with a 2.6% WR. Which really sucks if you want to spend more in early retirement but makes sense if bad returns are ahead.

VPW has a much higher rate and seems a lot more attractive but if you accept that valuations does indicate returns will be muted in the future (because historically it does) then you would want to look again at periods where valuations are high and how well the various withdrawal methods worked.

Baseline is retiree at 55 with a $1M 60/40 portfolio and $24K a year SS starting at age 70, 40 year retirement ending age 95.

For 100% success rate with SWR the maximum WR is 4.4%.

https://www.cfiresim.com/59b3916f-6789- ... 62aafd9fdc

Here are the full data runs for VPW and Variable CAPE

https://www.cfiresim.com/e917b271-0258- ... d2da3bbc7a

https://www.cfiresim.com/807a5506-4cca- ... fa32e5dad8

But lets look around 1929 and 1966

Variable CAPE has you starting around 2.8% for 1929. Makes sense. Even better as the market crashed you got to pull more out of the portfolio back to around 4% even during the depression era.

https://www.cfiresim.com/7ead213e-1eb7- ... 925cb23a98

VPW not so great:

https://www.cfiresim.com/af3cbaba-a4f8- ... b2e5fd6bd7

Longer periods far below 4.4% WR.

1966 is even less rosy from 1975 to 1985 you're below 3% WR for VPW

https://www.cfiresim.com/0f9c0f8b-95a4- ... 5af92d8574

For Variable CAPE you start low and stay low a long time:

https://www.cfiresim.com/d93b4f7c-ecee- ... 101cc21544

Meh.

Just adding SS to SWR gives your a nice bump to SWR even for a 40 year retirement unless I did my inputs wrong somewhere. I don't think SPIAs help but we can try that in another post.
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

Marseille07 wrote: Fri Dec 17, 2021 10:57 am
nigel_ht wrote: Fri Dec 17, 2021 10:29 am Thinking about it more it strikes me that for a 2020/2021 retiree that VPW isn't very safe.

ERN's preferred Variable CAPE method has your initial year withdrawals around 2.6%, SWR is 3.5% but VPW is much higher. With future inflation and market performance questionable someone who retired with a 2% SPIA in 2020 or early 2021 is facing a lot more required flexibility than average.
I'm not in the VPW camp, but VPW is actually safe even though the WR is higher.

Remember Snowbog asking upthread that VPW says "you can spend 200K" but they don't spend that much, what to do?

This is basically the key. Unless you jump the gun at 1.6M doing 4.5% or something, most people have accumulated 25x or more; which means they end up underspending than what VPW says you can spend. IOW your effective WR is lower than what VPW says; which makes this method safer.
Which begs the question of why bother? If you aren't going to spend more why do variable at all when just adding SS into the equation puts SWR at a 4.4% max WR with 100% historical success rate.?
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

nigel_ht wrote: Fri Dec 17, 2021 11:00 am Which begs the question of why bother? If you aren't going to spend more why do variable at all when just adding SS into the equation puts SWR at a 4.4% max WR with 100% historical success rate.?
It's just a nice guideline if you want to gradually spend down your entire portfolio over N years. SWR doesn't have this concept; 4.4% may have 100% historical success rate but that's not a guarantee. VPW doesn't depend on historical data, mathematically you will spend it all down.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by canadianbacon »

Charon wrote: Thu Jul 29, 2021 3:44 pm Holy cow what is going on in this thread? I started reading because I'm interested in VPW vs. SWR, and all I see is the OP repeating over and over that everyone is saying VPW is "safer". No one in this thread is doing that. I haven't seen people in other threads doing that either. OP is very confused and apparently thinks "safe" is a single dimension, despite myriad people in this thread alone explaining how that's not true.
I would agree with you. This is a vanity thread.
Bulls make money, bears make money, pigs get slaughtered.
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