Is VPW a safer retirement strategy than SWR?

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NearlyRetired
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by NearlyRetired »

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.
My emphasis - you are correct, I should have said any fees and platform charges, i.e. it is the total amount than can be taken out of the investment
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by NearlyRetired »

marcopolo wrote: Sat Jul 24, 2021 5:07 pm
It does take into account your current portfolio value.
I/we may be talking about different things? This is what I am referring to and you enter your current portfolio balance every time you are determining how much to withdraw. What am I missing?
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by marcopolo »

NearlyRetired wrote: Sun Jul 25, 2021 3:14 am
marcopolo wrote: Sat Jul 24, 2021 5:07 pm
It does take into account your current portfolio value.
I/we may be talking about different things? This is what I am referring to and you enter your current portfolio balance every time you are determining how much to withdraw. What am I missing?
Yes, as I said it does take into account current portfolio value. You made claims that it takes into account valuations, which is a way (some believe) to estimate expected future returns. There are tools that take valuations into account to estimate future portfolio growth, and adjust withdrawal amounts. VPW does not do that.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Seasonal
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Re: Is VPW/ABW a frugal retirement strategy?

Post by Seasonal »

Withdrawing a fixed (or inflation adjusted) amount from a portfolio risks running out of money.

Withdrawing a percentage (fixed or variable) from a portfolio does not risk running out of money, however income will of course be variable.

Based on posts here, very few would stick to a fixed amount withdrawal no matter how much the market might decline. They would adjust withdrawals, effectively turning fixed amount methods into variable withdrawal methods.

We can test whatever we want based on history. We can not, however, claim that history proves what is safe. In this context, we only know the past, not the future. Nonetheless, anchoring on the past is a popular pastime.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by dknightd »

nigel_ht wrote: Tue Jul 13, 2021 2:09 pm So touching up my IPS for the future and started wondering given that VPW/ABW attempt to optimize spending (ie WR) vs SWR if they were really frugal? The objective is to be able to safely exceed SWR in good years and dial down in bad...ie to maximize retirement spending...generally to front load expenditures while still healthy for a more active and better lifestyle when you can still enjoy it.

The converse in the accumulation phase would be a savings strategy that attempted to minimized the required savings to reach a minimally fully funded retirement portfolio to maximize current lifestyle right? For example if my target is 33X I would save only enough to hit that target leaning toward maximize spending vs maximizing savings.

. . . snip . . .

We can spend it all, regardless of market performance, without worry. We have "saved first" for the rest of the retirement

. . . snip . . .
Hi Nigel_ht,
I'm guessing your are still in the accumulation phase, thinking about how much you need to save in order to have a comfortable and secure retirement. So naturally you start thinking about how you will decide how much you can withdraw from your savings (and the "income" from those savings) when you no longer have income from working. I purposely used the word "income", because your investments might provide growth, which could be considered income. Or they might not. The double whammy might be when you have no income from working, and no "income" from your investments.

First off, there is no perfect withdrawal plan. They all have compromises. And all of them could "fail". And everybody has a different definition of "fail". Perhaps the first thing you need to do is define what you consider you failed. And try to avoid that ;)

It does not matter what your "income" is. Being "frugal" is spending less than you earn.

What I did is decide what was (a little more than) enough (call that X), and decide what I'd prefer (call that Y). Consult with partner if you have one!!!

Then I ran every tool I could find to make sure we'd never likely go under X, and have a pretty good chance of meeting Y. Then I retired from working for money.

X will be provided by SS and SPIA. I might want to buy more spia later since they are not inflation protected.

VPW was never designed to meet minimum required to stay alive. If was designed to spend as much as possible, and to never run out of extra money that you could have spent. VPW or ABW or other plans may or may not meet your desired withdrawal ideas. I look at them every year. It gives me an estimate of what I could spend every year.

My plan going forward is, have X as safe as possible. Use VPW or similar ideas to tell me what I could likely spend if I wanted to. When I'm 72 follow the RMD. Between now and then put as much as I can in Roth accounts for lumpy expenses or "vacations". That might become my Z
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

:happy
SnowBog wrote: Sun Jul 25, 2021 12:01 am https://calculator.ficalc.app/

I believe has data back to 1871, and you can use "constant dollar" (aka SWR) or VPW. That said, I'm not a fan of their VPW model - which uses the original table to completely exhaust portfolio by 100 (which is not what the longinvest model uses).

If I recall, one of your original scenarios was $1M 60/40, with $30k minimum income (adjusted for inflation) for 30 year retirement.

VPW shows 100% success https://calculator.ficalc.app?additiona ... gyName=vpw

SWR (4%) shows 95% success, with 8% "nearly failed", and > 16% "large ending portfolio) l: https://calculator.ficalc.app?additiona ... tantDollar

Personally, I'm not convinced the future is going to look exactly like the past... But to each their own...
Nice! Thank you. The past is what we have for realistic data. If you think the future will be worse you can still do an analysis and provide more margin in your minimum spend amount for worse than historical outcomes.

So apple to apple comparison shows that VPW succeeds 73.55% of the time if you need 4% spending vs SWR at 95.04%

So SWR is safer.

VPW with 10% flexibility ($36K) succeeds 84.30%. SWR 100%
VPW with 15% flexibility ($34K) succeeds 93.56%. SWR 100%
VPW with 20% flexibility ($32k) succeeds 96.69%

Only until you have 25% flexibility do you hit 100% success rate with VPW ($30200).

SWR has 100% success rate at $36000.

So if your minimum spend is $30,200 then using a 3.6% SWR you need a portfolio of $840,000. That allows you to front load spending by $160,000 while maintaining a 100% historical success rate using the same assumptions as in the tool.

Adding $15K of SS starting at the 10 year mark allows a 4.5% SWR with 100% success rate. VPW isn’t too far behind at 99.17% with a required $45K spend.

For VPW your max safe minimum $44,300 with 100% success rate.

So not as far behind as without SS.

What is interesting, but also intuitive, is that for $2M VPW falls behind with only a 98.35% success rate at $80K minimum while SWR can do $81K at 100%. You have to have a minimum of $76K…or 24% flexibility.

The smaller SS is relative to your minimum spend the more flexibility you need. Hence the strong emphasis on SS, pension, SPIA, etc for VPW.

For a quick FIRE scenario retiring at age 40 to age 100 (60 years) with $15K SS kicking in 30 years after retirement SWR and VPW both supports 3.6% at 100% ($36K).

FIRE folks running 4% spend rate have a success rate of 86.81 using VPW and 89% with SWR.

TL;DR

In an apples to apples comparison SWR is safer but VPW allows for higher withdrawals.

When SS becomes a significantly large percentage of the minimum spend the safety difference drops but so will the difference in spending because the SWR percentage also increases.

You can use either with 100% success rate for FIRE as long as your minimum spend is $36K or lower with VPW providing a more comfortable spend.

The more marginal your retirement funds relative to minimum spend the higher the risk of failure with VPW vs SWR.
Last edited by nigel_ht on Sun Jul 25, 2021 9:14 am, edited 1 time in total.
dknightd
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Re: Is VPW/ABW a frugal retirement strategy?

Post by dknightd »

nigel_ht wrote: Sun Jul 25, 2021 8:15 am The more marginal your retirement funds relative to minimum spend the higher the risk of failure with VPW vs SWR.
The more marginal your retirement funds are, the more risk you take of not having enough! That seems obvious.
If you are lucky, you can choose when to retire.

I'm waiting for your new improved plan!
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

dknightd wrote: Sun Jul 25, 2021 7:50 am
nigel_ht wrote: Tue Jul 13, 2021 2:09 pm So touching up my IPS for the future and started wondering given that VPW/ABW attempt to optimize spending (ie WR) vs SWR if they were really frugal? The objective is to be able to safely exceed SWR in good years and dial down in bad...ie to maximize retirement spending...generally to front load expenditures while still healthy for a more active and better lifestyle when you can still enjoy it.

The converse in the accumulation phase would be a savings strategy that attempted to minimized the required savings to reach a minimally fully funded retirement portfolio to maximize current lifestyle right? For example if my target is 33X I would save only enough to hit that target leaning toward maximize spending vs maximizing savings.

. . . snip . . .

We can spend it all, regardless of market performance, without worry. We have "saved first" for the rest of the retirement

. . . snip . . .
Hi Nigel_ht,
I'm guessing your are still in the accumulation phase, thinking about how much you need to save in order to have a comfortable and secure retirement. So naturally you start thinking about how you will decide how much you can withdraw from your savings (and the "income" from those savings) when you no longer have income from working. I purposely used the word "income", because your investments might provide growth, which could be considered income. Or they might not. The double whammy might be when you have no income from working, and no "income" from your investments.

First off, there is no perfect withdrawal plan. They all have compromises. And all of them could "fail". And everybody has a different definition of "fail". Perhaps the first thing you need to do is define what you consider you failed. And try to avoid that ;)

It does not matter what your "income" is. Being "frugal" is spending less than you earn.

What I did is decide what was (a little more than) enough (call that X), and decide what I'd prefer (call that Y). Consult with partner if you have one!!!

Then I ran every tool I could find to make sure we'd never likely go under X, and have a pretty good chance of meeting Y. Then I retired from working for money.

X will be provided by SS and SPIA. I might want to buy more spia later since they are not inflation protected.

VPW was never designed to meet minimum required to stay alive. If was designed to spend as much as possible, and to never run out of extra money that you could have spent. VPW or ABW or other plans may or may not meet your desired withdrawal ideas. I look at them every year. It gives me an estimate of what I could spend every year.

My plan going forward is, have X as safe as possible. Use VPW or similar ideas to tell me what I could likely spend if I wanted to. When I'm 72 follow the RMD. Between now and then put as much as I can in Roth accounts for lumpy expenses or "vacations". That might become my Z
X will vary but now we have an idea of what the minimum X is for the generic $1M retirement portfolio with no SS. About $30K for 100% success rate.

With SS it’s higher but so is the safe withdrawal amount.

But that still not safe because that’s a nominal spend plan. Just based on my parents i factor in one spouse needing 50K a year out of pocket from 70-75 until they pass (yes they had LTCI) and 100K a year from 90-100 (nursing home). My mom was healthy until 90, might have lived to 100 if she hadn’t passed away just as we were leaving for the nursing home.

What’s interesting in this scenario is the sensitivity of correct estimation for SWR vs VPW.

For SWR 45K is 100%. Go to $46K and it drops to high 90s etc. It’s a relatively graceful reduction in success for errors of estimation.

https://calculator.ficalc.app/?addition ... tantDollar

For VPW $44K minimum is 100% success but $45K drops to 62% success rate. It falls off a cliff around the boundary of success and failure. That’s moderately concerning.

https://calculator.ficalc.app/?addition ... gyName=vpw

I upped SS to $45K. That’s probably more reasonable for a couple with $1M saved.
Last edited by nigel_ht on Sun Jul 25, 2021 9:14 am, edited 1 time in total.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

dknightd wrote: Sun Jul 25, 2021 8:35 am
nigel_ht wrote: Sun Jul 25, 2021 8:15 am The more marginal your retirement funds relative to minimum spend the higher the risk of failure with VPW vs SWR.
The more marginal your retirement funds are, the more risk you take of not having enough! That seems obvious.
If you are lucky, you can choose when to retire.

I'm waiting for your new improved plan!
Yes, if your minimum spending (including SS) is close to the SWR amount for your retirement duration don’t use VPW. Use SWR and live without boosted spending in the early years.

If your error bars for spending are high…don’t use VPW.

Factoring in two common end of life scenarios (in home care spouse one, end of life nursing home spouse two) makes VPW seem to get sensitive around the failure boundary. You go from 100% to 60-70% quickly.

Given I prefer not to have my wife struggle taking care of me if I have a major medical event in my 70s I’ll factor in fairly significant out of pocket expenses for in home care on top of LTCI. Then since I don’t want her to spend her last years in a Medicaid nursing home I’ve factored in additional out of pocket expenses for a private nursing home.

If we’re lucky and avoid both in home care and nursing home the charities will be happy. I can live with that.
longinvest
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Re: Is VPW a safer retirement strategy than SWR?

Post by longinvest »

nigel_ht wrote: Sun Jul 25, 2021 8:46 am What’s interesting in this scenario is the sensitivity of correct estimation for SWR vs VPW.

For SWR 45K is 100%. Go to $46K and it drops to high 90s etc. It’s a relatively graceful reduction in success for errors of estimation.

...

For VPW $44K minimum is 100% success but $45K drops to 62% success rate. It falls off a cliff around the boundary of success and failure. That’s moderately concerning.
Dear Nigel_ht,

This is an obviously flawed analysis based on equating a tiny partial failure (VPW "only" delivering $44,000, during one year out of all retirement years, instead of $45,000 and more for all years) to a total failure (e.g. SWR delivering $0 withdrawals until the end of retirement).

It has never been an objective of VPW to meet a minimal spending amount. No withdrawal method from a portfolio of fluctuating assets can guarantee a future income floor given unknown future returns. Wishful thinking can't change this. Backtests over historical returns don't predict future outcomes.

While VPW doesn't guaranteed an income floor, it is mathematically guaranteed to never prematurely deplete the portfolio. As a consequence, VPW will always deliver a withdrawal (bigger than $0), even in an unfavorable future outcome unlike SWR which can prematurely deplete the portfolio and then deliver $0 for the rest of retirement.

In historical backtests, the bigger risk of SWR was that of significant underspending; it let the retiree die as the richest person in the graveyard in most cases. VPW doesn't do that. Instead, it adapts withdrawal amounts to market returns to allow the retiree to spend most of the portfolio during retirement.

Best regards,

longinvest
Last edited by longinvest on Sun Jul 25, 2021 10:32 am, edited 6 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
dknightd
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Re: Is VPW a safer retirement strategy than SWR?

Post by dknightd »

One day I might live to collect SS. My current plan is when I'm 70, I'll do that.
Once that happens, RMDs will kick in soon.
If I can't live on SS , SPAI, and RMD's I would be very surprised. But it could happen.

One thing about not running out of money is, what do you do, with the left over, if you died before you planned?
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
zuma
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

I don’t understand the obsession with backtesting arbitrary sets of data in order to “prove” one methodology is “safer” than the other. Both approaches have their pros and cons. Choose whatever method works for you, based on your specific situation and preferences. In reality, all retirees need to prepare for some level of uncertainty.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

longinvest wrote: Sun Jul 25, 2021 9:59 am
nigel_ht wrote: Sun Jul 25, 2021 8:46 am What’s interesting in this scenario is the sensitivity of correct estimation for SWR vs VPW.

For SWR 45K is 100%. Go to $46K and it drops to high 90s etc. It’s a relatively graceful reduction in success for errors of estimation.

...

For VPW $44K minimum is 100% success but $45K drops to 62% success rate. It falls off a cliff around the boundary of success and failure. That’s moderately concerning.
Dear Nigel_ht,

This is an obviously flawed analysis based on equating a tiny partial failure (VPW "only" delivering $44,000, during one year out of all retirement years, instead of $45,000 and more for all years) to a total failure (e.g. SWR delivering $0 withdrawals until the end of retirement).
No, this is incorrect. If you don’t understand a statement please look at the accompanying links to the original runs you deleted.

69 out of 111 cohorts end up in portfolio depletion for VPW if you have a $45K minimum spend rate while $44K succeeds all 111 time series.

SWR has ZERO failures at $45K (4.5% withdrawal rate).

You may or may not agree with the scenario setup but to claim that SWR fails completely while VPW only suffers a tiny partial failure is completely false.

https://calculator.ficalc.app/?addition ... gyName=vpw
longinvest
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Re: Is VPW a safer retirement strategy than SWR?

Post by longinvest »

nigel_ht wrote: Sun Jul 25, 2021 10:39 am
longinvest wrote: Sun Jul 25, 2021 9:59 am
nigel_ht wrote: Sun Jul 25, 2021 8:46 am What’s interesting in this scenario is the sensitivity of correct estimation for SWR vs VPW.

For SWR 45K is 100%. Go to $46K and it drops to high 90s etc. It’s a relatively graceful reduction in success for errors of estimation.

...

For VPW $44K minimum is 100% success but $45K drops to 62% success rate. It falls off a cliff around the boundary of success and failure. That’s moderately concerning.
Dear Nigel_ht,

This is an obviously flawed analysis based on equating a tiny partial failure (VPW "only" delivering $44,000, during one year out of all retirement years, instead of $45,000 and more for all years) to a total failure (e.g. SWR delivering $0 withdrawals until the end of retirement).
No, this is incorrect. If you don’t understand a statement please look at the accompanying links to the original runs you deleted.

69 out of 111 cohorts end up in portfolio depletion for VPW if you have a $45K minimum spend rate while $44K succeeds all 111 time series.

SWR has ZERO failures at $45K (4.5% withdrawal rate).

You may or may not agree with the scenario setup but to claim that SWR fails completely while VPW only suffers a tiny partial failure is completely false.

https://calculator.ficalc.app/?addition ... gyName=vpw
Dear Nigel_ht,

When you modify VPW, you create a new withdrawal method. Calling this modified method "VPW" is misleading.

Mainly, you're claiming that "Nigel_ht's variable withdrawal method with floor" can prematurely deplete a portfolio. Maybe, but It isn't VPW.

Best regards,

longinvest
Last edited by longinvest on Sun Jul 25, 2021 10:46 am, edited 3 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

zuma wrote: Sun Jul 25, 2021 10:25 am I don’t understand the obsession with backtesting arbitrary sets of data in order to “prove” one methodology is “safer” than the other. Both approaches have their pros and cons. Choose whatever method works for you, based on your specific situation and preferences. In reality, all retirees need to prepare for some level of uncertainty.
There is plenty of uncertainty in estimates of future expenses as well as future performance.

100% success rate using historical data eliminates one aspect of variability.

Yes, both have pros and cons…SWR is safer while VPW allows for a larger lifetime spend.

VPW isn’t both safer and allows for a larger lifetime spend.

For some circumstances (ie high percentage of expenses covered by fixed income) VPW provides for higher lifetime spend with equivalent safety.

By looking at VPW failure cases and behavior around failure scenarios gives folks a better understanding to make a more informed decision.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

longinvest wrote: Sun Jul 25, 2021 10:44 am
nigel_ht wrote: Sun Jul 25, 2021 10:39 am
longinvest wrote: Sun Jul 25, 2021 9:59 am
nigel_ht wrote: Sun Jul 25, 2021 8:46 am What’s interesting in this scenario is the sensitivity of correct estimation for SWR vs VPW.

For SWR 45K is 100%. Go to $46K and it drops to high 90s etc. It’s a relatively graceful reduction in success for errors of estimation.

...

For VPW $44K minimum is 100% success but $45K drops to 62% success rate. It falls off a cliff around the boundary of success and failure. That’s moderately concerning.
Dear Nigel_ht,

This is an obviously flawed analysis based on equating a tiny partial failure (VPW "only" delivering $44,000, during one year out of all retirement years, instead of $45,000 and more for all years) to a total failure (e.g. SWR delivering $0 withdrawals until the end of retirement).
No, this is incorrect. If you don’t understand a statement please look at the accompanying links to the original runs you deleted.

69 out of 111 cohorts end up in portfolio depletion for VPW if you have a $45K minimum spend rate while $44K succeeds all 111 time series.

SWR has ZERO failures at $45K (4.5% withdrawal rate).

You may or may not agree with the scenario setup but to claim that SWR fails completely while VPW only suffers a tiny partial failure is completely false.

https://calculator.ficalc.app/?addition ... gyName=vpw
Dear Nigel_ht,

When you modify VPW, you create a new withdrawal method. Calling this modified method "VPW" is misleading.

Mainly, you're claiming that "Nigel_ht's variable withdrawal method with floor" is riskier than SWR. Maybe it's so, I don't care. It isn't VPW.
Best regards,

longinvest
The withdrawal strategy, unless incorrectly implemented by the tool author, IS VPW.

That a minimum spending amount is applied is a real world constraint for all retirees that actually need retirement income above what SS and pensions provide.

In looking at the data it appears that VPW can fail quite dramatically under real world usage.

Nobody has a $0 minimum spend so it’s important to know when VPW can fail.

I get that you don’t like the results but data is data. That you don’t care is a disservice to VPW users. Especially when it really doesn’t look that bad.

Someone can easily make the reasoned decision that 95% success in historical scenarios using their minimum estimated expenses is perfectly fine for their risk tolerance and would prefer a larger early spend rate.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

dknightd wrote: Sun Jul 25, 2021 10:03 am One day I might live to collect SS. My current plan is when I'm 70, I'll do that.
Once that happens, RMDs will kick in soon.
If I can't live on SS , SPAI, and RMD's I would be very surprised. But it could happen.

One thing about not running out of money is, what do you do, with the left over, if you died before you planned?
Give it to my wife. If not her then charity or the kids.

In any case VPW also leaves you with a large pot
of money if you die before you planned.

Unless you have an obsession with not being the “richest person in the graveyard” this isn’t as significant a problem as being unable to cover unplanned expenses.
Last edited by nigel_ht on Sun Jul 25, 2021 11:05 am, edited 1 time in total.
zuma
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

zuma wrote: Sun Jul 25, 2021 11:04 am
nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
Minimum spending is part of real world usage.

Why would you not consider minimum expenses in retirement planning and if your withdrawal strategy can support it?
zuma
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

nigel_ht wrote: Sun Jul 25, 2021 11:06 am
zuma wrote: Sun Jul 25, 2021 11:04 am
nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
Minimum spending is part of real world usage.

Why would you not consider minimum expenses in retirement planning and if your withdrawal strategy can support it?
In the real world, I will adapt spending to my income and I can use the VPW worksheet to estimate how a 50% market decline will affect my withdrawals.

Also, VPW doesn't claim to support an income floor, so it seems a little unfair to impose that limitation on VPW and then say that "VPW fails" when it doesn't meet the floor.
SnowBog
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Re: Is VPW a safer retirement strategy than SWR?

Post by SnowBog »

nigel_ht wrote: Sun Jul 25, 2021 10:39 am
longinvest wrote: Sun Jul 25, 2021 9:59 am
nigel_ht wrote: Sun Jul 25, 2021 8:46 am What’s interesting in this scenario is the sensitivity of correct estimation for SWR vs VPW.

For SWR 45K is 100%. Go to $46K and it drops to high 90s etc. It’s a relatively graceful reduction in success for errors of estimation.

...

For VPW $44K minimum is 100% success but $45K drops to 62% success rate. It falls off a cliff around the boundary of success and failure. That’s moderately concerning.
Dear Nigel_ht,

This is an obviously flawed analysis based on equating a tiny partial failure (VPW "only" delivering $44,000, during one year out of all retirement years, instead of $45,000 and more for all years) to a total failure (e.g. SWR delivering $0 withdrawals until the end of retirement).
No, this is incorrect. If you don’t understand a statement please look at the accompanying links to the original runs you deleted.

69 out of 111 cohorts end up in portfolio depletion for VPW if you have a $45K minimum spend rate while $44K succeeds all 111 time series.

SWR has ZERO failures at $45K (4.5% withdrawal rate).

You may or may not agree with the scenario setup but to claim that SWR fails completely while VPW only suffers a tiny partial failure is completely false.

https://calculator.ficalc.app/?addition ... gyName=vpw
I agree with longinvest... You are coming up with scenarios attempting to prove a point you think you've found - by coming to with scenarios...

In your setup, you are forcing an extra $50k of medical expenses for 5 years and an extra $100k of retirement home starting at 30 years. Should we end up living out our days in a retirement home (and absent of high cost memory care needs), we wouldn't need an "extra" $100k - as we basically wouldn't have any other expenses but the retirement home. Regardless, you are "forcing" VPW to provide you income that VPW is not guaranteed to do. (In fairness, this is a failure of the tool as it allows you to use VPW in ways its not intended to use...)

Without these, both show 100% success (by your definition of minimum spend). SWR shows > 80% of scenarios end with a large balance - which is its own "problem" (and one is the reasons VPW exists).

But again, from my view, you are missing the point...

You are assuming SWR is "safer" based on looking at past data, and likely cherry picking your inputs until you get the results you expect. But SWR is most likely to either leave your heirs rich or you broke - rarely is it in the middle. (Obviously, if you pick a conservative withdrawal rate, you may minimize the risk of being broke but increase the risk of large ending balances.) But given your fixation on a "minimum spend", maybe it's the right option for you. The only advice I'd make is "keep your eyes on the wheel", if the future sequence doesn't look like the past, "failure" could be painful...

VPW by contrast, adapts based on the available portfolio (and age). Overall, IMHO it does a better job of "threading the needle" such that we are less likely to end up with a massive ending balance and less likely to end up broke. Mathematically, VPW is designed not to prematurely deplete the portfolio, although to your concern it might mean that you don't get your "minimum spend". Personally, I think that's the feature as it's a good - and early - indication that things aren't going well for your plan - and you might want to start figuring out what's going on... I feel confident my spouse (who isn't interested in finances) can manage.
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Re: Is VPW a safer retirement strategy than SWR?

Post by SnowBog »

nigel_ht wrote: Sun Jul 25, 2021 11:06 am
zuma wrote: Sun Jul 25, 2021 11:04 am
nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
Minimum spending is part of real world usage.

Why would you not consider minimum expenses in retirement planning and if your withdrawal strategy can support it?
Ok, then let's use this as a more realistic "real world" scenario... https://calculator.ficalc.app?additiona ... gyName=vpw

One of the many flaws in your analysis, is that you are assuming someone using VPW spends every last penny of the suggested withdrawal. As has been stated repeatedly, that's simply unrealistic...

The above caps the VPW withdrawal at $80k, while also assuming that a person can cut back on 10% of their spending if they have to (so miminum now $40,500). After all, the point of VPW is variable, and I find it illogical that if someone's portfolio was at risk of being depleted (or pushed to where it couldn't support their needs) they'd continue to make the same withdrawals without cutting back...

This shows 100% success for VPW, with your other - IMHO flawed assumptions intact.

Again, we can throw 1,000's of scenarios until we find one we think proves our point... But don't so doesn't change the characteristics of either SWR or VPW.
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Re: Is VPW a safer retirement strategy than SWR?

Post by randomguy »

zuma wrote: Sun Jul 25, 2021 11:19 am
nigel_ht wrote: Sun Jul 25, 2021 11:06 am
zuma wrote: Sun Jul 25, 2021 11:04 am
nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
Minimum spending is part of real world usage.

Why would you not consider minimum expenses in retirement planning and if your withdrawal strategy can support it?
In the real world, I will adapt spending to my income and I can use the VPW worksheet to estimate how a 50% market decline will affect my withdrawals.

Also, VPW doesn't claim to support an income floor, so it seems a little unfair to impose that limitation on VPW and then say that "VPW fails" when it doesn't meet the floor.
Without the requirement for an income floor, the 4% rule also never fails.....

You either look at the VPW charts and go "spending 30k/year for 10 years of prime retirement is ok cause I get to spend 60k when I am 90" or you go "Man that income pattern sucks. I would much rather spend 40k/year when I am a young retiree and cut spending 10% if the bad times hit. Might not be the richest person in the nursing home but I am ok with that". And of course in reality, you don't have to pick between these two plans. There are tons of options. You need to pick what fits your needs.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

SnowBog wrote: Sun Jul 25, 2021 11:39 am
nigel_ht wrote: Sun Jul 25, 2021 11:06 am
zuma wrote: Sun Jul 25, 2021 11:04 am
nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
Minimum spending is part of real world usage.

Why would you not consider minimum expenses in retirement planning and if your withdrawal strategy can support it?
Ok, then let's use this as a more realistic "real world" scenario... https://calculator.ficalc.app?additiona ... gyName=vpw

One of the many flaws in your analysis, is that you are assuming someone using VPW spends every last penny of the suggested withdrawal. As has been stated repeatedly, that's simply unrealistic...

The above caps the VPW withdrawal at $80k, while also assuming that a person can cut back on 10% of their spending if they have to (so miminum now $40,500).
You do realize that the $80K cap doesn’t do anything right? With or without a cap $44K minimum works and $45K fails…the reason why your scenario works is because $40,500 is less than $44,000.

Without the cap is still 100%. No surprise there…

https://calculator.ficalc.app/?addition ... gyName=vpw

With $80K cap VPW still fails for $45K

https://calculator.ficalc.app/?addition ... gyName=vpw

To get $45K to work 100% with VPW you need to drop the max spend to $52K.

https://calculator.ficalc.app/?addition ... gyName=vpw

Okay…that’s not as variable as $80K but it is above $45K for SWR...so yes that’s great for VPW.

So if you pair a cap with a minimum spend you can get the same 100% success rate as SWR.

Good to know isn’t it? It’s also good to know that the band isn’t quite as wide as you may have expected (ie $52K vs $80K).

I’m not opposed to VPW. When it works better than SWR I’m happy…if I can withdraw $52K rather than $45K with the same 100% historical success rate that’s a win.

Perhaps Longinvest will add this feature to his spreadsheet since it is useful.
After all, the point of VPW is variable, and I find it illogical that if someone's portfolio was at risk of being depleted (or pushed to where it couldn't support their needs) they'd continue to make the same withdrawals without cutting back...
A minimum spend that has slack isn’t actually a minimum spend is it?
This shows 100% success for VPW, with your other - IMHO flawed assumptions intact.
The only assumption is that life throws curve balls at you and for retirees these tend to be health related.

Are you claiming that retirees don’t need in home care or nursing home care for end of life?

You can reduce the spend estimates if you like. Those are rough orders of magnitude based on why my mom paid out of pocket for Dad and what we estimated the nursing home would cost.
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

randomguy wrote: Sun Jul 25, 2021 11:57 am Without the requirement for an income floor, the 4% rule also never fails.....
But they are different approaches.

With the 4% rule, a retiree by definition starts with an income floor, namely 4% of the portfolio balance, and then hopes to withdraw that amount (adjusted for inflation) throughout retirement. So the method "fails" if the portfolio is depleted when using that starting amount as a floor.

By contrast, by its nature of being a variable system, VPW assumes the possibility that a retiree's income might decrease significantly. So it makes no sense to impose an income floor on VPW and use that as a criterion for success or failure.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

zuma wrote: Sun Jul 25, 2021 12:19 pm
randomguy wrote: Sun Jul 25, 2021 11:57 am Without the requirement for an income floor, the 4% rule also never fails.....
But they are different approaches.

With the 4% rule, a retiree by definition starts with an income floor, namely 4% of the portfolio balance, and then hopes to withdraw that amount (adjusted for inflation) throughout retirement. So the method "fails" if the portfolio is depleted when using that starting amount as a floor.

By contrast, by its nature of being a variable system, VPW assumes the possibility that a retiree's income might decrease significantly. So it makes no sense to impose an income floor on VPW and use that as a criterion for success or failure.
So if my minimum spend is 4% why doesn’t this apply if I use VPW? If my minimum spend is 1% then SWR never fails unless the US gets nuked (Japan with a 0.25% SWR).

Somewhere above is a nice piece from nest-egg on global SWR amounts and is closer to 3.5% vs 2.8%.

Income floors exist in real life. For some retirees it’s so low in comparison to portfolio value it doesn’t matter but there is a zone where it’s important when determining how you want to do withdrawals in retirement.
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

nigel_ht wrote: Sun Jul 25, 2021 12:30 pm
zuma wrote: Sun Jul 25, 2021 12:19 pm
randomguy wrote: Sun Jul 25, 2021 11:57 am Without the requirement for an income floor, the 4% rule also never fails.....
But they are different approaches.

With the 4% rule, a retiree by definition starts with an income floor, namely 4% of the portfolio balance, and then hopes to withdraw that amount (adjusted for inflation) throughout retirement. So the method "fails" if the portfolio is depleted when using that starting amount as a floor.

By contrast, by its nature of being a variable system, VPW assumes the possibility that a retiree's income might decrease significantly. So it makes no sense to impose an income floor on VPW and use that as a criterion for success or failure.
So if my minimum spend is 4% why doesn’t this apply if I use VPW? If my minimum spend is 1% then SWR never fails unless the US gets nuked (Japan with a 0.25% SWR).

Somewhere above is a nice piece from nest-egg on global SWR amounts and is closer to 3.5% vs 2.8%.

Income floors exist in real life. For some retirees it’s so low in comparison to portfolio value it doesn’t matter but there is a zone where it’s important when determining how you want to do withdrawals in retirement.
VPW is not designed to guarantee an income floor.

You might not like that, and I can certainly understand why, but in my opinion it's not inherently a flaw with the system itself. It's a tradeoff that one accepts and understands when using VPW.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by NearlyRetired »

marcopolo wrote: Sun Jul 25, 2021 3:19 am
NearlyRetired wrote: Sun Jul 25, 2021 3:14 am
marcopolo wrote: Sat Jul 24, 2021 5:07 pm
It does take into account your current portfolio value.
I/we may be talking about different things? This is what I am referring to and you enter your current portfolio balance every time you are determining how much to withdraw. What am I missing?
Yes, as I said it does take into account current portfolio value. You made claims that it takes into account valuations, which is a way (some believe) to estimate expected future returns. There are tools that take valuations into account to estimate future portfolio growth, and adjust withdrawal amounts. VPW does not do that.
But surely, current portfolio balance is the account valuation? And this is what VPW uses as one of its inputs to calculate an output
To err is to be human, to really mess up, use a computer
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

zuma wrote: Sun Jul 25, 2021 1:04 pm
nigel_ht wrote: Sun Jul 25, 2021 12:30 pm
zuma wrote: Sun Jul 25, 2021 12:19 pm
randomguy wrote: Sun Jul 25, 2021 11:57 am Without the requirement for an income floor, the 4% rule also never fails.....
But they are different approaches.

With the 4% rule, a retiree by definition starts with an income floor, namely 4% of the portfolio balance, and then hopes to withdraw that amount (adjusted for inflation) throughout retirement. So the method "fails" if the portfolio is depleted when using that starting amount as a floor.

By contrast, by its nature of being a variable system, VPW assumes the possibility that a retiree's income might decrease significantly. So it makes no sense to impose an income floor on VPW and use that as a criterion for success or failure.
So if my minimum spend is 4% why doesn’t this apply if I use VPW? If my minimum spend is 1% then SWR never fails unless the US gets nuked (Japan with a 0.25% SWR).

Somewhere above is a nice piece from nest-egg on global SWR amounts and is closer to 3.5% vs 2.8%.

Income floors exist in real life. For some retirees it’s so low in comparison to portfolio value it doesn’t matter but there is a zone where it’s important when determining how you want to do withdrawals in retirement.
VPW is not designed to guarantee an income floor.

You might not like that, and I can certainly understand why, but in my opinion it's not inherently a flaw with the system itself. It's a tradeoff that one accepts and understands when using VPW.
It seems like you can provide a floor if you also use a relatively tight cap and still get 100% historical success.

Why wouldn’t you want to have a floor? You did spend time trying to figure out your minimum spend right?

Likewise, why wouldn’t you want to know where the 100% historical success points are?

It seems relatively easy for the spreadsheet to calculate a cap based on desired minimum spend and success rate.

You’re welcome.
Last edited by nigel_ht on Sun Jul 25, 2021 1:15 pm, edited 1 time in total.
randomguy
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Re: Is VPW a safer retirement strategy than SWR?

Post by randomguy »

zuma wrote: Sun Jul 25, 2021 1:04 pm
nigel_ht wrote: Sun Jul 25, 2021 12:30 pm
zuma wrote: Sun Jul 25, 2021 12:19 pm
randomguy wrote: Sun Jul 25, 2021 11:57 am Without the requirement for an income floor, the 4% rule also never fails.....
But they are different approaches.

With the 4% rule, a retiree by definition starts with an income floor, namely 4% of the portfolio balance, and then hopes to withdraw that amount (adjusted for inflation) throughout retirement. So the method "fails" if the portfolio is depleted when using that starting amount as a floor.

By contrast, by its nature of being a variable system, VPW assumes the possibility that a retiree's income might decrease significantly. So it makes no sense to impose an income floor on VPW and use that as a criterion for success or failure.
So if my minimum spend is 4% why doesn’t this apply if I use VPW? If my minimum spend is 1% then SWR never fails unless the US gets nuked (Japan with a 0.25% SWR).

Somewhere above is a nice piece from nest-egg on global SWR amounts and is closer to 3.5% vs 2.8%.

Income floors exist in real life. For some retirees it’s so low in comparison to portfolio value it doesn’t matter but there is a zone where it’s important when determining how you want to do withdrawals in retirement.
VPW is not designed to guarantee an income floor.

You might not like that, and I can certainly understand why, but in my opinion it's not inherently a flaw with the system itself. It's a tradeoff that one accepts and understands when using VPW.
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.

So now we have 2 systems that never fail (after how can you fail when it is acceptable to do nothing) and then the question is which income distribution do you prefer... And my answer would be neither. VPW overreacts to market conditions and the 4% rule doesn't react. Why not pick a system that reacts in reasonable ways?
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Re: Is VPW a safer retirement strategy than SWR?

Post by Marseille07 »

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.
Last edited by Marseille07 on Sun Jul 25, 2021 1:29 pm, edited 1 time in total.
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

nigel_ht wrote: Sun Jul 25, 2021 1:08 pm It seems like you can provide a floor if you also use a relatively tight cap and still get 100% historical success.

Why wouldn’t you want to have a floor? You did spend time trying to figure out your minimum spend right?
Yes, of course. And VPW will likely provide it. But it's not guaranteed. I'm not looking for certainty based on historical backtesting. My plan is to be as flexible as possible and make adjustments throughout life. :happy
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by marcopolo »

NearlyRetired wrote: Sun Jul 25, 2021 1:06 pm
marcopolo wrote: Sun Jul 25, 2021 3:19 am
NearlyRetired wrote: Sun Jul 25, 2021 3:14 am
marcopolo wrote: Sat Jul 24, 2021 5:07 pm
It does take into account your current portfolio value.
I/we may be talking about different things? This is what I am referring to and you enter your current portfolio balance every time you are determining how much to withdraw. What am I missing?
Yes, as I said it does take into account current portfolio value. You made claims that it takes into account valuations, which is a way (some believe) to estimate expected future returns. There are tools that take valuations into account to estimate future portfolio growth, and adjust withdrawal amounts. VPW does not do that.
But surely, current portfolio balance is the account valuation? And this is what VPW uses as one of its inputs to calculate an output
You are perhaps confusing portfolio value with asset class valuations.

Valuations are a measure of how expensive an asset is, such as PE ratio, or CAPE, price to book, etc. Valuations are often used to predict future growth under the assumption that high valuations (such as high CAPE) lead to poor future returns. This can dampen future spending ability in an amortization based approach.

VPW does not do any of that. Buried deep inside the spreadsheet are fixed "growth rates" that assume a straight line fixed growth of assets.

I am not sure can one can say definitively that one approach is better than the other. But, when using these tools, it is useful to understand the assumptions they are making.

I wonder how many people using VPW know the defaukt assumed growth rate of the tool, and are comfortable with that.

Hint: if we actually got what VPW assumes by default, the SWR would be much higher than the 4% that is often discussed here.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Is VPW a safer retirement strategy than SWR?

Post by marcopolo »

nigel_ht wrote: Sun Jul 25, 2021 12:17 pm
SnowBog wrote: Sun Jul 25, 2021 11:39 am
nigel_ht wrote: Sun Jul 25, 2021 11:06 am
zuma wrote: Sun Jul 25, 2021 11:04 am
nigel_ht wrote: Sun Jul 25, 2021 10:55 am In looking at the data it appears that VPW can fail quite dramatically under real world usage.
Maybe it's just me, but I don't consider your theoretical backtesting data to be "real world usage".
Minimum spending is part of real world usage.

Why would you not consider minimum expenses in retirement planning and if your withdrawal strategy can support it?
Ok, then let's use this as a more realistic "real world" scenario... https://calculator.ficalc.app?additiona ... gyName=vpw

One of the many flaws in your analysis, is that you are assuming someone using VPW spends every last penny of the suggested withdrawal. As has been stated repeatedly, that's simply unrealistic...

The above caps the VPW withdrawal at $80k, while also assuming that a person can cut back on 10% of their spending if they have to (so miminum now $40,500).
You do realize that the $80K cap doesn’t do anything right? With or without a cap $44K minimum works and $45K fails…the reason why your scenario works is because $40,500 is less than $44,000.

Without the cap is still 100%. No surprise there…

https://calculator.ficalc.app/?addition ... gyName=vpw

With $80K cap VPW still fails for $45K

https://calculator.ficalc.app/?addition ... gyName=vpw

To get $45K to work 100% with VPW you need to drop the max spend to $52K.

https://calculator.ficalc.app/?addition ... gyName=vpw

Okay…that’s not as variable as $80K but it is above $45K for SWR...so yes that’s great for VPW.

So if you pair a cap with a minimum spend you can get the same 100% success rate as SWR.

Good to know isn’t it? It’s also good to know that the band isn’t quite as wide as you may have expected (ie $52K vs $80K).

I’m not opposed to VPW. When it works better than SWR I’m happy…if I can withdraw $52K rather than $45K with the same 100% historical success rate that’s a win.

Perhaps Longinvest will add this feature to his spreadsheet since it is useful.
After all, the point of VPW is variable, and I find it illogical that if someone's portfolio was at risk of being depleted (or pushed to where it couldn't support their needs) they'd continue to make the same withdrawals without cutting back...
A minimum spend that has slack isn’t actually a minimum spend is it?
This shows 100% success for VPW, with your other - IMHO flawed assumptions intact.
The only assumption is that life throws curve balls at you and for retirees these tend to be health related.

Are you claiming that retirees don’t need in home care or nursing home care for end of life?

You can reduce the spend estimates if you like. Those are rough orders of magnitude based on why my mom paid out of pocket for Dad and what we estimated the nursing home would cost.
Again, I am not a huge fan of VPW, but your arguments seem awfully tortured.

On the floor side of spending, you want very little variability. You used 5% change in spending, which I think we can all agree is absurdly tight spending requirements. Yet, on the ceiling, you want to nearly double your spending?!? and seem unhappy that you only get about 16% more spending?!?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

zuma wrote: Sun Jul 25, 2021 1:23 pm
nigel_ht wrote: Sun Jul 25, 2021 1:08 pm It seems like you can provide a floor if you also use a relatively tight cap and still get 100% historical success.

Why wouldn’t you want to have a floor? You did spend time trying to figure out your minimum spend right?
Yes, of course. And VPW will likely provide it. But it's not guaranteed. I'm not looking for certainty based on historical backtesting. My plan is to be as flexible as possible and make adjustments throughout life. :happy
What’s really weird is that y’all refuse to want to know what values work historically in order to be “flexible”.

Especially since one you add in social security VPW can provide the same 100% success rate as SWR if you are willing to cap your flexibility.

Going back to the very first run:

https://calculator.ficalc.app/?addition ... gyName=vpw

Where SWR only allows $45K with a $15K SS VPW allows for a range from $45K to $46.8K. A potential 4% increase in withdrawal amount without a corresponding increase in risk of depletion.

Of course you still have a 1/N issue with VPW as you try to accelerate spend down as you approach your termination date but I guess if you use a large enough N it works (age 110 or something)

Y’all don’t have to unfairly compare a $30K min spend using VPW to a 4% SWR to show that VPW has advantages.

Not quite as huge an advantage as some folks believe at the moment but that extra advantage is gained at the cost of increased risk.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

marcopolo wrote: Sun Jul 25, 2021 1:36 pm
and seem unhappy that you only get about 16% more spending?!?
Nope I called that a win. It’s not often you get something for nothing.

Well not nothing…VPW still tries to spend toward 0 by the terminal age but it can’t with a spend cap in place…on the other hand the number of large remaining portfolios at death is increased.
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Re: Is VPW a safer retirement strategy than SWR?

Post by SnowBog »

nigel_ht wrote: Sun Jul 25, 2021 1:08 pm Likewise, why wouldn’t you want to know where the 100% historical success points are?
Because other than intellectual curiosity or using history to see how things might respond, IMHO it serves no purpose looking forward...

There is no guarantee that the future looks anything like the past. For all we know our "worst" or "best" days may be ahead of us...

Plus there's also the adage of "man plans, and God laughs".

I have near zero faith I can accurately predict my expenses 10 years from now, let alone 30+ years from now. And I have even less faith that I can accurately estimate what my portfolio will look like, and what kind of "income" it will support in 30 years. But I know that I can adapt my expenses, very similar to my working years... Which is what VPW entails, and "as a system" its mathematically more likely of meeting my needs regardless of what the future holds. Coming up with edge cases attempting to disprove that seems... odd...

But, we've answered your OP - VPW can be "frugal" - the fact that it [might] have a higher initial withdrawal rate is irrelevant in real world scenarios.

And I've tried my best to address your several twists since the OP, VPW is very safe under nearly all conditions in that it adapts to those conditions. However, nothing (than having boatloads of excess money) is safe under every condition, as you've shown by torturing data in an attempt to show edge cases...

But feel that this discussion is no longer adding value, simply repeating itself. So I'm checking out of this thread.
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by NearlyRetired »

marcopolo wrote: Sun Jul 25, 2021 1:30 pm
NearlyRetired wrote: Sun Jul 25, 2021 1:06 pm
marcopolo wrote: Sun Jul 25, 2021 3:19 am
NearlyRetired wrote: Sun Jul 25, 2021 3:14 am
marcopolo wrote: Sat Jul 24, 2021 5:07 pm
It does take into account your current portfolio value.
I/we may be talking about different things? This is what I am referring to and you enter your current portfolio balance every time you are determining how much to withdraw. What am I missing?
Yes, as I said it does take into account current portfolio value. You made claims that it takes into account valuations, which is a way (some believe) to estimate expected future returns. There are tools that take valuations into account to estimate future portfolio growth, and adjust withdrawal amounts. VPW does not do that.
But surely, current portfolio balance is the account valuation? And this is what VPW uses as one of its inputs to calculate an output
You are perhaps confusing portfolio value with asset class valuations.

Valuations are a measure of how expensive an asset is, such as PE ratio, or CAPE, price to book, etc. Valuations are often used to predict future growth under the assumption that high valuations (such as high CAPE) lead to poor future returns. This can dampen future spending ability in an amortization based approach.

VPW does not do any of that. Buried deep inside the spreadsheet are fixed "growth rates" that assume a straight line fixed growth of assets.

I am not sure can one can say definitively that one approach is better than the other. But, when using these tools, it is useful to understand the assumptions they are making.

I wonder how many people using VPW know the defaukt assumed growth rate of the tool, and are comfortable with that.

Hint: if we actually got what VPW assumes by default, the SWR would be much higher than the 4% that is often discussed here.
I use the word "valuation" possibly incorrectly, to mean "the value of my portfolio" - if it has another meaning in this sense then my apologies.

The only "Buried deep inside the spreadsheet" I can find is the assumption that that the "discount rate" - if I understand it correctly - that is applied to the calculations which are:

Stocks 5% and Bonds 1.8% (not sure if this is nominal or real)

but that is really the only variable in this equation.

All other inputs are known (assuming you accept the proposed inflation target). Of course there is nothing stopping anyone from modifying these values if a personal view is that these are unrealistic.

But none of this really changes the fundamentals that the VPW mechanism will adapt to current portfolio "valuations" :? which for my money is more adaptive than relaying on the SWR "rule"
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zuma
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Re: Is VPW a safer retirement strategy than SWR?

Post by zuma »

nigel_ht wrote: Sun Jul 25, 2021 1:47 pm
zuma wrote: Sun Jul 25, 2021 1:23 pm
nigel_ht wrote: Sun Jul 25, 2021 1:08 pm It seems like you can provide a floor if you also use a relatively tight cap and still get 100% historical success.

Why wouldn’t you want to have a floor? You did spend time trying to figure out your minimum spend right?
Yes, of course. And VPW will likely provide it. But it's not guaranteed. I'm not looking for certainty based on historical backtesting. My plan is to be as flexible as possible and make adjustments throughout life. :happy
What’s really weird is that y’all refuse to want to know what values work historically in order to be “flexible”.
As if being flexible is a bad thing.

Also checking out of this thread... :beer
Lastrun
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Re: Is VPW a safer retirement strategy than SWR?

Post by Lastrun »

SnowBog wrote: Sun Jul 25, 2021 2:02 pm But feel that this discussion is no longer adding value, simply repeating itself. So I'm checking out of this thread.

Yep, bottom line is you pick your poison-sequence of return risk or sequence of income risk. VPW or ABW don't guarantee a minimum income floor and SWR does not guarantee you won't run our of money. Past market performance is not a guarantee of future results. Standard BH clichés YMMV and roads to Dublin. Enough said.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

SnowBog wrote: Sun Jul 25, 2021 2:02 pm
nigel_ht wrote: Sun Jul 25, 2021 1:08 pm Likewise, why wouldn’t you want to know where the 100% historical success points are?
Because other than intellectual curiosity or using history to see how things might respond, IMHO it serves no purpose looking forward...
So the claim here appears to be that historical worst case scenarios have nothing to teach us about portfolio survival. Ie the “no purpose”

I would disagree.
Plus there's also the adage of "man plans, and God laughs".
“In preparing for battle I have always found that plans are useless, but planning is indispensable.”

—Eisenhower
I have near zero faith I can accurately predict my expenses 10 years from now, let alone 30+ years from now. And I have even less faith that I can accurately estimate what my portfolio will look like, and what kind of "income" it will support in 30 years. But I know that I can adapt my expenses, very similar to my working years...
Without knowing the range of possibilities how do you know you can adapt?

Accuracy isn’t really needed any more than accuracy in predicting what the enemy will do is in battle planning.

Typically I look at it from the perspective of “most likely” and “most dangerous” possibilities.

Most likely the market during my retirement will be within the historical worst case scenarios and we’ll be mostly healthy through most of retirement.

I can estimate a reasonable looking spending profile for a normal retirement. Pad it a bit for normal variance and test to see if it has 100% success rate using historical outcomes. This doesn’t mean 100% success rate…just that it can likely survive what the market can throw at it…including SORR. I look at both the desired spending profile and the bare minimum spending profile. I’ll accept some risk for the desired profile but want 100% success for the minimum.

For the most dangerous I have a scenario where healthcare spending, one of the few areas with large left tail risk, and see how that works out using historical data. Then you balance how much of this risk you want to mitigate with either increased savings in accumulation or lower spending in retirement.

Accuracy isn’t necessary here. The “plan” is useless for execution but the act of planning these outcomes and looking at the risks and how to mitigate them will help when the time comes to decide whether to keep spending because it’s likely to be okay or to pull back and go defensive because things are looking worse than historical.
And I've tried my best to address your several twists since the OP,
It’s twisty because of thread merges.
VPW is very safe under nearly all conditions in that it adapts to those conditions. However, nothing (than having boatloads of excess money) is safe under every condition, as you've shown by torturing data in an attempt to show edge cases...
SWR is safer if you don’t use spending caps in scenarios where you don’t have boatloads of excess money.

In fact VPW assumes you to have “boatloads of extra money” because you need significant spending flexibility.

Folks with smaller retirement accounts have less flexibility between minimum required spending and what the portfolio can safely provide for.

It’s strange when there are use cases where VPW is superior but y’all don’t like it (presumably because caps limit flexibility) but insist on saying VPW has advantages when it’s clearly the opposite.

The only folks that can afford their withdrawals to drop significantly have a lot of headroom in their budgeting. This generally means they have a lot of money in their portfolio relative to required expenses.
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

zuma wrote: Sun Jul 25, 2021 2:15 pm
nigel_ht wrote: Sun Jul 25, 2021 1:47 pm
zuma wrote: Sun Jul 25, 2021 1:23 pm
nigel_ht wrote: Sun Jul 25, 2021 1:08 pm It seems like you can provide a floor if you also use a relatively tight cap and still get 100% historical success.

Why wouldn’t you want to have a floor? You did spend time trying to figure out your minimum spend right?
Yes, of course. And VPW will likely provide it. But it's not guaranteed. I'm not looking for certainty based on historical backtesting. My plan is to be as flexible as possible and make adjustments throughout life. :happy
What’s really weird is that y’all refuse to want to know what values work historically in order to be “flexible”.
As if being flexible is a bad thing.

Also checking out of this thread... :beer
Flexibility isn’t a bad thing.

Thinking you have more flexibility than you really have is a bad thing because it can lead to portfolio depletion.
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nigel_ht
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Re: Is VPW a safer retirement strategy than SWR?

Post by nigel_ht »

Lastrun wrote: Sun Jul 25, 2021 2:20 pm
SnowBog wrote: Sun Jul 25, 2021 2:02 pm But feel that this discussion is no longer adding value, simply repeating itself. So I'm checking out of this thread.

Yep, bottom line is you pick your poison-sequence of return risk or sequence of income risk. VPW or ABW don't guarantee a minimum income floor and SWR does not guarantee you won't run our of money. Past market performance is not a guarantee of future results. Standard BH clichés YMMV and roads to Dublin. Enough said.
SWR does guarantee that you won’t run out of money in historical outcomes.

Worse than historical outcomes generally not unless your SWR percentage is fairly far below the maximum SWR percentage. I.e using 2% SWR vs a historically 100% successful 3.5% for your AA.

4% turns out not to be a SWR…historically it only has a 95% success rate. It is a constant dollar withdrawal amount but it isn’t safe.
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Re: Is VPW a safer retirement strategy than SWR?

Post by ionball »

nigel_ht wrote: Sun Jul 25, 2021 2:38 pm SWR is safer if you don’t use spending caps in scenarios where you don’t have boatloads of excess money.
I think you found the answer to your question. You would be wise to use the tools that are most suitable for your requirements, and waste no time on tools that you find objectionable.
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Re: Is VPW a safer retirement strategy than SWR?

Post by Da5id »

nigel_ht wrote: Sun Jul 25, 2021 2:38 pm The only folks that can afford their withdrawals to drop significantly have a lot of headroom in their budgeting. This generally means they have a lot of money in their portfolio relative to required expenses.
4% SWR as far as I know generally it isn't implemented, just a useful value easy to determine in academic studies and a good starting place.

But is your assertion that someone who actually planned on using 4% SWR would likely stick with it through the large drawdowns of the past when bad sequence of returns hits? As in huge drawdowns early on? And if they aren't flexible (your assumption above), I guess their only answer is to pray that historical outcomes will protect them. Seems very uncomfortable.

I think https://earlyretirementnow.com/2017/03/ ... -criteria/ gives a more evenhanded take on a number of strategies than you seem inclined to do. I'm not using VPW, but think it is fine. All strategies aren't good if you have a bad beginning and have little flexibility of course.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by JaneyLH »

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

Post by nigel_ht »

Da5id wrote: Sun Jul 25, 2021 3:03 pm
nigel_ht wrote: Sun Jul 25, 2021 2:38 pm The only folks that can afford their withdrawals to drop significantly have a lot of headroom in their budgeting. This generally means they have a lot of money in their portfolio relative to required expenses.
4% SWR as far as I know generally it isn't implemented, just a useful value easy to determine in academic studies and a good starting place.
Well some FIRE folks use 4%…

I dunno how to assess how often 4% is used in the real world. I have to assume that because of the prevalence in retirement planning literature that it gets used by some folks who assume it’s a default.
But is your assertion that someone who actually planned on using 4% SWR would likely stick with it through the large drawdowns of the past when bad sequence of returns hits?
My assertion is that if VPW is a ceiling on spending then the same applies to SWR. The fact that is it called the SAFE withdrawal rate implies that anything below this value is also safe. Anything above this rate, less safe.

So SWR doesn’t require to spend at the SWR percentage if you can afford not to and still meet your minimum expenses.
As in huge drawdowns early on? And if they aren't flexible (your assumption above), I guess their only answer is to pray that historical outcomes will protect them. Seems very uncomfortable.
Perhaps it’s unclear but my point is that folks who have spending needs that are close to 4% do NOT have the flexibility to drop below 4% BUT can still have a successful retirement because 4% (or 3.8%) worked in historical worst cases.

They do NOT have the flexibility to use VPW because it can drop them below their minimum spend amount.

Not everyone retires with $1M+ or 25% headroom.
I think https://earlyretirementnow.com/2017/03/ ... -criteria/ gives a more evenhanded take on a number of strategies than you seem inclined to do. I'm not using VPW, but think it is fine. All strategies aren't good if you have a bad beginning and have little flexibility of course.


I think our assessment are about the same:

Image

VPW gets a D in “no long lasting cuts in withdrawals”.

Evenhanded is doing apples to apples comparisons. Not by comparing 4% SWR to VPW using a 3% floor.

Whatever the minimum expenses for an individual happens to be it doesn’t change because they choose a different withdrawal strategy. But for some reason VPW proponents insist on doing this and claiming victory.

I don’t really care about who “wins”…it looks like VPW provides an modest improvement on withdrawals vs SWR if you use an appropriate cap. Whether I use VPW with caps or not depends on simplicity and whether I find something better.

If 3% SWR exceeds my desired spending I probably won’t bother.
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David Jay
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Re: Variable Percentage Withdrawal (VPW) - Danger Will Robinson!

Post by David Jay »

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?
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Da5id
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Re: Is VPW a safer retirement strategy than SWR?

Post by Da5id »

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.
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Re: Is VPW/ABW a frugal retirement strategy?

Post by nigel_ht »

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…
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