nigel_ht wrote: ↑Sat Jul 24, 2021 12:55 pm
Unless your job was commission or tips based or based on personal business profits you likely didn’t have very large fluctuations in income that requires you to adjust to.
You forgot those with bonuses, stock options, RSUs, ESPP, those part of start-ups, those who have an equity/partner stake in the business, and a whole host of other forms of variable income such as side hustles. While this might still be a small segment of the population, it's not an insignificant segment...
In the past 5 years, I've had massive "variability" in my income due to some of these factors. One year had income that was roughly double the year prior, and which has not been as high since...
And in each of those years, we adapted our spending and savings accordingly. We'll do the same during retirement...
And for what it's worth, we won't be retiring when VPW (or SWR or any other method)
just barely shows enough for us to retire... We'll retire when the models show that we'll have "enough" to live the type of retirement we want, which includes lots of discretionary expenses. And guess what - those expenses can be reduced or eliminated if markets are really bad - just like we did while working...
nigel_ht wrote: ↑Sat Jul 24, 2021 12:55 pm
...
Like I said, if it works for you great. But VPW does have risks if you spend more in the first few years and run into SORR…you are forced to decide whether to increase your spend which risks portfolio depletion fast than it may have been with SWR or dropping below you minimum spend and “selling your house” to achieve the flexibility required.
SORR is a risk - regardless of withdrawal methods. SWR is not "immune" to it... And VPW is not "more at risk" to it...
As others have pointed out, if you really want to avoid SORR and have guaranteed income, then you may want to consider something like a Liability Matching Portfolio (LMP) often constructed with inflation adjusted sources like I Bonds or TIPS.
nigel_ht wrote: ↑Sat Jul 24, 2021 12:55 pm
The key issue is that folks where 4% spend is marginal to meet their spending needs will see VPW as a “safe” way to spend more than 4% and the risk of failure is obscured because VPW claims it never depletes before the end date.
If the user really needs 4.5% to meet their needs including SS this isn’t easily seen as it is with SWR and the computed historical failure calculations.
Your comment makes no sense to me...
My working theory is your are implying that someone trying to figure out if they can retire would (made up numbers for example):
- Figure out their annual expenses - let's say $50k
- Look at SWR of 4% and see it could only support $49k/year...
- So they look at VPW and see it could support $51k in the first year, and they fail to pay attention to the "required flexibility" which shows it might only support $26k in some years...
- So they blindly go ahead and retire using VPW only to find out they never saved enough (as they clearly didn't understand VPW at all...)
That is illogical to me... Anyone using VPW is expected to understand that the "income" (aka withdrawals) from the portfolio are
variable. Anyone who fails to understand that, is missing the point of VPW...
Unfortunately, I think this includes you... You've stated a few times how VPW is supposed to "guarantee minimumal income", that it's a "bug" that it does not... Again, to me that's illogical...
Other than an LMP and/or an income source like SPIA, pension, social security (and some of these are questionable) - there is no "guaranteed" income... SWR does not magically give you "guaranteed" withdrawals...
Sure you can find an SWR % (say < 3%) that has never failed a backtest in meeting your "minimum" expenses. It's
highly likely -
but not guaranteed - that it will continue to do so going forward. But as others, such as longinvest have pointed out - you are trading one (in your mind) "risk" of not having enough income in a given year for other risks such as a higher risk of either dying ultra rich or broke (SWR is rarely in the middle).
Those of us that understand VPW accept what it is, and isn't, and we use it (or plan to use it) accordingly.