Amortization Based Withdrawal (ABW)

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AlohaJoe
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Re: Amortization Based Withdrawal (ABW)

Post by AlohaJoe »

A common criticism of all variable withdrawal strategies is "but it might force me to cut non-discretionary expenses in a way I find unacceptable during a market crash". I think this is a misunderstanding of ABW: the result of the ABW calculation isn't telling you how much to withdraw. It is telling you what withdrawal is risk-neutral given the assumptions you provided. Withdrawing less will have somewhat less risk. Withdrawing more will have somewhat more risk.

The actuarial toolkit can help us explore how much extra risk we're actually talking about, so we aren't making the decision based on gut feelings or arbitrary rules of thumb. Let's assume that blindly following your spreadsheet tells you the 35 years of retirement withdrawals look like this:

Code: Select all

-$49,581.35
-$39,771.50
-$28,897.07
-$32,712.39
-$36,564.45
-$32,662.52
-$30,529.42
-$30,372.92
-$31,388.71
-$27,856.95
-$32,035.54
-$34,460.89
-$34,258.65
-$41,060.55
-$45,666.00
-$42,809.42
-$44,776.90
-$50,931.24
-$46,051.02
-$54,745.74
-$55,465.87
-$57,734.08
-$53,111.12
-$64,683.60
-$68,338.21
-$54,817.24
-$39,828.97
-$45,087.63
-$50,396.95
-$45,018.90
-$42,078.84
-$41,863.13
-$43,263.20
-$38,395.36
-$44,154.73
(That's what an actual retiree in 1972 with $1,000,000 in a 60/40 portfolio and assuming 3.7% (i.e. historical average) returns would have seen in inflation-adjusted numbers.)

What if a $21,000 spending cut in 24 months is too much to swallow? Or what if sub-$35,000 for a decade is too much to swallow?

So just give yourself a floor of $35,000! It isn't like the ABW Police are going to come arrest you for doing that.

Code: Select all

-$49,581.35
-$39,771.50
-$35,000.00
-$35,000.00
-$35,985.99
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$37,215.25
-$41,389.40
-$38,800.34
-$40,583.57
-$46,161.56
-$41,738.37
-$49,618.83
-$50,271.52
-$52,327.31
-$48,137.29
-$58,626.01
-$61,938.37
-$49,683.63
-$36,099.00
-$40,865.20
-$45,677.30
-$40,802.90
-$38,138.18
-$37,942.67
-$39,211.62
-$35,000.00
-$39,780.74
It...works fine. Why? Because by giving yourself a floor you are betting on a mean reversion. But so is SWR!

But just picking a number out of thin air for the floor feels a tad unsatisfactory. Why not $40,000? Heck, why not $45,000?

We can use our spreadsheet's Goal Seek in combination with the PMT function to find out what expected return is implied by a different withdrawal. And by looking at that implied expected return, we can see how much risk we are taking by adding a floor at a certain level and the decide whether we are comfortable with it or not.

edit: You also actually just use the spreadsheet function =RATE() to do this even easier in many simple scenarios. Which I swear I knew about but totally blanked on while writing this post.

In this case, let's say in that third year we decide that cutting spending from $39,000 to $29,000 is just too much. Especially since we just cut from $49,000 to $39,000 the year before. Sure there's been a massive stock market crash and high inflation...but who wants to cut $20,000 in spending in the first 2 years of retirement? You could have just kept working if you're going to do nothing but stay at home and eat cheese & bologna sandwiches while watching free-to-air TV.

If we withdraw $35,000 instead of $29,000 in Year 3...what does that mean? Goal Seek tells us that it means we are assuming a 5.35% expected (real) return. And we can repeat that same calculation every single year. These are the implied expected returns assuming a $35,000 spending floor:

Code: Select all

5.35%
4.37%
3.46%
4.47%
5.19%
5.39%
5.21%
6.73%
5.43%
4.78%
4.97%
3.01%
We originally started with an expected return of 3.7% so by the end of this 12-year sequence we've nearly completed the mean reversion.

Maybe you decide that an implied expected return of 5.35% is way too much Riverboat Gambler for your tastes. And 6.73% is definitely way too much; might as well just invest in Bitcoin if you're that crazy, right? (Especially since these are the expected return for the entire remainder of your retirement; e.g. 20+ years.)

1) But keep in mind that your original 3.7% expected return was based on assuming future market crashes. At this point, we're sitting at -40% returns, so the market crash is in the past. Of course, there are no guarantees of mean reversion (though SWR assumes it) but a lot people are pretty comfortable assuming future expected returns will be higher after one of the largest market crashes in US history. (And, as we saw with the actual withdrawals, it worked out that way.)

2) But the even bigger point is that now you have the information to understand how much risk you are taking! You aren't just blindly following "increase withdrawals by $1,230 because that's what Guyton-Klinger said to do".

And my gut feeling is that when most Bogleheads see the implied risk that they are actually signing up for, they'll be more hesitant to just blindly follow some other withdrawal scheme. Because actually nothing I did above actually has anything to do with ABW per se. You could apply exactly the same analysis to SWR withdrawals or Guyton-Klinger withdrawals or McClung's EM or anything else that has some kind of floor or guardrails. Because when SWR tells you to keep withdrawing $40,000 after a 40% market crash, it is also making an implicit expected return forecast. But now you can open up the black box and see if you're comfortable with its assumptions.

The actuarial toolkit allows us to make the implicit explicit and then use that to make more informed decisions.
Last edited by AlohaJoe on Mon Nov 08, 2021 7:34 pm, edited 3 times in total.
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HomerJ
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Re: Amortization Based Withdrawal (ABW)

Post by HomerJ »

willthrill81 wrote: Wed Feb 27, 2019 4:47 pmthe CAPE on 1/1/2000 was 43.77, so the expected return for stocks over the next decade would be 1/43.77 or 2.3%.
Your very first assumption was junk. Garbage in, Garbage out.

1/CAPE is not science. It's a random fit to recent data.

I wish I had seen this thread 3 years ago so I could have saved 16 pages of posting.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
marcopolo
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Re: Amortization Based Withdrawal (ABW)

Post by marcopolo »

This is a really nice analysis!
Thank you for that.
AlohaJoe wrote: Sun Nov 07, 2021 9:55 pm A common criticism of all variable withdrawal strategies is "but it might force me to cut non-discretionary expenses in a way I find unacceptable during a market crash". I think this is a misunderstanding of ABW: the result of the ABW calculation isn't telling you how much to withdraw. It is telling you what withdrawal is risk-neutral given the assumptions you provided. Withdrawing less will have somewhat less risk. Withdrawing more will have somewhat more risk.

The actuarial toolkit can help us explore how much extra risk we're actually talking about, so we aren't making the decision based on gut feelings or arbitrary rules of thumb. Let's assume that blindly following your spreadsheet tells you the 35 years of retirement withdrawals look like this:

Code: Select all

-$49,581.35
-$39,771.50
-$28,897.07
-$32,712.39
-$36,564.45
-$32,662.52
-$30,529.42
-$30,372.92
-$31,388.71
-$27,856.95
-$32,035.54
-$34,460.89
-$34,258.65
-$41,060.55
-$45,666.00
-$42,809.42
-$44,776.90
-$50,931.24
-$46,051.02
-$54,745.74
-$55,465.87
-$57,734.08
-$53,111.12
-$64,683.60
-$68,338.21
-$54,817.24
-$39,828.97
-$45,087.63
-$50,396.95
-$45,018.90
-$42,078.84
-$41,863.13
-$43,263.20
-$38,395.36
-$44,154.73
(That's what an actual retiree in 1972 with $1,000,000 in a 60/40 portfolio and assuming 3.7% (i.e. historical average) returns would have seen in inflation-adjusted numbers.)

What if a $21,000 spending cut in 24 months is too much to swallow? Or what if sub-$35,000 for a decade is too much to swallow?

So just give yourself a floor of $35,000! It isn't like the ABW Police are going to come arrest you for doing that.

Code: Select all

-$49,581.35
-$39,771.50
-$35,000.00
-$35,000.00
-$35,985.99
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$35,000.00
-$37,215.25
-$41,389.40
-$38,800.34
-$40,583.57
-$46,161.56
-$41,738.37
-$49,618.83
-$50,271.52
-$52,327.31
-$48,137.29
-$58,626.01
-$61,938.37
-$49,683.63
-$36,099.00
-$40,865.20
-$45,677.30
-$40,802.90
-$38,138.18
-$37,942.67
-$39,211.62
-$35,000.00
-$39,780.74
It...works fine. Why? Because by giving yourself a floor you are betting on a mean reversion. But so is SWR!

But just picking a number out of thin air for the floor feels a tad unsatisfactory. Why not $40,000? Heck, why not $45,000?

We can use our spreadsheet's Goal Seek to find out what expected return is implied by a different withdrawal. And by looking at that implied expected return, we can see how much risk we are taking by adding a floor at a certain level and the decide whether we are comfortable with it or not.

In this case, let's say in that third year we decide that cutting spending from $39,000 to $29,000 is just too much. Especially since we just cut from $49,000 to $39,000 the year before. Sure there's been a massive stock market crash and high inflation...but who wants to cut $20,000 in spending in the first 2 years of retirement? You could have just kept working if you're going to do nothing but stay at home and eat cheese & bologna sandwiches while watching free-to-air TV.

If we withdraw $35,000 instead of $29,000 in Year 3...what does that mean? Goal Seek tells us that it means we are assuming a 5.35% expected (real) return. And we can repeat that same calculation every single year. These are the implied expected returns assuming a $35,000 spending floor:

Code: Select all

5.35%
4.37%
3.46%
4.47%
5.19%
5.39%
5.21%
6.73%
5.43%
4.78%
4.97%
3.01%
We originally started with an expected return of 3.7% so by the end of this 12-year sequence we've nearly completed the mean reversion.

Maybe you decide that an implied expected return of 5.35% is way too much Riverboat Gambler for your tastes. And 6.73% is definitely way too much; might as well just invest in Bitcoin if you're that crazy, right? (Especially since these are the expected return for the entire remainder of your retirement; e.g. 20+ years.)

1) But keep in mind that your original 3.7% expected return was based on assuming future market crashes. At this point, we're sitting at -40% returns, so the market crash is in the past. Of course, there are no guarantees of mean reversion (though SWR assumes it) but a lot people are pretty comfortable assuming future expected returns will be higher after one of the largest market crashes in US history. (And, as we saw with the actual withdrawals, it worked out that way.)

2) But the even bigger point is that now you have the information to understand how much risk you are taking! You aren't just blindly following "increase withdrawals by $1,230 because that's what Guyton-Klinger said to do".

And my gut feeling is that when most Bogleheads see the implied risk that they are actually signing up for, they'll be more hesitant to just blindly follow some other withdrawal scheme. Because actually nothing I did above actually has anything to do with ABW per se. You could apply exactly the same analysis to SWR withdrawals or Guyton-Klinger withdrawals or McClung's EM or anything else that has some kind of floor or guardrails.

The actuarial toolkit allows us to make the implicit explicit and then use that to make more informed decisions.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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willthrill81
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Re: Amortization Based Withdrawal (ABW)

Post by willthrill81 »

HomerJ wrote: Sun Nov 07, 2021 10:39 pm
willthrill81 wrote: Wed Feb 27, 2019 4:47 pmthe CAPE on 1/1/2000 was 43.77, so the expected return for stocks over the next decade would be 1/43.77 or 2.3%.
Your very first assumption was junk. Garbage in, Garbage out.

1/CAPE is not science. It's a random fit to recent data.

I wish I had seen this thread 3 years ago so I could have saved 16 pages of posting.
Why don't you tell us what you really think Homer? :P

Everyone should know that any such forecast is imprecise. The actual returns of U.S. stocks were -2.7%, so 1/CAPE was actually overly optimistic for that specific period. But an advantage of this approach is that it's self-correcting. If your returns are higher than you expected, then you can withdraw more later or end with a larger portfolio than you planned for and vice versa.

ABW does not need 1/CAPE to work. You can use any forward return estimate you want. Check out the excellent post above by AlohaJoe to see alternative approaches.
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Northern Flicker
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Re: Amortization Based Withdrawal (ABW)

Post by Northern Flicker »

I haven't read through the thread, so apologies if this is redundant, but a 30-year TIPS ladder with each TIPS purchased in sn smount to mature at the real spending need for the year so that the proceeds fund the year's expenses is an amortizing withdrawal of assets over 30 years.
AlohaJoe
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Re: Amortization Based Withdrawal (ABW)

Post by AlohaJoe »

AlohaJoe wrote: Sun Nov 07, 2021 9:55 pm Because actually nothing I did above actually has anything to do with ABW per se. You could apply exactly the same analysis to SWR withdrawals or Guyton-Klinger withdrawals or McClung's EM or anything else that has some kind of floor or guardrails. Because when SWR tells you to keep withdrawing $40,000 after a 40% market crash, it is also making an implicit expected return forecast. But now you can open up the black box and see if you're comfortable with its assumptions.
And just as an example of how this looks in practice, let's take someone who followed the 4% rule and retired in 1972, as a mirror image to our variable withdrawal example above. They blindly increase withdrawals by CPI, ignoring the value of their portfolio. This same goal seek analysis tells us what implied expected return the SWR is implicitly expecting at each point in time in order for everything to work out.

Code: Select all

ER      Yrs      Withdrawal
1.31%	30	-$40,000.00
2.91%	29	-$43,482.35
5.94%	28	-$48,847.06
4.85%	27	-$52,235.29
3.82%	26	-$54,776.47
5.04%	25	-$58,447.06
5.98%	24	-$63,717.65
6.32%	23	-$72,188.24
6.21%	22	-$81,223.53
8.25%	21	-$88,470.59
6.80%	20	-$91,858.82
6.15%	19	-$95,341.18
6.61%	18	-$99,105.88
4.21%	17	-$102,870.59
We can see that SWR starts out extremely conservative. Just 1.31% expected return. (That's how it turns 25 years of savings into a 30 year retirement.) But it needs to continually ramp up the expected return in order to compensate for the falling portfolio value. It peaks at an 8.25% expected return (for the next 21 years!) and spends 7 years at or above a 6% expected return. (Remember, this is for a 60/40 portfolio.) I imagine that many self-avowed conservative Bogleheads would probably be aghast at the idea of predicating their retirement on expecting such high returns but that's precisely what SWR requires in order to maintain its spending levels.

Of course, in this case it basically worked out thanks to mean reversion and the bull market of the 1980s.
Iconicus
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Re: Amortization Based Withdrawal (ABW)

Post by Iconicus »

willthrill81 wrote: Sun Nov 07, 2021 11:46 pm
HomerJ wrote: Sun Nov 07, 2021 10:39 pm
willthrill81 wrote: Wed Feb 27, 2019 4:47 pmthe CAPE on 1/1/2000 was 43.77, so the expected return for stocks over the next decade would be 1/43.77 or 2.3%.
Your very first assumption was junk. Garbage in, Garbage out.

1/CAPE is not science. It's a random fit to recent data.

I wish I had seen this thread 3 years ago so I could have saved 16 pages of posting.
Why don't you tell us what you really think Homer? :P

Everyone should know that any such forecast is imprecise. The actual returns of U.S. stocks were -2.7%, so 1/CAPE was actually overly optimistic for that specific period. But an advantage of this approach is that it's self-correcting. If your returns are higher than you expected, then you can withdraw more later or end with a larger portfolio than you planned for and vice versa.

ABW does not need 1/CAPE to work. You can use any forward return estimate you want. Check out the excellent post above by AlohaJoe to see alternative approaches.
I'm interested in seeing the alternatives approaches, but your link is incorrect (goes to the top of this thread's page 16, not the post you wanted it to). Please fix. Thank you.
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Re: Amortization Based Withdrawal (ABW)

Post by willthrill81 »

Iconicus wrote: Mon Nov 08, 2021 8:41 am
willthrill81 wrote: Sun Nov 07, 2021 11:46 pm
HomerJ wrote: Sun Nov 07, 2021 10:39 pm
willthrill81 wrote: Wed Feb 27, 2019 4:47 pmthe CAPE on 1/1/2000 was 43.77, so the expected return for stocks over the next decade would be 1/43.77 or 2.3%.
Your very first assumption was junk. Garbage in, Garbage out.

1/CAPE is not science. It's a random fit to recent data.

I wish I had seen this thread 3 years ago so I could have saved 16 pages of posting.
Why don't you tell us what you really think Homer? :P

Everyone should know that any such forecast is imprecise. The actual returns of U.S. stocks were -2.7%, so 1/CAPE was actually overly optimistic for that specific period. But an advantage of this approach is that it's self-correcting. If your returns are higher than you expected, then you can withdraw more later or end with a larger portfolio than you planned for and vice versa.

ABW does not need 1/CAPE to work. You can use any forward return estimate you want. Check out the excellent post above by AlohaJoe to see alternative approaches.
I'm interested in seeing the alternatives approaches, but your link is incorrect (goes to the top of this thread's page 16, not the post you wanted it to). Please fix. Thank you.
No, it does go to AlohaJoe's post. He shows that dynamic returns, as I did in the OP, are not necessary in order for someone to use ABW. One can use fixed returns, which is precisely what VPW does (keep in mind that VPW is just one specific application of ABW).
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

AlohaJoe wrote: Sun Nov 07, 2021 9:55 pm We can use our spreadsheet's Goal Seek in combination with the PMT function to find out what expected return is implied by a different withdrawal. And by looking at that implied expected return, we can see how much risk we are taking by adding a floor at a certain level and the decide whether we are comfortable with it or not.
I think that's a great idea. Whatever withdrawal strategy one is using, whether it's SWR or variable with guardrails or anything else, use Goal Seek in ABW to back out what the return assumption is. There is a return assumption embedded in that withdrawal. Best to see what it is.
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Re: Amortization Based Withdrawal (ABW)

Post by HomerJ »

willthrill81 wrote: Mon Nov 08, 2021 8:51 am
Iconicus wrote: Mon Nov 08, 2021 8:41 am
willthrill81 wrote: Sun Nov 07, 2021 11:46 pm
HomerJ wrote: Sun Nov 07, 2021 10:39 pm
willthrill81 wrote: Wed Feb 27, 2019 4:47 pmthe CAPE on 1/1/2000 was 43.77, so the expected return for stocks over the next decade would be 1/43.77 or 2.3%.
Your very first assumption was junk. Garbage in, Garbage out.

1/CAPE is not science. It's a random fit to recent data.

I wish I had seen this thread 3 years ago so I could have saved 16 pages of posting.
Why don't you tell us what you really think Homer? :P

Everyone should know that any such forecast is imprecise. The actual returns of U.S. stocks were -2.7%, so 1/CAPE was actually overly optimistic for that specific period. But an advantage of this approach is that it's self-correcting. If your returns are higher than you expected, then you can withdraw more later or end with a larger portfolio than you planned for and vice versa.

ABW does not need 1/CAPE to work. You can use any forward return estimate you want. Check out the excellent post above by AlohaJoe to see alternative approaches.
I'm interested in seeing the alternatives approaches, but your link is incorrect (goes to the top of this thread's page 16, not the post you wanted it to). Please fix. Thank you.
No, it does go to AlohaJoe's post. He shows that dynamic returns, as I did in the OP, are not necessary in order for someone to use ABW. One can use fixed returns, which is precisely what VPW does (keep in mind that VPW is just one specific application of ABW).
Thank you for the clarification. My apologies for my tone...
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Amortization Based Withdrawal (ABW)

Post by willthrill81 »

HomerJ wrote: Mon Nov 08, 2021 9:51 am
willthrill81 wrote: Mon Nov 08, 2021 8:51 am
Iconicus wrote: Mon Nov 08, 2021 8:41 am
willthrill81 wrote: Sun Nov 07, 2021 11:46 pm
HomerJ wrote: Sun Nov 07, 2021 10:39 pm

Your very first assumption was junk. Garbage in, Garbage out.

1/CAPE is not science. It's a random fit to recent data.

I wish I had seen this thread 3 years ago so I could have saved 16 pages of posting.
Why don't you tell us what you really think Homer? :P

Everyone should know that any such forecast is imprecise. The actual returns of U.S. stocks were -2.7%, so 1/CAPE was actually overly optimistic for that specific period. But an advantage of this approach is that it's self-correcting. If your returns are higher than you expected, then you can withdraw more later or end with a larger portfolio than you planned for and vice versa.

ABW does not need 1/CAPE to work. You can use any forward return estimate you want. Check out the excellent post above by AlohaJoe to see alternative approaches.
I'm interested in seeing the alternatives approaches, but your link is incorrect (goes to the top of this thread's page 16, not the post you wanted it to). Please fix. Thank you.
No, it does go to AlohaJoe's post. He shows that dynamic returns, as I did in the OP, are not necessary in order for someone to use ABW. One can use fixed returns, which is precisely what VPW does (keep in mind that VPW is just one specific application of ABW).
Thank you for the clarification. My apologies for my tone...
No prob. :beer
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

Northern Flicker wrote: Sun Nov 07, 2021 11:53 pm I haven't read through the thread, so apologies if this is redundant, but a 30-year TIPS ladder with each TIPS purchased in sn smount to mature at the real spending need for the year so that the proceeds fund the year's expenses is an amortizing withdrawal of assets over 30 years.
That's right. The ABW calculator assumes a single return rate, so it may be a bit too crude for an actual ladder where you have different interest rates for different maturities. But the idea is the same, and the ABW calculator can provide a quick estimate of the payout. Below is a 30 year TIPS ladder assuming a real interest rate of -0.75%:

Image
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Re: Amortization Based Withdrawal (ABW)

Post by Northern Flicker »

The differing rate of return for different maturity terms on the ladder just drive differing present values at which to fund the ladder. The maturity value would be the amortized real withdrawal.
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

Northern Flicker wrote: Tue Nov 09, 2021 2:04 am The differing rate of return for different maturity terms on the ladder just drive differing present values at which to fund the ladder. The maturity value would be the amortized real withdrawal.
That's right.
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Re: Amortization Based Withdrawal (ABW)

Post by Wrench »

Ben Mathew wrote: Mon Nov 08, 2021 10:19 am
Northern Flicker wrote: Sun Nov 07, 2021 11:53 pm I haven't read through the thread, so apologies if this is redundant, but a 30-year TIPS ladder with each TIPS purchased in sn smount to mature at the real spending need for the year so that the proceeds fund the year's expenses is an amortizing withdrawal of assets over 30 years.
That's right. The ABW calculator assumes a single return rate, so it may be a bit too crude for an actual ladder where you have different interest rates for different maturities. But the idea is the same, and the ABW calculator can provide a quick estimate of the payout. Below is a 30 year TIPS ladder assuming a real interest rate of -0.75%:

Image
Quite reasonable as a first estimate, but for those unfamiliar with TIPS, there are no TIPS bonds available today for the years 2033 - 2039. That makes it a bit trickier if you want to build a 30 year ladder today. You have to wait a number of years to slowly fill out the ladder, or double up on the years prior to 2033, or post 2039. Alternatively, one could substitute iBonds for those years subject to the annual limits and when you started buying them.

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Re: Amortization Based Withdrawal (ABW)

Post by JasonFIRE »

Is the ABW method the same as siamond’s custom VPW in FI Calc?

If not, does anyone have a link to siamond’s custom VPW?

https://calculator.ficalc.app/

Many thanks.
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

JasonFIRE wrote: Sun Dec 05, 2021 5:01 pm Is the ABW method the same as siamond’s custom VPW in FI Calc?

If not, does anyone have a link to siamond’s custom VPW?

https://calculator.ficalc.app/

Many thanks.
Yes it is. You can find the link to Siamond's implementation in the ABW wiki under Savings portfolio focused approach.
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Re: Amortization Based Withdrawal (ABW)

Post by siamond »

Ben Mathew wrote: Sun Dec 05, 2021 5:14 pm
JasonFIRE wrote: Sun Dec 05, 2021 5:01 pm Is the ABW method the same as siamond’s custom VPW in FI Calc?

If not, does anyone have a link to siamond’s custom VPW?

https://calculator.ficalc.app/

Many thanks.
Yes it is. You can find the link to Siamond's implementation in the ABW wiki under Savings portfolio focused approach.
I wasn't aware of this FI Calc calculator. It's cool to see that the author used a few ideas I've discussed over the years (e.g. more flexibility on expected returns, terminal value and the optional use of a floor). I don't know how the author processed the additional income/withdrawal inputs though and if they are amortized over time as ABW does. It would be great if the author could chime in, actually!

About the expected returns, the FI Calc backtesting logic clearly assumes a fixed rate over the retirement period though. While ABW strongly suggests to use a value which is periodically re-assessed (e.g. once a year), depending on market conditions. This is a key mechanism to mitigate the short-term and long-term variability of withdrawals and spending budget and make one's retirement life less of a roller coaster directly driven by market vagaries. Historical CAPE and bond yields can be found for the US market (while it's much harder to find for other market segments), so one can derive corresponding backtesting (which I did myself years ago through spreadsheet means). It would be cool if a nifty calculator like FI Calc would include such option for periodically adjusted expected returns.
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Re: Amortization Based Withdrawal (ABW)

Post by JasonFIRE »

siamond wrote: Mon Dec 06, 2021 11:33 am I don't know how the author processed the additional income/withdrawal inputs though and if they are amortized over time as ABW does. It would be great if the author could chime in, actually!
Yeah, the tool is nifty as heck. I agree that some more explanation for the calculations would be helpful.
siamond wrote: Mon Dec 06, 2021 11:33 am It would be cool if a nifty calculator like FI Calc would include such option for periodically adjusted expected returns.
In FI Calc's documentation, it says Siamond's method (CVPW) is the exact same thing as VPW, except for the ability to enter a custom rate.

FI Calc and cFIREsim are extremely helpful for me. I dream about a Bogleheads owned and managed version with full transparency into all data and calculations.
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Re: Amortization Based Withdrawal (ABW)

Post by LadyGeek »

siamond wrote: Mon Dec 06, 2021 11:33 am I wasn't aware of this FI Calc calculator. It's cool to see that the author used a few ideas I've discussed over the years (e.g. more flexibility on expected returns, terminal value and the optional use of a floor). I don't know how the author processed the additional income/withdrawal inputs though and if they are amortized over time as ABW does. It would be great if the author could chime in, actually!

About the expected returns, the FI Calc backtesting logic clearly assumes a fixed rate over the retirement period though. While ABW strongly suggests to use a value which is periodically re-assessed (e.g. once a year), depending on market conditions. This is a key mechanism to mitigate the short-term and long-term variability of withdrawals and spending budget and make one's retirement life less of a roller coaster directly driven by market vagaries. Historical CAPE and bond yields can be found for the US market (while it's much harder to find for other market segments), so one can derive corresponding backtesting (which I did myself years ago through spreadsheet means). It would be cool if a nifty calculator like FI Calc would include such option for periodically adjusted expected returns.
The developer demonstrated the calculator as part of the Chicago virtual Bogleheads chapter meeting on May 5, 2021.

It's on YouTube here: Bogleheads® Chapter Series - FI Calc Demonstration
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

siamond wrote: Mon Dec 06, 2021 11:33 am
Ben Mathew wrote: Sun Dec 05, 2021 5:14 pm
JasonFIRE wrote: Sun Dec 05, 2021 5:01 pm Is the ABW method the same as siamond’s custom VPW in FI Calc?

If not, does anyone have a link to siamond’s custom VPW?

https://calculator.ficalc.app/

Many thanks.
Yes it is. You can find the link to Siamond's implementation in the ABW wiki under Savings portfolio focused approach.
I wasn't aware of this FI Calc calculator. It's cool to see that the author used a few ideas I've discussed over the years (e.g. more flexibility on expected returns, terminal value and the optional use of a floor). I don't know how the author processed the additional income/withdrawal inputs though and if they are amortized over time as ABW does. It would be great if the author could chime in, actually!

About the expected returns, the FI Calc backtesting logic clearly assumes a fixed rate over the retirement period though. While ABW strongly suggests to use a value which is periodically re-assessed (e.g. once a year), depending on market conditions. This is a key mechanism to mitigate the short-term and long-term variability of withdrawals and spending budget and make one's retirement life less of a roller coaster directly driven by market vagaries. Historical CAPE and bond yields can be found for the US market (while it's much harder to find for other market segments), so one can derive corresponding backtesting (which I did myself years ago through spreadsheet means). It would be cool if a nifty calculator like FI Calc would include such option for periodically adjusted expected returns.
Sorry. I assumed the FI Calc creator had communicated with you and implemented your strategy. I don't know if the implemented strategy is the same as yours or not. Clearly, the intent was to. But whether it was implemented the same way is probably worth checking.
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Re: Amortization Based Withdrawal (ABW)

Post by siamond »

JasonFIRE wrote: Mon Dec 06, 2021 11:58 am In FI Calc's documentation, it says Siamond's method (CVPW) is the exact same thing as VPW, except for the ability to enter a custom rate.

FI Calc and cFIREsim are extremely helpful for me. I dream about a Bogleheads owned and managed version with full transparency into all data and calculations.
Well, my views on the topic evolved over the years and through the practical experience of using such a 'custom' method during my own early retirement, backtesting at length and studying various use cases with fellow Bogleheads from the Metro-Boston chapter. ABW (the 'savings portfolio' approach) represents my current thinking, while I've been using for several years now. I suspect the FI Calc author intersected some less well formed thoughts a while ago. Thank you for the pointer, this should lead to a fruitful discussion. Appreciated.
LadyGeek wrote: Mon Dec 06, 2021 12:00 pmThe developer demonstrated the calculator as part of the Chicago virtual Bogleheads chapter meeting on May 5, 2021.

It's on YouTube here: Bogleheads® Chapter Series - FI Calc Demonstration
Ah thank you, I was wondering who was the author and how to contact him. Now I know. Will sync up.

Sorry, I've been a bit out of touch over the past year or so, been busy with other stuff in my early retired life!
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Re: Amortization Based Withdrawal (ABW)

Post by KarenC »

LadyGeek wrote: Mon Dec 06, 2021 12:00 pm The developer demonstrated the calculator as part of the Chicago virtual Bogleheads chapter meeting on May 5, 2021.

It's on YouTube here: Bogleheads® Chapter Series - FI Calc Demonstration
Anybody else hearing a loud music overlay on that video starting about 3 minutes in?
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Re: Amortization Based Withdrawal (ABW)

Post by JasonFIRE »

KarenC wrote: Mon Dec 06, 2021 2:05 pm
LadyGeek wrote: Mon Dec 06, 2021 12:00 pm The developer demonstrated the calculator as part of the Chicago virtual Bogleheads chapter meeting on May 5, 2021.

It's on YouTube here: Bogleheads® Chapter Series - FI Calc Demonstration
Anybody else hearing a loud music overlay on that video starting about 3 minutes in?
Yes. But, after fast forwarding a bit, it stopped and has not returned.

While I am here, thanks Ben and Siamond for your replies. And, thanks Siamond for replying to my questions on the TVM thread. Lots to think about.
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Re: Amortization Based Withdrawal (ABW)

Post by siamond »

JasonFIRE wrote: Sun Dec 05, 2021 5:01 pm Is the ABW method the same as siamond’s custom VPW in FI Calc?
Ben Mathew wrote: Mon Dec 06, 2021 12:02 pm
siamond wrote: Mon Dec 06, 2021 11:33 am I wasn't aware of this FI Calc calculator. It's cool to see that the author used a few ideas I've discussed over the years (e.g. more flexibility on expected returns, terminal value and the optional use of a floor). I don't know how the author processed the additional income/withdrawal inputs though and if they are amortized over time as ABW does. It would be great if the author could chime in, actually! [...]
Sorry. I assumed the FI Calc creator had communicated with you and implemented your strategy. I don't know if the implemented strategy is the same as yours or not. Clearly, the intent was to. But whether it was implemented the same way is probably worth checking.
After listening to some of the video Ladygeek provided, the 'Custom VPW' method is essentially what its title implies, opening a few PMT parameters to customization, which is something I've been indeed been advocating in the past, among other things. It does map to one simplified form of ABW, but doesn't support amortization for extra income/withdrawal, nor periodically updated expected returns, etc. The extra income/withdrawal model in FI Calc is rather bizarre if you ask me, but this would be better discussed in another thread (cFIREsim also has issues in this respect).

In all fairness, ABW, by virtue of being a fully open model, can be used in many different ways. And some aspects of it are a bit tricky to backtest, by lack of historical data, notably if the choices for Asset Allocation are made more flexible. FI Calc is clearly a work in progress and a neat tool with its mobile-friendly interface. But to come back to the original question, Custom VPW in FI Calc isn't a full implementation of ABW and it would require non-negligible work to map one to the other.
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Re: Amortization Based Withdrawal (ABW)

Post by jamesplease »

Hey all – creator of FI Calc here. I'd be happy to answer any questions anyone has about Custom VPW within FI Calc. I'm caught up with the conversation so far, so I'll drop in a couple of notes/answers to questions below.
JasonFIRE wrote: Sun Dec 05, 2021 5:01 pm Is the ABW method the same as siamond’s custom VPW in FI Calc?
A bit of history on the "Custom VPW" strategy in FI Calc: in early 2020 I was researching VPW on the Bogleheads forum so that I could confidently introduce it into FI Calc. I looked up the earliest threads where VPW was originally proposed, and if I'm remembering right folks in that thread had some heated debates on whether or not to make some of the VPW "inner values" configurable or not. Because it seemed like both sides felt so strongly about their point of view, I decided to add two VPWs into FI Calc: the standard "VPW" and a second "Custom VPW". These were old conversations that I was referencing, and I don't recall ABW coming up in those threads.. A quick search suggests the threads I was referencing started in 2013, while this thread for ABW was created in 2019, so it might be that ABW didn't exist at the time the conversations I was referencing were happening. This was nearly 2 years ago now, so I may also be misremembering some of the details.

I'm also not sure if the name "Custom VPW" was ever written here by anyone or if it was a name I came up for FI Calc.

Either way, it's not a surprise to me if there are some key differences between Custom VPW and ABW given that I haven't explicitly researched ABW before. I would love to get a more faithful ABW within FI Calc if it's feasible, though.
siamond wrote: Mon Dec 06, 2021 11:33 am I don't know how the author processed the additional income/withdrawal inputs though and if they are amortized over time as ABW does. It would be great if the author could chime in, actually!
Additional income/withdrawals in FI Calc aren't amortized as you describe, although I think amortizing them is a neat approach. I've jotted a note down to investigate what it would take to introduce that logic into FI Calc.
siamond wrote: Mon Dec 06, 2021 11:33 am About the expected returns, the FI Calc backtesting logic clearly assumes a fixed rate over the retirement period though. While ABW strongly suggests to use a value which is periodically re-assessed (e.g. once a year), depending on market conditions. ... It would be cool if a nifty calculator like FI Calc would include such option for periodically adjusted expected returns.
This is a great idea, and as I mentioned above I'd love to have a more accurate representation of ABW within FI Calc. I'll need to take a closer look at ABW to see what the algorithm or guidelines are for re-assessing the value based on market conditions.
JasonFIRE wrote: Mon Dec 06, 2021 11:58 am Yeah, the tool is nifty as heck. I agree that some more explanation for the calculations would be helpful.
Thanks for the kind words! My highest priority to-do list item is improving the documentation around the algorithm and calculations, but I can't commit to a date when that will be completed.
KarenC wrote: Mon Dec 06, 2021 2:05 pm Anybody else hearing a loud music overlay on that video starting about 3 minutes in?
I hear it, too! I'm not entirely sure why that was overlaid. As someone else mentioned in this thread it does go away after a few minutes, but it's strange that it blocks out some of the content. Very peculiar!
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Re: Amortization Based Withdrawal (ABW)

Post by LadyGeek »

I confirm that jamesplease is the developer of FI Calc. Welcome!
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Re: Amortization Based Withdrawal (ABW)

Post by fourwheelcycle »

A key finance element of Type A life care contract CCRCs is that each resident's entrance fee is placed in a restricted ABW fund to support future operation of the CCRC. The CCRC's financial model only works if residents' apartments do, on average, become available for the next generation of residents, and new entrance fees, around the time of their actuarial life expectancy.

A common dark humor comment at CCRCs is to point out "Remember, we each have a responsibility to fulfill our actuarial obligation to the community."
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

jamesplease wrote: Wed Dec 08, 2021 11:46 pm Hey all – creator of FI Calc here.
Welcome to Bogleheads!
jamesplease wrote: Wed Dec 08, 2021 11:46 pm A bit of history on the "Custom VPW" strategy in FI Calc: in early 2020 I was researching VPW on the Bogleheads forum so that I could confidently introduce it into FI Calc. I looked up the earliest threads where VPW was originally proposed, and if I'm remembering right folks in that thread had some heated debates on whether or not to make some of the VPW "inner values" configurable or not. Because it seemed like both sides felt so strongly about their point of view, I decided to add two VPWs into FI Calc: the standard "VPW" and a second "Custom VPW". These were old conversations that I was referencing, and I don't recall ABW coming up in those threads.. A quick search suggests the threads I was referencing started in 2013, while this thread for ABW was created in 2019, so it might be that ABW didn't exist at the time the conversations I was referencing were happening. This was nearly 2 years ago now, so I may also be misremembering some of the details.
I'm glad that you added the option to customize future expected return. I think it's necessary for good planning. But to complete the circle, you'll also want to modify the historical returns being used and make it match expected returns. If a user assumes that stocks will return 4% going forward, it doesn't make sense to take that input and then simulate withdrawals using raw historical stock returns that averaged 7%. ABW simulations using 4% real will look suboptimal, but that's because of the 7% returns being simulated. The TPAW planner spreadsheets located in the TPAW wiki provide a way to adjust historical returns to match expected returns, in case you're interested in using that approach.

You may also want to look into incorporating nonzero withdrawal growth (g) into the calculator. That is an important parameter of financial planning (corresponding to precautionary savings), and it would be a shame to hardcode it to 0%.

You are currently displaying a withdrawal range across all of retirement. I think it's much more informative to break it down and display withdrawal ranges for each age. The TPAW planning spreadsheets do this, if you want to see an example.
jamesplease wrote: Wed Dec 08, 2021 11:46 pm Additional income/withdrawals in FI Calc aren't amortized as you describe, although I think amortizing them is a neat approach. I've jotted a note down to investigate what it would take to introduce that logic into FI Calc.
You've probably seen that there was a long discussion in this thread about the right way to do this about a year ago. I don't think anyone wants to repeat that debate. Please do read that discussion carefully and be aware of the issues that come up. The concepts involved are not trivial, and there is much disagreement about the right way to do it. The extra income and expenses section of the ABW wiki provides a summary of the different approaches.
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Re: Amortization Based Withdrawal (ABW)

Post by balbrec2 »

Both strategies have merit. Almost always, one will allow a higher withdrawal than the other.
Why not take an (ABW +VPW)/2 approach?

just thought
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Re: Amortization Based Withdrawal (ABW)

Post by willthrill81 »

balbrec2 wrote: Fri Jan 21, 2022 4:04 pm Both strategies have merit. Almost always, one will allow a higher withdrawal than the other.
Why not take an (ABW +VPW)/2 approach?

just thought
I see no point in trying to merge the two. VPW is based on 'preset' assumptions, whereas you can change those to whatever you want with ABW.
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Re: Amortization Based Withdrawal (ABW)

Post by 59Gibson »

AlohaJoe wrote: Mon Nov 08, 2021 4:43 am
AlohaJoe wrote: Sun Nov 07, 2021 9:55 pm Because actually nothing I did above actually has anything to do with ABW per se. You could apply exactly the same analysis to SWR withdrawals or Guyton-Klinger withdrawals or McClung's EM or anything else that has some kind of floor or guardrails. Because when SWR tells you to keep withdrawing $40,000 after a 40% market crash, it is also making an implicit expected return forecast. But now you can open up the black box and see if you're comfortable with its assumptions.
And just as an example of how this looks in practice, let's take someone who followed the 4% rule and retired in 1972, as a mirror image to our variable withdrawal example above. They blindly increase withdrawals by CPI, ignoring the value of their portfolio. This same goal seek analysis tells us what implied expected return the SWR is implicitly expecting at each point in time in order for everything to work out.

Code: Select all

ER      Yrs      Withdrawal
1.31%	30	-$40,000.00
2.91%	29	-$43,482.35
5.94%	28	-$48,847.06
4.85%	27	-$52,235.29
3.82%	26	-$54,776.47
5.04%	25	-$58,447.06
5.98%	24	-$63,717.65
6.32%	23	-$72,188.24
6.21%	22	-$81,223.53
8.25%	21	-$88,470.59
6.80%	20	-$91,858.82
6.15%	19	-$95,341.18
6.61%	18	-$99,105.88
4.21%	17	-$102,870.59
We can see that SWR starts out extremely conservative. Just 1.31% expected return. (That's how it turns 25 years of savings into a 30 year retirement.) But it needs to continually ramp up the expected return in order to compensate for the falling portfolio value. It peaks at an 8.25% expected return (for the next 21 years!) and spends 7 years at or above a 6% expected return. (Remember, this is for a 60/40 portfolio.) I imagine that many self-avowed conservative Bogleheads would probably be aghast at the idea of predicating their retirement on expecting such high returns but that's precisely what SWR requires in order to maintain its spending levels.

Of course, in this case it basically worked out thanks to mean reversion and the bull market of the 1980s.
Yes the expected returns are pretty shocking and the fact that within 9 yrs the nominal w/d amount doubled! Then a complete reversal 1981-85 ER nearly cut in half..big time gains. This is good stuff, informative thread
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

The ABW wiki states under Asset Allocation > Fixed asset allocation:
The amortization formula assumes an expected rate of return on the portfolio which stays consistent over the retirement period. This is easier to justify if the retiree plans to maintain a fixed asset allocation (AA). If instead the retiree is planning to change the AA over time (e.g. glide down from 60/40 to 30/70 over the course of the retirement), then the expected return will display more variations over time, skewing the amortization computation. The calculator provided here is not designed for such case. Entering the average expected return in the calculator may provide a rough estimate, but due to the potential for significant errors, more precise modeling is recommended.
To enable ABW for asset allocations that are not fixed, I have added the formula for amortizing with non-constant returns to the ABW formulas wiki:

Allowing for non-constant expected returns

I added a link to it in the ABW wiki at the end of the above quoted paragraph:
If you want to model a strategy with varying asset allocation, see Allowing for non-constant expected returns for the amortization formula with non-constant returns.
If PMT in Excel or some other such function can be used to do this, let me know and I'll add it to the formulas wiki.
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Re: Amortization Based Withdrawal (ABW)

Post by Ben Mathew »

The online TPAW Planner now supports a "savings portfolio" strategy in addition to the default "total portfolio" strategy.

In the savings portfolio approach, the present value of future savings and retirement income is not counted as a bond. You directly specify the asset allocation of the savings portfolio. Income during retirement such as Social Security and pensions simply reduce the withdrawals required from the savings portfolio during the years in which you receive the income. Conversely, an extra expense in any year increases the withdrawal required from the savings portfolio for that year. The savings portfolio is amortized to meet the net withdrawal requirements.

See post in the TPAW thread.
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Question to experts about the ABW method

Post by coffeeblack »

[Thread merged into here --admin LadyGeek]

After reading the ABW method and doing some calculations I have a question about withdrawal growth (g).

So it seems you can put 0 for constant growth, a negative or positive number for more or less withdrawal at the start and end.

Is the positive and negative (g) after inflation adjustment.

For example:
Let say we take 40K per year set to a -1, So the next year you reduce the overall amount you take out. Is that overall reduced amount inflation adjusted?
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Re: Amortization Based Withdrawal (ABW)

Post by LadyGeek »

I merged coffeeblack's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: Question to experts about the ABW method

Post by Ben Mathew »

coffeeblack wrote: Thu Mar 30, 2023 11:27 am After reading the ABW method and doing some calculations I have a question about withdrawal growth (g).

So it seems you can put 0 for constant growth, a negative or positive number for more or less withdrawal at the start and end.

Is the positive and negative (g) after inflation adjustment.

For example:
Let say we take 40K per year set to a -1, So the next year you reduce the overall amount you take out. Is that overall reduced amount inflation adjusted?
The analysis can be done in real or nominal dollars. From the ABW wiki > Real vs nominal rate of return:
If a real (inflation adjusted) rate of return is used, the withdrawal strategy becomes automatically adjusted for inflation. In the above example, if the real rate of return is 3%, the retiree will be able to take out $44,470 (inflation adjusted) each year. If instead, the retiree enters a nominal interest rate of 5%, the calculator says that they can take out $60,434 per year. But that's in nominal dollars, so real consumption will decline each year by the inflation rate. In practice, it is strongly recommended to use a real rate of return.
As stated in the wiki, it's recommended that the analysis be done real dollars and real rates of return. Then r would be the real rate of return and g would be the desired real growth rate of withdrawals.

But if you wanted to do the analysis in nominal dollars, then r would be the nominal rate of return and g would be the desired growth rate of nominal withdrawals.
Last edited by Ben Mathew on Thu Mar 30, 2023 7:07 pm, edited 1 time in total.
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Re: Question to experts about the ABW method

Post by coffeeblack »

if the real rate of return is 3%, the retiree will be able to take out $44,470 (inflation adjusted) each year. If instead, the retiree enters a nominal interest rate of 5%, the calculator says that they can take out $60,434 per year. But that's in nominal dollars, so real consumption will decline each year by the inflation rate.
So what I didn't understand is if we are using real rates of return and it is adjusting for inflation, then if we set the (g) at -1 or -1.5, it would still adjust the reduced value by inflation. In other words the inflation adjusted feature would be left alone while the (g) would change.

Also, it seems this form of WR has to be done annually and is based on portfolio value at the time of the calculation. So if the portfolio drops 10% then you WR would be less as well. It seems it would make sense to have less in stocks and more in bonds and other products that generate a more stable income/interest. The lower AA could lower your real return.
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Re: Question to experts about the ABW method

Post by Ben Mathew »

coffeeblack wrote: Thu Mar 30, 2023 5:43 pm
if the real rate of return is 3%, the retiree will be able to take out $44,470 (inflation adjusted) each year. If instead, the retiree enters a nominal interest rate of 5%, the calculator says that they can take out $60,434 per year. But that's in nominal dollars, so real consumption will decline each year by the inflation rate.
So what I didn't understand is if we are using real rates of return and it is adjusting for inflation, then if we set the (g) at -1 or -1.5, it would still adjust the reduced value by inflation. In other words the inflation adjusted feature would be left alone while the (g) would change.
if you are using real rates of return, then you don't need to include the inflation rate in g. Suppose real return is 3%, inflation is 2% and nominal return is 5%. Then if you want to hold expected real withdrawals constant, you can enter either

r=3%, g= 0% (if you are doing the analysis in real dollars)

or

r=5%, g= 2% (f you are doing the analysis in nominal dollars)

But if you are holding a risky portfolio, you may want to be cautious and reduce early retirement withdrawals to be safer in late retirement ("precautionary savings"). This would call for increasing g (> 0% in the real dollars analysis, and > 2% in the nominal dollars analysis). Conversely, if you want to consume more in early retirement because that's when you're healthier and more active, that would call for reducing g (< 0% in the real dollars analysis, and < 2% in the nominal dollars analysis). g allows you control the relative expected spending between early and late retirement years.
coffeeblack wrote: Thu Mar 30, 2023 5:43 pm Also, it seems this form of WR has to be done annually and is based on portfolio value at the time of the calculation. So if the portfolio drops 10% then you WR would be less as well.
If the portfolio drops 10% and expected returns don't change, then yes, withdrawals will drop by 10%. But if expected returns rise (as is typically the case when expected returns are based on valuations), then withdrawals will drop by less than 10%.
coffeeblack wrote: Thu Mar 30, 2023 5:43 pm It seems it would make sense to have less in stocks and more in bonds and other products that generate a more stable income/interest. The lower AA could lower your real return.
Yes, a more bond heavy allocation will generate more stable withdrawals, though high bond allocations beyond about 30/70 will require duration matching. A 100% duration matched bond allocation (e.g. a TIPS ladder) will generate fixed withdrawals with no volatility (ignoring uncertainty about life expectancy).

And yes, stability of withdrawals is purchased at the cost of lower expected withdrawals due to the lower expected return from bonds.
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Re: Question to experts about the ABW method

Post by coffeeblack »

Ben Mathew wrote: Thu Mar 30, 2023 6:33 pm
coffeeblack wrote: Thu Mar 30, 2023 5:43 pm
if the real rate of return is 3%, the retiree will be able to take out $44,470 (inflation adjusted) each year. If instead, the retiree enters a nominal interest rate of 5%, the calculator says that they can take out $60,434 per year. But that's in nominal dollars, so real consumption will decline each year by the inflation rate.
So what I didn't understand is if we are using real rates of return and it is adjusting for inflation, then if we set the (g) at -1 or -1.5, it would still adjust the reduced value by inflation. In other words the inflation adjusted feature would be left alone while the (g) would change.
if you are using real rates of return, then you don't need to include the inflation rate in g. Suppose real return is 3%, inflation is 2% and nominal return is 5%. Then if you want to hold expected real withdrawals constant, you can enter either

r=3%, g= 0% (if you are doing the analysis in real dollars)

or

r=5%, g= 2% (f you are doing the analysis in nominal dollars)

But if you are holding a risky portfolio, you may want to be cautious and reduce early retirement withdrawals to be safer in late retirement ("precautionary savings"). This would call for increasing g (> 0% in the real dollars analysis, and > 2% in the nominal dollars analysis). Conversely, if you want to consume more in early retirement because that's when you're healthier and more active, that would call for reducing g (< 0% in the real dollars analysis, and < 2% in the nominal dollars analysis). g allows you control the relative expected spending between early and late retirement years.
coffeeblack wrote: Thu Mar 30, 2023 5:43 pm Also, it seems this form of WR has to be done annually and is based on portfolio value at the time of the calculation. So if the portfolio drops 10% then you WR would be less as well.
If the portfolio drops 10% and expected returns don't change, then yes, withdrawals will drop by 10%. But if expected returns rise (as is typically the case when expected returns are based on valuations), then withdrawals will drop by less than 10%.
coffeeblack wrote: Thu Mar 30, 2023 5:43 pm It seems it would make sense to have less in stocks and more in bonds and other products that generate a more stable income/interest. The lower AA could lower your real return.
Yes, a more bond heavy allocation will generate more stable withdrawals, though high bond allocations beyond about 30/70 will require duration matching. A 100% duration matched bond allocation (e.g. a TIPS ladder) will generate fixed withdrawals with no volatility (ignoring uncertainty about life expectancy).

And yes, stability of withdrawals is purchased at the cost of lower expected withdrawals due to the lower expected return from bonds.
:sharebeer
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