Variable Percentage Withdrawal (VPW)

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nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Thu Aug 04, 2022 5:30 pm To help readers seeing the harshness of feeding the initial "Portfolio Balance After Loss" (red cell) as "Portfolio Balance" (yellow input cell) in the retirement worksheet, here is a simulation of what this implies in the worksheet's static model (where returns are constant, except for initial losses).

Two hypothetical retirees of age 65 each have a $1,000,000 60/40 stocks/bonds portfolio from which they'll take withdrawal (in addition to receiving Social Security, which isn't shown in the simulation). Both die on their 88th birthday. The first retiree uses VPW to determine withdrawal amounts. The second retiree has full faith in the 4% SWR method and, consequently, withdraws $40,000 from the portfolio regardless of portfolio performance.
Social Security changes the equation...I guess we assume neither has it.
Just before the first withdrawal, stocks drop -75% (two -50% drops with rebalancing in between). Given the 60/40 allocation, this means two consecutive -30% portfolio losses, resulting into a ($1.000,000 X 70% X 70%) = $490,000 portfolio (before withdrawal).
I guess rebalance bands in this scenario suck lol...
The VPW retiree adjusts the initial withdrawal accordingly. The SWR retiree, on the other hand, fully trusts the portfolio to recover and 4% SWR to work "as it did in the past" (in some markets)...
If you haven't taken your first withdrawal you likely wouldn't use the original $1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The VPW retiree gets a little more than $24,000/year and leaves behind almost quarter of a million dollars. The SWR retiree gets $40,000/year for the first 15 years, a little less during the 16th year, and then gets $0 for the remaining 7 years before death at age 88, having depleted the portfolio at age 80.
Well, yes. You're withdrawing far above SWR because of the way you set up the scenario.
This test is really harsh, much worse than a U.S. Great Depression back test. I think (I'm not sure; it's been many years since I've read about it) that it was a Japanese investor who faced portfolio depletion in as little as 16 years using 4% SWR.
Well, I guess it's success if you can live on $24,000 a year and stack the deck against SWR with a very strange initial starting condition...
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willthrill81
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Re: Variable Percentage Withdrawal (VPW)

Post by willthrill81 »

nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original $1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The fatal flaw, IMHO, of all these comparisons to a 'SWR' is that they assume that someone is deciding on day 1 of retirement how much they will withdraw from their portfolio in inflation-adjusted dollars every year for the next 30 years without ever glancing at their portfolio. Literally nobody does that, nor should they as that would be utterly ridiculous and foolish.

Rather, everyone makes adjustments to their withdrawals as they go, especially when their portfolio is suffering. Nobody is blithely draining their portfolio because of robotic adherence to predetermined 'rules'.

In hindsight, the SWR is a reasonably good metric to indicate how much retirement income could have been withdrawn from an invested portfolio. But it's not a withdrawal strategy that anyone is using, nor should anyone do so.
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nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Thu Aug 04, 2022 5:53 pm Before anybody asks, here's what would have happened if the 4% SWR retiree of this post had decided, instead, to withdraw according the initial after-loss portfolio balance:

Image

Without any surprise, this SWR retiree who failed to trust in the 4% SWR got less than $20,000/year, that's -20% less than the VPW retiree, and died with more than $400,000, almost as much as the initial after-loss $490,000 portfolio balance.
$24K vs $19.6K is an improvement...and VPW tends to get to withdraw more.

This isn't a failure to trust SWR but correctly apply it. I'm also not sure you can assume that a SWR developed through backtesting historical data works in artificial scenarios.

You certainly can compute a SWR for any scenario though...if the worst historical case was a 75% drop followed by 3.76% constant returns over the next 20 years the computed SWR would provide you the largest WR for that scenario as the worst case.
SnowBog
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Re: [YouTube] Rob Berger's opinion of Variable Percentage Withdrawal (VPW)

Post by SnowBog »

nigel_ht wrote: Thu Aug 04, 2022 6:13 pm
SnowBog wrote: Thu Aug 04, 2022 3:52 pm Except edge cases (like the 1966 example for 4% SWR, where again it was more likely you'd be dead than broke), nearly all of these retirement methods are going to work out just fine the vast majority of the time. You are just making trade-offs in the assumptions you prefer and the risks you are trying to manage.
Lol, in any year but 2022 considering 1966 as a remote edge case would likely be accepted without comment...
Maybe "edge case" was the wrong choice... But I used 1966 as that is what the recent YouTube video critiquing VPW used. And I think its notable that the oft cited "4% rule" failed while VPW didn't (again with the expectation that the retiree could scale back their expenses).
nigel_ht wrote: Thu Aug 04, 2022 6:13 pm
SnowBog wrote: Thu Aug 04, 2022 3:52 pm Likewise, if we are able to, I'd much rather give to our heirs/charities while we are alive then to leave them a big pile of unspent cash they get when we die (which may be far less impactful on their lives at that point in time).
That's up to you but the step up in basis is a huge benefit.
Depends on where your assets are when you die...

Instead of working until it's impossible for us to ever fail... We are looking at the possibility of retiring in our early 50's. That gives us maybe 18 years of "no income" years (delayed pensions and social security), giving us options of doing TGH in the 0% bracket and/or aggressive Roth conversions (in the lowest tax brackets we'll likely see the rest of our lives).

Doing so we'll shift from what's currently a roughly 50% taxable and 50% tax-advantaged balance, to what I'm projecting will be closer to 0% taxable, 20% tax-deferred, and 80% Roth by the time we are 70, and moving towards 100% Roth as RMD's deplete the tax-deferred.

As such, other than on our house, there really won't be any "step-up" in basis for our heirs. So that's not really a factor for us...

But I should also add that our goal is not [currently] to leave a sizable inheritance for our heirs. It's highly likely we will, but not our goal. If it were, I might reconsider "ear marking" some of the taxable holdings for such a purpose - to maximize the step-up in basis. But doing so also carries the added risk that the step-up in basis continues to exist for the next 30+ years...

And again, VPW works nicely for us in this model. It accounts for our delayed pensions and social security, and guides us in how much we can spend (including taxes which will gate our TGH and/or Roth conversions) in those early ("no income") retirement years, and adjusts as our portfolio grows or shrinks with the markets, as well as when our individual income streams start kicking in.

I've yet to have someone explain in simple terms that my non-financially inclined spouse could follow how we'd use a different withdrawal method... (Other than the "just wing it" method... :wink: )
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Re: [YouTube] Rob Berger's opinion of Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

SnowBog wrote: Thu Aug 04, 2022 7:22 pm I've yet to have someone explain in simple terms that my non-financially inclined spouse could follow how we'd use a different withdrawal method... (Other than the "just wing it" method... :wink: )
Well, you simply need to save enough money to say "Honey, don't worry about it...every year make sure you log in and push this button to automagically rebalance the portfolio. It's set up to put dividends into our bank account. Just spend that."

VTI dividend yield is like 1.46%. That's $73K from a $5M VTI stash.

Easy peasy to manage. You just need a lot of money...
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

willthrill81 wrote: Thu Aug 04, 2022 6:58 pm
nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original $1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The fatal flaw, IMHO, of all these comparisons to a 'SWR' is that they assume that someone is deciding on day 1 of retirement how much they will withdraw from their portfolio in inflation-adjusted dollars every year for the next 30 years without ever glancing at their portfolio. Literally nobody does that, nor should they as that would be utterly ridiculous and foolish.

Rather, everyone makes adjustments to their withdrawals as they go, especially when their portfolio is suffering. Nobody is blithely draining their portfolio because of robotic adherence to predetermined 'rules'.

In hindsight, the SWR is a reasonably good metric to indicate how much retirement income could have been withdrawn from an invested portfolio. But it's not a withdrawal strategy that anyone is using, nor should anyone do so.
SWR gives you a reasonably good planning metric to minimize the need to derail your early retirement plans if SORR hits. Even more so if you build in contingency and management reserves into your SWR planning process.

Variable methods, by their nature, will cut back spending during downturns and most of the time it won't be necessary to do so.

It's true that you won't know until much later if you happen to be in a worse than historical worst case for a while...so you have to choose where you accept increased risk.

So to me the outcomes are this:

SORR hits.

SWR allows me to keep my early retirement plans. If it's worse than the historical worst case and my management reserve can't cover it...then I have to re-plan the remainder of the retirement once I realize its worse than the historical worst case. But this is the less likely outcome.

Variable methods probably require that I scale back. The majority of the time the outcome is not as bad as the historical worst case so I've unnecessarily scaled back and lost a few of my healthier years not doing stuff that I planned.

SORR doesn't hit.

SWR allows me to keep my early retirement plans.

Variable methods would have allowed me to spend even more...which would be nice but if I'm satisfied with my SWR based spending plans...eh...I'd rather guard against the SORR scenario.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original $1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The worksheet implements a slightly-worse than worst possible sequence of returns for the loss by making it happen just before the first withdrawal, instead of just after.

A slightly-less harsh test would be to make the loss happen just after the first withdrawal:

Image

This time, the VPW retiree gets additional money in the first year, but the same withdrawal amount as last time for all other years (dying at age 88 with the same portfolio balance as last time, too).

The SWR retiree gets $40,000 for 16 years, slightly less for the 17th year, and $0 for the remaining 6 years, dying at age 88 having depleted the portfolio years earlier at age 81.

The previous test was slightly harsher.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Thu Aug 04, 2022 8:22 pm
nigel_ht wrote: Thu Aug 04, 2022 6:50 pm If you haven't taken your first withdrawal you likely wouldn't use the original $1M as your starting value...this is a really odd way to implement this. Why does the VPW retiree get to adjust and not the SWR retiree?
The VPW worksheet implements a slightly-worse than worst possible sequence of returns for the -75% stock loss by making it happen just before the first withdrawal, instead of just after.

A slightly-less harsh test would be to make the loss happen just after the first withdrawal:

Image
You have a math error...if you withdraw $49.966 the first year then you will not end up with $483,020 on year two.

You end up with $950,034. Which then ends up as 465,516.66.

With a 5.1% WR that leaves you with $23,741,35 available year 2.

This means it's harder, not easier for VPW to make the crash happen just after you take out money for the first year. It's a wash for SWR.
This time, the VPW retiree gets additional money in the first year, but the same withdrawal amount as last time for all other years (dying at age 88 with the same portfolio balance as last time, too).
Like I said, if you can live on $24K a year that's great and you are assuming inflation is 0%. If you can't live on $24K a year then you're screwed on year 2.

Your flexibility test isn't based on a 75% reduction but a 50% one. A VPW user with the minimum required flexibility has a spending floor of around $35,000. Which means they run out of money at age 84...

If the minimum spend is $24K then if the SWR user capitulates before age 72 (seven years) the money also lasts until age 88.

With 2% inflation the last full year of payout for SWR is age 77. For VPW your spending power is down to $14,917.59 by age 88.
With 2% deflation the last full year of payout for SWR is age 84. For VPW your spending power is up to $37,437.17 by age 88.

With 3$ inflation the last full year of payout for SWR is age 76. For VPW your spending power is down to $11,782.81 by age 88.
With 3% deflation the last full year of payout for SWR is age 88. For VPW your spending power is up to $46,854.92 by age 88.
The SWR retiree gets $40,000 for 16 years, slightly less for the 17th year, and $0 for the remaining 6 years, dying at age 88 having depleted the portfolio years earlier at age 81.

The previous test was slightly harsher.
Again,it's not slightly harsher...it's actually easier for VPW because you get to change to a lower WR earlier. SWR always takes out $40K regardless.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

nigel_ht wrote: Thu Aug 04, 2022 9:14 pm You have a math error...if you withdraw $49.966 the first year then you will not end up with $483,020 on year two.

You end up with $950,034. Which then ends up as 465,516.66.
The initial portfolio is $1,000,000 before withdrawal. $49,966 (5.0%) is withdrawn, leaving ($1,000,000 - $49,966) = $950,034 in the portfolio just after withdrawal. Just then, the portfolio loses -30% twice in a row, resulting into a ($950,034 X 70% X 70%) = $465,517 portfolio just after withdrawal and loss, at the beggining of the first year. During the first year (like all subsequent years), the portfolio grows by 3.76% to ($465,517 X (1 + 3.76%)) = $483,020.

My calculations are correct.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Thu Aug 04, 2022 9:26 pm
nigel_ht wrote: Thu Aug 04, 2022 9:14 pm You have a math error...if you withdraw $49.966 the first year then you will not end up with $483,020 on year two.

You end up with $950,034. Which then ends up as 465,516.66.
The initial portfolio is $1,000,000 before withdrawal. $49,966 (5.0%) is withdrawn, leaving ($1,000,000 - $49,966) = $950,034 in the portfolio just after withdrawal. Just then, the portfolio loses -30% twice in a row, resulting into a ($950,034 X 70% X 70%) = $465,517 portfolio just after withdrawal and loss, at the beggining of the first year. During the first year (like all subsequent years), the portfolio grows by 3.76% to ($465,517 X (1 + 3.76%)) = $483,020.

My calculations are correct.
Well that's interesting...you have the exact same number as the prior chart which is why that caught my eye. Is 5% of $490,000 not $24,500 rather than $24,483? And 5% of $1M is $50K and not $49,966.

Hmmm...it appears I wasn't paying attention at all...for year three the VPW portfolio is $475,778 and the VPW percentage is still 5.1%. Why is the withdrawal still $24,483 and not $24,264?

In any case, the primary point is that if you need more than $24K a year to live on then VPW failed on year 2.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

nigel_ht wrote: Thu Aug 04, 2022 9:55 pm In any case, the primary point is that if you need more than $24K a year to live on then VPW failed on year 2.
And, my point (reusing some of your words) is that if you need any money at all (e.g. more than $0 a year) to live on after portfolio depletion, then SWR failed for the rest of your life.

This thread is about VPW, a sensible appraoch which adapts withdrawal amounts to the retiree’s retirement horizon, asset allocation, and portfolio returns during retirement. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

If VPW isn't your thing and you prefer SWR, you're free to ignore this thread.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

longinvest wrote: Thu Aug 04, 2022 11:16 pm
nigel_ht wrote: Thu Aug 04, 2022 9:55 pm In any case, the primary point is that if you need more than $24K a year to live on then VPW failed on year 2.
And, my point (reusing some of your words) is that if you need any money at all (e.g. more than $0 a year) to live on after portfolio depletion, then SWR failed for the rest of your life.
SWR fails in worse than historical worst cases…this is pretty well understood.

It’s also pretty well understood that worse than historical worst cases are rare.

SWR therefore rarely fails and when it does in the future it will be quite noteworthy.
"Fear sells" they say. I think that SWR is the perfect selling tool for financial advisory firms and insurance companies. Fear of premature portfolio depletion helps convincing clients to aim for lower and lower "safe withdrawal rates".

I can only imagine sales people salivating at seeing their clients save, save, and save, working longer and longer, or, more probably, buying expensive investment and insurance products that are supposed to "solve" this possibility of financial ruin.
I have no idea what the relevance is to this discussion.

In any case Bengen has argued for higher rather than lower SWRs so the drive toward lower SWR isn’t universal…although in an interview with Rob Berger I recall he says that SWRs may be falling because inflation is the driving factor.

Which is correct…so 1929 is less scary than 1966 for retirees…regardless of what withdrawal method you use.

Which is an area that backtesting can expose while a static 75% drop test may not.
To me, this is just ridiculous. No human would ever ignore portfolio performance and continue taking constant inflation-adjusted withdrawals in the midst of a prolonged severe market downturn.
SWR is a ceiling and not a floor. In a prolonged market downturn you can of course pull out less just like you can pull out less than the recommended VPW value.

All it says is that for a given duration, in a given country using a specific AA and set of assumptions the historical safe withdrawal rate is X%. If you withdraw below X%, historically you didn’t run out of money.

This is useful if you don’t want to pull out less in a downturn that isn’t likely to be worse than historical.

VPW is a useful tool among many.
SWR is a useful tool among many.
ABW is a useful tool among many.

All have pros and cons.
This thread is about VPW, a sensible appraoch which adapts withdrawal amounts to the retiree’s retirement horizon, asset allocation, and portfolio returns during retirement. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
With the trade off that it can produce insufficient withdrawals to meet expenses.

If you have “sufficient flexibility” this trade off is worthwhile…but it still exists.
If VPW isn't your thing and you prefer SWR, you're free to ignore this thread and go on with your life.
Nobody was really talking about SWR except in passing because the focus was on Rob Berger‘s video.

Snowbog brought it up on page 34 but even then it was mostly ignored because SWR wasn’t all that relevant to the discussion.

/shrug

It wasn’t and still isn’t.

All I said was backtesting is better than the 75% test because 1929 dropped 86% and 15 years was a pretty long recovery. We then took a little side trip down the SWR lane but it wasn’t necessary to discuss the value of backtests…
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Re: Variable Percentage Withdrawal (VPW)

Post by Zeno »

longinvest, thank you for everything you do and have done.
Last edited by Zeno on Sun Aug 07, 2022 8:15 pm, edited 1 time in total.
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canadianbacon
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Re: Variable Percentage Withdrawal (VPW)

Post by canadianbacon »

willthrill81 wrote: Thu Aug 04, 2022 6:40 pm
Wrench wrote: Thu Aug 04, 2022 6:37 pmWhen I run SIMBA's backtest from 1900 to 2021 with 60/40 asset allocation the largest drawdown was ~41% in 1932. with recovery in 4 years. Where is your 89% or 75% coming from?
100% stocks, not a 60/40.
Then it's not a good-faith argument, because VPW is not designed to be used with 100% equities. Someone doing this is following their own method that leads to more volatility than the actual method, and then saying "boy that is volatile." Well no kidding.
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furwut
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Re: Variable Percentage Withdrawal (VPW)

Post by furwut »

Zeno wrote: Fri Aug 05, 2022 2:30 am longinvest, thank you for everything you do and have done. VPW is an awesome tool. I can’t fathom the effort you have put — and continue to put — into it. I am still amazed it is offered up to humanity for free. It is tools like VPW that make forum participation worthwhile. I feel the same about the TPAW (Ben) and related threads, too. Developers like you that prepare these tools deserve accolocades.
1000 percent!

I’m put off by some of the constant sniping that goes on in this thread. I’ve watched the Rob Berger video twice now. It’s a quick glancing overview and not a substitute for reading this thread and the resources in the Wiki.

For those who want a better understanding of how to evaluate VPW in contrast with other retirement spending methodologies I recommend going thru anything/everything written by Dirk Cotton on The Retirement Cafe blog. And the links and comments are valuable as well.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

I have uploaded version 2.7 of the VPW Accumulation And Retirement Worksheet.

Here's the main change:
  • Improve warning messages when the portfolio is too small to fully bridge pensions.
As usual, comments are welcome.

Enjoy!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Escapevelocity
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Re: Variable Percentage Withdrawal (VPW)

Post by Escapevelocity »

longinvest wrote: Wed Aug 10, 2022 12:55 pm I have uploaded version 2.7 of the VPW Accumulation And Retirement Worksheet.

Here's the main change:
  • Improve warning messages when the portfolio is too small to fully bridge pensions.
As usual, comments are welcome.

Enjoy!
Thanks longinvest! Can I assume you’re using the word pensions above to include also social security?
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Escapevelocity wrote: Wed Aug 10, 2022 1:13 pm
longinvest wrote: Wed Aug 10, 2022 12:55 pm I have uploaded version 2.7 of the VPW Accumulation And Retirement Worksheet.

Here's the main change:
  • Improve warning messages when the portfolio is too small to fully bridge pensions.
As usual, comments are welcome.

Enjoy!
Thanks longinvest! Can I assume you’re using the word pensions above to include also social security?
Escapevelocity, the specific name of a defined benefit pension (such as "Social Security", "Work pension", "Military pension", etc.) is entered by the retiree into a yellow cell of the worksheet. By "pensions", in my previous post, I meant all of the defined benefit pensions (#1 to #4) of the worksheet.
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psychodoc
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Re: Variable Percentage Withdrawal (VPW)

Post by psychodoc »

Thanks, longinvest. I'll echo the many appreciative comments throughout this thread: comprehendible, comprehensive, reasonable, and very helpful!
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

psychodoc wrote: Wed Aug 10, 2022 1:49 pm Thanks, longinvest. I'll echo the many appreciative comments throughout this thread: comprehendible, comprehensive, reasonable, and very helpful!
Psychodoc, thanks for the nice comments.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
4nursebee
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Re: Variable Percentage Withdrawal (VPW)

Post by 4nursebee »

furwut wrote: Fri Aug 05, 2022 7:48 am
Zeno wrote: Fri Aug 05, 2022 2:30 am longinvest, thank you for everything you do and have done. VPW is an awesome tool. I can’t fathom the effort you have put — and continue to put — into it. I am still amazed it is offered up to humanity for free. It is tools like VPW that make forum participation worthwhile. I feel the same about the TPAW (Ben) and related threads, too. Developers like you that prepare these tools deserve accolocades.
1000 percent!

I’m put off by some of the constant sniping that goes on in this thread. I’ve watched the Rob Berger video twice now. It’s a quick glancing overview and not a substitute for reading this thread and the resources in the Wiki.

For those who want a better understanding of how to evaluate VPW in contrast with other retirement spending methodologies I recommend going thru anything/everything written by Dirk Cotton on The Retirement Cafe blog. And the links and comments are valuable as well.
I don’t see much at that cafe blog recently.
I entered vpw in the search box and had zero hits.
Pale Blue Dot
furwut
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Re: Variable Percentage Withdrawal (VPW)

Post by furwut »

4nursebee wrote: Sat Aug 13, 2022 8:40 am
furwut wrote: Fri Aug 05, 2022 7:48 am
Zeno wrote: Fri Aug 05, 2022 2:30 am longinvest, thank you for everything you do and have done. VPW is an awesome tool. I can’t fathom the effort you have put — and continue to put — into it. I am still amazed it is offered up to humanity for free. It is tools like VPW that make forum participation worthwhile. I feel the same about the TPAW (Ben) and related threads, too. Developers like you that prepare these tools deserve accolocades.
1000 percent!

I’m put off by some of the constant sniping that goes on in this thread. I’ve watched the Rob Berger video twice now. It’s a quick glancing overview and not a substitute for reading this thread and the resources in the Wiki.

For those who want a better understanding of how to evaluate VPW in contrast with other retirement spending methodologies I recommend going thru anything/everything written by Dirk Cotton on The Retirement Cafe blog. And the links and comments are valuable as well.
I don’t see much at that cafe blog recently.
I entered vpw in the search box and had zero hits.
Sadly Dirk passed away last year. In the few years he posted I easily count him as one the best and most approachable personal finance writers- not regurgitating simple topics but making complex ones understandable to numbskulls like me.

He may not have ever written specfically about VPW but he did do an interesting series on applying game theory to an assortment of retirement strategies. I'll try to pick out the posts below and include some interesting supporting ones:

P.S., recommend reading the back & forth in the comments section. Easily doubles the value of every post.

A Tiny Bit of Game Theory 12/15/2014
Game Theory and Social Security Benefits 12/19/2014
Retirement Planning for the Unwealthy 12/30/2014
The Sustainable Withdrawal Range 2/9/2015
Dominated Strategies 2/13/2015
Dominated Strategies and Dynamic Spending 2/20/2015 VPW!
Pure and Mixed Strategies 2/17/2015
Dominated Strategies, Illogical Strategies, Problematic Strategies and Strategies That Just Make Me Queasy 3/17/2015
A Second Look at Time Segmentation Strategies 3/20/2015
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Lawrence of Suburbia
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Lawrence of Suburbia »

[Thread merged into here --admin LadyGeek]

Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence of Suburbia, there's no complexity.

At the end of July 2022, for example (link), the retiree only filled the yellow cells of the worksheet with the following information:
  • Age
  • Portfolio balance
  • Portfolio asset allocation
  • Portfolio withdrawal frequency
  • Social Security start age, monthly payment amount, and indicating that payments are subject to annual cost of living adjustments
  • Work pension payment amount and indicating that payments aren't subject to annual cost of living adjustments
Actually, the worksheet was already pre-filled with previous month data, so the retiree only needed to update the portfolio balance. That's a single cell!

Based on the above information, the worksheet suggested a withdrawal amount ($5,773) in green cells.

Image

This is as simple as it could be. Starting with a $1,000,000 portfolio in late June 2019, the retiree was able to get the following retirement income amounts (available for taxes and expenses) so far:
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $84,506 (annualized) -- $56,337 in 8 months
This more than double the amounts the retiree would have gotten using your approach (Vanguard LifeStrategy Moderate Growth Fund (VSMGX) distributions + $12,000/year work pension payments), which would have oscillated around ($25,000/year from VSMGX + $12,000 from work pension) = $37,000/year! The worksheet's approach gracefully handles the delayed Social Security pension. It is based on the Variable Percentage Withdrawal (VPW) method which adapts portfolio withdrawal amounts to the retiree's age, asset allocation, and portfolio returns during retirement. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio. The worksheet's instructions suggest to consider around age 80 to buy a SPIA* with annual 2% cost of living adjustments with part (not all) of the remaining portfolio, when necessary to dampen financial risks associated with living beyond age 100.

* Single Premium Immediate Annuity.

The worksheet is simple to use, yet it implements a robust approach to retirement which helps the retiree spend most of the portfolio while alive, instead of dying with a gigantic unspent portfolio.

Note that there's a single forward test post per month. It's quite simple and involves updating the worksheet's yellow cells, making a withdrawal, and using simple arithmetic to dampen short-term income fluctuations with a small withdrawal cushion (an Ally savings account containing approximately 5 months of withdrawals). That's all. Here's a link to the latest one which contains a link to the previous one, and so on.

All other posts are commentary. Some posts explain in details the worksheet's calculations. Others show how market returns and interest rates affect portfolio and savings account balances. Some posts look inside the chosen globally-diversified balanced index Vanguard fund. There are inflation-adjusted illustrations of the forward test, too. Everything is explained to provide complete transparency about this forward test so that any reader can independently check the validity of calculations.
Last edited by longinvest on Fri Sep 30, 2022 10:35 pm, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Zeno »

Following
Last edited by Zeno on Sun Aug 21, 2022 6:53 pm, edited 1 time in total.
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Lawrence of Suburbia
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Lawrence of Suburbia »

longinvest wrote: Sat Aug 13, 2022 3:42 pm
Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence of Suburbia, there's no complexity.

At the end of July 2020, for example (link), the retiree only filled the yellow cells of the worksheet with the following information:
  • Age
  • Portfolio balance
  • Portfolio asset allocation
  • Portfolio withdrawal frequency
  • Social Security start age, monthly payment amount, and indicating that payments are subject to annual cost of living adjustments
  • Work pension payment amount and indicating that payments aren't subject to annual cost of living adjustments
Actually, the worksheet was already pre-filled with previous month data, so the retiree only needed to update the portfolio balance. That's a single cell!

Based on the above information, the worksheet suggested a withdrawal amount ($5,773) in green cells.

Image

This is as simple as it could be. Starting with a $1,000,000 portfolio in late June 2019, the retiree was able to get the following retirement income amounts (available for taxes and expenses) so far:
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $84,506 (annualized) -- $56,337 in 8 months
This more than double the amounts the retiree would have gotten using your approach (Vanguard LifeStrategy Moderate Growth Fund (VSMGX) distributions + $12,000/year work pension payments), which would have oscillated around ($25,000/year from VSMGX + $12,000 from work pension) = $37,000/year! The worksheet's approach gracefully handles the delayed Social Security pension. It is based on the Variable Percentage Withdrawal (VPW) method which adapts portfolio withdrawal amounts to the retiree's age, asset allocation, and portfolio returns during retirement. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio. The worksheet's instructions suggest to consider around age 80 to buy a SPIA* with annual 2% cost of living adjustments with part (not all) of the remaining portfolio, when necessary to dampen financial risks associated with living beyond age 100.

* Single Premium Immediate Annuity.

The worksheet is simple to use, yet it implements a robust approach to retirement which helps the retiree spend most of the portfolio while alive, instead of dying with a gigantic unspent portfolio.

Note that there's a single forward test post per month. It's quite simple and involves updating the worksheet's yellow cells, making a withdrawal, and using simple arithmetic to dampen short-term income fluctuations with a small withdrawal cushion (an Ally savings account containing approximately 5 months of withdrawals). That's all. Here's a link to the latest one which contains a link to the previous one, and so on.

All other posts are commentary. Some posts explain in details the worksheet's calculations. Others show how market returns and interest rates affect portfolio and savings account balances. Some posts look inside the chosen globally-diversified balanced index Vanguard fund. There are inflation-adjusted illustrations of the forward test, too. Everything is explained to provide complete transparency about this forward test so that any reader can independently check the validity of calculations.
Thanks for that!
74% VTHRX/8% DODWX/12% TIAA Traditional/6% SWVXX
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SevenBridgesRoad »

Zeno wrote: Sat Aug 13, 2022 4:16 pm
longinvest wrote: Sat Aug 13, 2022 3:42 pm
Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence of Suburbia, there's no complexity ….
+1

We are probably going to start officially using VPW no later than Jan 2024. I figure it will take us 30 seconds on December 31, 2023 to use the tool to calculate the annual amount we will withdraw. On reflection, likely only 4 seconds.

And I don’t have an advanced degree in finance and am really terrible at spreadsheets. longinvest’s generosity in laying all of this out is by way of transparency and reassurance, and should not be confused with complexity with which the user must toil. For the user, VPW is unbelievably elegant and simple.

Again, hats off to longinvest. The VPW threads and ones like it (e.g., TPAW) are invaluable analytical components of this forum.
Lawrence, another retiree of 4 years here. I too don't like unnecessary complexity or a lot of math. Have used the VPW retirement worksheet the entire four years. A single entry each month is all: the dollar amount of portfolio. Everything else is already set up from four years ago. We do not find it necessary to use the optional smoothing method.

Simple; you will need other hobbies besides tinkering with your finances.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by iim7V7IM7 »

[Thread merged into here --admin LadyGeek]

QUESTION:

In the 11 pages (786 posts!) associated with VPW Spreadsheet is there any consensus between annual, quarterly or monthly withdrawal methods on long term investment performance? A simple December withdrawal is attractive with its simplicity and it does allow you to plan for the following year, but I want to make sure there aren’t downsides to an annual withdrawal strategy.

To Longinvest, thank you for creating this!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SnowBog »

iim7V7IM7 wrote: Sun Aug 14, 2022 11:01 am QUESTION:

In the 11 pages (786 posts!) associated with VPW Spreadsheet is there any consensus between annual, quarterly or monthly withdrawal methods on long term investment performance? A simple December withdrawal is attractive with its simplicity and it does allow you to plan for the following year, but I want to make sure there aren’t downsides to an annual withdrawal strategy.

To Longinvest, thank you for creating this!
I'm not sure I've seen a "consensus"...

But a prior post I thought had some insightful thoughts.
longinvest wrote: Thu Aug 04, 2022 7:31 am Here's some additional information about the three years (so far) of this forward test ... All amounts are rounded to the nearest dollar and expressed in June 2022 dollars (using average CPI for inflation adjustments).
  • ...
  • Initial monthly total retirement income value: $7,078
    • Annualized initial income: ($7,078 X 12) = $84,932
    • Ratio of initial portfolio to annualized initial income: ($1,113,543 / $84,932) = 13 times initial income
  • ...
  • Average monthly income over 37 months: ($265,298 / 37) = $7,170
    • Minimum monthly income: $6,910 (June 2020)
    • Maximum monthly income: $7,463 (September 2021)
  • Minimum cumulative 12-month income: $84,079 (from November 2019 to October 2020)
  • Maximum cumulative 12-month income: $88,756 (from April 2021 to March 2022)
  • This could be expressed as: $86,418 ± $2,339
In other words, annual income fluctuated by no more than ±2.7% around $86,418, so far. Meanwhile, the LifeStrategy Moderate Growth Fund investment fluctuated significantly more, losing (in inflation-adjusted terms) -13% in January-March 2020 and -21% in September-2021-June 2022. (Looking at 12-month periods: the LifeStrategy fund lost -20% from June 30, 2021 to June 30, 2022).

Two factors contributed to dampening annual income fluctuations (in addition to the 40% bond allocation of the LifeStrategy fund): the inclusion of current (work) and future (Social Security) pensions within the retirement plan, and the use of monthly withdrawals, more-or-less averaging portfolio values over 12 months with the help of a small withdrawal cushion which is a savings account containing approximately 5 months of withdrawals. This is no more than the average* cash amount that would have been held by a retiree making annual VPW withdrawals (instead of monthly withdrawals).

* A retiree making annual withdrawals usually spends the money more-or-less equally over 12 months. So there would be 1/12 spent immediately, 1/12 held for one month, 1/12 held for 2 months, and so on, for an average holding period of 5.5 months.
My takeaway from the above using a "monthly" approach, combined with the "dampening" account provides the least "variability" in income - as the changes are gradual over months.

You could potentially use a "dampening" approach with quarterly or annual to achieve similar - but that would keep more of your assets in cash than maybe you want to.

Otherwise, the quarterly and/or annual might feel bumpier. But whether that's a problem is entirely up to you...

We are still several years away, but my expectation is we'll just use an annual number. For me, a major factor in choosing VPW is its simplicity - including leaving something easy to follow for surviving spouse. Showing them how to update a few cells in a spreadsheet once a year, and then to withdraw no more than that and use that for the year's expenses (including taxes) - doesn't get any easier.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by HENRYGRUGER »

Longinvest...

As I fear when I downloaded your marvelous work product, it doesn't accept my age in the accumulation section (currently 71) and I am getting an error message in the Retirement Tab.

Is it operator error?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by FiveK »

HENRYGRUGER wrote: Sun Aug 14, 2022 12:21 pm ...I am getting an error message in the Retirement Tab.
Probably need more specifics (e.g., in which cell the error message appears) for a reasonable chance at solving.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by furwut »

FiveK wrote: Sun Aug 14, 2022 12:29 pm
HENRYGRUGER wrote: Sun Aug 14, 2022 12:21 pm ...I am getting an error message in the Retirement Tab.
Probably need more specifics (e.g., in which cell the error message appears) for a reasonable chance at solving.
Make sure you haven’t added a trailing space to an entry.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by HENRYGRUGER »

furwut wrote: Sun Aug 14, 2022 3:42 pm
FiveK wrote: Sun Aug 14, 2022 12:29 pm
HENRYGRUGER wrote: Sun Aug 14, 2022 12:21 pm ...I am getting an error message in the Retirement Tab.
Probably need more specifics (e.g., in which cell the error message appears) for a reasonable chance at solving.
Make sure you haven’t added a trailing space to an entry.
In the cell F12 there is a RED Error with an Arrow Pointing to the number 70, cell E 12, which is the age I filed for SS Benefits.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by FiveK »

HENRYGRUGER wrote: Sun Aug 14, 2022 7:44 pm
furwut wrote: Sun Aug 14, 2022 3:42 pm
FiveK wrote: Sun Aug 14, 2022 12:29 pm
HENRYGRUGER wrote: Sun Aug 14, 2022 12:21 pm ...I am getting an error message in the Retirement Tab.
Probably need more specifics (e.g., in which cell the error message appears) for a reasonable chance at solving.
Make sure you haven’t added a trailing space to an entry.
In the cell F12 there is a RED Error with an Arrow Pointing to the number 70, cell E 12, which is the age I filed for SS Benefits.
What is in cells B10 and E11?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SnowBog »

FiveK wrote: Sun Aug 14, 2022 10:39 pm
HENRYGRUGER wrote: Sun Aug 14, 2022 7:44 pm
furwut wrote: Sun Aug 14, 2022 3:42 pm
FiveK wrote: Sun Aug 14, 2022 12:29 pm
HENRYGRUGER wrote: Sun Aug 14, 2022 12:21 pm ...I am getting an error message in the Retirement Tab.
Probably need more specifics (e.g., in which cell the error message appears) for a reasonable chance at solving.
Make sure you haven’t added a trailing space to an entry.
In the cell F12 there is a RED Error with an Arrow Pointing to the number 70, cell E 12, which is the age I filed for SS Benefits.
What is in cells B10 and E11?
Hint - if your Age (B10) is greater than the retirement benefits "start age" (E12), then it's expected that "already started" (E11) is set to Yes. Otherwise, its flagged as an error, as either you didn't change your retirement start date and/or your benefits have already started but you didn't correctly note that.
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Re: Variable Percentage Withdrawal (VPW)

Post by LadyGeek »

I moved iim7V7IM7's question into this thread from A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test) which is intended for forward testing. This is the general discussion thread.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence, actually the nuts and bolts of VPW are really simple, and that’s part of its appeal. longinvest will speak for himself, but my understanding is that all the detailed math presented on this thread is there because this is a rigorous test of the VPW principles using a hypothetical portfolio. The thread is documenting what amounts to a scientific experiment. Everyone interested needs to be able to verify each step. That doesn’t mean that the typical end user must perform continual math gyrations to compute the VPW monthly withdrawal. In essence, the work is done for the retiree in advance, if you just consult the VPW grid. That spreadsheet will identify a withdrawal amount, expressed as a % of portfolio, based on the investor’s age and asset allocation.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SevenBridgesRoad »

smectym wrote: Tue Aug 16, 2022 9:57 pm
Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence, actually the nuts and bolts of VPW are really simple, and that’s part of its appeal. longinvest will speak for himself, but my understanding is that all the detailed math presented on this thread is there because this is a rigorous test of the VPW principles using a hypothetical portfolio. The thread is documenting what amounts to a scientific experiment. Everyone interested needs to be able to verify each step. That doesn’t mean that the typical end user must perform continual math gyrations to compute the VPW monthly withdrawal. In essence, the work is done for the retiree in advance, if you just consult the VPW grid. That spreadsheet will identify a withdrawal amount, expressed as a % of portfolio, based on the investor’s age and asset allocation.
I agree with everything, Smectym, except the last half of the last sentence. The "Monthly Portfolio Withdrawal" is expressed as a dollar amount, not a %, unless we are looking at different worksheets.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Lawrence of Suburbia »

Thanks all, I misunderstood. Fear of spreadsheets, you might say! I looked up the table on the Bogle Wiki, very easy :oops:

The one thing that throws me is, at my age and allocation ... 5.3%? ... seems rather scary.

I think I might keep the concept, but back my age off a few years to get to maybe 4.5% and start there. But now that I know what's going on, it's a cool concept!

Another method that you might find intriguing:

Age ÷ 20

So, if you're 65, 65 ÷ 20 = 3.25%. This is kinda the one I've been following, my last withdrawals have me at 3.4%, coincidentally the right one for my current age. Maybe Age ÷ 17 gets you closer to the Variable Percentage method? ... anyway, it's dead simple; just look up your portfolio balance once a year, divide your age by 20 (or whatever), apply the percentage, voila!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Zeno »

Following
Last edited by Zeno on Sun Aug 21, 2022 6:25 pm, edited 1 time in total.
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Re: Variable Percentage Withdrawal (VPW)

Post by LadyGeek »

I moved a discussion by Lawrence of Suburbia into the general VPW discussion thread (this one) from A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test).

(Thanks to the member who reported the post and explained what's wrong.)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

SevenBridgesRoad wrote: Tue Aug 16, 2022 10:16 pm
smectym wrote: Tue Aug 16, 2022 9:57 pm
Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence, actually the nuts and bolts of VPW are really simple, and that’s part of its appeal. longinvest will speak for himself, but my understanding is that all the detailed math presented on this thread is there because this is a rigorous test of the VPW principles using a hypothetical portfolio. The thread is documenting what amounts to a scientific experiment. Everyone interested needs to be able to verify each step. That doesn’t mean that the typical end user must perform continual math gyrations to compute the VPW monthly withdrawal. In essence, the work is done for the retiree in advance, if you just consult the VPW grid. That spreadsheet will identify a withdrawal amount, expressed as a % of portfolio, based on the investor’s age and asset allocation.
I agree with everything, Smectym, except the last half of the last sentence. The "Monthly Portfolio Withdrawal" is expressed as a dollar amount, not a %, unless we are looking at different worksheets.
Thanks, SevenBridges. We probably are looking at different templates; the one I have in mind is the “VPW Rates Based on Age and Asset Allocation” contained in this summary overview wiki:

https://www.bogleheads.org/wiki/Variabl ... withdrawal
smectym
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by smectym »

Zeno wrote: Wed Aug 17, 2022 7:04 am
Lawrence of Suburbia wrote: Tue Aug 16, 2022 11:00 pm Thanks all, I misunderstood. Fear of spreadsheets, you might say! I looked up the table on the Bogle Wiki, very easy :oops:

The one thing that throws me is, at my age and allocation ... 5.3%? ... seems rather scary.

I think I might keep the concept, but back my age off a few years to get to maybe 4.5% and start there. But now that I know what's going on, it's a cool concept!

...
I can help you with your concern, LoS, at least I think so, as I had the same reaction initially to VPW. The suggested WR's for our age(s) just seemed too high. As a MMM refugee, I'm genetically wired to shrink from a WR north of 4%, which is what VPW was indicating for us. It just seemed wrong.

Then I came to realize that I was wrong.

Following is what I came to realize after studying this thread (and the main VPW thread):

1. VPW is designed to "encourage" the robust use of one's portfolio. It is effectively driving towards zero at the end. That said, it also assumes/hopes/encourages the user to make use of SS, a pension (if available), and a possible late-stage-of-life SPIA. It also has a more conservative suggestion in case markets are down, of course.

2. Thus, if one has a "giving" goal or some other life planning need that arguably sits outside of one's main portfolio, it is suggested in the main VPW thread that one deal with that separately. Carve it out of VPW, if you will. I think in the main VPW thread the example of funding a future CCRC is used (but I'm forgetful so may be wrong about that example).

3. Like all retirement planners, one doesn't actually have to make the "suggested" withdrawal. VPW is indicating what you could withdraw based on current market conditions. So it could be viewed as a reassuring "ceiling" in a way, which is how we intend to use it. I don't intend to withdraw the suggested amounts. Much of this is psychological on our end as there is more than one life form in the house. So I can point to the tool and say: "Look, these really smart people have been crowdsourcing this elegant tool for a decade, and there is even a forward test, and we are going lower than that." To me, that's priceless, and may alone negate the need to revisit with a FA as emergency back-up immediately prior to retirement.

4. Despite #3 above, buried deep in the main VPW thread the point is made that one should take the "suggested" withdrawal as a de-risking maneuver, then put that amount somewhere safer (e.g., HYSA), then draw for the period from that separate and safer account, leaving a residue perhaps. Stated another way, VPW effectively encourages one to "sell high" without having to spend it all, if that makes sense. This attribute of VPW was my "aha" moment for the tool. I thought to myself: "That is really cool and elegant."

I will look at your other suggested method, LoS. Thank you for posting it.
Zeno’s point #4 is key, and also highlights that despite the surface simplicity of the VPW approach there’s quite a bit going on beneath the surface. It seems to me that VPW is an important development in the analytics of the epic SWR debate. Yet, other threads on this forum continue to lean toward “how low can we go” in advocating draconian cuts to SWR, even to 2% or lower; fair enough, the debate continues.
nigel_ht
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by nigel_ht »

smectym wrote: Wed Aug 17, 2022 11:15 am Zeno’s point #4 is key, and also highlights that despite the surface simplicity of the VPW approach there’s quite a bit going on beneath the surface. It seems to me that VPW is an important development in the analytics of the epic SWR debate. Yet, other threads on this forum continue to lean toward “how low can we go” in advocating draconian cuts to SWR, even to 2% or lower; fair enough, the debate continues.
What you write is disingenuous because Pfau's 2.21% is based on "using a 25% stock allocation and seeks a 95% chance that real wealth will not fall below 20% of its initial level by year 35 of retirement" with a 2% COLA.

This was pointed out in that thread you are in.

Bengen and Trinity used different criteria got slightly different results.

If you look at Wade's 75% stock allocation and seeking an 80% chance that real wealth will not fall below 10% of its initial level by year 25 of retirement scenario the WR is 3.5% with CPI based COLA. That's not quite the same criteria as Trinity but closer.

For whatever reason he didn't want to add a line where the criteria matched bengen or trinity. Maybe because the number gets pretty close to 4%.

He does do Inflation (CPI-) Adjusted Spending with Five Years of Buffer Asset and the aggressive scenario goes to 4.46%.

https://retirementresearcher.com/dashboard/

Most variations on SWR lets you take out more if you retire at the right time (ie low valuations) or add various things into your portfolio (SCV, buffers, etc).

VPW doesn't provide CPI based COLA...you just get whatever you get.

Some folks don't like us discussing SWR in this thread. I would appreciate you not bringing it up in a way in which a response is warranted.
SevenBridgesRoad
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SevenBridgesRoad »

smectym wrote: Wed Aug 17, 2022 10:57 am
SevenBridgesRoad wrote: Tue Aug 16, 2022 10:16 pm
smectym wrote: Tue Aug 16, 2022 9:57 pm
Lawrence of Suburbia wrote: Sat Aug 13, 2022 2:02 pm Boy, all these variable withdrawal guideline things seem to involve a lot of work and math for something that's basically unknowable (future returns, inflation, the economy, etc.) ...

I couldn't get through the first page, my own fault for being ADD and rather innumerate.

I retired four years ago in blissful ignorance; I had enough $ at that time to supplement my S.S. income by only taking dividend income from my savings. Yup; no retirement plan, hadn't heard of the 4% rule, none of it.

Foolish? Yes it was. Or is.

What I'm doing now is, I just spend based upon my needs, as frugally as possible, with the notion of doing that for the next 5-6 years, until hopefully sequence of returns risk has passed, for me (I'll be 75 or so). Doesn't mean I'll not be doing modest interesting/fun stuff; but not lavishly. Being semi-quarantined due to Covid19 has probably helped, my spending in 2020/2021 had to have been minimalistic. But, I don't really follow any rule -- I'm just mindful of what I pull out of the portfolio, figure out what the % was at year end (last year was around 3.4%), adjust if I need to (or can), and continue breathing.

Apology if this is a threadcrap.
Lawrence, actually the nuts and bolts of VPW are really simple, and that’s part of its appeal. longinvest will speak for himself, but my understanding is that all the detailed math presented on this thread is there because this is a rigorous test of the VPW principles using a hypothetical portfolio. The thread is documenting what amounts to a scientific experiment. Everyone interested needs to be able to verify each step. That doesn’t mean that the typical end user must perform continual math gyrations to compute the VPW monthly withdrawal. In essence, the work is done for the retiree in advance, if you just consult the VPW grid. That spreadsheet will identify a withdrawal amount, expressed as a % of portfolio, based on the investor’s age and asset allocation.
I agree with everything, Smectym, except the last half of the last sentence. The "Monthly Portfolio Withdrawal" is expressed as a dollar amount, not a %, unless we are looking at different worksheets.
Thanks, SevenBridges. We probably are looking at different templates; the one I have in mind is the “VPW Rates Based on Age and Asset Allocation” contained in this summary overview wiki:

https://www.bogleheads.org/wiki/Variabl ... withdrawal
Got it. I’m using the VPW Retirement Worksheet.
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

While our hypothetical retiree is enjoying a comfortable retirement in the forward test, the race to the lowest possible SWR rages on! This shouldn't be a surprise; those who stand to make a profit from bigger portfolios or from selling retirement solutions love SWR because fear sells.++

++ Why Fear Sells: The Business of Panic & Paranoia, Martin Lindstrom, Brain World magazine, November 2019.

SWR is the perfect sales tool! And, from a sales point of view, it continues to improve. If you didn't know it, here it is:

SWR is down to 1.9% according to a recent study. So, apparently, even if you were to accumulate, in a balanced portfolio, as much as 50 times your planned annual portfolio withdrawal amount, that wouldn't be enough; you might still run out of money before the end of 30 years of retirement. Who would ever early retire at age 50? Do the calculation: 50 + 30 = ...

Here's how Christine Benz explains this 1.9% SWR in a recent Bogleheads Live interview:

Excerpts from the transcript found at https://www.buzzsprout.com/1973223/10753933
29:35 Jon: [...] Christine, let's talk about the Morningstar study on sustainable distribution rates.** [...]

30:14 Christine: [...] In our paper, the baseline conclusion was that if you want to be 90% certain you won’t run out of money over a 30-year time horizon, and you have a balanced 50/50 or 60/40 portfolio, and you're using a fixed, real withdrawal system, you'd want to start at 3.3% initially, and then you could inflation-adjust that dollar amount thereafter. If you wanted a 95% success rate, 5% failure rate, that's a trade-off and you would have to bring that initial withdrawal rate down to 3.1%. At a 99% success rate with a failure rate of only 1%, the starting withdrawal would be 2.5%. So, you can see we're going down, down, down. And if you wanted to have a 100% success rate on that balanced portfolio over 30-year time horizon, the starting withdrawal would have to be 1.9%, based on our research and using our forward-looking forecast of what our team expects the market to return over the next several decades.

** The State of Retirement Income - Safe Withdrawal Rates, Christine Benz, Jeffrey Ptak, and John Rekenthaler, Morningstar Research, November 2021.
(I added the link to the study and the emphasis.)

I can imagine sales people salivating at the "down, down, down" trend...

Here's what I think. Maybe the sky will fall during retirement. Maybe not. Nobody knows. The difference between VPW and SWR is that VPW won't cut expenses before it needs to do so, and if it does, it will be due to a severe crisis where others in society have to cut their expenses, too.^^ SWR, on the other hand, will let the retiree severely underspend all retirement long and die with a gigantic unspent portfolio just in case something bad was to happen in the future, yet if things turn bad, it can leave the retiree penniless. SWR almost guarantees an undesirable outcome (underspend or overspend), and thus triggers fear.

^^ The Covid crisis has clearly shown that people are way more adaptable than how they're portrayed in SWR studies.

Here's how I explained one advantage of VPW earlier in the forward test thread:
longinvest wrote: Sat Jan 02, 2021 12:02 pm In life, we dress according to the current situation. We put on warm clothes, Winter boots, and a Winter coat when getting outside during the Winter. We dress more lightly during the Summer. We don't wait until Winter to go to the store in our Summer clothes to buy Winter clothes. We buy Winter clothes (and Summer clothes) in advance and keep both Winter and Summer clothes in our homes. Also, in the Summer, we don't put on a Winter coat; we take advantage of the warm weather, instead, to put on a swim suit and jump into the outside pool and have fun.

The VPW Retirement Worksheet works similarly. It allows us to withdraw money from the portfolio according to the current situation. When the portfolio balance is higher, withdrawals are bigger, and when the portfolio balance is lower, withdrawals are smaller. VPW doesn't dress up withdrawals for Winter during the Summer. In other words, it doesn't keep withdrawals small when the portfolio balance is high. But, it informs the retiree about the normal consequences of bad weather (rain, wind, cold) so that the retiree can prepare for it (e.g. it informs the retiree about the consequences of stocks losing -50%).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
smectym
Posts: 1530
Joined: Thu May 26, 2011 5:07 pm

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

Post by smectym »

nigel_ht wrote: Wed Aug 17, 2022 4:01 pm
smectym wrote: Wed Aug 17, 2022 11:15 am Zeno’s point #4 is key, and also highlights that despite the surface simplicity of the VPW approach there’s quite a bit going on beneath the surface. It seems to me that VPW is an important development in the analytics of the epic SWR debate. Yet, other threads on this forum continue to lean toward “how low can we go” in advocating draconian cuts to SWR, even to 2% or lower; fair enough, the debate continues.
What you write is disingenuous because Pfau's 2.21% is based on "using a 25% stock allocation and seeks a 95% chance that real wealth will not fall below 20% of its initial level by year 35 of retirement" with a 2% COLA.

This was pointed out in that thread you are in.

Bengen and Trinity used different criteria got slightly different results.

If you look at Wade's 75% stock allocation and seeking an 80% chance that real wealth will not fall below 10% of its initial level by year 25 of retirement scenario the WR is 3.5% with CPI based COLA. That's not quite the same criteria as Trinity but closer.

For whatever reason he didn't want to add a line where the criteria matched bengen or trinity. Maybe because the number gets pretty close to 4%.

He does do Inflation (CPI-) Adjusted Spending with Five Years of Buffer Asset and the aggressive scenario goes to 4.46%.

https://retirementresearcher.com/dashboard/

Most variations on SWR lets you take out more if you retire at the right time (ie low valuations) or add various things into your portfolio (SCV, buffers, etc).

VPW doesn't provide CPI based COLA...you just get whatever you get.

Some folks don't like us discussing SWR in this thread. I would appreciate you not bringing it up in a way in which a response is warranted.
Nigel, I’ll have to parse your comments because frankly I don’t understand most of them, but be assured I did not have the Wade Pfau thread specifically in mind, and don’t have a position on the merits of Wade Pfau’s approach, and haven’t studied it (my comment in that thread, if I recall, was not at all in that vein). If I inadvertently hit a nerve, I apologize: not my intent.
nigel_ht
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Re: Variable Percentage Withdrawal (VPW)

Post by nigel_ht »

[Post moved into here from: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test) --admin LadyGeek]
longinvest wrote: Sun Jul 17, 2022 6:04 pm
EnjoyIt wrote: Sat Jul 16, 2022 2:44 pm Sorry if this is asked before, but in regards to the required flexibility portion of this spreadsheet.

The market is down quite a bit from its peak. Somewhere between 20-25% depending on what one invests in. I honestly have not checked. What are the chances that it will go down an additional 50% on top of an already depressed market? Should this calculation of 50% drop be done from the peak or maybe this calculation should be done somewhere between peak and today since another 50% drop is far less likely today compared to January 1st of this year for example?
EnjoyIt, I suggest reading this post of the main VPW thread which addresses your questions.
Skimming this thread I notice this question...isn't there both downturn AND inflation effects...in July 2019 the required flexibility was to be able to drop income to $61,286.
longinvest wrote: Sun Jun 30, 2019 10:37 am The VPW Worksheet suggests to take a $5,356 withdrawal and tells us that total annual retirement income is currently estimated at $76,276. In case of unfavorable market returns where stocks would lose 50%, the portfolio would lose -$300,000 and retirement income would be reduced by -20% to $61,286. The retiree is OK with that.
In Aug 2022 dollars that's $70,745.08 in income.

https://www.bls.gov/data/inflation_calculator.htm

Recently you posted:
longinvest wrote: Sat Sep 10, 2022 1:39 pm After such a loss, total annual retirement income would be reduced to $64,894, representing a reduction of (($64,894 - $79,265) / 12) = -$1,198/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,198/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,198 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
Today the required flexibility is $64,894...or $56,217 in July 2019.

They need to have $5,069 more flexibility in July 2019 dollars ($5,851 in August 2022 dollars) in just 3 years...

This criteria is important as it is part of how you determine if you have the flexibility to use VPW/retire.

What does it mean if you fail the current flexibility requirement in 2022? If my retirement expenses were $60K in 2019 I would feel pretty good given the flexibility requirement was $61K.

Today my expenses, if they rose in step with CPI-U, would be $69,250...nearly $5K above the required flexibility amount.
Marseille07
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

nigel_ht wrote: Fri Sep 23, 2022 11:20 am Skimming this thread I notice this question...isn't there both downturn AND inflation effects...in July 2019 the required flexibility was to be able to drop income to $61,286.
I don't believe percentage-based methods account for inflation. If you need 50K/year in today's dollars, simply prepare enough for 100K/year to provide 50% of flexibility, regardless of inflation. And hopefully market returns would be good enough to fund your retirement.

Personally I don't think you need 50% of flexibility, something like 20~30% should do.
Pappy205
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Re: Variable Percentage Withdrawal (VPW)

Post by Pappy205 »

Quick question - I am setting up the worksheet and I can’t seem to eliminate the work pension (amount $1,000)… I do not have a work pension. Any help on how to fix this? Many thanks!
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