Variable Percentage Withdrawal (VPW)

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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

Here's a copy of a post I wrote earlier today on another thread to explain that VPW is a tool for creating retirement income, and that, when using VPW, common budgeting techniques and tools remain useful for handling lumpy expenses.

During accumulation, the VPW worksheet suggests a sensible amount to save and invest into the portfolio. During retirement, it suggests a sensible amount to withdraw from the portfolio and combine with Social Security and pensions. As the name of the method implies, these amounts are variable. They adapt (every year or more often) to the investor's evolving situation and portfolio balance:
longinvest wrote: Tue Dec 20, 2022 8:08 am Basic personal finance tools and techniques, like low-interest loans, saving in advance, or a combination of the two, are commonly used for lumpy expenses like buying a car or a house. This works both during accumulation and during retirement.

During accumulation, people don't ask their employer to increase their salary in "car replacement years" and lower it in other years. This would make no sense. People naturally use budgeting tools and techniques to handle their lumpy expenses.

[...] I particularly like the variable percentage withdrawal (VPW) method. It's a method for creating retirement income. Like a work salary, it doesn't eliminate the need to use budgeting tools and techniques to handle lumpy expenses.

Our wiki provides a VPW Accumulation And Retirement Worksheet which can be downloaded or used online. Every year (or more frequently) during accumulation it suggests a sensible amount to save and invest into the portfolio. Every year (or more frequently) during retirement it suggests a sensible amount to withdraw from the portfolio and combine with Social Security (possibly delayed to age 70) and pensions (with or without cost-of-living adjustments) to create retirement income. Here are the links: During retirement, any excess retirement income money, after paying taxes and expenses, can be used for gifting while alive and enjoying the process (instead of waiting after death), or for saving for upcoming lumpy expenses, appropriately putting the money into a savings account (not into a portfolio of fluctuating assets).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
iim7V7IM7
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Re: Variable Percentage Withdrawal (VPW)

Post by iim7V7IM7 »

Some Questions:

Temporary Retirement Income:

I noticed in the VPW Accumulation and Retirement Spreadsheet under "Temporary Retirement Income #1" I entered my Social Security Bridge income. This will occur from 65 years 8 months old to 69 years 11 months old (52 months @ $4,202/month or $218,504). This comes from a separate account than our Portfolio (a Brokerage Account in a Money Market and Short-Term Muni Bonds).

I entered a start and stop age of age 66 and age 70 (Lines 39 and 40). Because the I am planning stop working at 65 years 7 months and my wife at 66 years 2 months, I chose age 66 on the spreadsheet (Line 10) as a retirement age in that it was closest to both of our ages. I noticed on Lines 98 and 117 it is subtracting from the Portfolio Balance (Line 10). It also is using an odd value of $191,829 which is 45.65 months x $4,202/month and not 48 months x $4,202/month or $201,696.

Questions:

When you have Temporary Retirement Income should I add that to my Portfolio Balance because it is subtracting it?

When two people are retiring with differing ages (ours are only 7 months apart) what age should be entered into Line 10? Is it better to keep separate worksheets for each retiree?

Thanks
Topic Author
longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

iim7V7IM7 wrote: Fri Dec 30, 2022 11:32 am When two people are retiring with differing ages (ours are only 7 months apart) what age should be entered into Line 10?
Iim7V7IM7, the answer is in our wiki:

Image
iim7V7IM7 wrote: Fri Dec 30, 2022 11:32 am Is it better to keep separate worksheets for each retiree?
Both approaches work as long as the age of the younger spouse is used to fill the single worksheet or the separate worksheets (including the start age of delayed pensions, for example).
iim7V7IM7 wrote: Fri Dec 30, 2022 11:32 am I noticed in the VPW Accumulation and Retirement Spreadsheet under "Temporary Retirement Income #1" I entered my Social Security Bridge income. This will occur from 65 years 8 months old to 69 years 11 months old (52 months @ $4,202/month or $218,504). This comes from a separate account than our Portfolio (a Brokerage Account in a Money Market and Short-Term Muni Bonds).

I entered a start and stop age of age 66 and age 70 (Lines 39 and 40). Because the I am planning stop working at 65 years 7 months and my wife at 66 years 2 months, I chose age 66 on the spreadsheet (Line 10) as a retirement age in that it was closest to both of our ages. I noticed on Lines 98 and 117 it is subtracting from the Portfolio Balance (Line 10). It also is using an odd value of $191,829 which is 45.65 months x $4,202/month and not 48 months x $4,202/month or $201,696.
The cost of pension bridge amounts in lines 98 and 177 are unrelated to temporary income calculations in this specific case. They're related to other pensions which start after age 66.

Temporary Retirement Income #1 is primarily handled on lines 73 and 82, using ratios C and D on lines 59 and 60. More specifically, the worksheet calculates that the Adjusted Annual Payment of the $4,202/month Social Security Bridge income is $9,681/year.

Image
(Note that these displayed percentages are rounded. Worksheet calculations use precise percentages.)

Image


Line 82 reports that no bridge ($0) is required from the start of retirement at age 66 until the start of Social Security Bridge income at age 66.

Here's the explanation. The retiree will get ($4,202 X 12) = $50,424 for 4 years. It would hypothetically require a ($50,424 / 26.4%) = $190,995 portfolio for a 4-year VPW depletion schedule to deliver such a withdrawal amount. At age 66, such a portfolio would deliver a ($190,995 X 5.1%) = $9,681 withdrawal amount. The remaining ($50,424 - $9,681) = $40,743 annual income is invested into the investor's portfolio (or, equivalently, is used to reduce the suggested portfolio withdrawal, at age 66, by a similar amount).
iim7V7IM7 wrote: Fri Dec 30, 2022 11:32 am When you have Temporary Retirement Income should I add that to my Portfolio Balance because it is subtracting it?
Nothing should be added to the portfolio balance. The worksheet already does all the tricky calculations to keep things simple for its users.
Last edited by longinvest on Fri Dec 30, 2022 2:02 pm, edited 2 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
iim7V7IM7
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Re: Variable Percentage Withdrawal (VPW)

Post by iim7V7IM7 »

Thank you.

I think maintaining two separate sheets is useful because withdrawals will come from his and hers IRAs separately.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

In the forward test thread, forum member Iim7V7IM7 asked:
iim7V7IM7 wrote: Sun Jan 01, 2023 12:22 pm Can you kindly point me to the answer for somethings that must have been discussed before:

1) Difference in income smoothing between annual balance, quarterly balance and monthly balance withdrawals?
2) The optimal size of a cash buffer in terms of months or years of withdrawal income (and rationale underpinning it) and is it kept in a money market or checking account?
Iim7V7IM7, answers (and more!) can be found in this previous post and the posts it links to.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
ryman554
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Re: Variable Percentage Withdrawal (VPW)

Post by ryman554 »

Marseille07 wrote: Sun Dec 11, 2022 11:38 am
longinvest wrote: Sun Dec 11, 2022 11:35 am In another thread, I explained how VPW is, by design, immune to sequence of returns risk but remains exposed to market risk. Here's the main text of my post (with minor modifications):
Correct. For some reason even some long-timers here do not understand this. I find it very bizarre.
But let's be careful. Immune means very different things with respect to the context.

Your immune really means you aren't going ever run out of money in your portfolio until the projected death date. (Potentially one year or two earlier depending on the projected vs actual rate of return in the final year or three where the WR gets very large (1/N)) It's a feature of all time value of money calculations

Other's immune might be to not have enough money to actually live on. No question that SWR is (may? again, depends on sequence of return (great, then really really lousy)), and how close to the edge the retiree is when they start) be more susceptible to this, but the fact of the matter is, without a floor, VPW is not immune from some amount of destitution. Note that this is not a bug in the proposed strategy.

I prefer to think of VPW is a well thought out withdrawal strategy, especially shown with this current forward test and all the associated protections built in as discussed by the community. This is an excellent case study. But it's not immune from disaster, depending on your definition.
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canadianbacon
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Re: Variable Percentage Withdrawal (VPW)

Post by canadianbacon »

ryman554 wrote: Mon Jan 02, 2023 5:01 pm I prefer to think of VPW is a well thought out withdrawal strategy, especially shown with this current forward test and all the associated protections built in as discussed by the community. This is an excellent case study. But it's not immune from disaster, depending on your definition.
I think you might be missing the context of the exchange. VPW is still exposed to the risk of crap market returns, of course. There is no drawdown approach that guarantees success for every starting balance and set of returns. What longinvest is saying about SORR is that with VPW you are less concerned about what order those returns come in. This lines up with my own simulations. It still doesn’t mean it’s fun for you to have a bad SOR in retirement and find yourself cutting expenses early and waiting for a rebound. With both fixed withdrawal and variable withdrawal there is a risk that an adverse sequence leaves the portfolio in too rough a condition to take advantage of an eventual recovery. With VPW that looks like an early drop in spending that never gets back to baseline. If you run a 2000 retirement through the back testing spreadsheet you can see it in all its glory. But getting back to the point, immune to sequence risk basically means that if the market returns X% in the next ten years you are in the same spot roughly regardless of what order the returns came in that resulted in X. Hope that makes sense.
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eddie_money
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

I've got a question on VPW using the VPW table instead of the sheet.

I understand the steps as outlined here (https://www.bogleheads.org/wiki/Variabl ... _VPW_table) except the very first:
To simplify calculations when using the VPW Table with a pen and paper, missing payments between retirement and the start of a pension such as Social Security (possibly delayed to age 70[6]) can be provided by using a simple high-interest savings account or a certificate of deposit (CD) ladder. For the purposes of VPW calculations, the money set aside in this savings account or CD ladder should not be considered as part of the portfolio.
What is meant by "missing payments"? Payments to whom or what?

And about that CD ladder:
  • What is the source of the money that should be put in the CD ladder, and for what goal it should be used?
  • How do I determine the total amount of money that should be put in the CD ladder, and how often should I have it to 'ladder'?
I tried searching but couldn't find an answer. If there's a post that gives more insights on the workings of the VPW table (in conjunction with future pension income) that would be great as well!

Edit:

Maybe a real life example can be given?

Say I have an investment portfolio worth 500K, 50/50 in stocks/bonds, all to be assigned to my retirement.
I am 60 and want to retire. My SS kicks in at 70, expected $2000 a month. No other pension incomes.

How would this work using the VPW table and the steps as outlined?
SnowBog
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

eddie_money wrote: Tue Jan 10, 2023 7:11 am I've got a question on VPW using the VPW table instead of the sheet.

I understand the steps as outlined here (https://www.bogleheads.org/wiki/Variabl ... _VPW_table) except the very first:
To simplify calculations when using the VPW Table with a pen and paper, missing payments between retirement and the start of a pension such as Social Security (possibly delayed to age 70[6]) can be provided by using a simple high-interest savings account or a certificate of deposit (CD) ladder. For the purposes of VPW calculations, the money set aside in this savings account or CD ladder should not be considered as part of the portfolio.
What is meant by "missing payments"? Payments to whom or what?

And about that CD ladder:
  • What is the source of the money that should be put in the CD ladder, and for what goal it should be used?
  • How do I determine the total amount of money that should be put in the CD ladder, and how often should I have it to 'ladder'?
I tried searching but couldn't find an answer. If there's a post that gives more insights on the workings of the VPW table (in conjunction with future pension income) that would be great as well!

Edit:

Maybe a real life example can be given?

Say I have an investment portfolio worth 500K, 50/50 in stocks/bonds, all to be assigned to my retirement.
I am 60 and want to retire. My SS kicks in at 70, expected $2000 a month. No other pension incomes.

How would this work using the VPW table and the steps as outlined?
I'm sure longinvest can provide a better answer, probably even a link to a prior answer... But I'll attempt a reply...

The "missing payments" refers to your $2000/month (inflation adjusted) social security between retirement (60) and claiming age (70).

As I understand the "original" approach, the funds for those payments (for simple math*, $2k * 12 * 10 = $240,000) was set aside in a separate portfolio. Presumably the use of something like a CD, TIPS, Etc. Ladder would be used. The "source" would be your savings (excess income), which effectively lowers the amount of your VPW portfolio. For example (simple math*), if you initially had $2,240,000, you'd take $240,000 and move it into a "ladder", leaving VPW with a $2M portfolio.

By contrast, the updated spreadsheet factors this in, and no longer requires a "side" portfolio for the "missing payments". Again simple math*, if your total portfolio is $2,240,000, as I understand it, the spreadsheet "sets aside" the $240,000 to fund the "missing payments", and then calculates VPW based on the remainder (aka $2M).

* In non-simple versions, you'd want to adjust based on real returns of the "side" portfolio. For example, if you happened to build a ladder of TIPS with a 4% [real] return, you would need less than the full $240,000.

In our case, we are using EE Bonds as a DIY Annuity to form part of this bridge. viewtopic.php?t=358793. Within the VPW spreadsheet, we model this as "temporary" income - ideally between the year we retire and the year we start collecting social security (for clarity, we "remove" the EE Bonds from the portfolio value entered into VPW). I didn't start this approach in time, so some of the earlier years will be covered with I Bonds (in place of a CD/TIPS/etc. ladder). We just leave the I Bonds "included" in the VPW portfolio, and let the spreadsheet figure out the math.

To be crystal clear, what we are doing has arguably nothing to do directly with VPW. Looking at the "forward test", it uses a single banking account as a buffer (holding 6 months withdrawal), and the rest is in a single balanced fund (60/40 IIRC). VPW does not dictate any specific portfolio construction...
eddie_money
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Thank you for the explanation SnowBog, it makes more sense now.

I have been playing around with these numbers in a spreadsheet a bit, and now I understand what's it for; it will spread out the monthly retirement income much better over the years from the very beginning of the retirement until the end.

But (in my 500K scenario), this would also mean the overall portfolio risk will drop from 50/50 stocks/bonds to 26/26/48 stocks/bonds/cash initially. With only 26% of my total assets left on the stock markets, I'm not sure if that meets my risk requirements?
SnowBog
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

eddie_money wrote: Tue Jan 10, 2023 1:47 pm Thank you for the explanation SnowBog, it makes more sense now.

I have been playing around with these numbers in a spreadsheet a bit, and now I understand what's it for; it will spread out the monthly retirement income much better over the years from the very beginning of the retirement until the end.

But (in my 500K scenario), this would also mean the overall portfolio risk will drop from 50/50 stocks/bonds to 26/26/48 stocks/bonds/cash initially. With only 26% of my total assets left on the stock markets, I'm not sure if that meets my risk requirements?
That's not the way I look/think about it... At least not using the spreadsheet version... (I wasn't familiar with VPW prior to the spreadsheet, so I can only guess...)

But using the "forward test" as a reference, the retiree's AA was 60/40, and they are 100% invested in a single "balanced" fund that maintains their 60/40, which includes their "set aside" portion for their "missing payments". For withdrawals, they choose to implement monthly withdrawals, and to maintain a 6 month buffer of withdrawals in a banking account. (OK, so maybe their AA is closer to 59/41 — but "good enough".).

In other words, they didn't alter their AA. They didn't move the "missing payments" portion to cash. The spreadsheet is handling the math on how much of the total portfolio is available for the "variable" part of VPW, and how much is the "missing payments" portion. The newer versions also make it clear if have an adequate portfolio to cover those "missing payments", including if there was a projected 50% drop (aka "required flexibility"). They just maintain their single 60/40 fund and withdraw as needed.

So I see no reason why you couldn't do the same with your 50/50 AA. I don't mean move to a single fund... But I don't see a reason, and don't recall any recommendations, of people changing their AA to "use" VPW. (When I've seen recommendations of AA related to VPW, it's usually related to the "required flexibility". If you lack the "required flexibility", then perhaps your AA is too aggressive...)

So unless I've misunderstood, you could just continue to manage your portfolio as you currently do, maintaining the 50/50 AA.

Unrelated to VPW, you might decide to adjust the makeup of your fixed income. For example, you wouldn't want to have all your fixed income in something like long term treasuries if you are retiring and needing the money soon... Some retirees might move 0.5-3+ years of expenses to cash or other short term bonds, while maintaining their overall AA. But arguably, you'd do that (or not) regardless of your decision to use VPW, APW, SWR, or any other withdrawal approach.
Marseille07
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Re: Variable Percentage Withdrawal (VPW)

Post by Marseille07 »

SnowBog wrote: Tue Jan 10, 2023 5:23 pm
eddie_money wrote: Tue Jan 10, 2023 1:47 pm Thank you for the explanation SnowBog, it makes more sense now.

I have been playing around with these numbers in a spreadsheet a bit, and now I understand what's it for; it will spread out the monthly retirement income much better over the years from the very beginning of the retirement until the end.

But (in my 500K scenario), this would also mean the overall portfolio risk will drop from 50/50 stocks/bonds to 26/26/48 stocks/bonds/cash initially. With only 26% of my total assets left on the stock markets, I'm not sure if that meets my risk requirements?
That's not the way I look/think about it... At least not using the spreadsheet version... (I wasn't familiar with VPW prior to the spreadsheet, so I can only guess...)

But using the "forward test" as a reference, the retiree's AA was 60/40, and they are 100% invested in a single "balanced" fund that maintains their 60/40, which includes their "set aside" portion for their "missing payments". For withdrawals, they choose to implement monthly withdrawals, and to maintain a 6 month buffer of withdrawals in a banking account. (OK, so maybe their AA is closer to 59/41 — but "good enough".).

In other words, they didn't alter their AA. They didn't move the "missing payments" portion to cash. The spreadsheet is handling the math on how much of the total portfolio is available for the "variable" part of VPW, and how much is the "missing payments" portion. The newer versions also make it clear if have an adequate portfolio to cover those "missing payments", including if there was a projected 50% drop (aka "required flexibility"). They just maintain their single 60/40 fund and withdraw as needed.

So I see no reason why you couldn't do the same with your 50/50 AA. I don't mean move to a single fund... But I don't see a reason, and don't recall any recommendations, of people changing their AA to "use" VPW. (When I've seen recommendations of AA related to VPW, it's usually related to the "required flexibility". If you lack the "required flexibility", then perhaps your AA is too aggressive...)

So unless I've misunderstood, you could just continue to manage your portfolio as you currently do, maintaining the 50/50 AA.

Unrelated to VPW, you might decide to adjust the makeup of your fixed income. For example, you wouldn't want to have all your fixed income in something like long term treasuries if you are retiring and needing the money soon... Some retirees might move 0.5-3+ years of expenses to cash or other short term bonds, while maintaining their overall AA. But arguably, you'd do that (or not) regardless of your decision to use VPW, APW, SWR, or any other withdrawal approach.
Iirc I thought the intent of the 6-month buffer was to smooth out withdrawals. But once you start using VPW, the recommendation is to simply withdraw (set aside as cash) in full, whether you actually need to spend the proceeds or not.

Doing so doesn't alter the VPW portion of the AA, but makes your overall AA certainly more conservative, as you'd have extra cash sitting elsewhere like the above poster's 26/26/48 stocks/bonds/cash example says.

It's not a matter of right or wrong, but I actually thought this approach is rather interesting.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

eddie_money wrote: Tue Jan 10, 2023 7:11 am I've got a question on VPW using the VPW table instead of the sheet.

I understand the steps as outlined here (https://www.bogleheads.org/wiki/Variabl ... _VPW_table) except the very first:
To simplify calculations when using the VPW Table with a pen and paper, missing payments between retirement and the start of a pension such as Social Security (possibly delayed to age 70[6]) can be provided by using a simple high-interest savings account or a certificate of deposit (CD) ladder. For the purposes of VPW calculations, the money set aside in this savings account or CD ladder should not be considered as part of the portfolio.
What is meant by "missing payments"? Payments to whom or what?
Eddie_money, the [6] reference in "missing payments between retirement and the start of a pension such as Social Security (possibly delayed to age 70[6])" points to:

6. ↑ Bogleheads® forum topic: Delay Social Security to age 70 and Spend more money at 62.

I suggest following the link to forum member Cut-Throat's famous 2012 post about safely spending more at age 62 by delaying Social Security to age 70.

It should become clear, after reading it, that the missing payments are those of the delayed pension (between retirement and the start of the delayed pension).
eddie_money wrote: Tue Jan 10, 2023 7:11 am And about that CD ladder:
  • What is the source of the money that should be put in the CD ladder, and for what goal it should be used?
  • How do I determine the total amount of money that should be put in the CD ladder, and how often should I have it to 'ladder'?
The money is withdrawn from the fluctuating (stocks and bonds) portfolio and put into something that doesn't fluctuate in value and pays enough interest to mostly keep up with inflation (hopefully) between retirement and the start of Social Security payments, like a high-interest savings account or a CD ladder. It's simple and good enough.

The suggested amount is: monthly payment X 12 X number of gap years
eddie_money wrote: Tue Jan 10, 2023 7:11 am I tried searching but couldn't find an answer. If there's a post that gives more insights on the workings of the VPW table (in conjunction with future pension income) that would be great as well!

Edit:

Maybe a real life example can be given?

Say I have an investment portfolio worth 500K, 50/50 in stocks/bonds, all to be assigned to my retirement.
I am 60 and want to retire. My SS kicks in at 70, expected $2000 a month. No other pension incomes.

How would this work using the VPW table and the steps as outlined?
The retiree would withdraw ($2,000 X 12 X (70-60)) = $240,000 from the portfolio and put it into a high-interest saving account. The first year, the retiree would withdraw 1/10 of the savings account balance. The second year, the retiree would withdraw 1/9 of the savings account balance. And so on. After 10 years, the savings account would be depleted, but Social Security $2,000/month payments would start.

The remaining ($500,000 - $240,000) = $260,000 would be left into the 50/50 stocks/bonds portfolio and be used for VPW withdrawals.

You'll find a more elaborate discussion in this earlier post starting at "The baseline is Cut-Throat's approach [...]".
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
eddie_money
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Thank you all for your responses.
longinvest wrote: Tue Jan 10, 2023 6:43 pm The retiree would withdraw ($2,000 X 12 X (70-60)) = $240,000 from the portfolio and put it into a high-interest saving account. The first year, the retiree would withdraw 1/10 of the savings account balance. The second year, the retiree would withdraw 1/9 of the savings account balance. And so on. After 10 years, the savings account would be depleted, but Social Security $2,000/month payments would start.

The remaining ($500,000 - $240,000) = $260,000 would be left into the 50/50 stocks/bonds portfolio and be used for VPW withdrawals.
Thank you for explaining. Now I have a bit better understanding of the why and how of this mechanism, I tried to model this scenario using both the VPW table, and the VPW sheet.
  • Using the sheet: Age 60, portfolio 50/50 stocks/bonds, balance 500K. VPW-rate starting at 4.5%. $2000 SS at age 70. Suggested withdrawal is $37,160 in the first year.
  • When using the VPW table: I place $240K in a HYSA/CD-ladder, withdrawing $24,000 in the first year. The suggested withdrawal (4.5%) of the remaining $260K is $11,700. Those combined add up to $35,700. Quite a bit less.
It seems this difference in outcomes can be fully attributed to the fact the overall portfolio risk declines by transferring almost half of it into risk-free assets to 'bridge' the gap to SS. When applying a 90/10 asset allocation to the remaining VPW portfolio (keeping the overall wealth somewhere closer to 50/50 AA), the suggested withdrawal rate jumps to 5.3% which allows me to withdraw $13,864 initially from the VPW portfolio, to be combined with the SS 'bridge' totaling to $37,864 (much closer to, and even a little over, the VPW sheet suggested withdrawal).

Does this make sense? Or am I drawing wrong conclusions here?
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

eddie_money wrote: Wed Jan 11, 2023 4:22 am Now I have a bit better understanding of the why and how of this mechanism, I tried to model this scenario using both the VPW table, and the VPW sheet.
  • Using the sheet: Age 60, portfolio 50/50 stocks/bonds, balance 500K. VPW-rate starting at 4.5%. $2000 SS at age 70. Suggested withdrawal is $37,160 in the first year.
  • When using the VPW table: I place $240K in a HYSA/CD-ladder, withdrawing $24,000 in the first year. The suggested withdrawal (4.5%) of the remaining $260K is $11,700. Those combined add up to $35,700. Quite a bit less.
It seems this difference in outcomes can be fully attributed to the fact the overall portfolio risk declines by transferring almost half of it into risk-free assets to 'bridge' the gap to SS. When applying a 90/10 asset allocation to the remaining VPW portfolio (keeping the overall wealth somewhere closer to 50/50 AA), the suggested withdrawal rate jumps to 5.3% which allows me to withdraw $13,864 initially from the VPW portfolio, to be combined with the SS 'bridge' totaling to $37,864 (much closer to, and even a little over, the VPW sheet suggested withdrawal).

Does this make sense? Or am I drawing wrong conclusions here?
Eddie_money, there doesn't exist a risk-free asset in real life. All assets are risky, but they differ in the risks they carry. I'll assume that you meant volatility-free assets like savings accounts, CDs, and similar assets often referred to as cash.

While it eliminates volatility, there's a potential cost to leaving money into cash, instead of investing it. That's why putting $240,000 into cash results into a slightly lower total income of $35,700 for the first year, -4% less than the worksheet's $37,160.

Changing the portfolio's asset allocation to 90/10 stocks/bonds doesn't eliminate this potential cost. At age 70, when the cash bridge is depleted, the portfolio's asset allocation remains 90/10 stocks bonds and results into wider income fluctuations than the worksheet's scenario where the residual portfolio, at age 70, still has a 60/40 stocks/bonds allocation.

What I'm saying is that the two approaches (using a single portfolio with the worksheet versus using separate VPW portfolio and cash bridge) differ.

Personally, I much prefer the simplicity of using a single balanced portfolio with the worksheet. But it requires a big enough portfolio, which isn't the case here. The worksheet issues a "Portfolio too small to fully bridge pensions after loss" warning:

Image

That's because the estimated bridge cost

Image

is bigger than 50% of the after-loss portfolio balance:

Image

If I was in such a situation, I'd consider working a few additional years, until the estimated bridge cost gets significantly lower than 50% of the projected after-loss portfolio balance. The worksheet's Accumulation sheet can help with this. (See this thread for details).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
eddie_money
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

longinvest wrote: Wed Jan 11, 2023 7:22 am Eddie_money, there doesn't exist a risk-free asset in real life. All assets are risky, but they differ in the risks they carry. I'll assume that you meant volatility-free assets like savings accounts, CDs, and similar assets often referred to as cash.
Agreed. What I really meant in this context was money not exposed to market risk.
What I'm saying is that the two approaches (using a single portfolio with the worksheet versus using separate VPW portfolio and cash bridge) differ.
Understood. So coming back to my earlier observation, if I understand correctly:
  • When using the VPW table method, the 'cost of the bridge' is 100% placed in cash. The remainder (the VPW portfolio) is subject to market risk. Because of this, the overall retirement portfolio is subject to lower risk (and therefore has lower returns) compared to the VPW sheet method (which exposes both 'cost of bridge' and 'VPW portfolio' to market risk). Important note: If a fixed asset allocation is chosen for the VPW portfolio, the asset allocation (and therefore market risk) of the overall retirement portfolio can change over time as the 'bridge' gets slowly depleted and the VPW portfolio is subject to market volatility.
  • When using the VPW sheet, the full retirement portfolio (both bridge and VPW parts) are exposed to (the same level of) market risk. Although the overall risk (and therefore expected returns) is higher then using the VPW table method, there's a risk of early depletion of the 'cost of bridge', hence the warning in the sheet if the overall portfolio isn't large enough to potentially compensate for that loss.
If I was in such a situation, I'd consider working a few additional years, until the estimated bridge cost gets significantly lower than 50% of the projected after-loss portfolio balance.
According to the sheet, yes, this would make sense. But the sheet doesn't account for certain factors that might be relevant too on someones decision to start retirement. Say in this scenario, working isn't an option for the retiree anymore. Besides that, the retiree can live off the pension (and bridge) income alone without a problem to meet all of their financial needs. Why should we expose the bridge to market risk (by using the sheet) in this scenario?

And if we continue down that line, is it safe to say the VPW sheet shouldn't be used at all in cases where the portfolio balance isn't all that high relative to the (DB) pension income(s)?

As an example I took these numbers: age 60, portfolio balance $255K, COLA pension $4000 a month starting at 65. Someone could easily put that $250K in a HYSA, pull $48K a year 2% inflation adjusted, until pension income starts kicking in. However, the sheets suggested withdrawal (at 60/40) of only $34K a year, and as expected throws you the 'bridge warning'. This low withdrawal doesn't make sense, how come the sheet is suggesting that?
azanon
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Re: Variable Percentage Withdrawal (VPW)

Post by azanon »

<Deleted - question answered by Longinvest>
Last edited by azanon on Thu Jan 12, 2023 10:04 am, edited 1 time in total.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

eddie_money wrote: Thu Jan 12, 2023 7:14 am But the sheet doesn't account for certain factors that might be relevant too on someones decision to start retirement. Say in this scenario, working isn't an option for the retiree anymore.
Eddie_money, there's an infinite number of potential scenarios. But, typically Bogleheads investors will have a large-enough portfolio to bridge delayed Social Security with their balanced portfolio. The few without a large-enough portfolio can use forum member Cut-Throat's cash bridging approach.
eddie_money wrote: Thu Jan 12, 2023 7:14 am Besides that, the retiree can live off the pension (and bridge) income alone without a problem to meet all of their financial needs. Why should we expose the bridge to market risk (by using the sheet) in this scenario?
Using the worksheet with a single balanced portfolio (possibly invested into a One-Fund Portfolio) is simpler for a less financially-inclined spouse or caretaker than using a separate VPW portfolio and a cash bridge. Many people value such simplicity.
eddie_money wrote: Thu Jan 12, 2023 7:14 am And if we continue down that line, is it safe to say the VPW sheet shouldn't be used at all in cases where the portfolio balance isn't all that high relative to the (DB) pension income(s)?
This makes no sense at all. The VPW worksheet only issues a warning when the cost of bridging a delayed pension is more than 50% of the portfolio. There won't be a warning, regardless of how much pension income the retiree is getting, if all pensions are already started.

Note that the worksheet is simply trying to preserve liquidity (e.g. not let the portfolio shrink too fast). It would be a mistake to only plan in terms of retirement income. Both income and liquidity are important during retirement.

If the portfolio is too small for bridging a delayed pension using the portfolio, one possible solution is to bridge the pension using cash and use the worksheet with the remaining portfolio, considering the pension as already started. (From the worksheet's point of view, the pension is already started as the retiree is already getting monthly payments from the cash bridge). Another solution is to claim the pension earlier. Another is to delay retirement. The worksheet's warning is an indication that the retiree must rethink the plan.
eddie_money wrote: Thu Jan 12, 2023 7:14 am As an example I took these numbers: age 60, portfolio balance $255K, COLA pension $4000 a month starting at 65. Someone could easily put that $250K in a HYSA, pull $48K a year 2% inflation adjusted, until pension income starts kicking in. However, the sheets suggested withdrawal (at 60/40) of only $34K a year, and as expected throws you the 'bridge warning'. This low withdrawal doesn't make sense, how come the sheet is suggesting that?
The worksheet is trying to preserve liquidity and telling the investor that it's too early to retire with the submitted scenario. And, this makes a lot of sense. Here's why.

If the retiree puts ($4,000 X 12 X (65 - 60)) = $240,000 into a cash bridge, to cover the missing $4,000/month payments from age 60 to age 65, the retiree will be left with a ($255,000 - $240,000) = $15,000 portfolio. This would mostly deplete the retiree's portfolio at age 60 and probably leave the retiree with less than $14,000 of liquidity (after VPW withdrawals) at age 65.

If the retiree has no choice but to retire with this scenario, the retiree will have to make a difficult choice between how much monthly income to get from a cash bridge until age 65, and how much liquidity to preserve.

Yet, this scenario is practically never chosen in real life. Most pensions have options to claim earlier than age 65 (getting a smaller monthly payment). Claiming at age 60 would be a good option, in this case, fully keeping the $255,000 balanced portfolio for VPW withdrawals and preserving liquidity in the process.

The worksheet's warning can help the retiree look for a better scenario than the one submitted to the worksheet, as I've just shown in the previous paragraph.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
eddie_money
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Re: Variable Percentage Withdrawal (VPW)

Post by eddie_money »

Thank you for all the patience you having with me, I'm learning a lot from your explanations.
longinvest wrote: Thu Jan 12, 2023 7:57 am Note that the worksheet is simply trying to preserve liquidity (e.g. not let the portfolio shrink too fast). It would be a mistake to only plan in terms of retirement income. Both income and liquidity are important during retirement.
I wonder if a dependable (and an initially / short-term higher) retirement income isn't more important to an retiree in their early 'golden years' (hopefully still healthy, and able to spend it well), than keeping large sums liquidity for the long term?

For what I understand, but please correct me if I'm wrong, these large sums of liquidity are only there in the first place to accommodate for volatile market swings, which is only relevant if you keep your retirement portfolio's market exposure to relative high equity risk, which it only relevant is you still have long term portfolio growth in mind.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

eddie_money wrote: Thu Jan 12, 2023 4:14 pm I wonder if a dependable (and an initially / short-term higher) retirement income isn't more important to an retiree in their early 'golden years' (hopefully still healthy, and able to spend it well), than keeping large sums liquidity for the long term?

For what I understand, but please correct me if I'm wrong, these large sums of liquidity are only there in the first place to accommodate for volatile market swings, which is only relevant if you keep your retirement portfolio's market exposure to relative high equity risk, which it only relevant is you still have long term portfolio growth in mind.
Eddie_money, both retirement income and liquidity are important. Life doesn't always go as planned; liquidity gives options, especially when plans change.

Here's an example: An investor retires with a big-enough portfolio to provide for the missing payments of a future pension. After a while, the retiree is approached for a job with awesome work conditions and a big salary. The retiree decides to take the job and stop portfolio withdrawals. Had the retiree been getting pension payments, it would probably have been impossible to stop them, causing undesired additional taxation due to combining pension income with the new salary.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
dunno
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Re: Variable Percentage Withdrawal (VPW)

Post by dunno »

Hi,

sorry if the question has already been answered but I didn't find it.

I understand that the VPW model works with various mixes of all world stocks and all world bonds and that a Life Strategy like ETF it s what's suggested.

In the last couple years I ve built a slightly different portfolio to reduce volatility and a number of other risks while hopefully maintaining good returns (core is a 60/40 life strategy but it also includes gold and US/EU small cap values). I was wondering whats the average returns that your VPW model is using for the 60/40 and 70/30 portfolios and what are the cons of using a more articulated portfolio instead.

thanks
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

dunno wrote: Thu Jan 19, 2023 6:06 am Hi,

sorry if the question has already been answered but I didn't find it.

I understand that the VPW model works with various mixes of all world stocks and all world bonds and that a Life Strategy like ETF it s what's suggested.

In the last couple years I ve built a slightly different portfolio to reduce volatility and a number of other risks while hopefully maintaining good returns (core is a 60/40 life strategy but it also includes gold and US/EU small cap values). I was wondering whats the average returns that your VPW model is using for the 60/40 and 70/30 portfolios and what are the cons of using a more articulated portfolio instead.

thanks
Dunno, VPW's internal growth trend is just a wild ass guess (WAG). More importantly, it isn't a prediction of future returns. It only aims to be good enough for calculating reasonable portfolio contribution amounts during accumulation and withdrawal amounts during retirement.

I'd simply enter the portfolio's stock and bond allocation into the VPW Accumulation And Retirement Worksheet. The worksheet's 10% increment, for stock/bond allocations, was chosen to remove any illusion of precision, as that would be false precision.

As for the concept of a more articulated portfolio, this isn't the thread to debate it. There already are countless debate threads between those who think they can design optimal portfolios and those who think that accepting average market returns is good enough. You can also create a new thread to discuss the concept.

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

Post by SevenBridgesRoad »

longinvest wrote: Thu Jan 19, 2023 8:10 am
dunno wrote: Thu Jan 19, 2023 6:06 am Hi,

sorry if the question has already been answered but I didn't find it.

I understand that the VPW model works with various mixes of all world stocks and all world bonds and that a Life Strategy like ETF it s what's suggested.

In the last couple years I ve built a slightly different portfolio to reduce volatility and a number of other risks while hopefully maintaining good returns (core is a 60/40 life strategy but it also includes gold and US/EU small cap values). I was wondering whats the average returns that your VPW model is using for the 60/40 and 70/30 portfolios and what are the cons of using a more articulated portfolio instead.

thanks
Dunno, VPW's internal growth trend is just a wild ass guess (WAG). More importantly, it isn't a prediction of future returns. It only aims to be good enough for calculating reasonable portfolio contribution amounts during accumulation and withdrawal amounts during retirement.

I'd simply enter the portfolio's stock and bond allocation into the VPW Accumulation And Retirement Worksheet. The worksheet's 10% increment, for stock/bond allocations, was chosen to remove any illusion of precision, as that would be false precision.

As for the concept of a more articulated portfolio, this isn't the thread to debate it. There already are countless debate threads between those who think they can design optimal portfolios and those who think that accepting average market returns is good enough. You can also create a new thread to discuss the concept.

Welcome to the forum!
If you go looking at other debate threads, as suggested, here's a favorite of mine, in which several pieces of BH dogma are well challenged: viewtopic.php?t=287967
dunno
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Re: Variable Percentage Withdrawal (VPW)

Post by dunno »

longinvest wrote: Thu Jan 19, 2023 8:10 am
dunno wrote: Thu Jan 19, 2023 6:06 am
Dunno, VPW's internal growth trend is just a wild ass guess (WAG). More importantly, it isn't a prediction of future returns. It only aims to be good enough for calculating reasonable portfolio contribution amounts during accumulation and withdrawal amounts during retirement.
Thanks for the reply and help to the community.

I understand that 's a WAG, I just wanted to know what's the "guess" you guys used to understand if my own guess on my portfolio's growth somehow matches enough to be able to translate VPW for my personal scenario? Considering all the usual disclaimers of course.

Thank you
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

dunno wrote: Mon Jan 23, 2023 3:42 am
longinvest wrote: Thu Jan 19, 2023 8:10 am
dunno wrote: Thu Jan 19, 2023 6:06 am
Dunno, VPW's internal growth trend is just a wild ass guess (WAG). More importantly, it isn't a prediction of future returns. It only aims to be good enough for calculating reasonable portfolio contribution amounts during accumulation and withdrawal amounts during retirement.
Thanks for the reply and help to the community.

I understand that 's a WAG, I just wanted to know what's the "guess" you guys used to understand if my own guess on my portfolio's growth somehow matches enough to be able to translate VPW for my personal scenario? Considering all the usual disclaimers of course.

Thank you
Dunno, here are some previous posts discussing VPW's timeless constant growth trend:
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
dunno
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Re: Variable Percentage Withdrawal (VPW)

Post by dunno »

longinvest wrote: Mon Jan 23, 2023 6:50 am
dunno wrote: Mon Jan 23, 2023 3:42 am
longinvest wrote: Thu Jan 19, 2023 8:10 am
dunno wrote: Thu Jan 19, 2023 6:06 am
Dunno, here are some previous posts discussing VPW's timeless constant growth trend:
[ quote fixed by admin LadyGeek]

Thanks
dknightd
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Re: Variable Percentage Withdrawal (VPW)

Post by dknightd »

longinvest wrote: Tue Dec 20, 2022 1:22 pm Here's a copy of a post I wrote earlier today on another thread to explain that VPW is a tool for creating retirement income, and that, when using VPW, common budgeting techniques and tools remain useful for handling lumpy expenses.

During accumulation, the VPW worksheet suggests a sensible amount to save and invest into the portfolio. During retirement, it suggests a sensible amount to withdraw from the portfolio and combine with Social Security and pensions. As the name of the method implies, these amounts are variable. They adapt (every year or more often) to the investor's evolving situation and portfolio balance:
longinvest wrote: Tue Dec 20, 2022 8:08 am Basic personal finance tools and techniques, like low-interest loans, saving in advance, or a combination of the two, are commonly used for lumpy expenses like buying a car or a house. This works both during accumulation and during retirement.

During accumulation, people don't ask their employer to increase their salary in "car replacement years" and lower it in other years. This would make no sense. People naturally use budgeting tools and techniques to handle their lumpy expenses.

[...] I particularly like the variable percentage withdrawal (VPW) method. It's a method for creating retirement income. Like a work salary, it doesn't eliminate the need to use budgeting tools and techniques to handle lumpy expenses.

Our wiki provides a VPW Accumulation And Retirement Worksheet which can be downloaded or used online. Every year (or more frequently) during accumulation it suggests a sensible amount to save and invest into the portfolio. Every year (or more frequently) during retirement it suggests a sensible amount to withdraw from the portfolio and combine with Social Security (possibly delayed to age 70) and pensions (with or without cost-of-living adjustments) to create retirement income. Here are the links: During retirement, any excess retirement income money, after paying taxes and expenses, can be used for gifting while alive and enjoying the process (instead of waiting after death), or for saving for upcoming lumpy expenses, appropriately putting the money into a savings account (not into a portfolio of fluctuating assets).

Every thing you write is sensible. Thanks for sharing. We do not like our "income" to change much year to year. When I was working some years it would go up, some years it would stay the same. Luckily it has never gone down..

I think I like stability. One problem with the VPW method, it is variable, and might go up or down. I understand that investing is risky, and results might vary.

Is it possible to recast the VPW method to make sure spending money does not go away? I suspect not. If I'm in the middle, I have to assume we're OK
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

In the forward test thread, forum member Mtwhmemn asked:
mtwhmemn wrote: Sat Feb 04, 2023 10:36 am Sorry if this has been answered before...where can I assign a specific Cost of Living Adjustment, e.g. 2%, to an immediate annuity in Defined Benefit Pension? What is the default and how can I change it to 2% if that is where I'm supposed to put an annuity? Thanks.
Mtwhmemn, the simple answer is that, when the pension has cost of living adjustments, the "Cost of Living Adjustment" (COLA) choice should be set to "Yes". No further adjustment is needed.

Now, if a retiree thinks that a pension provides only half of the required cost of living adjustment, the pension could be divided in two halves, one half with COLA set to "Yes" and the other set to "No". It's simple and effective.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
mtwhmemn
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Re: Variable Percentage Withdrawal (VPW)

Post by mtwhmemn »

longinvest wrote: Sat Feb 04, 2023 11:28 am In the forward test thread, forum member Mtwhmemn asked:
mtwhmemn wrote: Sat Feb 04, 2023 10:36 am Sorry if this has been answered before...where can I assign a specific Cost of Living Adjustment, e.g. 2%, to an immediate annuity in Defined Benefit Pension? What is the default and how can I change it to 2% if that is where I'm supposed to put an annuity? Thanks.
Mtwhmemn, the simple answer is that, when the pension has cost of living adjustments, the "Cost of Living Adjustment" (COLA) choice should be set to "Yes". No further adjustment is needed.

Now, if a retiree thinks that a pension provides only half of the required cost of living adjustment, the pension could be divided in two halves, one half with COLA set to "Yes" and the other set to "No". It's simple and effective.
Makes sense and thanks for moving...I realize I put the question in the wrong place.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

I have uploaded version 2.8 of the VPW Accumulation And Retirement Worksheet.

After studying the behavior over time of the 50% of portfolio cap on pension bridges, I came to the conclusion that the cap is good enough to sufficiently preserve liquidity, even when the deficit is large and the number of bridge years is more than a few years. As a consequence, I have eliminated the dreaded "Portfolio too small to fully bridge pensions..." warnings.

Here are the main changes:
  • Remove warnings about portfolio size when pensions are partially bridged.
  • Display nothing for unused defined benefit pension and temporary retirement income entries.
As usual, comments are welcome.

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

Post by longinvest »

In this post, I explain in details why I removed the portfolio size warning in version 2.8 of the worksheet.

A hypothetical 50 years old retiree has a $1,000,000 balanced portfolio (60/40 stocks/bonds) and anticipates to get a $50,000 (annual) pension indexed to inflation (such as Social Security) starting at age 70. There's a 20 year gap between retirement and the start of pension payments.

Assuming some cash investment (like I-Bonds, CDs, etc.) could deliver approximately 0% real per year for the next 20 years, the retiree could put aside $50,000 into a savings account for this year and put ($50,000 X 19) = $950,000 into cash investments for the remaining 19 gap years. The total cost of the pension bridge would be ($50,000 + $950,000) = $1,000,000. The retiree would be burning the entire portfolio to bridge the future pension and be left with no portfolio at age 70. The retiree would reliably get $50,000 per year (adjusted to inflation) for life starting at age 50.

The first version (1.x) of the VPW worksheet supported bridging future pensions using the portfolio. The VPW Table percentage for a 20-year depletion schedule and a 60/40 portfolio is 6.9%. As a consequence, the worksheet calculated an approximate ($50,000 / 6.9%) = $720,290 cost for the pension bridge, leaving $279,710 for a normal withdrawal using the 4.3% VPW Table percentage at age 50, that's ($279,710 X 4.3%) = $12,037, resulting into a total income of $62,037 in the first year of retirement.

But, a portfolio fluctuates. If the balanced portfolio was to lose -30% (due to stocks losing half of their value) just before making the first withdrawal, it would shrink to $700,000, which is less than the full cost of the (portfolio) pension bridge. To protect the portfolio from premature (before age 70) depletion, version 1.x of the worksheet reduced bridge withdrawals in proportion of bridge funding ratio. In other words, the bridge withdrawal would have been (($700,000 / $720,290) X $50,000) = $48,592, instead of $50,000, after the loss. Nothing would have been left for an additional normal withdrawal. If the portfolio doesn't recover sufficiently, it gets depleted at age 70, like the cash bridge.

Version 2.x of the VPW worksheet added a 50% of portfolio cap on bridge funding to preserve lifelong liquidity. In other words, the worksheet assumes that only 50% of the current portfolio is available for pension bridges. If this is insufficient, bridge withdrawals are reduced in proportion of bridge funding ratio.

Getting back to our example, this means that only $500,000 is available for bridging the pension. It's less than the estimated $720,290 cost. Consequently, the worksheet reduces the bridge withdrawal to (($500,000 / $720,290) X $50,000) = $34,708 leaving $500,000 for the normal VPW withdrawal. That's ($500,000 X 4.3%) = $21,517 for a total retirement income of ($34.708 + $21,517) = $56,225.

But, as I previously wrote, a portfolio fluctuates. A drop to $700,000 just before withdrawal would change the picture. The cap would become $350,000, resulting into a ($350,000 / $720,290) = $24,296 bridge withdrawal. The normal withdrawal would be ($350,000 X 4.3%) = $15,062 for a total retirement income of ($24.296 + $15,062) = $39,358 after the loss. That's 20% less than $50,000, but liquidity is being preserved and hopefully, if the portfolio recovers, total retirement income increases back above $50,000.

When I designed version 2.x, I considered the two limits (assuming constant returns in a model):
  • Full bridging: when the pension bridge costs 100% of the portfolio, income is level all retirement long, but it leaves the retiree without a portfolio when the pension starts.
  • No bridge: no money is spent on the bridge. Until the pension starts, only normal VPW withdrawals are made. When the pension starts, total retirement income increases by the annual pension amount.
None of these two limit possibilities was appealing to me. So, I chose the middle position: use no more than half the portfolio for bridge withdrawals and the rest for normal withdrawals. That's where the 50% comes from.

What I hadn't analyzed, until now, is the long-term impact of this choice. The worksheet has no memory of the past. It only uses current information to make its suggestions. As a consequence, I had no confidence that the 50% of portfolio cap would behave acceptably with large deficits over long periods. I worried that maybe the residual portfolio would possibly shrink to almost nothing. That's why a "Portfolio is too small..." warning was shown when the estimated cost of bridges was bigger than 50% of the portfolio.

By analyzing it, I've discovered that the 50% of portfolio cap is significantly more robust than I anticipated. Using a constant return projection, the ($500,000 / 720,290 - 1) = -31% deficit shrinks to 0% at age 64 while total retirement income increases from $56,225 to $65,116, where it stays for the remaining of retirement. At age 70, the residual portfolio is $279,298 before withdrawal.

Repeating the calculations after loss, assuming no recovery (other than the normal 60/40 stocks/bonds growth trend), the ($350,000 / 720,290 - 1) = -51% deficit shrinks to 0% at age 67 while total retirement income increases from $39,358 to $57,662, where it stays for the remaining of retirement. At age 70, the residual portfolio is $141,571 before withdrawal.

If I allow the portfolio to gradually recover from its -30% loss over 20 years (in other words, after 20 years, the total cumulative return is identical to not having had the loss), total retirement income increases from $39,358 to $50,743 at age 60, continuing to $64,391 at age 70 (-1% less than the no-loss scenario), where it stays for the remaining of retirement. At age 70, the residual portfolio is $265,906 (-5% less than the no-loss scenario) before withdrawal.

Using various synthetic scenarios, with small, medium, big, and huge deficits, over short, medium, and long gaps, testing unfavorable return sequences (like losses before first withdrawals), I was unable to find a case where the 50% cap wouldn't have delivered an acceptable outcome, given the analyzed situation. I am positively surprised by the robustness of the 50% cap for bridges.

An interesting case is an age 50 retirement with a $1,000,000 balanced portfolio, but with a $25,000 pension at age 70. The cost of a cash bridge would be (20 X $25,000) = $500,000, resulting into a total retirement income of $46,517 for the no-loss scenario and of $40,062 after loss. Using a portfolio bridge (with the 50% cap) results into a total income of $52,636 for the no-loss scenario and of $39,358 after loss (gradually increasing to $39,664 at age 52 and staying there). In other words, when using the portfolio for bridging the 20 year gap, instead of a cash bridge, there's a significant (+13%) bonus for the no-loss scenario and practically no difference (-1%) after loss when assuming that the -30% loss isn't recovered during gap years.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

I have uploaded version 2.9 of the VPW Accumulation And Retirement Worksheet.

Thanks to a report on our Canadian sister forum (FWF), I was able to reproduce and fix a problem in the Accumulation sheet caused by trying to multiply a number by an empty cell (which was previously $0 in versions 2.7 and earlier).

Here's the main change:
  • Add missing emptiness tests in Accumulation sheet.
As usual, comments are welcome.

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

Post by jocdoc »

I downloaded the ODF version. The default of the v 2.9 defined benefit 2, work pension is yes with $1000 per month. If you change it to no or change the amount to zero you get an error message. If I have no work pension How do I change this section to remove this income?
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

jocdoc wrote: Wed Mar 01, 2023 7:08 am The default of the v 2.9 defined benefit 2, work pension is yes with $1000 per month. If you change it to no or change the amount to zero you get an error message. If I have no work pension How do I change this section to remove this income?
Jocdoc, the worksheet doesn't allow for incomplete or inconsistent pension entries (like indicating that a pension isn't started, but not providing a start age for the pension). To remove pension #2, all of its cells must be emptied (including its name).
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
antiqueman
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Re: Variable Percentage Withdrawal (VPW)

Post by antiqueman »

When longvest initially started VPW, I followed his posts and utilized the retirement VPW calculator /worksheets. Later, all the additional pre-retirement information was added to the spreadsheet and it became to complicated for me to follow. (I am older and have trouble with complicated software.


Is there anyway to download the initial retirement calculator, only, to help those of us who are in retirement and do not need the accumulation part of the worksheet/calculator functions. Is the basic retirement calculator, which I recall had only about 5 excel cells that needed to be filled in to run the numbers, still available?

Thank you.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

antiqueman wrote: Wed Mar 01, 2023 7:28 am When longvest initially started VPW, I followed his posts and utilized the retirement VPW calculator /worksheets. Later, all the additional pre-retirement information was added to the spreadsheet and it became to complicated for me to follow. (I am older and have trouble with complicated software.


Is there anyway to download the initial retirement calculator, only, to help those of us who are in retirement and do not need the accumulation part of the worksheet/calculator functions. Is the basic retirement calculator, which I recall had only about 5 excel cells that needed to be filled in to run the numbers, still available?

Thank you.
Antiqueman, to get what you're asking for, you could download the VPW Accumulation and Retirement Worksheet, then:
  • Delete the Accumulation sheet (or simply empty all its yellow cells)
  • Select the Retirement sheet.
  • Empty the 5 yellow cells of "Defined Benefit Pension #1" (Social Security).
  • Empty the 5 yellow cells of "Defined Benefit Pension #2" (Work Pension).
The Retirement sheet will initially require 4 entries: age, portfolio balance, portfolio allocation, and withdrawal frequency.

Every year (or more frequently, if using a shorter withdrawal frequency), only two entries must be updated, age and portfolio balance (assuming the allocation is constant) to get a new withdrawal amount suggestion.

I much prefer that retirees add their pension information into the Retirement sheet and update it annually, so that they get a proper Required Flexibility estimate relative to total retirement income (including Social Security). Those with a fixed pension (without cost-of-living adjustments), a delayed pension, or temporary retirement income also benefit from the worksheet's calculations to adjust portfolio withdrawals accordingly.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
azanon
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Re: Variable Percentage Withdrawal (VPW)

Post by azanon »

I imagine this has been asked before (sorry), but on the "accumulation" worksheet, is the "suggested portfolio contribution," using a before, or after tax basis? Like many, I have both Roth and Traditional IRA options, so saving in Roth requires more money since I'm paying the taxes upfront.

And the reverse of the same question, in retirement, if I have both Roth and Traditional IRAs, should I withdraw in direct proportion to the percent I have in each?
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

azanon wrote: Wed Mar 01, 2023 10:41 am I imagine this has been asked before (sorry), but on the "accumulation" worksheet, is the "suggested portfolio contribution," using a before, or after tax basis? Like many, I have both Roth and Traditional IRA options, so saving in Roth requires more money since I'm paying the taxes upfront.
Azanon, this simple worksheet obviously doesn't implement federal and state tax rules. All calculations are on a before-tax basis.

I don't want to derail this thread into a long debate about tax strategies. I'll simply state the neutral (good enough) position which is to aim for level taxable income over life. This suggests primarily directing retirement savings into traditional (401k and IRA) accounts.

The few lucky accumulating investors with so high a salary that they can't entirely put their retirement savings into traditional accounts can reduce their "excess contribution" by their effective average tax rate after traditional savings and pension contributions. Here's a made up example just to illustrate what I mean:
  • Gross salary: $200,000 (including employer match)
  • Suggested annual retirement portfolio contribution: $40,000 (VPW worksheet suggested amount)
  • Traditional (401k, IRA, etc.) contribution: $32,500 ($22,500 + 5% employer match)
  • Annual Social Security (SS) contribution: $8,500 (old age and survivor tax, without the disability component)
  • Taxes (taking into account traditional contribution and SS contribution): $50,000 (state and federal)
The excess contribution is ($40,000 - 32,500) = $7,500. The average tax rate after traditional savings and pension contributions is ($50,000 / ($200,000 - $32,300 - $8,500)) = 31.4%. As a result, the accumulating investors could reduce the contribution amount by (31% X $7,500) = $2,355. That's a difference of only $200/month on a suggested portfolio contribution of $3,335/month. The investor could as well ignore these additional calculations, just contribute the worksheet's suggested amount, and be done with it.
azanon wrote: Wed Mar 01, 2023 10:41 am And the reverse of the same question, in retirement, if I have both Roth and Traditional IRAs, should I withdraw in direct proportion to the percent I have in each?
Taking the same neutral (good enough) position, aiming for level lifelong taxable income, suggests taking withdrawals proportionally from various accounts, except for pension bridge withdrawals and portfolio contributions for fixed pensions and temporary retirement income. Again, simplicity would lean towards ignoring the more complex calculations and simply going with taking the worksheet's suggested withdrawal proportionally from traditional, Roth, and taxable accounts.

Want to get fancy about it? Here are some thoughts:

Recognizing that tax-advantaged accounts are an awesome fiscal gift to investors, one could proceed in two steps, instead:
  1. (On paper) Calculate a projected net amount for taking the withdrawal proportionally from accounts (subtracting projected taxes).
  2. (Actual actions) Withdraw this projected net amount in priority from the taxable account along with an additional amount for paying (effective) taxes. Of course, one cannot withdraw less from a traditional account than mandated by Required Minimum Distribution (RMD) rules.
This is equivalent to making tax-advantaged account contributions equivalent to the amount not withdrawn from these (traditional and Roth) accounts, saving immediate taxes on the omitted traditional withdrawal and future ongoing taxes on withdrawn taxable investments.

How about Roth conversions? There's no easy answer. It can be a financial risk to prepay taxes. The portfolio loss (before taxes) due to prepaid taxes compounds over time (Jack Bogle called that "the tyranny of compounding costs"). The difficulty is that one never knows if taxes will ever be due in the future. The tax rate on qualified charitable distributions from traditional accounts could be 0%, for example.

Yet, trying to locate assets to avoid paying taxes can have unintended side effects and end up being counterproductive. See this illustration of why I think that a mirrored allocation is good enough (and probably desirable).

There's also the stepped-up basis at death for taxable investments, giving some potential advantage if one dies early*. But, tax laws could change in the future, too. It's really complex. Unfortunately, the optimal strategy is elusive; it will only be know after the fact, once the retiree's dead.

* VPW aims to spend most of the portfolio while the retiree is alive.

One could easily argue that neutrality (aiming for good enough instead of aiming for an elusive optimal strategy) would favor "tax diversification", in other words, spreading one's investments across accounts with different tax exposure (traditional, Roth, and taxable).

Everytime I'm tempted to get fancy about tax strategies, I start looking at the different pieces of the puzzle and I end up in the same dead end (no pun intended). Then I think about how can I explain whatever I'm considering to my wife in a way she'll be able to continue doing it if she survives me. This brings me back to simplicity.

In my personal life, I came to the following relatively simple solution (it's simple enough for my wife):
  1. Use a separate Retirement sheet for all Roth accounts (combined), both during accumulation and retirement. The Porfolio Balance is equal to the sum of all Roth accounts (like Roth 401k and Roth IRA accounts). Don't include any pension information into this sheet. Let's call this the Roth sheet.
  2. Put all other accounts (combined) into an Accumulation sheet (during accumulation) or a Retirement sheet (during retirement), along with pension (and temporary retirement income) information. Let's call this the Other sheet.
  3. During accumulation: Contribute to the overall portfolio the suggested contribution amount of the Other sheet minus the suggested withdrawal amount of the Roth sheet.
  4. During retirement: Withdraw the suggested withdrawal amount of the Other sheet proportionally from traditional and taxable accounts. Also withdraw the suggested withdrawal amount of the Roth sheet from a Roth account.
Using separate sheets for Roth and Other accounts forces bridge withdrawals (and contributions for fixed pensions and temporary retirement income) to be taken from traditional (and taxable, if any) accounts, helping to keep taxable income level over life.

That's simple enough for us. Other investors might prefer using a single sheet and not have to deal with combining two amounts (Roth and Other sheet suggestions).
Last edited by longinvest on Fri Mar 10, 2023 3:15 pm, edited 4 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
SnowBog
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Re: Variable Percentage Withdrawal (VPW)

Post by SnowBog »

longinvest wrote: Thu Mar 02, 2023 9:01 am It's really complex. Unfortunately, the optimal strategy is elusive; it will only be know after the fact, once the retiree's dead.
Just to emphasis this point, there are often overlapping and conflicting influences regarding withdrawals.

To give an example, we plan to "retire early" which will give us many years of "no income" (other than dividends/interest) and thus by default "low taxes", before our delayed pensions/social security kick in. During those years we need to balance:
  • How to fund expenses prior to age 59.5 (when we can access "retirement" accounts without penalty under normal conditions)
  • Limited opportunity for "tax gain harvesting" potentially in the 0% long term tax bracket
  • Limited opportunity for Roth conversions in low tax brackets (which potentially lowers our lifetime taxes)
  • Optionally trying to manage "income" to qualify for ACA (Healthcare) subsidies
  • "Tax smart" withdrawals, for example, let's say with the above our "taxable income" is near a "cliff" (could be the next tax bracket, point where LTCG rate goes up, ACA cliff, etc.). If we need $10k "more", we may want to make that "tax-free" income by using up cash and/or making a withdrawal from Roth.
As you can see, these overlap and conflict. Optimizing for ACA might mean that you end up paying more in taxes (over your lifetime) than if you optimized for TGH and/or Roth conversions. But optimizing for TGH/Roth could mean paying more for healthcare (because you lose ACA subsidies).

And the whole thing is subject to tax law changes. As just one example, when we first tried to figure out our plan, RMDs started at age 70. Then they were moved to age 72. Now they are moving again, IIRC out to age 75. That's potentially 5 "extra" years to do TGH/Roth conversions (although we can't defer pensions/social security that far - which adds its own wrinkle).

As it relates back to VPW, our plan is to use the "recommended withdrawal" amount as being "portfolio depletion", inclusive of expenses and taxes. But without regard to "transfers" between accounts. For example, let's say VPW shows a withdrawal of $100k, let's say $80k covers expenses, and the remaining $20k can be used for taxes/other. Let's say our taxes up to this point are $10k, leaving us with $10k for "other". Assuming no conflicts with ACA/TGH, that could mean we do "enough" Roth conversions to "use up" that "extra" $10k. For simple numbers, let's say that means we move $50k from our 401k into Roth. That $50k was "transferred" between accounts - and this is not "counted against" the VPW withdrawals (as the portfolio balance didn't change - except for the $10k taxes related to the conversion). It just now happens to be we have $50k more in a potentially "tax-free" withdrawal scenario than previously. So when we get around to spending that particular $50k, it likely won't contribute to our taxes (assuming we've met 5 years rules, etc.).
azanon
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Re: Variable Percentage Withdrawal (VPW)

Post by azanon »

Longinvest,

Incredibly helpful response - thanks for taking the time to write that! I might borrow your personal solution that you're giving your wife.

To clarify succulently, I definitely wasn't looking to derail it into a tax discussion, rather just wanted to make sure I was making a sensible decision in how I was using this accumulation/retirement worksheet given my and my wife's 2 Roth IRAs + my large Traditional IRA. I knew dollar-for-dollar, a Roth IRA dollar was quite a bit more than a traditional one, so I thought I should ask.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

azanon wrote: Thu Mar 02, 2023 3:26 pm Longinvest,

Incredibly helpful response - thanks for taking the time to write that! I might borrow your personal solution that you're giving your wife.

To clarify succulently, I definitely wasn't looking to derail it into a tax discussion, rather just wanted to make sure I was making a sensible decision in how I was using this accumulation/retirement worksheet given my and my wife's 2 Roth IRAs + my large Traditional IRA. I knew dollar-for-dollar, a Roth IRA dollar was quite a bit more than a traditional one, so I thought I should ask.
Azanon, you're welcome. I started a few years ago with a more complex system that estimated taxes during accumulation and retirement and tried to balance net income before and after retirement. But, it was too complex to explain to my wife in a way in a way she'd be able to manage it without me. Simplifying this to a two-sheets solution without any tax calculation took efforts. That's the annoying thing about simple solutions; they often seem so easy and obvious. Yet, finding them can sometimes take years. Enjoy!
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CharlatanPrime
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Re: Variable Percentage Withdrawal (VPW)

Post by CharlatanPrime »

Hello all.

I just registered here after running across some VPW discussions on Reddit. I wanted to get a quick sanity check on how I'm using the spreadsheet.

I retired in 2022, so I'm no longer in the accumulation phase of my life. I read the instructions and did the following:

- zeroed out all the yellow cells in the Accumulation tab
- filled in the yellow cells in the Distribution tab, including both my and my wife's social security payments

With that data in place, I'm supposed to withdraw the amount shown in the green cell, right? I understand that's a gross withdrawal and I need to factor income taxes into that.

Apologies if this seems self-evident to y'all. I had been using a much more complicated homebrew spreadsheet using that I came up with a value that's about 1/3 lower than the VPW spreadsheet indicates. So I guess I'm having a bit of a 'reverse sticker-shock' moment and wanted to make sure I'm not doing something dumb.

Thanks in advance.
mxinvestor23
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Expected returns of stocks and bonds in wiki spreadsheet.

Post by mxinvestor23 »

In order to calculate the withdrawal percentage the spreadsheet uses the number of periods left for withdrawals and the expected return for the portfolio. The expected return is determined with the average real returns for stocks and bonds since 1900. Why is the real return used instead of the nominal return? I don't think the calculation of the withdrawal should take into account inflation because it uses a PMT formula.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

CharlatanPrime wrote: Mon Mar 20, 2023 8:05 am Hello all.

I just registered here after running across some VPW discussions on Reddit. I wanted to get a quick sanity check on how I'm using the spreadsheet.
CharlatanPrime, welcome to the forum!
CharlatanPrime wrote: Mon Mar 20, 2023 8:05 am I retired in 2022, so I'm no longer in the accumulation phase of my life. I read the instructions and did the following:

- zeroed out all the yellow cells in the Accumulation tab
- filled in the yellow cells in the Distribution tab, including both my and my wife's social security payments

With that data in place, I'm supposed to withdraw the amount shown in the green cell, right? I understand that's a gross withdrawal and I need to factor income taxes into that.
This seems correct, at first sight.

But there's more to it, in the case of a couple. I'll get back to that in a separate post.
CharlatanPrime wrote: Mon Mar 20, 2023 8:05 am Apologies if this seems self-evident to y'all. I had been using a much more complicated homebrew spreadsheet using that I came up with a value that's about 1/3 lower than the VPW spreadsheet indicates. So I guess I'm having a bit of a 'reverse sticker-shock' moment and wanted to make sure I'm not doing something dumb.

Thanks in advance.
From the little you've written so far, I can't see if the fact that VPW withdrawal amounts are actually variable has been properly taken into account.

It might be simpler to point you to the forward test which illustrates, in details, how the worksheet can be used during retirement. I suggest to pay a particular attention to this recent post. There's also this post of the current thread which provides additional explanations.
Last edited by longinvest on Mon Mar 20, 2023 7:03 pm, edited 1 time in total.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

mxinvestor23 wrote: Mon Mar 20, 2023 3:56 pm In order to calculate the withdrawal percentage the spreadsheet uses the number of periods left for withdrawals and the expected return for the portfolio. The expected return is determined with the average real returns for stocks and bonds since 1900. Why is the real return used instead of the nominal return? I don't think the calculation of the withdrawal should take into account inflation because it uses a PMT formula.
Mxinvestor23, welcome to the forum!

What you wrote is incorrect.

VPW doesn't use expected returns. Early in this thread, the "expected returns" term was unfortunately used. That was before I learned that expected returns were just guesses by gurus, differing depending on which guru you were listening to! In other words, I've since realized that expected returns are pure garbage. A few years ago, forum member Lack_ey provided this explanation of what an expected return is:
lack_ey wrote: Tue Jul 28, 2015 11:41 am I'll let others try to address the other issues if they wish, but just so we're on the same page...
longinvest wrote:By the way, back in the day, many, many years ago, when I took a probability course, an "Expected Value" was just the result of a calculation over a set of data. The meaning of "expected" was, if applied to historical data, that it would have been the thing to expect before the data unrolled. So, an expected value based on past data predicts the past!  If you are to provide a mathematical future "expected" value, you'll have to compute it on future data, of course. ;)
Calculating the mean of a data set is not the expected value. Depending on how you do sampling, what the underlying distribution is, etc., it may or may not be a decent estimate of the expected value.

We're dealing with stochastic processes with statistical characteristics that probably change over time. As you say, we are looking to the future, not the past. We are talking about what we think future distributions will more likely be. Expressing a view on what we think (future) expected value will be does not require crunching future data, as stated above. It is a guess, a prediction.

The VPW worksheet uses a growth trend as discount rate and explicitly states that:
  • A growth trend is a timeless wild-ass guess that aims to represent an annual return that is lower than a high annual return and higher than a low annual return.
  • Its role is to distinguish between a high annual return and a low annual return.
  • It's not a prediction of future returns. It's fixed and must never be changed.
  • At the top of a bubble, it's likely to be higher than future returns. At the bottom of a crash, it's likely to lower than future returns.
  • The selected growth trends are based on the long-term returns of world stocks and bonds from 1900 to 2018 according the Summary Edition of the Credit Suisse Global Investment Returns Yearbook 2019.
If I look, for example, at some of the past nominal annual returns of a TIPS fund, the Vanguard Inflation-Protected Securities Fund (VIPSX), I can use the VPW worksheet growth trend for bonds (1.9%) to grossly estimate (it's not precise) if they were low or high when taking inflation into account:
  • 2012: 7.78% [inflation 1.74%] = 5.94% real (high)
  • 2013: -8.92% [inflation 1.50%] = -10.27% real (low)
  • 2014: 3.83% [inflation 0.76%] = 3.05% real (high)
  • 2015: -1.83% [inflation 0.73%] = -2.54% real (low)
  • 2016: 4.52% [inflation 2.07%] = 2.40% real (high)
  • 2017: 2.81% [inflation 2.11%] = 0.69% real (low)
  • 2018: -1.49% [inflation 1.91%] = -3.34% real (low)
  • 2019: 8.06% [inflation 2.29%] = 5.64% real (high)
  • 2020: 10.90% [inflation 1.36%] = 9.41% real (high)
  • 2021: 5.56% [inflation 7.04%] = -1.38% real (low)
  • 2022: -11.95% [inflation 6.45%] = -17.29% (low)
The real returns of marketable securities fluctuate; they're not constant. The fluctuations of inflation-indexed bonds are significant (but smaller than stock fluctuations).

The main factor which affects withdrawals, when using VPW with a portfolio of stocks and bonds, is the fluctuation of returns.

Nobody knows how much the TIPS market will return over my lifetime. Even if I could buy a zero-coupon 10-year TIPS (this doesn't exist), I would only know its exact time-weighted real return over the single specific period from now to its maturity date. I wouldn't know its time-weighted return over any other future period of time as I couldn't predict how much a buyer would be willing to give me for it in the future before maturity and, of course, it wouldn't exist after maturity. Also, I won't be spending all of my portfolio in exactly 10 years. I don't even know exactly how much a Toyota Corolla will cost in inflation-adjusted dollars in exactly 10 years from now! I'm actually pretty sure that its price will still vary from car vendor to car vendor (if it's still sold).

Our lives and markets are full of uncertainty. It's best to accept it, to stop trying to predict future returns, and to move on with our lives.

For a detailed discussion about the growth trend and why it wouldn't be a good idea to use future return predictions to calibrate withdrawal percentages, see this post and this post.

I'll add that the VPW worksheet provides a required flexibility estimate in addition to its withdrawal amount suggestion. This is very important. Withdrawal amounts are variable. It's in the name of the method. Higher portfolio returns lead to higher withdrawal amounts. Lower portfolio returns lead to lower withdrawal amounts.
Last edited by longinvest on Mon Mar 20, 2023 8:37 pm, edited 1 time in total.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

CharlatanPrime wrote: Mon Mar 20, 2023 8:05 am - filled in the yellow cells in the Distribution tab, including both my and my wife's social security payments
CharlatanPrime, when planning retirement for a couple, it's important:
  1. to use the younger spouse's age to express all ages in the worksheet, and
  2. to consider the financial situation of the survivor after the first spouse passes away.

Here's a simple example. A couple, both of age 65, retires with a $1,000,000 balanced portfolio (60/40 stocks/bonds). Both spouses anticipate receiving $2,000 per month Social Security payments by delaying them to age 70. Selecting a monthly withdrawal schedule in the Retirement sheet results into the following suggestion (for 2023):
  • Monthly Portfolio Withdrawal: $7 234
Looking at the detailed calculations (in the lower part of the Retirement sheet) reveals how this was calculated (for 2023):

Available for VPW: ($1,000,000 (portfolio balance) - $111,612 (bridge for 1st pension) - $111,612 (bridge for 2nd pension)) = $776,775.
VPW withdrawal amount: ($776,775 X 5.0%) = $38,812.
Total retirement income: ($24,000 (1st pension bridge withdrawal) + $24,000 (2nd pension bridge withdrawal) + $38,812 (VPW withdrawal)) = $86,812
Note that ($86,812 / 12) = $7,234.

If the first spouse passes away after age 70, the survivor will only get one Social Security payment in addition to the VPW withdrawal. Total income would drop, in the 2023 projection, by -28% to ($24,000 (survivor Social Security payment) + $38,812 (VPW withdrawal)) = $62,812. This calculation takes into account the (potential) depletion of pension bridges before first death.

Repeating this calculation with the after-loss projection gives me a -33% retirement income drop from $71,823 (couple) to $47,823 for the survivor.

Are both spouses comfortable with such scenarios? Some couple will anticipate the survivor to downsize housing and reduce travel expenses and be fine with the financial impact. Other couples might prefer to reduce the financial impact, which can be done by only including one Social Security payment in the worksheet, which would reduce the suggested monthly portfolio withdrawal, for 2023, to $5,699. That's -27% less for the couple (before taxes) during their younger retirement years while they're enjoying life together in order to keep retirement income unaffected for the survivor after first death. It also results into an extra (unplanned for) $2,000/month for the couple, starting at age 70, for as long as both are alive.

It's important to make sure both spouses are aware of the financial impact of first death and that both agree with the choice of including both pensions or a single one (or any in-between position) when planning with the worksheet.
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CharlatanPrime
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Re: Variable Percentage Withdrawal (VPW)

Post by CharlatanPrime »

longinvest wrote: Mon Mar 20, 2023 5:02 pm
CharlatanPrime wrote: Mon Mar 20, 2023 8:05 am Apologies if this seems self-evident to y'all. I had been using a much more complicated homebrew spreadsheet using that I came up with a value that's about 1/3 lower than the VPW spreadsheet indicates. So I guess I'm having a bit of a 'reverse sticker-shock' moment and wanted to make sure I'm not doing something dumb.

Thanks in advance.
From the little you've written so far, I can't see if the fact that VPW withdrawal amounts are actually variable has been properly taken into account.

It might be simpler to point you to the forward test which illustrates, in details, how the worksheet can be used during retirement. I suggest to pay a particular attention to this recent post. There's also this post of the current thread which provides additional explanations.
Thank you for the detailed response and the additional thread references. I have spent some time reading over and digesting the additional information you provided. Good stuff!

Perhaps I was a bit too terse in my initial post. I do understand that the portfolio balance gets updated monthly, which effects a change in the monthly withdrawal value. And I read the VPW forward test thread so now I have seen 'in-action' how the updates work, from updating the portfolio to changing the monthly withdrawal, and then using the savings account which serves to smooth out the withdrawal. That makes a lot of sense.

The reason I posted initially is because the calculated withdrawal is a lot higher than my current calculations (which is more or less following the 4% rule), so I wanted to make sure I hadn't fudged things or omitted some obvious step. But from reading the forward test thread it seems like I've done everything correctly. As mentioned, my wife and I are retired and are both taking SS so we don't have to worry about the accumulation phase or any bridging to get us from retirement to SS (that actually happened last year). So I guess the revelation to me was that we could be withdrawing a lot more than we currently are. Not quite sure how to use the extra money, as we've been budgeting for years so every penny is accounted for and allocated. But I will work diligently on fixing that issue!

As to your follow-on post about couples, and the effect death has on your budget, I will admit that I haven't talked to my wife about the impact when one of us dies. That's a really good point, and something we need to discuss. Thanks for that additional point.
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longinvest
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Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

CharlatanPrime wrote: Mon Mar 20, 2023 9:34 pm Thank you for the detailed response and the additional thread references. I have spent some time reading over and digesting the additional information you provided. Good stuff!

Perhaps I was a bit too terse in my initial post. I do understand that the portfolio balance gets updated monthly, which effects a change in the monthly withdrawal value. And I read the VPW forward test thread so now I have seen 'in-action' how the updates work, from updating the portfolio to changing the monthly withdrawal, and then using the savings account which serves to smooth out the withdrawal. That makes a lot of sense.

The reason I posted initially is because the calculated withdrawal is a lot higher than my current calculations (which is more or less following the 4% rule), so I wanted to make sure I hadn't fudged things or omitted some obvious step. But from reading the forward test thread it seems like I've done everything correctly. As mentioned, my wife and I are retired and are both taking SS so we don't have to worry about the accumulation phase or any bridging to get us from retirement to SS (that actually happened last year). So I guess the revelation to me was that we could be withdrawing a lot more than we currently are. Not quite sure how to use the extra money, as we've been budgeting for years so every penny is accounted for and allocated. But I will work diligently on fixing that issue!

As to your follow-on post about couples, and the effect death has on your budget, I will admit that I haven't talked to my wife about the impact when one of us dies. That's a really good point, and something we need to discuss. Thanks for that additional point.
Thanks for the feedback.
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L84SUPR
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Re: Variable Percentage Withdrawal (VPW)

Post by L84SUPR »

Is the default Bond Growth Trend in the spreadsheet still valid if 70 percent of the total portfolio "bonds" is the bridging fund which is invested in the G Fund? My understanding is the Growth Trend values are real and I don't expect the G Fund to make 1.9 percent real over the next seven years.

My total AA is 50/50; excluding bridging fund the AA is 80/20. In rough numbers, total portfolio is invested as follows.

35 US Stock
15 XUS Stock
35 G Fund
15 Bonds (whatever is in Wellington and TD2065)

Target AA at age 70 is 70/30. I haven't decided what percentage of bonds will be G Fund but I don't think it will exceed 50 percent of bonds which could be 15 percent of total.

I have compared results from the spreadsheet (which includes the bridging fund) and table (which excludes the bridging fund) and they are within 1 percent even though they use different AAs. Overall, I think the Bond Growth Trend is good enough for my situation and will get better as the bridging fund is spent down. Just curious about the applicability of the default Bond Growth Trend value when a cash equivalent is included in "bonds".
1/3rd VTWAX, 1/3rd Wellington, 1/3rd G Fund | All models are wrong. Some are useful.
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Variable Percentage Withdrawal (VPW)

Post by longinvest »

L84SUPR wrote: Tue Mar 21, 2023 9:18 am Is the default Bond Growth Trend in the spreadsheet still valid if 70 percent of the total portfolio "bonds" is the bridging fund which is invested in the G Fund? My understanding is the Growth Trend values are real and I don't expect the G Fund to make 1.9 percent real over the next seven years.

My total AA is 50/50; excluding bridging fund the AA is 80/20. In rough numbers, total portfolio is invested as follows.

35 US Stock
15 XUS Stock
35 G Fund
15 Bonds (whatever is in Wellington and TD2065)

Target AA at age 70 is 70/30. I haven't decided what percentage of bonds will be G Fund but I don't think it will exceed 50 percent of bonds which could be 15 percent of total.

I have compared results from the spreadsheet (which includes the bridging fund) and table (which excludes the bridging fund) and they are within 1 percent even though they use different AAs. Overall, I think the Bond Growth Trend is good enough for my situation and will get better as the bridging fund is spent down. Just curious about the applicability of the default Bond Growth Trend value when a cash equivalent is included in "bonds".
L84SUPR, I don't know the G Fund. I made a quick internet search. If I understood correctly, it's a cash-like fund, in that it doesn't fluctuate in value.

VPW was designed with a typical Bogleheads portfolio in mind, a portfolio of globally-diversified total-market stock and bond index funds.

Before the introduction of the worksheet in 2019, it was suggested to replace missing payments between retirement and the start of a pension using a dedicated cash bridge equal to (number of gap years X annual sum of pension payments). For example, for a 65 years old retiree with a $1,000,000 portfolio anticipating to get $2,000/month Social Security payment starting at age 70, it was suggested to put aside ((70 - 65) X (12 X $2,000)) = $120,000 into a cash bridge, then 1/5 of the amount would be used during the first retirement year (age 65), 1/4 of the residual amount (with accrued interest) would be used during the second retirement year (age 66), and so on. This $120,000 would be excluded from the portfolio balance for VPW calculations. Assuming the $1,000,000 portfolio had a 60/40 allocation, $120,000 would be sold and put into a savings account (or similar savings like the G Fund), leaving a $880,000 60/40 portfolio for VPW withdrawals. This suggestion remains valid, today, for those who want to use the VPW Table with a pen a paper to calculate withdrawal amounts. In the first year of retirement, this would result into a ($880,000 X 5.0% (age 65 percentage for 60/40)) = $44,000 portfolio withdrawal combined with (12 X $2000) = $24,000 taken out of the cash bridge for a total of $68,000 available for taxes and expenses.

The VPW worksheet was developed to simplify things, eliminating the need to use a separate cash bridge for future pensions. Instead, it uses a single stocks-and-bonds portfolio for calculating a combined bridge (when applicable) and VPW withdrawal. It does this very carefully, informing the retiree about the estimated impact of a -50% stock loss (called required flexibility) and restricting the portion projected to be used for bridging pensions from exceeding 50% of the portfolio. For the example outlined in the previous paragraph, the worksheet projects a bridge cost of ((12 X $2,000) / 21.5% (5-year depletion percentage for 60/40)) = $111,612, and uses the remaining $888,388 to calculate a ($888,388 X 5.0% (age 65 percentage for 60/40)) = $44,389 VPW withdrawal for a total portfolio withdrawal of $68,389 (including the bridge withdrawal). The after-loss projection starts with a $700,000 portfolio and repeats the calculation, resulting into a projected $53,399 combined withdrawal after loss.

As you can see, the entire $1,000,000 was subject to a -50% stock loss, reducing the portfolio by (-50% X $600,000) = -$300,000 when using the worksheet. No money was stored away into a cash buffer or protected from the loss.

Had a similar -50% stock loss projection been made with the first scenario, it would have resulted into the $120,000 cash buffer remaining untouched and the $880,000 portfolio losing -$264,000 and shrinking to $616,000. Total income would have dropped to ($24,000 + $30,800) = $54,800.

The worksheet hasn't been designed for including a dedicated cash bridge within the portfolio balance. Someone who prefers bridging the future pension using a cash bridge, instead of using the stocks-and-bonds portfolio, would put aside $120,000 into a cash bridge, and insert the remaining $880,000 portfolio balance into the VPW worksheet, indicating that $2,000/month Social Security payments have already started (which is the case from the worksheet's point of view, as missing payments are provided outside of it). This would result into a $43,970 portfolio withdrawal suggestion, for a total income of $67,970 in the first year of retirement. This is practically identical to the old approach. The few dollars of difference is due to the rounding of percentages in the VPW Table. The worksheet doesn't round percentages during calculations.

In summary, I suggest choosing between using a dedicated cash bridge or letting the worksheet bridge future pensions using a stocks-and-bonds portfolio. If the cash bridge is chosen, it should be excluded from the worksheet portfolio balance, and bridged pensions should be marked as already started. I personally prefer the simpler approach of letting the worksheet bridge future pensions using my single stocks-and-bonds portfolio and tell me about the required flexibility.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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