After
3.5 years, the portfolio has declined, in inflation-adjusted terms, from
$1,149,592.33 before withdrawal on June 30, 2019 to
$915,865.87 before withdrawal on November 30, 2022. That's
-20.3% less.
The VPW worksheet has been providing for missing Social Security payments, as this pension is delayed to age 70.
We can check that this is perfectly normal, putting a $1,149,592 portfolio balance at age 65 into the VPW worksheet with $2,299/month Social Security and $1,150/month work pension payments:
- Calculations for 2019 (expressed in November 2022 dollars)
- Cost of bridges: $128,299
- Balance for VPW: $1,021,293
- ($128,299 + $1,021,293) = $1,149,592
- Calculations after loss
- Cost of bridges: $128,299
- Balance for VPW: $676,416
- ($128,299 + $676,416) = $804,715 (that's -30% less than $1,149,592)
In a
recent post, 3.5 years later, we got:
- Calculations for 2022
- Cost of bridges: $51,372
- Balance for VPW: $864,494
- ($51,372 + $864,494) = $915,866
The
cost of bridges estimate is driven by projected Social Security payments. It's what it is. The interesting part is to compare the balance available for VPW 3.5 later, based on the initial 2019 balances available for VPW before and after loss.
Instead of using a financial calculator (which could be intimidating for some readers), we'll use the
VPW Table to project VPW portfolio balances at ages 68 and 69, and calculate the average of these amounts as projected portfolio balance at age 68.5, 3.5 years after age 65:
- VPW percentage at age 65: 5.0%
- VPW percentage at age 68: 5.2%
- VPW percentage at age 69: 5.3%
The idea is this. In a hypothetical world where market returns are constant and predictable, the VPW table delivers a constant withdrawal amount. So, if at age 65 it delivers $x, the age 65 portfolio (before withdrawal) has to be $x/5.0%. Similarly, if at age 68 it delivers the same $x, the age 68 portfolio (before withdrawal) has to be $x/5.2%. Neat, isn't it?
We must also take into account the work pension. It initially was $1,150/month ($13,800 annual). The adjusted annual amount was
$9,070 (using the 65.7% fixed pension adjustment factor) and was projected to lose
((1 / (1.02^3)) - 1) = -5.8% (
$523 annual) in 3 years or
((1 / (1.02^4)) - 1) = -7.6% (
$691 annual) in 4 years. As a consequence, we'll estimate the age 68 projected balance available for VPW as:
(((Balance X 5.0%) + $523) / 5.2%) and do a similar calculation for age 69.
2019 Projections in November 2022 dollars:
- Before loss:
- Age 68: (($1,021,293 X 5.0%) + $523) / 5.2%) = $992,070
- Age 69: (($1,021,293 X 5.0%) + $691) / 5.3%) = $976,522
- Age 68.5: (($992,070 + $976,522) / 2) = $984,296
- After loss:
- Age 68: (($676,416 X 5.0%) + $523) / 5.2%) = $660,458
- Age 69: (($676,416 X 5.0%) + $691) / 5.3%) = $651,166
- Age 68.5: (($660,458 + $651,166) / 2) = $655,812
Adding the cost of bridges ($51,372) to both amounts gives us the projected portfolio balance
range in 2019 for 3.5 years later, based on the simple
-50% stock loss test, expressed in November 2022 dollars:
- Lower projected portfolio balance: ($655,812 + $51,372) = $707,184
- Higher projected portfolio balance: ($984,296 + $51,372) = $1,035,668
There we go. Everything is normal. The $915,866 November 2022 balance is actually
closer to the high $1,035,668 projection than to the low $707,184 projection.
VPW
doesn't aim to preserve a constant or increasing portfolio balance! On the contrary, VPW aims to safely spend
most of the portfolio while the retiree is alive.
Happy holidays!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)