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

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

Post by MandarinOrange »

**Thanks for answering my questions and letting me know I'm on the wrong thread. I'll hop over to the correct thread and read through it.**

Thanks so much for all this hard work! I'm new and really want to use the VPW spreadsheet but have some very basic questions. Can someone point me to parts of this thread where these questions have probably already been answered?

• Do any numbers in the spreadsheet's Tables or Lists tabs need to be updated annually (i.e., do I need to download the spreadsheet every year to calculate my 'Annual Portfolio Withdrawal' or just download once?
• On the Lists tab, should I update the Inflation value due to the high inflation rates lately, or leave as 2%?
• I don't really know what to do with the 'Required Flexibility' section. Can someone step through this for me? If I open this spreadsheet on Jan 1st after a really bad previous year and enter my data into the yellow cells to calculate my 'Annual Portfolio Withdrawal', what do I do with the Required Flexibility section?
• For the Retirement tab, how do I know how much is in my cushion? Do I need to know?
When I enter the 'Balance Available for VPW' from cell B99 into FI Calc as the 'Initial Portfolio Value', I get an 'Average Initial Withdrawal Amount' from FI Calc that matches your 'VPW Withdrawal' from cell B101. I'm taking that as a good sign that I'm doing something right!
Last edited by MandarinOrange on Fri Apr 21, 2023 12:33 pm, edited 1 time in total.
justgary
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by justgary »

MandarinOrange wrote: Thu Apr 20, 2023 9:52 pm Thanks so much for all this hard work! I'm new and really want to use the VPW spreadsheet but have some very basic questions. Can someone point me to parts of this thread where these questions have probably already been answered?

• Do any numbers in the spreadsheet's Tables or Lists tabs need to be updated annually (i.e., do I need to download the spreadsheet every year to calculate my 'Annual Portfolio Withdrawal' or just download once?
• On the Lists tab, should I update the Inflation value due to the high inflation rates lately, or leave as 2%?
• I don't really know what to do with the 'Required Flexibility' section. Can someone step through this for me? If I open this spreadsheet on Jan 1st after a really bad previous year and enter my data into the yellow cells to calculate my 'Annual Portfolio Withdrawal', what do I do with the Required Flexibility section?
• For the Retirement tab, how do I know how much is in my cushion? Do I need to know?
When I enter the 'Balance Available for VPW' from cell B99 into FI Calc as the 'Initial Portfolio Value', I get an 'Average Initial Withdrawal Amount' from FI Calc that matches your 'VPW Withdrawal' from cell B101. I'm taking that as a good sign that I'm doing something right!
Reading through this thread from Page 1 should answer most of your questions. In general, you will see that the spreadsheet is really intended for monthly use rather than annual. For annual withdrawals, you might choose to not keep a cushion at all. As you read through the thread, you will find that @longinvest has recently changed the way the cushion is calculated. In his usual fashion, he has explained his reasoning for doing so.

You don't need to do anything besides put your data in the yellow boxes and read the result in the green boxes. The required flexibility is a reminder that some of your retirement income should be discretionary, so that you can temporarily reduce spending when the market tanks.

Note also that this is the Forward Test thread. The VPW discussion thread is viewtopic.php?t=120430. You may find even more exciting information in that thread.
goblue100
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by goblue100 »

MandarinOrange wrote: Thu Apr 20, 2023 9:52 pm Thanks so much for all this hard work! I'm new and really want to use the VPW spreadsheet but have some very basic questions.
I think Longinvest is trying to keep this thread focused on the forward test. General VPW question should be submitted/addressed in this thread:
viewtopic.php?t=120430&start=1350
"Confusion has its cost" - Crosby, Stills and Nash
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of March 31, 2023, was spread across 3,907 U.S. stocks, 7,976 international stocks, 10,330 U.S. bonds, and 6,856 international bonds for a total of 29,069 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into from the start of this forward test until March 31, 2023:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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

Post by longinvest »

The sum of the $882,749.17 Vanguard LifeStrategy Moderate Growth Fund investment and of the $28,788.76 Ally Bank savings account was $911,537.93 on March 31, 2023 (see this post). If the recent changes hadn't been made, the Retirement sheet would have suggested to take a $5,756 portfolio withdrawal:

Image

The impact of recent changes on monthly income, before smoothing with the income cushion, was: (($5,302 withdrawal + $1,000 pension payment) - ($5,756 withdrawal + $1,000 pension payment) = -$454.
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for March 2023.

We're interested to calculate an average CPI-U to associate with our forward test at the end of March 2023. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
04/2022 289.109
05/2022 292.296
06/2022 296.311
07/2022 296.276
08/2022 296.171
09/2022 296.808
10/2022 298.012
11/2022 297.711
12/2022 296.797
01/2023 299.170
02/2023 300.840
03/2023 301.836
We take note that the average CPI-U for the last 12 months at the end of March 2023 was 296.778.

Last year, we calculated that the average CPI-U for the last 12 months at the end of March 2022 was 276.211.

The trailing 1-year average inflation at the end of March 2023 was ((296.778 / 276.211) - 1) = 7.45%.

The chosen Ally savings account has an annual percentage yield (APY) of 3.75%. It's -3.70% below trailing average inflation.
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in March 2023 dollars:

Image

Note that, starting on March 31, 2023, the monthly process was simplified using an income cushion and the retiree started planning for a potential Social Security shortfall. These changes had an impact of -$454 on monthly income before smoothing with the income cushion (see this post).
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Investment Portfolio and Income Cushion Balances as of April 30, 2023

The April 2023 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 0.97% and the annual percentage yield (APY) of the Ally savings account was 3.75%.

We use account balances as of March 31, 2023 and apply April 2023 growth on investments and interest on savings.
  • Investment portfolio (Vanguard LifeStrategy Moderate Growth Fund (VSMGX)): ($871,447.17 X (1 + 0.97%)) = $879,900.21
  • Income cushion (Ally Bank savings account): ($33,408.76 X ((1 + 3.75%)^(1 / 12))) = $33,511.41
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of April 30, 2023

We continue our forward test. Here's a link to the previous entry.

As of April 30, 2023, the retiree's investment portfolio and income cushion balances are:
  • Investment portfolio (Vanguard LifeStrategy Moderate Growth Fund (VSMGX)): $879,900.21
  • Income cushion (Ally Bank savings account): $33,511.41
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,370 per month (in 2023 dollars).

The Social Security and Medicare Boards of Trustees project that the OASI program will only be able to pay 77% of scheduled benefits starting in year 2033, unless changes are made. Consequently, the retiree considers (100% - 77%) = 23% of promised benefits as a temporary pension from age 70 to age 78 (the retiree's age in January 2033).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $5,315 portfolio withdrawal. In accordance with the process illustrated in this post, the retiree withdraws the suggested amount and deposits it along with the $1,000 April 2023 pension payment into the income cushion increasing its balance to:
  • Income cushion: ($33,511.41 + $5,315 + $1,000) = $39,826.41
Then the retiree transfers one sixth of the balance ($39,826.41 / 6) = $6,638 out of the income cushion as retirement income for May 2023, available for taxes and expenses.

After withdrawal and transfer, ($879,900.21 - $5,315) = $874,585.21 is left into the investment portfolio and ($39,826.41 - $6,638) = $33,188.41 is left into the income cushion at the end of April 2023.

The Ally savings account currently carries an annual percentage yield (APY) of 3.75%.

Chart

Here's a chart of total monthly retirement income (blue bars, left axis) and total portfolio and cushion balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

May 2023 total retirement income is $6,638 and on the morning of May 1, 2023, the total portfolio and cushion balance is $907,773.62.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $83,394
  • 2023: $80,417 (annualized) -- $33,507 in 5 months
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stuper1
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by stuper1 »

longinvest,

First off, I want to say thank you for all your hard work on this stuff. I've been reading up a lot on VPW recently, and I think it will be very helpful for my retirement which hopefully starts in a very few years. It's a very simple, elegant, powerful approach.

I have a request for you to consider. On the fourth Saturday of the month, when you post the inflation-adjusted chart, please consider adding a second chart or table that shows the inflation-adjusted calendar-year income totals since the beginning of the test. Sometimes it's helpful to think in yearly amounts, and it would be helpful to see how those have evolved on an inflation-adjusted basis. If you add this second chart/table, I'm not sure how you would handle the current year since it has less than 12 months; maybe leave it off until the next January, or footnote it as a projected estimate based on the most recent month. Thank you for considering this request, and thanks again for everything you have done on this project.

Edit to add: a simple way to add the inflation-adjusted annual income, would be a second chart that shows "Inflation-Adjusted Trailing-12-Month Total Income". Since the forward test started in July 2019, the first data point on this chart would be in July 2020, and then a new data point would be added each month representing the sum of the most-recent 12 months of inflation-adjusted monthly income. To see calendar year totals, one would just look at the December entries for each year. This would avoid needing to do projections for the latest year and annualizing the 2019 amounts.
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

stuper1 wrote: Sun May 07, 2023 9:30 am longinvest,

First off, I want to say thank you for all your hard work on this stuff. I've been reading up a lot on VPW recently, and I think it will be very helpful for my retirement which hopefully starts in a very few years. It's a very simple, elegant, powerful approach.
Stuper1, your nice comments are appreciated.
stuper1 wrote: Sun May 07, 2023 9:30 am I have a request for you to consider. On the fourth Saturday of the month, when you post the inflation-adjusted chart, please consider adding a second chart or table that shows the inflation-adjusted calendar-year income totals since the beginning of the test. Sometimes it's helpful to think in yearly amounts, and it would be helpful to see how those have evolved on an inflation-adjusted basis. If you add this second chart/table, I'm not sure how you would handle the current year since it has less than 12 months; maybe leave it off until the next January, or footnote it as a projected estimate based on the most recent month. Thank you for considering this request, and thanks again for everything you have done on this project.

Edit to add: a simple way to add the inflation-adjusted annual income, would be a second chart that shows "Inflation-Adjusted Trailing-12-Month Total Income". Since the forward test started in July 2019, the first data point on this chart would be in July 2020, and then a new data point would be added each month representing the sum of the most-recent 12 months of inflation-adjusted monthly income. To see calendar year totals, one would just look at the December entries for each year. This would avoid needing to do projections for the latest year and annualizing the 2019 amounts.
While I know how much salary I got so far in 2023 in nominal dollars from January to April, I don't know nor do I care about how much I've earned so far in 2023 in inflation-adjusted March 2023 dollars (that's the latest available CPI-U value). Somehow, this doesn't prevent me from living my life. I'm pretty sure other people are like me.

What I'm expressing, here, is the futility of trying to assess the impact of inflation on one's life on a monthly basis. It just doesn't make any sense. CPI-U is just an index measuring the price of an average basket of goods and services. Car payments don't change, every month, according to fluctuations of the CPI-U, neither do mortgage or rent payments.

Monthly forward test posts (like this one) include historical annual retirement income. As numbers are expressed in nominal terms, they're stable from month to month except for the current year where the cumulative amount increases from month to month and the annualized amount slowly adjusts towards the final amount (unknown before December). Adding similar information to the monthly inflation-adjusted chart post would just create unnecessary confusion as all numbers would change every month.

Instead, every year I'll continue publishing a post like this one which summarizes the forward test in inflation-adjusted June 2022 dollars. Recent changes with their -$454 monthly impact (-$302 accounting for Social Security shortfall and -$152 for stopping to include the cushion as part of the portfolio balance for VPW calculations) will likely make things look slightly worse in the next summary than if the forward test had already included these changes in 2019.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
stuper1
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by stuper1 »

longinvest wrote: Sun May 07, 2023 2:59 pm
stuper1 wrote: Sun May 07, 2023 9:30 am longinvest,

First off, I want to say thank you for all your hard work on this stuff. I've been reading up a lot on VPW recently, and I think it will be very helpful for my retirement which hopefully starts in a very few years. It's a very simple, elegant, powerful approach.
Stuper1, your nice comments are appreciated.
stuper1 wrote: Sun May 07, 2023 9:30 am I have a request for you to consider. On the fourth Saturday of the month, when you post the inflation-adjusted chart, please consider adding a second chart or table that shows the inflation-adjusted calendar-year income totals since the beginning of the test. Sometimes it's helpful to think in yearly amounts, and it would be helpful to see how those have evolved on an inflation-adjusted basis. If you add this second chart/table, I'm not sure how you would handle the current year since it has less than 12 months; maybe leave it off until the next January, or footnote it as a projected estimate based on the most recent month. Thank you for considering this request, and thanks again for everything you have done on this project.

Edit to add: a simple way to add the inflation-adjusted annual income, would be a second chart that shows "Inflation-Adjusted Trailing-12-Month Total Income". Since the forward test started in July 2019, the first data point on this chart would be in July 2020, and then a new data point would be added each month representing the sum of the most-recent 12 months of inflation-adjusted monthly income. To see calendar year totals, one would just look at the December entries for each year. This would avoid needing to do projections for the latest year and annualizing the 2019 amounts.
While I know how much salary I got so far in 2023 in nominal dollars from January to April, I don't know nor do I care about how much I've earned so far in 2023 in inflation-adjusted March 2023 dollars (that's the latest available CPI-U value). Somehow, this doesn't prevent me from living my life. I'm pretty sure other people are like me.

What I'm expressing, here, is the futility of trying to assess the impact of inflation on one's life on a monthly basis. It just doesn't make any sense. CPI-U is just an index measuring the price of an average basket of goods and services. Car payments don't change, every month, according to fluctuations of the CPI-U, neither do mortgage or rent payments.

Monthly forward test posts (like this one) include historical annual retirement income. As numbers are expressed in nominal terms, they're stable from month to month except for the current year where the cumulative amount increases from month to month and the annualized amount slowly adjusts towards the final amount (unknown before December). Adding similar information to the monthly inflation-adjusted chart post would just create unnecessary confusion as all numbers would change every month.

Instead, every year I'll continue publishing a post like this one which summarizes the forward test in inflation-adjusted June 2022 dollars. Recent changes with their -$454 monthly impact (-$302 accounting for Social Security shortfall and -$152 for stopping to include the cushion as part of the portfolio balance for VPW calculations) will likely make things look slightly worse in the next summary than if the forward test had already included these changes in 2019.
No problem, I understand. As an alternate, would it be possible for you to include in one of your monthly posts a link to the underlying spreadsheet that contains the non-adjusted and inflation-adjusted monthly income and portfolio balance numbers? That way, people who are interested could grab the numbers and do whatever manipulations and analysis they care to do. Maybe such a link is not possible or is a hassle. I don't know all the constraints involved. Thanks again for everything you've done on this.
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,315 portfolio withdrawal at the end of April 2023.

Detailed calculations are provided in the lower part of the Retirement sheet. Displayed amounts and percentages are rounded.

Image

Image

The retiree will get $1,825/month Social Security (77%) payments in 2 years. That's ($1,825 X 12) = $21,900/year. The percentage for a 2-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 50.9% (called [G] above). As a consequence, ($21,900 / 50.9%) = $43,006 is kept aside (on paper) for Social Security (77%) bridge withdrawals.

The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of its purchasing power due to inflation, only 65.7% (called [B] above) of the pension payment is spent (see this post and this post for detailed explanations). That's ($1,000 X 12 X 65.7%) = $7,887/year.

The retiree will get $545/month Social Security (23%) payments for 8 years in 2 years. To transform this temporary income into lifelong income, only part of the income will be spent (see this post for explanations). The percentage for age 70 with a 60/40 stocks/bonds allocation in the VPW Table is 5.4% (called [C] above). The percentage for a 8-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 14.2% (called [D] above). As a consequence, only ($545 X 12 X 5.4% / 14.2%) = $2,497/year will be spent. The percentage for a 2-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 50.9% (called [K] above). As a consequence, ($2,497 / 50.9%) = $4,904 is kept aside (on paper) for Social Security (23%) bridge withdrawals.

At age 68 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.2% (called [A] above).

Image

The retiree has a $879,900 portfolio, but ($43,006 + $4,904) = $47,911 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($879,900 - $47,911) = $831,989 available for VPW and results into a ($831,989 X 5.2%) = $43,501 VPW withdrawal. Adding ($21,900 + $7,887 + $2,497) = $32,284 of (bridged and adjusted) pension income results into a total annual retirement income of ($43,501 + $32,284) = $75,785.

Image

The monthly income target is ($75,785 / 12) = $6,315. The work pension provides $1,000. The difference, ($6,315 - $1,000) = $5,315, is withdrawn from the portfolio.

Image

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stock allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $879,900) = -$263,970 portfolio loss, reducing the portfolio to ($879,900 - $263,970) = $615,930 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $61,984, representing a reduction of (($61,984 - $75,785) / 12) = -$1,150/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,150/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,150 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort (see this post for additional explanations).
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espressofreak
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by espressofreak »

As of 19 May 2023, the Ally Savings account interest rate has increased from 3.75% to 3.85%.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of April 30, 2023, was spread across 3,895 U.S. stocks, 7,972 international stocks, 10,375 U.S. bonds, and 6,898 international bonds for a total of 29,140 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into from the start of this forward test until April 30, 2023:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for April 2023.

We're interested to calculate an average CPI-U to associate with our forward test at the end of April 2023. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
05/2022 292.296
06/2022 296.311
07/2022 296.276
08/2022 296.171
09/2022 296.808
10/2022 298.012
11/2022 297.711
12/2022 296.797
01/2023 299.170
02/2023 300.840
03/2023 301.836
04/2023 303.363
We take note that the average CPI-U for the last 12 months at the end of April 2023 was 297.966.

Last year, we calculated that the average CPI-U for the last 12 months at the end of April 2022 was 278.049.

The trailing 1-year average inflation at the end of April 2023 was ((297.966 / 278.049) - 1) = 7.16%.

The chosen Ally savings account has an annual percentage yield (APY) of 3.85%. It's -3.31% below trailing average inflation.
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longinvest
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test and additional information expressed in April 2023 dollars:

Image

Inflation-adjusted initial portfolio balance: $1,176,483

Inflation-Adjusted Historical Annual Retirement Income
  • 2019: $89,559 (annualized) -- $44,779 in 6 months, starting retirement in July
  • 2020: $88,893
  • 2021: $93,290
  • 2022: $88,511
  • 2023: $81,113 (annualized) -- $33,797 in 5 months
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Investment Portfolio and Income Cushion Balances as of May 31, 2023

The May 2023 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -0.96% and the annual percentage yield (APY) of the Ally savings account was 3.75%.

We use account balances as of April 30, 2023 and apply May 2023 growth on investments and interest on savings.
  • Investment portfolio (Vanguard LifeStrategy Moderate Growth Fund (VSMGX)): ($874,585.21 X (1 + -0.96%)) = $866,189.19
  • Income cushion (Ally Bank savings account): ($33,188.41 X ((1 + 3.75%)^(1 / 12))) = $33,290.38
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Forward test as of May 31, 2023

We continue our forward test. Here's a link to the previous entry.

As of May 31, 2023, the retiree's investment portfolio and income cushion balances are:
  • Investment portfolio (Vanguard LifeStrategy Moderate Growth Fund (VSMGX)): $866,189.19
  • Income cushion (Ally Bank savings account): $33,290.38
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,370 per month (in 2023 dollars).

The Social Security and Medicare Boards of Trustees project that the OASI program will only be able to pay 77% of scheduled benefits starting in year 2033, unless changes are made. Consequently, the retiree considers (100% - 77%) = 23% of promised benefits as a temporary pension from age 70 to age 78 (the retiree's age in January 2033).

We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $5,256 portfolio withdrawal. In accordance with the process illustrated in this post, the retiree withdraws the suggested amount and deposits it along with the $1,000 May 2023 pension payment into the income cushion increasing its balance to:
  • Income cushion: ($33,290.38 + $5,256 + $1,000) = $39,546.38
Then the retiree transfers one sixth of the balance ($39,546.38 / 6) = $6,591 out of the income cushion as retirement income for June 2023, available for taxes and expenses.

After withdrawal and transfer, ($866,189.19 - $5,256) = $860,933.19 is left into the investment portfolio and ($39,546.38 - $6,591) = $32,955.38 is left into the income cushion at the end of May 2023.

The Ally savings account currently carries an annual percentage yield (APY) of 3.85%.

Chart

Here's a chart of total monthly retirement income (blue bars, left axis) and total portfolio and cushion balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

June 2023 total retirement income is $6,591 and on the morning of June 1, 2023, the total portfolio and cushion balance is $893,888.57.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $83,394
  • 2023: $80,196 (annualized) -- $40,098 in 6 months
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espressofreak
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by espressofreak »

The Ally Savings account interest rate will increase from 3.85% to 4.00%, as of 7 June 2023.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

espressofreak wrote: Tue Jun 06, 2023 3:56 pm The Ally Savings account interest rate will increase from 3.85% to 4.00%, as of 7 June 2023.
Thanks Espressofreak.

That's still barely more than 55% of trailing 1-year average inflation (7.16%). Luckily, the cushion is small (yet very effective at dampening the impact of market fluctuations on retirement income) and money stays into the cushion for only 5-months, on average, limiting the cash drag.

That's a fun calculation, for those who like playing with numbers. When adding an amount into the cushion, 16.67% of it, that's 1/6, is immediately transferred into the spending account. One month later, 13.89% (plus interest, which I'll ignore, as it doesn't make a difference), that's 1/6 of 5/6 of the initial amount, is transferred into the spending account. The next month, 11.57% of the original amount (1/6 of 5/6 of 5/6) is transferred, and so on. The weighted average time spent into the cushion is an infinite addition ((16.67% X 0 month) + (13.89% X 1 month) + (11.57% X 2 months) + ...) which adds up to exactly 5 months. This can be (approximately) verified using a spreadsheet. After a little less than 4,100 lines (months), the term gets too small to be represented internally and becomes 0. In other words, the value of ((1/6 X (5/6)^(4,100)) X 4,100 months) is too small to be represented other than by (0 month). The sum of the first 4,101 terms, in the spreadsheet, is (5 months).
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,256 portfolio withdrawal at the end of May 2023.

Detailed calculations are provided in the lower part of the Retirement sheet. Displayed amounts and percentages are rounded.

Image

Image

The retiree will get $1,825/month Social Security (77%) payments in 2 years. That's ($1,825 X 12) = $21,900/year. The percentage for a 2-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 50.9% (called [G] above). As a consequence, ($21,900 / 50.9%) = $43,006 is kept aside (on paper) for Social Security (77%) bridge withdrawals.

The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of its purchasing power due to inflation, only 65.7% (called [B] above) of the pension payment is spent (see this post and this post for detailed explanations). That's ($1,000 X 12 X 65.7%) = $7,887/year.

The retiree will get $545/month Social Security (23%) payments for 8 years in 2 years. To transform this temporary income into lifelong income, only part of the income will be spent (see this post for explanations). The percentage for age 70 with a 60/40 stocks/bonds allocation in the VPW Table is 5.4% (called [C] above). The percentage for a 8-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 14.2% (called [D] above). As a consequence, only ($545 X 12 X 5.4% / 14.2%) = $2,497/year will be spent. The percentage for a 2-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 50.9% (called [K] above). As a consequence, ($2,497 / 50.9%) = $4,904 is kept aside (on paper) for Social Security (23%) bridge withdrawals.

At age 68 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.2% (called [A] above).

Image

The retiree has a $866,189 portfolio, but ($43,006 + $4,904) = $47,911 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($866,189 - $47,911) = $818,278 available for VPW and results into a ($818,278 X 5.2%) = $42,784 VPW withdrawal. Adding ($21,900 + $7,887 + $2,497) = $32,284 of (bridged and adjusted) pension income results into a total annual retirement income of ($42,784 + $32,284) = $75,069.

Image

The monthly income target is ($75,069 / 12) = $6,256. The work pension provides $1,000. The difference, ($6,256 - $1,000) = $5,256, is withdrawn from the portfolio.

Image

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stock allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $866,189) = -$259,857 portfolio loss, reducing the portfolio to ($866,189 - $259,857) = $606,332 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $61,482, representing a reduction of (($61,482 - $75,069) / 12) = -$1,132/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,132/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,132 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort (see this post for additional explanations).
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of May 31, 2023, was spread across 3,883 U.S. stocks, 7,964 international stocks, 10,476 U.S. bonds, and 6,973 international bonds for a total of 29,296 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into from the start of this forward test until May 31, 2023:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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

Post by Wrench »

Longinvest - thank you for continuing this interesting real-world test of VPW. I applaud all your time and effort in this activity.

After 4 years in this test, the retiree has spent ~24% of his initial portfolio balance. If I were following this approach, I would be losing sleep over that. It may very well turn out just fine should the market turn into a raging bull, but at this point I would be very worried! I understand the system is designed so the retiree will never run out of money, and that spending from the portfolio is front-loaded because social security has not started. But that still doesn't change the fact that a pretty big fraction of the initial portfolio has been spent only four years into retirement! Longinvest - how would you assuage my concerns?

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

Post by exodusing »

The VPW wiki includes "At age 80, if you're still alive, it's important to consider using part (but not all) of your remaining portfolio to buy a Single Premium Immediate Annuity (SPIA) with annual cost-of-living adjustments". There don't seem to be any available annuities with COLAs, although there are some that increase by a fixed percentage each year.

Thank you for continuing this thread. Very interesting.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by lucastx »

Wrench wrote: Sat Jun 17, 2023 9:08 am Longinvest - thank you for continuing this interesting real-world test of VPW. I applaud all your time and effort in this activity.

After 4 years in this test, the retiree has spent ~24% of his initial portfolio balance. If I were following this approach, I would be losing sleep over that. It may very well turn out just fine should the market turn into a raging bull, but at this point I would be very worried! I understand the system is designed so the retiree will never run out of money, and that spending from the portfolio is front-loaded because social security has not started. But that still doesn't change the fact that a pretty big fraction of the initial portfolio has been spent only four years into retirement! Longinvest - how would you assuage my concerns?

Wrench
The portfolio started at $1M and is currently worth $866K. Approximately 87% of the portfolio remains. Where is the 24% coming from, is that the total amount of the withdrawals?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by espressofreak »

longinvest wrote: Tue Jun 06, 2023 4:36 pm
espressofreak wrote: Tue Jun 06, 2023 3:56 pm The Ally Savings account interest rate will increase from 3.85% to 4.00%, as of 7 June 2023.
Thanks Espressofreak.

That's still barely more than 55% of trailing 1-year average inflation (7.16%). Luckily, the cushion is small (yet very effective at dampening the impact of market fluctuations on retirement income) and money stays into the cushion for only 5-months, on average, limiting the cash drag.

That's a fun calculation, for those who like playing with numbers. {...} The sum of the first 4,101 terms, in the spreadsheet, is (5 months).
That's a fun calculation, indeed, longinvest. I didn't do the one year calculation, but I'm guessing that for a cash cushion of 12 months, the average length of exposure is 10 months?

As I head towards doing my own version of a personal real-life forward test of VPW, I have to say that I find this entire thread to be quite fascinating and illuminating. I thank you for your extended dedication and attention to the "trials and tribulations" of our 2019 retiree (while the rest of us bask in the glow of your work)!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Wrench »

lucastx wrote: Sat Jun 17, 2023 11:54 am
Wrench wrote: Sat Jun 17, 2023 9:08 am Longinvest - thank you for continuing this interesting real-world test of VPW. I applaud all your time and effort in this activity.

After 4 years in this test, the retiree has spent ~24% of his initial portfolio balance. If I were following this approach, I would be losing sleep over that. It may very well turn out just fine should the market turn into a raging bull, but at this point I would be very worried! I understand the system is designed so the retiree will never run out of money, and that spending from the portfolio is front-loaded because social security has not started. But that still doesn't change the fact that a pretty big fraction of the initial portfolio has been spent only four years into retirement! Longinvest - how would you assuage my concerns?

Wrench
The portfolio started at $1M and is currently worth $866K. Approximately 87% of the portfolio remains. Where is the 24% coming from, is that the total amount of the withdrawals?
Right. Sorry for the confusion. I used an interim value of the portfolio of ~$1.17M so the draw down is ~24%. Still would feel very uncomfortable to me, though I guess the answer is as you say: after 4 years the portfolio is only 13% less than it was at the start. If it did that every 4 years, it would last roughly 30 years as designed.

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

Post by longinvest »

Wrench wrote: Sat Jun 17, 2023 9:08 am Longinvest - thank you for continuing this interesting real-world test of VPW. I applaud all your time and effort in this activity.
Wrench, you're welcome.
Wrench wrote: Sat Jun 17, 2023 9:08 am After 4 years in this test, the retiree has spent ~24% of his initial portfolio balance. If I were following this approach, I would be losing sleep over that. It may very well turn out just fine should the market turn into a raging bull, but at this point I would be very worried! I understand the system is designed so the retiree will never run out of money, and that spending from the portfolio is front-loaded because social security has not started. But that still doesn't change the fact that a pretty big fraction of the initial portfolio has been spent only four years into retirement! Longinvest - how would you assuage my concerns?
lucastx wrote: Sat Jun 17, 2023 11:54 am The portfolio started at $1M and is currently worth $866K. Approximately 87% of the portfolio remains. Where is the 24% coming from, is that the total amount of the withdrawals?
Wrench wrote: Sun Jun 18, 2023 6:30 am Right. Sorry for the confusion. I used an interim value of the portfolio of ~$1.17M so the draw down is ~24%. Still would feel very uncomfortable to me, though I guess the answer is as you say: after 4 years the portfolio is only 13% less than it was at the start. If it did that every 4 years, it would last roughly 30 years as designed.
Everything is perfectly normal. Just a few months ago, I provided a detailed analysis. Here are excerpts:
longinvest wrote: Sun Dec 25, 2022 12:19 pm 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.
[...]
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:
[...]
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.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

exodusing wrote: Sat Jun 17, 2023 9:17 am The VPW wiki includes "At age 80, if you're still alive, it's important to consider using part (but not all) of your remaining portfolio to buy a Single Premium Immediate Annuity (SPIA) with annual cost-of-living adjustments". There don't seem to be any available annuities with COLAs, although there are some that increase by a fixed percentage each year.
Exodusing, it's my intention to discuss this topic later this Summer in the main VPW thread.
exodusing wrote: Sat Jun 17, 2023 9:17 am Thank you for continuing this thread. Very interesting.
Thanks for your nice comment.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

espressofreak wrote: Sat Jun 17, 2023 12:39 pm
longinvest wrote: Tue Jun 06, 2023 4:36 pm [...] money stays into the cushion for only 5-months, on average, limiting the cash drag.

That's a fun calculation, for those who like playing with numbers. {...} The sum of the first 4,101 terms, in the spreadsheet, is (5 months).
That's a fun calculation, indeed, longinvest. I didn't do the one year calculation, but I'm guessing that for a cash cushion of 12 months, the average length of exposure is 10 months?
Espressofreak, that's approximately it. More precisely, assuming that the income cushion contains approximately 11 months of retirement income and that, every month, the monthly withdrawal and monthly pension payments are deposited into the income cushion, then 1/12 of the cushion is sent into the spending account, money sits into the income cushion for 11 months on average.
espressofreak wrote: Sat Jun 17, 2023 12:39 pm As I head towards doing my own version of a personal real-life forward test of VPW, I have to say that I find this entire thread to be quite fascinating and illuminating. I thank you for your extended dedication and attention to the "trials and tribulations" of our 2019 retiree (while the rest of us bask in the glow of your work)!
Thanks for the extravagant comment. It leaves me speechless.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for May 2023.

We're interested to calculate an average CPI-U to associate with our forward test at the end of May 2023. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
06/2022 296.311
07/2022 296.276
08/2022 296.171
09/2022 296.808
10/2022 298.012
11/2022 297.711
12/2022 296.797
01/2023 299.170
02/2023 300.840
03/2023 301.836
04/2023 303.363
05/2023 304.127
We take note that the average CPI-U for the last 12 months at the end of May 2023 was 298.952.

Last year, we calculated that the average CPI-U for the last 12 months at the end of May 2022 was 279.974.

The trailing 1-year average inflation at the end of May 2023 was ((298.952 / 279.974) - 1) = 6.78%.

The chosen Ally savings account has an annual percentage yield (APY) of 4.00%. It's -2.78% below trailing average inflation.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test and additional information expressed in May 2023 dollars:

Image

Inflation-adjusted initial portfolio balance: $1,180,376

Inflation-Adjusted Historical Annual Retirement Income
  • 2019: $89,855 (annualized) -- $44,928 in 6 months, starting retirement in July
  • 2020: $89,187
  • 2021: $93,599
  • 2022: $88,804
  • 2023: $81,000 (annualized) -- $40,500 in 6 months
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

🎉 This thread is celebrating its fourth year, already! 🎉

This week, I invite readers to provide their feedback about the last four years. I'll get back to my regular posts next weekend.

So, how did you enjoy the ride, so far? Did this thread have an impact on your retirement plans?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by SevenBridgesRoad »

longinvest wrote: Sat Jul 01, 2023 12:28 pm 🎉 This thread is celebrating its fourth year, already! 🎉

This week, I invite readers to provide their feedback about the last four years. I'll get back to my regular posts next weekend.

So, how did you enjoy the ride, so far? Did this thread have an impact on your retirement plans?
Wow, does the time fly!

In the Fall, I'll be five years retired. The main VPW thread and Retirement Worksheet provided the tools to use the method from the beginning of my retirement. The Forward Test has given me additional confidence that my wife and I made the right choice for our situation. For example, we use a one-fund approach across our two IRAs and taxable account, as "good enough". We are quite comfortable with the potential required flexibility in withdrawals/spending, having covered our core expenses with SS and two single premium simple annuities.

The VPW method is allowing us to spend our inheritance now with the adult kids and our grandkids while we're still able to enjoy it with them, and yet be confident we will not run out of money and become a burden.

You can be very proud of your contribution to the community. Happy "Fourth"!
L84SUPR
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by L84SUPR »

longinvest wrote: Sat Jul 01, 2023 12:28 pm 🎉 This thread is celebrating its fourth year, already! 🎉

This week, I invite readers to provide their feedback about the last four years. I'll get back to my regular posts next weekend.

So, how did you enjoy the ride, so far? Did this thread have an impact on your retirement plans?
The VPW method provides a structured approach to reconcile the statements "stay the course" and "be flexible". Nobody in their right mind would blindly follow the 4% rule in the face of a multi-year down turn. VPW provides a way to commit up front to future adjustments based on market conditions, and then stay the course. I really appreciate this characteristic and your efforts to show how this plays out in a real-world scenario.

I'm not thrilled by the variability and downward trend in the withdrawals that is occurring during the forward test and would like to have our withdrawals be more consistent even if they are a little lower in the first year. Consequently, I adjust the US stock portion of our portfolio for overvaluation before entering the portfolio value in the VPW spreadsheet. I have been doing this quarterly for the past 18 months and like the resulting damped, and upward, trend.

I am retiring in six months but DW has decided to continue working and I have a substantial annual leave payout coming in January. We will take a reduced amount from the bridging fund but don't need to withdraw from the portfolio. I will continue to dry-run the VPW spreadsheet and follow this thread as we approach our first portfolio withdrawal in 2025.
1/3rd VTWAX, 1/3rd Wellington, 1/3rd G Fund | All models are wrong. Some are useful.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by tj »

This thread has always been a good read.
green_phone
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by green_phone »

So, how did you enjoy the ride, so far?
I've found it interesting to see how the VPW works. Thanks for updating!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by goblue100 »

longinvest wrote: Sat Jul 01, 2023 12:28 pm 🎉 This thread is celebrating its fourth year, already! 🎉

So, how did you enjoy the ride, so far? Did this thread have an impact on your retirement plans?
I'm a regular reader of this thread, and being a forward test right into a pandemic has been really interesting. I retired about 18 months after the thread started. I can't say it impacted my plans but may have given me some confidence that I had enough.

One idea I had to make the thread more realistic, is our retiree has to survive a trial every year to see if he makes it to next year, based on the SS Actuarial Life Table. For a 68 year old, he would fail the trial around 2% of the time. I'm not really looking to end the thread, but the random nature of such a trial would drive home the point none of us are promised next year.
"Confusion has its cost" - Crosby, Stills and Nash
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by peteyboy »

longinvest wrote: Sat Jul 01, 2023 12:28 pm 🎉 This thread is celebrating its fourth year, already! 🎉

This week, I invite readers to provide their feedback about the last four years. I'll get back to my regular posts next weekend.

So, how did you enjoy the ride, so far? Did this thread have an impact on your retirement plans?
I "officially" retired in April of 2020 at age 54. I found this thread later that year (August or September) and after reading through it I felt an enormous sense of relief. The impact the thread and the VPW spreadsheet had on me was two-fold:

Firstly, I became comfortable that if I didn't earn another dollar working, we had accumulated enough for my wife and I to completely retire. The impact of releasing the stress for me on this front was enormous and can't be overstated. I didn't retire by choice, another source of stress, so anything to minimize stress was critical. Remember this was right when COVID was starting (I got COVID in March 2020), yet another source of stress and anxiety.

Secondly, it gave us a understandable and thoughtful strategy (VPW) to approach how to access our retirement savings. We use the calculated withdrawal amount of 4.8% (currently age 57, 70/30 allocation) as an upper limit and we stay well below it, withdrawing at an annual rate of < 3%, so far. The 4% SWR approach just wasn't doing it for me, though this was my mindset before retirement. It seemed overly simplified and not responsive to how our investments were doing, which didn't make sense to me.

Many thanks for starting this in July of 2019. It's helped me out a ton.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by Workinprogress »

It almost feels like sacrilege posting in this thread. While not in retirement, I am subscribed to this thread and committed to utilizing this method of withdrawal in a year or two when I am. It has given me a tool to play with different scenarios and feel very comfortable in knowing that I really do have enough to retire comfortably.
Thank you for your continued efforts.
Spyder59
Posts: 31
Joined: Fri Apr 21, 2017 7:13 pm

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

Post by Spyder59 »

After decades of active investing, it was clear to me that the time/reward balance as compared with a passive Boglehead approach was questionable. It took quite a few years to simplify my investments and limit the hours of life spent “managing” my investments and reading about retirement withdrawal strategies. I retired eight years ago at the age of 56. Choosing a withdrawal method was challenging and then…VPW. I have read each posting on VPW and the One Fund from Longinvest. It is hard to overstate how valuable these postings have been in order to understand and execute VPW and have the confidence to rely on it over the long haul (as well as getting over the tax arguments against using a one fund approach for non qualified accounts).

Toay, I have one all-in-one mutual fund, together with a pension/cola and future SS. VPW has been an intuitive and stable retirement tool (I am in my third year of using it). While I still calculate monthly VPW rates for informational purposes, I rely on VPW once a year to set my withdrawal rate for the year. At this point, after reviewing the VPW forward test from inception, and my own experience using it, I am going to cease my monthly calculation as they are not needed.

It’s hard to overstate the value of simplicity and stability, especially if you trying to break the habit of active investing. While common sense and my actual performance made it clear that a simpler approach was better, it’s not so easy to actually stop fussing and fidgeting. I am very grateful for Longinvest’s time and efforts to develop VPW, for me it has been a game changer. In fact, the only investing threads I monitor are this one and the One Fund…

So, many thanks Longinvest!
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

SevenBridgesRoad, L84SUPR, Tj, Green_phone, Goblue100, Peteyboy, Workinprogress, and Spyder59, thanks for your feedback!
longinvest wrote: Sat Jul 01, 2023 12:28 pm 🎉 This thread is celebrating its fourth year, already! 🎉

This week, I invite readers to provide their feedback about the last four years. I'll get back to my regular posts next weekend.

So, how did you enjoy the ride, so far? Did this thread have an impact on your retirement plans?
SevenBridgesRoad wrote: Sat Jul 01, 2023 8:05 pm Wow, does the time fly!

In the Fall, I'll be five years retired. The main VPW thread and Retirement Worksheet provided the tools to use the method from the beginning of my retirement. The Forward Test has given me additional confidence that my wife and I made the right choice for our situation. For example, we use a one-fund approach across our two IRAs and taxable account, as "good enough". We are quite comfortable with the potential required flexibility in withdrawals/spending, having covered our core expenses with SS and two single premium simple annuities.

The VPW method is allowing us to spend our inheritance now with the adult kids and our grandkids while we're still able to enjoy it with them, and yet be confident we will not run out of money and become a burden.

You can be very proud of your contribution to the community. Happy "Fourth"!
L84SUPR wrote: Sun Jul 02, 2023 9:49 am The VPW method provides a structured approach to reconcile the statements "stay the course" and "be flexible". Nobody in their right mind would blindly follow the 4% rule in the face of a multi-year down turn. VPW provides a way to commit up front to future adjustments based on market conditions, and then stay the course. I really appreciate this characteristic and your efforts to show how this plays out in a real-world scenario.

I'm not thrilled by the variability and downward trend in the withdrawals that is occurring during the forward test and would like to have our withdrawals be more consistent even if they are a little lower in the first year. Consequently, I adjust the US stock portion of our portfolio for overvaluation before entering the portfolio value in the VPW spreadsheet. I have been doing this quarterly for the past 18 months and like the resulting damped, and upward, trend.

I am retiring in six months but DW has decided to continue working and I have a substantial annual leave payout coming in January. We will take a reduced amount from the bridging fund but don't need to withdraw from the portfolio. I will continue to dry-run the VPW spreadsheet and follow this thread as we approach our first portfolio withdrawal in 2025.
tj wrote: Sun Jul 02, 2023 9:51 pm This thread has always been a good read.
green_phone wrote: Mon Jul 03, 2023 6:41 pm I've found it interesting to see how the VPW works. Thanks for updating!
goblue100 wrote: Tue Jul 04, 2023 8:50 am I'm a regular reader of this thread, and being a forward test right into a pandemic has been really interesting. I retired about 18 months after the thread started. I can't say it impacted my plans but may have given me some confidence that I had enough.

One idea I had to make the thread more realistic, is our retiree has to survive a trial every year to see if he makes it to next year, based on the SS Actuarial Life Table. For a 68 year old, he would fail the trial around 2% of the time. I'm not really looking to end the thread, but the random nature of such a trial would drive home the point none of us are promised next year.
peteyboy wrote: Tue Jul 04, 2023 9:46 am I "officially" retired in April of 2020 at age 54. I found this thread later that year (August or September) and after reading through it I felt an enormous sense of relief. The impact the thread and the VPW spreadsheet had on me was two-fold:

Firstly, I became comfortable that if I didn't earn another dollar working, we had accumulated enough for my wife and I to completely retire. The impact of releasing the stress for me on this front was enormous and can't be overstated. I didn't retire by choice, another source of stress, so anything to minimize stress was critical. Remember this was right when COVID was starting (I got COVID in March 2020), yet another source of stress and anxiety.

Secondly, it gave us a understandable and thoughtful strategy (VPW) to approach how to access our retirement savings. We use the calculated withdrawal amount of 4.8% (currently age 57, 70/30 allocation) as an upper limit and we stay well below it, withdrawing at an annual rate of < 3%, so far. The 4% SWR approach just wasn't doing it for me, though this was my mindset before retirement. It seemed overly simplified and not responsive to how our investments were doing, which didn't make sense to me.

Many thanks for starting this in July of 2019. It's helped me out a ton.
Workinprogress wrote: Fri Jul 07, 2023 8:28 am It almost feels like sacrilege posting in this thread. While not in retirement, I am subscribed to this thread and committed to utilizing this method of withdrawal in a year or two when I am. It has given me a tool to play with different scenarios and feel very comfortable in knowing that I really do have enough to retire comfortably.
Thank you for your continued efforts.
Spyder59 wrote: Fri Jul 07, 2023 9:49 am After decades of active investing, it was clear to me that the time/reward balance as compared with a passive Boglehead approach was questionable. It took quite a few years to simplify my investments and limit the hours of life spent “managing” my investments and reading about retirement withdrawal strategies. I retired eight years ago at the age of 56. Choosing a withdrawal method was challenging and then…VPW. I have read each posting on VPW and the One Fund from Longinvest. It is hard to overstate how valuable these postings have been in order to understand and execute VPW and have the confidence to rely on it over the long haul (as well as getting over the tax arguments against using a one fund approach for non qualified accounts).

Toay, I have one all-in-one mutual fund, together with a pension/cola and future SS. VPW has been an intuitive and stable retirement tool (I am in my third year of using it). While I still calculate monthly VPW rates for informational purposes, I rely on VPW once a year to set my withdrawal rate for the year. At this point, after reviewing the VPW forward test from inception, and my own experience using it, I am going to cease my monthly calculation as they are not needed.

It’s hard to overstate the value of simplicity and stability, especially if you trying to break the habit of active investing. While common sense and my actual performance made it clear that a simpler approach was better, it’s not so easy to actually stop fussing and fidgeting. I am very grateful for Longinvest’s time and efforts to develop VPW, for me it has been a game changer. In fact, the only investing threads I monitor are this one and the One Fund…

So, many thanks Longinvest!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

Investment Portfolio and Income Cushion Balances as of June 30, 2023

The June 2023 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 3.37% and the annual percentage yield (APY) of the Ally savings account was 3.85%.

We use account balances as of May 31, 2023 and apply June 2023 growth on investments and interest on savings.
  • Investment portfolio (Vanguard LifeStrategy Moderate Growth Fund (VSMGX)): ($860,933.19 X (1 + 3.37%)) = $889,946.64
  • Income cushion (Ally Bank savings account): ($32,955.38 X ((1 + 3.85%)^(1 / 12))) = $33,059.29
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

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

Post by longinvest »

Forward test as of June 30, 2023

We continue our forward test. Here's a link to the previous entry.

As of June 30, 2023, the retiree's investment portfolio and income cushion balances are:
  • Investment portfolio (Vanguard LifeStrategy Moderate Growth Fund (VSMGX)): $889,946.64
  • Income cushion (Ally Bank savings account): $33,059.29
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,370 per month (in 2023 dollars).

The Social Security and Medicare Boards of Trustees project that the OASI program will only be able to pay 77% of scheduled benefits starting in year 2033, unless changes are made. Consequently, the retiree considers (100% - 77%) = 23% of promised benefits as a temporary pension from age 70 to age 78 (the retiree's age in January 2033).

The retiree's age has increased by one to 69. We update the Age cell and the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:

Image

The VPW Worksheet suggests to take a $5,526 portfolio withdrawal. In accordance with the process illustrated in this post, the retiree withdraws the suggested amount and deposits it along with the $1,000 June 2023 pension payment into the income cushion increasing its balance to:
  • Income cushion: ($33,059.29 + $5,526 + $1,000) = $39,585.29
Then the retiree transfers one sixth of the balance ($39,585.29 / 6) = $6,598 out of the income cushion as retirement income for July 2023, available for taxes and expenses.

After withdrawal and transfer, ($889,946.64 - $5,526) = $884,420.64 is left into the investment portfolio and ($39,585.29 - $6,598) = $32,987.29 is left into the income cushion at the end of June 2023.

The Ally savings account currently carries an annual percentage yield (APY) of 4.00%.

Chart

Here's a chart of total monthly retirement income (blue bars, left axis) and total portfolio and cushion balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.

July 2023 total retirement income is $6,598 and on the morning of July 1, 2023, the total portfolio and cushion balance is $917,407.93.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $82,388
  • 2022: $83,394
  • 2023: $80,050 (annualized) -- $46,696 in 7 months
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Since in April 2023, pension payments are spent in the month following their receipt. To keep things simple and intuitive, I've decided to keep updating the retiree's age while doing the end-of-June calculation (as the retiree's birthday is in June).

In 2024, the retiree's first Social Security payment will be received during the month of July and will be spent in August. The retiree's age will still be updated to 70 for the June 30, 2024 calculation, causing a small income deficit equal to July's Social Security payment. For this single month, the missing amount will be withdrawn from the portfolio.
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,526 portfolio withdrawal at the end of June 2023.

Detailed calculations are provided in the lower part of the Retirement sheet. Displayed amounts and percentages are rounded.

Image

Image

The retiree will get $1,825/month Social Security (77%) payments in 1 years. That's ($1,825 X 12) = $21,900/year. The percentage for a 1-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 100.0% (called [G] above). As a consequence, ($21,900 / 100.0%) = $21,900 is kept aside (on paper) for Social Security (77%) bridge withdrawals.

The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of its purchasing power due to inflation, only 65.7% (called [B] above) of the pension payment is spent (see this post and this post for detailed explanations). That's ($1,000 X 12 X 65.7%) = $7,887/year.

The retiree will get $545/month Social Security (23%) payments for 8 years in 1 years. To transform this temporary income into lifelong income, only part of the income will be spent (see this post for explanations). The percentage for age 70 with a 60/40 stocks/bonds allocation in the VPW Table is 5.4% (called [C] above). The percentage for a 8-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 14.2% (called [D] above). As a consequence, only ($545 X 12 X 5.4% / 14.2%) = $2,497/year will be spent. The percentage for a 1-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 100.0% (called [K] above). As a consequence, ($2,497 / 100.0%) = $2,497 is kept aside (on paper) for Social Security (23%) bridge withdrawals.

At age 69 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.3% (called [A] above).

Image

The retiree has a $889,947 portfolio, but ($21,900 + $2,497) = $24,397 is kept aside (on paper) for Social Security bridge withdrawals. This leaves ($889,947 - $24,397) = $865,550 available for VPW and results into a ($865,550 X 5.3%) = $46,022 VPW withdrawal. Adding ($21,900 + $7,887 + $2,497) = $32,284 of (bridged and adjusted) pension income results into a total annual retirement income of ($46,022 + $32,284) = $78,306.

Image

The monthly income target is ($78,306 / 12) = $6,526. The work pension provides $1,000. The difference, ($6,526 - $1,000) = $5,526, is withdrawn from the portfolio.

Image

The VPW worksheet also calculates a Required Flexibility that must be maintained by the retiree. To do so, it first applies a -50% loss to the stock allocation and then repeats its calculations. With 60/40 stocks/bonds allocation, this results into a (-50% X 60%) = -30% portfolio loss. That's a (-30% X $889,947) = -$266,984 portfolio loss, reducing the portfolio to ($889,947 - $266,984) = $622,963 after the loss. Then, it repeats its calculations:

Image

After such a loss, total annual retirement income would be reduced to $64,111, representing a reduction of (($64,111 - $78,306) / 12) = -$1,183/month.

The retiree must maintain the flexibility to easily cut spending by up to -$1,183/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,183 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort (see this post for additional explanations).
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

The retiree's portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), an automatically-rebalanced low-cost global balanced index One-Fund Portfolio with a 60/40 stocks/bonds target allocation which, as of June 30, 2023, was spread across 3,859 U.S. stocks, 7,969 international stocks, 10,543 U.S. bonds, and 7,007 international bonds for a total of 29,378 global securities, approximating the (free float) Global Stock-and-Bond Portfolio with a moderate home bias.

Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into from the start of this forward test until June 30, 2023:

Image

Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:

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

Post by longinvest »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for June 2023.

We're interested to calculate an average CPI-U to associate with our forward test at the end of June 2023. Here are the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
07/2022 296.276
08/2022 296.171
09/2022 296.808
10/2022 298.012
11/2022 297.711
12/2022 296.797
01/2023 299.170
02/2023 300.840
03/2023 301.836
04/2023 303.363
05/2023 304.127
06/2023 305.109
We take note that the average CPI-U for the last 12 months at the end of June 2023 was 299.685.

Last year, we calculated that the average CPI-U for the last 12 months at the end of June 2022 was 282.025.

The trailing 1-year average inflation at the end of June 2023 was ((299.685 / 282.025) - 1) = 6.26%.

The chosen Ally savings account has an annual percentage yield (APY) of 4.00%. It's -2.26% below trailing average inflation.
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: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)

Post by longinvest »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test and additional information expressed in June 2023 dollars:

Image

Inflation-adjusted initial portfolio balance: $1,183,271

Inflation-Adjusted Historical Annual Retirement Income
  • 2019: $90,076 (annualized) -- $45,038 in 6 months, starting retirement in July
  • 2020: $89,406
  • 2021: $93,828
  • 2022: $89,022
  • 2023: $80,909 (annualized) -- $47,197 in 7 months
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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