A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Longinvest,
Thanks for all your work on this project. I have a question regarding the 12 month effect of the dampening account.
The dampening account smooths out the month to month withdrawal amounts. What effect does it have for the twelve month total. Meaning, at the end of twelve months how might these two total withdrawal amounts compare:
A) The total dollar amount of twelve monthly withdrawals using a dampening account
B) The total dollar amount of twelve monthly withdrawals without a dampening account
Would the dollar amount at the finish line be similar, but "A" provides a smoother ride along the way, or would the dollar amounts be significantly different?
Thanks for all your work on this project. I have a question regarding the 12 month effect of the dampening account.
The dampening account smooths out the month to month withdrawal amounts. What effect does it have for the twelve month total. Meaning, at the end of twelve months how might these two total withdrawal amounts compare:
A) The total dollar amount of twelve monthly withdrawals using a dampening account
B) The total dollar amount of twelve monthly withdrawals without a dampening account
Would the dollar amount at the finish line be similar, but "A" provides a smoother ride along the way, or would the dollar amounts be significantly different?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Travelintime, I've answered your interesting theory question in this post of the main VPW thread.
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)
Effective 7/8/20, the APY for Ally savings will be 1.00% (reduced from 1.10%).
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Thanks for the report, Investor9904678.Investor9904678 wrote: ↑Tue Jul 07, 2020 7:16 pm Effective 7/8/20, the APY for Ally savings will be 1.00% (reduced from 1.10%).
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)
Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,444 portfolio withdrawal at the end of June 2020.
The retiree will get $2,032/month Social Security payments in 4 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $981,253 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($981,253 - $92,364) X 5.1%) = $45,333 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,384 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $45,333 VPW withdrawal. This sums up to ($24,384 - $4,116 + $45,333) = $65,601 and results into a ($65,601 / 12) = $5,467 portfolio withdrawal. The $23 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($65,601 + (12 X $1,000)) = $77,601/year ($6,467/month) available for taxes and expenses.
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 stocks 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 $981,253) = -$294,376 portfolio loss, reducing the portfolio to ($981,253 - $294,376) = $686,877 after the loss. This implies a (($24,384 - $4,116 + (($686,877 - $92,364) X 5.1%)) / 12) = $4,216 monthly portfolio withdrawal which represents a ($4,216 - $5,467) = -$1,251 reduction after the loss.
The retiree must maintain the flexibility to easily cut spending by up to -$1,251/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,251 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
The retiree will get $2,032/month Social Security payments in 4 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $981,253 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($981,253 - $92,364) X 5.1%) = $45,333 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,384 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $45,333 VPW withdrawal. This sums up to ($24,384 - $4,116 + $45,333) = $65,601 and results into a ($65,601 / 12) = $5,467 portfolio withdrawal. The $23 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($65,601 + (12 X $1,000)) = $77,601/year ($6,467/month) available for taxes and expenses.
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 stocks 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 $981,253) = -$294,376 portfolio loss, reducing the portfolio to ($981,253 - $294,376) = $686,877 after the loss. This implies a (($24,384 - $4,116 + (($686,877 - $92,364) X 5.1%)) / 12) = $4,216 monthly portfolio withdrawal which represents a ($4,216 - $5,467) = -$1,251 reduction after the loss.
The retiree must maintain the flexibility to easily cut spending by up to -$1,251/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,251 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
Last edited by longinvest on Sat Aug 15, 2020 7:04 am, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
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 stock/bond target allocation which, as of June 30, 2020, is spread across 3,531 US stocks, 7,334 international stocks, 9,658 US bonds, and 6,262 international bonds for a total of 26,785 global securities.
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until June 30, 2020:
Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until June 30, 2020:
Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:
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)
The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for June 2020.
We're interested to calculate an average CPI-U to associate with our forward test at the end of June 2020. Here were the last 12 CPI-U values:
We take note that the average CPI-U for the last 12 months at the end of June 2020 was 257.230.
Last year, we calculated that the average CPI-U for the last 12 months at the end of June 2019 was 253.268.
The trailing 1-year average inflation at the end of June 2020 was ((257.230 / 253.268) - 1) = 1.56%.
The chosen Ally savings account has an annual percentage yield (APY) of 1.00%. It's 0.56% below trailing average inflation.
We're interested to calculate an average CPI-U to associate with our forward test at the end of June 2020. Here were the last 12 CPI-U values:
Code: Select all
Month CPI-U
07/2019 256.571
08/2019 256.558
09/2019 256.759
10/2019 257.346
11/2019 257.208
12/2019 256.974
01/2020 257.971
02/2020 258.678
03/2020 258.115
04/2020 256.389
05/2020 256.394
06/2020 257.797
Last year, we calculated that the average CPI-U for the last 12 months at the end of June 2019 was 253.268.
The trailing 1-year average inflation at the end of June 2020 was ((257.230 / 253.268) - 1) = 1.56%.
The chosen Ally savings account has an annual percentage yield (APY) of 1.00%. It's 0.56% 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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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in June 2020 dollars:
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)
The month of August 2020 has five weekends. I'm taking advantage of the extra weekend to summarize the content of this thread for new readers joining us. I'll resume my regular weekly posts next weekend.
This thread illustrates a simple Bogleheads retirement approach by doing what we call a forward test. It's an ongoing live simulation which was started on June 30, 2019 with a well-defined plan but unknown future portfolio returns (see this post).
The simulated hypothetical retirement started at age 65 with a $1,000,000 portfolio ($1,015,642 in June 2020 dollars) and a fixed $1,000 per month work pension ($1,016 in June 2020 dollars) while delaying Social Security to age 70 to receive $2,000 per month in 2019 dollars ($2,032 in 2020 dollars).
Except for a small withdrawal cushion kept into an Ally Bank savings account, representing approximately 5 months of withdrawals, the portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a globally-diversified low-cost automatically-rebalanced all-in-one 60/40 stock/bond index fund. It's a One-Fund Portfolio which approximates the Market Portfolio, the portfolio of all investment-grade stocks and bonds of the world, adapted for U.S. investors with a moderate home bias (see this post for detailed explanations).
Portfolio withdrawals amounts are determined, monthly, using the Retirement sheet of the VPW Accumulation And Retirement Worksheet which implements an accumulation and retirement plan based on our wiki's sensible Variable percentage withdrawal (VPW) method. VPW allows the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
The approach is really simple. Each month:
Here's an inflation-adjusted chart of this forward test, so far, expressed in June 2020 dollars. Retirement income has averaged $76,858/year, fluctuating between $6,302/month (min, June 2020) and $6,455/month (max, July 2019).
THREAD STRUCTURE
The regular posts of this forward test thread are of two types: one action post per month, and additional explanation posts which document and explain what's happening and the underlying calculations in details. There are additional irregular posts by forum members to discuss the forward test.
USEFUL TRICK
It's easy to navigate the action posts of this thread in reverse, back to the first action post, by starting with the latest action post (currently this post) and clicking on the previous entry link in each post.
THEORY DISCUSSIONS AND SUPPORT FOR PERSONAL SITUATIONS
Members who wish to discuss the underlying theory of the approach are invited to do so in the main VPW thread.
For getting support with personal situations, it's best to start a new thread in the Personal Investments forum and post a link to it in the main VPW thread to attract attention.
* In practice, steps 3 and 4 are combined resulting into a single much smaller withdrawal cushion transfer.
** To be accurate, that's almost all of it. At age 70, the retiree will start receiving Social Security payments and the size of the withdrawal cushion will need to be consequently reduced. At age 80, the Retirement sheet will provide an estimate of the retiree's Income Floor After Age 100. The retiree will be invited to consider buying an inflation-indexed (e.g. 2%-indexed) SPIA*** with part (but not all) of the remaining portfolio to increase this floor, if necessary to live comfortably (but no more) independently from portfolio withdrawals. This is to dampen the financial risk associated with long life as VPW will have mostly (but not entirely) depleted the investment portfolio by age 100 if the retiree is still alive.
*** Single Premium Immediate Annuity.
This thread illustrates a simple Bogleheads retirement approach by doing what we call a forward test. It's an ongoing live simulation which was started on June 30, 2019 with a well-defined plan but unknown future portfolio returns (see this post).
The simulated hypothetical retirement started at age 65 with a $1,000,000 portfolio ($1,015,642 in June 2020 dollars) and a fixed $1,000 per month work pension ($1,016 in June 2020 dollars) while delaying Social Security to age 70 to receive $2,000 per month in 2019 dollars ($2,032 in 2020 dollars).
Except for a small withdrawal cushion kept into an Ally Bank savings account, representing approximately 5 months of withdrawals, the portfolio is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a globally-diversified low-cost automatically-rebalanced all-in-one 60/40 stock/bond index fund. It's a One-Fund Portfolio which approximates the Market Portfolio, the portfolio of all investment-grade stocks and bonds of the world, adapted for U.S. investors with a moderate home bias (see this post for detailed explanations).
Portfolio withdrawals amounts are determined, monthly, using the Retirement sheet of the VPW Accumulation And Retirement Worksheet which implements an accumulation and retirement plan based on our wiki's sensible Variable percentage withdrawal (VPW) method. VPW allows the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
The approach is really simple. Each month:
- The retiree updates the Portfolio Balance cell. (The Age and Social Security Monthly Payment cells must also be updated once a year.)
- The retiree withdraws the amount suggested in the Monthly Portfolio Withdrawal cell from the Vanguard LifeStrategy Moderate Growth Fund investment.
- The retiree adds the withdrawn money into the withdrawal cushion (increasing it to approximately 6 months of withdrawals).
- The retiree takes out one sixth (1/6) of the withdrawal cushion (leaving approximately 5 months of withdrawals) and combines it with with the $1,000 work pension as retirement income for the month (available for taxes and expenses).*
Here's an inflation-adjusted chart of this forward test, so far, expressed in June 2020 dollars. Retirement income has averaged $76,858/year, fluctuating between $6,302/month (min, June 2020) and $6,455/month (max, July 2019).
THREAD STRUCTURE
The regular posts of this forward test thread are of two types: one action post per month, and additional explanation posts which document and explain what's happening and the underlying calculations in details. There are additional irregular posts by forum members to discuss the forward test.
USEFUL TRICK
It's easy to navigate the action posts of this thread in reverse, back to the first action post, by starting with the latest action post (currently this post) and clicking on the previous entry link in each post.
THEORY DISCUSSIONS AND SUPPORT FOR PERSONAL SITUATIONS
Members who wish to discuss the underlying theory of the approach are invited to do so in the main VPW thread.
For getting support with personal situations, it's best to start a new thread in the Personal Investments forum and post a link to it in the main VPW thread to attract attention.
* In practice, steps 3 and 4 are combined resulting into a single much smaller withdrawal cushion transfer.
** To be accurate, that's almost all of it. At age 70, the retiree will start receiving Social Security payments and the size of the withdrawal cushion will need to be consequently reduced. At age 80, the Retirement sheet will provide an estimate of the retiree's Income Floor After Age 100. The retiree will be invited to consider buying an inflation-indexed (e.g. 2%-indexed) SPIA*** with part (but not all) of the remaining portfolio to increase this floor, if necessary to live comfortably (but no more) independently from portfolio withdrawals. This is to dampen the financial risk associated with long life as VPW will have mostly (but not entirely) depleted the investment portfolio by age 100 if the retiree is still alive.
*** Single Premium Immediate Annuity.
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)
Great work long invest! Love the idea of simplicity and making retirement withdrawals less of a mystery. I did have a question about the bridge in the current version of the spreadsheet. If the bridge funds are not invested in the Life Strategy Fund, and portfolio withdrawals are from the Life Strategy Fund, what is the bridge used for? Is it held as a reserve fund? Is it later to be invested in the Life Strategy Fund after reaching the optimal Social Security age? In the early version I believe the bridge was actually used to make up the income for the delayed Social Security payments.
Thanks in advance for your help!
Thanks in advance for your help!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Thanks Dodgerdiehard and welcome to the forum! In this forward test, there is no bridge portfolio. There's a single retirement portfolio, all invested into LifeStrategy Moderate Growth (except for a small withdrawal cushion at Ally Bank representing approximately 5 months of withdrawals). The spreadsheet does all the calculations to handle the work pension (which has no cost-of-living adjustments) and to fill the income gap until Social Security payments start (at age 70). The spreadsheet's calculations are explained in this post and this post.Dodgerdiehard wrote: ↑Tue Aug 04, 2020 1:41 pm Great work long invest! Love the idea of simplicity and making retirement withdrawals less of a mystery. I did have a question about the bridge in the current version of the spreadsheet. If the bridge funds are not invested in the Life Strategy Fund, and portfolio withdrawals are from the Life Strategy Fund, what is the bridge used for? Is it held as a reserve fund? Is it later to be invested in the Life Strategy Fund after reaching the optimal Social Security age? In the early version I believe the bridge was actually used to make up the income for the delayed Social Security payments.
Thanks in advance for your help!
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)
Portfolio balance as of July 31, 2020
The July 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 3.58% and the annual percentage yield (APY) of the Ally savings account was 1.00%.
We use account balances as of June 30, 2020 and apply July 2020 growth on investments and interest on savings.
The July 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 3.58% and the annual percentage yield (APY) of the Ally savings account was 1.00%.
We use account balances as of June 30, 2020 and apply July 2020 growth on investments and interest on savings.
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($949,292.19 X (1 + 3.58%)) = $983,276.85
- Withdrawal cushion (at Ally Bank): ($26,633.94 X ((1 + 1.00%)^(1 / 12))) = $26,656.03
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)
Forward test as of July 31, 2020
We continue our forward test. Here's a link to the previous entry.
As of July 31, 2020, the retiree's portfolio is composed of:
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,032 per month (in 2020 dollars).
We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:
The VPW Worksheet suggests to take a $5,565 withdrawal. The retiree withdraws the suggested amount.
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
After withdrawal and transfer, ($983,276.85 - $5,565) = $977,711.85 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($26,656.03 + $195) = $26,851.03 is left into the withdrawal cushion for a total portfolio balance of $1,004,562.88 at the end of July 2020.
The Ally savings account currently carries an annual percentage yield (APY) of 1.00%.
Chart
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
August 2020 total retirement income is $6,370 and on the morning of August 1, 2020, the total portfolio balance is $1,004,562.88.
Historical Annual Retirement Income
We continue our forward test. Here's a link to the previous entry.
As of July 31, 2020, the retiree's portfolio is composed of:
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $983,276.85
- Withdrawal cushion (at Ally Bank): $26,656.03
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,032 per month (in 2020 dollars).
We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:
The VPW Worksheet suggests to take a $5,565 withdrawal. The retiree withdraws the suggested amount.
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
- Adjusted withdrawal amount: (($5,565 + $26,656.03) / 6) = $5,370
- Adjustment: ($5,370 - $5,565) = -$195
After withdrawal and transfer, ($983,276.85 - $5,565) = $977,711.85 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($26,656.03 + $195) = $26,851.03 is left into the withdrawal cushion for a total portfolio balance of $1,004,562.88 at the end of July 2020.
The Ally savings account currently carries an annual percentage yield (APY) of 1.00%.
Chart
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
August 2020 total retirement income is $6,370 and on the morning of August 1, 2020, the total portfolio balance is $1,004,562.88.
Historical Annual Retirement Income
- 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
- 2020: $76,323 (annualized) -- $50,882 in 8 months
Last edited by longinvest on Sat Sep 05, 2020 11:24 am, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Thanks longinvest for the references. Just so I'm clear, the entire portfolio is invested in the Life Strategy Moderate Growth fund. When a bridge to Social Security is needed, the specific amount needed to fund the bridge is subtracted from the total portfolio before calculating the specific age-based percentage withdrawal. For example, on a $1 million portfolio, if a 5 year bridge to Social Security costs $100,000, only $900,000 is used to calculate age based portfolio withdrawal. However, the total withdrawal from investment portfolio is a combination of the age based withdrawal and approx. 1/5 of the Social Security bridge. This entire amount is taken from the Life Strategy Moderate Growth fund. Everything is done with just one fund. It truly is a masterpiece in simplicity! Thanks again for your great work.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,565 portfolio withdrawal at the end of July 2020.
The retiree will get $2,032/month Social Security payments in 4 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $1,009,933 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($1,009,933 - $92,364) X 5.1%) = $46,796 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,384 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $46,796 VPW withdrawal. This sums up to ($24,384 - $4,116 + $46,796) = $67,064 and results into a ($67,064 / 12) = $5,589 portfolio withdrawal. The $24 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($67,064 + (12 X $1,000)) = $79,064/year ($6,589/month) available for taxes and expenses.
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 stocks 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 $1,009,933) = -$302,980 portfolio loss, reducing the portfolio to ($1,009,933 - $302,980) = $706,953 after the loss. This implies a (($24,384 - $4,116 + (($706,953 - $92,364) X 5.1%)) / 12) = $4,301 monthly portfolio withdrawal which represents a ($4,301 - $5,589) = -$1,288 reduction after the loss.
The retiree must maintain the flexibility to easily cut spending by up to -$1,288/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,288 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
The retiree will get $2,032/month Social Security payments in 4 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $1,009,933 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($1,009,933 - $92,364) X 5.1%) = $46,796 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,384 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $46,796 VPW withdrawal. This sums up to ($24,384 - $4,116 + $46,796) = $67,064 and results into a ($67,064 / 12) = $5,589 portfolio withdrawal. The $24 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($67,064 + (12 X $1,000)) = $79,064/year ($6,589/month) available for taxes and expenses.
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 stocks 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 $1,009,933) = -$302,980 portfolio loss, reducing the portfolio to ($1,009,933 - $302,980) = $706,953 after the loss. This implies a (($24,384 - $4,116 + (($706,953 - $92,364) X 5.1%)) / 12) = $4,301 monthly portfolio withdrawal which represents a ($4,301 - $5,589) = -$1,288 reduction after the loss.
The retiree must maintain the flexibility to easily cut spending by up to -$1,288/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,288 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
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 stock/bond target allocation which, as of July 31, 2020, was spread across 3,529 US stocks, 7,392 international stocks, 9,719 US bonds, and 6,294 international bonds for a total of 26,934 global securities.
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until July 31, 2020:
Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until July 31, 2020:
Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Finally got a chance to play with the "new" VWP- Accumulationo-and-retirement-worksheet. I have a wishlist item for the accumulation and retirement tab: I wish there were an end date (by age) option for the various defined benefit pension entries. Not all "pensions" (or pension variants) are for life, and I'll have one that has an ending date (ends at age 62, specifically).
Love it otherwise though - thanks so much!
Love it otherwise though - thanks so much!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
I'll second this emotion. I'm in same situation with a pension variant that ends at age 62. I usually just leave it out of calculations, but it would be nice to include it.
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
I'm simply having a hard time believing this spreadsheet whatsoever, putting in my numbers as a 25 year old with a million dollars invested, it tells me I should start withdrawing $43,717 for 2020 in a 80/20 Stocks/Bonds portfolio. This is obviously an utterly insane suggestion to make, if this spreadsheet doesn't work for all age groups/circumstances then I have a hard time justifying its use for anyone else...
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
The math that says a 25 year old should begin retirement on a million dollar portfolio by drawing 43k
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
I agree with FiveK. Show us the math that you don't agree with. (Keep in mind you are investing most of your money in stocks with the number you quote and the worksheet has the word "variable" in it.)
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Yes, be more specific in the attack. VPW is just a modified PMT method. You could argue with Longinvest's 99 years and WAG for expected return, but you need to be more specific than "utterly insane."
This is like saying your mortgage payment is utterly insane, it may be because you bought too big of a house or got a bad loan, but its not because of the math.
This is like saying your mortgage payment is utterly insane, it may be because you bought too big of a house or got a bad loan, but its not because of the math.
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
This discussion is important but it should probably be moved to a separate thread as it is off track of the VPW example. However, LakerP and FiveK/dogagility are all making good points that highlight the benefits and limits of the VPW model. The math for VPW works as it is a sophisticated modified NPV calculation. However, the assumptions embedded within the model assume a 5.0% real return on equities and 1.9% real return for bonds, which is the historical return between 1900 and 2018. As the model provides on the List Tab:dogagility wrote: ↑Tue Aug 25, 2020 5:38 amI agree with FiveK. Show us the math that you don't agree with. (Keep in mind you are investing most of your money in stocks with the number you quote and the worksheet has the word "variable" in it.)
- 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 is fixed and must never be changed.
- At the top of a bubble, it is likely to be higher than future returns. At the bottom of a crash it is 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.
Using those inputs, the math works out that a 25 year old should withdraw $43K annually. The implications are that if future returns are lower than historical returns, future withdrawals could be dramatically lower than $43K inflation adjusted. The model could also be tweaked on individually to use projected future returns and there are several other threads on the merits of using historical asset class returns vs. projected asset class returns. As an example, I use the average expected future returns from five sources (BlackRock, Vanguard, Research Affiliates, AQR, Star Research) in a modified VPW/NPV model. Those expected future real returns are 4.9% for equities and -0.2% for bonds. Using these assumptions, the withdrawal rate for a 25 year old is approximately $35K or approximately 20% lower than using historical returns in the model.
Longinvest makes the case in his VPW template for using historical returns (e.g. sell high, buy low and impossible to predict future returns). The case for using projected returns are that it creates a more realistic spending picture and results in less volatility in withdrawals (e.g. when the market drops, expected future returns are higher so the percentage withdrawal rate is higher). Longinvest is clear that he believes hisotrical returns are better for his VPW model: "It's not a prediction of future returns. It is fixed and must never be changed." and he can weigh in on his reasoning. However, I would recommend that this conversation be moved to a separate thread so as to avoid distracting from the excellent example of using VPW model.
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
That sounds pretty close to the perpetual withdrawal rate of an 80/20 portfolio.LakerP wrote: ↑Tue Aug 25, 2020 2:26 am I'm simply having a hard time believing this spreadsheet whatsoever, putting in my numbers as a 25 year old with a million dollars invested, it tells me I should start withdrawing $43,717 for 2020 in a 80/20 Stocks/Bonds portfolio. This is obviously an utterly insane suggestion to make, if this spreadsheet doesn't work for all age groups/circumstances then I have a hard time justifying its use for anyone else...
I can assure you, the chart didn't instruct you to retire at 25. And from what I recall of the revision notes, longinvest was talked into adding the 80/20 (and 90/10) by request, certainly not because he advises that you use an 80/20 with VPW. Furthermore, VPW is optimally designed to be combined with steady sources of income such as social security, pensions, and annuities. I'm assuming you have none of those.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
azanon wrote: ↑Mon Aug 24, 2020 10:22 am Finally got a chance to play with the "new" VWP- Accumulationo-and-retirement-worksheet. I have a wishlist item for the accumulation and retirement tab: I wish there were an end date (by age) option for the various defined benefit pension entries. Not all "pensions" (or pension variants) are for life, and I'll have one that has an ending date (ends at age 62, specifically).
Love it otherwise though - thanks so much!
Azanon and Hitchcock_Fan, this thread is about the VPW forward test. I've replied to your theory posts in this post of the VPW theory thread.Hitchcock_Fan wrote: ↑Mon Aug 24, 2020 8:14 pm I'll second this emotion. I'm in same situation with a pension variant that ends at age 62. I usually just leave it out of calculations, but it would be nice to include it.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
LakerP wrote: ↑Tue Aug 25, 2020 2:26 am I'm simply having a hard time believing this spreadsheet whatsoever, putting in my numbers as a 25 year old with a million dollars invested, it tells me I should start withdrawing $43,717 for 2020 in a 80/20 Stocks/Bonds portfolio. This is obviously an utterly insane suggestion to make, if this spreadsheet doesn't work for all age groups/circumstances then I have a hard time justifying its use for anyone else...
This thread is about the VPW forward test. I've replied to forum member LakerP's post in this post of the VPW theory thread.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for July 2020.
We're interested to calculate an average CPI-U to associate with our forward test at the end of July 2020. Here were the last 12 CPI-U values:
We take note that the average CPI-U for the last 12 months at the end of July 2020 was 257.441.
Last year, we calculated that the average CPI-U for the last 12 months at the end of July 2019 was 253.649.
The trailing 1-year average inflation at the end of July 2020 was ((257.441 / 253.649) - 1) = 1.50%.
The chosen Ally savings account has an annual percentage yield (APY) of 0.80%. It's 0.70% below trailing average inflation.
We're interested to calculate an average CPI-U to associate with our forward test at the end of July 2020. Here were the last 12 CPI-U values:
Code: Select all
Month CPI-U
08/2019 256.558
09/2019 256.759
10/2019 257.346
11/2019 257.208
12/2019 256.974
01/2020 257.971
02/2020 258.678
03/2020 258.115
04/2020 256.389
05/2020 256.394
06/2020 257.797
07/2020 259.101
Last year, we calculated that the average CPI-U for the last 12 months at the end of July 2019 was 253.649.
The trailing 1-year average inflation at the end of July 2020 was ((257.441 / 253.649) - 1) = 1.50%.
The chosen Ally savings account has an annual percentage yield (APY) of 0.80%. It's 0.70% below trailing average inflation.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in July 2020 dollars:
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Portfolio balance as of August 31, 2020
The August 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 3.21% and the annual percentage yield (APY) of the Ally savings account was 0.80%.
We use account balances as of July 31, 2020 and apply August 2020 growth on investments and interest on savings.
The August 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 3.21% and the annual percentage yield (APY) of the Ally savings account was 0.80%.
We use account balances as of July 31, 2020 and apply August 2020 growth on investments and interest on savings.
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($977,711.85 X (1 + 3.21%)) = $1,009,096.40
- Withdrawal cushion (at Ally Bank): ($26,851.03 X ((1 + 0.80%)^(1 / 12))) = $26,868.87
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Forward test as of August 31, 2020
We continue our forward test. Here's a link to the previous entry.
As of August 31, 2020, the retiree's portfolio is composed of:
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,032 per month (in 2020 dollars).
We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:
The VPW Worksheet suggests to take a $5,675 withdrawal. The retiree withdraws the suggested amount.
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
After withdrawal and transfer, ($1,009,096.40 - $5,675) = $1,003,421.40 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($26,868.87 + $251) = $27,119.87 is left into the withdrawal cushion for a total portfolio balance of $1,030,541.27 at the end of August 2020.
The Ally savings account currently carries an annual percentage yield (APY) of 0.80%.
Chart
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
September 2020 total retirement income is $6,424 and on the morning of September 1, 2020, the total portfolio balance is $1,030,541.27.
Historical Annual Retirement Income
We continue our forward test. Here's a link to the previous entry.
As of August 31, 2020, the retiree's portfolio is composed of:
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,009,096.40
- Withdrawal cushion (at Ally Bank): $26,868.87
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,032 per month (in 2020 dollars).
We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:
The VPW Worksheet suggests to take a $5,675 withdrawal. The retiree withdraws the suggested amount.
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
- Adjusted withdrawal amount: (($5,675 + $26,868.87) / 6) = $5,424
- Adjustment: ($5,424 - $5,675) = -$251
After withdrawal and transfer, ($1,009,096.40 - $5,675) = $1,003,421.40 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($26,868.87 + $251) = $27,119.87 is left into the withdrawal cushion for a total portfolio balance of $1,030,541.27 at the end of August 2020.
The Ally savings account currently carries an annual percentage yield (APY) of 0.80%.
Chart
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
September 2020 total retirement income is $6,424 and on the morning of September 1, 2020, the total portfolio balance is $1,030,541.27.
Historical Annual Retirement Income
- 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
- 2020: $76,408 (annualized) -- $57,306 in 9 months
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,675 portfolio withdrawal at the end of August 2020.
The retiree will get $2,032/month Social Security payments in 4 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $1,035,965 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($1,035,965 - $92,364) X 5.1%) = $48,124 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,384 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $48,124 VPW withdrawal. This sums up to ($24,384 - $4,116 + $48,124) = $68,392 and results into a ($68,392 / 12) = $5,699 portfolio withdrawal. The $24 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($68,392 + (12 X $1,000)) = $80,392/year ($6,699/month) available for taxes and expenses.
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 stocks 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 $1,035,965) = -$310,790 portfolio loss, reducing the portfolio to ($1,035,965 - $310,790) = $725,175 after the loss. This implies a (($24,384 - $4,116 + (($725,175 - $92,364) X 5.1%)) / 12) = $4,378 monthly portfolio withdrawal which represents a ($4,378 - $5,699) = -$1,321 reduction after the loss.
The retiree must maintain the flexibility to easily cut spending by up to -$1,321/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,321 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
The retiree will get $2,032/month Social Security payments in 4 years. That's $24,384/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds in the VPW Table is 26.4%. As a consequence, ($24,384 / 26.4%) = $92,364 is kept aside (on paper) for Social Security bridge withdrawals.
The $1,000/month work pension isn't indexed to inflation. To dampen the erosion of inflation, only 65.7% of the pension is spent (see this post) and an annual ($1,000 X 12 X (100% - 65.7%)) = $4,116 is invested into the portfolio.
The retiree has a $1,035,965 portfolio, but $92,364 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds portfolio, the percentage in the VPW Table is 5.1%. This results into a (($1,035,965 - $92,364) X 5.1%) = $48,124 annual VPW withdrawal.
So, on an annual basis the retiree plans to withdraw $24,384 in replacement of future Social Security payments, to invest $4,116 to dampen the ravages of inflation on the fixed work pension, and to take a $48,124 VPW withdrawal. This sums up to ($24,384 - $4,116 + $48,124) = $68,392 and results into a ($68,392 / 12) = $5,699 portfolio withdrawal. The $24 difference with the VPW Worksheet's suggested amount is due to rounding.
Note that Total Retirement Income also includes the monthly $1,000 work pension payment for a total of ($68,392 + (12 X $1,000)) = $80,392/year ($6,699/month) available for taxes and expenses.
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 stocks 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 $1,035,965) = -$310,790 portfolio loss, reducing the portfolio to ($1,035,965 - $310,790) = $725,175 after the loss. This implies a (($24,384 - $4,116 + (($725,175 - $92,364) X 5.1%)) / 12) = $4,378 monthly portfolio withdrawal which represents a ($4,378 - $5,699) = -$1,321 reduction after the loss.
The retiree must maintain the flexibility to easily cut spending by up to -$1,321/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,321 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
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 stock/bond target allocation which, as of August 31, 2020, was spread across 3,525 US stocks, 7,425 international stocks, 9,881 US bonds, and 6,304 international bonds for a total of 27,135 global securities.
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until August 31, 2020:
Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:
Here's a growth chart of the Vanguard LifeStrategy Moderate Growth Fund and of the four markets it invests into since the start of this forward test until August 31, 2020:
Here's a comparative chart of the growth of the four markets relative to the Vanguard LifeStrategy Moderate Growth Fund over the same period:
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Isn't the retiree's allocation affected by 26k in a savings account? Or are we assuming they also reallocate to maintain 60/40? And not just in this instance, but ongoing. I'm having trouble understanding how this would work.longinvest wrote: ↑Sat Aug 03, 2019 2:42 pm
As of July 31, 2019, the retiree's portfolio is composed of:Total Portfolio Balance: $997,884.37
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $971,057.95
- Withdrawal Cushion (Ally savings account): $26,826.42
This great by they way, thank you!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Tejfyy, the decision to consider the withdrawal cushion as part of the portfolio, for VPW withdrawal calculation purpose, was discussed and subjected to a community vote earlier in this thread. Here's the post explaining the issue, my personal opinion, and the result of the vote.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Ally savings account is now down to 0.60%.
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Great thank you!longinvest wrote: ↑Wed Sep 23, 2020 6:19 amTejfyy, the decision to consider the withdrawal cushion as part of the portfolio, for VPW withdrawal calculation purpose, was discussed and subjected to a community vote earlier in this thread. Here's the post explaining the issue, my personal opinion, and the result of the vote.
I read through threads at the links you provided longinvest. Let me then see if I can answer my original question. Given that the withdrawal cushion is considered part of the portfolio it DOES affect your AA, so you're rebalancing must include the cushion. Correct?
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
With high yield savings accounts providing the lowest yield I believe since this thread was started, what are others thinking and doing with your cushion accounts now? Someone had suggested Vanguard Federal Money Market VMFXX. I'm partial to savings accounts and no-penalty CDs.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Investor9904678, thanks for reporting this.
Tejfyy, the retiree has:Tejfyy wrote: ↑Thu Sep 24, 2020 6:08 pmGreat thank you!longinvest wrote: ↑Wed Sep 23, 2020 6:19 amTejfyy, the decision to consider the withdrawal cushion as part of the portfolio, for VPW withdrawal calculation purpose, was discussed and subjected to a community vote earlier in this thread. Here's the post explaining the issue, my personal opinion, and the result of the vote.
I read through threads at the links you provided longinvest. Let me then see if I can answer my original question. Given that the withdrawal cushion is considered part of the portfolio it DOES affect your AA, so you're rebalancing must include the cushion. Correct?
- An investment portfolio which is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund. This globally-diversified all-in-one index fund has a 60/40 stock/bond target allocation and is automatically rebalanced by its fund managers.
- An Ally savings account (called withdrawal cushion) containing approximately five months of withdrawals.
Ally's rate is low but still competitive. The retiree has no reason to go through the hassle of moving the withdrawal cushion elsewhere.Tejfyy wrote: ↑Thu Sep 24, 2020 6:51 pm With high yield savings accounts providing the lowest yield I believe since this thread was started, what are others thinking and doing with your cushion accounts now? Someone had suggested Vanguard Federal Money Market VMFXX. I'm partial to savings accounts and no-penalty CDs.
I've explained in this post of the main VPW thread that half of a withdrawal is already gone within the first four months and only 10% of a withdrawal remains in the withdrawal cushion after one year. After two years, the money's practically all gone. In other words, even if the interest rate on savings is slightly lower than inflation, withdrawn money doesn't stay long enough in the withdrawal cushion to be perceptibly affected by the erosive impact of inflation.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Ahh right it's already managed, that didn't register. I'm in two total market index funds--stocks, bonds, and then CDs, 50/50. I do my own rebalancing thus my question.longinvest wrote: ↑Fri Sep 25, 2020 7:35 am Tejfyy, the retiree has:
- An investment portfolio which is entirely invested into the Vanguard LifeStrategy Moderate Growth Fund. This globally-diversified all-in-one index fund has a 60/40 stock/bond target allocation and is automatically rebalanced by its fund managers.
That makes perfect sense. When we're talking about the erosive effects of low interest rates and inflation in retirement at what point do we start seeing the effects?longinvest wrote: ↑Fri Sep 25, 2020 7:35 am
I've explained in this post of the main VPW thread that half of a withdrawal is already gone within the first four months and only 10% of a withdrawal remains in the withdrawal cushion after one year. After two years, the money's practically all gone. In other words, even if the interest rate on savings is slightly lower than inflation, withdrawn money doesn't stay long enough in the withdrawal cushion to be perceptibly affected by the erosive impact of inflation.
Thank you again!
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Tejfyy, this thread is specifically about the ongoing VPW forward test. In the future, it would be nice if you asked questions related to your own portfolio using a new thread in the Personal Investments forum.
I've just written that a 5-month withdrawal cushion won't cause a perceptible erosion of purchase power over time.Tejfyy wrote: ↑Fri Sep 25, 2020 12:53 pmThat makes perfect sense. When we're talking about the erosive effects of low interest rates and inflation in retirement at what point do we start seeing the effects?longinvest wrote: ↑Fri Sep 25, 2020 7:35 am I've explained in this post of the main VPW thread that half of a withdrawal is already gone within the first four months and only 10% of a withdrawal remains in the withdrawal cushion after one year. After two years, the money's practically all gone. In other words, even if the interest rate on savings is slightly lower than inflation, withdrawn money doesn't stay long enough in the withdrawal cushion to be perceptibly affected by the erosive impact of inflation.
If your question wasn't about this VPW forward test, but about the relation between inflation, low interest rates, and loss of purchase power in general, I suggest that you start a new thread in the Investing - Theory, News & General forum to discuss this interesting topic.
Last edited by longinvest on Sat Sep 26, 2020 9:31 am, edited 1 time in total.
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for August 2020.
We're interested to calculate an average CPI-U to associate with our forward test at the end of August 2020. Here were the last 12 CPI-U values:
We take note that the average CPI-U for the last 12 months at the end of August 2020 was 257.721.
Last year, we calculated that the average CPI-U for the last 12 months at the end of August 2019 was 254.016.
The trailing 1-year average inflation at the end of August 2020 was ((257.721 / 254.016) - 1) = 1.46%.
The chosen Ally savings account has an annual percentage yield (APY) of 0.60%. It's 0.86% below trailing average inflation.
We're interested to calculate an average CPI-U to associate with our forward test at the end of August 2020. Here were the last 12 CPI-U values:
Code: Select all
Month CPI-U
09/2019 256.759
10/2019 257.346
11/2019 257.208
12/2019 256.974
01/2020 257.971
02/2020 258.678
03/2020 258.115
04/2020 256.389
05/2020 256.394
06/2020 257.797
07/2020 259.101
08/2020 259.918
Last year, we calculated that the average CPI-U for the last 12 months at the end of August 2019 was 254.016.
The trailing 1-year average inflation at the end of August 2020 was ((257.721 / 254.016) - 1) = 1.46%.
The chosen Ally savings account has an annual percentage yield (APY) of 0.60%. It's 0.86% 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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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in August 2020 dollars:
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
The month of October 2020 has five weekends. I'm taking advantage of the extra weekend to discuss investment philosophy. I'll resume my regular weekly posts next weekend.
The retirement plan illustrated in this forward test is based on the Bogleheads investment philosophy which consists of 10 principles:
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 stock/bond target allocation. As of August 31, 2020, it was spread across 27,135 global securities. It satisfies principles 3, 4, 5, 6, 7, 9, and 10. In a taxable account, its low turnover satisfies principle 8*.
* Tax concerns have been kept of out of the scope of this forward test. In real life, principle 8 would be satisfied by fully taking advantage of workplace retirement plans (and employer match) and other tax-advantaged accounts, only adding contributions into a taxable account when tax-advantaged accounts are full. The adequacy of using a single identical balanced index fund in all accounts (including taxable) is discussed in details in the One-Fund Portfolio thread.
Using the VPW Accumulation And Retirement Worksheet with a global balanced index fund is simple and satisfies the principles of the Bogleheads investment philosophy.
The retirement plan illustrated in this forward test is based on the Bogleheads investment philosophy which consists of 10 principles:
The illustrated retirement plan relies on our wiki's VPW Accumulation And Retirement Worksheet which implements a workable financial plan for both accumulation and retirement. It takes into account the investor's age, portfolio size and allocation, salary and target financial independence age (during accumulation), contribution frequency (during accumulation) or withdrawal frequency (during retirement), as well as current or future pensions including Social Security. It's very easy to use. It needs a few simple inputs (in yellow cells) and it suggests a contribution or a withdrawal amount (in green cells). Here are two screenshots: accumulation and retirement. It satisfies principles 1, 2, 5, and 10.1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course
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 stock/bond target allocation. As of August 31, 2020, it was spread across 27,135 global securities. It satisfies principles 3, 4, 5, 6, 7, 9, and 10. In a taxable account, its low turnover satisfies principle 8*.
* Tax concerns have been kept of out of the scope of this forward test. In real life, principle 8 would be satisfied by fully taking advantage of workplace retirement plans (and employer match) and other tax-advantaged accounts, only adding contributions into a taxable account when tax-advantaged accounts are full. The adequacy of using a single identical balanced index fund in all accounts (including taxable) is discussed in details in the One-Fund Portfolio thread.
Using the VPW Accumulation And Retirement Worksheet with a global balanced index fund is simple and satisfies the principles of the Bogleheads investment philosophy.
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)
Portfolio balance as of September 30, 2020
The September 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -1.62% and the annual percentage yield (APY) of the Ally savings account was 0.60%.
We use account balances as of August 31, 2020 and apply September 2020 growth on investments and interest on savings.
The September 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -1.62% and the annual percentage yield (APY) of the Ally savings account was 0.60%.
We use account balances as of August 31, 2020 and apply September 2020 growth on investments and interest on savings.
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,003,421.40 X (1 + -1.62%)) = $987,165.97
- Withdrawal cushion (at Ally Bank): ($27,119.87 X ((1 + 0.60%)^(1 / 12))) = $27,133.39
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)
Forward test as of September 30, 2020
We continue our forward test. Here's a link to the previous entry.
As of September 30, 2020, the retiree's portfolio is composed of:
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,032 per month (in 2020 dollars).
We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:
The VPW Worksheet suggests to take a $5,584 withdrawal. The retiree withdraws the suggested amount.
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
After withdrawal and transfer, ($987,165.97 - $5,584) = $981,581.97 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($27,133.39 + $131) = $27,264.39 is left into the withdrawal cushion for a total portfolio balance of $1,008,846.36 at the end of September 2020.
The Ally savings account currently carries an annual percentage yield (APY) of 0.60%.
Chart
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
October 2020 total retirement income is $6,453 and on the morning of October 1, 2020, the total portfolio balance is $1,008,846.36.
Historical Annual Retirement Income
We continue our forward test. Here's a link to the previous entry.
As of September 30, 2020, the retiree's portfolio is composed of:
- Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $987,165.97
- Withdrawal cushion (at Ally Bank): $27,133.39
The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,032 per month (in 2020 dollars).
We update the Portfolio Balance cell in the Retirement sheet of the VPW Accumulation And Retirement Worksheet. No other entry needs updating. We get:
The VPW Worksheet suggests to take a $5,584 withdrawal. The retiree withdraws the suggested amount.
After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
- Adjusted withdrawal amount: (($5,584 + $27,133.39) / 6) = $5,453
- Adjustment: ($5,453 - $5,584) = -$131
After withdrawal and transfer, ($987,165.97 - $5,584) = $981,581.97 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($27,133.39 + $131) = $27,264.39 is left into the withdrawal cushion for a total portfolio balance of $1,008,846.36 at the end of September 2020.
The Ally savings account currently carries an annual percentage yield (APY) of 0.60%.
Chart
Here's a chart of total retirement income (blue bars, left axis) and total portfolio balance after withdrawal (red line, right axis). Amounts are displayed as of the morning of the first day of the month.
October 2020 total retirement income is $6,453 and on the morning of October 1, 2020, the total portfolio balance is $1,008,846.36.
Historical Annual Retirement Income
- 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
- 2020: $76,511 (annualized) -- $63,759 in 10 months
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Thank for the update. Please keep it up!
I am watching this and when I retire, will rollover some of my 401k into Vanguard to produce this.
I am watching this and when I retire, will rollover some of my 401k into Vanguard to produce this.
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
I've just come across this thread and it looks to be very useful (I will retire within the next couple of years): thank you for this work, longinvest!
I have a couple of questions that have likely been answered elsewhere, if someone could point me to the answers, I'd appreciate it:
1. Is there a meaningful difference in income (either in terms of amount or volatility) if the portfolio withdrawal is done quarterly or annually as opposed to month-by-month?
2. How did you arrive at the six-month savings cushion period? Is there a reason to hold six months of income as opposed to one year or two years or some other income buffer?
I have a couple of questions that have likely been answered elsewhere, if someone could point me to the answers, I'd appreciate it:
1. Is there a meaningful difference in income (either in terms of amount or volatility) if the portfolio withdrawal is done quarterly or annually as opposed to month-by-month?
2. How did you arrive at the six-month savings cushion period? Is there a reason to hold six months of income as opposed to one year or two years or some other income buffer?
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Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
Whyme, you're welcome.
I think that the initial theory post about monthly withdrawals mostly answers your question. Here's the link: Note that the idea of 12 cash silos has been since replaced by a much simpler 5-months withdrawal cushion. See these posts:whyme wrote: ↑Wed Oct 14, 2020 12:47 pmI have a couple of questions that have likely been answered elsewhere, if someone could point me to the answers, I'd appreciate it:
1. Is there a meaningful difference in income (either in terms of amount or volatility) if the portfolio withdrawal is done quarterly or annually as opposed to month-by-month?
- Difference between cash silos and withdrawal cushion
- Withdrawal cushion process
- Comparative simulation of cash silos and withdrawal cushion
Unlike a 5-month withdrawal cushion, bigger withdrawal cushions introduce a cash drag. A visual analysis is provided in the second section of this post.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Re: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test)
I'd also like to thank Longinvest for all the work you've put into the VPW spreadsheet, the backtesting spreadsheet, and all the great discussion and support you have provided.
I've been playing with it for a few weeks now, and I must say I like it a lot. It indicates I'm in even better shape for retirement than I thought, so of course I like that. But I do also like the simplicity of it; something that my wife and I can likely keep up with as we age.
I was planning to run a bunch of manual scenarios and track results to play what-if games, then I checked out the backtesting spreadsheet. Everything I wanted was in there.
Anyway, it's another fantastic tool for looking at possible future incomes. Thank you so much!
I've been playing with it for a few weeks now, and I must say I like it a lot. It indicates I'm in even better shape for retirement than I thought, so of course I like that. But I do also like the simplicity of it; something that my wife and I can likely keep up with as we age.
I was planning to run a bunch of manual scenarios and track results to play what-if games, then I checked out the backtesting spreadsheet. Everything I wanted was in there.
Anyway, it's another fantastic tool for looking at possible future incomes. Thank you so much!