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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK »

longinvest wrote: Sat Jan 04, 2020 10:38 am Social Security projection (2020)

The retiree is delaying Social Security to age 70.

Forum member FiveK entered the retiree's earnings record into the personal finance toolbox. He reported an estimated $2,032 monthly Social Security payment at age 70, expressed in 2020 dollars.
With the recent announcement of a 1.3% COLA, the age 70 estimate in 2021 dollars is now $2,059/mo.
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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,584 portfolio withdrawal at the end of September 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 $1,014,299 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 (($1,014,299 - $92,364) X 5.1%) = $47,019 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 $47,019 VPW withdrawal. This sums up to ($24,384 - $4,116 + $47,019) = $67,287 and results into a ($67,287 / 12) = $5,607 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 ($67,287 + (12 X $1,000)) = $79,287/year ($6,607/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 $1,014,299) = -$304,290 portfolio loss, reducing the portfolio to ($1,014,299 - $304,290) = $710,009 after the loss. This implies a (($24,384 - $4,116 + (($$710,009 - $92,364) X 5.1%)) / 12) = $4,314 monthly portfolio withdrawal which represents a ($4,314 - $5,607) = -$1,293 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,293/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,293 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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 »

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 September 30, 2020, was spread across 3,566 U.S. stocks, 7,531 international stocks, 9,908 US bonds, and 6,315 international bonds for a total of 27,320 global securities. (See this post for more details).

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 September 30, 2020:

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)
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 »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for September 2020.

We're interested to calculate an average CPI-U to associate with our forward test at the end of September 2020. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
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
09/2020 260.280
We take note that the average CPI-U for the last 12 months at the end of September 2020 was 258.014.

Last year, we calculated that the average CPI-U for the last 12 months at the end of September 2019 was 254.376.

The trailing 1-year average inflation at the end of September 2020 was ((258.014 / 254.376) - 1) = 1.43%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.60%. It's 0.83% below trailing average inflation.
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 »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in September 2020 dollars:

Image
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 »

Portfolio balance as of October 31, 2020

The October 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -1.41% and the annual percentage yield (APY) of the Ally savings account was 0.60%.

We use account balances as of September 30, 2020 and apply October 2020 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($981,581.97 X (1 + -1.41%)) = $967,741.66
  • Withdrawal cushion (at Ally Bank): ($27,264.39 X ((1 + 0.60%)^(1 / 12))) = $27,277.98
Total Portfolio Balance: $995,019.64
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 October 31, 2020

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

As of October 31, 2020, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $967,741.66
  • Withdrawal cushion (at Ally Bank): $27,277.98
Total Portfolio Balance: $995,019.64

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:

Image

The VPW Worksheet suggests to take a $5,502 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,502 + $27,277.98) / 6) = $5,463
  • Adjustment: ($5,463 - $5,502) = -$39
The retiree transfers $39 of withdrawal money to the Ally savings account and combines the remaining $5,463 with the $1,000 Novemer 2020 work pension payment for a total retirement income of $6,463 available for taxes and expenses in November 2020.

After withdrawal and transfer, ($967,741.66 - $5,502) = $962,239.66 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($27,277.98 + $39) = $27,316.98 is left into the withdrawal cushion for a total portfolio balance of $989,556.64 at the end of October 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.

November 2020 total retirement income is $6,463 and on the morning of November 1, 2020, the total portfolio balance is $989,556.64.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,606 (annualized) -- $70,222 in 11 months
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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,502 portfolio withdrawal at the end of October 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 $995,020 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 (($995,020 - $92,364) X 5.1%) = $46,035 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 $46,035 VPW withdrawal. This sums up to ($24,384 - $4,116 + $46,035) = $66,303 and results into a ($66,303 / 12) = $5,525 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 ($66,303 + (12 X $1,000)) = $78,303/year ($6,525/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 $995,020) = -$298,506 portfolio loss, reducing the portfolio to ($995,020 - $298,506) = $696,514 after the loss. This implies a (($24,384 - $4,116 + (($696,514 - $92,364) X 5.1%)) / 12) = $4,257 monthly portfolio withdrawal which represents a ($4,257 - $5,525) = -$1,268 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,268/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,268 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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 »

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 October 31, 2020, was spread across 3,590 U.S. stocks, 7,486 international stocks, 9,976 U.S. bonds, and 6,329 international bonds for a total of 27,381 global securities. (See this post for more details).

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 October 31, 2020:

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)
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 »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for October 2020.

We're interested to calculate an average CPI-U to associate with our forward test at the end of October 2020. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
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
09/2020 260.280
10/2020 260.388
We take note that the average CPI-U for the last 12 months at the end of October 2020 was 258.268.

Last year, we calculated that the average CPI-U for the last 12 months at the end of October 2019 was 254.748.

The trailing 1-year average inflation at the end of October 2020 was ((258.268 / 254.748) - 1) = 1.38%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.60%. It's -0.78% below trailing average inflation.
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 »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in October 2020 dollars:

Image
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 »

Portfolio balance as of November 30, 2020

The November 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 7.76% and the annual percentage yield (APY) of the Ally savings account was 0.60%.

We use account balances as of October 31, 2020 and apply November 2020 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($962,239.66 X (1 + 7.76%)) = $1,036,909.46
  • Withdrawal cushion (at Ally Bank): ($27,316.98 X ((1 + 0.60%)^(1 / 12))) = $27,330.60
Total Portfolio Balance: $1,064,240.06
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 November 30, 2020

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

As of November 30, 2020, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,036,909.46
  • Withdrawal cushion (at Ally Bank): $27,330.60
Total Portfolio Balance: $1,064,240.06

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:

Image

The VPW Worksheet suggests to take a $5,794 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,794 + $27,330.60) / 6) = $5,521
  • Adjustment: ($5,521 - $5,794) = -$273
The retiree transfers $273 of withdrawal money to the Ally savings account and combines the remaining $5,521 with the $1,000 December 2020 work pension payment for a total retirement income of $6,521 available for taxes and expenses in December 2020.

After withdrawal and transfer, ($1,036,909.46 - $5,794) = $1,031,115.46 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($27,330.60 + $273) = $27,603.60 is left into the withdrawal cushion for a total portfolio balance of $1,058,719.06 at the end of November 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.

December 2020 total retirement income is $6,521 and on the morning of December 1, 2020, the total portfolio balance is $1,058,719.06.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,794 portfolio withdrawal at the end of November 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 $1,064,240 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 (($1,064,240 - $92,364) X 5.1%) = $49,566 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 $49,566 VPW withdrawal. This sums up to ($24,384 - $4,116 + $49,566) = $69,834 and results into a ($69,834 / 12) = $5,820 portfolio withdrawal. The $26 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 ($69,834 + (12 X $1,000)) = $81,834/year ($6,820/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 $1,064,240) = -$319,272 portfolio loss, reducing the portfolio to ($1,064,240 - $319,272) = $744,968 after the loss. This implies a (($24,384 - $4,116 + (($744,968 - $92,364) X 5.1%)) / 12) = $4,463 monthly portfolio withdrawal which represents a ($4,463 - $5,820) = -$1,357 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,357/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,357 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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 »

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 November 30, 2020, was spread across 3,586 U.S. stocks, 7,455 international stocks, 10,005 U.S. bonds, and 6,333 international bonds for a total of 27,379 global securities. (See this post for more details).

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 November 30, 2020:

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)
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 »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for November 2020.

We're interested to calculate an average CPI-U to associate with our forward test at the end of November 2020. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
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
09/2020 260.280
10/2020 260.388
11/2020 260.229
We take note that the average CPI-U for the last 12 months at the end of November 2020 was 258.520.

Last year, we calculated that the average CPI-U for the last 12 months at the end of November 2019 was 255.179.

The trailing 1-year average inflation at the end of November 2020 was ((258.520 / 255.179) - 1) = 1.31%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -0.81% below trailing average inflation.
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 »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in November 2020 dollars:

Image
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 »

FiveK wrote:
Happy New Year 2021 to all readers! 🎉

FiveK and Neurosphere,

For the upcoming January forward test entry, I'll need a new estimate of the Social Security monthly payment for the hypothetical retiree who has the work record described in this post and is delaying it to age 70 (payments starting in July 2024).

It would be very nice if you could use your usual calculators to estimate the Social Security monthly payment, expressed in 2021 dollars December 2020 dollars (corrected to be precise). The projection has to be consistent with the projections that you provided me in the last two years. Thanks!
Last edited by longinvest on Fri Jan 01, 2021 1:15 pm, edited 2 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
User avatar
neurosphere
Posts: 5205
Joined: Sun Jan 17, 2010 12:55 pm

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

Post by neurosphere »

longinvest wrote: Fri Jan 01, 2021 9:35 am
FiveK wrote:
Happy New Year 2021 to all readers! 🎉

FiveK and Neurosphere,

For the upcoming January forward test entry, I'll need a new estimate of the Social Security monthly payment for the hypothetical retiree who has the work record described in this post and is delaying it to age 70 (payments starting in July 2024).

It would be very nice if you could use your usual calculators to estimate the Social Security monthly payment, expressed in 2021 dollars. The projection has to be consistent with the projections that you provided me in the last two years. Thanks!
The only adjustment that need be made is to increase for the recent COLA of 1.3%. PIA does not yet have that built in, but the math is easy. Note that annual SS COLAs are rounded to the nearest 0.1%, while the "actual" underlying inflation numbers are kept to a higher precision. The actual inflation this year was closer to 1.336 or so.

For what it's worth, my calculator does not round the CPI, which is why "neuropshere's" calculator can disagree with other calculators. Because over time, the actual future benefit will indeed track the underlying index, so for conceptualizing a future benefit, the actual index is the more accurate number. That is, who can predict whether a future benefit will round up, or down? So I don't round. But a "this year" benefit does indeed use the rounded number.

Summary -- Anypia will output a benefit of $1560 $2058 if a COLA of 1.3% is manually entered (rounded CPI that SS uses). My calculator gives a benefit of $1566 (actual CPI) [shoot, didn't save a copy with the inputs but it would have been a few dollars more].

Note that CPI numbers are not out for Dec 2020. So if you want "2021" values (i.e. through Dec 31st, 2020), you'll have to wait. But because the benefits as listed above are the benefit that will actually be received for the 2021 calendar year, I assume that's all you mean.
Last edited by neurosphere on Fri Jan 01, 2021 12:29 pm, edited 1 time in total.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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 »

neurosphere wrote: Fri Jan 01, 2021 12:12 pm Note that CPI numbers are not out for Dec 2020. So if you want "2021" values (i.e. through Dec 31st, 2020), you'll have to wait.
Neurosphere,

I just need an inflation-adjusted value (e.g. projection using 0% wage inflation and 0% CPI inflation) using data that were already available in December 2020. The projection should remain consistent with previous inputs into the VPW Retirement Worksheet (see last's year projection in this post).

A retiree will never be able to get into a time machine to look at future CPI numbers reported in January to make a withdrawal on the previous end of December.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
User avatar
neurosphere
Posts: 5205
Joined: Sun Jan 17, 2010 12:55 pm

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

Post by neurosphere »

longinvest wrote: Fri Jan 01, 2021 12:20 pm
neurosphere wrote: Fri Jan 01, 2021 12:12 pm Note that CPI numbers are not out for Dec 2020. So if you want "2021" values (i.e. through Dec 31st, 2020), you'll have to wait.
Neurosphere,

I just need an inflation-adjusted value (e.g. projection using 0% wage inflation and 0% CPI inflation) using data that were already available in December 2020. The projection should remain consistent with previous inputs into the VPW Retirement Worksheet (see last's year projection in this post).

A retiree will never be able to get into a time machine to look at future CPI numbers reported in January to make a withdrawal on the previous end of December.
Just take the $2032 number from last year's post and increase by the newly announced COLA of 1.3% --> $2058. No other input matters anymore, as there are no new earnings, and wage inflation (NAWI) data no longer affects the benefit for one over 60. Thus the only update is to increase the previously calculated benefit by the COLA. :) All the calculators essentially assume 0/0 for wage and price inflation in future years as the default. And wage inflation is no longer relevant. So once you update this year's benefit the previous age 70 estimate with the COLA of 1.3%, the benefit does not again change in the future until/unless one applies a non-zero COLA.

[Note, I edited my previous post. I had listed the age 66 benefit, not 70.]
Last edited by neurosphere on Sun Nov 12, 2023 4:09 am, edited 1 time in total.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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 »

neurosphere wrote: Fri Jan 01, 2021 12:35 pm Just take the $2032 number from last year's post and increase by the newly announced COLA of 1.3% --> $2058. No other input matters anymore, as there are no new earnings, and wage data no longer affects the benefit for one over 60. Thus the only update is to increase the previously calculated benefit by the COLA. :) All the calculators essentially assume 0/0 for wage and price inflation in future years as the default. And wage inflation is no longer relevant. So once you update this year's benefit the previous age 70 estimate with the COLA of 1.3%, the benefit does not again change in the future until/unless one applies a non-zero COLA.

[Note, I edited my previous post. I had listed the age 66 benefit, not 70.]
Thanks!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
User avatar
FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK »

neurosphere wrote: Fri Jan 01, 2021 12:35 pm Just take the $2032 number from last year's post and increase by the newly announced COLA of 1.3% --> $2058.
Close enough to the $2059 estimated in this post. ;)
User avatar
neurosphere
Posts: 5205
Joined: Sun Jan 17, 2010 12:55 pm

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

Post by neurosphere »

FiveK wrote: Fri Jan 01, 2021 3:06 pm
neurosphere wrote: Fri Jan 01, 2021 12:35 pm Just take the $2032 number from last year's post and increase by the newly announced COLA of 1.3% --> $2058.
Close enough to the $2059 estimated in this post. ;)
lol. Perhaps longinvest didn't trust your arithmetic and wanted us each to revisit the question. :wink:
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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 »

neurosphere wrote: Fri Jan 01, 2021 3:19 pm
FiveK wrote: Fri Jan 01, 2021 3:06 pm
neurosphere wrote: Fri Jan 01, 2021 12:35 pm Just take the $2032 number from last year's post and increase by the newly announced COLA of 1.3% --> $2058.
Close enough to the $2059 estimated in this post. ;)
lol. Perhaps longinvest didn't trust your arithmetic and wanted us each to revisit the question. :wink:
I'd prefer to have you both agree on a single number for 2021, hypothetically calculated in December 2020 (from an initial $2,000 in 2019, if this helps). So, is it $2,058 or $2,059?

P.S. If anybody complains about the accuracy of Social Security estimates in this forward test, in the future, I'll refer them back to your posts. :wink:
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
User avatar
FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

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

Post by FiveK »

I'm good with either one. :)
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 »

The month of January 2021 has 5 weekends. I'll take opportunity of this extra weekend to explain an important aspect of how VPW works.

In life, we dress according to the current situation. We put on warm clothes, Winter boots, and a Winter coat when getting outside during the Winter. We dress more lightly during the Summer. We don't wait until Winter to go to the store in our Summer clothes to buy Winter clothes. We buy Winter clothes (and Summer clothes) in advance and keep both Winter and Summer clothes in our homes. Also, in the Summer, we don't put on a Winter coat; we take advantage of the warm weather, instead, to put on a swim suit and jump into the outside pool and have fun.

The VPW Retirement Worksheet works similarly. It allows us to withdraw money from the portfolio according to the current situation. When the portfolio balance is higher, withdrawals are bigger, and when the portfolio balance is lower, withdrawals are smaller. VPW doesn't dress up withdrawals for Winter during the Summer. In other words, it doesn't keep withdrawals small when the portfolio balance is high. But, it informs the retiree about the normal consequences of bad weather (rain, wind, cold) so that the retiree can prepare for it (e.g. it informs the retiree about the consequences of stocks losing -50%).

🎉 Happy New Year 2021! 🎉
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Emilyjane
Posts: 191
Joined: Sat Jul 27, 2013 6:39 am

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

Post by Emilyjane »

longinvest wrote: Sat Jan 02, 2021 12:02 pm . VPW doesn't dress up withdrawals for Winter during the Summer. In other words, it doesn't keep withdrawals small when the portfolio balance is high. But, it informs the retiree about the normal consequences of bad weather (rain, wind, cold) so that the retiree can prepare for it
Great analogy, Longinvest. I’ve been happy with how VPW has worked for me in my 2 years of retirement. Thanks for all you do.
"Real knowledge is to know the extent of one's ignorance", Confucius
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 »

Portfolio balance as of December 31, 2020

The December 2020 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 3.09% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of November 30, 2020 and apply December 2020 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,031,115.46 X (1 + 3.09%)) = $1,062,976.93
  • Withdrawal cushion (at Ally Bank): ($27,603.60 X ((1 + 0.50%)^(1 / 12))) = $27,615.08
Total Portfolio Balance: $1,090,592.01
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 »

Social Security projection (2021)

The retiree is delaying Social Security to age 70.

Forum member FiveK has reported an estimated $2,059 monthly Social Security payment at age 70, expressed in 2021 dollars. Forum member Neurosphere reported a similar estimate.
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 December 31, 2020

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

As of December 31, 2020, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,062,976.93
  • Withdrawal cushion (at Ally Bank): $27,615.08
Total Portfolio Balance: $1,090,592.01

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 dollars).

We update the Portfolio Balance cell as well as the Social Security amount 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 $5,928 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,928 + $27,615.08) / 6) = $5,591
  • Adjustment: ($5,591 - $5,928) = -$337
The retiree transfers $337 of withdrawal money to the Ally savings account and combines the remaining $5,591 with the $1,000 January 2021 work pension payment for a total retirement income of $6,591 available for taxes and expenses in January 2021.

After withdrawal and transfer, ($1,062,976.93 - $5,928) = $1,057,048.93 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($27,615.08 + $337) = $27,952.08 is left into the withdrawal cushion for a total portfolio balance of $1,085,001.01 at the end of December 2020.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

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.

January 2021 total retirement income is $6,591 and on the morning of January 1, 2021, the total portfolio balance is $1,085,001.01.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $79,092 (annualized) -- $6,591 in 1 month
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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,928 portfolio withdrawal at the end of December 2020.

The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4%. As a consequence, ($24,708 / 26.4%) = $93,591 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 $1,090,592 portfolio, but $93,591 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1%. This results into a (($1,090,592 - $93,591) X 5.1%) = $50,847 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw $24,708 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 $50,847 VPW withdrawal. This sums up to ($24,708 - $4,116 + $50,847) = $71,439 and results into a ($71,439 / 12) = $5,953 portfolio withdrawal. The $25 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 ($71,439 + (12 X $1,000)) = $83,439/year ($6,953/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 $1,090,592) = -$327,178 portfolio loss, reducing the portfolio to ($1,090,592 - $327,178) = $763,414 after the loss. This implies a (($24,708 - $4,116 + (($763,414 - $93,591) X 5.1%)) / 12) = $4,563 monthly portfolio withdrawal which represents a ($4,563 - $5,953) = -$1,390 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,390/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,390 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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 »

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 December 31, 2020, was spread across 3,634 U.S. stocks, 7,386 international stocks, 9,995 U.S. bonds, and 6,338 international bonds for a total of 27,353 global securities. I suggest reading this post which explains the choice of this fund which approximates the global (free float) 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 since the start of this forward test until December 31, 2020:

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)
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 »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for December 2020.

We're interested to calculate an average CPI-U to associate with our forward test at the end of December 2020. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
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
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
We take note that the average CPI-U for the last 12 months at the end of December 2020 was 258.811.

Last year, we calculated that the average CPI-U for the last 12 months at the end of December 2019 was 255.657.

The trailing 1-year average inflation at the end of December 2020 was ((258.811 / 255.657) - 1) = 1.23%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -0.73% below trailing average inflation.
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 »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in December 2020 dollars:

Image
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
NoblesvilleIN
Posts: 198
Joined: Sat Mar 24, 2018 6:04 pm
Location: Noblesville IN

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

Post by NoblesvilleIN »

by longinvest » Sat Jan 30, 2021 9:25 am

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for December 2020.

We're interested to calculate an average CPI-U to associate with our forward test at the end of December 2020.
We take note that the average CPI-U for the last 12 months at the end of December 2020 was 258.811.

Last year, we calculated that the average CPI-U for the last 12 months at the end of December 2019 was 255.657.

The trailing 1-year average inflation at the end of December 2020 was ((258.811 / 255.657) - 1) = 1.23%.
On New Year's Day each year for the last 17 years I have updated a spreadsheet to track our investments. This year I added some rows to sanity check our actual withdrawals using the VPW spreadsheet, VPW table, and the 4% SWR hueristic. I retired in December '18, spouse retired December '19. Since I am doing my calculations on January 1st, the December numbers are not published yet. I used the November CPI-U, published in mid-December to calculate the inflation rate to enter in the VPW spreadsheet. Eg. Nov '20 = 260.229; Nov '19 = 257.208; inflation = 1.17% ((260.229-257.208)/257.208).

Am I potentially overstating or understating inflation by using YOY November instead of using the average as you do? What am I missing by using just November instead of the average?

Side Note that is not really relevant to this thread: Our actual withdrawal rate was 3.09% of the December '18 balance (start of my retirement); a little over half of what the VPW table suggests; and nowhere near what the VPW spreadsheet suggests we can withdraw. It is hard (not painful, just hard) for us to spend. We are more interested in getting rid of stuff than getting more stuff. Obviously travel is out for now, but even if it wasn't, I'm not sure how much we would actually do. We have livestock that we have to make arrangements for when we leave town and don't really like to impose on nearby family or neighbors (although they have volunteered). We are not comfortable enough in our numbers to start making large donations to charity or gifts to our children. This thread and Willthrill's year 2000 retiree thread are helping me realize that we can absorb a large expense in most years and not suffer down the road. Thank you
User avatar
neurosphere
Posts: 5205
Joined: Sun Jan 17, 2010 12:55 pm

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

Post by neurosphere »

NoblesvilleIN wrote: Sat Jan 30, 2021 9:33 am Am I potentially overstating or understating inflation by using YOY November instead of using the average as you do? What am I missing by using just November instead of the average?
In my opinion (and keep in mind I don't know anything but the very basic concept of this VPW strategy) it matters very little whether you choose to use a specific month's actual CPI, an annual average, or some other similar metric. Over time it will all even out. The only potential hiccough is if there is some huge anomaly that is confined to a single month, i.e. a 20% increase in Nov followed by a similar decrease in Dec. This is exceedingly unlikely, and besides one would be able to "See" that in the data and make decisions accordingly.

Personally, I might choose to use the average of the 3rd quarter CPI, similar to what SS uses to calculate their CPI changes. Makes it quite easy, because there is someone else already doing the math for you and this value is likely to be in your news headlines as soon as it is available. ;)
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
NoblesvilleIN
Posts: 198
Joined: Sat Mar 24, 2018 6:04 pm
Location: Noblesville IN

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

Post by NoblesvilleIN »

Thank you
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 »

Portfolio balance as of January 31, 2021

The January 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was -0.44% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of December 31, 2020 and apply January 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,057,048.93 X (1 + -0.44%)) = $1,052,397.91
  • Withdrawal cushion (at Ally Bank): ($27,952.08 X ((1 + 0.50%)^(1 / 12))) = $27,963.70
Total Portfolio Balance: $1,080,361.61
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 January 31, 2021

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

As of January 31, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,052,397.91
  • Withdrawal cushion (at Ally Bank): $27,963.70
Total Portfolio Balance: $1,080,361.61

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 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:

Image

The VPW Worksheet suggests to take a $5,884 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,884 + $27,963.70) / 6) = $5,641
  • Adjustment: ($5,641 - $5,884) = -$243
The retiree transfers $243 of withdrawal money to the Ally savings account and combines the remaining $5,641 with the $1,000 February 2021 work pension payment for a total retirement income of $6,641 available for taxes and expenses in February 2021.

After withdrawal and transfer, ($1,052,397.91 - $5,884) = $1,046,513.91 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($27,963.70 + $243) = $28,206.70 is left into the withdrawal cushion for a total portfolio balance of $1,074,720.61 at the end of January 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

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.

February 2021 total retirement income is $6,641 and on the morning of February 1, 2021, the total portfolio balance is $1,074,720.61.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $79,392 (annualized) -- $13,232 in 2 months
Last edited by longinvest on Sat Mar 06, 2021 8:06 am, edited 1 time in total.
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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,884 portfolio withdrawal at the end of January 2021.

The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4%. As a consequence, ($24,708 / 26.4%) = $93,591 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 $1,080,362 portfolio, but $93,591 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1%. This results into a (($1,080,362 - $93,591) X 5.1%) = $50,325 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw $24,708 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 $50,325 VPW withdrawal. This sums up to ($24,708 - $4,116 + $50,325) = $70,917 and results into a ($70,917 / 12) = $5,910 portfolio withdrawal. The $26 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 ($70,917 + (12 X $1,000)) = $82,917/year ($6,910/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 $1,080,362) = -$324,109 portfolio loss, reducing the portfolio to ($1,080,362 - $324,109) = $756,253 after the loss. This implies a (($24,708 - $4,116 + (($756,253 - $93,591) X 5.1%)) / 12) = $4,532 monthly portfolio withdrawal which represents a ($4,532 - $5,910) = -$1,378 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,378/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,378 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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 »

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 January 31, 2021, was spread across 3,640 U.S. stocks, 7,361 international stocks, 10,025 U.S. bonds, and 6,323 international bonds for a total of 27,349 global securities. I suggest reading this post which explains the choice of this fund which approximates the global (free float) 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 since the start of this forward test until January 31, 2021:

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)
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 »

The Bureau of Labor Statistics has published the consumer price index for all urban consumers (CPI-U) for January 2021.

We're interested to calculate an average CPI-U to associate with our forward test at the end of January 2021. Here were the last 12 CPI-U values:

Code: Select all

 Month   CPI-U
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
09/2020 260.280
10/2020 260.388
11/2020 260.229
12/2020 260.474
01/2021 261.582
We take note that the average CPI-U for the last 12 months at the end of January 2021 was 259.112.

Last year, we calculated that the average CPI-U for the last 12 months at the end of January 2020 was 256.179.

The trailing 1-year average inflation at the end of January 2021 was ((259.112 / 256.179) - 1) = 1.14%.

The chosen Ally savings account has an annual percentage yield (APY) of 0.50%. It's -0.64% below trailing average inflation.
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 »

Using average CPI-U calculated in this and previous posts, here's an inflation-adjusted chart of this forward test expressed in January 2021 dollars:

Image
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 »

Portfolio balance as of February 28, 2021

The February 2021 return of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) was 1.08% and the annual percentage yield (APY) of the Ally savings account was 0.50%.

We use account balances as of January 31, 2021 and apply February 2021 growth on investments and interest on savings.
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): ($1,046,513.91 X (1 + 1.08%)) = $1,057,816.26
  • Withdrawal cushion (at Ally Bank): ($28,206.70 X ((1 + 0.50%)^(1 / 12))) = $28,218.43
Total Portfolio Balance: $1,086,034.69
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 February 28, 2021

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

As of February 28, 2021, the retiree's portfolio is composed of:
  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX): $1,057,816.26
  • Withdrawal cushion (at Ally Bank): $28,218.43
Total Portfolio Balance: $1,086,034.69

The retiree has a fixed $1,000 per month pension and is delaying Social Security to age 70 to receive $2,059 per month (in 2021 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:

Image

The VPW Worksheet suggests to take a $5,908 withdrawal. The retiree withdraws the suggested amount.

After making the withdrawal, the retiree calculates an adjustment using the withdrawal cushion balance:
  • Adjusted withdrawal amount: (($5,908 + $28,218.43) / 6) = $5,688
  • Adjustment: ($5,688 - $5,908) = -$220
The retiree transfers $220 of withdrawal money to the Ally savings account and combines the remaining $5,688 with the $1,000 March 2021 work pension payment for a total retirement income of $6,688 available for taxes and expenses in March 2021.

After withdrawal and transfer, ($1,057,816.26 - $5,908) = $1,051,908.26 is left invested into the Vanguard LifeStrategy Moderate Growth Fund and ($28,218.43 + $220) = $28,438.43 is left into the withdrawal cushion for a total portfolio balance of $1,080,346.69 at the end of February 2021.

The Ally savings account currently carries an annual percentage yield (APY) of 0.50%.

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.

March 2021 total retirement income is $6,688 and on the morning of March 1, 2021, the total portfolio balance is $1,080,346.69.

Image

Historical Annual Retirement Income
  • 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
  • 2020: $76,743
  • 2021: $79,680 (annualized) -- $19,920 in 3 months
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
User avatar
Bentonkb
Posts: 83
Joined: Sun Mar 07, 2021 5:47 am

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

Post by Bentonkb »

This is really valuable. I hope you can keep it up for a long time. I'm also hoping that you, longinvest, are personally benefiting from all the work you've done here. When this VPW idea replaces the 4% rule as the most talked about plan, it would be nice to know that you will get the credit.

Soon there will be zillions of YouTube channels dedicated to applications of VPW and financial planners will be making their livings by running your spreadsheet.
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 »

Here's how the VPW Accumulation And Retirement Worksheet calculated its suggested $5,908 portfolio withdrawal at the end of February 2021.

The retiree will get $2,059/month Social Security payments in 4 years. That's $24,708/year. The percentage for a 4-year withdrawal schedule with a 60/40 stocks/bonds allocation in the VPW Table is 26.4%. As a consequence, ($24,708 / 26.4%) = $93,591 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 $1,086,035 portfolio, but $93,591 is kept aside (on paper) for Social Security bridge withdrawals. At age 66 with a 60/40 stocks/bonds allocation, the percentage in the VPW Table is 5.1%. This results into a (($1,086,035 - $93,591) X 5.1%) = $50,615 annual VPW withdrawal.

So, on an annual basis the retiree plans to withdraw $24,708 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 $50,615 VPW withdrawal. This sums up to ($24,708 - $4,116 + $50,615) = $71,207 and results into a ($71,207 / 12) = $5,934 portfolio withdrawal. The $26 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 ($71,207 + (12 X $1,000)) = $83,207/year ($6,934/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 $1,086,035) = -$325,811 portfolio loss, reducing the portfolio to ($1,086,035 - $325,811) = $760,224 after the loss. This implies a (($24,708 - $4,116 + (($760,224 - $93,591) X 5.1%)) / 12) = $4,549 monthly portfolio withdrawal which represents a ($4,549 - $5,934) = -$1,385 reduction after the loss.

The retiree must maintain the flexibility to easily cut spending by up to -$1,385/month because stocks could easily lose -50% of their value within a short time period. In other words, at least $1,385 must be budgeted for optional discretionary spending that could be eliminated without affecting the retiree's comfort.
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 »

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 February 28, 2021, was spread across 3,669 U.S. stocks, 7,420 international stocks, 10,074 U.S. bonds, and 6,321 international bonds for a total of 27,484 global securities. I suggest reading this post which explains the choice of this fund which approximates 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 since the start of this forward test until February 28, 2021:

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)
bigskyguy
Posts: 406
Joined: Sat Jan 24, 2015 3:59 pm

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

Post by bigskyguy »

Just want to add my sincere thanks to you for your contribution to our collective investing success. We are a retired couple and have utilized your spreadsheet for the risk portion of our portfolio, with the Vanguard Life Strategy Growth Fund as our single risk portfolio investment vehicle.
Coupling it with our sizable investment in a TIPS ladder/annuity LMP, and we feel we are well positioned for our investing future.
Than you.

Joe in Montana
Post Reply