Total Portfolio Allocation and Withdrawal (TPAW)

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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

WHY CALCULATE THE PRESENT VALUE OF THE PENSION?

The argument is often made that there is no need to calculate the present value of the pension. Instead we can just use the pension to offset expenses in retirement. What's the point of converting a future income stream into a present value only to turn around and convert that present value back to a future income stream? Seems circular.

The following example, taken from a post I made in another thread, illustrates why including the present value of the pension is useful:

Take a 55 year old retiree with $1 million in savings and a pension of $30,000 per year (real $) starting age 70. The PV of the pension at a real interest rate of 0% is $930,000. So we have:

Savings portfolio = $1,000,000
Total portfolio = savings + PV of the pension = $1,930,000

Suppose the asset allocation on the total portfolio is 35/65. This translates to 0.35 * $1,930,000 = $675,500 in stocks. This implies a 68/32 allocation on the savings portfolio as shown in the first row of the table below:

Image

At this point it's just semantics. Whether it's a 35/65 on the total portfolio or 68/32 on the savings portfolio, the end result is $675,000 in stocks, $324,500 in actual bonds, and $930,000 worth of pension.

But what happens if stocks drop 30%? As shown in the second row, the AA becomes 59/41 on the savings portfolio and 27/73 on the total portfolio. Now the question is: how should they rebalance? Should they rebalance back to the original 68/32 on the savings portfolio (as shown in the third row)? In that case, they will have $542,198 in stocks. Or should they rebalance back to the original 35/65 on the total portfolio (as shown in the fourth row)? That would mean $604,573 in stocks.

To evaluate this, note that rebalancing the savings portfolio back to the original 68/32 will mean that the total portfolio will become 31/69. This means that a 10% increase in the value of stocks will translate to only a .31 * 10% = 3.1% increase in total wealth and therefore only a 3.1% increase in retirement spending. The original allocation had a sharper response of .35 * 10% = 3.5%. So wealth (and therefore retirement spending) will become less sensitive to market performance than it was before.

If, on the other hand, they rebalance back to the original 35/65 on the total portfolio, then the response remains the same as before: a 10% increase in stocks will increase wealth (and therefore retirement spending) by the same 3.5% as before.

So the problem with not counting the pension as a bond is that the relationship between the asset allocation and retirement spending risk keeps changing. It's hard to know what a particular allocation means and it's not clear why you should rebalance back to it when its meaning has changed. With the total portfolio method, AA has a stable relationship to retirement spending and it's easier to see why you might (or might not) want to rebalance back to your original allocation.

This example focused on the effect of market performance. But a similar argument can be made about other aspects of the plan: A 68/32 allocation on the savings portfolio will mean different things at different ages, distance from pension, size of pension etc. It will mean a riskier allocation when the pension is far away, a safer allocation when the pension gets closer, and an even safer allocation after the pension begins. It will mean a riskier allocation when the pension is small and a safer allocation when the pension is large. By contrast, a 35/65 allocation on the total portfolio means the same thing at all times: a 10% increase in the the stock market will lead to a 3.5% increase in retirement spending. So you can more directly understand and evaluate your asset allocation.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

I have updated both the "accumulator" and "retiree" versions of the following spreadsheets in the TPAW wiki:

- Planner with Monte Carlo Simulation
- Simulator

The update fixes an error in how entries in the "extra withdrawals" column were handled.

Various minor changes were also made. The spreadsheets should now look more consistent in design.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

THE WITHDRAWAL STRATEGY DERIVED IN MERTON (1969) IS ABW

The seminal academic papers on optimal allocation and withdrawal are Samuelson (1969) and Merton (1969). They have similar models and were published as companion papers in the August 1969 issue of The Review of Economics and Statistics. Merton's model is in continuous time with a lognormal probability distribution. Samuelson's model is in discrete time with more general probability distributions. I show here that the optimal allocation and withdrawal strategy derived in Merton (1969) aligns with the allocation and withdrawal strategy in TPAW.

The allocation part is straightforward. Merton's solution is a fixed asset allocation on the total portfolio. This was popularized in the book Lifecycle Investing by Ayres and Nalebuff. TPAW implements a fixed asset allocation on the total portfolio, but with stocks capped at 100% to avoid leverage.

The withdrawal part is less clear. TPAW uses amortization based withdrawals (ABW). How does ABW align with Merton's withdrawal strategy? Merton's paper doesn't talk about amortization and the formulas don't look (to me, at least) like amortization based formulas. So it's not obvious that they are connected. [Edit: Per carlb's post below, Merton's formulas are the continuous time version of the amortization formula.] In this post, I show via some examples that Merton's withdrawal strategy is in fact ABW.

ABW is a simple and natural withdrawal technique that investors came up with on their own. The fact that it is also the optimal withdrawal strategy formally derived in Merton (1969) puts ABW on a firm theoretical footing.

Here's the proof by example:

EXAMPLE 1

There are five inputs needed to calculate Merton's allocation and withdrawal strategy:

Stock and bond returns
Risk free bond return: 0.00%
Expected stock return: 3.50%
Standard deviation of stock return: 19.00%

Risk and time preference
Relative risk aversion (RRA): 2
Subjective time discount rate: 0.00%

The subjective time discount rate above says how much the person values future consumption relative to current consumption. The higher the discount rate, the less they value future consumption and so the less they will want to save. I entered a 0% discount rate which means that they value future consumption the same as today's consumption.

If we enter the above five inputs into Merton's formulas, we get the following strategy:

- Fixed asset allocation of 48/52 on the total portfolio

- Withdrawal strategy given by the withdrawal rates in column (1) of the table below:

Image

Merton's withdrawal rates will be slightly off for us because Merton is using a continuous time model and we're working in discrete time with one year periods. We can improve accuracy by using smaller time periods like weeks or days. But I stuck with one year periods to keep things simple.

Column (2) shows that Merton's withdrawal rates match an ABW schedule with g=1.29%. The small discrepancy in the highlighted years towards the end is due to Merton's formulas being in continuous time.

Note that even though we input a time discount rate of 0%, meaning that this person values future consumption the same as present consumption, Merton's formulas says to use a growing amortization schedule of g=1.29%. This means scheduling more consumption in the future than in the present. In other words, the model is saying to save during early retirement to have more in late retirement. The reason for this saving is twofold:

(1) The portfolio is growing. (Though we assumed bonds are yielding 0% real, the stocks are still growing.) So future consumption is cheaper than present consumption. In other words, giving up an apple today will yield more than an apple tomorrow. So a person who values the present and the future equally will want to consume more in the future than in the present.

(2) There is more risk in later years because stock risk adds up over time. It is less clear what your withdrawal will be 20 years from now than 2 years from now. Saving protects against the risk of withdrawals falling too low in late retirement. This is known as "precautionary saving."

EXAMPLE 2

Let us now increase risk aversion from 2 to 4. Merton's formulas then give us:

- Fixed asset allocation of 24/76 on the total portfolio

- Withdrawal strategy given by the withdrawal rates in column (3) of the table above. Column (4) shows that these withdrawal rates match an ABW schedule with g = 0.54%. g is lower now because

(1) The portfolio is growing more slowly because the AA is safer. That means future consumption is not much cheaper than present consumption. Giving up an apple today won't yield much more than an apple tomorrow. So the impulse to save is lower.

(2) Since the AA is safer, there is less need for precautionary savings.

Note that even though these withdrawal rates don't differ much from the ones in example 1, the scheduled withdrawals themselves are quite different because of the safer AA. In example 1, scheduled withdrawals grew from $22,196 to $41,313. With the safer AA and slower growth in example 2, despite the similar withdrawal rates, scheduled withdrawals grow only from $21,633 to $28,002. So the withdrawals are quite different even though the withdrawal rates are similar.

EXAMPLE 3

In examples 1 and 2, the discount rate was 0% and so Merton's formula told us to use a growing amortization schedule (g>0). If we increase the discount rate--meaning this person cares less about future consumption relative to present consumption--we will get lower g. In this example, I increase the discount rate until Merton's formula yields g=0%. Columns (5) and (6) show that if we set the discount rate to 2.13%, then Merton's formula will call for amortizing using a flat amortization schedule (g=0%). (The asset allocation remains the same at 24/76.)

A discount rate of 2.13% means that you value consuming $1 in 30 years only as much as you value consuming $0.53 today. If a person values future consumption more than that, they should be using a growing amortization schedule. Saving during retirement is a critical tool of retirement planning that should not be assumed away with a flat amortization schedule.

Spreadsheet with these calculations here.
Last edited by Ben Mathew on Mon Jul 31, 2023 8:36 pm, edited 3 times in total.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by carlb »

Merton's paper doesn't talk about amortization and the formulas don't look (to me, at least) like amortization based formulas.
It does look like the continuous repayment form of the annuity.

Image
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Re: Total portfolio allocation and withdrawal (TPAW)

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carlb wrote: Sat Oct 09, 2021 10:46 pm
Merton's paper doesn't talk about amortization and the formulas don't look (to me, at least) like amortization based formulas.
It does look like the continuous repayment form of the annuity.

Image
Awesome! So v in Merton's formulas seems to be the continuous time equivalent to r-g in ABW.

Thanks for the clarification. And welcome to the forum!
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by phoroner »

Hi Ben,

Early/mid accumulator here. Long-time reader but first post. I’ve been following the TPAW discussion and find it illuminating. Thank you.

When I think about Traditional vs Roth decisions, it is a choice about lifetime decision of when to pay taxes with goal of time-varying in order to minimize. Of course there is a lot of uncertainty in this, and a lot to be said for the benefit of immediate deduction and ‘insurance-like’ aspect to Traditional contributions. However, the TPAW method seems to provide a unique estimate of retirement spending based on year-by-year anticipated savings, spending, and portfolio returns; this is closely related to income and could be useful for decisions for accumulators about T vs R contributions and retiree’s Roth Conversion strategies. Have you given consideration to using it in this way? How difficult would it be to add a ‘pre-tax’ vs ‘post-tax’ designation to saving/assets in the spreadsheet?

Thanks again for your great work here!
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Re: Total portfolio allocation and withdrawal (TPAW)

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phoroner wrote: Sun Oct 10, 2021 12:37 pm Hi Ben,

Early/mid accumulator here. Long-time reader but first post. I’ve been following the TPAW discussion and find it illuminating. Thank you.

When I think about Traditional vs Roth decisions, it is a choice about lifetime decision of when to pay taxes with goal of time-varying in order to minimize. Of course there is a lot of uncertainty in this, and a lot to be said for the benefit of immediate deduction and ‘insurance-like’ aspect to Traditional contributions. However, the TPAW method seems to provide a unique estimate of retirement spending based on year-by-year anticipated savings, spending, and portfolio returns; this is closely related to income and could be useful for decisions for accumulators about T vs R contributions and retiree’s Roth Conversion strategies. Have you given consideration to using it in this way? How difficult would it be to add a ‘pre-tax’ vs ‘post-tax’ designation to saving/assets in the spreadsheet?

Thanks again for your great work here!
Welcome to the forum! I'm glad that you are finding TPAW useful.

I would like to incorporate tax planning into TPAW. This will entail separating savings into traditional, Roth and taxable accounts and then figuring out the optimal contribution and conversion strategy. This is a complex problem. I don't think there's a way to add it to the current spreadsheets without making it too complicated and difficult to use. I will eventually make an online version of the TPAW planner. It will be easier to incorporate the complexities of tax planning in the online format. I will definitely work on including it there.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total portfolio allocation and withdrawal (TPAW)

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I think the TPAW wiki is ready to graduate from "under construction" status. Are there any changes needed before it can become a regular wiki page?
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Re: Total portfolio allocation and withdrawal (TPAW)

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The TPAW wiki has transitioned from "under construction" status to a regular wiki page. Please update any links/bookmarks to the new permanent address:

https://www.bogleheads.org/wiki/Total_p ... withdrawal
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

I had uploaded the "TPAW Planner with Monte Carlo Simulation" file only in the Excel format because I wasn't sure if the Excel "data table" that I used for the Monte Carlo simulation would convert automatically to Google Sheets.

Turns out it does not convert automatically to Google Sheets. But forum member NearlyRetired has created a version that will work in Libre Office:

TPAW Planner with Monte Carlo Simulation - for Retirees (Libre Office)

The simulation seems to take longer in Libre Office (NearlyRetired reports 3-4 minutes in Libre Office vs Excel taking about 20 seconds on my computer).

I've added the spreadsheet to the wiki. If you are a Libre Office user, please check it out and let us know if there are any problems.

And if someone has successfully converted the spreadsheet to Google Sheets, please send me a link and I will post that on the wiki as well.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by NearlyRetired »

Thanks for updating the Wiki Ben - I have uploaded a modified version which now runs in about 30 seconds or so, so not too disimilar to Excel.

Please anyone, let me know if you have any problems with this version
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Re: Total portfolio allocation and withdrawal (TPAW)

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NearlyRetired wrote: Sun Oct 31, 2021 4:00 am Thanks for updating the Wiki Ben - I have uploaded a modified version which now runs in about 30 seconds or so, so not too disimilar to Excel.

Please anyone, let me know if you have any problems with this version
That's great news! Thanks for your work on this.
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Re: Total portfolio allocation and withdrawal (TPAW)

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Ben Mathew wrote: Sat Jul 03, 2021 12:19 pm
Image
I just came across this (from your reference in the Morningstar SWR thread). It gives me peace. TY.

My personal plan is almost precisely as you describe: revisit the portfolio each year and ask "what is my SWR now?"
I will almost certainly use something like this to produce the answer: https://calculator.ficalc.app/

As a practical matter, I am only really interested in years 30-10. I'm too old for the rest to matter.
And if I make it to year 10 with a reasonable portfolio, that's good enough.

It comforts me to see the various methods converging on similar predictions. I deem it "common sense".
And that is the highest praise I can muster for predicting the future!

:beer
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Re: Total portfolio allocation and withdrawal (TPAW)

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vanbogle59 wrote: Thu Nov 11, 2021 1:17 pm I just came across this (from your reference in the Morningstar SWR thread). It gives me peace. TY.

My personal plan is almost precisely as you describe: revisit the portfolio each year and ask "what is my SWR now?"
I will almost certainly use something like this to produce the answer: https://calculator.ficalc.app/
:beer
Glad you find it useful. A variable SWR strategy is a lot more reasonable than fixed SWR withdrawals with no adjustments. In fact, I think a variable SWR might be identical to an ABW strategy with non-constant withdrawal growth. So one might say you are following an ABW strategy of sorts.
:sharebeer
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Re: Total portfolio allocation and withdrawal (TPAW)

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ONLINE TPAW PLANNER

I have gotten some feedback in the past that the TPAW planning spreadsheets are hard for some people to use. I wanted to create an online version of the planner that would be easier to use. I don't have the programming expertise to build it myself. But fortunately my brother does, and I was able to enlist his help to make it happen. The online TPAW planner is located at

tpawplanner.com

(I have received permission from a moderator to post this link in this thread.)

It's easier to add features to an online planner without making it too complex to use. So I took the opportunity to add two features that aren't in the spreadsheets:

(1) LEGACY: You can enter a legacy goal and choose a separate AA for those funds. It often makes sense to have a different AA for legacy funds and retirement funds. I've seen this come up in discussions a few times, so I think it will be useful.

(2) SPENDING CEILING: This is useful if you are are not interested in spending more than a certain amount and would rather save the excess for future needs or a legacy.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by zie »

I like the tpawplanner website, definitely easier to understand than the spreadsheet, of which I gave up a while ago. A few small issues:

On FireFox 95.0 on macOS, the little hover bubbles on the graph that show the $ amounts one can spend do not show up. There is also no Y axis, making the little hover bubble amounts even more important. Perhaps this could be part of the 'output' page, saying something about spending patterns in retirement.

I noticed, in my particular situation, it says in the output, I don't need to do anything, but it shows: "5th - $0" at age 72. I assume that's a 5th percentile, meaning 95% of the time I'll be above $0 withdrawal, but I have no idea how it's even remotely possible, since I told the website SS starts at age 70 and SS is more than $0. So even if my investments went kaboom somehow, SS would still give me a floor spending above $0.

So I'm confused.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zeno »

Ben Mathew wrote: Tue Dec 07, 2021 6:42 pm ONLINE TPAW PLANNER

I have gotten some feedback in the past that the TPAW planning spreadsheets are hard for some people to use. I wanted to create an online version of the planner that would be easier to use. I don't have the programming expertise to build it myself. But fortunately my brother does, and I was able to enlist his help to make it happen. The online TPAW planner is located at

tpawplanner.com

(I have received permission from a moderator to post this link in this thread.)

It's easier to add features to an online planner without making it too complex to use. So I took the opportunity to add two features that aren't in the spreadsheets:

(1) LEGACY: You can enter a legacy goal and choose a separate AA for those funds. It often makes sense to have a different AA for legacy funds and retirement funds. I've seen this come up in discussions a few times, so I think it will be useful.

(2) SPENDING CEILING: This is useful if you are are not interested in spending more than a certain amount and would rather save the excess for future needs or a legacy.
That is really cool, thank you!

I also entered my data and got a confusing return. We are at 50x, so it may we exceed some ceiling threshold.
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Re: Total portfolio allocation and withdrawal (TPAW)

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zie wrote: Wed Dec 08, 2021 11:18 am I like the tpawplanner website, definitely easier to understand than the spreadsheet, of which I gave up a while ago.
Glad to hear you like it.
zie wrote: Wed Dec 08, 2021 11:18 am On FireFox 95.0 on macOS, the little hover bubbles on the graph that show the $ amounts one can spend do not show up.
Thanks for letting us know. We were able to reproduce this, and are working on fixing it.
zie wrote: Wed Dec 08, 2021 11:18 am I noticed, in my particular situation, it says in the output, I don't need to do anything, but it shows: "5th - $0" at age 72. I assume that's a 5th percentile, meaning 95% of the time I'll be above $0 withdrawal, but I have no idea how it's even remotely possible, since I told the website SS starts at age 70 and SS is more than $0. So even if my investments went kaboom somehow, SS would still give me a floor spending above $0.

So I'm confused.
SS should give you a spending floor, unless you entered a legacy goal. If the legacy goal is large enough, it can try to save some SS for legacy instead of spending. Do you have a legacy goal entered? If so, can you remove it and see if you're still dropping below the SS floor?

If you want to share made-up inputs that can recreate the problem, please send me a link either in this thread or in a PM. (Use the "save as link" button under INPUT.)
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Re: Total portfolio allocation and withdrawal (TPAW)

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Zeno wrote: Wed Dec 08, 2021 11:29 am
Ben Mathew wrote: Tue Dec 07, 2021 6:42 pm ONLINE TPAW PLANNER

I have gotten some feedback in the past that the TPAW planning spreadsheets are hard for some people to use. I wanted to create an online version of the planner that would be easier to use. I don't have the programming expertise to build it myself. But fortunately my brother does, and I was able to enlist his help to make it happen. The online TPAW planner is located at

tpawplanner.com

(I have received permission from a moderator to post this link in this thread.)

It's easier to add features to an online planner without making it too complex to use. So I took the opportunity to add two features that aren't in the spreadsheets:

(1) LEGACY: You can enter a legacy goal and choose a separate AA for those funds. It often makes sense to have a different AA for legacy funds and retirement funds. I've seen this come up in discussions a few times, so I think it will be useful.

(2) SPENDING CEILING: This is useful if you are are not interested in spending more than a certain amount and would rather save the excess for future needs or a legacy.
That is really cool, thank you!

I also entered my data and got a confusing return. We are at 50x, so it may we exceed some ceiling threshold.
Glad you like the online planner. There is no ceiling for the inputs, so that shouldn't be the issue. Can you provide more details? Or If you want to share made-up inputs that can recreate the issue, please share a link either in this thread or in a PM. (Use the "save as link" button under INPUT to get a link.)
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Re: Total portfolio allocation and withdrawal (TPAW)

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Ben Mathew wrote: Wed Dec 08, 2021 11:57 am Glad you like the online planner. There is no ceiling for the inputs, so that shouldn't be the issue. Can you provide more details? Or If you want to share made-up inputs that can recreate the issue, please share a link either in this thread or in a PM. (Use the "save as link" button under INPUT to get a link.)
Thank you, Mr. Mathew. And thanks to your brother as well.

I just sent you a PM.

I'm not the smartest tech guy on the planet, so I'm quite certain it is operator error on my end, or just my inability to understand the output.
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Re: Total portfolio allocation and withdrawal (TPAW)

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zie wrote: Wed Dec 08, 2021 11:18 am On FireFox 95.0 on macOS, the little hover bubbles on the graph that show the $ amounts one can spend do not show up.
This issue should now be fixed. Let me know if you still have problems with it.

Thanks again for the heads up.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

Zeno wrote: Wed Dec 08, 2021 12:07 pm
Ben Mathew wrote: Wed Dec 08, 2021 11:57 am Glad you like the online planner. There is no ceiling for the inputs, so that shouldn't be the issue. Can you provide more details? Or If you want to share made-up inputs that can recreate the issue, please share a link either in this thread or in a PM. (Use the "save as link" button under INPUT to get a link.)
Thank you, Mr. Mathew. And thanks to your brother as well.

I just sent you a PM.

I'm not the smartest tech guy on the planet, so I'm quite certain it is operator error on my end, or just my inability to understand the output.
No worries. Thanks for sharing the inputs. This was a case of the spending ceiling set low relative to the portfolio, so all spending percentiles were at the ceiling. The graph becomes a line. That's the correct output, but can be confusing to interpret. Glad we could resolve it.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by zie »

Ben Mathew wrote: Wed Dec 08, 2021 11:54 am
SS should give you a spending floor, unless you entered a legacy goal. If the legacy goal is large enough, it can try to save some SS for legacy instead of spending. Do you have a legacy goal entered? If so, can you remove it and see if you're still dropping below the SS floor?

If you want to share made-up inputs that can recreate the problem, please send me a link either in this thread or in a PM. (Use the "save as link" button under INPUT.)
AH, yup I had inadvertently entered a Legacy. that fixed the issue for me. Thanks! :) So you can't use the Legacy feature in the real world, as it will happily force you to spend $0/yr to ensure your legacy. Probably not very realistic. I don't think the model needs fixing, but it was confusing, especially since I didn't remember entering the Legacy. Though I did do the save as link option to move across browsers to see about the FF specific issue.

Anyways, thanks! definitely way easier to understand than the spreadsheet!


The FF issue is fixed, but I found a new issue:

"Error in parameter: Property age.end: Greater than 110."

The age max is 119 on the slider bar, but when you save as and use the link you get the above error, if your ending age is > 110.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

zie wrote: Wed Dec 08, 2021 1:26 pm
Ben Mathew wrote: Wed Dec 08, 2021 11:54 am
SS should give you a spending floor, unless you entered a legacy goal. If the legacy goal is large enough, it can try to save some SS for legacy instead of spending. Do you have a legacy goal entered? If so, can you remove it and see if you're still dropping below the SS floor?

If you want to share made-up inputs that can recreate the problem, please send me a link either in this thread or in a PM. (Use the "save as link" button under INPUT.)
AH, yup I had inadvertently entered a Legacy. that fixed the issue for me. Thanks! :) So you can't use the Legacy feature in the real world, as it will happily force you to spend $0/yr to ensure your legacy. Probably not very realistic. I don't think the model needs fixing, but it was confusing, especially since I didn't remember entering the Legacy.
The modeling behind legacy and extra discretionary withdrawals is bit tricky because they have to scale with the market (i.e. if markets do well, the target should increase, and if markets do badly, the target should decrease.) The scaling I'm doing isn't quite perfect and it's possible that it's sometimes allocating too much to legacy and too little to retirement spending.

A solution to this on the user's end would be to simply reduce the legacy target. That will allocate more to retirement and less to legacy overall, which will reduce the likelihood of saving needed retirement funds for legacy. On my end, at some point I'll try to improve the scaling algorithm. That's a tough problem, and probably a long term goal. But in the nearer term, I'm planning to introduce an income floor. That's easy to do, and will provide a simple way to prioritize retirement spending up to the floor over legacy goals.
zie wrote: Wed Dec 08, 2021 1:26 pm The FF issue is fixed, but I found a new issue:

"Error in parameter: Property age.end: Greater than 110."

The age max is 119 on the slider bar, but when you save as and use the link you get the above error, if your ending age is > 110.
Thanks for the heads up. This should now be fixed. Let me know if you still see this problem.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by zie »

Ben Mathew wrote: Wed Dec 08, 2021 2:19 pm
zie wrote: Wed Dec 08, 2021 1:26 pm
Ben Mathew wrote: Wed Dec 08, 2021 11:54 am
SS should give you a spending floor, unless you entered a legacy goal. If the legacy goal is large enough, it can try to save some SS for legacy instead of spending. Do you have a legacy goal entered? If so, can you remove it and see if you're still dropping below the SS floor?

If you want to share made-up inputs that can recreate the problem, please send me a link either in this thread or in a PM. (Use the "save as link" button under INPUT.)
AH, yup I had inadvertently entered a Legacy. that fixed the issue for me. Thanks! :) So you can't use the Legacy feature in the real world, as it will happily force you to spend $0/yr to ensure your legacy. Probably not very realistic. I don't think the model needs fixing, but it was confusing, especially since I didn't remember entering the Legacy.
The modeling behind legacy and extra discretionary withdrawals is bit tricky because they have to scale with the market (i.e. if markets do well, the target should increase, and if markets do badly, the target should decrease.) The scaling I'm doing isn't quite perfect and it's possible that it's sometimes allocating too much to legacy and too little to retirement spending.

A solution to this on the user's end would be to simply reduce the legacy target. That will allocate more to retirement and less to legacy overall, which will reduce the likelihood of saving needed retirement funds for legacy. On my end, at some point I'll try to improve the scaling algorithm. That's a tough problem, and probably a long term goal. But in the nearer term, I'm planning to introduce an income floor. That's easy to do, and will provide a simple way to prioritize retirement spending up to the floor over legacy goals.
Sorry I think I came off much more Debbie Downer than I intended, I apologize for that. I like the idea of an income floor, that would be interesting, and would get the information I would be interested in. i.e. I want to know how much I might be able to leave behind while still having a comfortable retirement for myself.

I didn't mean to be critical. Also, I agree the age 110 error does appear to be fixed for me as well.

Anyways, thanks for the reply and your work on this tool!
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zeno »

Ben Mathew wrote: Wed Dec 08, 2021 1:26 pm
Zeno wrote: Wed Dec 08, 2021 12:07 pm
Ben Mathew wrote: Wed Dec 08, 2021 11:57 am Glad you like the online planner. There is no ceiling for the inputs, so that shouldn't be the issue. Can you provide more details? Or If you want to share made-up inputs that can recreate the issue, please share a link either in this thread or in a PM. (Use the "save as link" button under INPUT to get a link.)
Thank you, Mr. Mathew. And thanks to your brother as well.

I just sent you a PM.

I'm not the smartest tech guy on the planet, so I'm quite certain it is operator error on my end, or just my inability to understand the output.
No worries. Thanks for sharing the inputs. This was a case of the spending ceiling set low relative to the portfolio, so all spending percentiles were at the ceiling. The graph becomes a line. That's the correct output, but can be confusing to interpret. Glad we could resolve it.
Thank you for the real-time help and analysis, Ben. I'm indebted to you.
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Re: Total portfolio allocation and withdrawal (TPAW)

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zie wrote: Wed Dec 08, 2021 2:47 pm
Ben Mathew wrote: Wed Dec 08, 2021 2:19 pm
zie wrote: Wed Dec 08, 2021 1:26 pm
Ben Mathew wrote: Wed Dec 08, 2021 11:54 am
SS should give you a spending floor, unless you entered a legacy goal. If the legacy goal is large enough, it can try to save some SS for legacy instead of spending. Do you have a legacy goal entered? If so, can you remove it and see if you're still dropping below the SS floor?

If you want to share made-up inputs that can recreate the problem, please send me a link either in this thread or in a PM. (Use the "save as link" button under INPUT.)
AH, yup I had inadvertently entered a Legacy. that fixed the issue for me. Thanks! :) So you can't use the Legacy feature in the real world, as it will happily force you to spend $0/yr to ensure your legacy. Probably not very realistic. I don't think the model needs fixing, but it was confusing, especially since I didn't remember entering the Legacy.
The modeling behind legacy and extra discretionary withdrawals is bit tricky because they have to scale with the market (i.e. if markets do well, the target should increase, and if markets do badly, the target should decrease.) The scaling I'm doing isn't quite perfect and it's possible that it's sometimes allocating too much to legacy and too little to retirement spending.

A solution to this on the user's end would be to simply reduce the legacy target. That will allocate more to retirement and less to legacy overall, which will reduce the likelihood of saving needed retirement funds for legacy. On my end, at some point I'll try to improve the scaling algorithm. That's a tough problem, and probably a long term goal. But in the nearer term, I'm planning to introduce an income floor. That's easy to do, and will provide a simple way to prioritize retirement spending up to the floor over legacy goals.
Sorry I think I came off much more Debbie Downer than I intended, I apologize for that. I like the idea of an income floor, that would be interesting, and would get the information I would be interested in. i.e. I want to know how much I might be able to leave behind while still having a comfortable retirement for myself.

I didn't mean to be critical.
No worries. I like to hear when some aspect of the planner isn't working for what someone wants to do. It helps me figure out what direction to go in next. The spending floor seems like what you would need to simulate what you're describing. That will be added soon. This would actually allow simulation of the full spectrum of strategies from fully variable to fully fixed:

- No spending floor or ceiling: fully variable withdrawals

- Spending floor < spending ceiling: variable withdrawals with guardrails, intermediate between variable and fixed withdrawals.

- Spending floor = spending ceiling: fully fixed withdrawals
zie wrote: Wed Dec 08, 2021 2:47 pm Also, I agree the age 110 error does appear to be fixed for me as well.
Great. Thanks for finding these bugs.
Last edited by Ben Mathew on Wed Dec 08, 2021 5:03 pm, edited 1 time in total.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

Zeno wrote: Wed Dec 08, 2021 4:15 pm
Ben Mathew wrote: Wed Dec 08, 2021 1:26 pm
Zeno wrote: Wed Dec 08, 2021 12:07 pm
Ben Mathew wrote: Wed Dec 08, 2021 11:57 am Glad you like the online planner. There is no ceiling for the inputs, so that shouldn't be the issue. Can you provide more details? Or If you want to share made-up inputs that can recreate the issue, please share a link either in this thread or in a PM. (Use the "save as link" button under INPUT to get a link.)
Thank you, Mr. Mathew. And thanks to your brother as well.

I just sent you a PM.

I'm not the smartest tech guy on the planet, so I'm quite certain it is operator error on my end, or just my inability to understand the output.
No worries. Thanks for sharing the inputs. This was a case of the spending ceiling set low relative to the portfolio, so all spending percentiles were at the ceiling. The graph becomes a line. That's the correct output, but can be confusing to interpret. Glad we could resolve it.
Thank you for the real-time help and analysis, Ben. I'm indebted to you.
You're welcome. Glad I could be of help.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by longratio »

Ben Mathew wrote: Tue Dec 07, 2021 6:42 pm ONLINE TPAW PLANNER

tpawplanner.com
This is really cool! I also like the visual design (and the font ;-))

I have one question regarding 'future savings and retirement'. If I add a single year entry in the future (current age 55, single year entry is for age 60), what is the difference between nominal and real for that entry? Is it that you calculate the NPV for that entry using the inflation entry if selecting nominal and 0 if selecting real?

And one suggestion / feature request. Can you maybe add the output tables of the portfolio, withdrawal and equity / bond splits for the 25th label of the simulation runs for each year. Personally I think it is helpful if I see this over time (that's what I like about the excel also).

Anyway great work, many thanks.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

longratio wrote: Wed Dec 15, 2021 1:57 pm
Ben Mathew wrote: Tue Dec 07, 2021 6:42 pm ONLINE TPAW PLANNER

tpawplanner.com
This is really cool! I also like the visual design (and the font ;-))
Thanks. Glad to hear you like it!
longratio wrote: Wed Dec 15, 2021 1:57 pm I have one question regarding 'future savings and retirement'. If I add a single year entry in the future (current age 55, single year entry is for age 60), what is the difference between nominal and real for that entry? Is it that you calculate the NPV for that entry using the inflation entry if selecting nominal and 0 if selecting real?
All of the calculations are done in real dollars. So any nominal amounts you enter in "future savings and retirement income" or "extra spending" is first converted to real dollars using the inflation rate in the "Expected Returns and Inflation" section.

So if current age is 55, inflation rate is 2%, and you enter $100 nominal income for age 60, then that $100 is converted to $100/(1+.02)^5 = $90.57 real dollars.

If on the other hand you enter $100 real income for age 60, then it simply stays as $100 real dollars for the calculations.
longratio wrote: Wed Dec 15, 2021 1:57 pm And one suggestion / feature request. Can you maybe add the output tables of the portfolio, withdrawal and equity / bond splits for the 25th label of the simulation runs for each year. Personally I think it is helpful if I see this over time (that's what I like about the excel also).
Sure. I was thinking of displaying the full distribution (5th to 95th percentiles) for asset allocation and portfolio values for each year. I can add the option to see only a specific percentile if that will be helpful.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by At60Investing »

Ben thanks for the great work on TPAW! I’m using it to help me with modeling retirement income decisions on pension lump sum vs. pension annuity selection. Also I’m really concerned about sequence of returns risk and trying to understand how the tool accommodates this. I’m very conservative wrt investing risk tolerance as I head into retirement in a few months and my take on markets is we are in for far below average returns.
Can you guide me to research what fund selections some are using that define the stock/bond AA?
Also when I run the planning tool Monte Carlo sim in Fidelity it tells me that my pension choice should be annuity and when I run TPAW the lump sum is the better choice. I assume they use SWR for that tool?
Anyway I’m doing my homework and you’ve given me a useful tool!

FYI wrt expected value theory and ergodicity check out Ole Peters’s work https://www.nature.com/articles/s41567-019-0732-0#Sec1 relating to ensemble vs. time average probability. Interesting.

Thanks again!
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Re: Total portfolio allocation and withdrawal (TPAW)

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At60Investing wrote: Sat Jan 01, 2022 1:18 pm Ben thanks for the great work on TPAW!
Glad you're finding it useful.
At60Investing wrote: Sat Jan 01, 2022 1:18 pm I’m using it to help me with modeling retirement income decisions on pension lump sum vs. pension annuity selection.
[...]
Also when I run the planning tool Monte Carlo sim in Fidelity it tells me that my pension choice should be annuity and when I run TPAW the lump sum is the better choice. I assume they use SWR for that tool?
I'm not sure how the Fidelity simulations work. But TPAW would calculate the present value (PV) of the future stream of income using bond rates. So whether lump sum or pension comes out ahead will depend on which has the higher PV. Annuities have the advantage that they provide longevity insure. That is a valuable benefit. So unless you expect a shorter than average lifespan, I would use a pretty high max age (say till age 100) when entering the annuity stream. Generally, I would favor the annuity unless the lump sum is a clear win.

You might also find it helpful to calculate breakeven age as shown in this post.
At60Investing wrote: Sat Jan 01, 2022 1:18 pm Also I’m really concerned about sequence of returns risk and trying to understand how the tool accommodates this.
TPAW handles sequence of return risk very well. Spending goes down during the crash but recovers fully if and when the market recovers. There is no permanent damage to the portfolio. See these posts:

How retirement income responds to a poor sequence of returns (temporary crash)

Why retirement income recovers fully after a temporary crash
At60Investing wrote: Sat Jan 01, 2022 1:18 pm Can you guide me to research what fund selections some are using that define the stock/bond AA?
Not sure what you mean by this question. Are you asking how to settle on a stock/bond AA or how to calculate the asset allocation of different funds?

If the former, then you would simply adjust the asset allocation in the TPAW Monte Carlo planner, and the simulations will show retirement spending becoming more or less widely dispersed in retirement. You pick the AA that you like and implement it using your preferred stock and bond funds.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by dogagility »

Ben Mathew wrote: Mon Nov 30, 2020 8:39 pm 12/7/2021: TPAW now has an online planner: tpawplanner.com
Ben, this online tool is easy to use. Thanks to you and your brother for taking the time to implement it.

My wife and I plan to use a fixed AA and adjust portfolio withdrawals in retirement based upon current portfolio value.

For the online TPAW tool, I don't see an output that suggests a withdrawal amount. Instead, the output seems to be a monte carlo simulation of withdrawal amounts over time. This is unlike the VPW tool that suggests a specific withdrawal amount at that moment in time (which of course is just a suggestion).

My question: how does the retiree use the online TPAW tool to arrive at a specific suggested withdrawal amount?
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

dogagility wrote: Thu Feb 10, 2022 6:16 am
Ben Mathew wrote: Mon Nov 30, 2020 8:39 pm 12/7/2021: TPAW now has an online planner: tpawplanner.com
Ben, this online tool is easy to use. Thanks to you and your brother for taking the time to implement it.
Glad to hear you're finding it easy to use. I'm really liking the freedom of the online format. It's easy to add features without making it too complex to use.
dogagility wrote: Thu Feb 10, 2022 6:16 am My wife and I plan to use a fixed AA and adjust portfolio withdrawals in retirement based upon current portfolio value.

For the online TPAW tool, I don't see an output that suggests a withdrawal amount. Instead, the output seems to be a monte carlo simulation of withdrawal amounts over time. This is unlike the VPW tool that suggests a specific withdrawal amount at that moment in time (which of course is just a suggestion).

My question: how does the retiree use the online TPAW tool to arrive at a specific suggested withdrawal amount?
If you are retired, the leftmost data point on the graph will be your current age, and the withdrawal displayed for that age will be your planned spending for this year. This spending may consist of both withdrawal from the portfolio as well as income from retirement such as Social Security. To see precisely how this spending is funded, click on "Tasks for this year." That will have a detailed statement about your current year's withdrawal, along with rebalance targets for this year.

Does that provide what you are looking for?
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by dogagility »

Ben Mathew wrote: Thu Feb 10, 2022 11:20 am
dogagility wrote: Thu Feb 10, 2022 6:16 am
Ben Mathew wrote: Mon Nov 30, 2020 8:39 pm 12/7/2021: TPAW now has an online planner: tpawplanner.com
Ben, this online tool is easy to use. Thanks to you and your brother for taking the time to implement it.
Glad to hear you're finding it easy to use. I'm really liking the freedom of the online format. It's easy to add features without making it too complex to use.
dogagility wrote: Thu Feb 10, 2022 6:16 am My wife and I plan to use a fixed AA and adjust portfolio withdrawals in retirement based upon current portfolio value.

For the online TPAW tool, I don't see an output that suggests a withdrawal amount. Instead, the output seems to be a monte carlo simulation of withdrawal amounts over time. This is unlike the VPW tool that suggests a specific withdrawal amount at that moment in time (which of course is just a suggestion).

My question: how does the retiree use the online TPAW tool to arrive at a specific suggested withdrawal amount?
If you are retired, the leftmost data point on the graph will be your current age, and the withdrawal displayed for that age will be your planned spending for this year. This spending may consist of both withdrawal from the portfolio as well as income from retirement such as Social Security. To see precisely how this spending is funded, click on "Tasks for this year." That will have a detailed statement about your current year's withdrawal, along with rebalance targets for this year.

Does that provide what you are looking for?
Yes, thank you.

I didn't see the "tasks for this year" since (on my chromebook anyway) it was covered by a box containing the "legacy" amounts at different probability percentiles.
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Re: Total portfolio allocation and withdrawal (TPAW)

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dogagility wrote: Thu Feb 10, 2022 1:39 pm I didn't see the "tasks for this year" since (on my chromebook anyway) it was covered by a box containing the "legacy" amounts at different probability percentiles.
Ah, I see. That box is a temporary solution to show legacy. We are working on incorporating legacy properly in the graph. The box will go away soon.

Edit: For now we've moved the legacy box lower so it's not hiding the text. This might cause it to hide more of the graph in some cases. We'll fix the problem properly in the next few weeks. Thanks for bringing it to our attention.
Last edited by Ben Mathew on Thu Feb 10, 2022 2:49 pm, edited 2 times in total.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zeno »

I’m just poking back in again here to say the tool is awesome. We can’t thank you enough, Ben.
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Re: Total portfolio allocation and withdrawal (TPAW)

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Zeno wrote: Thu Feb 10, 2022 2:24 pm I’m just poking back in again here to say the tool is awesome. We can’t thank you enough, Ben.
Thanks, Zeno. Glad to hear you like it!
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by mkc »

Interesting tool.

I'm a bit confused about the "tasks this year" and one's desired AA.

I put our desired asset allocation in (55/45), ran the tool with our parameters, future social security and pension, (note we are both 60), and the "tasks this year" told us to rebalance to 90% stock, 10% bond.

I'm perplexed by this recommendation.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by AlohaJoe »

mkc wrote: Thu Feb 10, 2022 8:46 pm Interesting tool.

I'm a bit confused about the "tasks this year" and one's desired AA.

I put our desired asset allocation in (55/45), ran the tool with our parameters, future social security and pension, (note we are both 60), and the "tasks this year" told us to rebalance to 90% stock, 10% bond.

I'm perplexed by this recommendation.
You want to be 55/45. Future Social Security and pension are part of the 45.
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Re: Total portfolio allocation and withdrawal (TPAW)

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mkc wrote: Thu Feb 10, 2022 8:46 pm Interesting tool.

I'm a bit confused about the "tasks this year" and one's desired AA.

I put our desired asset allocation in (55/45), ran the tool with our parameters, future social security and pension, (note we are both 60), and the "tasks this year" told us to rebalance to 90% stock, 10% bond.

I'm perplexed by this recommendation.
As AlohaJoe noted, the asset allocation you enter in the TPAW planner is the AA for the "total portfolio" which includes future savings and retirement income counted as bonds. So the AA you will want to enter here will typically be lower than the AA you would choose for your savings portfolio. The idea is to find the AA that's right for you by looking at its impact on the retirement spending distribution shown in the graph. From the instructions:
Adjust these two sliders [AA and spending tilt] while looking at the retirement spending graph. Find the combination that generates the retirement spending graph that you like the best.

Stock Allocation

Picking a higher stock allocation increases your expected retirement spending. So it moves the graph up. This is the reward. But it also widens the distribution--the highs are higher and the lows are lower. This is the risk.

Don't anchor on any preexisting ideas that you may have about what a conservative, moderate or aggressive stock allocation should be. TPAW counts future savings and retirement income as bonds. So the asset allocation on your savings portfolio will typically be higher than the asset allocation you choose here. What matters is what is displayed in the retirement spending graph. So just focus on that and pick the asset allocation that gives you the graph you like best. You may settle on a significantly lower stock percentage than you had expected. That's okay.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zardoz »

Ben Mathew wrote: Tue Dec 07, 2021 6:42 pm ONLINE TPAW PLANNER

I have gotten some feedback in the past that the TPAW planning spreadsheets are hard for some people to use. I wanted to create an online version of the planner that would be easier to use. I don't have the programming expertise to build it myself. But fortunately my brother does, and I was able to enlist his help to make it happen. The online TPAW planner is located at

tpawplanner.com
Thanks so much for this interesting tool. Forgive me if this is explained elsewhere, but what data is used for the Monte Carlo simulation? And how does that data change when we change the values for inflation and expected returns? Are the 3 variables (stock returns, bond returns, inflation) randomized independently from each other, or are their simulated values based on historical combinations?
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by sixtyforty »

Great job on this online tool. All the explanations at every section is very nice. Well done. Thank-you.
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

Zardoz wrote: Fri Feb 11, 2022 1:23 am
Ben Mathew wrote: Tue Dec 07, 2021 6:42 pm ONLINE TPAW PLANNER

I have gotten some feedback in the past that the TPAW planning spreadsheets are hard for some people to use. I wanted to create an online version of the planner that would be easier to use. I don't have the programming expertise to build it myself. But fortunately my brother does, and I was able to enlist his help to make it happen. The online TPAW planner is located at

tpawplanner.com
Thanks so much for this interesting tool. Forgive me if this is explained elsewhere, but what data is used for the Monte Carlo simulation? And how does that data change when we change the values for inflation and expected returns? Are the 3 variables (stock returns, bond returns, inflation) randomized independently from each other, or are their simulated values based on historical combinations?
The Monte Carlo simulations are based on the annual real returns of US stocks and 10 year Treasury bonds from 1871-2020. The data was obtained from Shiller's spreadsheet, and is described in this thread.

The return distribution for the simulation is obtained by shifting the historical distribution up or down to match the expected real return entered in the planner. A year in 1871-2020 is then randomly drawn and the stock and bond returns for that year becomes the simulated return. Since the simulated stock and bond returns are both drawn from the same randomly drawn year, the historical correlations between stocks and bonds is preserved.

The distribution being sampled from is already in real returns, so the expected inflation entered in the planner does not affect it. It is used only to convert any nominal dollars that you may enter in the future savings, retirement income, and extra withdrawals sections.
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Re: Total portfolio allocation and withdrawal (TPAW)

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sixtyforty wrote: Fri Feb 11, 2022 7:24 am Great job on this online tool. All the explanations at every section is very nice. Well done. Thank-you.
Thank you for the feedback. I appreciate it!
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zardoz »

Ben Mathew wrote: Fri Feb 11, 2022 9:13 am The Monte Carlo simulations are based on the annual real returns of US stocks and 10 year Treasury bonds from 1871-2020. The data was obtained from Shiller's spreadsheet, and is described in this thread.

The return distribution for the simulation is obtained by shifting the historical distribution up or down to match the expected real return entered in the planner. A year in 1871-2020 is then randomly drawn and the stock and bond returns for that year becomes the simulated return. Since the simulated stock and bond returns are both drawn from the same randomly drawn year, the historical correlations between stocks and bonds is preserved.

The distribution being sampled from is already in real returns, so the expected inflation entered in the planner does not affect it. It is used only to convert any nominal dollars that you may enter in the future savings, retirement income, and extra withdrawals sections.
Thanks for the very clear explanation. Being able to see how the shape of the Monte Carlo scenarios changes as we change the asset allocation is very powerful and informative.

The next piece I'm trying to understand better is how each year's withdrawal is calculated. I wasn't able to find that in the help text for the online tool but I may have missed it, and I'm not sure which of the articles linked from the main thread best explains this. Does the online tool use ABW as described in https://www.bogleheads.org/wiki/Amortiz ... withdrawal, or does it do something different, or something more specific, or something that is tailored based on our inputs to the tool?
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

Zardoz wrote: Sat Feb 12, 2022 1:50 pm Being able to see how the shape of the Monte Carlo scenarios changes as we change the asset allocation is very powerful and informative.
Glad to hear this. It's my favorite visual as well.
Zardoz wrote: Sat Feb 12, 2022 1:50 pm The next piece I'm trying to understand better is how each year's withdrawal is calculated. I wasn't able to find that in the help text for the online tool but I may have missed it, and I'm not sure which of the articles linked from the main thread best explains this. Does the online tool use ABW as described in https://www.bogleheads.org/wiki/Amortiz ... withdrawal, or does it do something different, or something more specific, or something that is tailored based on our inputs to the tool?
Yes, the withdrawal methodology is amortization based withdrawal (ABW) as described in the wiki article you linked to. Formulas are all the same. What's specific to TPAW is that the amortization is performed on the "total portfolio" which includes the present value of pensions and Social Security. Including retirement income like this in the amortization calculation automatically adjusts the withdrawals for uneven retirement income like a gap before Social Security starts. But it does create the risk of withdrawing too much in anticipation of future income and running out of money before the income begins (liquidity risk). This would be visible in the simulations and can be addressed during planning. There is more about how to deal with liquidity risk under Learn > Future Savings and Retirement Income > Liquidity
LIQUIDITY

The “total portfolio” method of counting future savings and retirement income as bonds works well to spread risk evenly across time, reducing the total risk that you would need to take for a given expected return. But it can create liquidity risk if you have a delayed Social Security or pension. Seeing that you have a lot of bonds in the form of pensions, it may place a large fraction of your savings portfolio in stocks to reach the desired stock exposure. If stocks do badly before pensions start, the savings portfolio can run out of money and you will temporarily be without funds till the pension begins. Withdrawals may also be too generous in anticipation of future income, causing you to come up short before the pension begins.

Liquidity is most likely to be a problem when the savings portfolio is small relative to the pension, there is a long gap before pension starts, and you have chosen a riskier asset allocation.

If there is a liquidity problem, the simulation will show you running out of money before your pension starts. If this is happening, you can resolve it by doing one or more of the following:

1. Reduce stock allocation.

2. Increase spending tilt so you consume less in early retirement.

3. Add a constant essential expense (e.g. $10,000 per year) to all retirement years. If you enter an essential spending amount equal to the pension, it will create a full bond bridge to the pension and will definitely solve the liquidity problem. But you can usually get by with less. Entering an essential spending amount less than the pension may be enough to reduce the liquidity risk to acceptably low levels. So experiment with that before resorting to a full bond bridge.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zardoz »

Ben Mathew wrote: Sat Feb 12, 2022 6:20 pm Yes, the withdrawal methodology is amortization based withdrawal (ABW) as described in the wiki article you linked to. Formulas are all the same. What's specific to TPAW is that the amortization is performed on the "total portfolio" which includes the present value of pensions and Social Security. Including retirement income like this in the amortization calculation automatically adjusts the withdrawals for uneven retirement income like a gap before Social Security starts. But it does create the risk of withdrawing too much in anticipation of future income and running out of money before the income begins (liquidity risk). This would be visible in the simulations and can be addressed during planning. There is more about how to deal with liquidity risk under Learn > Future Savings and Retirement Income > Liquidity
This is great, thanks for explaining this part. The "Essential Expenses" knob is an interesting one that I had initially overlooked. I need to give some more thought to whether I want to use it or not. This explanation from the online text was helpful:
"If you schedule $10,000 in extra essential spending for some age, that spending goal gets funded by 100% bonds. So the money will be there even if the stock market does badly. If instead you schedule $10,000 in extra discretionary spending, the funds for that spending goal gets the same asset allocation as your general retirement spending."
Thanks again for such a useful tool. When I found this thread, the new web version of the planner was already available, so I haven't even looked into the spreadsheet version yet. Do you want to add a link to https://tpawplanner.com to the wiki page to help more people find it?
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Ben Mathew »

Zardoz wrote: Wed Feb 16, 2022 10:51 pm The "Essential Expenses" knob is an interesting one that I had initially overlooked. I need to give some more thought to whether I want to use it or not. This explanation from the online text was helpful:
"If you schedule $10,000 in extra essential spending for some age, that spending goal gets funded by 100% bonds. So the money will be there even if the stock market does badly. If instead you schedule $10,000 in extra discretionary spending, the funds for that spending goal gets the same asset allocation as your general retirement spending."
So far I only have three funding categories--essential, discretionary, and legacy--funded by 0/100, retirement spending AA, and legacy AA respectively. In principle, we could have any number of goals funded by its own AA. But I figured that more would be too complex for planning.
Zardoz wrote: Wed Feb 16, 2022 10:51 pm When I found this thread, the new web version of the planner was already available, so I haven't even looked into the spreadsheet version yet.
The online planner will have more features because it's easier to add features without making it too complex to use. The simulations also run much faster--almost instantaneous online vs about 30 seconds in the spreadsheet. The spreadsheet will be useful for those looking to understand how TPAW works and customize aspects of it for their own use. I personally just use the online planner now because it's so much faster and easier.
Zardoz wrote: Wed Feb 16, 2022 10:51 pm Do you want to add a link to https://tpawplanner.com to the wiki page to help more people find it?
Thanks for the suggestion. I'd prefer to hold off for now because I'm still adding new features and would need to describe the differences between the online planner, the spreadsheets, and Merton's model in the wiki. It will be easier to do that once the development phase is over.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total portfolio allocation and withdrawal (TPAW)

Post by Zardoz »

Ben Mathew wrote: Thu Feb 17, 2022 10:54 am
Zardoz wrote: Wed Feb 16, 2022 10:51 pm Do you want to add a link to https://tpawplanner.com to the wiki page to help more people find it?
Thanks for the suggestion. I'd prefer to hold off for now because I'm still adding new features and would need to describe the differences between the online planner, the spreadsheets, and Merton's model in the wiki. It will be easier to do that once the development phase is over.
That's exciting news, looking forward to it!
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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