Vanguard looks at withdrawal strategies

[REWahoo]

A recently published Vanguard article looks at three withdrawal strategies:

... dollar amount grown by inflation, percentage of portfolio, and percentage of portfolio with ceiling and floor, the hybrid.

Those of you familiar with "the 95% Rule" spending model in FIRECalc (from Bob Clyatt's book, Work Less, Spend More) will note the similarity to the hybrid model.

I thought it was interesting that in testing each of the three strategies "10,000 times", Vanguard used something new to me: VCMM

The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960.

Sounds a bit like FIRECalc, eh?

It should not come as a surprise that the hybrid model "wins"...

Vanguard study looks at ways to spend retirement savings

 

[Rich_by_the_Bay]

Nice link. We're on a percent of total portfolio with -5% floor. Not sure where surplus money will end up when that happens, but it will be a nice problem to face.

Just yesterday I set up the automatic monthly transfer from MMF to our personal checking account. Now I really feel retired.

 

[unclemick]

Hi - my name is unclemick and I'm a recovering 'cheap SOB'. .

Just kidding BUT now that I'm old enough for SS, my fear trumps model approach during times when Mr Market drops big time is small non cola Pension and SS - ballpark 40% of income in normal times, cutting portfolio withdrawal way back. Early in ER(before SS and pension) I had a backup 'hard times' income from dividend stocks and interest. Hence my running pssst Wellesley joke.

In ancient times when I worked - I spent time in the 'make em and break world of test' sometimes the models did not hold to theory making grown engineers cry and accusing the test.

Those pesky hormones on occasion overwhelm the math causing one to grab the throttle and put the model in park.

heh heh heh - this human being human and all that. Models are cool guides though? Right?

 

[W2R]

Interesting article!

It is hard for me to understand the psychology of using a rigid percentage, or even a rigid floor and ceiling for SWR. Remember back in October, 2008, how many of us felt? Yeep. I can't imagine spending at the same level as always under circumstances like those.

I have a fairly rigid ceiling for SWR I suppose, but floor? I would push that floor DOWN, maybe even to 0% if the bottom dropped out of the market again. I would do that by claiming SS and ramping up the LBYM as necessary.

 

[REWahoo]

It is hard for me to understand the psychology of using a rigid percentage, or even a rigid floor and ceiling for SWR. Remember back in October, 2008, how many of us felt? Yeep. I can't imagine spending at the same level as always under circumstances like those.

Yep, I was pulling up the spending drawbridge at the time.

I have a fairly rigid ceiling for SWR I suppose, but floor? I would push that floor DOWN, maybe even to 0% if the bottom dropped out of the market again. I would do that by claiming SS and ramping up the LBYM as necessary, plus I do have enough cash to support me for a few years.

Do I interpret this correctly - you don't consider spending your cash as a withdrawal from your nest egg?

 

[W2R]

Do I interpret this correctly - you don't consider spending your cash as a withdrawal from your nest egg?

That would be a withdrawal. A withdrawal like that wouldn't entail selling low, until I rebalanced....

 

[REWahoo]

A withdrawal like that wouldn't entail selling low, until I rebalanced....

Since you would have probably spent even more of your cash in good times, I don't think it would actually qualify as a 'selling low' event. At least that's the way I look at it.

 

[W2R]

Since you would have probably spent even more of your cash in good times, I don't think it would actually qualify as a 'selling low' event. At least that's the way I look at it.

Besides, in this theoretical market crash if I only withdrew from the cash reserves, well the cash reserves would be smaller... but then the equity portion would be smaller too, due to the crash. So I might not need to rebalance. My asset allocation might not need any tweaking at all to restore the planned asset percentages.

Or, maybe that is what you meant too.

Anyway, if that worked out then I wouldn't necessarily have to claim SS, but I would still probably LBYM because it is so hard to see the portfolio drop like a rock.

 

[Koolau]

I know we've discussed this all before, but....It would be difficult for me to make a significant withdrawal from a port which had just taken a significant market hit. Maybe it's just me, but that would cause me too much anxiety. I think, with certain exceptions, I would tighten the belt (and suspenders, heh, heh) and wait for some kind of recovery. My actual approach has been to limit the possibilities of market hits by staying very conservative (for the most part). I've stuck my toe, now my foot, and maybe even mid calf into the market because I can see that a conservative portfolio (while it may never go down much) also doesn't allow enough growth to even consider an otherwise "conservative" withdrawal of 4%. So, if the gators don't getcha the skeeters will.

For the most part, I used all the "withdrawal strategies" for planning during the accumulation phase of retirement (how much do I need, based on a certain withdrawal rate). Now that the withdrawal phase has arrived, I've pretty much abandoned the "planning models" and begun to play it by ear. Probably not very logical, but I sleep well. YMMV.

 

[REWahoo]

For the most part, I used all the "withdrawal strategies" for planning during the accumulation phase of retirement (how much do I need, based on a certain withdrawal rate). Now that the withdrawal phase has arrived, I've pretty much abandoned the "planning models" and begun to play it by ear. Probably not very logical, but I sleep well. YMMV.

Translation: "After measuring with a micrometer, I marked with a grease pencil and am now cutting with an axe."

Been there, doing that.

 

[Moemg]

Nice link. We're on a percent of total portfolio with -5% floor. Not sure where surplus money will end up when that happens, but it will be a nice problem to face.

.

I put my surplus into a mad money account . Some years it does not get spent just rolled over and then if I suddenly decide to go on a fabulously expensive trip I have the money . I also do a percentage of my yearly portfolio and I even adjusted it all the way down when the market tanked . It was not as painful for me because I have of my pension & Survivor SS but I could see how that would not work for people just living off their portfolio . Most of us had drops in our portfolios of over 25% . That is a huge drop in your standard of living .

 

[FIREd]

I put my surplus into a mad money account . Some years it does not get spent just rolled over and then if I suddenly decide to go on a fabulously expensive trip I have the money . I also do a percentage of my yearly portfolio and I even adjusted it all the way down when the market tanked . It was not as painful for me because I have of my pension & Survivor SS but I could see how that would not work for people just living off their portfolio . Most of us had drops in our portfolios of over 25% . That is a huge drop in your standard of living .

I plan on placing the good years' income surpluses in a savings account to be used to minimize the bad years' income deficits. It will hopefully smooth out our standard of living a little bit when we start living solely on a fixed percentage of portfolio (probably with a floor/ceiling system).

 

[Moemg]

I plan on placing the good year income surpluses in a savings account to be used to minimize the bad year income deficits. It will hopefully smooth out our standard of living a little bit when we start living solely on a fixed percentage of portfolio (probably with a floor/ceiling system).

Great idea my good year surplus was used in 2009 for just that . It kept me from

 

[youbet]

....It would be difficult for me to make a significant withdrawal from a port which had just taken a significant market hit.

Hindsight is everything I suppose, but in looking back on the recent recession and the painful hit my portfolio took, I'm very grateful for our decision to go ahead and spend as planned despite the dip in our portfolio value.

At the beginning of the recession, we were about 3 yrs into RE. We had some travel, some toy purchases and some home improvements on the agenda, all very discretionary. It was a bit scary, but we went ahead with our plans and are extremely pleased that we did. We've visited some places that required some physical stamina and we're not getting any younger. We bought our camper and kayaks and have enjoyed them tremendously. This includes some great new friends we met through club camping trips. And a re-do of our living room has been completed along with some other minor redecorating.

And now our FIRE portfolio is about the same value (real dollars) today as it was when we FIRE'd five years ago. Thank you Mr Recovery. Yep, it was a bit scary continuing with spending while the markets plunged, but we tried to remember that every day we're spending time too and it's harder turning back the hands of the clock than managing a struggling portfolio.

YMMV.

 

[Independent]

I'd say that anybody looking at retirement, and planning to use assets that can fluctuate with the market, needs to mentally imagine being in the situation where the bottom seems to have dropped out and have a plan for that case.

1. Some people will have an income base of SS and pension,
2. some will have a stash of stable value assets,
3. some will have youbet's nerves,
4. some will find their nerves are strengthened by knowing that back testing and models say they can stick to a plan (this is where this article can help).

They all work, but you have to do the best you can to mentally walk through the valley and be convinced that your plan works for you.

I happen to think a percentage with a dollar amount floor and possibly a ceiling makes a lot of sense for people who are deeply into equities. That's a little different from Vanguard's approach, and I think it's more appropriate for people instead of endowment funds.
But, in fact, we're using lots of #2.

 

[pb4uski]

Who would start with a 4.75% initial withdrawal rate? Sounds aggressive to me. Wonder that the survival rate would have been with 4%. Suspect that it would have approached the 89% survival rate for the hybrid approach.

 

[Alan]

Interesting article.

I was lucky that the last 2 bears happened while I was accumulating so I haven't been put to the test yet. I was also lucky that my company held onto to its DB pension so that I am now in the position where I have pensions to cover the essentials and a maximum % ceiling that I won't exceed, If the portfolio really takes a big dive I can ramp down the withdrawal to zero and hopefully ride it out.

 

[ERD50]

I plan on placing the good years' income surpluses in a savings account to be used to minimize the bad years' income deficits. It will hopefully smooth out our standard of living a little bit when we start living solely on a fixed percentage of portfolio (probably with a floor/ceiling system).

Well, this is exactly what an inflation adjusted SWR does for you, isn't it? You don't have to adjust for downturns, because that was already factored in (historically at least). If you look at a 4% SWR for example, obviously some years produce a surplus, and it isn't spent. In downturns, you spend despite the fact that the portfolio has shrunk.

Hindsight is everything I suppose, but in looking back on the recent recession and the painful hit my portfolio took, I'm very grateful for our decision to go ahead and spend as planned despite the dip in our portfolio value.

... It was a bit scary, but we went ahead with our plans and are extremely pleased that we did.

....

And now our FIRE portfolio is about the same value (real dollars) today as it was when we FIRE'd five years ago.


YMMV.

+1 What a shame it would be to lose all those opportunities, good times, and enjoyment and then see that the market returned to a point that you could have done those things anyway, and maybe now it's too late.

That said, I'm shooting for a fairly conservative SWR long term. If I were pulling 5% or so, then 'd feel the need to cut back at times, but I'd prefer to keep a more consistent, conservative WR.

-ERD50

 

[Ronnieboy]

Hindsight is everything I suppose, but in looking back on the recent recession and the painful hit my portfolio took, I'm very grateful for our decision to go ahead and spend as planned despite the dip in our portfolio value.

At the beginning of the recession, we were about 3 yrs into RE. We had some travel, some toy purchases and some home improvements on the agenda, all very discretionary. It was a bit scary, but we went ahead with our plans and are extremely pleased that we did. We've visited some places that required some physical stamina and we're not getting any younger. We bought our camper and kayaks and have enjoyed them tremendously. This includes some great new friends we met through club camping trips. And a re-do of our living room has been completed along with some other minor redecorating.

And now our FIRE portfolio is about the same value (real dollars) today as it was when we FIRE'd five years ago. Thank you Mr Recovery. Yep, it was a bit scary continuing with spending while the markets plunged, but we tried to remember that every day we're spending time too and it's harder turning back the hands of the clock than managing a struggling portfolio.

YMMV.

I thought this was the whole idea of running 'retirement scenarios' that if you have a success rate of 99% to age 90 then you have $1+ left over at that time 99 out of 100 times and 1 time you had -$1 or more.
If you slow down planned spending during the rough times then you are essentially starting your retirement plan all over again.

I realize that it 'feels' better to do that I would probably do the same, but realistically if you spend less during the down years and more during the up years you are for the most part, treading water, not that there is anything wrong with that.

 

[youbet]

I thought this was the whole idea of running 'retirement scenarios' that if you have a success rate of 99% to age 90 then you have $1+ left over at that time 99 out of 100 times and 1 time you had -$1 or more.
If you slow down planned spending during the rough times then you are essentially starting your retirement plan all over again.

I realize that it 'feels' better to do that I would probably do the same, but realistically if you spend less during the down years and more during the up years you are for the most part, treading water, not that there is anything wrong with that.

Your comments make no sense in regard to my post. Perhaps you're misunderstanding...... I did keep spending per plan through the recession. It worked out well although it was scary at times. I posted on the issue here on this forum more than once.

What did you do?

 

[Ronnieboy]

Perhaps you're misunderstanding...... I did keep spending per plan through the recession. It worked out well although it was scary at times. I posted on the issue here on this forum more than once.

What did you do?

I'm still working for da' man, but I was only commenting on your post because you did what I believe is supposed to be done. Keep withdrawing on plan and it will work out well if the scenarios came out at 100%.

If you planned SWR is 4% then you take the same year after year, but during the down year I read about people dropping their SWR to match the down year (and I think I might too) because it would 'feel' better. But that is essentially treading water because you are resetting the SWR from 4% to 3% then back to 4%....

 

[youbet]

I'm still working for da' man, but I was only commenting on your post because you did what I believe is supposed to be done. Keep withdrawing on plan and it will work out well if the scenarios came out at 100%.

If you planned SWR is 4% then you take the same year after year, but during the down year I read about people dropping their SWR to match the down year (and I think I might too) because it would 'feel' better. But that is essentially treading water because you are resetting the SWR from 4% to 3% then back to 4%....

OK Gotcha.......

FireCalc does show that even a withdrawal plan destined to survive 100%
of the time will likely give you a wild ride along the way! Your time on earth, however, ticks down at a steady pace without regard to investment returns, inflation rates or any of the like.

Unless you're fortunate enough to RE at a very young age, I wouldn't put off desired and planned for activities for long, recession or not. That's assuming your original plan was conservative of course.

 

[Independent]

Who would start with a 4.75% initial withdrawal rate? Sounds aggressive to me. Wonder that the survival rate would have been with 4%. Suspect that it would have approached the 89% survival rate for the hybrid approach.

You have to consider how much you get to spend, not just the survival rates. The article doesn't discuss that as much as I'd like.

 

[Gotadimple]

You know, I thought this article looked familiar. Someone else posted a link in another thread to the underlying research paper made available to Vanguard's advisor community.

https://advisors.vanguard.com/VGApp...commentary/research/article/IWE_RetResDynamic

You may want to bookmark the page as it appears there may be several interesting articles on this site.

Rita

 

[OrcasIslandBound]

Is there a group on this forum that specializes in those who plan to retire early but have nothing but social security (later on) and investments today? IE no pension, no retirement plan from Megacorp, etc. (And no health care right now, will have to buy it on the open market.)

Seems to this group has the most difficulty in planning their retirement with the gyrations in the market.

Me:
No pension, hoping to retire on 56th birthday a little less than 3 years from now.