VPW - Best Withdrawal Calculator I've seen to date.....

[Cut-Throat]

Here is a calculator developed by a Bogelhead member this past summer. It is a Calculator called VPW (variable Percentage Withdrawal). It cannot fail like a fixed SWR. It Will deplete your portfolio much better than a fixed SWR and hence lets you spend more money.

Instead of operating like a 3 or 4% inflation adjusted withdrawal, it performs more like we actually take our money from our portfolio. Taking more money in down market years and less in up market years. It also takes into account your mortality and therefore has a rising percentage as you age. There is a Free VPW calculator that you can download here.

https://www.dropbox.com/s/dcfoq1b39jybcdd/VariablePercentageWithdrawal.xls

It will allow you to input all your info and backtest it against Market history (Like Firecalc). For a lot of discussion on this tool, visit Bogelheads and Search for VPW. You'll find any questions you have will have already been answered there.

 

[2B]

The link didn't work for me.

 

[KB]

I was able to download the file. I'll try it out later today.

 

[ERD50]

Interesting, thanks.

It downloaded and appears to work fine for me in LibreOffice (apparently no tricky macros which often don't translate so well). Will require some digging and playing to comment further, but at first glance I am impressed.

-ERD50

 

[Ed_The_Gypsy]

Thanks, Cut-Throat. Looks good.

 

[kramer]

If I understand the calculator correctly, he asks for some basic inputs on your asset allocation and projects a real return number (Real) for your portfolio. Then you input a life expectancy and so there are a certain number of years to termination of plan (Life). Then it calculates the current year withdrawal by computing how much you could withdraw each year for the rest of your Life if your portfolio returned Real each year and you wanted to end up with zero dollars on the day you expect to die.

So at a 0% real return, this becomes a 1/Life calculator. (e.g., 30 year life expectancy, 0% real return, yields 3.33% current year withdrawal).

To get your current annual VPW withdrawal amount, you should be able to go to this web calculator and enter your expected real return and life expectancy.

Retirement Spending Calculator

Since one is recomputing their withdrawal each year, the amount you withdraw will vary depending on the cumulative performance of the portfolio. Each year your remaining life expectancy is getting shorter so it is safer to draw more than the previous year, for example, if the portfolio balance remained the same.

I didn't see a good explanation of all of the assumptions in the FAQ, but this is how I understood them. Please correct me if I am wrong. Thanks.

 

[bizlady]

Interesting calculator. On the Calculation tab, what does the "Internal Rate" represent?

 

[explanade]

Looking forward to trying it out.

 

[Cut-Throat]

If you read through this thread on Bogelheads, it will probably answer all your detailed questions on Methodology, etc.

Bogleheads • View topic - Variable Percentage Withdrawal

 

[MasterBlaster]

For completeness on this topic:

The potential downside to variable withdrawal rate calculators is that should you retire into a raging bear market, them your appropriate variable withdrwal may not be enough to live on. But should you take out more than specified in those lean years you may be resigning yourself to a life of poverty because you have severely depleted the portfolio before it has a chance to grow again.

 

[Cut-Throat]

For completeness on this topic:

The potential downside to variable withdrawal rate calculators is that should you retire into a raging bear market, them your appropriate variable withdrwal may not be enough to live on. But should you take out more than specified in those lean years you may be resigning yourself to a life of poverty because you have severely depleted the portfolio before it has a chance to grow again.

Exactly the opposite !........ Not having enough to live on during a raging bear market is a function of Asset Allocation, not your withdrawal rate. And an inflation adjusted SWR will deplete a portfolio faster than VPW.

Please tell us what withdrawal method would 'save you' from your scenario?

Download the tool and Backtest your theories first, before making claims like these.

 

[MasterBlaster]

Exactly the opposite !........ Not having enough to live on during a raging bear market is a function of Asset Allocation, not your withdrawal rate. And an inflation adjusted SWR will deplete a portfolio faster than VPW.

Please tell us what withdrawal method would 'save you' from your scenario?

Download the tool and Backtest your theories first, before making claims like these.

Did you actually read (and understand) what I posted ?

I'll give an example of what I posted. Lets say you have a $1MM portfolio and the variable witdrwal scheme suggests you could take out 5.5 percent annually for the next year. That would give you an income of $55k before taxes.

Then (just) suppose a year later another great recesion hits and your portfolio is now worth half. Your predicted 5.5 percent withdrawal is then only $27.5k. Could you live on that amount ? Maybe - or maybe not.

If you need significantly more than that to live on, and take substantially more out (than the scheme warrants) then the nestegg gets depleted at the worst possible time. If you were to take out the previously determined $55k then your portfolio is now worth less than 90 percent of what it once was (forever).

Should the raging bear market last for more than a few years you will be in real trouble should you continue depleting your portfolio - for the rest of your life. At any rate you may have to live with much less than planned.

That's what the post was all about. And that's the (potential) downside to variable withdrwal schemes.

Please tell us what withdrawal method would 'save you' from your scenario?

Since a traditional SWR takes a lessor amount out of the nestegg, the effects of prolonged bear markets (perhaps) can be managed better. Traditional safe withdrawal schemes also do an (arguably) better job of banking gains for the inevitable lean times that may come.

By the way, I am not arguing for one method or the other. I just understand that each scheme has it's weaknesses.

 

[Cut-Throat]

Did you actually read (and understand) what I posted ?

I'll give an example of what I posted. Lets say you have a $1MM portfolio and the variable witdrwal scheme suggests you could take out 5.5 percent annually for the next year. That would give you an income of $55k before taxes.

Then (just) suppose a year later another great recesion hits and your portfolio is now worth half. Your predicted 5.5 percent withdrawal is then only $27.5k. Could you live on that amount ? Maybe - or maybe not.

If you need significantly more than that to live on, and take substantially more out (than the scheme warrants) then the nestegg gets depleted at the worst possible time. If you were to take out the previously determined $55k then your portfolio is not worth less than 90 percent of what it was (forever).

Should the raging bear market last for more than a few years you will be in real trouble - for the rest of your life. At any rate you may have to live with much less than planned.

That's what the post was all about. And that's the (potential) downside to variable withdrwal schemes.



Since a traditional SWR takes a lessor amount out of the nestegg, the effects of prolonged bear markets (perhaps) can be managed better.

Yes, I read what you posted, but you didn't read what I posted.

If a 'great recession' hit and your portfolio was worth half, and you could not live on the 27.5K (plus pension and Social Security), then you were taking on too much risk and your Asset Allocation was wrong to begin with. As an example, Someone that is only 30% stocks and 70% Bonds, would suffer at the Maximum about a 15% Portfolio Loss. (Rule of Thumb - Most you are willing to lose in Percent times 2, should be your stock allocation).

A traditional SWR in the Face of a Bear Market puts your portfolio in even more jeopardy. Using your example of the severe recession that cuts a portfolio in half. The VPW takes about $27.5K, but the fixed 4% SWR still takes an inflation adjusted $40K, which is very damaging to your portfolio, because you are now selling assets when they are down. When the market does turn around again, your portfolio is bigger with VPW than with a fixed SWR and thus will grow bigger.

I think you better study up on this one a bit more before commenting.

 

[haha]

For completeness on this topic:

The potential downside to variable withdrawal rate calculators is that should you retire into a raging bear market, them your appropriate variable withdrwal may not be enough to live on. But should you take out more than specified in those lean years you may be resigning yourself to a life of poverty because you have severely depleted the portfolio before it has a chance to grow again.

And what is the cure for these problems? I thought they were part of reality.

Ha

 

[MasterBlaster]

Yes, I read what you posted, but you didn't read what I posted.

I think you better study up on this one a bit more before commenting.

You,ll have bigger problems than has yet been discussed should you try to pull out 5.5% from a bond-heavy portfolio. Besides being unsustainable, These type portfolios were devistated in the 70"s. Should massive inflation at those or greater rates occur then you'll be in real trouble.

Sorry you (still) can't see the potential weakness in a variable scheme. There is no free-lunch here. The larger withdrwal rate comes with it's own set of issues.

Safe withdrawal rate schemes have that name for a reason.

 

[MasterBlaster]

And what is the cure for these problems? I thought they were part of reality.

Ha

The cure is to not deplete the nestegg so much that it can't (eventually) recover when the markets revert.

 

[Cut-Throat]

You,ll have bigger problems than has yet been discussed should you try to pull out 5.5% from a bond-heavy portfolio. Besides being unsustainable, These type portfolios were devistated in the 70"s. Should massive inflation at those or greater rates occur then you'll be in real trouble.

Sorry you (still) can't see the potential weakness in a variable scheme. There is no free-lunch here. The larger withdrwal rate comes with it's own set of issues.

Safe withdrawal rate schemes have that name for a reason.

If you download the VPW tool, and backtest it against the "70s", you can see the results and decide for yourself. I have no problem with the "70s" or 70% Bonds.

The cure is to not deplete the nestegg so much that it can't (eventually) recover when the markets revert.

And that is exactly what VPW does as opposed to an Inflation Adjusted SWR. So, it sounds like you are advocating VPW.
Which makes me think, You have not even tried the tool or understand the concept.

 

[HillCountry]

This withdraw method can be appropriate depending on how long you plan to live.

For people looking for 25 years, it is quite good, just because it starts with 4% WR.

For people looking for 50 or more years, it does not work at all. 2% WR is just too conservative.

 

[Cut-Throat]

This withdraw method can be appropriate depending on how long you plan to live.

For people looking for 25 years, it is quite good, just because it starts with 4% WR.

For people looking for 50 or more years, it does not work at all. 2% WR is just too conservative.

You've done something wrong !... I just ran VPW for 50 years and the standard VPW starts out with a 3.7% Withdrawal Rate and increases from there.

So, tell us your inputs and how you arrived at 2%

 

[kramer]

This withdraw method can be appropriate depending on how long you plan to live.

For people looking for 25 years, it is quite good, just because it starts with 4% WR.

For people looking for 50 or more years, it does not work at all. 2% WR is just too conservative.

That would only be the beginning withdrawal rate if you assumed a real return of your portfolio of 0%. For instance, if you assumed a real portfolio return of 2% for your 2 cases above the initial withdrawal rate for VPW would be:

Real return of 2% assumed:

Initial SWR for 25 years life expectancy: 5.0%
Initial SWR for 50 years life expectancy: 3.1%

By the way, I just used the web calculator in the link above to produce these numbers in a few seconds.

The withdrawal rate would then be recalculated each year and applied to the current portfolio value.

 

[Cut-Throat]

That would only be the beginning withdrawal rate if you assumed a real return of your portfolio of 0%. For instance, if you assumed a real portfolio return of 2% for your 2 cases above the initial withdrawal rate for VPW would be:

Real return of 2% assumed:

Initial SWR for 25 years life expectancy: 5.0%
Initial SWR for 50 years life expectancy: 3.1%

By the way, I just used the web calculator in the link above to produce these numbers in a few seconds.

The withdrawal rate would then be recalculated each year and applied to the current portfolio value.

And this is why the VPW is better than the simple 'web calculator'. It lets you spend more money earlier with a 3.7% WR instead of 3.1%. And since it also backtests against market history based on your portfolio Asset Allocation, you can see some of the Worst Case Historical results.

 

[walkinwood]

I like these variable withdrawal calculators because, as HA says, they reflect real life. We've adapted to these variations over the past five years of ER.

I plan to study the tool some more, but I think using your life expectancy + some fudge number (say 5) each year may yield an even more useful number. Any thoughts on this?

 

[kramer]

And this is why the VPW is better than the simple 'web calculator'. It lets you spend more money earlier with a 3.7% WR instead of 3.1%. And since it also backtests against market history based on your portfolio Asset Allocation, you can see some of the Worst Case Historical results.

Are you sure you got 3.7% for a 2.0% projected real return rate? I just put the numbers in VPW and got exactly what I posted.

You can tell what the real rate of return assumed by VPW is by looking at what the "internal rate" setting is on the Calculation tab.

If you put in 100% bonds in the VPW tab, for instance, it gives you a 2% real rate and you get exactly the numbers that I posted.

 

[Dreamer]

Thanks, Cut-Throat. I will have to study this and the Boglehead thread later. It is good to see you posting again.

 

[haha]

In principle anyway, this is the same approach that we are confronted with when we do RMDs. Say you turn 70.5 on Jan 1,2010. That year, you are required to withdraw the Dec31, 2009 ending balance divided by your life expectancy as specified in an IRS table. IRA Required Minimum Distributions Table | Bankrate.com

As we can see, it is a fairly conservative method, and although I have not made an in depth comparison with Cut-Throat's favorite, I doubt that they can be very different, or at least very different in effectiveness.

I think everyone understands that one must accept either variability of annual income, or variability of time until the game is over. Or some combination of these two, as in Clyatt's variation.

None of these things can suspend reality.

Ha