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Old 11-21-2014, 08:32 PM   #241
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Cut-throat, I am now giving you an honorary electronic laurel wreath for your contribution here!

I'm coming around to the VPW methodology slowly. Creating a spending pool is a new thought for me. OK, it may be just a mental crutch, but right now it is appealing. Of course, my immediate thought is how should I invest it so it can grow even bigger? Oops, this is becoming circular reasoning.
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Old 11-21-2014, 10:45 PM   #242
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Originally Posted by Cut-Throat View Post
Does FireCalc also seem to good to be true when you end up with far more Millions at the end of your plan than you started with most of the time?
No, it's just descriptive statistics at work.
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Old 11-22-2014, 08:44 AM   #243
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For this very reason, I won't put unspent funds for a given year back into the portfolio, but rather keep in it funds not vulnerable to a long bear market. It can be applied toward lean years when portfolio withdrawals are reduced.
This looks like a version of market timing to me.

Looking at your total asset allocation, you shift to a more conservative ratio when market values get up above X% of your initial value. You plan to move back to your original AA when market values get below Y%.

I'm not saying that's a bad idea, in fact, I find it appealing. But, I think it's a different idea than making my spending track market values.
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Old 11-22-2014, 09:09 AM   #244
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This looks like a version of market timing to me.

Looking at your total asset allocation, you shift to a more conservative ratio when market values get up above X% of your initial value. You plan to move back to your original AA when market values get below Y%.

I'm not saying that's a bad idea, in fact, I find it appealing. But, I think it's a different idea than making my spending track market values.
LOL!

Except there is no timing (anticipating the near-term future) involved, just a reaction to past events, just like rebalancing. Saying there may be a bear market at any point and maintaining a short-term buffer, or saying that investments go up over the long-term and creating an AA accordingly is not timing.

I see my funds as being in two camps: short-term, and long-term. The long-term is invested in a fixed AA that is designed to withstand inflation, and hope for long-term market appreciation in spite of events like bear markets. The short-term is isolated from events like bear markets, and is there to spend now or in the near future. Once it's withdrawn, I don't think it should be risked again - that is all.

People who reinvest their unspent funds are hoping to optimize their long term return. I'm hoping to minimize my short-term volatility in spending year-to-year. I count on my long-term funds only, i.e. my retirement portfolio, to provide the long-term growth, and withdrawal is calculated based only on the long-term funds value.

If it's not obvious, I use a constant % withdrawal method - a fixed % based on end of year portfolio value. So some years I withdraw more than others. Allowing the unspent funds to accumulate simply gives me some "income smoothing" year-to-year rather than dealing with sudden changes in my spending or worrying about suffering a shortfall next year.

I actually keep at least 2 years worth of spending in short-term funds, as well as some monies earmarked for certain one-time expenses. It simply means that large market swings don't have an immediate impact on me, and if I do have to reduce spending, it can be done gradually rather than abruptly.

This is my "sleep at night" strategy and allows me to ignore market volatility.
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Old 11-22-2014, 10:24 AM   #245
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This looks like a version of market timing to me.
Almost any decision to buy or sell can be a version of market timing. However, IMHO, when people talk about market timing they usually are referring to making asset changes based upon some supposed ability to predict the short term future of the market.

When I buy or sell to adjust my AA, I have no idea what the short term market will do. Or even the medium term market. I just figure it will follow the long term past, going up and down at times that are completely unknown to me. Alas, I can't read minds, my crystal ball is cracked, and my time machine is broken.
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Old 11-22-2014, 10:26 AM   #246
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If it's not obvious, I use a constant % withdrawal method - a fixed % based on end of year portfolio value. So some years I withdraw more than others. Allowing the unspent funds to accumulate simply gives me some "income smoothing" year-to-year rather than dealing with sudden changes in my spending or worrying about suffering a shortfall next year.
+1

I think you are very wise.
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Old 11-22-2014, 10:51 AM   #247
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...(snip)...
If it's not obvious, I use a constant % withdrawal method - a fixed % based on end of year portfolio value. So some years I withdraw more than others. Allowing the unspent funds to accumulate simply gives me some "income smoothing" year-to-year rather than dealing with sudden changes in my spending or worrying about suffering a shortfall next year....
I too am using a constant withdrawal percentage. Well at least I thought it was a good idea for the last year.

Looking at VPW, I'm asking myself if the constant I chose was well thought out. VPW is suggesting 5.3% for 2015.

I had figured on maybe 3.5% and that would probably allow us to do a lot of fun things plus not have to skimp in between vacations. SS and medicare help a lot in making 3.5% comfortable. This figure was based on FIRECalc, a personal rebalance spreadsheet with history going way back, plus trying to be conservative.

I think that I can now raise that WR to somewhere higher then 4% at least. I think this will change my way of thinking and actually make spending more enjoyable as opposed to falling into too much of a defensive mindset.

I could put some of any unspent funds into a spending surplus pool as discussed above. But it should not grow too large or I would just be doing saving in a different way and going back to my old parsimonious ways.
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Old 11-22-2014, 11:24 AM   #248
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I too am using a constant withdrawal percentage. Well at least I thought it was a good idea for the last year.

Looking at VPW, I'm asking myself if the constant I chose was well thought out. VPW is suggesting 5.3% for 2015.

I had figured on maybe 3.5% and that would probably allow us to do a lot of fun things plus not have to skimp in between vacations. SS and medicare help a lot in making 3.5% comfortable. This figure was based on FIRECalc, a personal rebalance spreadsheet with history going way back, plus trying to be conservative.

I think that I can now raise that WR to somewhere higher then 4% at least. I think this will change my way of thinking and actually make spending more enjoyable as opposed to falling into too much of a defensive mindset.

I could put some of any unspent funds into a spending surplus pool as discussed above. But it should not grow too large or I would just be doing saving in a different way and going back to my old parsimonious ways.
I'm sticking with the 3.X% something spending rate until I reach 65 years. Then I'll reevaluate.

If my unspent funds appear to be growing too much, I'll just start spending a bit more.
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Old 11-23-2014, 09:21 AM   #249
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LOL!

Except there is no timing (anticipating the near-term future) involved, just a reaction to past events, just like rebalancing. Saying there may be a bear market at any point and maintaining a short-term buffer, or saying that investments go up over the long-term and creating an AA accordingly is not timing.

I see my funds as being in two camps: short-term, and long-term. The long-term is invested in a fixed AA that is designed to withstand inflation, and hope for long-term market appreciation in spite of events like bear markets. The short-term is isolated from events like bear markets, and is there to spend now or in the near future. Once it's withdrawn, I don't think it should be risked again - that is all.

People who reinvest their unspent funds are hoping to optimize their long term return. I'm hoping to minimize my short-term volatility in spending year-to-year. I count on my long-term funds only, i.e. my retirement portfolio, to provide the long-term growth, and withdrawal is calculated based only on the long-term funds value.

If it's not obvious, I use a constant % withdrawal method - a fixed % based on end of year portfolio value. So some years I withdraw more than others. Allowing the unspent funds to accumulate simply gives me some "income smoothing" year-to-year rather than dealing with sudden changes in my spending or worrying about suffering a shortfall next year.

I actually keep at least 2 years worth of spending in short-term funds, as well as some monies earmarked for certain one-time expenses. It simply means that large market swings don't have an immediate impact on me, and if I do have to reduce spending, it can be done gradually rather than abruptly.

This is my "sleep at night" strategy and allows me to ignore market volatility.
I suppose we're using "market timing" differently. I'm using it to mean:
A. changing your total asset allocation in response to some economic indicator. In this case, the indicator is "market value of the long term portion of my total asset portfolio".

You're using it to mean:
B. changing your total asset allocation based on a belief that you have a better crystal ball than other investors.

I can see that you are not doing B. But, I think you are doing A.

The standard concern about percent-of-current-balance withdrawal strategies is that they assume the followers will accept substantial swings in their annual spending. But, that statement assumes that people are going to spend exactly 100% of what they withdraw.

You've got a different plan. You're stabilizing your spending by adding another asset class. If we wanted to backtest your plan, we would need to add a short term asset column to the VPW worksheet and have money going into and coming out of that column at various times based on some rule that seems reasonable to you.

Again, I'm not saying it's a bad plan, just that it's different from the VPW worksheet.
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Old 11-23-2014, 09:26 AM   #250
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Almost any decision to buy or sell can be a version of market timing. However, IMHO, when people talk about market timing they usually are referring to making asset changes based upon some supposed ability to predict the short term future of the market.

When I buy or sell to adjust my AA, I have no idea what the short term market will do. Or even the medium term market. I just figure it will follow the long term past, going up and down at times that are completely unknown to me. Alas, I can't read minds, my crystal ball is cracked, and my time machine is broken.
As above, I think we may not be communicating due to different meanings for the same words.

Suppose I buy and sell solely to maintain a fixed asset allocation. I would not call that "market timing".

I'm using "market timing" to mean some deliberate change in asset allocation. As in the post above, I can think of at least two different reasons for that type of change.
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Old 11-23-2014, 09:42 AM   #251
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I suppose we're using "market timing" differently. I'm using it to mean:
A. changing your total asset allocation in response to some economic indicator. In this case, the indicator is "market value of the long term portion of my total asset portfolio".

You're using it to mean:
B. changing your total asset allocation based on a belief that you have a better crystal ball than other investors.
I've always though of "market timing" as definition B -- i.e. changes in asset allocation due to some prediction of the future market directions.

If you use definition A, wouldn't pretty much every form of rebalancing be market timing?


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Suppose I buy and sell solely to maintain a fixed asset allocation. I would not call that "market timing".
But isn't this based on market values as per your indicator in example A?
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Old 11-23-2014, 10:26 AM   #252
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Old 11-23-2014, 11:14 AM   #253
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I was curious how my withdrawals over the last 10 years compared to what VPW suggests. Over the last 10 years our compounded withdrawal rate was about 5.0% per year. Most of this was before taking SS.

It turns out that although our withdrawals fluctuated a lot, they were almost identical to what VPW suggests. This is based on my age when I first retired and our current allocations (which actually fluctuated a bit over the last 10 years).

So in a round about way, I was using VPW all the time.
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Old 11-23-2014, 12:02 PM   #254
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This is a useful finding that may be counter-intuitive to some and of particular use to anyone who is looking to optimize their withdrawals. Even to those of us who have more conservative WR's, it can't hurt to know that the extra chunk of discretionary spending we were dreaming of will adversely affect the portfolio less, if taken during good times.
It will affect it even less if we detour on the way to buying our cruise tickets and put it in conservative intermediate bonds.

Ha
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Old 11-23-2014, 04:26 PM   #255
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I've always though of "market timing" as definition B -- i.e. changes in asset allocation due to some prediction of the future market directions.

If you use definition A, wouldn't pretty much every form of rebalancing be market timing?

But isn't this based on market values as per your indicator in example A?
Yes, we could label "rebalancing to maintain a fixed ratio" as "market timing". Or not, depending on what we are trying to communicate.

I don't want to argue definitions. My use of "market timing" was clearly a distraction from my point.

I was simply saying that Audrey's strategy seems mostly about changing asset allocations in hopes of maintaining a reasonably level spending pattern and long term sustainability.

VPW (at least as Cut-Throat has described it) seems more about maximizing your spending by accepting a very variable spending pattern.
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Old 11-23-2014, 04:34 PM   #256
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I suppose we're using "market timing" differently. I'm using it to mean:
A. changing your total asset allocation in response to some economic indicator. In this case, the indicator is "market value of the long term portion of my total asset portfolio".

You're using it to mean:
B. changing your total asset allocation based on a belief that you have a better crystal ball than other investors.

I can see that you are not doing B. But, I think you are doing A.

The standard concern about percent-of-current-balance withdrawal strategies is that they assume the followers will accept substantial swings in their annual spending. But, that statement assumes that people are going to spend exactly 100% of what they withdraw.

You've got a different plan. You're stabilizing your spending by adding another asset class. If we wanted to backtest your plan, we would need to add a short term asset column to the VPW worksheet and have money going into and coming out of that column at various times based on some rule that seems reasonable to you.

Again, I'm not saying it's a bad plan, just that it's different from the VPW worksheet.
I'm not using VPW. I haven't studied it either. I only use asset allocation in my retirement fund, the one I withdraw from annually according to a constant % withdrawal, and I don't change that AA based on economic conditions, so I don't consider that I'm changing my AA. What I do with the funds after withdrawal have no bearing whatsoever. IMO there is no requirement that absolutely all your assets be managed as a single asset allocation.
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Old 11-23-2014, 09:30 PM   #257
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I'm not using VPW. I haven't studied it either. I only use asset allocation in my retirement fund, the one I withdraw from annually according to a constant % withdrawal, and I don't change that AA based on economic conditions, so I don't consider that I'm changing my AA. What I do with the funds after withdrawal have no bearing whatsoever. IMO there is no requirement that absolutely all your assets be managed as a single asset allocation.
Understood that you don't consider it market timing because you "don't change that AA based on economic conditions" but, it absolutely does have a bearing, for the reason listed below. Likely a good one, since you seem to be saying you save some of the withdrawal but, a 'bearing' (impact) nonetheless.

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It will affect it even less if we detour on the way to buying our cruise tickets and put it in conservative intermediate bonds.

Ha
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Old 11-23-2014, 10:10 PM   #258
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Understood that you don't consider it market timing because you "don't change that AA based on economic conditions" but, it absolutely does have a bearing, for the reason listed below. Likely a good one, since you seem to be saying you save some of the withdrawal but, a 'bearing' (impact) nonetheless.
What bearing? Withdrawal and spending are two different animals. I simply don't force myself to spend all I withdraw, and I don't reinvest it to risk it in the retirement portfolio either, but leave it earmarked for near term spending whenever or however I choose.

I don't need to take less out of the portfolio just because I can spend less in any given year if I choose. I have already determined a withdrawal rate I think is fairly safe but not overly conservative, and there is no need to withdraw less. I am also managing against the portfolio growing too large. I don't want to run out of funds, but I don't want to end up with a huge portfolio at the end either.

That is another reason I chose the constant withdrawal percent method [aka % remaining portfolio method] which does in fact withdraw more $ after a good market run.

And I don't put excess (not spent right away) in intermediate bond funds either as those are appropriate for money not needed before 5 years, and I consider that I might need the excess much sooner than that. I might need some of it in a year, so I don't risk it in long or intermediate-term investments.
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Old 11-23-2014, 10:19 PM   #259
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I think Audrey is doing a fine job managing investments and spending.

How about getting back to the main subject, VPW. What are you guys thinking of doing with VPW? Or are you giving it any thought?
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Old 11-23-2014, 11:11 PM   #260
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Sorry - I piped up when discussions were sparked longinvest's observations of what can happen to funds left in the portfolio.

And by Cut-throat's additional info:

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I am taking the defaults and am actually withdrawing what VPW tells me to. It goes into a Cash "Spending Account", never to be invested again. You can also use this account to "Buffer" shortfalls in Withdrawals.
Due to the principle that
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The main idea is to 'Get the money out of the Market' when VPW tells you to. Plans work! Execute the Plan!

VPW is a disciplined approach to removing more money from the Markets (Stock/Bond) during up market years and removing less from down market years.
As my method behaves in a similar way, even though it may not be as optimized.

I will probably gradually increase my % withdrawal number as we age, evaluating, say, every 5 years.

I am definitely an advocate of taking more $ out of the market after good years, regardless of whether you can spend it all right away.
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