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Old 11-24-2014, 09:15 AM   #261
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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.
It has an impact because you keep the money; it becomes part of your NW, even if for a short while. That impacts your AA, which impacts the return and value of your portfolio. What you are doing is establishing a 'cash buffer' with the additional funds. Cash buffers create PF drag.

BTW, I like 'cash buffers.' We use one (CD ladder + ST bond fund) but, we do it up front as part of our selected AA. I like them because the peace of mind helps, and I'm willing to accept the PF drag as a price for the peace of mind.

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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?
Actually, I think this is central to the discussion of VPW; which is why the "withdrawal but don't spend" distinction has been made numerous times in this thread. I expect there are many who evaluate/consider VPW and, as part of that consideration, evaluate the 'withdrawal per VPW but don't spend it all' approach. What happens to those funds impacts PF performance and terminal value, which seems very relevant to me when discussing any systematic WD methodology.
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Old 11-24-2014, 09:24 AM   #262
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I have a cash buffer in my AA (5 years of expenses in CDs & Short Term Bonds). If I were to move to VPW I would shorten the cash buffer to 3 years. VPM does not have short term / cash as part of its portfolio calculation, but I wouldn't sleep at night with less than 3 years cash buffer. Any excess withdrawals in good years would go to add to my cash buffer back to a max of 5 years expenses. That probably blows the entire theory of VPW but I need to sleep at night
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Old 11-24-2014, 09:38 AM   #263
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Actually, I think this is central to the discussion of VPW; which is why the "withdrawal but don't spend" distinction has been made numerous times in this thread. I expect there are many who evaluate/consider VPW and, as part of that consideration, evaluate the 'withdrawal per VPW but don't spend it all' approach. What happens to those funds impacts PF performance and terminal value, which seems very relevant to me when discussing any systematic WD methodology.
I agree. Was trying to get us away from the "is, is not" market timing thoughts.

I'm still thinking about the unused VPW spending question. For our age and portfolio AA, VPW tells me to spend 5.3% next year and suppose I only spend 4%. Things I could do to keep track of it:
1) Just make an entry in my spreadsheet as unspent money to track. The equivalent amount should be in near cash, maybe even short term bonds.
2) Keep it entirely in a separate "spend" account with no equity exposure and not think of it as even part of the "investment portfolio".
3) Make the appropriate adjust to VPW's "Depletion Years" to get WR=4% for my current year's withdrawal. In our case this would be 80 years and mean the portfolio will last until I'm about 147 years old.
4) Reduce equities to get WR = 4%. In our case that would mean 0% equities.

I'm tending to favor #1. Looking at #3 and #4 shows me just how conservative a 4% withdrawal rate really is for our age. Interesting.
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Old 11-24-2014, 09:41 AM   #264
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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.
Ahhh...... Very good. I think that strategy is called 'selling high'.

Like my old grandpappy used to say 'Buy Low, Sell High. Works every time'.
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Old 11-24-2014, 09:43 AM   #265
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Like my old grandpappy used to say 'But Low, Sell High. Works every time'.
You left off a "t"...
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Old 11-24-2014, 09:52 AM   #266
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Here's a new thread discussing multiple retirement calculators. It's a good reference point to begin comparisons. And, the cFIREsim calculator is already pre-loaded with VPW for those who want to evaluate scenarios or compare VPW to other variable withdrawal methods.

Best Retirement Calculators-A good starting point
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Old 11-24-2014, 09:53 AM   #267
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You left off a "t"...
Fixed. Dang keyboard must be defective.
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Old 11-24-2014, 10:10 AM   #268
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It has an impact because you keep the money; it becomes part of your NW, even if for a short while. That impacts your AA, which impacts the return and value of your portfolio. What you are doing is establishing a 'cash buffer' with the additional funds. Cash buffers create PF drag.

BTW, I like 'cash buffers.' We use one (CD ladder + ST bond fund) but, we do it up front as part of our selected AA. I like them because the peace of mind helps, and I'm willing to accept the PF drag as a price for the peace of mind.



Actually, I think this is central to the discussion of VPW; which is why the "withdrawal but don't spend" distinction has been made numerous times in this thread. I expect there are many who evaluate/consider VPW and, as part of that consideration, evaluate the 'withdrawal per VPW but don't spend it all' approach. What happens to those funds impacts PF performance and terminal value, which seems very relevant to me when discussing any systematic WD methodology.
Allowing extra cash, particularly after "good years" to accumulate in a spending buffer, is a perfectly natural reaction to a variable income stream. So you'll probably see it used with any method where some years have higher $$ coming in than others. This kind of "income smoothing" is just common sense and offers one solution to folks squeamish about living with a variable income. There is no requirement to spend all you withdraw in a single year. If you get a sudden 15-20% rise in income after a spectacular year like 2013, why do you have to spend it all immediately?

There is also simply no requirement that one's entire net worth be managed as a single AA. I would go further to say that's preposterous.

The only "rule" perhaps, is that whatever collection of investments on has set aside whose purpose is "for very long-term investment and withdrawal for income during retirement", might be wisely managed and rebalanced using a target AA, as from this you can model withdrawal rates and survivability and volatility against various asset allocations (taking into account inflation), and pick what you think might work well enough for you to stick with it for the decades you hopefully are invested.

I see the comment about cash buffers are a performance drag all the time. So what? I have already decided to choose an AA rather than go 100% small cap stocks, because I'm not looking to maximize my long-term performance at the expense of the volatility that concentration would cause. By choosing an AA that includes fixed income, you've already created a major performance "drag".

I have setup my retirement portfolio, target AA, and withdrawal % to match what I think I can stick with. It doesn't matter if I could perhaps withdraw more $$ from somewhere if I counted ALL my assets. I just know what I can probably count on withdrawal for this retirement pool of money over the long run, regardless of what my other investments are doing.

I have X monies set aside for funding retirement with an annual draw. I have other monies set aside for short-term spending, and various other shorter term things, and some earmarked for potential health expenses down the road. I even have some other much riskier investments that I have owned for a long time, and that if they went "poof" wouldn't mess up my retirement income. Someone saving for college for their children, and for retirement, hopefully manages them separately as they are two separate investment pools with different time lines and goals. Same difference.
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Old 11-24-2014, 10:19 AM   #269
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I agree. Was trying to get us away from the "is, is not" market timing thoughts.

I'm still thinking about the unused VPW spending question. For our age and portfolio AA, VPW tells me to spend 5.3% next year and suppose I only spend 4%. Things I could do to keep track of it:
1) Just make an entry in my spreadsheet as unspent money to track. The equivalent amount should be in near cash, maybe even short term bonds.
2) Keep it entirely in a separate "spend" account with no equity exposure and not think of it as even part of the "investment portfolio".
3) Make the appropriate adjust to VPW's "Depletion Years" to get WR=4% for my current year's withdrawal. In our case this would be 80 years and mean the portfolio will last until I'm about 147 years old.
4) Reduce equities to get WR = 4%. In our case that would mean 0% equities.

I'm tending to favor #1. Looking at #3 and #4 shows me just how conservative a 4% withdrawal rate really is for our age. Interesting.
Obviously I do #2, and do not think of it as part of the "retirement investment portfolio" once it's withdrawn.

I do keep short-term funds in separate accounts from the brokerage funds that make up our retirement investment portfolio. Beats a spreadsheet, IMO, as it keeps things very clean.

I can't speak to 3) and 4) as I don't use the VPW calculator.

I don't believe I would ever reduce equities below 40% in my retirement AA, as the long-term inflation-adjusted survivability really rolls off after that point. Well, maybe if I make it to 80 I will.
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Old 11-24-2014, 10:20 AM   #270
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The opportunity cost of cash buffers can be thought of as being similar to an insurance premium we pay to protect us against having to sell to much when the market is to low. Like any insurance we need to balance the price versus the potential benefits.
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Old 11-24-2014, 10:33 AM   #271
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Obviously I do #2, and do not think of it as part of the "retirement investment portfolio" once it's withdrawn.

I do keep short-term funds in separate accounts from the brokerage funds that make up our retirement investment portfolio. Beats a spreadsheet, IMO, as it keeps things very clean.
#2 is fine, I think.

Perhaps another way is to just adjust the AA. For instance, a 60/40 portfolio goes to a 59/41 if one spends 1% less then VPW tells them to in that year. Then one would be continually playing with the AA depending on their spending history. The money set aside is still put into short term investments.

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I can't speak to 3) and 4) as I don't use the VPW calculator.
...
Don't know if you have Excel or LibreOffice (spell?) but I think it worthwhile to at least play with one's own parameters.
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Old 11-24-2014, 10:50 AM   #272
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#2 is fine, I think.

Perhaps another way is to just adjust the AA. For instance, a 60/40 portfolio goes to a 59/41 if one spends 1% less then VPW tells them to in that year. Then one would be continually playing with the AA depending on their spending history. The money set aside is still put into short term investments.

Don't know if you have Excel or LibreOffice (spell?) but I think it worthwhile to at least play with one's own parameters.
I know I have already spent quite a bit of time in this thread reading posts (I did go back and read all), and posting. But at this point after reading, I'm not inclined to play with more spreadsheets and models simply because I'm pretty comfortable with my current system and I have lots of other things keeping me quite busy.

Doing the evaluation might mean I decide I can withdraw more annually than I am and that my current approach is too conservative. But I'm content with my current income. I can reevaluate options at any point in the future.

I only have Numbers, but it might be able to handle the file without critical errors.
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Old 11-24-2014, 11:24 AM   #273
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I don't want to push this too much. Just want to say that VPW is extremely easy to manage.

Basically there are only about 4 critical inputs to manage (age, US stock %, Intl stock %, portfolio size). "Depletion Years" is currently set so the total portfolio goes to age 100, but this can be adjusted to control the very late life estate value. "Start Year" is just for data analysis purposes.
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Old 11-24-2014, 11:39 AM   #274
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I don't want to push this too much. Just want to say that VPW is extremely easy to manage.

Basically there are only about 4 critical inputs to manage (age, US stock %, Intl stock %, portfolio size). "Depletion Years" is currently set so the total portfolio goes to age 100, but this can be adjusted to control the very late life estate value. "Start Year" is just for data analysis purposes.
Sure - I can run it, but then I have to dig in to make sure I understand what is really going on. The posts here tell me that such digging and study will be very important.
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Old 11-24-2014, 01:16 PM   #275
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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.
Okay, I'm saying that Cut-throat likes the idea of making percent-of-current-portfolio withdrawals, and spending the amount withdrawn, because he thinks that maximizes his withdrawals without developing unacceptable risks. He understands that this makes his spending quite variable because it will fluctuate with market values.

I think you're making percent-of-current-portfolio withdrawals, and sometimes using part of the withdrawal to buy short term fixed income assets, because you want to stabilize your income. You feel that this approach helps you get money "off the table" when market prices are high, so you don't feel that you need to cut your spending sharply when the market goes down.

What you do with the funds after you withdraw them from your long term assets has no bearing on the asset allocation within your long term assets. However, I specified your "total" asset allocation. I intended the word "total" to mean all of your assets, not just the assets in your long term fund.

Unless I'm really confused, you expect to sell stocks most years. But, when stocks are up sharply, some of the proceeds will be used to buy short term assets.

Again, this is just wording. You want to use "asset allocation" to refer only to the assets in your long term fund. I am using "total asset allocation" to refer to all of your assets. If you like, I could have said:

"Looking at everything you own, you shift to a more conservative ratio when market values get up above X% of your initial value. You plan to move back to a less conservative ratio when market values get below Y%."
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Old 11-24-2014, 01:32 PM   #276
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Okay, I'm saying that Cut-throat likes the idea of making percent-of-current-portfolio withdrawals, and spending the amount withdrawn, because he thinks that maximizes his withdrawals without developing unacceptable risks. He understands that this makes his spending quite variable because it will fluctuate with market values.

I think you're making percent-of-current-portfolio withdrawals, and sometimes using part of the withdrawal to buy short term fixed income assets, because you want to stabilize your income. You feel that this approach helps you get money "off the table" when market prices are high, so you don't feel that you need to cut your spending sharply when the market goes down.

What you do with the funds after you withdraw them from your long term assets has no bearing on the asset allocation within your long term assets. However, I specified your "total" asset allocation. I intended the word "total" to mean all of your assets, not just the assets in your long term fund.

Unless I'm really confused, you expect to sell stocks most years. But, when stocks are up sharply, some of the proceeds will be used to buy short term assets.

Again, this is just wording. You want to use "asset allocation" to refer only to the assets in your long term fund. I am using "total asset allocation" to refer to all of your assets. If you like, I could have said:

"Looking at everything you own, you shift to a more conservative ratio when market values get up above X% of your initial value. You plan to move back to a less conservative ratio when market values get below Y%."
I don't manage my total assets as a single allocation. I don't understand why you keep emphasizing "total assets" since I don't use them to calculate my withdrawal either. Where is this requirement that ALL (investable, I assume) assets I own be managed and rebalanced as a single AA coming from?

I don't sell only stocks most years in my retirement portfolio. I sell whatever is needed to rebalance to the target AA (which is ~53% equities) after withdrawal. Some years bonds perform well too. It's just the normal process.

Cutthroat stated clearly that he also lets his unspent cash build in a cash buffer, and for much the same reason - income smoothing. His spending is independent of his withdrawal, just like mine. His spending doesn't have to be variable just because his withdrawal is.
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Old 11-24-2014, 01:46 PM   #277
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Personally, I think that it can be perfectly normal to put some of the excess withdrawal money (during a bull market) temporarily aside in a savings account (or short-term CD). For example, I might plan to use that money next year on a vacation, instead of this year. I already do that when I plan to make a big purchase (like a car), during my accumulation years.

But, I do not see that as a way to stabilize withdrawals. For that to work, I would need to know when and how long the next bear market will be.

In other words: It's not a few thousands of dollars put aside in a savings account that would have protected a 1966 retiree against inflation in the 1970s. I'm pretty sure that the cash reserve would have been depleted long before 1982.
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Old 11-24-2014, 01:57 PM   #278
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Personally, I think that it can be perfectly normal to put some of the excess withdrawal money (during a bull market) temporarily aside in a savings account (or short-term CD). For example, I might plan to use that money next year on a vacation, instead of this year. I already do that when I plan to make a big purchase (like a car), during my accumulation years.

But, I do not see that as a way to stabilize withdrawals. For that to work, I would need to know when and how long the next bear market will be.

In other words: It's not a few thousands of dollars put aside in a savings account that would have protected a 1966 retiree against inflation in the 1970s. I'm pretty sure that the cash reserve would have been depleted long before 1982.
Yes, I agree on that! --- I have a cash buffer mostly because my spending is not smooth from year to year.

I think anyone that employs VPW should be prepared to Live on 50% of the Initial Withdrawal Amount (Inflation Adjusted), if the times get 'rough'.

To enjoy the Extra Safety and higher Withdrawal Amounts that VPW provides over a Fixed SWR + Inflation amount, you have to willing to accept variable withdrawals. Otherwise you are probably better off to take your 2.5-4% Fixed Withdrawal + Inflation amount. Even though, when times get rough, I'll bet you cut back anyway!
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Old 11-24-2014, 02:19 PM   #279
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Personally, I think that it can be perfectly normal to put some of the excess withdrawal money (during a bull market) temporarily aside in a savings account (or short-term CD). For example, I might plan to use that money next year on a vacation, instead of this year. I already do that when I plan to make a big purchase (like a car), during my accumulation years.

But, I do not see that as a way to stabilize withdrawals. For that to work, I would need to know when and how long the next bear market will be.

In other words: It's not a few thousands of dollars put aside in a savings account that would have protected a 1966 retiree against inflation in the 1970s. I'm pretty sure that the cash reserve would have been depleted long before 1982.
Depending on your spending versus what your retirement fund is providing as withdrawn income, this might not be just "a few thousand". It might be quite significant after a few years. Some people might jump up their spending to match immediately, but I choose to increase my spending more gradually, or not increase it at all if my expenses don't happen to rise in a given year. I don't feel compelled to spend every last $ each year.

Some of the excess can be earmarked for a new car, or more travel at some point, and we do both of those. But if unspent, those funds are still available if you have a sudden reduction in the amount withdrawn from the retirement portfolio in a given year and you can choose to supplement it with the cash set aside for "splurges".

For a long bear market, you have to set your asset allocation and withdrawal rate such that your portfolio can survive even while withdrawing. That has nothing to do with what you do with your income after it is withdrawn.

I also have an extra year of expenses set aside in cash, and I have from the start when I adopted my % of remaining portfolio strategy. Assuming my portfolio income drops 20% and stays stuck for several years, that extra cash can help smooth things even if I have to gradually reduce spending over several years. I think that's way better than a sudden shock, and that's good enough "smoothing" for me.
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Old 11-24-2014, 02:27 PM   #280
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Depending on your spending versus what your retirement fund is providing as withdrawn income, this might not be just "a few thousand". It might be quite significant after a few years. Some people might jump up their spending to match immediately, but I choose to increase my spending more gradually, or not increase it at all if my expenses don't happen to rise in a given year. I don't feel compelled to spend every last $ each year.

Some of the excess can be earmarked for a new car, or more travel at some point, and we do both of those. But if unspent, those funds are still available if you have a sudden reduction in the amount withdrawn from the retirement portfolio in a given year and you can choose to supplement it with the cash set aside for "splurges".

For a long bear market, you have to set your asset allocation and withdrawal rate such that your portfolio can survive even while withdrawing. That has nothing to do with what you do with your income after it is withdrawn.

I also have an extra year of expenses set aside in cash, and I have from the start when I adopted my % of remaining portfolio strategy. Assuming my portfolio income drops 20% and stays stuck for several years, that extra cash can help smooth things even if I have to gradually reduce spending over several years. I think that's way better than a sudden shock, and that's good enough "smoothing" for me.
Not to ruin a perfectly good thread. But IF ONLY our government would follow a similar strategy in good and bad times. VPW for managing the federal budget!!!!
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