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Old 10-17-2013, 10:48 AM   #21
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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.
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Old 10-17-2013, 11:02 AM   #22
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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?
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Old 10-17-2013, 11:15 AM   #23
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Originally Posted by Cut-Throat View Post
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.
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Old 10-17-2013, 11:15 AM   #24
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Thanks, Cut-Throat. I will have to study this and the Boglehead thread later. It is good to see you posting again.
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Old 10-17-2013, 11:23 AM   #25
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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
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Old 10-17-2013, 11:23 AM   #26
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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.
You are using a 'Custom VPW' and I used the Standard VPW based on Asset Allocation of 70% Bonds and 30% Stocks. Change the AA to 70% Stocks and you get an initial WR of 4.5% (which is not unreasonable, just backtest it against against any of the Bad retirement years - 1937, 1966, 1929 etc. etc.)

In fact I am not even sure how you would input 2% projected real return in VPW, unless the sheet was changed. Where do you input 2%?
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Old 10-17-2013, 11:54 AM   #27
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You are using a 'Custom VPW' and I used the Standard VPW based on Asset Allocation of 70% Bonds and 30% Stocks. Change the AA to 70% Stocks and you get an initial WR of 4.5% (which is not unreasonable, just backtest it against against any of the Bad retirement years - 1937, 1966, 1929 etc. etc.)

In fact I am not even sure how you would input 2% projected real return in VPW, unless the sheet was changed. Where do you input 2%?
Yes, I get the same number that you do when I put in 30% domestic stocks and 70% bonds into the VPW spreadsheet. But all this is doing is generating a projected real return number and basing the withdrawal calculation entirely off of this single number (plus life expectancy). In the case you describe, the real return number assumed by VPW is 2.9%. The web calculator gets the same 3.7% initial withdrawal rate using 2.9%.

I got the 2% real number by inputting 100% bonds. I just picked 2% real out of the air to explain to the previous poster what he was doing wrong.

Anyway, this is all VPW is doing (besides also backtesting). The entire withdrawal calculation is based on that single real return number. I think it is fundamental to understanding what VPW is really doing. No one seemed to explain this on those bogleheads threads. It is important to understand the assumptions.
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Old 10-17-2013, 12:01 PM   #28
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Anyway, this is all VPW is doing (besides also backtesting). The entire withdrawal calculation is based on that single real return number. I think it is fundamental to understanding what VPW is really doing. No one seemed to explain this on those bogleheads threads. It is important to understand the assumptions.
VPW certainly cannot predict the future. And Backtesting is a Big Deal. It's all we got. Firecalc would do nothing at all, if it wasn't for backtesting.

And while the percentage of withdrawal is based on the Withdrawal Calculation. The Amount is based on the remaining portfolio balance and is backtested too.

So, I think that's about all we can do.
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Old 10-17-2013, 12:07 PM   #29
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So playing around with it a bit, it seems to just come up with a withdraw percentage based on your AA and maybe beginning and ending age?
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Old 10-17-2013, 12:08 PM   #30
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Yes, backtesting of VPW is certainly useful.

Also, since VPW never fails but just lowers the withdrawals in bad return scenarios, it is very important to look closely at scenarios to see if one would have really wanted to cut back that much, for instance.

While balancing that with probable increased lifetime consumption using VPW as compared to other methods like the standard inflation-adjusted SWR we often discuss.
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Old 10-17-2013, 12:40 PM   #31
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Originally Posted by haha View Post
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
Boy, those rmds are real conservative (assumes one lives to over 97 years old). Dist. period goes up by a factor of .9 per year. Guess if one wanted to assume living this old, you could subtract your present age from 97 and use this figure to divide into your nest egg on annual basis. Probably would result in leaving some coin on the table after you are put in the ground. Kiddies might be happy.
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Old 10-17-2013, 12:41 PM   #32
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I am not clear on what kind of backtesting VPW is doing. Is it just using historical numbers to get the real rate of return based on asset allocation or is it actually testing for failure using its withdrawal rates, time frame & historical asset returns? Need to go back to that thread and see if that's been addressed.
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Old 10-17-2013, 12:48 PM   #33
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I am not clear on what kind of backtesting VPW is doing. Is it just using historical numbers to get the real rate of return based on asset allocation or is it actually testing for failure using its withdrawal rates, time frame & historical asset returns? Need to go back to that thread and see if that's been addressed.
VPW cannot fail. The rate of return is a Fixed average based on your Asset Allocation. As far as backtesting, It will adjust your withdrawal amount from your remaining portfolio balance, as well as the backtested dates actual return rate. It also compares VPW to Std SWR and other withdrawal mthods.
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Old 10-17-2013, 01:08 PM   #34
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Cut-Throat,

I downloaded the tool, and tried it with my parameters:

2.3M
35 years
75/25 AA
(My estimated ER expense: $92,000)

One issue that I encountered is, when backtested from 1972, I will have a string of 11 years ('75 to '85) with much lower assets to withdraw using 'Var. %' method. Those would be much lower than my estimated ER expense. (Planned to ER next year.)

'Cost. $' method is the only one with enough assets withdrawn yearly to meet the expenses.

How do you adjust for this to use 'Var. %' method? Keep working few more years to build up a larger asset to begin with?
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Old 10-17-2013, 01:15 PM   #35
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Cut-Throat,

I downloaded the tool, and tried it with my parameters:

2.3M
35 years
75/25 AA
(My estimated ER expense: $92,000)

One issue that I encountered is, when backtested from 1972, I will have a string of 11 years ('75 to '85) with much lower assets to withdraw using 'Var. %' method. Those would be much lower than my estimated ER expense. (Planned to ER next year.)

'Cost. $' method is the only one with enough assets withdrawn yearly to meet the expenses.

How do you adjust for this to use 'Var. %' method? Keep working few more years to build up a larger asset to begin with?
Be Flexible. And remember, you probably will get Social Security and this does not drop with inflation, which is what your 1972-1983 time frame had a lot of. And doesn't constant Dollar eventually fail and you get nothing? Looks like you are completely broke with 10 years left to go in your plan to me with Constant $.

And remember no withdrawal tool will save you from reality. This is just a planning tool. It does not guarantee a $92 Grand a year lifestyle. If we get a decade of double digit inflation, Your Social Security will be about the only thing that saves you.
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Old 10-17-2013, 09:13 PM   #36
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Thanks for interesting topic & download.
VPW might be better if it inc more AA options. Holding short vs long term bonds can yield quite different returns over time.
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Old 10-17-2013, 09:18 PM   #37
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As was discussed on the BH forum, (C)VPW isn't for everybody. If you do want to maximize the use of your entire portfolio, if you have quite some flexibility in your spend, and if you have some cushion (e.g. SS, annuity, etc) to help you deal with the rough times, then it works great.

On the other hand, if you want to leave a significant legacy, or want to preserve your portfolio as a guarantee against LTC costs in your twilight years, or have no stomach for a highly variable annual spend, then maybe this isn't for you. Using life expectancy as an input parameter also makes me a bit nervous, who knows what's going to happen 30 to 40 years from now.

In any case, this is certainly a very useful addition to the set of possible withdrawal methods. And as the author emphasized, this isn't a full retirement plan, and it might be wise considering to apply it to part of your savings, not all of it.

PS. I did a LOT of backtesting with it, using my own Excel sheet and more diverse AA choices. And yes, as some of you pointed out, it does overreact to bear markets while maintaining a higher annual spend would actually be fine. It's actually not hard to tweak by adding a minimal floor on your spend. You just need to be careful to keep enough room for spend variations. Then it fits well with a dual-budget strategy, and gets more realistic.
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Old 10-17-2013, 10:05 PM   #38
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As was discussed on the BH forum, (C)VPW isn't for everybody. If you do want to maximize the use of your entire portfolio, if you have quite some flexibility in your spend, and if you have some cushion (e.g. SS, annuity, etc) to help you deal with the rough times, then it works great.

On the other hand, if you want to leave a significant legacy, or want to preserve your portfolio as a guarantee against LTC costs in your twilight years, or have no stomach for a highly variable annual spend, then maybe this isn't for you. Using life expectancy as an input parameter also makes me a bit nervous, who knows what's going to happen 30 to 40 years from now.

In any case, this is certainly a very useful addition to the set of possible withdrawal methods. And as the author emphasized, this isn't a full retirement plan, and it might be wise considering to apply it to part of your savings, not all of it.

PS. I did a LOT of backtesting with it, using my own Excel sheet and more diverse AA choices. And yes, as some of you pointed out, it does overreact to bear markets while maintaining a higher annual spend would actually be fine. It's actually not hard to tweak by adding a minimal floor on your spend. You just need to be careful to keep enough room for spend variations. Then it fits well with a dual-budget strategy, and gets more realistic.
Thank you for testing the spreadsheet. I agree that it is a useful tool.

In my case the Random option is of interest. I switched to that and pressed the F9 key to spin the wheel, so to speak.
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Old 10-18-2013, 04:03 PM   #39
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I've been using Retirement Calculator - Parameter Form and also tried esplanner.com basic free version Home | ESPlannerBasic I thought both were quite good for us at age 79. I'll try the one mentioned here and compare. The simpler the better as there is much I don't need.
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Old 10-19-2013, 11:05 AM   #40
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The Boglehead thread starts with "for a withdrawal method I've thought up ...". I'm sure this is an original idea to the writer, but the general category of withdrawal percentages that are 1/a, where "a" = present value of an annuity at current age, has been around for a long time.

As Kramer points out, RMD's are in this category, where "a" is the pv of a fixed annuity to the current life expectancy, at a 0% discount.
IIRC, the payout phase of a variable annuity has this form, where "a" is the pv of a life annuity with some assumed rate of about 3%.

In this version, "a" is the pv of a fixed annuity to some, pre-determined, date of death, at a discount rate that's a historic average return on an input AA.
I expect if we dig back into old posts on this forum, we'll see references to this method.

All percent of portfolio methods share the problem of poor early returns. They require spending cuts roughly proportional to the portfolio shrinkage in down markets. People may say "I can be flexible" without looking at past data and really facing the issue of what they will cut if they happen to hit the bad stretch. Running this worksheet with a 60/40 AA and starting in 1973 gives an initial withdrawal of $50,000, rapidly dropping to $29,900, which begins a 10 year stretch where the average withdrawal is $32,500. Somebody using this method needs to think about that $32,500 pretty carefully.

And, they all have issues toward the end. It's true that a fixed percent can never run out of money, but again the withdrawals can be extremely (too) low in later years. Alternatively, this approach schedules rising percents, with the trade-off that you're guaranteed to run out of money on some date. (But then caps the withdrawal, at a percent, with no clear idea of what that means for payout dollars.)

I think this is a decent withdrawal method, in fact, we're using something similar. But, many people have trouble converting the rules that result in percents into actual, spendable dollars. They need to look at the downsides very carefully.
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