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

[Totoro]

If the market drops 50%, you would have to be 100% in stocks to suffer an equivalent portfolio drop. You can tamp down the volatility with the proper asset allocation. Personally I am only 30% in stocks.

The VPW model doesn't change that much with changing asset allocations it seems. The difference between median and minimum withdrawal in the worst case scenario is still about x1.7 with 70% bonds (vs. x2 with 80% stocks).

The median does drop with 30% though if you go bonds heavy, so the minimum gets even lower.

The difference I think is in the fact that I am planning for a very long horizon (60+ years), so in fact VPW doesn't really do me much until I am well past the point where it matters.

Other ways to damp down volatility is to delay S.S. to age 70. I have set aside cash that is not included in my VPW Portfolio to cover the Shortfall of S.S. --- So, when S.S. kicks in at age 70, it will contribute to a Steady portion of income that is not affected by the VPW withdrawal amount.

Not an option for me (not a US citizen), and my own version is too far away down the line and will be a pittance ($6k per annum I'm guessing at most).

And yes, I would not have even considered retirement if my discretionary expenses were not much larger than my non-discretionary ones. I think every retiree should be able to easily cut their expenses in half. If they can't, they are asking for trouble.

Something to chew on for me, interesting view. I don't nearly have that much buffer right now (semi-FIRE). Thanks.

 

[Cut-Throat]

The VPW model doesn't change that much with changing asset allocations it seems. The difference between median and minimum withdrawal in the worst case scenario is still about x1.7 with 70% bonds (vs. x2 with 80% stocks).

Yes, but 1.7x is mostly due to inflation. Look at the nominal values. Retirees have a lot more control over inflation than a dropping nominal value. Most retirees have their homes paid for and educations, which are a large part of CPI. You also tend to purchase items which are more favorable to the 'shopping basket' of inflation. So, you have a lot more choices here than you would first think.

And remember you are looking at historical worst case conditions.

 

[photoguy]

No, there is a Big Difference! ---- The VPW withdrawal amount is removed from the market entirely and put into a Cash account. A Conservative SWR leaves money in the Markets, which could possibly get 'pummeled' in a down market.

I'm not saying that one should pick a conservative SWR (say 2%) and stick it to no matter what and never increase it even if your portfolio goes gangbusters. My plan is to be aware of the failure probabilities at various rates (e.g., 2-5%) and then have variable withdrawals depending on portfolio returns. So if the portfolio does well, I will loosen up and withdraw more; if the portfolio is in decline revert back to the lower SWR percentages.

I don't have survey numbers but I suspect a fair number of people do this and I think this in practice may not be that dissimilar from VPW.

One reason I like the traditional SWR definition (e.g. trinity) is that it precise quantifies the standard of living and yields a failure probability. With VPW, the withdrawals are always changing and makes it difficult to "equalize" two different withdrawal algorithms. So even if I use variable withdrawals, the trinity SWR methodology is very helpful for planning purposes.

Anyway thanks for bringing up this topic. I think it's great that you've been a strong advocate for VPW and this really helps the discussions.

 

[Live And Learn]

Originally Posted by Cut-Throat
And yes, I would not have even considered retirement if my discretionary expenses were not much larger than my non-discretionary ones. I think every retiree should be able to easily cut their expenses in half. If they can't, they are asking for trouble

.

Something to chew on for me, interesting view. I don't nearly have that much buffer right now (semi-FIRE). Thanks.

1/2 ? I'm nearing a 3% WR. If I had to cut my expenses in half and still be at 3% I'd need to double my portfolio and my initial WR would be 1.5% ! Talk about conservative !

 

[Cut-Throat]

1/2 ? I'm nearing a 3% WR. If I had to cut my expenses in half and still be at 3% I'd need to double my portfolio and my initial WR would be 1.5% ! Talk about conservative !

Not sure what you're saying here. Expenses and Withdrawal Rates are two different things.

Expenses are made up of discretionary and non-discretionary expenses. I made the point that retirees should have larger discretionary expenses than non-discretionary. Then cutting expenses in half would be easy, if need be.

 

[Chuckanut]

Not sure what you're saying here. Expenses and Withdrawal Rates are two different things.

Expenses are made up of discretionary and non-discretionary expenses. I made the point that retirees should have larger discretionary expenses than non-discretionary. Then cutting expenses in half would be easy, if need be.

I would agree with that for people who ER. But for many who reached and past normal retirement age their non-discretionary expenses are a very high percentage of their total expenses. It's just a fact of life for many, albeit an unhappy one.

 

[mathjak107]

Not sure what you're saying here. Expenses and Withdrawal Rates are two different things.

Expenses are made up of discretionary and non-discretionary expenses. I made the point that retirees should have larger discretionary expenses than non-discretionary. Then cutting expenses in half would be easy, if need be.

the budget i set for our up coming retirement on july 31st at 4:30 pm has non descretionary spending at less than 1/2 the total budget.

we have quite a bit of descretionary spending built in because with 3 sets of kids,spouses and grandkids we do quite a bit of spending when we see them.

we also want the slack for the awe craps in life.

 

[jebmke]

Not sure what you're saying here. Expenses and Withdrawal Rates are two different things.

I suppose it depends on how you do the counting. Everything I have is included in my portfolio, as long as it is liquid (thus, RE is excluded). The only reason I withdraw funds are to pay bills, period (or give it away, which is the same -- its gone). To put it another way, if I can convert it to food in a short period of time (3-4 days max), I count it in the portfolio.

 

[photoguy]

For people with a large discretionary budget (eg 1/2 of total or more as being discussed), what does it cover?

I'm having a hard time seeing how we would spend our money other than travel and gifts/charity. Even travel is questionable as I don't think we could get enough done in one year ( to equal the none discretionary budget).

I suppose we could start shopping at whole paycheck.


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[Cut-Throat]

For people with a large discretionary budget (eg 1/2 of total or more as being discussed), what does it cover?

I'm having a hard time seeing how we would spend our money other than travel and gifts/charity. Even travel is questionable as I don't think we could get enough done in one year ( to equal the none discretionary budget).

I suppose we could start shopping at whole paycheck.

This is a 'No Problem' for me! We love to travel and eat at fine Restaurants. We are Living in the Bahamas for 3 months this winter. We have to rent an Apartment there and a Car. I like to Fly Fish and Fishing Guides are over $500 a day. I'll spend $10 Grand alone on Guide Fees just in the Bahamas. Last year we we spent $35 Grand on a 2 week African Safari. I enjoy Spending money.

 

[Cut-Throat]

I suppose it depends on how you do the counting. Everything I have is included in my portfolio, as long as it is liquid (thus, RE is excluded). The only reason I withdraw funds are to pay bills, period (or give it away, which is the same -- its gone). To put it another way, if I can convert it to food in a short period of time (3-4 days max), I count it in the portfolio.

That's a fine system, but that's not how VPW works, which is the topic of this thread.

Each year I move the Calculated VPW amount to a Cash Spending Account, never to be invested in stocks or Bonds again. I do not include this in my portfolio. Expenses are withdrawn from the Spending Account Only.

 

[Live And Learn]

1/2 ? I'm nearing a 3% WR. If I had to cut my expenses in half and still be at 3% I'd need to double my portfolio and my initial WR would be 1.5% ! Talk about conservative !

Let me see if I can restate this so it is clearer. My current ER budget only includes 12% "discretionary" expense (definition of discretionary is travel and "spending money"). My WR is 3%

It was suggested that people should not retire until they could afford to cut their spending by 1/2. Put another way, it is suggested that one should not retire until they can afford 2x their non-discretionary expenses. Since I can't afford to fund 2x my budget (which is 88% non discretionary) with my current portfolio the only option I have is to double the portfolio if I want to stay at my desired 3% WR. Which means that my actual WR based upon my current budget would be 1.5% - which is a exceptionally conservative.

 

[Cut-Throat]

Let me see if I can restate this so it is clearer. My current ER budget only includes 12% "discretionary" expense (definition of discretionary is travel and "spending money"). My WR is 3%

It was suggested that people should not retire until they could afford to cut their spending by 1/2. Put another way, it is suggested that one should not retire until they can afford 2x their non-discretionary expenses. Since I can't afford to fund 2x my budget (which is 88% non discretionary) with my current portfolio the only option I have is to double the portfolio if I want to stay at my desired 3% WR. Which means that my actual WR based upon my current budget would be 1.5% - which is a exceptionally conservative.

OK, I now see what you were saying. But, as I pointed out when using VPW (Withdrawals and Expenses are 2 different things)

However, if you used VPW (The topic of this Thread) you could withdraw over 4% of portfolio value and either increase your discretionary spending or squirrel it away in a Spending Account for future spending. If your non-discretionary spending was less than 50% of your initial Withdrawal Amount (which is what I meant to say, instead of discretionary expenses), you'd be good to go.

IOW - Get the Withdrawals out of the Stock/Bond Market so that it would not be subject to a future market downturn. (One of the advantages of VPW --- Selling more assets High and Fewer Assets at Lower Prices. A fixed SWR with Inflation Adjustment is bad news in a Bear Market, Especially early on in retirement!)

 

[Cut-Throat]

I like VPW. Autopilot is an easy to use formula too.

0.5 x (Last year's withdrawal amount x (1 + Inflation %)) + (Last year's ending balance / RMD)

Put retirement savings withdrawals on autopilot - MarketWatch

Yes, the author of VPW used RMD in his Calculations, with afew extra wrinkles, Asset allocation and 'end of plan' etc. etc. Also the ability to backtest. But a lot of it was RMD derived.

 

[FUEGO]

Nice tool. I put in my rough stats and it allows me to spend almost double the 3% SWR I'm inclined to use since retiring at 33 (60 year retirement period?).

I checked out retiring in 1929 (on the cusp of the great depression) and the worst years in a 92% stock portfolio had me spending $20k ($29k if I had 50/50 stock/bonds). My actual budget is $32k/yr, so I could spend close to $60k the first year using the 5% WR in the VPW calc. Then the Great Depression happens and I'm stuck living on 20-29k.

29k isn't hard at all - just a tiny bit less vacationing, and maybe paying closer attention to the groceries we buy (less sushi, more hamburgers ).

20k? That would be bare bones with deferred maintenance on the house and cars. I'd probably pick up some part time work if it got that bad.

The calculator confirmed basically what I assumed all along. That we can spend substantially more than 3% SWR in most years in most scenarios.

 

[Cut-Throat]

Nice tool. I put in my rough stats and it allows me to spend almost double the 3% SWR I'm inclined to use since retiring at 33 (60 year retirement period?).

Yes, I think the VPW tool is better used for someone in their 50's and 60's with maybe a 40 year retirement period. Retiring at age 33 is almost unfathomable to me. I don't think I started earning any money until I was 33.

So, yes I think the VPW tool is going to give you some 'Wild' numbers at your age. 60 Years is a long time, so maybe Wild Numbers are on the menu! Also, the 92% Stock Portfolio is a source for the Wild Gyrations. Most Retirees withdrawing from a Portfolio would not be more than 60% Stocks. I am at 30% Stocks.

 

[seraphim]

Sounds like a new twist on an old strategy, and whenever someone says something like 'It can't fail," I cringe. A subject has a medical emergency, needs to access large amounts of money for years - it can fail; and maybe the system can allow you you to "spend more money", but it might be more prudent not to.

I'll stick to my 2% withdrawal, watch the portfolio continue to slowly grow over the years, and if there's no medical emergency or need, my son can have the security of inheriting a large nest egg.

I already spend as much as I want...


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[Cut-Throat]

Sounds like a new twist on an old strategy, and whenever someone says something like 'It can't fail," I cringe. A subject has a medical emergency, needs to access large amounts of money for years - it can fail

That's what Insurance is For!

And your 2% SWR will fail sooner. It's less safe!

 

[seraphim]

In your opinion - not mine.

Insurance does not cover all costs, nor does long term care coverage. MIL spent $5k a month over what her LTI paid - for three years. That doesn't take into consideration the four years she previously lived in a care center under conditions LTI didn't cover. Or other out of pocket costs. She was 85. Had she followed the VPW path - and withdrew then spent more money just because she could - she may have gone broke.

And since you know absolutely nothing about my finances, it's naive of you to tell me my withdrawel strategy will fail - for all you know that money is put into a savings account and never spent - which is possible for me to do.

...or that I have about twenty years of expenses in cash accounts, with a life expectancy of maybe fifteen years...

.. And a pension which covers all my needs - I only draw from the portfolio so I can travel most of the year.

It may also interest you to know that FireCalc suggests my portfolio will likely double (average scenario) in the next fifteen years given my current rate of withdrawal - even more when I extend the time to 35 years.

Want to reconsider your prediction? Lol

Looking back over this, I just realized it came across as arrogant - not my intent. My apologies. There is no one strategy suitable for everyone. No one has a crystal ball to predict what will happen. There is no basis for your comment that one strategy will fail before another.

 

[Huston55]

VPW advocates a certain approach to withdrawal; one that works for some but not others. There are some good threads on BH regarding this approach and the tool. The tool was developed by a guy named 'long invest' with the help of 'cuthroat' and others.

If you're interested in a variable withdrawal strategy, or strategies, I suggest trying '********' which is a great retirement calculator that evaluates multiple variable withdrawal strategies (VPW, Hebeler, Guyton-Klinger, Clyatt, etc.). It's well worth a spin or two.


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[Turn_the_Page]

Blindly following any scheme with no adjustments for poor market performance is a recipe for disaster. "I'm still taking out $100k this year, even though the market dropped like 1929!"

 

[Totoro]

After quite a bit of testing and some more thinking VPW basically does two things for you in my view:

• It assumes you are willing to slash your spending up to half during bad periods, and adjust upwards likewise in good periods.
• Stimulates to increases your spending as you age beyond 60 years old, realizing that you won't life forever and thus can spend principal.

For me that means it is most useful for older people with rather large discretionary buffers, who also have the discipline and ambition to have wildly varying expenses.


In other words: it helps stimulate spending for those people who can afford to anyway



For the rest of us, it helps remind that markets can be very volatile, and we need to expect the unexpected.

 

[Tandemlovers]

Thanks for the link for the eFIREsim.

I wasn't able to type in percentages for portfolio allocation
using my iPad, so I reverted to using the older version.


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[Cut-Throat]

After quite a bit of testing and some more thinking VPW basically does two things for you in my view:

• It assumes you are willing to slash your spending up to half during bad periods, and adjust upwards likewise in good periods.
• Stimulates to increases your spending as you age beyond 60 years old, realizing that you won't life forever and thus can spend principal.

For me that means it is most useful for older people with rather large discretionary buffers, who also have the discipline and ambition to have wildly varying expenses.


In other words: it helps stimulate spending for those people who can afford to anyway



For the rest of us, it helps remind that markets can be very volatile, and we need to expect the unexpected.

Actually VPW is almost the exact opposite as your two conclusions.

1.) Yes, it assumes you may have to adjust your spending by half, if need be. But remember it starts out with over a 5.5% of portfolio balance withdrawal (Retirement period of 30 years), vs. someone that is going to be 'Conservative and only takes 3% initially. Why take only 3% if you don't need to? You've just about cut your Withdrawal amount in half from the start! Most of it would disappear in a market crash, so the money won't be there to 'Save you' in a downturn anyway. Also, a lot of these periods that you are looking in VPW are inflation increases and the nominal values are not even close to half. These don't affect retirees that much as big components of inflation are 'Big ticket' items like housing and education costs, which retirees already have paid for.

2.) One of the objectives of VPW was to allow you to spend more in your early years and it does just that. Yes, the numbers grow in later years, but look at the graph that tracks the initial withdrawal adjusted for inflation. The starting amount is much larger than the 3-3.5% withdrawals that you hear about around here.

One thing to keep in mind when discussing withdrawal amounts. I think, if you cannot cut your spending in half during retirement, you probably need to go back to work anyway. If your resources are stretched that thin, you may be in for some unpleasant surprises during your retirement.

 

[Totoro]

1.) Yes, it assumes you may have to adjust your spending by half, if need be. But remember it starts out with over a 5% of portfolio withdrawal vs. someone that is going to be 'Conservative and only takes 3%.

Half of 5% (actually 4.5% for really young retirees in the standard setting?) means adjusting to 2.5% which is below the 3% you assume as conversative. The 3% is also a 'worst case' return used here by some to test robustness, it's not necessarily the actual amount spent.

Functionally in the end it is the same. In VPW you start with a higher % and know you may have to adjust downwards in future years pretty drastically.

In the other approach one starts with 3% and know you likely will be able to adjust upwards happily in future years (or have lucky heirs).

In both cases I believe one should compare the 'floor': how bad can it realistically get? And subsequently plan for that. So you need to weigh the 2.5% vs. the 3% in deciding whether one is 'good to go'. In that sense the VPW is actually a bit more conservative

Note that I'm talking about confidence in deciding whether to stop earning income at all, and what can be spent safely vs. what one needs.

What is nice about VPW though is that it puts the 'expected' value at centerstage: the 5% you mention. Other tools (like firecalc) emphasize a bit more the 'floor'. VPW starts with optimism and can adjust downwards or upwards, Firecalc starts with pessimism and almost always adjusts upwards

Most of it would disappear in a market crash anyway, so the money won't be there to 'Save you' in a downturn anyway.

Every dollar you don't take out is still invested (even if it drops down to 50 cents for a while).

I understand your point that inflation might hit retirees less as time goes on (anecdotal evidence from veterans here seem to confirm that). On the other hand you cannot count on that. Different categories go through different inflation periods throughout history. Apart from inflation you also have standards of living that may go up (economic growth as seen by most people).

2.) One of the objectives of VPW was to allow you to spend more in your early years and it does just that.

For an older one (>60 years) it does safely as one spends principal. A younger retiree cannot do that.

VPW (in standard settings) will advise you to spend more with a good chance that you'll have to scale back pretty drastically. Again it goes back to perspective I think. Do you start spending assuming a worst scenario or the average scenario? It's more a philosophy of life almost than anything else.

Yes, the numbers grow in later years, but look at the graph that tracks the initial withdrawal adjusted for inflation. The starting amount is much larger than the 3-3.5% withdrawals that you hear about around here.

Initial withdrawals are much higher for 60+ year olds.

Don't get me wrong, I really like the VPW model as an extra way of thinking and planning.

In the end though it again comes down to the same things:

• Plan for the worst within realistic boundaries
• Be flexible, both downwards and upwards
• Don't forget the upside and most likely scenario. That's what I like most about VPW, most other tools neglect that aspect.