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

[Cut-Throat]

One can see that the spending was down to 57% of the first year's spending in 1975, 7 years after retirement. Also the real portfolio balance was more then cut in half ... scary boots!

This sequence actually gave another 57% spending year in 1982.

Yes, this is pretty much the 'Worst case' Historical' Period of U.S. Markets and Inflation was the main Culprit!

When you look at the nominal numbers, the decline was not that bad. I remember running a Budget during those times and while prices were increasing, we adjusted our shopping basket to 'smooth out' things. Housing Prices were rising the most dramatically. We were renting at that time, but rent prices were a little more stable. Certain Food Prices were also skyrocketing. Gas Prices were rising steeply. Going all the way to 75 cents a Gallon!

But, if you run VPW and your initial withdrawal rate is over 100% higher like your example of 6.3% than a 'Conservative' 3% That you often see stated here. a Decline of 57% would be 'No Big Deal'.....Just keep things in Perspective!

 

[Lsbcal]

The first year 1968 saw a 6.8% VPW spending rate. So in those terms, the 57% in 1975 works out to a 3.9% spending rate.

Yes it is better then starting with a 4% of portfolio spending rate and sticking with that rate in terms of getting to do fun things. But I guess one has spent more during the 7 years which impacts the 1975 real portfolio balance, i.e. the spending wasn't a freebie.

If I set the spending to 4% fixed in the "Path" sheet column E, the 1975 inflation adjusted balance is about $563K. For the VPW approach it is $453K. Both results are kind of nightmares to me.

In the years 1968 to 1975 we had 2 bad recessions, the Arab oil embargo, inflation, and Watergate. I'm sure most of us would have reduced expenses and bolted the doors.

 

[Cut-Throat]

Yes it is better then starting with a 4% of portfolio spending rate and sticking with that rate in terms of getting to do fun things. But I guess one has spent more during the 7 years which impacts the 1975 real portfolio balance, i.e. the spending wasn't a freebie.

If I set the spending to 4% fixed in the "Path" sheet column E, the 1975 inflation adjusted balance is about $563K. For the VPW approach it is $453K. Both results are kind of nightmares to me.

And one of the Objectives of VPW was to spend more money in your early retirement years, where you could actually enjoy the Money! So it would have succeeded!

These are not nightmares at all! - Just numbers. How would a 3.9% SWR be a Nightmare! - We have folks here that are doing the 3% Thing! The Stage 4 Cancer that my friend was just diagnosed with and will be lucky to see Christmas is a Nightmare. Remember to keep things in Perspective. The 3.9% that you eluded to is a "Worst Case Historical Scenario!"

 

[Lsbcal]

Perhaps I should have said "a financial nightmare". To me having the real value of my portfolio cut in half 7 years from now would be very upsetting. Particularly since at that point I would not know where the bottom is going to be.

So expect me to be freaking out here if that comes to pass by 2021. But I do have a Plan B approach built in to my investing, which is way OT here.

I realize that VPW features a chance to spend at a higher rate, and that comes with a modest risk of more downside to the portfolio balance. Something to take seriously.

 

[Cut-Throat]

I realize that VPW features a chance to spend at a higher rate, and that comes with a modest risk of more downside to the portfolio balance. Something to take seriously.

Yes, but consider this. A fixed 3-4% SWR (With Inflation Adjustment) would be more risky than following VPW. --- VPW cannot Fail, you'll always have some money. --- A 4% SWR has failed over a 30 year Retirement.

If we do hit a very bad stretch in the near future, you sound as though you'd be fearful enough to not continue on a Fixed SWR. So, what would you do? Would you reduce spending and live like you were in the Great Depression anyway? This to me is a Bigger Financial and Real Life 'NightMare'. What if this period of Financial Gloom lasted for a Dozen years and you gave up the best part of your retirement life because you didn't have a plan.

 

[longinvest]

Hi,

Cut-Throat invited me to join this thread. I've been reading some of the latest posts, but I haven't read the entire thread, yet. I'll try to answer some of the questions in my next few posts.

 

[longinvest]

I wish there were a detailed youtube video that showed me how the VariablePercentageWithdrawl.xls spreadsheet works and so what I'm looking at.

That's a neat idea! I'll put that on my todo list. (I'll have to learn how to do it first). On the shorter term, it is my intention to write a small illustrated user manual.

 

[longinvest]

• 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.

I couldn't have said it in better words. It is OK to stress-test a plan against worst-case scenarios; it's another to have a plan that is only based on worst-case scenarios.

VPW tries to achieve a balance between protecting the retiree against worst-case scenarios, while allowing the retiree to benefit from upside markets (which are pretty common in historical scenarios).

 

[explanade]

How many are using VPW here? Maybe there should be a poll.

How many switched to VPW after using a more simple SWR?

 

[Lsbcal]

Yes, but consider this. A fixed 3-4% SWR (With Inflation Adjustment) would be more risky than following VPW. --- VPW cannot Fail, you'll always have some money. --- A 4% SWR has failed over a 30 year Retirement.

If we do hit a very bad stretch in the near future, you sound as though you'd be fearful enough to not continue on a Fixed SWR. So, what would you do? Would you reduce spending and live like you were in the Great Depression anyway? This to me is a Bigger Financial and Real Life 'NightMare'. What if this period of Financial Gloom lasted for a Dozen years and you gave up the best part of your retirement life because you didn't have a plan.

I view the future planning as an incremental planning situation. We all have a plan but most of us will incrementally adjust as we enter the war zone. I cannot actually tell how my plans will evolve although I do have some chess moves in reserve.

So much depends on stock and bond forward returns, travel aboard safety issues (war and pestulance), health, what spending will make us happy, etc. I'm not really the gloomy type and do plan to spend and live well. I totally agree that the next 10 years for us are important to fully enjoy.

 

[Lsbcal]

Hi,

Cut-Throat invited me to join this thread. I've been reading some of the latest posts, but I haven't read the entire thread, yet. I'll try to answer some of the questions in my next few posts.

Hi Longinvest, I like your VPW creation. I read your posts on Bogleheads and was impressed that you were very open minded about suggestions.

 

[longinvest]

Perhaps I should have said "a financial nightmare". To me having the real value of my portfolio cut in half 7 years from now would be very upsetting. Particularly since at that point I would not know where the bottom is going to be.

For retirements starting in 1966, there was simply no place to hide, even if one knew the future! One would have lost near half his portfolio, whether he used a constant-dollar withdrawal, VPW, or a constant-percentage withdrawal.

Both stocks and bonds significantly lagged inflation. Even keeping it in cash wasn't an escape from the inflation blood-bath! As for TIPS, they didn't even exist.

Worse: Buying a nominal Single-Premium Immediate Annuity (SPIA) would have been a disaster! As for inflation-adjusted SPIAs, I don't think they even existed at that point.

As for today, I don't know what the future has in store for us. VPW is a plan for spending a portfolio using market-adjusted withdrawals, based on a retirement horizon and an asset allocation. It's probably not the best of plans for our exact future (hard to know in advance), but it is intended as a robust yet simple plan.

 

[longinvest]

Or, you could use one of the other many variable withdrawal methodologies. VPW is only one of them. And, as Cut-Throat and others have pointed out, VPW is designed to 'deplete your portfolio.' So, if that's not for you, another variable withdrawal methodology is probably better for you.

As I explained somewhere on the Bogleheads forums, if you don't want to distribute your extra wealth during your lifetime, and enjoy the process, you can simply set VPW's target depletion age to 120 years old. By then, even your grandchildren should be in their 60s, so if you survive to 120 and you don't leave a legacy, it shouldn't matter too much. If you die before 120, you'll leave a respectable legacy.

Why chose a more complex plan, when a simpler one is good enough?

 

[longinvest]

What is the equation that is used for VPW? You have a return (based on historical returns and asset allocation) and you have an investment period (a rough estimate of longevity). Is VPW using something like an annuity payment equation like this?:
Annuity Due Payment - PV

Yes, VPW is based on a simple bare-bone annuity payment formula. It uses the asset allocation to determine a portfolio growth trend (which is NOT a prediction of future return from the time of retirement) to use in the formula.

There's nothing really new in VPW, except maybe:
1- the choice of a fixed growth trend based on asset allocation. (The "fixed" part is also very important to make sure not to hurt the portfolio in bad times),
2- the use of a retiree-specific target depletion age (instead of a fixed 30-year depletion target),
3- the availability of a free back-testing spreadsheet with two data sets: U.S. (1871-2013) and Canada (1970-2013).

 

[Lsbcal]

For retirements starting in 1966, there was simply no place to hide, even if one knew the future! One would have lost near half his portfolio, whether he used a constant-dollar withdrawal, VPW, or a constant-percentage withdrawal.

Both stocks and bonds significantly lagged inflation. Even keeping it in cash wasn't an escape from the inflation blood-bath! As for TIPS, they didn't even exist....

This is OT and I'm reluctant to go into too much detail because I think you'll agree we want to focus on VPW.

I'll just add that I'm not a pure buy-hold investor. In the 1975 we bought our first house in the Bay Area. That real estate portfolio benefited from inflation. But focusing just on stocks/bonds/cash, moving out of stocks and more into short term bonds would have been much better comparatively. Real returns for 3 year Treasuries were negative in some of the 1970's (as low as -4% in 1977) but not nearly as bad as stocks. Just some thoughts.

 

[longinvest]

This is OT and I'm reluctant to go into too much detail because I think you'll agree we want to focus on VPW.

I'll just add that I'm not a pure buy-hold investor. In the 1975 we bought our first house in the Bay Area. That real estate portfolio benefited from inflation. But focusing just on stocks/bonds/cash, moving out of stocks and more into short term bonds would have been much better comparatively. Real returns for 3 year Treasuries were negative in some of the 1970's (as low as -4% in 1977) but not nearly as bad as stocks. Just some thoughts.

OT

You're most probably right that one could have switched money into directly-owned real estate. Talk about some awesome market timing!

I was a child, at that time, so I wasn't aware of any of this.

/OT

 

[Lsbcal]

We were young and had to live somewhere.
I don't want to overstate my skills.

 

[longinvest]

Hi Longinvest, I like your VPW creation. I read your posts on Bogleheads and was impressed that you were very open minded about suggestions.

Thanks. Feel free to suggest improvements if you think that the spreadsheet presentation is not intuitive. It is difficult to find the right balance; there is so much data available to show, but it would overwhelm new users.

The nice thing about the spreadsheet is that it should be easy to use, for new users. But, it can also be modified by spreadsheet and financial wizards, not afraid of complexity, to show any additional data they seek.

 

[Lsbcal]

I would suggest showing real spending and real portfolio balance on the summary spreadsheet, not nominal. See my post on this today.

 

[FUEGO]

Hey LongInvest,

I've been enjoying the VPW tool immensely. I thought you might enjoy a tweak I added to give me confidence intervals. I'm down with "living stochasticly" and don't mind a bit of variability to outcome as long as I know the odds are in my favor (or maybe I embrace the randomness of life better than others that thing they can erroneously control the future ).

I set up a range of confidence intervals showing what different percentiles of withdrawals look like throughout all the years of the model. The percentiles I used include min, 5%, 10%, 25%, 50%, 75%, 90%, 95%, and max.

So I can say that the 5th percentile withdrawal in year 10 is $37,398 and 95% of the withdrawals for year 10 are higher than that. The 50th percentile, for example, is $78,362, and 50% of the withdrawals for year 10 are higher than that.

The purpose of looking at the percentiles for the result are to gauge just how bad the "worst case" might be. It gets away from the concept of "portfolio failures" (like in firecalc when your portfolio goes to zero) and gets to looking at the question of "how bad is bad?" if we end up on one of the model run years where investments did very poorly.

I can forward you my thrown together modified version of the VPW spreadsheet if you want to see an example of what I'm talking about.

 

[longinvest]

I would suggest showing real spending and real portfolio balance on the summary spreadsheet, not nominal. See my post on this today.

This data is shown in details on the "Path" sheet.

I personally think that looking at inflation-adjusted* data is misleading, because CPI is much more volatile than how inflation is felt by us. *(Even if the spreadsheet says "inflation", it's actually a CPI-adjusted amount. In economics, CPI is an indirect measure of inflation).

My salary is in nominal dollars. It doesn't adjust every month. While it adjusts yearly, adjustments sometimes lag CPI and sometimes are ahead of CPI.

Looking at withdrawals in nominal dollars is really how one gets to live through it. We live, everyday, in nominal dollars. It's the cost of goods that goes up. Sometimes (often) we can soften the blow of inflation for a while.

What's important to worry about is the longer-term trend of the cost of living, and whether withdrawals are able to keep up with it. That's why the VPW spreadsheet shows both withdrawals (blue line) and the cost of goods that could be bought by the CPI-adjusted initial withdrawal amount (red line).

Going back to your example of a 1966 retiree. In nominal dollars, he never saw a 50% loss in his portfolio (or withdrawals). Actually, had he used a 50/50 portfolio, he would have barely seen any significant reduction in portfolio value before age 90, even while taking withdrawals all along. Starting with $1M, the lowest portfolio value was $830K in January 1975. Not so bad, psychologically!

 

[Cut-Throat]

Looking at withdrawals in nominal dollars is really how one gets to live through it. We live, everyday, in nominal dollars. It's the cost of goods that goes up. Sometimes (often) we can soften the blow of inflation for a while.

What's important to worry about is the longer-term trend of the cost of living, and whether withdrawals are able to keep up with it. That's why the VPW spreadsheet shows both withdrawals (blue line) and the cost of goods that could be bought by the CPI-adjusted initial withdrawal amount (red line).

I completely agree with Longinvest on this one. Nominal Dollars are more Important. You have more control over inflation than you think! I lived through this period of the 70s and 80s, and while prices were rising, it was not as dramatic living it than the numbers indicate.

 

[longinvest]

Hey LongInvest,

I've been enjoying the VPW tool immensely.

Thanks.

I thought you might enjoy a tweak I added to give me confidence intervals. I'm down with "living stochasticly" and don't mind a bit of variability to outcome as long as I know the odds are in my favor (or maybe I embrace the randomness of life better than others that thing they can erroneously control the future ).

I set up a range of confidence intervals showing what different percentiles of withdrawals look like throughout all the years of the model. The percentiles I used include min, 5%, 10%, 25%, 50%, 75%, 90%, 95%, and max.

So I can say that the 5th percentile withdrawal in year 10 is $37,398 and 95% of the withdrawals for year 10 are higher than that. The 50th percentile, for example, is $78,362, and 50% of the withdrawals for year 10 are higher than that.

I had something like that, in some version of the spreadsheet, until I realized that there are 20 percentiles (5, 10,...,100), and for a typical 35 year plan, this made for less than 2 withdrawals per percentile, on average!

OK, for a 60-year retirement, you increase the average to 3. But, that's not very helpful. I finally came to the conclusion that the most helpful was to show the median (50% percentile) and minimum withdrawals, in inflation-adjusted dollars.

I think that the backtesting graph is more helpful in visualizing low-withdrawal periods. Summary numbers (like percentiles) do not convey information about whether low-withdrawals are all together in a lump or spread out through all retirement. The graph shows this.

 

[Huston55]

As I explained somewhere on the Bogleheads forums, if you don't want to distribute your extra wealth during your lifetime, and enjoy the process, you can simply set VPW's target depletion age to 120 years old. By then, even your grandchildren should be in their 60s, so if you survive to 120 and you don't leave a legacy, it shouldn't matter too much. If you die before 120, you'll leave a respectable legacy.

Why cho[o]se a more complex plan, when a simpler one is good enough?

Precisely. That's why I will use another tool, because: (1) I don't want to plan to deplete my portfolio and, (2) I don't want the wild fluctuations the VPW method can produce. And, using a 120 yo depletion age, as you suggested, simply mutes out the early spending advantage of VPW, which seems to be the primary attraction in the first place.

Instead of trying to modify VPW to meet my goals, I'll use a tool that is designed to meet them; one that: (1) plans on preserving a significant portion of my portfolio and, (2) that allows higher spending early in retirement but without the wild fluctuations of VPW.

I get that it's attractive to you, Cut-Throat, and perhaps many others; and that's a good thing - for you. But, as I noted in my previous post, if planning on portfolio depletion and wild withdrawal fluctuations is not to one's liking, then VPW is not the proper approach.

 

[longinvest]

Instead of trying to modify VPW to meet my goals, I'll use a tool that is designed to meet them; one that: (1) plans on preserving a significant portion of my portfolio and, (2) that allows higher spending early in retirement but without the wild fluctuations of VPW.

I get that it's attractive to you, Cut-Throat, and perhaps many others; and that's a good thing - for you. But, as I noted in my previous post, if planning on portfolio depletion and wild withdrawal fluctuations is not to one's liking, then VPW is not the proper approach.

Huston,

Of course, you are free to pick the withdrawal method that suits you. I was simply trying to explain a possible approach to using VPW for those concerned with ultra-long longevity and bequest motives.

I should mention that I would not describe VPW withdrawals as widely fluctuating. Yes, VPW tries to deliver return-adjusted withdrawals to the retiree. But, it is up to the retiree to select an appropriate asset allocation to control the volatility of withdrawals.

In the default spreadsheet setup, I show the withdrawals on a 50/50 portfolio. For such a portfolio, withdrawals are quite stable (and usually increasing). Here is the sequence of withdrawals on a $1M portfolio for a retiree starting a 35-year retirement in 1966, one of the worst years, ever, to retire in the U.S.:

$48,405 (1966)
$46,458
$48,867
$50,680
$47,278
$50,391
$53,722
$60,414
$54,445
$47,664
$56,513
$61,736
$63,192
$68,164
$72,386
$81,832 (1981)
...

I do not see any wild fluctuation there. There are fluctuations (due to 50% stocks), but that's to be expected from any variable withdrawal method. You can easily reduce volatility further by increasing the allocation to bonds, at the cost of lower long-term returns (and smaller withdrawals due to VPW's calculations).