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Old 11-08-2014, 05:51 AM   #121
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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!"
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Old 11-08-2014, 06:28 AM   #122
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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.
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Old 11-08-2014, 06:44 AM   #123
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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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Old 11-08-2014, 07:02 AM   #124
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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.
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Old 11-08-2014, 08:11 AM   #125
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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

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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).

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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.

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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.
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Old 11-08-2014, 08:21 AM   #126
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Just as an illustration, if you run firecalc on standard settings for 30 years, 85% equities and ask it to investigate for 50% failure rate (the average), you'll end up with:

6% withdrawal rate.

The 100% success rate is 3.59% withdrawal rate, about half (a bit more) than the 6%.

VPW would start with the 6% and advise you to shift downwards to the 3.59% when things don't go well (or upwards otherwise).

The biggest thing VPW seems to do is thus start from the typical scenario vs. start from the worst scenario.
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Old 11-08-2014, 08:26 AM   #127
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Just as an illustration, if you run firecalc on standard settings for 30 years, 85% equities and ask it to investigate for 50% failure rate (the average), you'll end up with:

6% withdrawal rate.

The 100% success rate is 3.59% withdrawal rate, about half (a bit more) than the 6%.

VPW would start with the 6% and advise you to shift downwards to the 3.59% when things don't go well (or upwards otherwise).

The biggest thing VPW seems to do is thus start from the typical scenario vs. start from the worst scenario.
But, that is the point. VPW does not have you scrimp on withdrawals until and IF you need to. YOU MAY NEVER NEED TO!

Also, with VPW you got to spend more money in your early retirement years, even if a market crash were to occur later. It doesn't matter how old you are.
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Old 11-08-2014, 08:31 AM   #128
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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!"
That is not true.

The Firecalc history includes 1929, and you could have been 90% in stocks, and supported a 40 year retirement by 'blindly' taking out 3.27% the first year, and 'blindly' adjusting for inflation each year.

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Old 11-08-2014, 08:48 AM   #129
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But, that is the point. VPW does not have you scrimp on withdrawals until and IF you need to. YOU MAY NEVER NEED TO!

Also, with VPW you got to spend more money in your early retirement years, even if a market crash were to occur later. It doesn't matter how old you are.
Seems to me we are in agreement after all

Thanks for the discussion!
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Old 11-08-2014, 10:20 AM   #130
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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.
This is the issue. Percent-of-current-balance strategies are for people who want to spend significant amounts on things that they view as "luxuries" (or whatever word you apply to "clearly discretionary").

Consider the 62 year old who has been practicing LBYM so that he can save money to retire. I can't see why I'd tell him he can't afford to retire unless he can cut his current LBYM spending by another 50%.

I'd say that people should have some cushion when they retire. That cushion may be extra assets that they don't plan to use except in some unforeseen emergency. Or, it may be extra spending that they are sure they can quickly eliminate if the winds blow the wrong way.
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Old 11-08-2014, 12:26 PM   #131
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This is the issue. Percent-of-current-balance strategies are for people who want to spend significant amounts on things that they view as "luxuries" (or whatever word you apply to "clearly discretionary").

Consider the 62 year old who has been practicing LBYM so that he can save money to retire. I can't see why I'd tell him he can't afford to retire unless he can cut his current LBYM spending by another 50%.

I'd say that people should have some cushion when they retire. That cushion may be extra assets that they don't plan to use except in some unforeseen emergency. Or, it may be extra spending that they are sure they can quickly eliminate if the winds blow the wrong way.
SWR should include a cushion over bare bones necessary expenses, so you have room to cutback if there is a market downturn. If SWR just meets expenses (not including luxuries), then I would keep working or choose a more conservative AA.

Using VPW you might have to cut expenses and while it is unpleasant it is more desirable than blindly withdrawing and depleting your portfolio. I think it's human nature during a recession to spend less so even those who are using the 4% SWR as a tool will probably make variable withdrawals.
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Old 11-08-2014, 02:06 PM   #132
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I wish there were a detailed youtube video that showed me how the VariablePercentageWithdrawl.xls spreadsheet works and so what I'm looking at. After poking around for a few minutes, I'm not sure I really "get it". And this is the second time I've come across and looked at this spreadsheet.

I guess the take-away is that red "inflation" line in "Backtesting Table Withdrawls"?

When it's set to 1972, the line keeps going up steeply. So, inflation adjusted, you'll be able to spend spend "$48,405" in 2015, and the equivalent of $231,777 in todays dollars, 35 years from now.

The line always starts at $48,405, but if I put at 1928, for instance, it says I can spend $83,939 in todays dollars, 35 years from now.

The $48,405 is sort of a magic number to me...not sure where it comes from. It appears in the table "Statistics for All Start Years" which baffles me. $48,405 is labelled "Minimum (inflation adjusted) Max". Tea and no tea at the same time? It looks like it's the start percentage times your portfolio or somewhere around that figure. But then the start percentage becomes magic. It looks like that is somehow based on the historical growth rates.

I didn't try every one, but it seems like except for using 1800's data, the withdrawls red line goes up. If this were optimized a-la "ES planner", wouldn't the red line be horizontal (level consumption)?
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Old 11-08-2014, 02:12 PM   #133
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SWR should include a cushion over bare bones necessary expenses, so you have room to cutback if there is a market downturn. If SWR just meets expenses (not including luxuries), then I would keep working or choose a more conservative AA.

Using VPW you might have to cut expenses and while it is unpleasant it is more desirable than blindly withdrawing and depleting your portfolio. I think it's human nature during a recession to spend less so even those who are using the 4% SWR as a tool will probably make variable withdrawals.
One could put a portion of their assets into a safer asset class like TIPs as a "cushion" and apply a more conservative withdrawal approach and use VPW for the remainder of the portfolio.


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Old 11-08-2014, 02:16 PM   #134
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I guess the take-away is that red "inflation" line in "Backtesting Table Withdrawls"?
The red line indicates your Initial Withdrawal Amount adjusted for Inflation. The Blue line represents your actual nominal Withdrawal Amount. If it is higher than the red line it indicates an amount that is actually higher than your initial withdrawal amount adjusted for inflation. If Lower, then it says you are spending an amount less than the inflation adjusted initial withdrawal.

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The $48,405 is sort of a magic number to me...not sure where it comes from. It appears in the table "Statistics for All Start Years" which baffles me. $48,405 is labelled "Minimum (inflation adjusted) Max". Tea and no tea at the same time? It looks like it's the start percentage times your portfolio or somewhere around that figure. But then the start percentage becomes magic. It looks like that is somehow based on the historical growth rates.
It's derived from your input numbers and a formula that includes, RMD, Life of Plan, Historical growth rates of Stocks and Bonds etc. It is self correcting because the percentage always goes against remaining portfolio balance.

It's really quite simple, there is no tutorial other that written text on the spreadsheet tab, but i'll answer any question you might have.
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Old 11-08-2014, 03:16 PM   #135
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The red line indicates your Initial Withdrawal Amount adjusted for Inflation. The Blue line represents your actual nominal Withdrawal Amount. If it is higher than the red line it indicates an amount that is actually higher than your initial withdrawal amount adjusted for inflation. If Lower, then it says you are spending an amount less than the inflation adjusted initial withdrawal.
.
Thanks for the explaination. I am becoming convinced that some type of variable withdrawal method works best, at least for me.

Correct me if I am wrong: These variable methods that try to maximize withdrawals and maintain high success rate assume that one does not care much about the value of one's estate. Correct?
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Old 11-08-2014, 03:19 PM   #136
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Thanks for the explaination. I am becoming convinced that some type of variable withdrawal method works best, at least for me.

Correct me if I am wrong: These variable methods that try to maximize withdrawals and maintain high success rate assume that one does not care much about the value of one's estate. Correct?
Correct! - One of the Objectives of VPW was to Spend as much as possible and have no interest in leaving an estate.

But you can certainly get creative without too much thought. If you did want to leave an estate worth $XXX just move this $XXX into another 'Account' to invest, and do not include it in VPW.
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Old 11-08-2014, 04:48 PM   #137
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VPW starts with optimism and can adjust downwards or upwards, Firecalc starts with pessimism and almost always adjusts upwards
Firecalc never 'adjusts upwards'.... It only takes your initial withdrawal and keeps it constant with inflation. The excess money only gets spent by the Heirs.
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Old 11-08-2014, 05:25 PM   #138
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Correct! - One of the Objectives of VPW was to Spend as much as possible and have no interest in leaving an estate.

But you can certainly get creative without too much thought. If you did want to leave an estate worth $XXX just move this $XXX into another 'Account' to invest, and do not include it in VPW.
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.

If you're interested in evaluating multiple 'variable withdrawal' methods, I suggest you try cFIREsim, which is a tool that evaluates many of them. Link below.

Crowdsourced Financial Independence and Early Retirement Simulator/Calculator
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Old 11-08-2014, 06:02 PM   #139
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Cut-Throat (great name, BTW. Reminds me of my hikes in the high country of NM)

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

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Old 11-08-2014, 06:06 PM   #140
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Cut-Throat (great name, BTW. Reminds me of my hikes in the high country of NM)

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

Zorba
Not sure exactly what the formula is. I just helped out with the design. But if you are handy with Spreadsheets, just download VPW and look at the Cells for the exact Formula!
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