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Old 11-08-2014, 07:15 PM   #141
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Originally Posted by Cut-Throat View Post
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.
?? That's just one of several withdrawal modes that FIRECalc can model. It can also model:
- Bernicke's Reality Retirement Plan: Inflation-adjusted spending increases every year until age 56, then declines slowly until until age 76 where it is kept at a constant inflation-adjusted level
- Percent of Remaining Portfolio: (which changes the amount withdrawn each year according to how well the portfolio is doing, in a manner similar to VPW, but not aiming for a zero dollar end balance)
- Percent of Remaining Portfolio--with maximum year-to-year reduction: This is a close approximation to the method described by Bob Clyatt in "Work Less, Live More". So, you can set the parameters so the withdrawal bumpiness is "smoothed out", never dropping more than, say, 5% from year to year.

Each withdrawal method is modeled against all the consecutive years of actual returns contained in FIRECalc.

A "percent of remaining portfolio" method with increasing %ages as we age (similar to the RMD table, but using a combined life expectancy and padding it by 10 years) is what we'll probably do. That's surely going to result in lower withdrawals in our "younger" years than an optimization based on the historical data set would suggest, but I just don't think optimizing to the Nth degree is prudent given all the unknowns/unknowables.
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Old 11-08-2014, 07:49 PM   #142
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...I just don't think optimizing to the Nth degree is prudent given all the unknowns/unknowables.
+1

Easy to get hung up in the attempt to "measure with a micrometer" and lose sight of reality.
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Old 11-08-2014, 11:01 PM   #143
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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.
I'm distinguishing between "a cushion" and "twice what you spend". I don't think I'd tell an older worker he has to keep working till his cushion amounts to 100% of what he normally spends.
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Old 11-09-2014, 01:21 AM   #144
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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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Yes, you are correct. See my posts on the first two pages of this thread. For myself, I find it easier to use a simple web calculator than the VPW spreadsheet.
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Old 11-09-2014, 07:41 AM   #145
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Yes, you are correct. See my posts on the first two pages of this thread. For myself, I find it easier to use a simple web calculator than the VPW spreadsheet.
Not really. The VPW spreadsheet also has Asset Allocation as part of its formula. (Bonds, U.S. Stocks and International Stocks). The annuity formula does not. You can certainly come up with your own VPW, but I like the graphs and other features of VPW. It's just not that complex.

Also, some folks like to see how their plan backtests against History of Stock and Bond Markets and Inflation. It's all done for you and it's free, so why not?

If you prefer your 'Web Calculator' over VPW put a link to it and I'll try it out. If I like it better, I'll use it too.
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Old 11-09-2014, 07:45 AM   #146
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I'm distinguishing between "a cushion" and "twice what you spend". I don't think I'd tell an older worker he has to keep working till his cushion amounts to 100% of what he normally spends.
+1

While this (being capable of saving an extra 100%) may work for some retirees, I doubt it works for most. Given the savings rate and NW data in the US (and I suspect other developed countries), this is not an appropriate approach for most retirees, not just older workers. That's because it's simply not possible for most folks. They will have to take a different path.

For those early retirees who are in better financial shape, and can consider methods like VPW, G-K, Clyatt , plain old SWR or, a "safety first" approach, I still question whether most (or even many) would "choose to work another X years until they had an additional 100%" versus retiring earlier and using another less aggressive withdrawal methodology.

In the end, we all want pretty much the same thing: all the $$$ we want when we want them, and none of the downside risk. Of course, the trick is balancing all that.
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Old 11-09-2014, 08:11 AM   #147
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While this (being capable of saving an extra 100%) may work for some retirees, I doubt it works for most. Given the savings rate and NW data in the US (and I suspect other developed countries), this is not an appropriate approach for most retirees, not just older workers. That's because it's simply not possible for most folks. They will have to take a different path.
This is not what I said -- "Being capable of Saving an extra 100%" Saving an extra 100% of WHAT? - I am talking about Non- Discretionary items and Discretionary items in a Budget.

I don't know of anyone that retires with a zero non-discretionary Budget, and if they did want to retire with every penny of their Withdrawal Rate dedicated to Non-Discretionary, I would tell them they are not ready to retire. My rule of thumb is that you better have at least Twice your Non-Discretionary Budget in your Initial Withdrawal amount or you're in trouble. But hey, this is not an exact science, so you do what you want.
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Old 11-09-2014, 09:07 AM   #148
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This is not what I said -- "Being capable of Saving an extra 100%" Saving an extra 100% of WHAT? - I am talking about Non- Discretionary items and Discretionary items in a Budget.

I don't know of anyone that retires with a zero non-discretionary Budget, and if they did want to retire with every penny of their Withdrawal Rate dedicated to Non-Discretionary, I would tell them they are not ready to retire. My rule of thumb is that you better have at least Twice your Non-Discretionary Budget in your Initial Withdrawal amount or you're in trouble. But hey, this is not an exact science, so you do what you want.
The 100% means saving enough that you can generate an income equal to twice your base income. The question is "what does 'base' income mean"?

I think most people want to continue their pre-retirement lifestyle after retirement. If they're getting "older", it's more important to get out of the rat race than it is to keep working until they can afford African safaris.

Yes, that pre-retirement spending may have a few things that they consider "discretionary" enough that they are willing to put them in the "I will cut this as soon as the market drops" category. So "base" is a little less than their pre-retirement spending. But I'm thinking base is 80-90% of current income for the average American, not 50%.

And, yes, I'd suggest that they work until they have some cushion above that. But, that cushion might be 20% of current spending - i.e. extra assets of 3 to 6 times current annual base spending.
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Old 11-09-2014, 10:06 AM   #149
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So "base" is a little less than their pre-retirement spending. But I'm thinking base is 80-90% of current income for the average American, not 50%.
This is an Early Retirement Forum. I am not talking to "Average Americans".

I'll say it again as simply as Possible: Take 4% of your Portfolio as a "Rule of Thumb" for your Withdrawal Rate. If you could not Live on 2%, if you had to, you probably don't have enough to retire "comfortably". (There are people on these forums that can live on their S.S. and Pensions alone without withdrawing anything from their portfolio) I would not hesitate to tell anyone on these forums that. And I certainly would not recommend that that they 'Retire Early', if they cannot live on that 2%

That's my recommendation, you can feel free to recommend anything you want.
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Old 11-09-2014, 04:12 PM   #150
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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 5.5% 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....
Some good points here. I'm still trying to get my head around VPW. I added a few inflation adjusted items to the summary:
1) A column showing the percentage of the starting year's spending (blue column of % numbers). This more explicitly tells me how spending will be affected then looking at the chart and comparing the blue & red lines.
2) Added a "real balance" (in red) to the Backtest Table Balance chart.

Here are the modifications:


.
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.
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Old 11-09-2014, 04:27 PM   #151
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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!
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Old 11-09-2014, 04:51 PM   #152
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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.
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Old 11-09-2014, 05:02 PM   #153
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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!"
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Old 11-09-2014, 05:16 PM   #154
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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.
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Old 11-09-2014, 05:24 PM   #155
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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.
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Old 11-09-2014, 05:28 PM   #156
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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.
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Old 11-09-2014, 05:32 PM   #157
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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.
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.
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Old 11-09-2014, 05:42 PM   #158
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  • 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).
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Old 11-09-2014, 05:47 PM   #159
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How many are using VPW here? Maybe there should be a poll.

How many switched to VPW after using a more simple SWR?
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Old 11-09-2014, 05:48 PM   #160
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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.
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