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

[Totoro]

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.

 

[Cut-Throat]

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.

 

[ERD50]

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.

-ERD50

 

[Totoro]

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!

 

[Independent]

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.

 

[spicoli]

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.

 

[sengsational]

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)?

 

[truenorth418]

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.


Sent from my iPhone using Early Retirement Forum

 

[Cut-Throat]

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.

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.

 

[Chuckanut]

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?

 

[Cut-Throat]

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.

 

[Cut-Throat]

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.

 

[Huston55]

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 ********, which is a tool that evaluates many of them. Link below.

Crowdsourced Financial Independence and Early Retirement Simulator/Calculator

 

[Zorba]

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

 

[Cut-Throat]

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!

 

[samclem]

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.

 

[REWahoo]

...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.

 

[Independent]

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.

 

[kramer]

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

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.

 

[Cut-Throat]

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.

 

[Huston55]

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.

 

[Cut-Throat]

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.

 

[Independent]

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.

 

[Cut-Throat]

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.

 

[Lsbcal]

....
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.