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

[photoguy]

I suppose we're using "market timing" differently. I'm using it to mean:
A. changing your total asset allocation in response to some economic indicator. In this case, the indicator is "market value of the long term portion of my total asset portfolio".

You're using it to mean:
B. changing your total asset allocation based on a belief that you have a better crystal ball than other investors.

I've always though of "market timing" as definition B -- i.e. changes in asset allocation due to some prediction of the future market directions.

If you use definition A, wouldn't pretty much every form of rebalancing be market timing?

Suppose I buy and sell solely to maintain a fixed asset allocation. I would not call that "market timing".

But isn't this based on market values as per your indicator in example A?

 

[REWahoo]

Dex? Is that you?

 

[Lsbcal]

I was curious how my withdrawals over the last 10 years compared to what VPW suggests. Over the last 10 years our compounded withdrawal rate was about 5.0% per year. Most of this was before taking SS.

It turns out that although our withdrawals fluctuated a lot, they were almost identical to what VPW suggests. This is based on my age when I first retired and our current allocations (which actually fluctuated a bit over the last 10 years).

So in a round about way, I was using VPW all the time.

 

[haha]

This is a useful finding that may be counter-intuitive to some and of particular use to anyone who is looking to optimize their withdrawals. Even to those of us who have more conservative WR's, it can't hurt to know that the extra chunk of discretionary spending we were dreaming of will adversely affect the portfolio less, if taken during good times.

It will affect it even less if we detour on the way to buying our cruise tickets and put it in conservative intermediate bonds.

Ha

 

[Independent]

I've always though of "market timing" as definition B -- i.e. changes in asset allocation due to some prediction of the future market directions.

If you use definition A, wouldn't pretty much every form of rebalancing be market timing?

But isn't this based on market values as per your indicator in example A?

Yes, we could label "rebalancing to maintain a fixed ratio" as "market timing". Or not, depending on what we are trying to communicate.

I don't want to argue definitions. My use of "market timing" was clearly a distraction from my point.

I was simply saying that Audrey's strategy seems mostly about changing asset allocations in hopes of maintaining a reasonably level spending pattern and long term sustainability.

VPW (at least as Cut-Throat has described it) seems more about maximizing your spending by accepting a very variable spending pattern.

 

[audreyh1]

I suppose we're using "market timing" differently. I'm using it to mean:
A. changing your total asset allocation in response to some economic indicator. In this case, the indicator is "market value of the long term portion of my total asset portfolio".

You're using it to mean:
B. changing your total asset allocation based on a belief that you have a better crystal ball than other investors.

I can see that you are not doing B. But, I think you are doing A.

The standard concern about percent-of-current-balance withdrawal strategies is that they assume the followers will accept substantial swings in their annual spending. But, that statement assumes that people are going to spend exactly 100% of what they withdraw.

You've got a different plan. You're stabilizing your spending by adding another asset class. If we wanted to backtest your plan, we would need to add a short term asset column to the VPW worksheet and have money going into and coming out of that column at various times based on some rule that seems reasonable to you.

Again, I'm not saying it's a bad plan, just that it's different from the VPW worksheet.

I'm not using VPW. I haven't studied it either. I only use asset allocation in my retirement fund, the one I withdraw from annually according to a constant % withdrawal, and I don't change that AA based on economic conditions, so I don't consider that I'm changing my AA. What I do with the funds after withdrawal have no bearing whatsoever. IMO there is no requirement that absolutely all your assets be managed as a single asset allocation.

 

[Huston55]

I'm not using VPW. I haven't studied it either. I only use asset allocation in my retirement fund, the one I withdraw from annually according to a constant % withdrawal, and I don't change that AA based on economic conditions, so I don't consider that I'm changing my AA. What I do with the funds after withdrawal have no bearing whatsoever. IMO there is no requirement that absolutely all your assets be managed as a single asset allocation.

Understood that you don't consider it market timing because you "don't change that AA based on economic conditions" but, it absolutely does have a bearing, for the reason listed below. Likely a good one, since you seem to be saying you save some of the withdrawal but, a 'bearing' (impact) nonetheless.

It will affect it even less if we detour on the way to buying our cruise tickets and put it in conservative intermediate bonds.

Ha

 

[audreyh1]

Understood that you don't consider it market timing because you "don't change that AA based on economic conditions" but, it absolutely does have a bearing, for the reason listed below. Likely a good one, since you seem to be saying you save some of the withdrawal but, a 'bearing' (impact) nonetheless.

What bearing? Withdrawal and spending are two different animals. I simply don't force myself to spend all I withdraw, and I don't reinvest it to risk it in the retirement portfolio either, but leave it earmarked for near term spending whenever or however I choose.

I don't need to take less out of the portfolio just because I can spend less in any given year if I choose. I have already determined a withdrawal rate I think is fairly safe but not overly conservative, and there is no need to withdraw less. I am also managing against the portfolio growing too large. I don't want to run out of funds, but I don't want to end up with a huge portfolio at the end either.

That is another reason I chose the constant withdrawal percent method [aka % remaining portfolio method] which does in fact withdraw more $ after a good market run.

And I don't put excess (not spent right away) in intermediate bond funds either as those are appropriate for money not needed before 5 years, and I consider that I might need the excess much sooner than that. I might need some of it in a year, so I don't risk it in long or intermediate-term investments.

 

[Lsbcal]

I think Audrey is doing a fine job managing investments and spending.

How about getting back to the main subject, VPW. What are you guys thinking of doing with VPW? Or are you giving it any thought?

 

[audreyh1]

Sorry - I piped up when discussions were sparked longinvest's observations of what can happen to funds left in the portfolio.

And by Cut-throat's additional info:

I am taking the defaults and am actually withdrawing what VPW tells me to. It goes into a Cash "Spending Account", never to be invested again. You can also use this account to "Buffer" shortfalls in Withdrawals.

Due to the principle that

The main idea is to 'Get the money out of the Market' when VPW tells you to. Plans work! Execute the Plan!

VPW is a disciplined approach to removing more money from the Markets (Stock/Bond) during up market years and removing less from down market years.

As my method behaves in a similar way, even though it may not be as optimized.

I will probably gradually increase my % withdrawal number as we age, evaluating, say, every 5 years.

I am definitely an advocate of taking more $ out of the market after good years, regardless of whether you can spend it all right away.

 

[Huston55]

What bearing? Withdrawal and spending are two different animals. I simply don't force myself to spend all I withdraw, and I don't reinvest it to risk it in the retirement portfolio either, but leave it earmarked for near term spending whenever or however I choose.

I don't need to take less out of the portfolio just because I can spend less in any given year if I choose. I have already determined a withdrawal rate I think is fairly safe but not overly conservative, and there is no need to withdraw less. I am also managing against the portfolio growing too large. I don't want to run out of funds, but I don't want to end up with a huge portfolio at the end either.

It has an impact because you keep the money; it becomes part of your NW, even if for a short while. That impacts your AA, which impacts the return and value of your portfolio. What you are doing is establishing a 'cash buffer' with the additional funds. Cash buffers create PF drag.

BTW, I like 'cash buffers.' We use one (CD ladder + ST bond fund) but, we do it up front as part of our selected AA. I like them because the peace of mind helps, and I'm willing to accept the PF drag as a price for the peace of mind.

I think Audrey is doing a fine job managing investments and spending.

How about getting back to the main subject, VPW. What are you guys thinking of doing with VPW? Or are you giving it any thought?

Actually, I think this is central to the discussion of VPW; which is why the "withdrawal but don't spend" distinction has been made numerous times in this thread. I expect there are many who evaluate/consider VPW and, as part of that consideration, evaluate the 'withdrawal per VPW but don't spend it all' approach. What happens to those funds impacts PF performance and terminal value, which seems very relevant to me when discussing any systematic WD methodology.

 

[Live And Learn]

I have a cash buffer in my AA (5 years of expenses in CDs & Short Term Bonds). If I were to move to VPW I would shorten the cash buffer to 3 years. VPM does not have short term / cash as part of its portfolio calculation, but I wouldn't sleep at night with less than 3 years cash buffer. Any excess withdrawals in good years would go to add to my cash buffer back to a max of 5 years expenses. That probably blows the entire theory of VPW but I need to sleep at night

 

[Lsbcal]

...
Actually, I think this is central to the discussion of VPW; which is why the "withdrawal but don't spend" distinction has been made numerous times in this thread. I expect there are many who evaluate/consider VPW and, as part of that consideration, evaluate the 'withdrawal per VPW but don't spend it all' approach. What happens to those funds impacts PF performance and terminal value, which seems very relevant to me when discussing any systematic WD methodology.

I agree. Was trying to get us away from the "is, is not" market timing thoughts.

I'm still thinking about the unused VPW spending question. For our age and portfolio AA, VPW tells me to spend 5.3% next year and suppose I only spend 4%. Things I could do to keep track of it:
1) Just make an entry in my spreadsheet as unspent money to track. The equivalent amount should be in near cash, maybe even short term bonds.
2) Keep it entirely in a separate "spend" account with no equity exposure and not think of it as even part of the "investment portfolio".
3) Make the appropriate adjust to VPW's "Depletion Years" to get WR=4% for my current year's withdrawal. In our case this would be 80 years and mean the portfolio will last until I'm about 147 years old.
4) Reduce equities to get WR = 4%. In our case that would mean 0% equities.

I'm tending to favor #1. Looking at #3 and #4 shows me just how conservative a 4% withdrawal rate really is for our age. Interesting.

 

[Chuckanut]

I am definitely an advocate of taking more $ out of the market after good years, regardless of whether you can spend it all right away.

Ahhh...... Very good. I think that strategy is called 'selling high'.

Like my old grandpappy used to say 'Buy Low, Sell High. Works every time'.

 

[REWahoo]

Like my old grandpappy used to say 'But Low, Sell High. Works every time'.

You left off a "t"...

 

[Huston55]

Here's a new thread discussing multiple retirement calculators. It's a good reference point to begin comparisons. And, the ******** calculator is already pre-loaded with VPW for those who want to evaluate scenarios or compare VPW to other variable withdrawal methods.

http://www.early-retirement.org/for...-a-good-starting-point-74632.html#post1521631

 

[Chuckanut]

You left off a "t"...

Fixed. Dang keyboard must be defective.

 

[audreyh1]

It has an impact because you keep the money; it becomes part of your NW, even if for a short while. That impacts your AA, which impacts the return and value of your portfolio. What you are doing is establishing a 'cash buffer' with the additional funds. Cash buffers create PF drag.

BTW, I like 'cash buffers.' We use one (CD ladder + ST bond fund) but, we do it up front as part of our selected AA. I like them because the peace of mind helps, and I'm willing to accept the PF drag as a price for the peace of mind.



Actually, I think this is central to the discussion of VPW; which is why the "withdrawal but don't spend" distinction has been made numerous times in this thread. I expect there are many who evaluate/consider VPW and, as part of that consideration, evaluate the 'withdrawal per VPW but don't spend it all' approach. What happens to those funds impacts PF performance and terminal value, which seems very relevant to me when discussing any systematic WD methodology.

Allowing extra cash, particularly after "good years" to accumulate in a spending buffer, is a perfectly natural reaction to a variable income stream. So you'll probably see it used with any method where some years have higher $$ coming in than others. This kind of "income smoothing" is just common sense and offers one solution to folks squeamish about living with a variable income. There is no requirement to spend all you withdraw in a single year. If you get a sudden 15-20% rise in income after a spectacular year like 2013, why do you have to spend it all immediately?

There is also simply no requirement that one's entire net worth be managed as a single AA. I would go further to say that's preposterous.

The only "rule" perhaps, is that whatever collection of investments on has set aside whose purpose is "for very long-term investment and withdrawal for income during retirement", might be wisely managed and rebalanced using a target AA, as from this you can model withdrawal rates and survivability and volatility against various asset allocations (taking into account inflation), and pick what you think might work well enough for you to stick with it for the decades you hopefully are invested.

I see the comment about cash buffers are a performance drag all the time. So what? I have already decided to choose an AA rather than go 100% small cap stocks, because I'm not looking to maximize my long-term performance at the expense of the volatility that concentration would cause. By choosing an AA that includes fixed income, you've already created a major performance "drag".

I have setup my retirement portfolio, target AA, and withdrawal % to match what I think I can stick with. It doesn't matter if I could perhaps withdraw more $$ from somewhere if I counted ALL my assets. I just know what I can probably count on withdrawal for this retirement pool of money over the long run, regardless of what my other investments are doing.

I have X monies set aside for funding retirement with an annual draw. I have other monies set aside for short-term spending, and various other shorter term things, and some earmarked for potential health expenses down the road. I even have some other much riskier investments that I have owned for a long time, and that if they went "poof" wouldn't mess up my retirement income. Someone saving for college for their children, and for retirement, hopefully manages them separately as they are two separate investment pools with different time lines and goals. Same difference.

 

[audreyh1]

I agree. Was trying to get us away from the "is, is not" market timing thoughts.

I'm still thinking about the unused VPW spending question. For our age and portfolio AA, VPW tells me to spend 5.3% next year and suppose I only spend 4%. Things I could do to keep track of it:
1) Just make an entry in my spreadsheet as unspent money to track. The equivalent amount should be in near cash, maybe even short term bonds.
2) Keep it entirely in a separate "spend" account with no equity exposure and not think of it as even part of the "investment portfolio".
3) Make the appropriate adjust to VPW's "Depletion Years" to get WR=4% for my current year's withdrawal. In our case this would be 80 years and mean the portfolio will last until I'm about 147 years old.
4) Reduce equities to get WR = 4%. In our case that would mean 0% equities.

I'm tending to favor #1. Looking at #3 and #4 shows me just how conservative a 4% withdrawal rate really is for our age. Interesting.

Obviously I do #2, and do not think of it as part of the "retirement investment portfolio" once it's withdrawn.

I do keep short-term funds in separate accounts from the brokerage funds that make up our retirement investment portfolio. Beats a spreadsheet, IMO, as it keeps things very clean.

I can't speak to 3) and 4) as I don't use the VPW calculator.

I don't believe I would ever reduce equities below 40% in my retirement AA, as the long-term inflation-adjusted survivability really rolls off after that point. Well, maybe if I make it to 80 I will.

 

[Chuckanut]

The opportunity cost of cash buffers can be thought of as being similar to an insurance premium we pay to protect us against having to sell to much when the market is to low. Like any insurance we need to balance the price versus the potential benefits.

 

[Lsbcal]

Obviously I do #2, and do not think of it as part of the "retirement investment portfolio" once it's withdrawn.

I do keep short-term funds in separate accounts from the brokerage funds that make up our retirement investment portfolio. Beats a spreadsheet, IMO, as it keeps things very clean.

#2 is fine, I think.

Perhaps another way is to just adjust the AA. For instance, a 60/40 portfolio goes to a 59/41 if one spends 1% less then VPW tells them to in that year. Then one would be continually playing with the AA depending on their spending history. The money set aside is still put into short term investments.

I can't speak to 3) and 4) as I don't use the VPW calculator.
...

Don't know if you have Excel or LibreOffice (spell?) but I think it worthwhile to at least play with one's own parameters.

 

[audreyh1]

#2 is fine, I think.

Perhaps another way is to just adjust the AA. For instance, a 60/40 portfolio goes to a 59/41 if one spends 1% less then VPW tells them to in that year. Then one would be continually playing with the AA depending on their spending history. The money set aside is still put into short term investments.

Don't know if you have Excel or LibreOffice (spell?) but I think it worthwhile to at least play with one's own parameters.

I know I have already spent quite a bit of time in this thread reading posts (I did go back and read all), and posting. But at this point after reading, I'm not inclined to play with more spreadsheets and models simply because I'm pretty comfortable with my current system and I have lots of other things keeping me quite busy.

Doing the evaluation might mean I decide I can withdraw more annually than I am and that my current approach is too conservative. But I'm content with my current income. I can reevaluate options at any point in the future.

I only have Numbers, but it might be able to handle the file without critical errors.

 

[Lsbcal]

I don't want to push this too much. Just want to say that VPW is extremely easy to manage.

Basically there are only about 4 critical inputs to manage (age, US stock %, Intl stock %, portfolio size). "Depletion Years" is currently set so the total portfolio goes to age 100, but this can be adjusted to control the very late life estate value. "Start Year" is just for data analysis purposes.

 

[audreyh1]

I don't want to push this too much. Just want to say that VPW is extremely easy to manage.

Basically there are only about 4 critical inputs to manage (age, US stock %, Intl stock %, portfolio size). "Depletion Years" is currently set so the total portfolio goes to age 100, but this can be adjusted to control the very late life estate value. "Start Year" is just for data analysis purposes.

Sure - I can run it, but then I have to dig in to make sure I understand what is really going on. The posts here tell me that such digging and study will be very important.

 

[Independent]

I'm not using VPW. I haven't studied it either. I only use asset allocation in my retirement fund, the one I withdraw from annually according to a constant % withdrawal, and I don't change that AA based on economic conditions, so I don't consider that I'm changing my AA. What I do with the funds after withdrawal have no bearing whatsoever. IMO there is no requirement that absolutely all your assets be managed as a single asset allocation.

Okay, I'm saying that Cut-throat likes the idea of making percent-of-current-portfolio withdrawals, and spending the amount withdrawn, because he thinks that maximizes his withdrawals without developing unacceptable risks. He understands that this makes his spending quite variable because it will fluctuate with market values.

I think you're making percent-of-current-portfolio withdrawals, and sometimes using part of the withdrawal to buy short term fixed income assets, because you want to stabilize your income. You feel that this approach helps you get money "off the table" when market prices are high, so you don't feel that you need to cut your spending sharply when the market goes down.

What you do with the funds after you withdraw them from your long term assets has no bearing on the asset allocation within your long term assets. However, I specified your "total" asset allocation. I intended the word "total" to mean all of your assets, not just the assets in your long term fund.

Unless I'm really confused, you expect to sell stocks most years. But, when stocks are up sharply, some of the proceeds will be used to buy short term assets.

Again, this is just wording. You want to use "asset allocation" to refer only to the assets in your long term fund. I am using "total asset allocation" to refer to all of your assets. If you like, I could have said:

"Looking at everything you own, you shift to a more conservative ratio when market values get up above X% of your initial value. You plan to move back to a less conservative ratio when market values get below Y%."