That is effectively my point. I don't plan on using VPW. I was just wondering the theoretical/conceptual differences between the two methodologies.
Yes my thought was wondering if applying a 95% rule to VPW which already always uses >4% of portfolio balances vs. Clyatt's 4% fixed WR of portfolio balances would drain the account much quicker.
Plus, the concept of VPW is to effectively run through the funds, while Clyatt is to maintain the starting "real" point of funds.
If one uses their own forward calculations, then isn't one just effectively in current environment not following the "larger WR% of VPW which might make it more attractive in the first place?
Difficult to compare things when nothing is cast in stone.
First, Clyatt's method is a variant of "the fixed %" methodology. Withdraw a certain % of your portfolio each year or a certain % of the remaining portfolio, whichever is larger. I've seen the "certain % of the portfolio" defined as anywhere from 4% to 6% and I've seen the "certain % of the portfolio range anywhere from 90% to 98%. You can look at historical return sequences and your AA to see what sort of withdrawal trajectories might have happened in the past. At any rate, I look at Clyatt's method as a subset of the fixed % of the portfolio method, which is designed to guarantee that a portfolio lasts in perpetuity. It can not guarantee exactly what your year to year withdrawals are going to actually look like - you may have fantastic years or your may have years where the withdrawals are below what you need to live on.
VPW, on the other hand, is a subset of a PMT methodology (also called the Actuarial Method). For expected returns, VPW uses an expected worldwide real returns from a Credit Suisse document. Another variant, called ARVA, uses the current real TIPs returns for expected returns. All PMT methodologies I've seen withdraw a percentage of the portfolio that varies each year. If you're using a fixed expected returns, then the % withdrawn each year will increase monotonically until the final year when 100% is withdrawn, if you live that long. Like the fixed % of the portfolio method, the actual dollar amount withdrawn each year will vary based on the product of the calculated % and the amount remaining in your portfolio. The advantage of an actuarial method isn't that it allows you to withdraw more each year than any other method - it actually doesn't do that. Instead it more efficiently guarantees that you withdraw everything you have by the end date you use for the calculation. That means that over the entire span of your retirement, you will have had more to live on than other methods. But because it variable, there is still a non-zero chance that some years could end up below your required spending level.
Then there is SWR (Safe Withdrawal Method). This one takes a certain % of your portfolio the first year, then increases the amount withdrawn in the next year by the previous year's inflation rate. The most famous version of this is the so-called 4% rule based on Bengen's work and the Trinity study of the worst case starting percentage in history that would result in a portfolio that would last 30 years. Again, 4% is just a number - depending on your portfolio construction or the number of years you want to plan for, it could be higher or lower than 4%. And what about all of the other starting years in history besides the worst one ever? For those times, you croak with quite a bit, sometimes a tremendous amount, of money left. Money you could have spent during retirement, if that's your desire. Or you can go conservative and choose some other number lower than 3%. With many folks concerns about risk, that works for them.
Then there is Guyton-Klinger which is a variant on SWR. Like SWR, it adjusts for inflation, but adds some guardrails to limit the amount withdrawn in any given year. In it's pure form, there are some other rules in the algorithm, but that's best found via google.
OK, back to PMT using forward looking return estimates. The question was asked:
If one uses their own forward calculations, then isn't one just effectively in current environment not following the "larger WR% of VPW which might make it more attractive in the first place?
I'm going to use the term PMT in deference to the author of VPW who usually takes issue with any thing that modifies VPW as he envisions it. With a PMT method that uses fixed expected returns, eventually there will be a year where the WR% exceeds any other method. Depending on the other methods you're comparing against, when the WR% exceeds other methods depends on what the starting % withdrawal is used for the other methods and it depends on the expected returns you use for the PMT method. But by the fact eventually the WR% gets to 100%, it will certainly surpass any other method.
But that's both a good thing and a bad thing. In backtesting PMT, you will find many years where the dollar amount withdrawn (either nominal or real) will literally shoot to the moon in the final years. Everybody's desire is different, but mine would be to have more of that money available in the earlier years of retirement when I could enjoy it more. For other starting years (like the late 1960's because of high inflation and a bear market), the annual withdrawals drop pretty quickly, then rise again in the later years forming a "U" shape curve.
Now, if expected future returns, say, 10 or so years out are higher, then I would want to withdraw more than the default used for VPW. If they are lower, then, I would want to withdraw less. And by updating the expected returns each year, you'll find that the annual withdrawals are "surfing the wave". The dollar amount withdrawn will still vary year on year, but you'll find that for good starting years in retirement, poor starting years and just "meh" years in history have more bounded dollar amount withdrawals.
Some of this was discussed on the G-K thread over at BH a while back with the poster "siamond" leading that discussion.
The thread is here:
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=160073&start=50
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