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Old 01-30-2018, 09:56 AM   #41
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I understand the general direction you're going.

It appears that when market values go down, you increase your expected returns. I can see from other posts that you've walked through 1966 as a test case. Presumably, you've explained this in a Bogleheads thread, do you have a link?
Hah, I can only wish that this was my idea. Siamond, among others have discussed this some. Here are some links with some lively conversations between Siamond and Longinvest (the author of VPW).

viewtopic.php?f=2&t=160073&start=50#p2418402
https://www.bogleheads.org/forum/vie...?f=10&t=144089
AlohaJoe also has some posts over there but he also has a blog that discussed PMT based withdrawal methods here:
https://medium.com/@justusjp/flavors...y-dbe09aed5be1

And here is the original VPW thread. the discussions of smoothing don't show up until later, but it's a start.
https://www.bogleheads.org/forum/vie...?f=10&t=120430


Just FYI before you jump in on bogleheads. Longinvest very much likes the pure form of VPW that he authored with a fixed expected return lasting the entire retirement. He has stated a view that if one wants a smoother trajectory, then one should have a different AA to support it and is not really in favor of long term smoothing like this. There is a lot of back and forth between Longinvest and Siamond because of this.
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Old 01-30-2018, 04:12 PM   #42
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Originally Posted by big-papa View Post
Hah, I can only wish that this was my idea. Siamond, among others have discussed this some. Here are some links with some lively conversations between Siamond and Longinvest (the author of VPW).

viewtopic.php?f=2&t=160073&start=50#p2418402
https://www.bogleheads.org/forum/vie...?f=10&t=144089
AlohaJoe also has some posts over there but he also has a blog that discussed PMT based withdrawal methods here:
https://medium.com/@justusjp/flavors...y-dbe09aed5be1

And here is the original VPW thread. the discussions of smoothing don't show up until later, but it's a start.
https://www.bogleheads.org/forum/vie...?f=10&t=120430


Just FYI before you jump in on bogleheads. Longinvest very much likes the pure form of VPW that he authored with a fixed expected return lasting the entire retirement. He has stated a view that if one wants a smoother trajectory, then one should have a different AA to support it and is not really in favor of long term smoothing like this. There is a lot of back and forth between Longinvest and Siamond because of this.
Additional. https://www.bogleheads.org/forum/vie...t=500#p2436122
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Old 01-31-2018, 11:16 AM   #43
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Thanks, lots of reading there. Just skimming, I didn't see the particular method I thought you had suggested.

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several of us have modified the algorithm to update expected returns each year. Once you do that V and P are both fluctuating year on year which tends to smooth the dollar withdrawals
That sounded to me like your smoothing method used varying estimates of future returns. Presumably, in years that your portfolio goes up you adjust to a lower future return, so the percent number goes down and the dollars you withdraw aren't as high as they would have been.

Based on an earlier post, I thought you might be tying to a trailing P/E ratio. In particular, when P/E is high, you lower the expected future return.
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Old 01-31-2018, 11:39 AM   #44
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Thanks, lots of reading there. Just skimming, I didn't see the particular method I thought you had suggested.



That sounded to me like your smoothing method used varying estimates of future returns. Presumably, in years that your portfolio goes up you adjust to a lower future return, so the percent number goes down and the dollars you withdraw aren't as high as they would have been.

Based on an earlier post, I thought you might be tying to a trailing P/E ratio. In particular, when P/E is high, you lower the expected future return.
It's based on Shiller's PE10 (aka CAPE) for stocks (1/CAPE is an OK guess for future expected returns and has the advantage of being easy to look up and compute each year) and for bonds it's the current interest rate of your favorite bond fund minus your best guess a future inflation.

Yup, it's a lot of reading.

Unfortunately, I don't know how to reference an exact post. But this should guide you.
https://www.bogleheads.org/forum/vie...rt=50#p2418402
Refer to Siamond's post on March 14, 2015 at 7:12pm
The second paragraph is the explanation. This is the first place where Siamond made the suggestion of updating expected returns each year in the PMT equation instead of just using a fixed expected return for the duration of retirement. Now he used the interest rate for 10 year bonds which is probably OK. It's probably better to use the interest rate for whatever bond fund you're using.

So you can follow the trail from there.

siamond later recognized that this method takes care of longer term smoothing, but still sees the need for short term smoothing. He and longinvest went back and forth about it, but ultimately what siamond uses is described in the following post:
https://www.bogleheads.org/forum/vie...g+PMT#p3433869
Refer to Siamond's post on July 3rd, 2017 at 5:40pm

That's basically the gist of it all. Seems to work well when I backtest. If you deviate from a basic US large cap + treasury portfolio, then you'll have to add some more terms, get data from other places (like for international, etc),
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Old 02-01-2018, 08:47 PM   #45
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That 60% drop in income did not occur in a single year. In several cases it took 22 years to drop that low before finally turning around. Usually it took at least 15.
This completely depends on your Asset Allocation. And by 'income', I'm assuming you mean just the Withdrawal Amount of your Portfolio? Income usually includes Social Security and Pensions as well. VPW should be looked at within the entire Framework for Post Retirement Spending....

60% Drop in Income is no where near my Personal Historical Worst Case. I've been using VPW for the last 5 years now.
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Old 02-02-2018, 07:20 AM   #46
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Of course not. The last five years have been a solid part of the 9 year rising bull. You wouldn’t expect much variation. And it should always be understood that the income only refers to the withdrawals from portfolio, whether needed or Not. Needing to live on it or not is an entirely different discussion and is what determines your risk level and requirements for smoothing vs desire or comfort with smoothing. That is why back testing CAN provide valuable insights, but still is not definitive.
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Old 02-02-2018, 07:49 AM   #47
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This completely depends on your Asset Allocation. And by 'income', I'm assuming you mean just the Withdrawal Amount of your Portfolio? Income usually includes Social Security and Pensions as well. VPW should be looked at within the entire Framework for Post Retirement Spending....

60% Drop in Income is no where near my Personal Historical Worst Case. I've been using VPW for the last 5 years now.
Not VPW. This is from running FIRECALC through the %remaining portfolio case with a 50/50 allocation and various withdrawal rates and looking at the real income (i.e. withdrawal) drops during the worst case years. Over many years, in the worst historical cases, you do see that much of a real decline because your portfolio drops that far down before finally recovering, and how far it drops depends on the withdrawal rate. I used TSM and 5 year treasuries for the 50/50. I’ll try to post the results table later.

I haven’t modeled other asset allocations. One can speculate that a higher equity allocation will make the portfolio drop more under the worst case historical scenarios, whether or not it improves average outcomes.

Yes, I was just looking at portfolio withdrawals. My income is without pension nor SS which I’m still 12 years from taking and it will then likely be quite small compared to my portfolio withdrawals. Every individual has to take into account their own total retirement income picture and spending requirements.
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Old 02-02-2018, 09:02 AM   #48
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It's based on Shiller's PE10 (aka CAPE) for stocks (1/CAPE is an OK guess for future expected returns and has the advantage of being easy to look up and compute each year) and for bonds it's the current interest rate of your favorite bond fund minus your best guess a future inflation.

Yup, it's a lot of reading.

Unfortunately, I don't know how to reference an exact post. But this should guide you.
https://www.bogleheads.org/forum/vie...rt=50#p2418402
Refer to Siamond's post on March 14, 2015 at 7:12pm
The second paragraph is the explanation. This is the first place where Siamond made the suggestion of updating expected returns each year in the PMT equation instead of just using a fixed expected return for the duration of retirement. Now he used the interest rate for 10 year bonds which is probably OK. It's probably better to use the interest rate for whatever bond fund you're using.

So you can follow the trail from there.

siamond later recognized that this method takes care of longer term smoothing, but still sees the need for short term smoothing. He and longinvest went back and forth about it, but ultimately what siamond uses is described in the following post:
https://www.bogleheads.org/forum/vie...g+PMT#p3433869
Refer to Siamond's post on July 3rd, 2017 at 5:40pm

That's basically the gist of it all. Seems to work well when I backtest. If you deviate from a basic US large cap + treasury portfolio, then you'll have to add some more terms, get data from other places (like for international, etc),
Thanks

It's going to take a while to digest this.
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Old 02-02-2018, 10:07 AM   #49
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Thanks

It's going to take a while to digest this.
Understandable. Also both siamond and I are still playing with this offline. What I suggested (1/CAPE) for an estimate of stock returns and bond interest rate minus expected inflation, updated each year seems pretty good. But those aren't the only forward looking models around.
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Old 02-02-2018, 10:48 AM   #50
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Understandable. Also both siamond and I are still playing with this offline. What I suggested (1/CAPE) for an estimate of stock returns and bond interest rate minus expected inflation, updated each year seems pretty good. But those aren't the only forward looking models around.
That looks straightforward enough. Simple enough for me anyway.

I just need ballpark.
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Old 02-02-2018, 10:56 AM   #51
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That looks straightforward enough. Simple enough for me anyway.

I just need ballpark.
Yep pretty straightforward. Main key is updating it into the PMT equation each year. Of course guessing inflation is always fun. For backtesting, I've tried using the previous year's inflation or an average of the last 2-5 years and that seems OK. These days one can look at the breakeven rate of TIPs to get an idea of future inflation. Like I said, many choices.
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Old 02-02-2018, 11:15 AM   #52
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Here is a spreadsheet showing how the %remaining portfolio behaves with a 50/50 Total Stock Market and 5 year Treasury and various withdrawal rates over a 30 year period.

%remaining portfolio means you withdraw the same % of the portfolio value each year. So income goes up and down with portfolio performance. As the portfolio grows you get higher income right away, but if the portfolio drops, your income from the portfolio also drops. A burning question is always - how much of an income drop might someone have to deal with using this withdrawal method?

All numbers are real. So an ending portfolio of $1M means you have what you started with in real spending power even after 30 years of withdrawals and inflation. This comes from some work samclem and I did a while back trying to figure out where the %remaining portfolio tipped from growing to shrinking on average. 4.35% was the magic number for this allocation. For this scenario the average ending portfolio matches the starting one.

This spreadsheet looks at various withdrawal rates on $1M portfolio. It shows the worst historical case for each and the lowest income someone would have experienced during the 30 years. It also shows the lowest ending portfolio (which historically does not correspond to the lowest intermediate income sequence) and the average ending portfolio.

% withdrawal remaining portfolio$1M starting portfolio incomelowest portfoliolowest income worst income drop from start in %average ending portfolioincome from average ending portfoliolowest ending portfolioincome from lowest ending portfolio
         
6.00%$60,000$270,798$16,24873%$593,418$35,605$298,371$17,902
5.00%$50,000$345,873$17,29465%$815,142$40,757$409,854$20,493
4.50%$45,000$388,214$17,47061%$954,171$42,938$479,758$21,589
4.35%$43,500$401,853$17,48160%$1,000,171$43,507$512,306$22,285
4.25%$42,500$411,198$17,47659%$1,032,020$43,861$518,901$22,053
4.00%$40,000$435,476$17,41956%$1,115,994$44,640$561,123$22,445
3.50%$35,000$474,093$16,59353%$1,304,200$45,647$655,754$22,951
3.33%$33,300$486,776$16,21051%$1,374,917$45,785$691,310$23,021
3.25%$32,500$492,854$16,01851%$1,409,464$45,808$708,681$23,032
3.00%$30,000$512,306$15,36949%$1,522,919$45,688$765,726$22,972

I think it's important to point out that historically, even with higher withdrawal rates, the lowest income was still above the income for lower withdrawal rates until you exceeded 4.35%. So the drops in income were more drastic, but in spending terms you were able to withdraw far more income before hitting that low number. You do have a higher terminal portfolio value with lower withdrawal rates. So perhaps a good way to choose a withdrawal rate is to look at the average and lowest ending portfolio and decide what is OK, and then look at how much of a drop in income you might have to stomach. If you start with much higher income supposedly you can build a cushion or that steeper drop.

In exploring the historical data with Firecalc it turned out that 1906, 1899 and 1892 were worse starting years than 1966. In fact there were several more - maybe 10 worse starting years before 1966, and these were mostly before 1916. It took quite a bit of reviewing the data to tease out the lowest income years. In general, the 1966 worst case income drop was ~5% less than these cases.

Here is another spreadsheet that shows the worst case starting year, the lowest income year, and the number of years it took to drop to that lowest income. As you can see they all occurred over a very long period of time, at least 15 years. So you have a combination of stock market losses, inflation, and withdrawals, grinding away at the portfolio over many years before a turnaround finally occurs and things improve. Interestingly all of the worst case historical periods ended with a higher terminal portfolio value than the historically lowest ending portfolio. 1920 was the lowest income year in all cases.

% withdrawal remaining portfoliostarting year for worst case runLowest income yearYears to lowest portfolio value
    
6.00%1892192029
5.00%1899192022
4.50%1899192022
4.35%1899192022
4.25%1899192022
4.00%1899192022
3.50%1906192015
3.33%1906192015
3.25%1906192015
3.00%1906192015
In the 1966 case it took 16 years to get to the lowest income, so similar time period - long slow grind down.
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Old 02-02-2018, 02:38 PM   #53
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Personally I prefer to take the full chunk out after a big up year figuring that it could go poof the next, so I might as well pull out the entire amount, accepting the raise the market gave me. I stockpile my excess income instead.

+1

Where do you put it? I was in ST Bond funds but now that interest rates are going up, maybe MM funds again?

And, do you think it should count when figuring one's the AA? I feel like it is no longer investment funds, but just money sitting around waiting to be spent.
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Old 02-02-2018, 05:00 PM   #54
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+1

Where do you put it? I was in ST Bond funds but now that interest rates are going up, maybe MM funds again?

And, do you think it should count when figuring one's the AA? I feel like it is no longer investment funds, but just money sitting around waiting to be spent.
Currently I have a combination of short-term CDs and high yield savings accounts, although I do still have some funds from a while back in short-term bond funds and some 3% 5 year CDs.

I don’t figure it as part of my AA because the funds have already been withdrawn from the portfolio.

What is the purpose of an AA? - it’s to let you know what/when to rebalance and to decide what percent you can reasonably withdraw. I only apply those rules to my retirement portfolio. Once the funds are removed I can do whatever I want without it affecting the retirement portfolio.
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Old 02-03-2018, 10:45 PM   #55
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Thanks.
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Old 02-04-2018, 10:39 AM   #56
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To the OP: I wish I had it at my fingertips, but I recently read an interview with the guy who created the 4% rule in which he pretty much validated your thesis that if you have a great market for a few years after retirement, go ahead and “pretend”’that your retirement started later with a 4% withdrawal on the new higher balance.
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Old 02-04-2018, 10:43 AM   #57
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... I recently read an interview with the guy who created the 4% rule ...
Cooley, Hubbard or Walz?

http://afcpe.org/assets/pdf/vol1014.pdf
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Old 02-05-2018, 08:19 AM   #58
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To the OP: I wish I had it at my fingertips, but I recently read an interview with the guy who created the 4% rule in which he pretty much validated your thesis that if you have a great market for a few years after retirement, go ahead and “pretend”’that your retirement started later with a 4% withdrawal on the new higher balance.
I'm the OP. I did not intend to say that you should automatically ratchet up as soon as you have a good year.

I back tested that strategy with FireCalc's returns and found that it introduced additional failure years.

I did not test "a few years". I would expect that waiting longer before ratcheting would work out in back testing. But, I haven't tried to put a number on "longer".

(IF 4% were 100% successful in back testing, I would have gotten a different answer. But, 4% is only 95% successful in FireCalc. And, then we get into the limits on back testing.)
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