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

[photoguy]

One advantage of the traditional SWR methodology (fixed withdrawal amount adjusted for inflation) is that one can compare two different investment strategies and see how they hold up. With variable withdrawals since the outputs are constantly changing it would make it difficult to compare say different AAs since the outcomes will need to evaluated on multiple different criteria.

[explanade]

Have the people who've FIRE'd been comparing their balances with what they projected and then possibly adjusting their withdrawal for a given year if their balance was greater or lower than their initial calculations?

Or maybe you find you aren't spending the full withdrawal for a given year so you withdraw less the following year?

[Alan]

Quote:

Originally Posted by explanade Have the people who've FIRE'd been comparing their balances with what they projected and then possibly adjusting their withdrawal for a given year if their balance was greater or lower than their initial calculations? Or maybe you find you aren't spending the full withdrawal for a given year so you withdraw less the following year?

Yes to both questions.

4th year of our retirement and very good market returns so my target of 3% WR has not been put to the test as we've not wanted to spend more than 3% up to now.

[kramer]

Quote:

Originally Posted by explanade Have the people who've FIRE'd been comparing their balances with what they projected and then possibly adjusting their withdrawal for a given year if their balance was greater or lower than their initial calculations? Or maybe you find you aren't spending the full withdrawal for a given year so you withdraw less the following year?

I am a retired single guy in my late 40's living abroad, no pension, low withdrawal rate. I find that my spending is pretty steady (or at least not closely related to my current portfolio level) and so, in my experience, the idea of spending that is varying a lot does not seem to match the way that I live. Maybe other retirees have a different experience.

However, I like the idea of knowing what I perceive to be a safe withdrawal rate for any given year. That is important to me, to know that my spending is within appropriate parameters. So I like using tools like VPW, although I think VPW is way off on the real investment returns that it estimates for a given portfolio. But I just substitute my own educated estimates for projected real returns.

[Cut-Throat]

Quote:

Originally Posted by Independent All percent of portfolio methods share the problem of poor early returns. They require spending cuts roughly proportional to the portfolio shrinkage in down markets. People may say "I can be flexible" without looking at past data and really facing the issue of what they will cut if they happen to hit the bad stretch. Running this worksheet with a 60/40 AA and starting in 1973 gives an initial withdrawal of $50,000, rapidly dropping to $29,900, which begins a 10 year stretch where the average withdrawal is $32,500. Somebody using this method needs to think about that $32,500 pretty carefully. And, they all have issues toward the end. It's true that a fixed percent can never run out of money, but again the withdrawals can be extremely (too) low in later years. Alternatively, this approach schedules rising percents, with the trade-off that you're guaranteed to run out of money on some date. (But then caps the withdrawal, at a percent, with no clear idea of what that means for payout dollars.)

BTW - All FireCalc Failures also start with poor portfolio performance in the early years. They result in Complete failures. So to compensate you get your SWR rate down to 3% or 2.5% and I've even heard of 2%! So, every portfolio suffers from poor early performance. VPW just waits until it's necessary to cut back.

Your alternative to starting with a WR of $50k and then dropping to an average of $32.5K is to start with a 'Conservative' SWR of 3% or $30K and prepare for the 'Great Market Downturn' right off the bat. (It may never happen, and you may have had more money to spend all along). No thanks!, I'll be Flexible. I really don't know anyone that would continue to take an inflation adjusted 4% into the teeth of a great recession.

And as for your point that withdrawals can be too low in later years, I don't think so. Show me a reasonable example where this is true? Backtest a year and show me how the spending is too meager in later years.

[Independent]

Quote:

Originally Posted by Cut-Throat BTW - All FireCalc Failures also start with poor portfolio performance in the early years. They result in Complete failures. So to compensate you get your SWR rate down to 3% or 2.5% and I've even heard of 2%! So, every portfolio suffers from poor early performance. VPW just waits until it's necessary to cut back. Your alternative to starting with a WR of $50k and then dropping to an average of $32.5K is to start with a 'Conservative' SWR of 3% or $30K and prepare for the 'Great Market Downturn' right off the bat. (It may never happen, and you may have had more money to spend all along). No thanks!, I'll be Flexible. I really don't know anyone that would continue to take an inflation adjusted 4% into the teeth of a great recession. And as for your point that withdrawals can be too low in later years, I don't think so. Show me a reasonable example where this is true? Backtest a year and show me how the spending is too meager in later years.

I see some apples vs. oranges regarding both calculators and conservatism here. If I use the same calculator, and the same conservatism, the relation really is between a flexible withdrawal starting at $50,000 and a fixed withdrawal starting at $40,000 (or, between a flexible withdrawal starting at $37,500 and a fixed withdrawal starting at $30,000, etc).

The VPW calculator only allows starting years of 1972 or later. For those years, there are no failures for a flat $40,000 withdrawal and the 60/40 AA. I think the worst year is 1973, which results in a portfolio of $290,000 after 35 years. So, if I believe the backtesting in the VPW calculator, $40,000 is a reasonable fixed withdrawal.

FireCalc doesn't fail either for start years of 1972 or later, with a 60/40 AA.
FireCalc will fail for start year 1973 if I use a 75/25 AA. The VPW calculator does not.
FireCalc has -$28,000 after 30 years. The VPW calculator, with the same 75/25 AA and $40,000 withdrawals, has $356,000 at the end of 30 years.

This isn't surprising. All these calculations are sensitive to the source of the historic returns and to small decisions regarding calculations. For example, the standard FireCalc assumption is 18 bp of investment expense. It also applies one extra year of inflation to each withdrawal (it takes the withdrawal at the beginning of the year, but the dollar amount it withdraws includes that year's inflation).

That's what I mean by apples vs. oranges regarding calculators. It seems wrong to test the fixed dollar SWR using FireCalc, then compare it to the Variable Percentage using the VPW calculator.

The "conservatism" comes from the notion that people who talk about 3% or 2.5% SWR are not relying on backtesting. They think it's likely that the future will be worse than the past. If I ask Firecalc for a 30 year, 100% success rate for its 113 possible start years, it will give me about 3.6%. If I could load the VPW calculator with the same 113 years of data, and use FireCalc's calculation assumptions, it might tell me that I shouldn't start with a 5% or $50,000 first year withdrawal, but maybe 4.5% or $45,000 instead.

I'm not trying to say that a variable percentage withdrawal is a bad idea. As I've already said, I use a version of it myself. My original point was that I think some people don't realize the magnitude of the spending reductions that these strategies assume.

The point of this post is that I think your numeric example is somewhat apples to oranges in terms of assumptions.

[Cut-Throat]

Quote:

Originally Posted by Independent The VPW calculator only allows starting years of 1972 or later.

Use the Shiller Data Set and you can go back as far as FireCalc. Then you can comment.

[Independent]

Quote:

Originally Posted by Cut-Throat Use the Shiller Data Set and you can go back as far as FireCalc. Then you can comment.

Thanks, this helps.

I set Data Set to "Shiller" and the AA to 75/25.

I didn't test every year, but I did check those where FireCalc SWR's tend to fail -- late 1960s and early 1970s. It turns out that 3.7% is the lowest number that gets through all of those years. So, if we're going to use backtesting, I'd test against 3.7% or $37,000.

The worst start year was 1966, where the $37,000 constant dollar withdrawals ended 35 years with a balance of $46,000.

That may also be the worst year for variable percentage withdrawals. The initial withdrawal is $53,000, it eventually drops to $22,800 before recovering.

Of course, the percentage withdrawals are scheduled to go to zero in the 36th year, and they do.

The VP withdrawals start at $53,000 and stay above $37,000 for 8 years.
Then they drop below, and stay below for the next 13 years.

To me, this 3.7% is a better comparison than "3% or even 2.5%".

The summary is still that percentage withdrawals have a lot going for them, but people embarking on this method should think ahead to whether they can really live on a lot less than their initial withdrawal if they happen to catch a bad retirement year. It's clear to me in this case that people who want to spend the $53,000 in the first year need some plan to live on less than $37,000 if the need arises. Those who really need at least $37,000 in every year should not start with $53,000 in the first year.

IMO, models using percentage withdrawal methods should have an additional input of "The smallest withdrawal I'm willing to accept in any year". That would help focus the user on the downside risk.


edit: I did a little more on this. I modified the VPW worksheet to accept a minimum $ withdrawal. To offset the fact that I'd be withdrawing "too much" in some down years, I also put in a maximum $ withdrawal.
Of course, if I set the minimum to $37,000, then I need to set the maximum to about $37,000, too.
Other possibilities (all approximate) are:
Min: $35,000 Max: $42,000
Min: $33,000 Max: $46,000
Min: $31,000 Max: $51,000

[Cut-Throat]

Quote:

Originally Posted by Independent IMO, models using percentage withdrawal methods should have an additional input of "The smallest withdrawal I'm willing to accept in any year". That would help focus the user on the downside risk.

The problem of course, is that the downside risk is unknown and possibly catastrophic. And by setting a 'Brake' on VPW, it becomes less effective (You are taking out more in down years, which is the real devastation of portfolios).

Yes, you have to know what the risk is in any portfolio withdrawal technique. But we're all big boys and girls here, otherwise we would not even be in this position. So, that goes without saying.

But the big benefit of VPW, is that it does not start preparing for 'Bad Times', until they arrive. So, it lets you spend more in your early on in retirement. And if the 'Bad times' never come, you don't end up with the huge pile of assets at the end of your retirement like a fixed SWR does MOST of the time. Remember you had to 'hunt' for 1966 for your example.

And if you think about it, starting with a Small SWR to prepare for a period of record low returns, means if that a bad market does come, you'll have a lot more invested to lose, than if you would have spent the money early on in retirement. This was a point that I was not understanding until I ran the numbers. Saving money for a Market Downturn, the money gets lost by falling market prices instead of that African Safari Vacation (Which I did check off my bucket list this past June)

[Independent]

Quote:

Originally Posted by Cut-Throat The problem of course, is that the downside risk is unknown and possibly catastrophic. And by setting a 'Brake' on VPW, it becomes less effective (You are taking out more in down years, which is the real devastation of portfolios). Yes, you have to know what the risk is in any portfolio withdrawal technique. But we're all big boys and girls here, otherwise we would not even be in this position. So, that goes without saying. But the big benefit of VPW, is that it does not start preparing for 'Bad Times', until they arrive. So, it lets you spend more in your early on in retirement. And if the 'Bad times' never come, you don't end up with the huge pile of assets at the end of your retirement like a fixed SWR does MOST of the time. Remember you had to 'hunt' for 1966 for your example. And if you think about it, starting with a Small SWR to prepare for a period of record low returns, means if that a bad market does come, you'll have a lot more invested to lose, than if you would have spent the money early on in retirement. This was a point that I was not understanding until I ran the numbers. Saving money for a Market Downturn, the money gets lost by falling market prices instead of that African Safari Vacation (Which I did check off my bucket list this past June)

Note that I edited my prior post with a few "collar" numbers. If I'm going to put a minimum withdrawal in, I need to offset that with some reductions in the good year (and first year) withdrawals. There's really a spectrum here from fully percentage to fully fixed. I gave some points on the spectrum.

I'm going to guess that someone who is taking African safaris can probably live on SS + 1% of initial portfolio. So the downside "risk" is just giving up some luxuries, and it's pretty easy for me to reason that if I'm in that position should enjoy those luxuries early, knowing I've got plenty of cushion.

Other people, who could (for example) be retiring early due to an unexpected layoff, might be running much closer to their "needs" and should take the downside more seriously.

[Cut-Throat]

Quote:

Originally Posted by Independent Note that I edited my prior post with a few "collar" numbers. If I'm going to put a minimum withdrawal in, I need to offset that with some reductions in the good year (and first year) withdrawals. There's really a spectrum here from fully percentage to fully fixed. I gave some points on the spectrum. I'm going to guess that someone who is taking African safaris can probably live on SS + 1% of initial portfolio. So the downside "risk" is just giving up some luxuries, and it's pretty easy for me to reason that if I'm in that position should enjoy those luxuries early, knowing I've got plenty of cushion. Other people, who could (for example) be retiring early due to an unexpected layoff, might be running much closer to their "needs" and should take the downside more seriously.

You are now 'developing' a different tool. I believe that there already is 'Floor and ceiling' type withdrawal plan, for those that want that. Also, some folks buy an annuity with part of their portfolio + social security for necessities.

This was never intended for the one withdrawal method for everyone. For myself, VPW works perfectly as designed.

[Katsmeow]

The problem I have with this is it doesn't deal with the situation where during some years of the plan, particularly early on, you need to withdraw more than the percentage called for. For the person who will be retiring with drawing SS and any pensions immediately, this may be fine. But, for earlier retirees that is often not the case. There can be a need to withdraw a higher percentage early on because SS has not yet been taken with the idea of withdrawing less later on.

Also, some early retirees will have higher expenses early on that won't exist later on. For example, we still have 2 kids at home so will have college expenses for the next few years making our expenditures much higher than they will be in the future (our withdrawal rate this year was about 10% which we planned for - it has been fortuitous that with the market where it has been this year we are currently well above our opening balances at the start of the year even with a 10% withdrawal rate). Now, obviously we can't sustain that for a long time (we will be sustaining it for about 2 more years), but Firecalc has let me look at the variable spending over the next few years plus the spending we anticipate after that (much lower). The Fidelity calculator also does that.

This calculator this thread is about might be useful to me once I start drawing SS (probably 6 to 10 years from now) but not really until then.

[Cut-Throat]

Quote:

Originally Posted by Katsmeow The problem I have with this is it doesn't deal with the situation where during some years of the plan, particularly early on, you need to withdraw more than the percentage called for. For the person who will be retiring with drawing SS and any pensions immediately, this may be fine. But, for earlier retirees that is often not the case. There can be a need to withdraw a higher percentage early on because SS has not yet been taken with the idea of withdrawing less later on. Also, some early retirees will have higher expenses early on that won't exist later on. For example, we still have 2 kids at home so will have college expenses for the next few years making our expenditures much higher than they will be in the future (our withdrawal rate this year was about 10% which we planned for - it has been fortuitous that with the market where it has been this year we are currently well above our opening balances at the start of the year even with a 10% withdrawal rate). Now, obviously we can't sustain that for a long time (we will be sustaining it for about 2 more years), but Firecalc has let me look at the variable spending over the next few years plus the spending we anticipate after that (much lower). The Fidelity calculator also does that. This calculator this thread is about might be useful to me once I start drawing SS (probably 6 to 10 years from now) but not really until then.

Look, you have to use a little imagination here. I am also delaying S.S. to age 70. I have that S.S. money in a separate account in Cash. I will withdraw 1/8 of that amount until I reach age 70. (The 8 year delay from 62-70).

This money is not included in my Portfolio when I run VPW. It is also not included in my A.A.

VPW is not a Complete Retirement Budget tool. It does what it does. For people that know how to Budget on their own, and want a Variable Withdrawal Plan, it works really well. Budgeting is not a 'Problem' with this tool, It was not designed to do it. And won't be.

[Koolau]

I'm always fascinated by Withdrawal Calculators. I used them back in the w*rking years as a part of my "fantasy life" about ER. When I got serious about ER, I used them (finally settled on FIRE Calc) as a PLANNING tool to see if I had enough to retire. Once I retired, I pretty much ignored FIRE Calc as well as any other tools (except I still think they are an interesting "gadget"). My point is that I have never used a retirement tool to determine my WDR. Retrospectively, I might mentally check my WDR vs "The 4% Rule" occasionally, but honestly, I take withdrawals on a "go with your gut" basis. The planning stage (using FIRE Calc) said I was good to go with about 4% or maybe a little more or less. Now, I depend on my back-ups (and back-ups to my back-ups) to cover the ups and downs of the markets.

So, if I have a question it would be:

"Do you use a WDR tool to actually calculate how much you will withdraw in a given year or do you, like me, use WDR calculators to plan for retirement AND as a back-test on you post ER progress?"

Please forgive the 90 degree turn (hijack?). YMMV

[Cut-Throat]

Quote:

Originally Posted by Koolau "Do you use a WDR tool to actually calculate how much you will withdraw in a given year or do you, like me, use WDR calculators to plan for retirement AND as a back-test on you post ER progress?" Please forgive the 90 degree turn (hijack?). YMMV

I like Plans, it takes the emotion out of Investing and Finances. A savings plan got me to early retirement. My investment plan will keep me invested in my asset allocation, despite a huge market downturn.

And now I will have a 'spending plan'. Needless austerity at this point in my life is senseless. If my plan says to spend more than my 'gut' tells me to. I'll follow the plan.

I'll follow VPW to the letter. It works.

[Independent]

Quote:

Originally Posted by Cut-Throat You are now 'developing' a different tool. I believe that there already is 'Floor and ceiling' type withdrawal plan, for those that want that. Also, some folks buy an annuity with part of their portfolio + social security for necessities. This was never intended for the one withdrawal method for everyone. For myself, VPW works perfectly as designed.

I get it. It's well designed for you. I was talking about people who have some downside flexibility, but not as much as you have.

[Independent]

Quote:

Originally Posted by Koolau I'm always fascinated by Withdrawal Calculators. I used them back in the w*rking years as a part of my "fantasy life" about ER. When I got serious about ER, I used them (finally settled on FIRE Calc) as a PLANNING tool to see if I had enough to retire. Once I retired, I pretty much ignored FIRE Calc as well as any other tools (except I still think they are an interesting "gadget"). My point is that I have never used a retirement tool to determine my WDR. Retrospectively, I might mentally check my WDR vs "The 4% Rule" occasionally, but honestly, I take withdrawals on a "go with your gut" basis. The planning stage (using FIRE Calc) said I was good to go with about 4% or maybe a little more or less. Now, I depend on my back-ups (and back-ups to my back-ups) to cover the ups and downs of the markets. So, if I have a question it would be: "Do you use a WDR tool to actually calculate how much you will withdraw in a given year or do you, like me, use WDR calculators to plan for retirement AND as a back-test on you post ER progress?" Please forgive the 90 degree turn (hijack?). YMMV

This is a good topic for a poll. (Maybe somebody already did one.)

I ran all the tools before I retired to convince myself that I could retire and to set some "spending expectation" for the first year.

After that, life happened. We spent more than I expected on some things, less on others. Our annual spending bounced around in ways that weren't related to investment returns.

But, I still run my favorite tool (which is a more complex version of the 1/a used by this model) at least once a year to get some notion of whether we're setting ourselves up for serious problems.

[Finance Dave]

I like this approach, and it is similar to the methodology I've been telling my DW about for a couple years. We are "phasing into" FIRE over the next two years (w*rking fewer hours each year until we get to zero). We did things a bit differently than most...we want our lifestyle in FIRE to be about 20% better in FIRE than it is today, yet our expenses will be way less (we paid off our house this year and no longer need to buy expensive furniture).

As a result, over 60% of our FIRE budget is for "fun" items like travel, entertainment, hobbies. This leaves us significant flexibility in year to year spending. As I said to my DW..."If the market tanks one year, we simply take 1 less vacation to a foreign destination the following year."

Therefore, the variable withdrawal rate method will work well for us. I'm looking forward to 2015...as that's when DW will stop w*rking completely and we can really ramp up the fun! 2014 will see a smattering of fun, with one trip to Europe for us, a trip to the hot air balloon festival in New Mexico, and some cooking classes!

[kramer]

Just to be extra clear, VPW keys each year off your portfolio's current cumulative value, not off of last year's performance. So one has to be prepared for long consecutive strings of low (and high) withdrawal years relative to your original withdrawal.

Last year's stock market performance may not have that much of an effect on your withdrawal (and this can be considered a positive, also).

Also, with VPW, you should be more conservative about estimating your life expectancy since you are guaranteed to end with little money, unlike traditional withdrawal plans. So you have to make sure that your guess is right. I noticed that some people don't consider this when comparing.

I would carefully understand the assumptions that went into the VPW projections for real returns. Personally, I think the default values are somewhat optimistic, especially for bonds.

Finally, it would be nice if the tool estimated the future volatility of withdrawals, say with a standard deviation estimate or something. This may not be too difficult to add and it would give the user a good idea of say, the 90% and 95% scenarios on the low end, and how low spending might go.

[target2019]

VPW has an option to use Random data for returns. Associated with that are options to enter an Average Real Return and Standard Deviation. Those are pre-populated with 3.2% and 15%. It seems that you could run two scenarios with a higher and then a lower standard deviation to achieve some high and low bands.

Just rambling...