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

[youbet]

How many are using VPW here?

Used it for what?

 

[youbet]

there's too much "sell" that's worked its way into this thread.

+1. Well said.

IMO, there is NO tool, calculator, back-tester, predictor or whatever that I would sign up to follow without alteration throughout FIRE. They all do what they do but have no ability whatsoever to predict the future.

FIRE'd 9 years, I've made several major changes in my spending level, investing philosophy/strategy and legacy plans already. I've used all the types of tools and calculators mentioned in this thread (only looked over newbie VPW but understand what it's doing) to test / back-test my own plans but have never fooled myself into thinking I could rely on any one of them to guide me.

Awareness of what's going on around you, a reasonable knowledge of finance, investing and economics and enough moxie to fend for yourself during all kinds of circumstances is what leads to FIRE success.

I'm doing the best I can and have been reasonably successful so far. I think many of the other long time posters can say that too. And I doubt any of them have been fooled into thinking that any tool can be followed blindly over the long run, including VPW.

 

[Lsbcal]

This year we are on track to spend about 3.3% of the portfolio. We took the vacations we wanted to take and bought the house items we felt we wanted. Next year we'll probably spend more and it's nice that VPW says 4% or even higher will work. So I tend to like it partly because it's telling me what I'd like to hear. I've been reminding myself to sometimes step outside the comfort zone of tight fisted purchasing and enjoy more experiences.

What I like about VPW is that it's transparent as I can look under the hood and see the data as well as the methods.

 

[haha]

Awareness of what's going on around you, a reasonable knowledge of finance, investing and economics and enough moxie to fend for yourself during all kinds of circumstances is what leads to FIRE success.

I'm doing the best I can and have been reasonably successful so far. I think many of the other long time posters can say that too. And I doubt any of them have been fooled into thinking that any tool can be followed blindly over the long run, including VPW.

+1. Heavy reliance on a tool makes one a tool himself.

There really is no magic. Enough money, basic good sense and some luck rule. I could be wrong, but as best I remember, 20+ year retirees have a few things in common, and they rarely post about the latest greatest technique for slicing a watermelon. Flexibility and common sense seem to be the usual traits.

Ha

 

[FUEGO]

So, do I understand right that you think that a CPI-adjusted withdrawal path would be more informative to you than the current separate nominal withdrawal and inflation (blue and red) lines in the chart? Even if it hides the significant volatility of CPI in a period like 1916+ ?

(Thanks for noticing that I have no vested interest in all this. I initially developed it for myself and asked the Bogleheads for comments. They helped me improve it and add it to their Wiki. I make no money with it. I do not even sell a book or something. But I do believe that it is a good antidote to fear mongers that use historical SWR failures to sell services and products to misinformed investors).

Yeah, pretty much what Lbscal is suggesting. Show the withdrawal in real terms. I know CPI can be volatile, but I'd rather see what I'm able to withdraw in real terms. Especially if I'm looking at a multi-decade forecast of annual withdrawals.

I can't conceptualize what a $250,000 withdrawal in 30 years looks like because it might be a little or maybe a whole lot before I consider what inflation has done to erode the purchasing power over those 30 years. With 1% inflation, that $250k annual withdrawal would buy me a whole lot. With 4% inflation, it wouldn't be very impressive.

 

[ERD50]

+1. Heavy reliance on a tool makes one a tool himself.

There really is no magic. Enough money, basic good sense and some luck rule. I could be wrong, but as best I remember, 20+ year retirees have a few things in common, and they rarely post about the latest greatest technique for slicing a watermelon. Flexibility and common sense seem to be the usual traits.

Ha

I agree with you that there is no magic. For a given portfolio, and a given time period, you can only pull so much money out (using history as a benchmark). You can't get blood out of a rock. A variable plan can have an effect, but it also comes with pluses/minuses - you may not want to cut back that much (personal decision, depends on your circumstances). No magic.

But I still think it is useful to look at tools like this. We get a feel for how things would have worked over the past scenarios, and I think that is valuable - history is all we really have. I don't think that any of us who realize the future is unknown (I assume that's all of us! ), would say they are 'reliant' on any tool. We will all need to re-evaluate as time goes on. Though I think the odds of running into trouble if you start with a conservative historical WR ( like ~ 3.1% for a 40 year term) are very slim - even with 'blindly' increasing spending with inflation.

Could our future be worse than the worst 40 year periods in the past? Sure, but I doubt that anyone with a planned 3.1% inflation-adjusted WR will need to make adjustments that would be much different than any one else supporting a similar standard-of-living from that portfolio.

Looking at the other side, yes, a conservative WR has historically left a lot on the table (roughly 50% of the time, it leaves more than you started with, sometimes much more). It looks like VPW is attempting to address this. I think there is a better way, at least based on history. I'll post more on that later, but IIRC, it was called the "Retire Again and Again" method, and was discussed at Bogleheads.

-ERD50

 

[Major Tom]

This is an interesting thread, and I thank longinvest for doing the work on this VPW technique. The tool seems quite attractive, as when I saw the amount it told me I could withdraw in the first year from my modest portfolio, visions of a very comfortable lifestyle began to parade before my eyes!

As others have said, I think most of us practice some kind of variable withdrawal technique already, though this one is an attempt to make the process more scientific. Having said that, I wonder if anyone who decides to use this tool as their main guide for withdrawals will stick to it religiously? If not, then they also are following their own personalized withdrawal technique, using this tool as their guide. Having VPW as a main "guideline" tool could result in a greater optimization of withdrawals than other approaches, possibly.

My own approach to withdrawals consists of a WR that amounted to 2.5% of the initial portfolio, an amount that, 3 years later, is unchanged (no adjustments for inflation yet), but now represents ~2% of the current portfolio value. It's not as much as I could be withdrawing were I using VPW, but it helps me to feel safe and when it comes to money, I like the feeling of safety!

My own version of a variable withdrawal rate consists of a rough plan to increase withdrawals in future years as my time frame becomes shorter, SS comes into the picture and hopefully, my portfolio grows somewhat. I will most likely mentally begin many more 30, 35, or 40 year withdrawal periods, each with new WR's, over the course of my retirement.

As unscientific and rigid as my approach appears, from the talk in this forum, it seems to be indicative of the kind of approach many of us employ. Just as most of us have an inbuilt "sensor" that allows us to gauge our personal month-to-month spending, so we also have a feel for how much we can withdraw from our portfolios without committing financial suicide.

Apologies, as I often find myself saying, for the vague ramble, and this is in no way intended as a put-down of any more specific technique discussed. Thank you for all the ideas.

 

[longinvest]

My emotions often make me blind to obvious facts. When I first implemented the backtesting, I tried to add a ceiling on VPW withdrawals in order to "protect" the portfolio against upcoming bear markets (e.g. leaving extra money invested in the portfolio, making it bigger than if I had withdrawn the money).

What the data showed me was an obvious fact that my mind was refusing to see: Any money not spent (and thus left in the portfolio) at market peak will be decimated by the upcoming bear market, making little difference on withdrawals during the bear market.

Our mind tricks us into thinking that if we deprive ourselves a little, during good times, we'll be able to save the portfolio from later bear markets, as we'll have more money. The data does not show this.

What the data shows, instead, is that reducing spending during bear markets is what actually makes a huge difference on the future. It helps preserve the portfolio and allows it to grow back when the worst of the crisis is over. Spending less in a bear market can make the difference between a non-recovering portfolio and a recovering one.

So, even if one has no intention to use VPW, it can still be very instructive to play with it to try to gather objective facts about how withdrawals, portfolio balance, and sequence of returns affect each other.

 

[Major Tom]

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.

 

[samclem]

What the data showed me was an obvious fact that my mind was refusing to see: Any money not spent (and thus left in the portfolio) at market peak will be decimated by the upcoming bear market, making little difference on withdrawals during the bear market.

Our mind tricks us into thinking that if we deprive ourselves a little, during good times, we'll be able to save the portfolio from later bear markets, as we'll have more money. The data does not show this.

I suppose leaving the money in equities as share prices rise is what exposes it to being decimated later. Maybe we're asking a withdrawal method to perform a function it can't do alone--maybe we should be looking at dynamic reallocation strategies that put aside stock market gains when the market is up--even more than a simple rebalancing to a fixed allocation accomplishes (Who dares say "market timing!?" Who dares say "h***s"?!")

What the data shows, instead, is that reducing spending during bear markets is what actually makes a huge difference on the future.

Just to pick a nit: I think we are using the term "spending" and "withdrawals from the equity portion of the portfolio" interchangeably.
But, there's little doubt that a "% of year-end balance" withdrawal strategy goes a long way toward preserving the portfolio's future ability to survive/grow by reducing withdrawals during market dips.

 

[Lsbcal]

...(snip)...
What the data showed me was an obvious fact that my mind was refusing to see: Any money not spent (and thus left in the portfolio) at market peak will be decimated by the upcoming bear market, making little difference on withdrawals during the bear market.
...

When we were into the awful bear market of late 2008, my wife mentioned that we should have bought that new car in early 2008 instead of holding off. So I've been wondering about this idea of spend it or maybe loose it. But I never really analyzed the data.

Here is a quick analysis using VPW. I used the "Path" sheet. Let's take some money not spent in 1965. Say we elect to not spend $10000. So this is our starting portfolio which I split 40/25/35 USequity/ForeighEquity/bonds. If I set withdrawals to zero by putting zeros into columns D and H, this simulates just letting the $10000 ride it out. From 1965 to 1975 (2 bear markets in there) the $10000 went down to $8061 (real not nominal). So we lost 20% or so temporarily.

Check me out on this one please as I did this kind of quickly. I purposely did not choose a market peak year as we are unlikely to choose a peak to reduce our spending. Even in if taken at a peak the numbers would be similar. If this analysis is roughly right then yes we might loose some of the money saved but nowhere near all of it. And that money is free to grow again later on.

Note I'm not saying to avoid spending and to play it safe. I'm just trying to get the analysis right.

 

[springnr]

[FONT=&quot]Every calculator employed has provided various insights into asset dissemination.[/FONT]

 

[youbet]

Our mind tricks us into thinking that if we deprive ourselves a little, during good times, we'll be able to save the portfolio from later bear markets, as we'll have more money.

I'm not sure what other members will have to say, but in my case I'm not tricked a bit by this. I think its pretty intuitive. If you were struggling with this, as apparently you were, your work with the data has indeed been useful to you!

The data does not show this.

Yes! My only surprise is that you were surprised!

What the data shows, instead, is that reducing spending during bear markets is what actually makes a huge difference on the future.

Evaluation of the risk/reward possibilities of the situation is still critical. For example, I FIRE'd into the 2008 recession. VPW would have told me to reduce spending I assume. But I had very important and meaningful personal plans for that timeframe that would have to be executed then or permanently canceled. I chose to spend as planned, despite the huge down market, and had the experiences (some travel, family events, etc.) and my portfolio has recovered nicely despite that. It might not have worked out that way, but had I not gone ahead with the activities, I'd certainly be deeply regretting it today. You have to set tools and their algorithms aside and look at your personal situation sometimes.

So, even if one has no intention to use VPW, it can still be very instructive to play with it to try to gather objective facts about how withdrawals, portfolio balance, and sequence of returns affect each other.

Yes indeed. Doing a deep dive into various tools and calculators is a fabulous mental exercise for learning how to live off passive income during FIRE. No one tool or calculator really gets it right for everyone all the time, but digging into them is a great exercise to help prepare for personal decision making.

Thanks for making the effort and for sharing.

 

[longinvest]

Check me out on this one please as I did this kind of quickly. I purposely did not choose a market peak year as we are unlikely to choose a peak to reduce our spending. Even in if taken at a peak the numbers would be similar. If this analysis is roughly right then yes we might loose some of the money saved but nowhere near all of it. And that money is free to grow again later on.

Note I'm not saying to avoid spending and to play it safe. I'm just trying to get the analysis right.

Here's how I analyzed it.

To stay with the graph you posted earlier on this thread: if one decided to withdraw $10,000 less in 1968, the first year of retirement, one withdrew $38,400 (= $48,400 - $10,000) out of a $1M portfolio. This is like saying that one just invested $10,000 in a $951,600 (= $1,000,000 - $48,400) portfolio.

In other words, one reduced his withdrawal by 20.66% ($10,000/$48,400) in order to increase his portfolio by 1.05%.

What's the impact of this on withdrawals during the later downturn? It increases the inflation-adjusted $28,100 withdrawal amount by approximately 1.05% to $28,400 in 1982, a difference of $300.

 

[longinvest]

Evaluation of the risk/reward possibilities of the situation is still critical. For example, I FIRE'd into the 2008 recession. VPW would have told me to reduce spending I assume. But I had very important and meaningful personal plans for that timeframe that would have to be executed then or permanently canceled. I chose to spend as planned, despite the huge down market, and had the experiences (some travel, family events, etc.) and my portfolio has recovered nicely despite that. It might not have worked out that way, but had I not gone ahead with the activities, I'd certainly be deeply regretting it today. You have to set tools and their algorithms aside and look at your personal situation sometimes.

I totally agree that one has find the proper balance between saving (or withdrawing less during retirement) and living, even during downturns. It seems to me that you were clearly aware of the trade-offs implied by your choice when you made it, and that you tried to make the best choice for you. Isn't this what any of us should strive to do?

 

[Lsbcal]

I see what you are saying now Longinvest. From the perspective of future spending (not portfolio total dollars) the impact is very small. Good point. If I save a sliver of the portfolio by holding off spending, I should not expect that to meaningfully contribute much to the total spending picture.

 

[FUEGO]

One option is to follow the VPW suggested withdrawals and just stick what you don't spend in cash or CDs for a rainy day. Call it the bucket approach if you like. Dynamic asset allocation* might be another phrase.

For me, that would mean spending only $40,000 per year initially (instead of $66k like VPW suggests). I would then stick $26k into my savings account the first year. Same thing the next year with whatever excess above my $40,000 spending level (maybe I stick $20,000 more in cash, maybe it's $30,000). At some point I'll have a lot of money in cash and might change approaches. Dynamically.

*dynamic asset allocation doesn't equal marking timing

 

[Major Tom]

One option is to follow the VPW suggested withdrawals and just stick what you don't spend in cash or CDs for a rainy day. Call it the bucket approach if you like. Dynamic asset allocation* might be another phrase.

I like that idea. If I were to take out what VPW says I can in my first year alone, I could use the difference between the withdrawal amount and what I normally spend to buy myself a nice used RV. Then for subsequent years, I can go back to my regular, and relatively conservative 2% WR

 

[Lsbcal]

Longinvest has revised VPW. I really like the changes. Here is a screen shot of the new look:
File:VPW.jpg - Bogleheads

As a reminder you can get the latest spreadsheet version here:
Variable percentage withdrawal - Bogleheads

VPW has convinced me I can spend more then our current withdrawal amount.

 

[Chuckanut]

Thanks Longinvest for sharing your work with us.

 

[explanade]

I just tried it. My AA is 60/40. Not sure of my actual international equity allocation but I estimated 15%.

So it starts me at 4.5% and it goes up from there, never lower. My actual draw is going to be more like 2.5 to 3% in my first year.

I started at 1972. For a 46 year run, the lowest WR is 4.5%.

Sounds too good to be true ...

 

[Lsbcal]

....
I started at 1972. For a 46 year run, the lowest WR is 4.5%.

Sounds too good to be true ...

You might want to put in 1968. That will probably give a lower inflation adjusted withdrawal by 1975. The percentage WR's do not change. As I understand it, the percentage withdrawals are set by the assumptions in the "Table" tab.

You can see the minimum withdrawals over various historical start dates i.e. the red line in the chart "Withdrawal Statistics for Every Start Year".

 

[Spudd]

I started at 1972. For a 46 year run, the lowest WR is 4.5%.

Sounds too good to be true ...

That's 4.5% of the balance of your portfolio, not of the initial balance. If your portfolio drops by 50% then so will your withdrawal.

 

[Lsbcal]

That's 4.5% of the balance of your portfolio, not of the initial balance. If your portfolio drops by 50% then so will your withdrawal.

But the withdrawal percentage moves up too so the spending decline is not linear.

If you look at this example File:VPW.jpg - Bogleheads you will see that the portfolio declined to 40% of the original 17 years after retiring in 1966. The spending went down from an original $48K in 1966 (4.8% initial WR) to about $28K (inflation adjusted) in 1982 before moving up again. So the spending was cut in real terms but not quite by 50% ... it was 58% of the starting spending.

 

[Spudd]

True, that's a good point. But I was just trying to point out to Explanade that the results may not have been as good as he originally thought.