A nearly riskless and stable spending rule for retirement? Lets discuss the ARVA strategy.

[TickTock]

^ ^ ^
Exactly! Look at the financial literature - 99% or so on how to accumulate, 1% on the decumulation phase (and how it's different from accumulation).

 

[Steelpony]

Well I semi retired about 18 years ago and fully retired about 11 years ago. I kept creating cash flow greater then my needs using compounding and DCA with never ending excess cash to present needs. I’ve never spent down, our PV vakue keeps rising.

Putting it simply this isn’t brain surgery with rules, charts, scholarly articles, grand schemes etc.

You create a paycheck and put some aside for future needs same as when you worked. Same disciplined spending, same needs, same optional wants.

After 45 years the results are a portfolio that increases in value faster than our personal inflation rate. Somewhere around 12% this year.

 

[Dtail]

Starting next year, I will be using a slight variation of Bob Clyatt's withdrawal strategy which is modeled in Firecalc.
The original 4% Bengen withdrawal strategy hasn't had a failure in close to 60 years.

 

[jazz4cash]

Nearly riskless?

 

[JohnnyPHX]

Nearly riskless?

Yes nothing is risk free.... nothing.

 

[FlaGator]

Well I semi retired about 18 years ago and fully retired about 11 years ago. I kept creating cash flow greater then my needs using compounding and DCA with never ending excess cash to present needs. I’ve never spent down, our PV vakue keeps rising.

Putting it simply this isn’t brain surgery with rules, charts, scholarly articles, grand schemes etc.

You create a paycheck and put some aside for future needs same as when you worked. Same disciplined spending, same needs, same optional wants.

After 45 years the results are a portfolio that increases in value faster than our personal inflation rate. Somewhere around 12% this year.

To that I would add:

-It was High Anxiety time for me when I pulled the plug 10 years ago. Ran multiple models and they all said I was OK, but I knew they were just "models"
-My simple math cross-check on models was to divide the stash by my spending/yr and see if my remaining years (w/o SS or any market return) beat my mother's 87 at her demise.
-Managing for ACA is tricky when your spending is sticky. Mine spending was, and it hasn't varied much in 10 years. Family associated expense, health care and some lifestyle choices pushed the spending beyond my initial planned budget, for nearly every year. I spent a lot of time balancing withdrawals from various accounts to stay within ACA limits.

But it "looked like" I had some cushion at the outset and the market cooperated with some drama and anxiety along the way. After 10 years, it's worked out, but man have there been some anxious periods.

Run the models, do your own cross-check on them and get as comfortable as you can. At some point, you'll say "it looks good enough and I can figure something out if needed". Then hold your breath, pull the trigger, and enjoy the ride

 

[Steelpony]

To that I would add:

-It was High Anxiety time for me when I pulled the plug 10 years ago. Ran multiple models and they all said I was OK, but I knew they were just "models"
-My simple math cross-check on models was to divide the stash by my spending/yr and see if my remaining years (w/o SS or any market return) beat my mother's 87 at her demise.
-Managing for ACA is tricky when your spending is sticky. Mine spending was, and it hasn't varied much in 10 years. Family associated expense, health care and some lifestyle choices pushed the spending beyond my initial planned budget, for nearly every year. I spent a lot of time balancing withdrawals from various accounts to stay within ACA limits.

But it "looked like" I had some cushion at the outset and the market cooperated with some drama and anxiety along the way. After 10 years, it's worked out, but man have there been some anxious periods.

Run the models, do your own cross-check on them and get as comfortable as you can. At some point, you'll say "it looks good enough and I can figure something out if needed". Then hold your breath, pull the trigger, and enjoy the ride

I just used a compound calculator. The key was “semi retired”. I wanted to ease out for the same reasons. I already had managed retirement for my parents for several years, saw the pitfalls. Made corrections with them and us.

We made partial income and supplemented it with investment income for 7 years until I could replace the income and healthcare with SS, medicare A and B, a health supplement plus generated income.

Facts I could see and experience. Crystal ball stuff means nothing to me. It never addressed our unique personal ever changing situation. It’s just a new paycheck with raises and some savings. You make 100 and spend 80-90 until it doesn’t matter anymore which is our situation now.

 

[Lorenzo]

I hope this thread continues (especially with Stefan Sharkansky participating!), as I think the "Safety-First" model doesn't get enough attention on these boards. Full Disclosure: DW and I use the traditional balanced-portfolio method. We might, of course, change in the future if our analysis says a different method is better for us.

FWIW, I've posted book reviews on Pfau's Retirement Planning Guidebook (2025 revision) and How Much Can I Spend In Retirement. I've read, but not posted, on Pfau's Safety-First Retirement Planning. Perhaps this will be the motivation for me to re-read and do a review...

For now, let me say that I consider the 30-year TIPS ladder's greatest strength to also be its greatest weakness - it gives a safe, inflation-adjusted (providing that your spend increases at the CPI-U rate) for 30 years maximum, but fails completely in year 31.

I recall the "Safety-First" strategy as Pfau called it in his book and thinking, "That's not for me. For much of my life my income was based on (let's say something akin to a sales commission) and it fluctuated from year to year, sometimes greatly. I am accustomed to reining in spending when I had a poor year and spending more freely when I had a good year. So why should I change my habits now in retirement? Building a FI ladder of, say, TIPS (or CDs or MYGAs or whatever) takes money away from growth investments." I think I understand the pros and cons, but it still doesn't feel comfortable. Still pondering which strategy is best for me.

 

[Earl E Retyre]

This is interesting because my investment approach is "Safety-First" but I never knew it had a name and never knew anyone else did this.

I ensure I have a "floor" to cover my expenses (mostly via CDs and Treasuries). Then I invest assets above the floor in the stock market for growth & inflation protection.

At first, my floor only covered needed expenses and stock covered discretionary and growth. Over time, I changed the definition of my floor to include needed plus discretionary expenses. If I include social security, my floor is way over-funded. But, until I actually start receiving social security, I am maintaining my floor as-is. Once I start receiving social security, I may add more to the stock market at that time.

This also addresses the other FIRE thread called, "Could you survive a great depression TODAY?". I feel that if the market takes a huge hit, and stays down for an unprecedented extended period, then I am still covered. Of course if history repeats itself, and the market continues to produce 10%+/year then I am leaving money on the table. But I am OK with that.

 

[JohnnyPHX]

I just used a compound calculator. The key was “semi retired”. I wanted to ease out for the same reasons. I already had managed retirement for my parents for several years, saw the pitfalls. Made corrections with them and us.

We made partial income and supplemented it with investment income for 7 years until I could replace the income and healthcare with SS, medicare A and B, a health supplement plus generated income.

Facts I could see and experience. Crystal ball stuff means nothing to me. It never addressed our unique personal ever changing situation. It’s just a new paycheck with raises and some savings. You make 100 and spend 80-90 until it doesn’t matter anymore which is our situation now.

So your simple retirement plan was to be "Semi Retired" until you started collecting SS? Happy it has worked out for you. I think most here prefer to look at alternatives that don't require continuing to work that long.

I appreciate the efforts of those that have taken the time and have created these ideas and calculators for those of us looking for alternatives to continued work. We can all agree nobody can predict the future but for some of us it is important to look at options while trying to plan for ours based on our personal situation. For us being frugal most of our adult lives to save for retirement we would be more comfortable knowing an approximate yearly spending limit. There is a big difference between being able to spend 65k and 95k comfortably in my opinion. These calculators can help us know if it might be possible depending on what type of risk one is willing to take.

 

[TickTock]

The 30 year limit only comes into play if you['re 65+, at least for most of us. If younger than that, can always roll forward and add another year as the calendar turns.

Sure. Those funds then come from the risky part of the portfolio. Does that change the optimal AA? How much more funding is prudent to figure for an extra 5 or 10 year extension to the TIPS ladder? I'm not sure, and I haven't seen any literature on the subject.

-Managing for ACA is tricky when your spending is sticky.

Very true. I'm thinking one good option is to switch from traditional portfolio to ARVA at age 65 (second-to-65 if married), as it eliminates ACA MAGI management and goes to age 95.

 

[Sharkansky]

I hope this thread continues (especially with Stefan Sharkansky participating!)

Thank you! It's my pleasure.

For now, let me say that I consider the 30-year TIPS ladder's greatest strength to also be its greatest weakness - it gives a safe, inflation-adjusted (providing that your spend increases at the CPI-U rate) for 30 years maximum, but fails completely in year 31.

While the ladder as such only goes out 30 years, there are reasonable ways to construct it to facilitate a longer time horizon. If you want an effectively, say, 35 year ladder, the article suggests putting enough extra in each of the first five rungs of the ladder so that you can buy a new 30 year TIPS issue each year when the older bond matures. When I went to implement this for the website I realized that there are numerous advantages in NOT doing it this way, but instead putting enough in the final rung of the ladder so as to be able to construct a new ladder at that time for the out years. You won't know until then exactly how much income your new ladder will produce, but you will also have a better sense then (if you're still alive) of your spending needs.

 

[Sharkansky]

I recall the "Safety-First" strategy as Pfau called it in his book and thinking, "That's not for me. For much of my life my income was based on (let's say something akin to a sales commission) and it fluctuated from year to year, sometimes greatly. I am accustomed to reining in spending when I had a poor year and spending more freely when I had a good year. So why should I change my habits now in retirement? Building a FI ladder of, say, TIPS (or CDs or MYGAs or whatever) takes money away from growth investments." I think I understand the pros and cons, but it still doesn't feel comfortable. Still pondering which strategy is best for me.

The article actually makes the same point that you do -- which is that many people are accustomed to receiving a combination of steady base salary and variable "bonus" income (profit sharing, performance, commission, etc) and spending varies accordingly. And that different people have different levels of comfort for how much of their compensation they want to be steady vs how much they seek the greater upside with the risk of some poor years. This strategy (and the website) enable you to turn the dial and select from the safe extreme of putting all your investments into the TIPS ladder to the other extreme of no TIPS ladder and all of your investments in stocks. If history is a guide, the latter choice will provide you with considerably higher average annual income , but also the likelihood of a few years with less income than what you would have had in those years with an all-TIPS portfolio.

 

[JohnnyPHX]

I feel like a lot of people here are hesitant to click on links and go to unfamiliar websites and give out info and rightfully so. I was hoping for others to give it a try and get some feed back on its usefulness compare to other apps they have used.
I thought I would share a screen shot of the app page and how clean it is. You put in the names and birth dates as needed for the calculations. Then follow the simple steps with the use of the drop down menus for each. Each drop down menu flows really nicely with descriptions if needed for you to review.

_______________________________________________________________________________________

Hopefully this is OK with everyone.

 

[Out-to-Lunch]

I feel like a lot of people here are hesitant to click on links and go to unfamiliar websites and give out info and rightfully so. I was hoping for others to give it a try and get some feed back on its usefulness compare to other apps they have used.

Sure, I like calculators, and would be happy to give it a try. But having to register is, for me, a hard pass.

 

[SnowballCamper]

To that I would add:
[message clipped]
Run the models, do your own cross-check on them and get as comfortable as you can. At some point, you'll say "it looks good enough and I can figure something out if needed". Then hold your breath, pull the trigger, and enjoy the ride

Yes! Each has to decide for themselves how to mitigate the risk. There is no best answer to plan for an uncertain outcome.

 

[Sunset]

^ ^ ^
Exactly! Look at the financial literature - 99% or so on how to accumulate, 1% on the decumulation phase (and how it's different from accumulation).

Probably as the vast majority of people need help to save but have no problems spending (even more than they have).

 

[Steelpony]

So your simple retirement plan was to be "Semi Retired" until you started collecting SS? Happy it has worked out for you. I think most here prefer to look at alternatives that don't require continuing to work that long.

I appreciate the efforts of those that have taken the time and have created these ideas and calculators for those of us looking for alternatives to continued work. We can all agree nobody can predict the future but for some of us it is important to look at options while trying to plan for ours based on our personal situation. For us being frugal most of our adult lives to save for retirement we would be more comfortable knowing an approximate yearly spending limit. There is a big difference between being able to spend 65k and 95k comfortably in my opinion. These calculators can help us know if it might be possible depending on what type of risk one is willing to take.

Of course one is free to choose any method or portfolio they want. Die young enough and they all work. My parents had a retirement that lasted from 1982-2017 not unlike what some claim on here, long periods. Think about planning out to 2061 constantly shuffling schemes that long using any tool, destroying compounding. That’s my definition of a forever part time job.

I prefer that all my spending is replaced each month and leaves extra cash to “save” and compound for future needs by creating a paycheck and funds for future “raises”. Similar to my whole working life. It’s what I knew already.

As far as SS I ran it up to the “household max” at the time, living on compounding income leading up to that. No use waiting any longer. By semiretired I should clarify I helped someone liquidate a business in parts to their advantage in so in between being “semi retired”.

 

[TickTock]

While the ladder as such only goes out 30 years, there are reasonable ways to construct it to facilitate a longer time horizon. If you want an effectively, say, 35 year ladder, the article suggests putting enough extra in each of the first five rungs of the ladder so that you can buy a new 30 year TIPS issue each year when the older bond matures. When I went to implement this for the website I realized that there are numerous advantages in NOT doing it this way, but instead putting enough in the final rung of the ladder so as to be able to construct a new ladder at that time for the out years. You won't know until then exactly how much income your new ladder will produce, but you will also have a better sense then (if you're still alive) of your spending needs.

Yes, I read the "Longevity Risk and the TIPS Ladder" from the article. There just isn't much detail there - and that's not a criticism of the article; you're presenting the core ARVA concept (which takes up the bulk of the article, as it should) and noting ways to adjust it. I'm interested in seeing more detail to that adjustment. Sounds like you've got more detail. I did go to the website. Do you have, or know of, any other discussion on extending the ladder that doesn't require registering on the website?

 

[TickTock]

Let’s say that you have a person who needs $70,000 a year to live and is getting $30,000 a year in Social Security. Social Security provides a real payoff because the amount you receive increases with inflation. So they have to pay off that $40,000 deficit every single year, ideally. I say “ideally” because it’s hard to realize perfectly in the real world. They want to have $40,000 worth of TIPS maturing every single year for the next 30 years, because that’s as far out as TIPS go. They need $1.2m worth of TIPS—30 years times the $40,000 they need per year. That should be the bedrock of their portfolio.

It's a bit better than that, because the interest from years 39 on down add to income in year 1, and so on.

How much better? It depends on the TIPS yield curve and how you handle the years when no TIPS mature.

Pfau's 2013 article shows a 17.5% decrease. How to Build a TIPS Bond Ladder for Retirement Income | Retirement Researcher

www.tipsladder.com lets you generate a TIPS ladder from the parameters you input. Using this show a 27.6% decrease (when using the parameters I entered for a 30-year ladder).

You could of course do the $40,000 per year extra funds and use the excess income generated during each year as front-loading spending (spend it while you're able to enjoy it).

With the common caveat to hold the TIPS ladder in a tax-deferred or exempt account to avoid the tax drag of paying on the increased adjusted principal of the bonds each year.

 

[BlueberryPie]

To be clear there is still potential significant variations in the risk portion of your income. A good rule of thumbs is assume your stocks go down 50% (happens once a decade on average) and your bonds stay out. So your additional payout could be down 50% if your risk portfolio is 100% stock. That's not "really risk-less" to me. But the risk is that you need to go camping instead of staying at a resort. Better than losing the house or eating cat food.

VPW is basically ABW (Amortization Based Withdrawal). TPAW is another flavor but that let's you an option to predict long-term market returns (ABW does too I suppose).

The biggest problem is that TIPS only go out 30 years. Many of us are planning on retirement of 40+ years (the forum name is *early* retirement). Saying "keep buying the as they become available is not necessarily a great answer since it's subject to the whims not only of interest rates, but also of the stock you would sell to buy TIPS)

One way I solved that for myself is taking Social Security at 70 to maximize the future floor, and matched it with a TIPs ladder before 70.

Safety First is a way to sleep well at night. It's not been discussed much because with the way stocks have performed in the last 20 years, nobody needed Safety First.

High Valuations and fear that the market will perform poorly for the long-ish term for people starting retirement today, coupled with decent TIPs yield make the idea appealing to some again

 

[crashdox]

I recall the "Safety-First" strategy as Pfau called it in his book and thinking, "That's not for me. For much of my life my income was based on (let's say something akin to a sales commission) and it fluctuated from year to year, sometimes greatly. I am accustomed to reining in spending when I had a poor year and spending more freely when I had a good year. So why should I change my habits now in retirement? Building a FI ladder of, say, TIPS (or CDs or MYGAs or whatever) takes money away from growth investments." I think I understand the pros and cons, but it still doesn't feel comfortable. Still pondering which strategy is best for me.

If you haven't already, enroll in one of their frequent seminars and take their test (I can't recall the name of it). It could be useful to you. Not affiliated.

 

[JohnnyPHX]

This is Stefan Sharkansky, author of the article and creator of The Best Third. Thank you, 2HOTinPHX, for mentioning my work! With respect for community guidelines against commercial promotion I will write about The Best Third only to respond to specific questions and comments about it.

The Best Third is very much a work in progress. Your comments are appreciated and helpful for improving it.

I'll try to address here the main points about the research article and the website made in previous replies:

1) The strategy is to use TIPS (Treasury Inflation-Protected Securities) for the guaranteed income portion (not T-bills or other nominal bonds)

2) 2HPTinPHX's question about the outputs "Why is it recommending 47 bonds and to purchase 64K of them. Am I spending 64k to purchase 47 X 1,000+ 47K worth of bonds? Can't wrap my mind around that part."

You are paying 64K for 47 $1000 bonds. The $1000 for a bond is its face value, which represents the amount that you are repaid at maturity. The trading price of a bond will typically vary from the face value (higher or lower) depending on changes in interest rates. With TIPS it's more complicated as the inflation adjustments cause the trading price to rise with inflation. Also the $1000 face value for a TIPS means that the repayment at maturity will be $1000 in terms of the dollars at the time the bond was issued. The actual dollar amount that is repaid will be adjusted upwards from there with inflation.

3) big-papa's comment "It looks like they're using STRIPS to cover the gap years in which there are currently no TIPS maturing. I personally wouldn't do that as that does have some inflation risk." he instead recommends " cover the gap years by adding an additional amount of TIPS to purchase for the last year before the gap and the first year after the gap. Then each year, you sell some of those and purchase a new 10 year TIPS. For example in Jan 2026, you will be able to purchase a 10 year TIPS that will plug the 2036 hole, by selling some 2035's and 2040's to make the purchase. Same thing each year until you're done. Less risk that way but it does require some maintenance over the new few years to plug the hole, but fairly straightforward."
Both approaches for dealing with the years without maturing TIPS are imperfect work-arounds and both have some risk. I mitigate (though cannot eliminate) the inflation risk of STRIPS by building in a 3% annual increase in the nominal value at maturity. While the interest payments and principal repayments from TIPS are essentially riskless, the market yields and trading prices of TIPS are volatile as with all other bonds. big-papa's approach is sensitive to changes in the yield curve. I opted for the approach that is less demanding on the user. Implementing big-papa's approach is just a matter of programming. We can always add it to the site if enough users ask for it.

4) big-papa's comment "If you're spreadsheet savvy download the spreadsheet and just use it - it's fairly easy." My paper also mentions that its strategy can be implemented using a spreadsheet. That is true in the context of the article's stated limitation that taxes weren't considered. When you take taxes into account and want to maximize after-tax spending capacity and want to smooth annual variation in tax costs it gets way more complicated -- with different tax considerations for taxable vs tax-deferred vs tax-exempt accounts, and progressive brackets. The after-tax outcomes of withdrawals computed by a straightforward application of a VPW rule are likely to be even more variable than one initially anticipates. The Best Third addresses a lot of the tax considerations already and will be improving in tax efficiency.

I welcome questions and comments, whether on the forum, by personal message or in the website's feedback box.

Hello again,

Have you considered the feedback in this thread about allowing access to the calculator without registration so more people here might give it a try?

 

[KScarguy]

Ok I thought this might have piqued some interest here today but zero response. I know it was a bit long but I think it might have caught a few peoples attention and look at the new calculator model The Best Third. I went and played around with it. It's really well laid out and flows nicely with well placed drop down menus. It's simplistic in feel but it allows for a lot of custom inputs. Then it takes all your input and gives you a few options for calculation methods. The results are a chart and a list of annual tbill amounts you should purchase so that you annual spending amount is covered by you pensions, SS and the TBills. It suggest total amount of TBills you need to purchase and the remainder is left in the stock market fund for additional growth. It's an interesting concept that I am still researching.

 

[pb4uski]

For years 31+ could one just add additional rungs that mature in years 1 to whenever and when that rung maturres use the maturty proceeds to buy a newly issued 30 year TIPS?

So for example, you want $1000, inflation adjusted in 35 years. Buy a TIPS with $1,000 primcipal that matures in 5 years. Then when it matures in 5 years, use the maturity proceeds to buy a newly issued 30 year TIPS. Wouldn't the combination of the two provide $1,000, inflation adjusted in 35 years?