VPW and market timing

[Golden Mean]

I retired 3 years ago at 51 and started using VPW last year. In that year I used VPW as a kind of roof/sanity check on spending and only "cashed in" what I needed to spend. This year I am selling (equities) monthly at the amount VPW states, which is currently (50%-80%) higher than my monthly spend. The excess funds are going into VUSXX (to keep them mentally separate from VMFXX). I don't include the VUSXX amount in my VPW, "Portfolio Balance". i.e. I'm counting the VUSXX money as spent.

Now, I may spend that VUSXX money on travel this year, in which case I guess I'm doing things "the VPW way". BUT if I don't travel/spend the VUSXX funds and carry them over to next year, I wonder if I'm doing some weird version of market timing.

Anyone doing something similar, where they have a set withdrawal rate/amount and if it's greater than expenses they "sequester" the excess money in some manner?


A couple of other things:
Because the market is rising, my AA is not changing with this behavior, so far. So it almost seems to me like I'm re-balancing (monthly) in some half-assed way.
I once read (here, bogleheads?) that it's better to spend (more) in the up years than to spend less in the up years in preparation for down years.

Any thoughts are appreciated.

 

[TheWizard]

I'm different in that my retirement income streams generally exceed my monthly expenses without having to withdraw from portfolio, so yes, I invest the excess, beyond $10k in checking, into stock funds in my taxable account...

 

[imjustawarrior]

I'm in my mid-50s and retired. I only sell something when I need the money. I like to keep 1-2 months of expenses in MMF in my Fidelity CMA.

If I used the VPW, I would not sell if I didn't need to. I'm not a big fan of "cash".

You could still have nearly 50 years of retirement to fund. You may want to consider keeping your money invested in the market. Then again, maybe you have a really sweet pension and SS coming or you have 100x of expenses. In those cases, do whatever you like.

 

[perez99]

I use VPW as a "validation" to my spending, but only withdraw as needed to keep certain amount of cash in a high yield savings account. The cash in the high yield comes from selling bonds or stocks.

 

[mrfeh]

I'm in my mid-50s and retired. I only sell something when I need the money.

+1

I wouldn't withdraw just because VPW tells me to.

 

[Dalton]

I just started looking at the VPW method about a week ago. I understand the thought process for what you're saying, but it seems to complicate the time-tested maintenance of your AA by rebalancing by selling what's high (for your expenses, in addition to rebalancing needs) and buying the sector that's low as needed per your IPS, which isn't really market timing in and of itself. i.e., my AA (and the buckets I maintain) assure that a bad year in the market won't force me to sell something that's not doing well.

 

[Mark1]

I retired 3 years ago at 51 and started using VPW last year. In that year I used VPW as a kind of roof/sanity check on spending and only "cashed in" what I needed to spend. This year I am selling (equities) monthly at the amount VPW states, which is currently (50%-80%) higher than my monthly spend. The excess funds are going into VUSXX (to keep them mentally separate from VMFXX). I don't include the VUSXX amount in my VPW, "Portfolio Balance". i.e. I'm counting the VUSXX money as spent.

Now, I may spend that VUSXX money on travel this year, in which case I guess I'm doing things "the VPW way". BUT if I don't travel/spend the VUSXX funds and carry them over to next year, I wonder if I'm doing some weird version of market timing.

Anyone doing something similar, where they have a set withdrawal rate/amount and if it's greater than expenses they "sequester" the excess money in some manner?

I do something very similar. I call the sequestered account my "big ticket item money" and use it to buy new vehicles, major home repairs/enhancements, help family, etc. Right now I have ~$205k within this account, so it has grown over the last several years. I will have a ~$25k bill coming in shortly for some woodwork being done in the house and I'm planning on ordering a new 2025 Outback once they're available, so that will knock down the account balance a little, but it seems to keep growing. We probably need to spend a bunch on travel, but we "live in a postcard" and really prefer to just stay in our area of the country.

Back in 2018/2019, I bought a new car and did ~$200K of upgrading to the property and I actually had to give my "big ticket account" a loan for awhile.

 

[Golden Mean]

I'm in my mid-50s and retired. I only sell something when I need the money. I like to keep 1-2 months of expenses in MMF in my Fidelity CMA.

If I used the VPW, I would not sell if I didn't need to. I'm not a big fan of "cash".

You could still have nearly 50 years of retirement to fund. You may want to consider keeping your money invested in the market. Then again, maybe you have a really sweet pension and SS coming or you have 100x of expenses. In those cases, do whatever you like.

So are you saying you are 100% in equities? I suspect that's optimum, but not an AA I think I could stick with.

My AA is 80/20 and isn't (currently) moving because my equities are growing faster than/or equal to my sales of equities and withdrawals.

 

[Golden Mean]

I just started looking at the VPW method about a week ago. I understand the thought process for what you're saying, but it seems to complicate the time-tested maintenance of your AA by rebalancing by selling what's high (for your expenses, in addition to rebalancing needs) and buying the sector that's low as needed per your IPS, which isn't really market timing in and of itself. i.e., my AA (and the buckets I maintain) assure that a bad year in the market won't force me to sell something that's not doing well.

I think you're right that I'm probably over complicating things. Though what I'm currently doing is not moving my 80/20 AA.

There's a thread on the boglehead's forum (from the VPW author/maintainer, longinvest) that uses a 6 or 12 month rolling "cushion account". You pull out what VPW says to, add it to the "cushion" and withdraw 1/12 (or 1/6?) of the account balance. I suspect, over the long run, I'm effectively doing something like that.

 

[Sojourner]

I'm probably in the minority here, but I don't do any sort of regular, periodic rebalancing or follow any particular withdrawal strategy. I tend to keep about two years worth of spending cash in funds like SNSXX, VUSXX, and VMFXX, from which I withdraw however much I need on a monthly basis to cover all spending. I do a yearly spending analysis to make sure I'm at (or below, actually) my SWR from FIRECalc. To me, that seems simple and adequate... for now, at least.

 

[Montecfo]

Do you need to do this monthly? Are you generating taxes? You may be over estimating the precision this adds, in my opinion.

I pull funds based on expected spend and I review the expected spend target once annually. This makes it easier to source funds without excessinve churn of assets.

 

[Sojourner]

There's a thread on the boglehead's forum (from the VPW author/maintainer, longinvest) that uses a 6 or 12 month rolling "cushion account". You pull out what VPW says to, add it to the "cushion" and withdraw 1/12 (or 1/6?) of the account balance. I suspect, over the long run, I'm effectively doing something like that.

Would you mind explaining (very briefly) what you think is beneficial or advantageous about this methodology? What problem are you trying to solve by doing all this? Sorry if this sounds naive or judgmental in any way. Definitely not my intention. I am genuinely curious.

 

[imjustawarrior]

So are you saying you are 100% in equities? I suspect that's optimum, but not an AA I think I could stick with.

My AA is 80/20 and isn't (currently) moving because my equities are growing faster than/or equal to my sales of equities and withdrawals.

I'm 75% equity, 24.5% bond, 0.5% cash.

 

[Golden Mean]

Do you need to do this monthly? Are you generating taxes? You may be over estimating the precision this adds, in my opinion.

I pull funds based on expected spend and I review the expected spend target once annually. This makes it easier to source funds without excessinve churn of assets.

Yes, monthly. Again, probably a form of market timing. In 2022 I sold Jan 2 for the year, but started doing monthly in 2023 since the market was down. Worked out well, but was totally a gamble.

Yes, generating LTCG. I have a MAGI I need to hit for ACA and that's all taken into account during my equity sales.

No churn, just selling equities.

 

[Golden Mean]

Would you mind explaining (very briefly) what you think is beneficial or advantageous about this methodology? What problem are you trying to solve by doing all this? Sorry if this sounds naive or judgmental in any way. Definitely not my intention. I am genuinely curious.

Assuming you're talking about my initial post and not VPW's cushion approach; I'm not sure if it's beneficial or just mental gymnastics, which is why I started the thread.

My though process is that it's better to spend more when the market is up than "save" when the market is up. i.e. The problem is, I'm not actually spending more, just pretending to spend more, if that makes sense.

 

[Golden Mean]

I'm 75% equity, 24.5% bond, 0.5% cash.

Ok, I think we are just talking semantics here. Bonds (not bond funds), cash, CDs, (ie fixed income) are all the same thing to me.

 

[SecondCor521]

Back in 2018/2019, I bought a new car and did ~$200K of upgrading to the property and I actually had to give my "big ticket account" a loan for awhile.

I'm curious how you effectuated this loan. I have some big ticket items coming up in the next few years and honestly didn't give a whole lot of thought to how to handle it beyond "eh, I have the money".

 

[SecondCor521]

Someone here does something sort of similar in terms of sequestering unspent money. Either @audreyh1 or @athena53 maybe?

 

[Dalton]

I think you're right that I'm probably over complicating things. Though what I'm currently doing is not moving my 80/20 AA.

There's a thread on the boglehead's forum (from the VPW author/maintainer, longinvest) that uses a 6 or 12 month rolling "cushion account". You pull out what VPW says to, add it to the "cushion" and withdraw 1/12 (or 1/6?) of the account balance. I suspect, over the long run, I'm effectively doing something like that.

Sure, I get it. I'm at 70/30, but feel like that 30% that is MM, bonds, bond funds, cash, is what will cover those kind of needs if they happen in bad times, and that big 70% pot should handle it in good times. I struggle to spend even my budget amount, and am trying to get in the habit of spending on stuff I need before it becomes an emergency. But, I'm also still trying to accumulate enough above my projected needs to build a workshop. In the meantime, I've been tax gain harvesting for a couple years to get to the income I told the ACA I'd have, lol.

I guess with the amount you have accrued, maybe you need a plan to set a ceiling on the amount of that slush fund, and what to do with the money (reinvest, donate, etc.).

 

[Golden Mean]

Sure, I get it. I'm at 70/30, but feel like that 30% that is MM, bonds, bond funds, cash, is what will cover those kind of needs if they happen in bad times, and that big 70% pot should handle it in good times. I struggle to spend even my budget amount, and am trying to get in the habit of spending on stuff I need before it becomes an emergency. But, I'm also still trying to accumulate enough above my projected needs to build a workshop. In the meantime, I've been tax gain harvesting for a couple years to get to the income I told the ACA I'd have, lol.

I guess with the amount you have accrued, maybe you need a plan to set a ceiling on the amount of that slush fund, and what to do with the money (reinvest, donate, etc.).

I think you are right about the ceiling, which is part of the reason I posted this thread. It's forcing me to think this over. Right now, this "sequestered" money is less that 1.5% of my portfolio.

 

[TheWizard]

Someone here does something sort of similar in terms of sequestering unspent money. Either @audreyh1 or @athena53 maybe?

How about INVESTING unspent money?
As you mentioned, we all have big ticket items from time to time, so then you'll be all set ..

 

[SecondCor521]

How about INVESTING unspent money?
As you mentioned, we all have big ticket items from time to time, so then you'll be all set ..

I leave my unspent money invested according to my AA. Theoretically this gives me more money than the sequestering approach on average over time. And historically it has. Practically, if one just is used to "sipping" on their portfolio and then for whatever reason needs to take a "big gulp" all at once that does create a bit of personal finance anxiety for me. Reminding myself that those things (in my case a car replacement and a roof replacement) only come along every 20 years or so helps. I also feel the need to try to pay attention to the tax consequences of a "big gulp" (in my case additional LTCG).

My reply though, was to try to help the OP. They were asking if anyone set aside unspent money. Although I don't, I think one of the other posters I mentioned does. Hopefully she will chime in. It's also possible I'm misremembering who does the sequester thing.

 

[Lsbcal]

I came to the realization from another thread here that VUSXX is better for taxable accounts if you are in a state with high taxes. VMFXX does not always have enough Treasuries to qualify to avoid state taxes. So our VMFXX money is just the money we will spend this year.

VPW is a very good tool and I use it a lot to evaluate risk levels for various AA's.

Personally I have no issue with well thought out market timing. As we age we might just want to splurge.

 

[mrfeh]

I came to the realization from another thread here that VUSXX is better for taxable accounts if you are in a state with high taxes. VMFXX does not always have enough Treasuries to qualify to avoid state taxes.

There are only 3 or 4 states that have the percentage test you are referring to.

Everywhere else, you can deduct the percentage of the interest that is from government obligations.

 

[Mark1]

I'm curious how you effectuated this loan. I have some big ticket items coming up in the next few years and honestly didn't give a whole lot of thought to how to handle it beyond "eh, I have the money".

Basically at the end of the year I always figure out how much I get to spend the following year each month based on my VPW withdraw for the year. Then I just have that much moved out of my portfolio each month to our Fido checking account (the excess always goes to the "big ticket account"). Since I gave myself " a loan" of $41,400, I just moved $1800 less per month for the next 23 months to compensate for the loan amount. Honestly, it was not that hard to live on the new, lesser amount, as we rarely spend our monthly allotment anyway. The point was mostly to make me aware to slow down our burn rate.