tag:blogger.com,1999:blog-5465015914589377788.post6890140538809127197..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: Variable Percentage Withdrawal: Garbage In, Garbage OutMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger17125tag:blogger.com,1999:blog-5465015914589377788.post-3481735230802205772022-04-04T09:31:15.093-04:002022-04-04T09:31:15.093-04:00Hi Jeremy,
It's certainly possible in princip...Hi Jeremy,<br /><br />It's certainly possible in principle to change the longevity assumption in VPW. I don't know how easy it would be to do this with the spreadsheet provided with VPW. However, doing this without also adjusting the return assumptions downward would just make VPW even riskier.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-75798908091164031122022-04-04T08:56:20.434-04:002022-04-04T08:56:20.434-04:00Is the VPW Strategy adjustable for longevity? I d...Is the VPW Strategy adjustable for longevity? I don't think the there is sufficient probability to 100. Thanks!Jeremyhttps://www.blogger.com/profile/11902457203877205132noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-9906804069614828332022-04-04T08:54:17.225-04:002022-04-04T08:54:17.225-04:00Is there a way to adjust the longevity assumption ...Is there a way to adjust the longevity assumption to something less than 100?Jeremyhttps://www.blogger.com/profile/11902457203877205132noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-65392384261293545482020-10-30T09:36:45.601-04:002020-10-30T09:36:45.601-04:00The following exchange contained broken comment au...The following exchange contained broken comment author links, so I replaced it with this single comment to remove the links.<br /><br />----- BHCh:<br /><br />The other question: what is the maximum drawdown and by how much will I have to cut expenditure? Thats where bonds come in handy. And if you can’t reduce expenditure by half (or whatever it is) then yes, you need a safety margn.<br /><br />----- Michael James: <br /><br />I didn't look through all the backtests, but the biggest spending reduction I saw was about 50% (and it lasted for many years). People will differ on how much safety margin they need, but this margin shouldn't be negative.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-9926598096734063272020-10-30T09:35:00.278-04:002020-10-30T09:35:00.278-04:00The following exchange contained broken comment au...The following exchange contained broken comment author links, so I replaced it with this single long comment to remove the links.<br /><br />----- BHCh:<br /><br />Always hard to develop a spreadsheet that would work for everyone.<br /><br />The key question with VPW: can you reduce your withdrawals by X% if the portfolio drops? In many cases the answer will be “yes”.<br /><br />People with small portfolios have DB income (eg state pension) dominating retirement income so taking less out of their investments isn’t as much of an impact as it seems.<br /><br />People with large portfolios should be able to withstand cuts.<br /><br />And those caught in the middle need a different approach. For example they could have a “buffer” cash pot which gets filled when the market outperforms growth assumptions and used when the market underperforms. <br /><br />----- Michael James:<br /><br />Hi BHCh,<br /><br />The problem isn't the spreadsheet so much as the two numbers for the assumed real rate of return on stocks and bonds.<br /><br />I agree that it's important to be able to reduce spending if portfolio returns disappoint. And yes, a base of CPP+OAS or the American equivalent helps with absorbing a portfolio withdrawal reduction. However, I don't see the sense in counting on bond returns that almost certainly can't happen.<br /><br />People can differ on how much margin they need. I can even see some retirees choosing to use VPW with historical average stock returns. But it doesn't make sense to use bond returns that won't happen. We need to start with sensible return estimates and reduce them with what ever margin we feel is necessary. But this margin shouldn't be negative.<br /><br />----- BHCh:<br /><br />Don’t know if the real returns on bond funds are predictable. Eg What happens if inflation goes up but then BoC starts buying old bonds at inflated prices? Whatever number we assume, its always uncertain.<br /><br />----- Michael James:<br /><br />The future isn't predictable. But make up any bond scenario you like. The only way you'll get to 1.9% real return is if bond rates go negative and then keep going further negative to ridiculous levels like -10%.<br /><br />----- BHCh:<br /><br />I agree that logically prospects for bond returns are very limited but not sure what happens with bond funds if the government decides to throw money at the economy by overpaying for bonds when the inflation is rising.<br /><br />And if the bonds are returning nothing for the next 50 years, perhaps we need to start looking at other sources of fixed income. Like farmland...<br /><br />----- Michael James:<br /><br />It's possible that interest rates could rise in the coming years, but the problem if you own bonds now is that you've locked in your interest rate. If you own 30-year bonds today and long-term rates rise, the value of your bond drops. So new investors in 30-year bonds would get higher rates, but you'd have to either stick with your crappy rate for 30 years or sell to lock in a loss and then buy a bond at a better rate. Either way, your overall bond returns stay poor for a very long time.<br /><br />----- Michael James:<br /><br />By the way, BHCh, I've noticed that your Blogger profile at<br />https://www.blogger.com/profile/08178467606233596591<br /><br />isn't publicly available. This causes web crawlers to declare that my blog is full of broken links. Believe it or not, I haven't found a way to stop Blogger from displaying your profile's URL when it displays the posts that you've commented on (short of just deleting your comments, which I don't want to do). If I could just never display any profile URLs for any of my commenters, I'd do it, but I haven't found a way.<br /><br />If making your profile public (possibly after removing parts you deem sensitive) would cause you other troubles, then don't worry about it and I'll keep looking for a technical solution. Otherwise, please consider making it public.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-91351380880135492522020-10-20T14:29:04.432-04:002020-10-20T14:29:04.432-04:00Hi Kevin,
Despite the fact that my approach looks...Hi Kevin,<br /><br />Despite the fact that my approach looks like a bucket strategy, I actually think of my portfolio as a single entity, cash and all. I use the 5 years of spending as a guide to how much to have in fixed income (bonds+GICs+cash). I prefer to lower my return expectations rather than have even more cash on the sidelines "just in case."<br /><br />Some people like to think of their main portfolio (with some stock/bond mix) and have some just-in-case cash on the side. This certainly adds safety, but it also reduces the stock allocation. As I said, I prefer to just lower my future return expectations.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-28559164040314120132020-10-20T13:59:23.226-04:002020-10-20T13:59:23.226-04:00Excellent I will read the posts. Thank you.Excellent I will read the posts. Thank you.Kevinhttps://www.blogger.com/profile/07808972977231613360noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-7885431230611837162020-10-20T13:57:58.884-04:002020-10-20T13:57:58.884-04:00Hi Michael,
The reduced spending is what I have st...Hi Michael,<br />The reduced spending is what I have struggled as well. My math skills are not as great as yours so for now I am thinking of saving approx 5 years of cash flow vs VPW in case there is a 50% market crash. For simplicity if VPW allows for withdrawal of $50K per year and $35K as max spending in case of a crash, I would save 5X$15K=$75 in cash outside of the VPW portfolio. I know it may not mathematically make sense but I am not sure how else to do it.Kevinhttps://www.blogger.com/profile/07808972977231613360noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-17431914743185594112020-10-20T13:56:30.483-04:002020-10-20T13:56:30.483-04:00Below are some relevant posts.
https://www.michae...Below are some relevant posts.<br /><br />https://www.michaeljamesonmoney.com/2019/04/my-bucket-strategy-for-retirement.html<br /><br />https://www.michaeljamesonmoney.com/2014/02/cushioned-retirement-investing.html<br /><br />https://www.michaeljamesonmoney.com/2013/10/a-retirement-income-strategy.html<br /><br />https://www.michaeljamesonmoney.com/2013/10/a-retirement-income-strategy-revisited.htmlMichael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-8140014547506212692020-10-20T13:46:49.261-04:002020-10-20T13:46:49.261-04:00Hi Kevin,
I do use VPW with lower growth assumpti...Hi Kevin,<br /><br />I do use VPW with lower growth assumptions, although nobody called it VPW back when I worked on it. However, I've been thinking about a version that assumes less ability to reduce spending, perhaps Bengen's 4% rule back-testing where you set a lower limit on how low your spending can go. I haven't yet figured out how to combine the idea of back-testing with more modern return assumptions (mainly that bonds return nothing over inflation).Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-60704608189608546022020-10-20T13:10:44.928-04:002020-10-20T13:10:44.928-04:00Thank you Michael. Do you use VPW using lower grow...Thank you Michael. Do you use VPW using lower growth or do you use other withdrawal strategies? Is so do you have any article/spreadsheet I can look at. Kevinhttps://www.blogger.com/profile/07808972977231613360noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-85312742009136056932020-10-20T12:43:14.624-04:002020-10-20T12:43:14.624-04:00Hi Kevin,
OK, I found the inflation figure at B14...Hi Kevin,<br /><br />OK, I found the inflation figure at B144 of the Lists tab in the VPW Accumulation and Retirement Worksheet. It's only used to discount the value of a fixed (non-indexed) pension.<br /><br />I'm sorry to be the bearer of bad tidings, but it's better to know now that you need to work longer, especially if you're like me and are very unlikely to find work in a decade or two that pays anything close to the salary I got while young. I'm glad I worked an extra couple of years instead of having to work for a decade or more when I'm older.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-4322362769004131422020-10-20T11:12:59.817-04:002020-10-20T11:12:59.817-04:00Hi Michael,
Inflation is on line 144 of the list ...Hi Michael,<br /><br />Inflation is on line 144 of the list tab. If I change the stock% to 4% and fixed to zero the I do get much lower withdrawal amount based on my original portfolio size. That means working many more years :( thank you for the postKevinhttps://www.blogger.com/profile/07808972977231613360noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-77688042870706201222020-10-20T10:51:01.868-04:002020-10-20T10:51:01.868-04:00Hi Kevin,
I'm not sure where you're chang...Hi Kevin,<br /><br />I'm not sure where you're changing the inflation figure, but having the withdrawal percentages not change when you change the inflation assumption is a sign that the returns are real values (not nominal).<br /><br />The Credit Suisse document is clear in stating that 5% for stocks and 1.9% for bonds are real (inflation-adjusted) figures.<br /><br />If the 5% and 1.9% figures really were nominal, then VPW would be designed to target constant nominal withdrawals over the full retirement. This would be a plan for eating cat food later in life.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-47629867057189375322020-10-20T10:30:23.228-04:002020-10-20T10:30:23.228-04:00When I change the inflation to a different %, the ...When I change the inflation to a different %, the amount to be withdrawn does not change. The calculations seem to be based on the nominal return of 5% for stocks and 1.9% for bonds. I do agree the bonds return can be reduced to 1.5% for now but why would the stock return be reduced to 4%?Kevinhttps://www.blogger.com/profile/07808972977231613360noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-76355230402682613192020-10-20T09:34:25.664-04:002020-10-20T09:34:25.664-04:00Anonymous: Based on Blackrock's numbers, I may...Anonymous: Based on Blackrock's numbers, I may be a little optimistic in assuming bond returns will match inflation. However, for now instead of actual bonds I use EQ savings accounts paying 1.5% (nominal), which isn't too far off inflation.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-35676788331589674432020-10-20T09:16:23.853-04:002020-10-20T09:16:23.853-04:00I'm not very good at predicting the future, bu...I'm not very good at predicting the future, but I assume Blackrock can do a better job than me. Their numbers are pretty close to yours. https://www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptionsAnonymousnoreply@blogger.com