Variable Percentage Withdrawal (VPW) for Canadians

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Dudsy »

I like the concept of VPW as it probably mimics our nature to spend more when your feeling richer and visa versa.

One question, do the withdrawal rate schedules for a given asset allocation inherently provide a measure of inflation protection over time?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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AltaRed wrote: 09 Feb 2018 13:08 In any event, we are arguing about nuances to a tested and forgiving withdrawal methodology. Each of us in withdrawal stage will do with it what we want at the time.
Effectively, during retirement, we'll have to adapt to our circumstances at the time. Life is not as tidy as a spreadsheet.

Actually, it took me a while to realize a hidden, yet fundamental advantage of VPW. It's its resilience in face of portfolio events. This might not seem like a big deal, but it is. VPW naturally adapts withdrawals to whatever remains in the portfolio at withdrawal time. So, if, during the preceding year, one has received a windfall increasing the size of the portfolio, or an unfortunate circumstance forced part of the portfolio to be liquidated, VPW will naturally adjust the withdrawal accordingly.

Compare this to other withdrawal methods, like SWR, where it's far from obvious how to adjust withdrawals in case of such portfolio events. In theory, the portfolio was not supposed to be subject to events, so withdrawals were only supposed to be adjusted to inflation. There's no recipe for adjusting withdrawals to windfalls and partial liquidations in popular writings about SWR.

This resilience property transforms VPW into a flexible guiding tool (instead of a rigid withdrawal method), somewhat like a budget. Sometimes, life happens and we go over or under budget. When this happens, we forget about the initial plan and adjust future budgets to our new reality. VPW does the same thing. It always makes its recommendation based on current circumstances, regardless of how we historically got there.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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I agree wholeheartedly.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed »

Dudsy wrote: 09 Feb 2018 15:12 One question, do the withdrawal rate schedules for a given asset allocation inherently provide a measure of inflation protection over time?
Remember that VPW calculates how much can be withdrawn. Feel free to withdraw less if you wish. It then just makes the portfolio number for the next January 1st just that much bigger.

As for inflation, implicitly yes to the degree underlying portfolio assets rise with inflation. Otherwise, no.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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I don't want to take any longevity risk, with my money. Ending up eating cat food under a bridge is just not an acceptable outcome, regardless of how long I live.
You exaggerating :). You can start getting GIS if your income drops below 18K ( and you still may have hundreds of thousands in TFSA and non-reg). In the worst case when your income is 0, you gonna get 17K OAS/GIS. More than enough for senior with paid off house.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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I just finished reading this thread. Regarding the various discussions about choosing an end age... 99, 85, etc. has anyone played with using a rolling 25 year end date every year? For me at 62 that means I'd use 87 this year, 88 next year, etc till I reach a max of 99.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Ken wrote: 05 Mar 2018 14:07 I just finished reading this thread. Regarding the various discussions about choosing an end age... 99, 85, etc. has anyone played with using a rolling 25 year end date every year? For me at 62 that means I'd use 87 this year, 88 next year, etc till I reach a max of 99.
The problem is that IF you take out the maximum percentages early on with a 25 year period, you will over-withdraw in the early years, such that your rolling 25 year periods will have less and less to work with as you age. I'd never do that, but have no problem using 95 until i am at least 80..and then re-visit moving to 99 if I felt smug about living long. The biggest spending years of a senior generally are the first decade after retirement and then potentially the last 2-5 years in assisted care.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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AltaRed wrote: 05 Mar 2018 14:36
Ken wrote: 05 Mar 2018 14:07I just finished reading this thread. Regarding the various discussions about choosing an end age... 99, 85, etc. has anyone played with using a rolling 25 year end date every year? For me at 62 that means I'd use 87 this year, 88 next year, etc till I reach a max of 99.
The problem is that IF you take out the maximum percentages early on with a 25 year period, you will over-withdraw in the early years, such that your rolling 25 year periods will have less and less to work with as you age. I'd never do that, but have no problem using 95 until i am at least 80..and then re-visit moving to 99 if I felt smug about living long. The biggest spending years of a senior generally are the first decade after retirement and then potentially the last 2-5 years in assisted care.
I should have mentioned that that is exactly the reason for doing it. To overweight the first years. I think it depends on your personal situation including starting value, province of residence, health, etc. Here in Alberta, for example, I know because my Mom is doing it, that I can spend my later years in a very nice assisted living lodge where my cost = whatever my income is minus $315. In her case that means CPP + OAS + OAS Supplement + Alberta Seniors Benefit - $315 = monthly cost of the lodge. The rest of the actual cost of the lodge is paid by Alberta Health Care. But that's getting quickly off topic.
Playing with the VPW spreadsheet myself, "restarting" my retirement at various ages up to 74 (=99-25) with a constant 25 year outlook, ie; 62-87, 63-88, etc. up to 74-99, the spreadsheet always takes 5.9% in the new "first" year. Whereas with the spreadsheet age range set to 62 to 99 it starts at 4.8% and reaches 5.9% at age 74. So yes, it takes 1% or so more each year till age 74 so your gonna have less to work with later on, but probably not such a huge amount as to threaten your future. I thought it was an interesting twist.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Ken wrote: 05 Mar 2018 16:26 Playing with the VPW spreadsheet myself, "restarting" my retirement at various ages up to 74 (=99-25) with a constant 25 year outlook, ie; 62-87, 63-88, etc. up to 74-99, the spreadsheet always takes 5.9% in the new "first" year. Whereas with the spreadsheet age range set to 62 to 99 it starts at 4.8% and reaches 5.9% at age 74. So yes, it takes 1% or so more each year till age 74 so your gonna have less to work with later on, but probably not such a huge amount as to threaten your future. I thought it was an interesting twist.
I had not played with that kind of analysis myself, so that is interesting information. Not sure many would be comfortable with that kind of potential exposure starting at age 62, at least not until one has some 'years' of retirement experience to see how their portfolios are doing. As fate would have it, capital markets have been rather generous since the 2008/2009 crisis, so anyone with a high equity allocation likely still has a growing portfolio under VPW despite pulling out 5+% each year. It may have felt quite different had we been in a bear market the last several years.

I know I am further ahead (portfolio larger) since I retired 12 years ago, despite continuous ramping up of spend rate. A good problem to have.....so far. And by luck, a tremendously smart decision to retire at 57 rather than 65. Free years of retirement life as far as I am concerned.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Ken,

I would personally never use VPW with a last-withdrawal age smaller than 99. We don't know how long we will live, and we certainly don't know how much markets will return during our retirement.

VPW is calibrated on average outcomes. It would be a mistake to assume that VPW will deliver increasing withdrawal amounts. Backtests starting in the 70s and 80s (as we can get with Canadian historical data) show upward withdrawal slopes, but this is only an artefact of looking at retirements starting in those years. There are other backtests with downward withdrawal slopes starting in earlier years (U.S. data). I've explained this on the Bogleheads forum: https://www.bogleheads.org/forum/viewto ... 6#p3620856

If I wanted to spend more during retirement, I would just save more before retirement, instead of trying to tweak the withdrawal method hoping it will magically find more money than the market gives. :wink:
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Ken wrote: 05 Mar 2018 16:26Playing with the VPW spreadsheet myself, "restarting" my retirement at various ages up to 74 (=99-25) with a constant 25 year outlook, ie; 62-87, 63-88, etc. up to 74-99, the spreadsheet always takes 5.9% in the new "first" year. Whereas with the spreadsheet age range set to 62 to 99 it starts at 4.8% and reaches 5.9% at age 74. So yes, it takes 1% or so more each year till age 74 so your gonna have less to work with later on, but probably not such a huge amount as to threaten your future. I thought it was an interesting twist.
If you 'shorten your life' to 25 yrs, you will get more each year to account for that.
Have you tried breaking your nest egg into two lumps, and using one from say 60 to 71 and the other from 72 to death?
This might also align with an unregistered account you spend early, and a RRSP account that you've let grow till 72 before drawing as a RRIF. Depending on the porfolio mix, the VPW tables give numbers not too dissimilar from the prescribed RRIF table.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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longinvest wrote: 05 Mar 2018 17:38 I would personally never use VPW with a last-withdrawal age smaller than 99. We don't know how long we will live, and we certainly don't know how much markets will return during our retirement.
You might say that now, but until you are into retirement and/or about to enter it, you really don't know how you will be positioned or feel at that point of your life. Never is a pretty strong position. What Ken has analyzed is worthy of discovery and thought if not practice.

I started retirement with a conservative financial approach. 12 years later and I am reckless by comparison. Because I can. We all travel our own road.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

AltaRed wrote: 05 Mar 2018 18:19
longinvest wrote: 05 Mar 2018 17:38 I would personally never use VPW with a last-withdrawal age smaller than 99. We don't know how long we will live, and we certainly don't know how much markets will return during our retirement.
You might say that now, but until you are into retirement and/or about to enter it, you really don't know how you will be positioned or feel at that point of your life. Never is a pretty strong position. What Ken has analyzed is worthy of discovery and thought if not practice.

I started retirement with a conservative financial approach. 12 years later and I am reckless by comparison. Because I can. We all travel our own road.
AltaRed,

The VPW spreadsheet already provides the settings to increase spending earlier; one can simply play with VPW's internal rate. It's available on the "Table" sheet for advanced users with specific needs and with an understanding of the risks it carries. Users can backtest it.

There's no need to decrease the age below 99 just to get it back there with time.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Ken »

longinvest wrote: 05 Mar 2018 17:38If I wanted to spend more during retirement, I would just save more before retirement, instead of trying to tweak the withdrawal method hoping it will magically find more money than the market gives. :wink:
Oops... too late. :)
OnlyMyOpinion wrote: 05 Mar 2018 18:05Have you tried breaking your nest egg into two lumps, and using one from say 60 to 71 and the other from 72 to death?
This might also align with an unregistered account you spend early, and a RRSP account that you've let grow till 72 before drawing as a RRIF.
Interesting. That's quite close to what I'm actually doing anyway. Like many on this forum my "problem" is trying to spend it. That's the main reason why an early-weighted but still reasonable spending regime might make sense. But keeping physical accounts separate this way wouldn't work. I'd have to spend far too much too early. Any separation would be virtual using different sub-accounts in my software or spreadsheet.
longinvest wrote: 05 Mar 2018 19:14The VPW spreadsheet already provides the settings to increase spending earlier; one can simply play with VPW's internal rate.
The problem with that is that life expectancy is not a fixed number. I haven't looked it up but lets say that today at 62, my life expectancy is 85. But when I reach 84 my life expectancy has changed to maybe 90 or something. Has this age related aspect of the actuarial tables been incorporated into the calculations? If it were then I would expect some form of the early-weighted spending I'm suggesting. Maybe it's already there, I don't know. I can't follow all the logic in your spreadsheet unless I unlock it and spend a bunch of time working it out. Anyway that's what I'm doing with my moving 25 year timeline... adjusting my life expectancy based on my current age.
Also I don't know how to or whether you have incorporated what many have mentioned... the desire to spend more earlier while you can enjoy it.
By the way; VPW is an awesome concept. Thanks for that.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed »

The problem is that with a normal sized portfolio on VPW implementation, you can't assume your actuarial age of 85 or so. You have to assume at age 62 that you will live longer than 85 to avoid too much draw down early. You can't wait until age 80 to say you are going to beat the odds of the grim reaper at that point and move the yardsticks to 90 or 95.

Now if you have a generous portfolio, then you likely won't be spending your annual VPW allotment anyway...so the pig just passes through the python a bit further so that you have an even bigger problem 10 years from now.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Ken,

Actuarial tables are useful to insurance companies and pension plans. Not all those of age 65 today will die at age 85, even though this is their life expectancy; some of them will die earlier, others will die later. The number 85 is an estimated average for the entire cohort of age 65 people, by observing what happened to individuals of previous cohorts. For individuals, this number is mostly useless.

VPW takes into account that we don't know how long we'll live, so it calibrates spending so that it won't completely deplete the portfolio before an unlikely-to-reach age for most (not all!) people. But, that's not sufficient. At age 80, inflation-indexed annuities have payouts that match VPW's percentages (or beat them); so it's usually recommended at that age, as long as one is still alive of course, to liquidate part (not all!) of the residual portfolio to buy an inflation-indexed life annuity and completely eliminate what is usually called longevity risk (e.g. the risk of having more life than money).
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

Wade Pfau says:


"Play the long game. A retirement income plan should be based on planning to live, rather than planning to die. A long life will be expensive to support, and it should be the focus. Fight the impatience that would lead one to choose short-term expediencies carrying greater long-term cost. This does not mean, however, that one sacrifices short-term satisfactions to plan for the long-term. There are many efficiencies that can be gained from a long-term focus that can support a higher sustained standard of living for as long as one lives. One still has to plan for a long life, even when rejecting strategies that only help in the event of a long life. Remember, planning to live to life expectancy is quite risky; half of the population will live longer than this. Planning to live longer means spending less than otherwise. Developing a plan that incorporates efficiencies that will not be realized until later can allow for more spending today in anticipation of those efficiencies. Not taking such long-term efficiency-improving actions will lead to a permanently reduced standard of living. The implication is more conservative lifetime spending in order to preserve assets for the long-term as a fix for the planning inefficiencies."

VPW addresses this issue very well.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Ken »

AltaRed wrote: 05 Mar 2018 20:02... You can't wait until age 80 to say you are going to beat the odds of the grim reaper at that point and move the yardsticks to 90 or 95.
I agree... so at 62 you assume it's 87 and at 63 you assume it's 88, etc. You move the yardstick every year.
longinvest wrote: 05 Mar 2018 20:06Not all those of age 65 today will die at age 85, even though this is their life expectancy; some of them will die earlier, others will die later.
Same comment as above... adjust the estimate every year. The result is not a HUGE spend... it's maybe 1% more.
longinvest wrote: 05 Mar 2018 20:06VPW takes into account that we don't know how long we'll live, so it calibrates spending so that it won't completely deplete the portfolio before an unlikely-to-reach age ...
Fair enough, but I think the result is almost guaranteed, given that 1 in 6000 reach age 100, to make you limit your spending unneccesarily... not saying you WILL spend it... just that you will ALLOW yourself to spend more if you choose to.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Ken,
Ken wrote: 05 Mar 2018 20:51 Fair enough, but I think the result is almost guaranteed, given that 1 in 6000 reach age 100, to make you limit your spending unneccesarily... not saying you WILL spend it... just that you will ALLOW yourself to spend more if you choose to.
The best way to safely maximize spending is to buy an annuity. The cheapest inflation-indexed annuities one can buy are delaying CPP and OAS until age 70, filling the gap between retirement and age 70 with fixed income. See:

Delay OAS to 70, spend 8.8% more at 65!
Delay CPP to 70 and safely spend 42% more starting at age 60!

Inflation-indexed (2%) annuities are sold by insurance companies. In February 2018, a single man age 65 could have bought a 2% indexed $440.35 life annuity for $100,000 (source). That's a 5.3% payout ratio.

Some people argue that spending diminishes with age. So, in some situations, it can be reasonable to buy a normal life annuity, one which doesn't increase from year to year. As of today, a single man age 65 could have bought a $545.23 life annuity for $100,000 (source). That's a 6.5% payout ratio.

For a couple age 65, $100,000 would have bought a 2% indexed $336.98 joint life annuity or a (normal) $440.71 joint life annuity. These are 4.0% (indexed) and 5.3% (fixed) payout ratios.

No portfolio withdrawal strategy can guarantee such stable inflation-indexed or fixed payments for life. Annuities can, because of mortality credits (those who die before their life expectancy subsidize those who live past their life expectancy).

The huge drawback of annuities is the loss of liquidity; the money's gone and has been permanently replaced with monthly payments. There's no going back.
Last edited by longinvest on 05 Mar 2018 22:01, edited 9 times in total.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Ken wrote: 05 Mar 2018 20:51... I think the result is almost guaranteed, given that 1 in 6000 reach age 100, to make you limit your spending unneccesarily... not saying you WILL spend it... just that you will ALLOW yourself to spend more if you choose to.
There is also the big uncertainty as to how your functional health will hold up. An average Canadian can expect to live their final 10.5 years with some level of diability (source). Some will plan for this by having more savings set aside for personal care, and assume that family or qualified help can be retained in their late 70's or 80's onward (I'm not optimisitc of that given the challenges that already exist). On the other hand, if your health is such that you need to move into long term care, you can have absolutely no income and not be turned away (in Ontario). So in the unfortunate event that you are on the long side of average, you either need to save lots - or save none. :?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

Pfau also argues that what we consider to be liquid assets may in fact be an illusion:

'Distinguish between technical liquidity and true liquidity. An important implication from the household balance sheet view is that the nature of liquidity in a retirement income plan must be carefully considered. In a sense, an investment portfolio is a liquid asset, but some of its liquidity may be only an illusion. Assets must be matched to liabilities. Some, or even all, of the investment portfolio may be earmarked to meet future lifestyle spending goals. Curtis Cloke describes this in his Thrive University program as allocation liquidity. A client is free to reallocate their assets in any way they wish, but the assets are not truly liquid because they must be preserved to meet the spending goal. This is different from free-spending liquidity, in which assets could be spent in any desired way because they are not earmarked to meet existing liabilities. While a retiree could decide to use these assets for another purpose, doing so would jeopardize the ability to meet future spending. In this sense, these assets are not as liquid as they appear.

True liquidity emerges when there are excess assets remaining after specifically setting aside what is needed to meet all of the household liabilities. This distinction is important because there could be cases when tying up part of one’s assets in something illiquid, such as a SPIA, may allow for the household liabilities to be covered more cheaply than could be done when all assets are positioned to provide technical liquidity. In simple terms, a SPIA which pools longevity risk may allow lifetime spending to be met at a cost of 20 years of the spending objective, while self-funding for longevity may require setting aside enough from an investment portfolio to cover 30-40 years of expenses. Because risk pooling and mortality credits allow for less to be set aside to cover the spending goal, there is now greater true liquidity and therefore more to cover other unexpected contingencies without jeopardizing core-spending needs. Liquidity, as it is traditionally defined in securities markets, is of little value as a distinct goal in a long-term retirement income plan."
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Ken »

longinvest wrote: 05 Mar 2018 21:20The huge drawback of annuities is the loss of liquidity; the money's gone and has been permanently replaced with monthly payments. There's no going back.
Yup. Choice... I love to have choices. Annuity eliminates that.
Thanks for the good thoughts and discussion. I'll think about all this for next year. I'm done for this year.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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gaspr wrote: 05 Mar 2018 21:47 Pfau also argues .......................................... a long-term retirement income plan."
Wow Wade, is that the long way of saying "annuitize your basic living expenses"?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Ken »

gaspr wrote: 05 Mar 2018 21:47Distinguish between technical liquidity and true liquidity. ...some of its liquidity may be only an illusion. ... Some, or even all, of the investment portfolio may be earmarked to meet future lifestyle spending goals. ...This is different from free-spending liquidity, in which assets could be spent in any desired way because they are not earmarked to meet existing liabilities.
This is another way of saying put your money into 2 pots, one you can't spend and one you allow yourself to spend should you choose to. The point of VPW or any other process is to decide how much to put into the free spending pot (this year for example), whether you actually spend it all or not.
gaspr wrote: 05 Mar 2018 21:47True liquidity emerges when there are excess assets remaining after specifically setting aside what is needed to meet all of the household liabilities. This distinction is important because there could be cases when tying up part of one’s assets in something illiquid, such as a SPIA, may allow for the household liabilities to be covered more cheaply than could be done when all assets are positioned to provide technical liquidity. In simple terms, a SPIA which pools longevity risk may allow lifetime spending to be met at a cost of 20 years of the spending objective, while self-funding for longevity may require setting aside enough from an investment portfolio to cover 30-40 years of expenses. Because risk pooling and mortality credits allow for less to be set aside to cover the spending goal, there is now greater true liquidity and therefore more to cover other unexpected contingencies without jeopardizing core-spending needs. Liquidity, as it is traditionally defined in securities markets, is of little value as a distinct goal in a long-term retirement income plan."
This is advocating, and more importantly explaining why, you should put enough to cover basic needs into an annuity and keep the remainder of the portfolio self invested so you still have it under your control and you can increase your spending if you like without risking future coverage of basic needs. Good thoughts. I have not considered an annuity thus far. I'll think about it this year.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

This blog post by Mike Piper refers to a study that seems to endorse the VPW method of retirement spending...

https://obliviousinvestor.com/an-ideal- ... -strategy/
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