Variable Percentage Withdrawal (VPW) for Canadians

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by SQRT »

Some good stuff here. Thanks. In my case it is really pretty simple. I just spend the income (divs) generated by the portfolio. If these ever get cut, I would need to reduce spending or run down my cash balance somewhat. So far hasn't really happened. Every few years, if the markets are good I plan to sell (maybe 1-2% ) and boost cash and ultimately spending. This approach will very likely result in a large bequest but currently only 64 ( wife 57) so can think more about that later.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Wallace »

longinvest, at the time of my earlier post I had read through this thread and your information on the website but hadn't yet downloaded the spreadsheet. Now that I have done so I can't believe how easy the process was. Once you understand the principle, it is the work of minutes to enter the data in the spreadsheet and the answer is right there.

It doesn't really matter how complicated or simple your investing style is. The spreadsheet simply needs to know the value of the portfolio at the end of each year and it works out the rest.

This is a really practical way to keep track of how you are doing in retirement. Up until now the best retirement calculator I have seen was FIREcalc but I think this one is even better. Thanks for the tremendous work you and LadyGeek have put into this. I use OpenOffice 4.1.1 and it seems to work just fine on their spreadsheet.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by couponstrip »

Agreed. The simplest tools are always the most useful.

The only fly in the ointment for me personally is that I would prefer to spend more in the younger years of retirement at the risk of having much less at age 78+. Mostly because I meet 78+ year olds every day who no longer wish to do things that cost a lot of money. And money has even more rapidly declining value thereafter.

What's the use of being an 90 year old with a 100k (2015 dollars) draw down every year when the highlights of the day are walking the dog and having the grandkids over in the afternoon for a visit? At that age, there is still much pleasure, but it doesn't cost much. Of course there are elderly folks that buck this generalization, but they are the exception to the rule.

So I tried the increased percentage drawdown override under the "tables" sheet and back tested which I think comes closer to modelling a withdrawal schedule that works for us.

The other thing to keep in mind is taxation. As longinvest has often said, this tool is not meant to be a tax plan (or financial plan for that matter), but taxes are a big deal, especially if you are buy and hold and/or have large CCPC/holdco/RRSP accounts. Simply entering the total amount of the savings from all these accounts will result in calculated withdrawals that will be much higher than the dollars that can actually be spent. Worth keeping in mind if you are using this tool to determine how much you need before telling the boss where to go. You'll need some extra cash for tax.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by SQRT »

couponstrip wrote:
The only fly in the ointment for me personally is that I would prefer to spend more in the younger years of retirement at the risk of having much less at age 78+. Mostly because I meet 78+ year olds every day who no longer wish to do things that cost a lot of money. And money has even more rapidly declining value thereafter.

What's the use of being an 90 year old with a 100k (2015 dollars) draw down every year when the highlights of the day are walking the dog and having the grandkids over in the afternoon for a visit? At that age, there is still much pleasure, but it doesn't cost much. Of course there are elderly folks that buck this generalization, but they are the exception to the rule.
Agree with this sentiment other than the higher cost of end of life care, As long as you can cover that, higher early draws make sense.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by OnlyMyOpinion »

This thread seemed best suited to pointing out a recent paper written by Graham Westmacott and Susan Daley at PWL Capital Inc.
It utilizes the concept of an 'annually recalculated virtual annuity (ARVA)' to deplete the balance in the 'growth' portion of your portfolio.

A worthwhile read, particularly if depletion of your portfolio is part of your retirement income plan:
https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by StuBee »

Thanks OMO! A very interesting read. I appreciate their comment that: "accumulation is for depletion". The financial industry overemphasizes the former in my opinion. It is all about ensuring future needs, no more and no less.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by BRIAN5000 »

A lot of information in that paper need the "cliff note" version for us retail investors. This needs to be ground down to some easy understandable basic rules.

Swedroe says Corporates aren't worth it
Bernstein says anything over a five-year duration isn't worth it ( or is it three?)
Bodie says use Tips to guarantee income

All at odds with the structure they suggest for the Security part of the portfolio?
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by StuBee »

I would venture to say that most of us (or at least many of us) already have a "secure portfolio" and a "growth portfolio". The secure part is called "fixed income" (which includes all forms of pensions) and the growth part is called "equity". The cut-off between what is secure and what is growth is somewhat murky such that some of the secure part may be less secure than some of the growth part.

I think that most of us are trying to aim for what the article suggests without the fancy math. I have a rough idea of what I will actually need for the rest of my lifetime and I have attempted to provide for the majority of this (at least 75%) with something of a FI nature. And then there are dividends that provide for the rest (and a bit more).

Finally, I have about 200 to 300K$ that I do not think that I will need. This is how I take care of volatility, sequence of return risk and whatever else the world may throw at me.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

With the help of LadyGeek*, I have improved the finiki: Variable Percentage Withdrawal page.

* LadyGeek helped with the Bogleheads wiki version of the page, which I reused for Finiki.

The most important change is the addition of a section on how to use variable-percentage withdrawals during retirement, both with the spreadsheet and without the spreadsheet.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Wallace »

couponstrip wrote: What's the use of being an 90 year old with a 100k (2015 dollars) draw down every year when the highlights of the day are walking the dog and having the grandkids over in the afternoon for a visit?
Hey, that's my lifestyle right now! :D

Well, it isn't yet, but in 5-10 years it will be. Not going to Florida for six weeks will save US$10,000. Not going on trips to Europe another CAN$10,000. We're already having some trouble getting around. Moving to a condo with no stairs will also save some money, and we'll be selling the cottage in a few years which will provide more capital. That will also save another $6000 a year in running costs.
The paper on variable annuities linked upthread, IMHO, misses some very basic truths. The first is that people live their lifestyle according to the income coming in, not the other way around. They've been doing it for centuries. When the money runs out before the end of the week/month/year they cut back, and have a cheese sandwich instead of ordering in pizza. People adapt. Mathematical formulae don't. Also, the authors assume that people are just plain silly. In their two examples at the end of the paper they assume that the couple with equities in their portfolio cashed everything out at the bottom of the 2008 crash "and never recovered the money they lost" - a common, dire warning from financial advisors. I was in exactly the same position as that couple and instead used spare cash to buy. When the market rebounded I was way ahead.

I put my figures into the VPW spreadsheet a week ago and will feel comfortable withdrawing anything up to the amount suggested. (6.5% for me this year) Next year at the same time I'll reassess and if the bear market has worsened I'll simply readjust the lifestyle according to the new figures. No big deal.

I like the VPW idea because the plan reflects the way that people actually budget in the real world.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by cannew »

Our annual expenses for the past 5 yrs has ranged from $55k to $75k and not necessarily increasing each year.
CPP\OAS at around $31k covers about 45% of our expenses. So we draw from our investments $25k to $45k
Fortunately our dividend income is not only sufficient to cover our RRIF withdrawals but probably $30k of it transferred to the TFSA & Non-registered In-kind.
As our dividends exceed our withdrawal needs the balance is re-invested which continues to increase our portfolio.
Our VPW is to increase or decrease our dividend withdrawals or VDW.
Notice lots of discussions on etf''s and indexing. Glad we don't have to pay even those small annual fees which would just cut into our annual dividend income. Sure the portfolio market value has taken a hit but my dividends continue to increase.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by kcowan »

Wallace wrote:I put my figures into the VPW spreadsheet a week ago and will feel comfortable withdrawing anything up to the amount suggested. (6.5% for me this year) Next year at the same time I'll reassess and if the bear market has worsened I'll simply readjust the lifestyle according to the new figures. No big deal.

I like the VPW idea because the plan reflects the way that people actually budget in the real world.
We have a couple of friends here in PV who are about 87 average for all four. They do what you are proposing. In a good year, they travel to live with their GCs in addition to their regular travel and invite them down to PV partly at their expense. In a down year, they decide to eat into principal or cut back. (Of course they have 3rd party managers who tell them!)

(But we also have many comparable older friends who are no longer around! Usually their survivors adopt of different strategy. One is from NJ and finally arrived Thursday. Her new mate of five years is not a Mexico guy so she comes down on her own for 6 weeks. Her prior mate was a PV addict but died of lung cancer.)
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

I've uploaded a new version of the spreadsheet. Download links are available on the finiki: Variable percentage withdrawal page.

I added 2015 return and inflation data.

As usual, comments are welcome.

Enjoy!
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

@longinvest.

Thanks for building and making VPW available!! An incredible amount of work has gone into this!

This is what you posted in Jan. 2015....


"Canadian concerns

In Canada, for a couple, things are more complex. OAS payments are a personal entitlement. They disappear at the death of the person. As a consequence, I wouldn't count on both payments of the couple in my retirement plan. (I would include a single OAS payment in the Social Security entry).

I don't know how similar CPP is to QPP, but QPP's survivor benefit is not increased when delaying the start of QPP payments, and the sum of QPP payment and survivor benefit is capped. So, again, one must be careful in selecting the lowest combination of QPP payment + survivor benefit. (I would add this lowest combination amount to the single OAS payment and put the sum in the Social Security entry).

Is there a different approach that Canadian couples take for planning retirement using OAS/CPP? The significant loss of income when one spouse dies (specially when one delays CPP and OAS) seems difficult to plan around. It makes me think that, in a couple, one would be better to take CPP and OAS as soon as possible after retirement, unlike in the US where delayed (and thus increased) Social Security payments continue (100%) for the surviving spouse."

Just wondering if you have done any more thinking about the problem? Personally, I would not be concerned if my wife was to die before me. I would find a way to make do. I am the one directing the finances and she has no real interest, so my concern is for what happens if I die first. The hole in her income stream caused by the loss of my CPP & OAS would be significant.

One possible solution would be for me to purchase enough life insurance to cover the cost of an annuity to replace the lost income. Another solution might be to set aside enough at retirement to be used to buy an annuity. My last idea, and my favorite, would be to leave instructions that upon my death, that all remaining assets be pensionized by purchasing annuities in my wife's name at that time. I like this idea because it is the easiest for her to manage. Also, payout rates for her would be much better than for a joint annuity, and get better as time goes on.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

gaspr wrote: Just wondering if you have done any more thinking about the problem? Personally, I would not be concerned if my wife was to die before me.
So far, I've settled on picking into account the lowest projected OAS+CPP combination at 70 of one spouse* into my projections.

* I mean "his CPP+OAS at 70" or "her CPP+OAS at 70"; the lowest of the two.

After death of one spouse (after 70), net income will go down, but expenses should go down, too. There won't be a need to pay for two plane tickets, etc. Still delayed OAS+CPP can easily reach $20K or even $25K per spouse. I prefer not to count on double that, specially that all residual retirement income will be taxed in the hands of the survivor, subject to higher marginal tax rates. I'm planning to simply use the extra money, while both are still alive after 70, to offset portfolio withdrawals and fill TFSAs (which will help the eventual survivor deal with higher taxes).
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

Does the idea of the surviving spouse annuitizing all remaining assets appeal to anyone? My wife could not carry on with VPW without help from someone. Professional help (if we could find someone trustworthy) is likely to eat 1% or more of the remaining assets each year. Mortality credits start to look pretty tempting at age 75 and beyond. From a simplicity point of view, I like it... monthly deposit in her account every month.

Cons are lack of inflation protection, lack of liquidity, worthiness of provider etc.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed »

Annuitizing "most" remaining assets souunds better if that can be managed with assets that remain. The annuity would provide for comfortable cash flow while the rest could be in GICs or even a Mawer balanced fund to provide flexibility for the survivior to gift money, etc as s/he sees fit. What the portion of each would be would depend on portfolio size at the time.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

gaspr wrote:Cons are lack of inflation protection, lack of liquidity, worthiness of provider etc.
I wouldn't recommend that my wife annuitize more than 50% of residual wealth on my death, and I would tell her to select at least a fixed annual 2% indexation, if she couldn't find a CPI-indexed annuity. I think that most annuity providers offer a fixed indexation option. Even if inflation turns our to be 3%, lagging inflation by 1% a year in old age is not so bad.

Even if we both survive, I do intend to buy enough inflation-indexed life annuity, in our late 70s, to cover all necessary expenses, so that VPW won't leave us penniless if one of us survives beyond 100. Anyway, indexed annuity payouts and VPW percentages, in the late 70s, are pretty close to one another.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

longinvest wrote: Anyway, indexed annuity payouts and VPW percentages, in the late 70s, are pretty close to one another.
That's kinda what I was thinking...I agree with the 2% fixed inflation adjustment. One thing I really like with this option is that it handles the issues of cognitive decline well....
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

AltaRed wrote:Annuitizing "most" remaining assets souunds better if that can be managed with assets that remain. The annuity would provide for comfortable cash flow while the rest could be in GICs or even a Mawer balanced fund to provide flexibility for the survivior to gift money, etc as s/he sees fit. What the portion of each would be would depend on portfolio size at the time.
Yes, this would be preferable if she could handle the management of the remaining portfolio. I think she would need some help and that just opens up a whole new can of worms...
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed »

gaspr wrote: Yes, this would be preferable if she could handle the management of the remaining portfolio. I think she would need some help and that just opens up a whole new can of worms...
If it is all in MAW104 Balanced Fund with an MER of 0.94%, it seems to me there is no management required. Hold the fund with Mawer directly and they supply a representative* for that account. I wouldn't lose any sleep over my surviviing spouse having, for example, $0.5 million or so in that one single fund....yes, really.

* i know someone who had plans to turn over their entire portfolio to Mawer and actually met with a proposed assigned representative. That someone would have committed their 7 digit porffolio to Mawer but wanted a more senior representative and Mawer refused. So they walked. But a junior rep is overseen by others in that shop so it's not like the snotty nosed kid was going to get away with anything. Besides if all a surviving spouse was going to do with that account was to sell units of MAW104 on an infrequent basis, said surviving spouse really doesn't have to talk to anyone other than an admin assistant.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr »

Thanks for the input folks...food for thought.

I have another question. If using this method as a couple, I assume we would use the age of the younger spouse to determine the withdrawal %?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

gaspr wrote:If using this method as a couple, I assume we would use the age of the younger spouse to determine the withdrawal %?
Of course.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

For anyone interested, there was a discussion about adding (or not) a glide path in the last years of VPW withdrawals, in the Bogleheads forum: Re: Variable Percentage Withdrawal (VPW). LadyGeek provided convincing arguments against it, but I think various issues were raised in the discussion about how to deal with longevity and disability-free life expectancy which can be of interest to FWF members.

Feel free to make suggestions about how to improve our finiki: VPW page and the spreadsheet to address of these issues.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek »

I would like to suggest that the spreadsheet clearly mention the legally required minimum withdrawal rates for tax-deferred accounts. While this a responsibility of the user, it is helpful to have this information inside the spreadsheet. Perhaps the "Instructions" worksheet can include a section:

===============================
Required minimum distributions
Please be aware of the legally required minimum distributions, as this takes priority over planning. Information can be found:

Canadian residents: Registered Retirement Income Fund - finiki, the Canadian financial wiki (applies to LIF, LRIF, and RRIF)
US residents: IRA distribution tables - Bogleheads (applies to IRA and certain employer provided retirement plans)

=================================

Caveat: I am US resident. Please review and modify as appropriate.
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