Variable Percentage Withdrawal (VPW) for Canadians

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 09 Oct 2016 16:30

RMDs should not be considered in using VPW, as it is a tax issue and not a cash flow issue. Just because a distribution must be made to satisfy RMD rules, there are no rules rules saying you have to spend it all. Some or all can be reinvested and remain as part of the portfolio.

I do agree that it should be made clear that all longevity risk be taken care of before embarking on withdrawals.

User avatar
LadyGeek
Gold Ring
Gold Ring
Posts: 1288
Joined: 26 Oct 2011 16:51
Location: Philadelphia, PA
Contact:

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek » 09 Oct 2016 16:44

^^^ That is a very good observation regarding RMDs. Perhaps your suggestion should be incorporated in the "Instructions", as I missed this very basic point.
Imagefiniki, the Canadian financial wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 09 Oct 2016 16:48

I guess the RMD tax issue cannot be totally ignored as the required taxes do affect cash flow...

longinvest
Gold Ring
Gold Ring
Posts: 1499
Joined: 10 Sep 2012 17:26
Location: QC

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest » 09 Oct 2016 17:03

gaspr wrote:RMDs should not be considered in using VPW, as it is a tax issue and not a cash flow issue. Just because a distribution must be made to satisfy RMD rules, there are no rules rules saying you have to spend it all. Some or all can be reinvested and remain as part of the portfolio.
I agree.

Of course, if one wanted to minimize the impact on "net income" (after tax), one would need a more complex tool such as steves' RRIFmetic.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 11 Jun 2017 13:56

Not sure if this question has been covered... When in withdrawal mode, what is the best way to handle portfolio distributions during the year. Does one just spend them as they come in, but include the amounts in the total portfolio before calculating the annual withdrawal? Or does one just reinvest all distributions as they occur? The second option will likely have trading costs...

longinvest
Gold Ring
Gold Ring
Posts: 1499
Joined: 10 Sep 2012 17:26
Location: QC

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest » 11 Jun 2017 14:06

gaspr wrote:
11 Jun 2017 13:56
Not sure if this question has been covered... When in withdrawal mode, what is the best way to handle portfolio distributions during the year. Does one just spend them as they come in, but include the amounts in the total portfolio before calculating the annual withdrawal? Or does one just reinvest all distributions as they occur? The second option will likely have trading costs...
I would keep things simple. I would not reinvest distributions; I'd let them accumulate and try to earn some interest on the money until the next withdrawal.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18816
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed » 11 Jun 2017 14:22

gaspr wrote:
11 Jun 2017 13:56
Not sure if this question has been covered... When in withdrawal mode, what is the best way to handle portfolio distributions during the year. Does one just spend them as they come in, but include the amounts in the total portfolio before calculating the annual withdrawal? Or does one just reinvest all distributions as they occur? The second option will likely have trading costs...
I'd pick the former if I was doing a pure VPW calculation. Any withdrawal method is a Total Return methodology anyway, and since you know what your investment income was the prior year (your Quicken/spreadsheet/Schedule 3&4), that can be factored in (along with CPP, etc) during the coming year.

I do not re-invest distributions. Thus it is important to include it in the calculation because otherwise,....how would you 'isolate' your investment income coming in this year every week or two? I would not complicate the world with re-investments along with 'sales'.

VPW is quite forgiving with respect to aberrations in any given year because it is essentially a new calculation every January and thus has an element of self-adjustment in it. IOW, don't overwork the math. After 11 years of retirement, the decimal places simply don't matter.

Added later: Per longinvest's post that I crossed paths on, accumulating the income into a HISA/ISA as suggested is indeed another simpler method.

And yet later: I do it my way since my annual spending plans don't need a full VPW allocation. The VPW percentage tells me approximately how much capital I could tap into if I needed/wanted to do so this year. Whatever I don't need to access, remains in the portfolio for next year's estimate.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 11 Jun 2017 14:53

Thanks!

Just thinking that one of longinvest's excellent hypothetical examples that include the CPP and OAS calculations might be a big improvement to the finiki article on VPW. I know that examples of this type really help me to understand the concept. Perhaps one example for an early retiree or couple, and another for an aged 65 person or couple...

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18816
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed » 11 Jun 2017 15:14

VPW simply tells you how much of your portfolio you can tap into, e.g. X.

What you do with that information is up to you to include in the rest of your budgeting. In theory, your annual spending (including provisions for income taxes) could be X + CPP + OAS + DB = Y. If your budget for the year is likely to be less than Y, then back calculate to new X1.... and that tells you to back off on the actual percentage you pull from the portfolio.

The first few years of retirement (withdrawal) will be a series of adjustments/what ifs to figure out actual spending and income taxes paid (including clawbacks) due to the various tax regimes on the different types of income. After that, a pattern can develop making the estimates easier. Again, don't get carried away by decimal points. My annual actuals vs estimates vary by perhaps 10% (income tax paid), 1-2% in terms of expected investment income, and about 0% on pension/CPP/OAS income.

In my case, I started cautious the first 2 years, then saw I could spend more and have ramped that up ever since to a level I am comfortable with and still well within my VPW percentage.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 11 Jun 2017 17:04

I can see where that makes sense for those with more than enough. For those like myself with more modest portfolios, the goal should be to safely withdraw as much as is possible, especially in the early retirement years. VPW does this better than any other method IMHO. Whether one spends it, saves it, or gives it away, is up to the individual.

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18816
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed » 11 Jun 2017 18:37

No argument here.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

steves
Gold Ring
Gold Ring
Posts: 3200
Joined: 01 Mar 2005 15:02
Location: Hornby Island BC
Contact:

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by steves » 11 Jun 2017 18:45

AltaRed wrote:
11 Jun 2017 15:14
VPW simply tells you how much of your portfolio you can tap into, e.g. X.

What you do with that information is up to you to include in the rest of your budgeting. In theory, your annual spending (including provisions for income taxes) could be X + CPP + OAS + DB = Y. If your budget for the year is likely to be less than Y, then back calculate to new X1.... and that tells you to back off on the actual percentage you pull from the portfolio.

The first few years of retirement (withdrawal) will be a series of adjustments/what ifs to figure out actual spending and income taxes paid (including clawbacks) due to the various tax regimes on the different types of income. After that, a pattern can develop making the estimates easier. Again, don't get carried away by decimal points. My annual actuals vs estimates vary by perhaps 10% (income tax paid), 1-2% in terms of expected investment income, and about 0% on pension/CPP/OAS income.

In my case, I started cautious the first 2 years, then saw I could spend more and have ramped that up ever since to a level I am comfortable with and still well within my VPW percentage.
Or, you could plug everything into a program and compute it. All the taxation, clawback etc rules are known RSP/RIF/LIF withdrawal and deposit limits as well. Run it for a high/medium/low rate scenario, pick a desired after tax income, and Bob's your Uncle
Live Rich, Die Broke (but not too soon).

chufinora
Silver Ring
Silver Ring
Posts: 370
Joined: 12 Oct 2009 15:03
Location: Ottawa

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by chufinora » 11 Jun 2017 19:43

But you still need to make some assumptions chiefly for inflation and investment return. With those assumptions it is easy to be precise but with a false sense of accuracy.

User avatar
AltaRed
Diamond Ring
Diamond Ring
Posts: 18816
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed » 11 Jun 2017 20:03

steves wrote:
11 Jun 2017 18:45
Or, you could plug everything into a program and compute it. All the taxation, clawback etc rules are known RSP/RIF/LIF withdrawal and deposit limits as well. Run it for a high/medium/low rate scenario, pick a desired after tax income, and Bob's your Uncle
True if one wishes to go to that extent but I'd suggest one doesn't need to be that precise during withdrawal. After a few years of retireemnt, most people can use prior year actuals for a good handle on this year's forecast, etc. The key is to have some faith in withdrawal methodology, such as VPW. If one underspends what the formula says, well that is just that much more that can be tapped at a later date.

I pretty much 'back-of-envelope' everythinng these days. Really don't need to even use a calculator. In my case, the primary variable is whether and how much cap gains I have when selling a non-reg asset as part of funding needs. Again, in my case, Interest income, other income and dividends are surprisingly stable (some dividend growth making up for divys lost from asset sales). That may not be the case where one is dipping into quite a bit of capital as part of withdrawal.

Edit: Corrected type
Last edited by AltaRed on 12 Jun 2017 11:39, edited 1 time in total.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom

DenisD
Gold Ring
Gold Ring
Posts: 2501
Joined: 19 Feb 2005 01:24
Location: Calgary

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by DenisD » 11 Jun 2017 21:49

For those with sizable RRSPs, there's a discontinuity when you reach 71 and have to convert to a RRIF. I've been doing the same thing, more or less, since I retired 25 years ago. Keeping my portfolio value constant in real terms. Or, since I started collecting CPP and OAS, growing it a bit. And living off the income and realized gains. I haven't withdrawn much from my RRSP.

But I'll be 71 next year. My tax bill will be going up. Maybe it's time to start thinking of drawing down my portfolio. So I've been working on a spreadsheet to model various scenarios, taking taxes into account. I could buy RRIFmetic. But that would be too easy. :)

User avatar
kcowan
Diamond Ring
Diamond Ring
Posts: 13188
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by kcowan » 12 Jun 2017 11:34

steves wrote:
11 Jun 2017 18:45
Or, you could plug everything into a program and compute it. All the taxation, clawback etc rules are known RSP/RIF/LIF withdrawal and deposit limits as well. Run it for a high/medium/low rate scenario, pick a desired after tax income, and Bob's your Uncle
Original phraseI am tempted to paraphrase the original: Plan with a micrometer and spend with an axe!
While it might be a great planning tool, it quickly loses its effectiveness during retirement when the important decisions have been made.
For the fun of it...Keith

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 14 Jan 2018 21:35

On the backtesting sheet, where it shows "Other Income", I have seen screenshots that show the Canadian "CCP & OAS" instead of the US "Social Security". Is there a way for the user to make the change? It's not a big deal as I'm pretty sure it has no affect on results...just curious.

longinvest
Gold Ring
Gold Ring
Posts: 1499
Joined: 10 Sep 2012 17:26
Location: QC

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest » 15 Jan 2018 23:28

gaspr wrote:
14 Jan 2018 21:35
On the backtesting sheet, where it shows "Other Income", I have seen screenshots that show the Canadian "CCP & OAS" instead of the US "Social Security". Is there a way for the user to make the change? It's not a big deal as I'm pretty sure it has no affect on results...just curious.
It's easy to modify the spreadsheet.

But, first, in LibreOffice and Excel the sheet must first be unprotected (see the Tools->Protect Sheet menu in LibreOffice; it should be similar in Excel). There's no password.

Once unprotected, the cell content can be changed from "Social Security" to "CPP & OAS". It think that it can be change right away (no protection) in the Google Sheet version.

It's recommended to re-protect the sheet (no password) to avoid accidental changes (especially in cells containing formulas).
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 16 Jan 2018 00:05

Got It. :thumbsup:

gaspr
Silver Ring
Silver Ring
Posts: 177
Joined: 10 Feb 2015 11:39

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gaspr » 20 Jan 2018 13:25

I have been playing around in the backtesting sheet. What stands out after a while is that the range of possible outcomes is huge!! And this seems to be true regardless of asset allocation.

Check out the results for a 65 yr old retiree, expecting to live to 99 yrs...100% International Stocks...1M Portfolio...Canada Data Set...Start Year 1975.
First year withdrawal...$58,000. Withdrawal in year 2000...$1,252,498 (nominal dollars) or $367,967 (inflation adjusted). CRAZY!!

For someone choosing Constant Dollar Withdrawal instead, taking out an inflation adjusted $40,000 each year, your portfolio balance at year 2000 is $48,210,265 (nominal) or $14,163,514 (adjusted).

Note to self...I should learn to use screenshots...

Now, for those who started retirement in year 2000, it is a whole different outlook. The jury is still out...

longinvest
Gold Ring
Gold Ring
Posts: 1499
Joined: 10 Sep 2012 17:26
Location: QC

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest » 20 Jan 2018 17:28

gaspr wrote:
20 Jan 2018 13:25
What stands out after a while is that the range of possible outcomes is huge!! And this seems to be true regardless of asset allocation.
Markets are what they are. Their returns have varied over time. Most members of this forum know this.

The backtesting spreadsheet is a good tool to help actually internalize how wide the dispersion of returns, over different historical periods, has been, and hopefully let go of the idea that anyone or any metric can predict future returns.

It's only when I admitted the impossibility of predicting future returns that I stopped trying to predict them. This forced me to start devising financial plans that must to work regardless of future returns, good or bad.
gaspr wrote:
20 Jan 2018 13:25
Check out the results for a 65 yr old retiree, expecting to live to 99 yrs...100% International Stocks...1M Portfolio...Canada Data Set...Start Year 1975.
First year withdrawal...$58,000. Withdrawal in year 2000...$1,252,498 (nominal dollars) or $367,967 (inflation adjusted). CRAZY!!
A 100% international stocks portfolio during retirement?! Knowing how wide the dispersion in returns has been in the past, I wouldn't have the temerity to do that, personally. But, yes, when the portfolio benefits from incredible growth due to a long bull market, VPW increases withdrawals accordingly, as the portfolio can safely sustain these higher withdrawals.
gaspr wrote:
20 Jan 2018 13:25
For someone choosing Constant Dollar Withdrawal instead, taking out an inflation adjusted $40,000 each year, your portfolio balance at year 2000 is $48,210,265 (nominal) or $14,163,514 (adjusted).
This assumes, of course, that the multimillionaire retiree is still taking $40,000 annual withdrawals from his $48,210,265 portfolio at age 90. He's on a good track to win the biggest portfolio at death contest!

That's a good illustration why I think people should let go of the 4% SWR idea during retirement, taking an initial withdrawal from a portfolio and then increasing this withdrawal with inflation each year regardless of market returns. When backtesting such idea over historical retirement periods, one discovers (unsurprisingly) that this lets most retirees die with gigantic unspent portfolios, while having lived on a modest retirement income. As for the remaining retirees, most of them end up eating cat food under a bridge because of an unlucky sequence of returns.

I think that it's more logical to combine stable lifelong non-portfolio income in the form of CPP, OAS, a pension (if any), and an inflation-indexed annuity (if necessary) with withdrawals from a portfolio which vary according to actual market returns.

The variability of total income due to portfolio fluctuations can easily be reduced in two ways: first, by increasing one's stable non-portfolio income (delaying CPP and OAS to age 70 is an efficient way to do that), and second, by increasing the ratio of bonds in the portfolio. Nominal bonds dampen nominal portfolio fluctuations and inflation-indexed bonds dampen inflation-adjusted portfolio fluctuations.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

gibor
Bronze Ring
Bronze Ring
Posts: 55
Joined: 01 Mar 2015 17:44

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by gibor » 04 Feb 2018 15:05

Can I consider GIC/HISA as Canadian Bonds? Or how I should treat it?
Currently we have allocation: 55% equities (both CDN and International), 10% FI (include CDN, US, int'l, prefs) and 35% HISA/GIC.

User avatar
Peculiar_Investor
Gold Ring
Gold Ring
Posts: 7313
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Peculiar_Investor » 04 Feb 2018 15:32

gibor wrote:
04 Feb 2018 15:05
Can I consider GIC/HISA as Canadian Bonds? Or how I should treat it?
Currently we have allocation: 55% equities (both CDN and International), 10% FI (include CDN, US, int'l, prefs) and 35% HISA/GIC.
As far as asset classes are concerned I would consider GICs as part of fixed income and HISA as cash equivalents. Short-term (under 1 year) GICs could also be considered cash equivalents.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

longinvest
Gold Ring
Gold Ring
Posts: 1499
Joined: 10 Sep 2012 17:26
Location: QC

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest » 04 Feb 2018 16:36

Peculiar_Investor wrote:
04 Feb 2018 15:32
gibor wrote:
04 Feb 2018 15:05
Can I consider GIC/HISA as Canadian Bonds? Or how I should treat it?
Currently we have allocation: 55% equities (both CDN and International), 10% FI (include CDN, US, int'l, prefs) and 35% HISA/GIC.
As far as asset classes are concerned I would consider GICs as part of fixed income and HISA as cash equivalents. Short-term (under 1 year) GICs could also be considered cash equivalents.
I would effectively consider a 5-year GIC ladder as equivalent to (short-term) bonds. I would consider HISAs as cash.

VPW can't predict future returns; it only tries to calibrate withdrawals as not to be too agressive for a given asset allocation, while also adapting withdrawals to market returns so that it will never prematurely deplete the portfolio.

As cash and short-term bonds have historically returned less than intermediate bonds, a purist could try to calibrate the VPW percentages on these somewhat lower returns. But, the main driver of portfolio returns and volatility is the 55% allocation to stocks. So, personally, I wouldn't try to be a purist, here. I would simply look into the VPW table for the closest asset allocation to your current portfolio's composition (e.g. 50/50 stocks/bonds) and use its numbers.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
shmenge
Silver Ring
Silver Ring
Posts: 236
Joined: 28 Jun 2008 06:17
Location: Ontario

Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by shmenge » 05 Feb 2018 07:19

Does RIFFing mean selling your RSP holdings at 71 upon conversion? Or does it mean just selling off the percentage required under law each year. Specifically, selling off your index portfolio (asking for a friend:) or keeping it through your retirement and just selling units as needed? I don't get it.
Be kind, everyone here is fighting a hard battle.

Post Reply