Variable Percentage Withdrawal (VPW) for Canadians

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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.

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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.
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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...

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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.
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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...

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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.
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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.
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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...

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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.
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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.

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed » 11 Jun 2017 18:37

No argument here.
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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
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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.

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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.
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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. :)

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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
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