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 »

I read the blog and it seems OK except he doesn't list any expenses that could be much higher in retirement. In our case these are: travel (multiples of when we were working). Medical expenses (we are getting older!) Better and more autos( as we actually have time to drive places). Renos to cottage( as we spend more time there). More personal use real estate(this would not be typical)
The retirement that needs 50-60% of pre retirement income is certainly doable, but methinks more likely out of necessity than choice. How much do you need vs how much do you want.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Springbok »

SQRT wrote:I read the blog and it seems OK except he doesn't list any expenses that could be much higher in retirement. In our case these are: travel (multiples of when we were working). Medical expenses (we are getting older!) Better and more autos( as we actually have time to drive places). Renos to cottage( as we spend more time there). More personal use real estate(this would not be typical)
The retirement that needs 50-60% of pre retirement income is certainly doable, but methinks more likely out of necessity than choice. How much do you need vs how much do you want.
That is exactly as I see it. When we were working, we didn't have time to spend money, so we saved it! I see same happening with our self employed kids except for the saving part :(
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by steves »

An interesting article regarding the limitations of spreadsheeting.....
http://www.nytimes.com/2014/05/26/upsho ... echp&_r=0#
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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steves wrote:An interesting article regarding the limitations of spreadsheeting.....
ctrl-` problem solved. Not to mention that it does have a programming language, a pretty easy to understand language at that.

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by chufinora »

steves wrote:An interesting article regarding the limitations of spreadsheeting.....
weird article IMHO, it implies (Or states obtusely) the spreadsheets big limitation is the difficulty in identifying the mathematical operations it is performing. Yet it does not indicate that any alternative is better. A computer program with a hidden algorithm is certainly not better in this aspect.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by steves »

He is presupposing that there is access to the source code. In that case, a procedural language is much easier to dissect, and can perform much more intricate calculations.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek »

FYI - longinvest has updated the spreadsheet and posted in the Bogleheads forum: Subject: Variable Percentage Withdrawal (VPW)
longinvest wrote:I have uploaded a new version of the VPW spreadsheet on the Bogleheads Wiki VPW Page.

Changes:
  • LadyGeek updated the Instructions sheet
  • LadyGeek modified the VPW sheet:
    • Inserted a blank column to separate the entry / VPW table from the backtesting area
    • Retitled the backtesting columns and charts (removed a "subtitle") entry in each chart
  • longinvest further improved the Statistics for All Start Years table subtitles.
Enjoy!
The changes are intended to make the spreadsheet easier to understand.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

I have uploaded a new version of the VPW spreadsheet (January 28, 2015).

You can find the download links on the finiki:Variable percentage withdrawal page.

Changes: All my thanks go to Norbert Schlenker of Libra Investment Management (Canadian data) and the Bogleheads Simba spreadsheet team (U.S. data) for providing spreadsheets with historical data.

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

Post by CROCKD »

After downloading from Dropbox I get MS Office Security Notice
Security Alert - Office File Validation detected a problem while trying to open file. Opening file is probably dangerous and may allow malicious user to take over your computer


I have the previous version of this program with no issues.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Somebody had a similar problem on the Bogleheads forum. I'll refer you to LadyGeek's reply on that thread: https://www.bogleheads.org/forum/viewto ... 0#p2261574
LadyGeek wrote:I downloaded the file and ran both LibreOffice Calc (Linux) and MS Excel 2010 (Windows).

LibreOffice Calc does not complain, but MS Excel opens the file with a scary warning:

Image
This is known as Protected View.

MS is saying that the file structure has changed, meaning that something other than MS has messed with the file. Not the data or VBA, but the underlying internal stuff, i.e. the "guts". The most probable cause is malware and is why the warning appears. However, MS says that if you trust the source, it's OK to use.

In this case, longinvest is using LibreOffice Calc to develop the file then save in MS Excel format (going the other way, MS to LibreOffice, does not work). I'm betting LibreOffice Calc does not save the file in 100% perfect MS Excel format and is the reason for the warning. I ignored the warning (clicked on "Edit Anyway").

In MS Excel 2013, I believe the error is the Security Alert as shown by BlueEars. Here's more info, including how to turn it off: Plan Office File Validation settings for Office 2013
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by CROCKD »

I got around this problem by opening the file in LibreOffice Calc and saving it as an .ods file
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek »

I updated finiki's article to include a screenshot and where to go for help (this thread): Variable percentage withdrawal

The screenshot is from longinvest (copied from the Bogleheads wiki).
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by couponstrip »

What a great project. Longinvest, you have developed a valuable tool. I have read through your trials in bringing this to the forum for debate on bogleheads, and I must commend you for persistence in the face of much skepticism, and your sustained resistance to deviating from the simple question your work seeks to answer. Of course we can dream up all kinds of different financial disasters requiring layers of conservation and income floor, but that only serves to complicate the task at hand. These complexities are best addressed by the individual investor's financial plan tailored to their risk tolerance.

As is often mentioned around here, when considering decades of time, it is probably more likely that something nonfinancial (war, health crisis, death) derails the plan than all of the semi-obscure financial disaster scenerios we are capable of coming up with combined.

I am fascinated with the back testing function. The common wisdom is that the worst time to retire is at the beginning of a bear market. However, the back testing suggests otherwise. It seems to show the lowest single year minimum withdrawal when a bear market occurs 10-15 years after retirement and average returns leading up.

The best examples are retirements starting in the 1890's and early 1900's especially 1899 and 1905. Back testing a retirement starting in these years reveals 1921 being the year of most extreme austerity. The withdrawal is half of what it started out at in year one of retirement. Of course it turns north eventually, but quite a few years later.

Can you imagine adjusting your lifestyle to a comfortable level of income for over a decade only to see it chopped in half 15 years later? There is no going back to work (as it was once known) after 15 years, but probably worse than that would be the fear of the unknown. I'm sure I would be questioning my plan at that point and wondering for how long these terrible returns were going to continue. I'd also be wondering if I was going to run out of money as my yearly withdrawal amount and nestegg dwindled.

A late 60's retirement start also looks bad, but less so. Interestingly, the early and late 90's was not so bad of a time to retire, presumably because the returns were so strong leading into the bear and rebounded sharply after. And inflation was low.

Back testing allows us to see the future. Everything ends up ok (and then some) 5-10 years later, but that's a long time to wait and wonder. This underscores the importance of a financial plan that includes a baseline, secure source of income to serve the basic needs.

Thanks for all the hard work.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Couponstrip, Thanks. I am so glad that Bogleheads finally agreed to discuss the method and ended up contributing many improvements to it. I was initially developing it for myself and just wanted to get some validation from people that knew way more than me about retirement planning and had experience living it. Thanks to their suggestions, I added backtesting; I had not even dreamt of such a powerful tool for understanding how VPW withdrawals and portfolios behave in real life during retirement. I have learned a lot from the discussions and debates.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by chufinora »

Longinvest - thanks for your efforts in creating and maintaining this interesting sheet. I have two questions and a feature request :)

On the backtesting sheet you have Social Security and Pension fields - playing with these am I right in assuming the Social Security amount is indexed to inflation (And Canadian inflation if using Canada dataset) and the pension amount is un-indexed?

Also the SS/Pensions are only considered as additional income they are not included within the variable percentage so do not impact the portfolio balance. What is the thinking behind this?

Would it be possible to enter age fields for when to start SS or Pension? For someone in early retirement, with future CPP/OAS or pensions this is a common situation that I find few retirement projectors include.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

chufinora wrote:Longinvest - thanks for your efforts in creating and maintaining this interesting sheet. I have two questions and a feature request :)

On the backtesting sheet you have Social Security and Pension fields - playing with these am I right in assuming the Social Security amount is indexed to inflation (And Canadian inflation if using Canada dataset) and the pension amount is un-indexed?
Yes, you are right. Social Security is indexed (and can serve to simulate all pension payments indexed to inflation). Pension is a recurring nominal amount, like typical Single Premium Immediate Annuity (SPIA) payments which are not indexed to inflation.
chufinora wrote: Also the SS/Pensions are only considered as additional income they are not included within the variable percentage so do not impact the portfolio balance. What is the thinking behind this?
The idea is that they represent a floor of income (indexed or not) which is not subject to the fluctuations of the stock and bond markets, and that continues until death.

I will continue this answer while addressing your feature request.
chufinora wrote: Would it be possible to enter age fields for when to start SS or Pension? For someone in early retirement, with future CPP/OAS or pensions this is a common situation that I find few retirement projectors include.
Of course, it is a typical situation. In case of early retirement (or delayed CPP/OAS), one needs an income bridge between retirement and the start of payments. My opinion is that this income bridge should be similar to these pension payments; it must not be subject to the fluctuations of markets.

In order to build a non-risky income bridge, I suggest setting aside an amount equal to ($X x (N-1)) in a GIC ladder, where $X is the annual future pension (in current dollars) and N is the number of years to bridge. An additional $X is used for bridging the income during the first year of retirement. Then each subsequent year, one ladder slice ($X plus interest) is used to bridge that year's income.

In the VPW backtesting sheet, I would put in the Portfolio entry the value of (Retirement portfolio - ($X x N)), and fill the pension fields.

If I was to add a pension age field, I would do the same calculation. I am simply afraid that users won't realize that they must to invest $X x (N-1) in a GIC ladder and use an additional $X in the first year of retirement.


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.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek »

longinvest wrote:...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.
I would suggest adding a new configuration item in the "VPW" tab, just below Start Age (insert after row 8 ):

- "Country" section with the choices of "US" or "Canada". Now, you have a hook which can test how you handle the rest of the spreadsheet.

In "Backtesting", based on the above:
- Set the "Other Income" section to a default setting of "OAS and CPP"
- Set the Backtesting Parameters to a default Data Set of "Canada" (allow the user to change it, or perhaps leave this alone)

From a UI (User Interface) perspective, I think this will help considerably. It also gives you some freedom to separately manage US vs. Canadian specific calculations.

For reference:

OAS = Old Age Security
CPP = Canada Pension Plan
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by chufinora »

longinvest wrote:In order to build a non-risky income bridge, I suggest setting aside an amount equal to ($X x (N-1)) in a GIC ladder, where $X is the annual future pension (in current dollars) and N is the number of years to bridge. An additional $X is used for bridging the income during the first year of retirement. Then each subsequent year, one ladder slice ($X plus interest) is used to bridge that year's income.

In the VPW backtesting sheet, I would put in the Portfolio entry the value of (Retirement portfolio - ($X x N)), and fill the pension fields.

If I was to add a pension age field, I would do the same calculation. I am simply afraid that users won't realize that they must to invest $X x (N-1) in a GIC ladder and use an additional $X in the first year of retirement.
Thanks, that does create some interesting numbers compared to ignoring the pension component - however it does not really address my strategy
longinvest wrote:Of course, it is a typical situation. In case of early retirement (or delayed CPP/OAS), one needs an income bridge between retirement and the start of payments. My opinion is that this income bridge should be similar to these pension payments; it must not be subject to the fluctuations of markets.
I don't fully agree here. Whilst I do have a 'cash bucket/GIC ladder' to ride out market downturns, I don't necessarily agree that it should be equivalent to future pensions as my default fallback position (Should the sustainability of my portfolio be compromised) is to return to employment. By following your proposal you are in effect adjusting the portfolio to a higher fixed income percentage which will affect (reduce) the 'potential' income draw (Whilst acknowledging you are reducing the risk to the portfolio)
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

LadyGeek wrote: I would suggest adding a new configuration item in the "VPW" tab, just below Start Age (insert after row 8 ):

- "Country" section with the choices of "US" or "Canada". Now, you have a hook which can test how you handle the rest of the spreadsheet.

In "Backtesting", based on the above:
- Set the "Other Income" section to a default setting of "OAS and CPP"
I like this idea. I could provide 3 choices: U.S., Canada, Other.

U.S. would get "Social Security" and "Pension" as entry titles.
Canada would get "CPP/QPP and OAS" and "Pension" as entry titles.
Other would get "Indexed pension" and "Non-indexed pension" as entry titles.
LadyGeek wrote: - Set the Backtesting Parameters to a default Data Set of "Canada" (allow the user to change it, or perhaps leave this alone)
I don't know how to do this.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

chufinora wrote:
longinvest wrote:In order to build a non-risky income bridge, I suggest setting aside an amount equal to ($X x (N-1)) in a GIC ladder, where $X is the annual future pension (in current dollars) and N is the number of years to bridge. An additional $X is used for bridging the income during the first year of retirement. Then each subsequent year, one ladder slice ($X plus interest) is used to bridge that year's income.

In the VPW backtesting sheet, I would put in the Portfolio entry the value of (Retirement portfolio - ($X x N)), and fill the pension fields.

If I was to add a pension age field, I would do the same calculation. I am simply afraid that users won't realize that they must to invest $X x (N-1) in a GIC ladder and use an additional $X in the first year of retirement.
Thanks, that does create some interesting numbers compared to ignoring the pension component - however it does not really address my strategy
What is your strategy?
chufinora wrote:
longinvest wrote:Of course, it is a typical situation. In case of early retirement (or delayed CPP/OAS), one needs an income bridge between retirement and the start of payments. My opinion is that this income bridge should be similar to these pension payments; it must not be subject to the fluctuations of markets.
I don't fully agree here. Whilst I do have a 'cash bucket/GIC ladder' to ride out market downturns, I don't necessarily agree that it should be equivalent to future pensions as my default fallback position (Should the sustainability of my portfolio be compromised) is to return to employment. By following your proposal you are in effect adjusting the portfolio to a higher fixed income percentage which will affect (reduce) the 'potential' income draw (Whilst acknowledging you are reducing the risk to the portfolio)
I see your point.

If the gap is 3 to 5 years, I don't think that it makes a big difference. If you're thinking about very early retirement (and maybe delayed OAS and CPP), I can see how this could be unsustainable. But, then, maybe the solution is simply ignore CPP and OAS and be happy when they magically appear later, possibly during a market downturn.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by chufinora »

In my case I am minimum 5 years from CPP and 12 years from OAS (And a UK pension). So not very early retirement (Freedom 55 if you like). I think it is overly conservative to ignore CPP/OAS.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek »

longinvest wrote:
LadyGeek wrote: - Set the Backtesting Parameters to a default Data Set of "Canada" (allow the user to change it, or perhaps leave this alone)
I don't know how to do this.
In MS Excel, this as a data validation field with "U.S., Canada" listed. Change the source to point to cells which contain a formula.

For example, U13 will contain either "U.S." or "Canada".
Cell T15: =IF($U$13="U.S.", "U.S.","Canada")

Point the data validation to use a list at T15. When you change the entry in U13, the list will flip to the choices in T15. It works in MS Excel, I haven't tried LibreOffice Calc yet.

Here's an example for "Other Income":
Cell T16: =IF($U$13="U.S.", "Social Security","OAS")
Cell T17: =IF($U$13="U.S.", "Pension","CPP")
Cell T18: =IF($U$13="U.S.", "","QPP")

Point the data validation to use a list from T16:T18.

Update: Fixed cell references.
Last edited by LadyGeek on 31 Jan 2015 20:51, edited 1 time in total.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

I can see how 12 years in GICs could seem wasteful. (As an aside: a similar approach would be to use a 12-year term-certain inflation-indexed SPIA).

If you're ready to gap withdrawal drops, in the interim, by going back to work if they drop too much, then you could split your portfolio in two parts: one part on which you apply a 12-year VPW, and another part on which you apply a normal VPW.

It is easy enough to simulate the 12-year VPW by itself and decide how much to dedicate to that part. On the other hand, I don't think that it makes sense to make the spreadsheet more complex to simulate the combination of an N-year VPW bridge with pension along normal VPW. The concept won't apply to many users. I think that this is a very individual approach; the spreadsheet already gets a little beyond its goal of simplicity by including pensions in its backtesting simulations. Dynamic web tools (such as cfiresim) are better suited for providing many planning options.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

LadyGeek: Terrific! Thanks.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Wallace »

I like the VPW concept. You mention that you have no bequest motive, and that you are happy to draw down all the funds. In practice, this is very unlikely to happen. Most programs that calculate retirement income, including your spreadsheet, suggest calculating periods of 30 to 35 years.

In real life, however, people rarely reach the age of 100. in fact at age 65, when most Canadians are planning their retirement strategies, their life expectancy is 20.2 years. That means that 20 years later, when their 85th birthday comes around, half of them have gone to that great golf course in the sky while their children are happily spending their inheritance. Five years later, when the 90th birthday comes around, only 2% are still alive, with 98% of retirement funds passed on to the next generation. If you are the one person in 6,000 who makes it to the age of 100 you may end up spending that last check, but in Canada you'll be able to enter a nursing home for the rest of your life absolutely free.

What this means is that you really don't have to worry about passing on an inheritance to the next generation. Nature will take care of it for you :) . So I agree with your plan of funding the best income possible for 30 or 35 years, using it to give yourself the lifestyle that you desire as it comes along, and the chances are 5999 out of 6000 that your children will have an inheritance when you go.
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