Variable Percentage Withdrawal (VPW) for Canadians

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longinvest
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Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Hi FWFers,

Over the last year, a group of Bogleheads forum members, including FWF's own LadyGeek, have been helping me to develop a new variable withdrawal method called VPW along with a back-testing spreadsheet to investigate how it would have behaved in the past. Here are a couple of related links:
This morning, I have just uploaded a new version that includes Canadian historical data, thanks to Libra Investment Management Inc.'s awesome excel spreadsheet at http://libra-investments.com/Total-returns.xls (Norbert Schlenker, if you read this: I tried to comply with the copyright attribution rule; please let me know if I failed to properly do so).

The basic idea of VPW is to compute the payment required to deplete a portfolio over N years assuming a fixed growth rate. Then, for every year (1 to N), VPW computes the percentage: payment / portfolio-balance. This percentage is then used to compute the actual portfolio withdrawal in real life, by applying it to the real-life current portfolio balance, every year.

Example:

Code: Select all

N = 30
Growth = 3%
=> Payment= 0.049533

Balance
=======
Year 1: 1.000000
Year 2: 0.978981 (= (1.000000 – 0.049533) * 1.03)
Year 3: 0.957331 (= ( 0.978981 – 0.049533) * 1.03)
…
Year 30: 0.049533

So, we get: 

VPW Table
=========
Year 1: 4.95% (= 0.049533 / 1.000000)
Year 2: 5.06% (= 0.049533 / 0.978981 )
…
Year 30: 100%
The VPW spreadsheet improves on this by providing an appropriate growth rate based on the user's Asset Allocation (Stocks/Bonds).

Of course, it's only a withdrawal method, not a full retirement plan. It can't offer a spending floor (that's the role of CPP, OAS, and pensions). Yet, it seems to me more sensible than the very risky "Safe" Withdrawal Rate (SWR) approach where you compute an initial withdrawal when you retire, then you index it to inflation every year, regardless of market returns, hoping everything will go well (and probably leaving tons of unspent money on the table if things go well, indeed).

So, what do you think?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by like_to_retire »

longinvest wrote:So, what do you think?
Well, when I click on your link and then click download, I get a red banner warning that "This spreadsheet is too large, Click here to Download". That action returns a "Page not found" error.

Then when I try a "File -> Download" menu , McAfee blocks it and responds with the popup warning "Potential bad Download Detected" - "McAfee has detected that your download may contain a virus". This may damage your hard drive or steal your personal information".

So, it hasn't gone well for me so far, although I'd like to try it. I'll pass until it gets a bit less scary. :)

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

The spreadsheet is developed using the free/open-source Libre Office software. It is effectively too complex for Google Docs to handle. But, the spreadsheet contains no macro; so if you are really worried, just disable macros when opening the spreadsheet (you should always disable them for spreadsheets downloaded from the Internet). This way, you won't experience any security risk.

Could you tell me if you get the same warning from McAfee if you try to another spreadsheet, like Simba's spreadsheet: http://www.bogleheads.org/wiki/Simba's_ ... preadsheet

If yes, then I guess that McAfee doesn't trust any spreadsheet. If not, I'll have to find out what's wrong in mine. FYI, you're the first person reporting an anti-virus problem.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by like_to_retire »

longinvest wrote:Could you tell me if you get the same warning from McAfee if you try to another spreadsheet, like Simba's spreadsheet: http://www.bogleheads.org/wiki/Simba's_ ... preadsheet
That one works fine. I downloaded it and ran it with no problem.

I guess you have to appreciate that people are quite wary these days about downloading anything that might introduce a virus. If I even get a whiff that McAfee doesn't like something, then I'm out.

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

like_to_retire wrote:
longinvest wrote:Could you tell me if you get the same warning from McAfee if you try to another spreadsheet, like Simba's spreadsheet: http://www.bogleheads.org/wiki/Simba's_ ... preadsheet
That one works fine. I downloaded it and ran it with no problem.

I guess you have to appreciate that people are quite wary these days about downloading anything that might introduce a virus. If I even get a whiff that McAfee doesn't like something, then I'm out.
ltr,

Thanks for the report. I am starting to suspect that the Web links to data sources are the problem. I have just uploaded a new version where I replaced the links with plain text. Can you tell me if McAfee still complains?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by like_to_retire »

longinvest wrote:I have just uploaded a new version where I replaced the links with plain text. Can you tell me if McAfee still complains?
That works fine now. No warnings. I downloaded it and it runs. :thumbsup:

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

like_to_retire wrote:
longinvest wrote:I have just uploaded a new version where I replaced the links with plain text. Can you tell me if McAfee still complains?
That works fine now. No warnings. I downloaded it and it runs. :thumbsup:

ltr
Great! Thanks a lot for letting me know about the problem and for your help testing the solution.

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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Springbok »

I was trying to think of a practical application for any of the withdrawal rate models.

I would imagine most retirees have a mix of registered and unregistered savings. Withdrawals from registered accounts are heavily taxed while there is no tax on unregistered withdrawals.

If someone had $500k in taxable and $1Million in registered, what size is their portfolio (for use in the spreadsheet)?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by AltaRed »

There is plenty of tax on dividends, other income, capital gains in taxable accounts, so that is the more difficult one to estimate.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Springbok wrote:I was trying to think of a practical application for any of the withdrawal rate models.

I would imagine most retirees have a mix of registered and unregistered savings. Withdrawals from registered accounts are heavily taxed while there is no tax on unregistered withdrawals.

If someone had $500k in taxable and $1Million in registered, what size is their portfolio (for use in the spreadsheet)?
I would say that the portfolio is 1500k (I don't tax-adjust the total). You use the rate to compute a pre-tax withdrawal. Then, you get to choose how much you want to withdraw from each of your registered (RRSP, TFSA) and taxable accounts. That's a tax management problem.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Sugerman »

Longinvest;

I certainly see the utility in this model over the more common SWR model (4% or otherwise), but have always found the single flaw in most retirement spending models as not recognizing the need to make minimum withdrawals from a Registered account (post 70 y.o.).

If one holds a majority of their savings in a registered (tax-deferred) plan, then one loses some control over the amount(s) withdrawn after a certain point. I found this paper (Sun & Webb, 2012) to be of interest (referring to their RMD spending model) in my own planning, in that I think it might be similar to what you are proposing as well:

http://crr.bc.edu/wp-content/uploads/20 ... 19-508.pdf

I think that the authors were arguing the point that SWR models perform poorly in comparison to "mortality" type models such as the IRS-RMD, and by extension, the CRA RRIF plan minimum criteria as well... even if the minimum amounts are applied before the requisite mandatory age or applied to non-tax-deferred savings.

The authors use a "Strategy Equivilent Wealth" calculation to conclude which method(s) are better. I'm not an economist by any stretch, but know that there are probably as many different ways to measure economic models as there are models themselves. Have you looked at any type of "performance" or "efficiency" comparisons between your VPW and a SWR model?
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by steves »

Just to remind everyone.... If you know your holdings (reg/nonreg/tfsa/realestate), the exact tax formula/algorithm, a rate of return, an inflation rate, a horizon age (death) and an estate value at death, then the most efficient plan is one in which the present value of all those future taxes (including the final one) is minimized. This is not real good spreadsheet fodder, BTW.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Shakespeare »

If one holds a majority of their savings in a registered (tax-deferred) plan, then one loses some control over the amount(s) withdrawn after a certain point.
Although that is true, there is no need to spend the excess: that is, it's a taxation issue not a withdrawal issue.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Sugerman wrote:Longinvest;

I certainly see the utility in this model over the more common SWR model (4% or otherwise), but have always found the single flaw in most retirement spending models as not recognizing the need to make minimum withdrawals from a Registered account (post 70 y.o.).

If one holds a majority of their savings in a registered (tax-deferred) plan, then one loses some control over the amount(s) withdrawn after a certain point. I found this paper (Sun & Webb, 2012) to be of interest (referring to their RMD spending model) in my own planning, in that I think it might be similar to what you are proposing as well:

http://crr.bc.edu/wp-content/uploads/20 ... 19-508.pdf

I think that the authors were arguing the point that SWR models perform poorly in comparison to "mortality" type models such as the IRS-RMD, and by extension, the CRA RRIF plan minimum criteria as well... even if the minimum amounts are applied before the requisite mandatory age or applied to non-tax-deferred savings.

The authors use a "Strategy Equivilent Wealth" calculation to conclude which method(s) are better. I'm not an economist by any stretch, but know that there are probably as many different ways to measure economic models as there are models themselves. Have you looked at any type of "performance" or "efficiency" comparisons between your VPW and a SWR model?
Quite interesting. But, I really view taxation as an orthogonal concern. There are so many variables that get into taxation (RRIF minimum withdrawals, pensions, CPP, OAS and the decision to delay them or not). All this is way beyond a modest tool such as VPW.

VPW does integrate a mortality prediction. By default, the spreadsheet depletes the portfolio by age 100. This can be changed. It is recommended to revisit your retirement plan and predictions every few years.

Back to the tax concerns: one must distinguish between making a RRIF withdrawal and spending the money (except for mandated taxes). There are probably various strategies for deciding which account(s) to attack first. TFSAs do really add some complexity to it all. I'm sure this forum is filled with people way more knowledgeable than me about it. I'm no economist or tax specialist. This is just a hobby for me. :-)
Last edited by longinvest on 24 May 2014 19:26, edited 2 times in total.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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steves wrote:Just to remind everyone.... If you know your holdings (reg/nonreg/tfsa/realestate), the exact tax formula/algorithm, a rate of return, an inflation rate, a horizon age (death) and an estate value at death, then the most efficient plan is one in which the present value of all those future taxes (including the final one) is minimized. This is not real good spreadsheet fodder, BTW.
I agree. There is a lot of uncertainty about one's future. That being said, it's still a good idea to make a reasonable plan for that uncertain future. VPW is just a tool to use within a (hopefully reasonable) plan.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Springbok »

AltaRed wrote:There is plenty of tax on dividends, other income, capital gains in taxable accounts, so that is the more difficult one to estimate.
I was assuming withdrawals are made because the money is needed for living expenses. Tax on income is therefore not totally relevant in this simple tool.

If I withdraw 5% of a $100k taxable portfolio, I get $5k to spend. If I withdraw 5% of a $100k RRIF, I get about $3k to spend.

So perhaps , if you want to know how much you will have to spend, you should deduct tax from your registered savings when coming up with the total portfolio value.

Tools like SWR are very rough. I don't really see much point in trying to fine tune them
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Springbok wrote:
AltaRed wrote:There is plenty of tax on dividends, other income, capital gains in taxable accounts, so that is the more difficult one to estimate.
I was assuming withdrawals are made because the money is needed for living expenses. Tax on income is therefore not totally relevant in this simple tool.

If I withdraw 5% of a $100k taxable portfolio, I get $5k to spend. If I withdraw 5% of a $100k RRIF, I get about $3k to spend.

So perhaps you should deduct tax from your registered savings when coming with the total portfolio value when using a tool like this.

Tools like SWR are very rough. I don't really see much point in trying to fine tune them
I plan to use VPW to actually tell me what's the maximum I can withdraw from my portfolio. So, if markets are bad, I won't take so much out that my portfolio is unable to recover when come the good years.

I plan to cover my bare-bones need budget with reliable income streams, not with my portfolio.

[Added] So, mainly, I want to somehow enjoy my delayed gratification. VPW was designed for depleting a portfolio, not for insuring a basic income stream. These goals are different.
Last edited by longinvest on 24 May 2014 20:10, edited 1 time in total.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Shakespeare »

I plan to use VPW to actually tell me what's the maximum I can withdraw from my portfolio.
A tool like VPW is useful pre-retirement for planning purposes.

However, once you reach 65 and are retired, simpler approaches are possible.

My own is as such:

1. Estimate your after-CPP/pension/OAS expenses for a modest (not extravagant) lifestyle.

2. Estimate how much you would need for an annuity at your present age to bring your income to that point. Round up to the next $100K. (This will go into bonds and GICs.)

3. Double 2. (This will go into equities.)

4. Spend the rest. :mrgreen:
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by longinvest »

Shakespeare wrote:
I plan to use VPW to actually tell me what's the maximum I can withdraw from my portfolio.
A tool like VPW is useful pre-retirement for planning purposes.

However, once you reach 65 and are retired, simpler approaches are possible.

My own is as such:

1. Estimate your after-CPP/pension/OAS expenses for a modest (not extravagant) lifestyle.

2. Estimate how much you would need for an annuity at your present age to bring your income to that point. Round up to the next $100K. (This will go into bonds and GICs.)

3. Double 2. (This will go into equities.)

4. Spend the rest. :mrgreen:
Where do you find your quotes for an inflation-indexed annuity? They seem pretty rare in Canada.

FYI, I will have a workplace pension. As my spouse and I own our home outright and are pretty frugal, we won't need annuities in addition to the pension and our QPP + OAS. We probably won't be so rich as getting our OAS clawed back, after splitting income. Unless makets gift us lots of money, but we're not counting on that.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Shakespeare »

Where do you find your quotes for an inflation-indexed annuity? They seem pretty rare in Canada.
I don't use an inflation-indexed annuity for that estimate.

Reasoning:

1. CPP and OAS are indexed. Thus, income is already partially indexed.

2. Spending declines as age increases, except for health expenses near the end.

3. If the money for an annuity is set aside but not spent for the annuity, the income that is purchased will rise with age.

4. Extra protection is available from the equity portion set aside and the house.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Shakespeare wrote:
Where do you find your quotes for an inflation-indexed annuity? They seem pretty rare in Canada.
I don't use an inflation-indexed annuity for that estimate.

Reasoning:

1. CPP and OAS are indexed. Thus, income is already partially indexed.

2. Spending declines as age increases, except for health expenses near the end.

3. If the money for an annuity is set aside but not spent for the annuity, the income that is purchased will rise with age.

4. Extra protection is available from the equity portion set aside and the house.
The calm and confidence I see in your message reminds me of an excellent book I read about planning retirement for Canadians: Fred Vettese's The Real Retirement. With some planning and saving, there's no need to worry so much about retirement. One definitely does not need as much as 70% of pre-retirement income during retirement to preserve the same living standard.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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Shakespeare wrote: However, once you reach 65 and are retired, simpler approaches are possible.
Our approach is slightly different.

We have a family budget based on past experience.

We receive about $30k in CPP/OAS (no pension worth mentioning)

Our taxable accounts spin off income which when untaxed CPP/OAS is added, is enough to live on. But now we are in RRIF withdrawal, it is not enough to cover taxes.

We withdraw the required amount from RRIFs (about 7.8%). More than 1/2 of that goes toward paying our income taxes. Another $12k goes into TFSAs (our safety accounts). Anything left over goes into our taxable accounts (and if it spins off any income, we pay tax again :( )

In our first 11 years of retirement, our overall portfolio has grown at about 5.9% pa despite us withdrawing whatever we need for living expenses (up to 4% of total portfolio). Now we have to pay tax on RRIF withdrawals and are in OAS clawback, the growth rate will no doubt change.

Only tool we used, was to limit our spending to approx CPP+OAS+4% of overall portfolio value. Seems to have worked for us.

PS: House is fully paid for and not dialed into planning at this stage.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by LadyGeek »

I've started a finiki article in case anyone would like to supply information focused on Canadian aspects. See: Variable percentage withdrawal - finiki, the Canadian financial wiki

It's just a shell right now, waiting for content.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

Post by Shakespeare »

With some planning and saving, there's no need to worry so much about retirement
Bill Bernstein pointed out a number of years ago that there is no point in planning above about 80% confidence because stuff happens in the other 20%.
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Re: Variable Percentage Withdrawal (VPW) for Canadians

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longinvest wrote: One definitely does not need as much as 70% of pre-retirement income during retirement to preserve the same living standard.
Hmm - I know that is what some people say. But I think it is a myth for many.

I can't think of anything we spend less on in retirement.
Same or higher house expenses, same or more cars, same food and drink. But having more time, we spend a lot more on many things like recreation and travel.

Those 70% or even 50% figures that are quoted probably assume we are still paying off mortgages , putting kids through school etc. But Pre-retirement to me is the period from say 50 to 65. By that time we have already disposed of many of those expenses and are hopefully accumulating the savings we need to retire.
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