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TPAW Planner - an interesting online drawdown simulator
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Neminem Laedit
Posted: 28 May 2024 21:57:21(UTC)
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(the author of TPAW Planner holds a Ph.D in Economics from Chicago)

https://tpawplanner.com/guest

Explanation
https://tpawplanner.com/learn

Anyone still using any type of fixed SWR (e.g. the 4% "Rule") is living in the Stone Age.

It's mathematically unsound, with a host of other objections.

The only rational approach to drawdown is amortization, aka the time value of money...

Yes, your income will fluctuate, but you will almost certainly extract much, much more before you die.

Versus living in near-penury to avoid the rare case (1966) of running out of money, and instead having an equal chance of dying perhaps with 9X your starting balance - the richest man/woman in the graveyard...

It's all based on the Excel/Sheets PMT function...

Variations on the theme are VPW, ABW, etc.
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SSJ
Posted: 28 May 2024 22:20:39(UTC)
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Eh, you mean there is a financial problem for which Bitcoin is not the solution? :)
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Neminem Laedit on 28/05/2024(UTC), Evies Dad on 30/05/2024(UTC), Law Man on 31/05/2024(UTC), dlp6666 on 03/06/2024(UTC), Thrugelmir on 26/08/2024(UTC), markus on 15/09/2024(UTC)
Neminem Laedit
Posted: 28 May 2024 22:25:57(UTC)
#3

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SSJ;307103 wrote:
Eh, you mean there is a financial problem for which Bitcoin is not the solution? :)


Can't speak for others, but Bitcoin is certainly helping me.

But I like to go further, and optimise every single aspect of my wealth.

Tax, NI, drawdown, legacy, etc.
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AndyJ
Posted: 30 May 2024 06:39:23(UTC)
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Hmmm.....you can optimise all you like but life isn't precisely predictable, "things happen", or as Mike Tyson once said, "everyone has a plan until they get punched in the face". Approximately right rather than precisely wrong is my motto for life.

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Baron Wuffet
Posted: 30 May 2024 17:54:56(UTC)
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There is also this online retirement calculator which uses stock market data from the past to illustrate what would have happened for a particular drawdown amount:
https://firecalc.com/

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Neminem Laedit
Posted: 30 May 2024 18:44:41(UTC)
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Quote:
EDIT: 28/12/2024
There was a digression here into VPW which, while adopting amortization, and some but not all of the features of TPAW, is inferior - not least because it involves spreadsheets rather than the seamless online software of TPAW, and TPAW is based on Total Portfolio, not just Savings Portfolio.

I suggest ignoring VPW, and jumping to:-
https://moneyforums.city...mulator.aspx#post317033

Anything VPW can do, TPAW can do more and better, and is backed by a Nobel Prize winner and a Chicago Economics Ph.D...


Baron Wuffet;307297 wrote:
There is also this online retirement calculator which uses stock market data from the past to illustrate what would have happened for a particular drawdown amount:
https://firecalc.com/


That's a rather rubbish one, actually.

Still wedded to the nonsense of fixed SWRs or fixed percentage.

FICalc (not FireCalc) is a much better sim, and VPW is superior to and simpler than almost all other withdrawal methods (TPAW and ABW are newer variations on the theme, so may be slightly superior to VPW - they have a few more tweaks, at any rate, e.g. rising/falling schedules)

FICalc VPW
E.g. 60 year old, with $1m, and full SP coming @ age 67. 30 year retirement horizon. Zero legacy planned.
100% stocks. (you can change this to see the effect of alternative allocations)
Initial withdrawal: $61,953 *, (~6.2%) and can sustain an inflation-linked floor of $42,900, (4.29%) according to historical data since 1871. Changing the allocation to include bonds seem to reduce the initial withdrawal somewhat, but increases the guaranteed floor a little. [You will have to experiment with entering a "floor" level - "Minimum Annual Withdrawal" - that still says "100% Success Rate" in the right-hand panel]

https://shorter.me/-N7ab

On average, in this case the retiree gets to spend a real $3m over thirty years... [this will decrease somewhat as bonds are added]

So the floor is higher than the stupid 4%"Rule" ! In a 'lucky' retirement you'd get to spend well over $100k in good years, sometimes much more. In an 'unlucky' retirement, you're still better off than the 4% "Rule".

Regarding the zero "legacy", wouldn't you prefer to drip-feed any excess income to your beneficiaries, probably IHT-free, rather than save it all up to be subject to a swingeing big-bang 40% tax after death - when children, etc. may be facing retirement themselves, and could have benefited earlier? [Not to mention the issue of end-of-life care fees? So nice to be able to say "Sorry, I spent it! So do one!"]

One should aim for a zero legacy plan, I think. Fixed SWR is again daft in this respect.

* I've emailed the web designer to ask for an easy display of the initial withdrawal, and he's put it on his to-do list. In the meantime, you can go to the right-hand "Results" panel, and under "Available Spending", click "Table", then click forward twice until you see "1994-2023: 1994" at the bottom, reading across to an initial withdrawal of in this case $61,953.75. This is the initial withdrawal irrespective of starting year, and if you change any of the parameters described above is where you would find a recalculated initial withdrawal, irrespective of starting year. Alternatively (but which is more long-winded, imho), click on any of the "Simulations" years towards the bottom of the right pane, and hover over the first year shown on the "Available Spending" chart...

[Always take note of the worst years 1966 and 1969, whatever your plan ! Yes, returns were poor, but it was INFLATION which (almost) killed them.]
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Neminem Laedit
Posted: 30 May 2024 21:43:44(UTC)
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Basic VPW can be simulated in Excel/Sheets using the PMT function, which follows the mathematics of Nobel prizewinner Robert C. Merton's seminal 1969 paper.
https://en.wikipedia.org/wiki/Robert_C._Merton
https://www.jstor.org/st...1926560?origin=crossref


This_year's_withdrawal = PMT(R%, N, V, B, 1) where:-

R% is a guess of future real investment returns [Don't worry, it only has to be a guess ! The system is self-correcting]

The R% guess is based on your preferred allocation, namely:

(s% * 5%) + (b% * 1.9%), where s% and b% are your allocations to stocks and bonds respectively, e.g. 60%/40%, and the 5% and 1.9% are their long-term real returns respectively. So 100% stocks would simply be an R% of 5%, for example. The R% must be a percent, so for example 0.05, which equals 5%, and not 5.

N is the years remaining. So, with a retirement horizon of 30 years, for example, N would initially be 30, then 29, 28, 27...etc.

V is the current value of the your portfolio. Perhaps in year "30" [the first year], it starts at £1m, for example. At the start of year "29" it will have risen or fallen (taking account of the year "30" withdrawal as well). Enter the new portfolio value at the start of each year.

B is the desired end Bequest (aka "Legacy"). Usually set to zero, for reasons mentioned above.

The final parameter "1" just forces the calculation to base the withdrawal as coming at the start of the year, rather than at the end.

So, for example, PMT(0.05, 30, 1000000, 0, 1) would indicate a £61,953.75 initial withdrawal, for 100% stocks, with a 30 year horizon, £1m initial portfolio, no bequest, as replicated in the FICalc simulation mentioned in the previous post...
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Neminem Laedit
Posted: 30 May 2024 23:26:30(UTC)
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AndyJ;307233 wrote:
Hmmm.....you can optimise all you like but life isn't precisely predictable, "things happen", or as Mike Tyson once said, "everyone has a plan until they get punched in the face". Approximately right rather than precisely wrong is my motto for life.



Oh, I thought my optimising for uncertainty was also taken as read.

It's the first thing you optimise for...
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Neminem Laedit
Posted: 31 May 2024 02:04:58(UTC)
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Neminem Laedit;307310 wrote:
Basic VPW can be simulated in Excel/Sheets using the PMT function, which follows the mathematics of Nobel prizewinner Robert Merton's seminal 1969 paper.
https://en.wikipedia.org/wiki/Robert_C._Merton
https://www.jstor.org/st...1926560?origin=crossref


This_year's_withdrawal = PMT(R%, N, V, B, 1) where:-

R% is a guess of future investment returns [Don't worry, it only has to be a guess ! The system is self-correcting]

The R% guess is based on your preferred allocation, namely:

(s% * 5%) + (b% * 1.9%), where s% and b% are your allocations to stocks and bonds respectively, e.g. 60%/40%, and the 5% and 1.9% are their long-term real returns respectively. So 100% stocks would simply be an R% of 5%, for example. The R% must be a percent, so for example 0.05, which equals 5%, and not 5.

N is the years remaining. So, with a retirement horizon of 30 years, for example, N would initially be 30, then 29, 28, 27...etc.

V is the current value of the your portfolio. Perhaps in year "30" [the first year], it starts at £1m, for example. At the start of year "29" it will have risen or fallen (taking account of the year "30" withdrawal as well). Enter the new portfolio value at the start of each year.

B is the desired end Bequest (aka "Legacy"). Usually set to zero, for reasons mentioned above.

The final parameter "1" just forces the calculation to base the withdrawal as coming at the start of the year, rather than at the end.

So, for example, PMT(0.05, 30, 1000000, 0, 1) would indicate a £61,953.75 initial withdrawal, for 100% stocks, with a 30 year horizon, £1m initial portfolio, no bequest, as replicated in the FICalc simulation mentioned in the previous post...


More simply put, for 100% stocks, 60 year-old, zero bequest, 30 year horizon, and normalising for an opening balance of 1, we have the following amortization schedule. (to two d.p.)

Yrs %Withdrawal
30 6.20%
29 6.29%
28 6.39%
27 6.50%
26 6.63%
25 6.76%
24 6.90%
23 7.06%
22 7.24%
21 7.43%
20 7.64%
19 7.88%
18 8.15%
17 8.45%
16 8.79%
15 9.18%
14 9.62%
13 10.14%
12 10.75%
11 11.47%
10 12.33%
9 13.40%
8 14.74%
7 16.46%
6 18.76%
5 22.00%
4 26.86%
3 34.97%
2 51.22%
1 100.00%

The Yrs (remaining) starts with 30 as the first year, and the %Withdrawal is the percentage (to two d.p) that should be withdrawn from the portfolio at that point in time (say for a starting portfolio of £1m, giving an initial withdrawal of almost £62k, although portfolio size doesn't matter in principle.. Addition of SP and other tweaks will make a difference though, so use something like FICalc which can handle these subtleties ).

So simply multiply these percentages by the portfolio balance at the start of the relevant year, irrespective of whether the portfolio has increased or decreased in value.

Note that the percentage withdrawal is monotonically increasing. Hence Variable Percentage Withdrawal. (VPW).[as opposed to Constant Percentage Withdrawal, e.g. take 5% every year (rubbish strategy!)]

The VPW inventor recommends capping the %Withdrawal at 10%, in this case around Year 13 (the eighteenth year of retirement), and also consider annuitizing at age 80 (Year 11), if feasible, against longevity risk.

NB: This is just an example. A different Asset Allocation, different longevity/retirement length assumptions, etc. will produce significantly different numbers, although the principles remain the same.
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Nigel Meek
Posted: 31 May 2024 14:00:57(UTC)
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Just happy to take the natural yield and leave the rest for the kids and grand-kids. Rocket science never was my strong point.
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