Author Topic: Is anyone planning to use an amortization based withdrawal (ABW) strategy?  (Read 1000 times)

ardrum

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I've been looking at various withdrawal strategies that provide flexible/variable withdrawals to prevent one from running out of money (with a trade-off being higher volatility in annual withdrawal amounts) as well as preventing having too much money leftover in old age.  I have no kids and have no plans to have a giant sum of money at the end of my life expectancy, and this excess money otherwise represents I could have retired sooner.

I looked at the Kitces guard rails strategy, about giving yourself a raise or pay-cut based on if your portfolio rises/falls to predetermined levels, and then I was also looking closely at the VPW (variable percent withdrawal) method, which I found appealing.  I then stumbled upon the ABW (amortization based withdrawal) strategy, and it has been what I'm most interested in using now.

I saved a copy of the ABW calculator from the Bogleheads forum (they have a generic file on Google drive you can copy) and customized it to my situation, which I am thoroughly enjoying since it gives me a vision of how my withdrawals could play out over the rest of my projected lifetime.

What I like about ABW is that it will adapt from year to year to raise or lower my allowed withdrawals based on actual market results to ensure I am not overspending my portfolio while also accounting for only "x" number of years left in my expected lifetime (to prevent underspending).

As I see it, the downside with ABW, like VPW, is the potential withdrawal amount volatility from year to year. 

I am addressing the volatility concern though by having a risk parity portfolio (any Risk Parity Radio fans here?) that sacrifices SOME expected return in hopes of cutting expected worst case drawdowns in HALF or so (I'm basically using a modified Golden Butterfly portfolio with tad less gold and more small cap value tilt).  In this manner, the volatility inherent in the VPW method is somewhat offset by adopting a portfolio that has much less expected volatility in returns.  I am also offsetting the volatility by having a chart that gives me permission to slightly/gradually increase my projected rate of return once my portfolio drawdown reaches various drawdown levels (assuming I get an unlucky sequence of returns).  In this way, if my portfolio were to drop 10%, I might only have to cut my spending 5-7% or whatnot.  Finally, I'm using an expected real return that I believe is on the conservative side (but not extremely conservative either...like 90% of the time historical returns have been better, 10% of the time they have been worse).

I was curious if anyone else is planning to use the ABW strategy, and if so, how they plan to use it for their situation.  I'd also be curious if anyone looked at it and chose to go another way (and why). 
« Last Edit: November 24, 2021, 12:12:40 PM by ardrum »

yachi

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Re: Is anyone planning to use an amortization based withdrawal (ABW) strategy?
« Reply #1 on: November 24, 2021, 01:54:17 PM »
I like the simplicity of the 4% rule, even if I end up following the 3.5% rule or something else because your spending stays relatively stable.  I believe I'll be happier if I don't increase my expenditures in good years only to decrease them in bad years.  If I never get used to drinking the good whisky, I'll never feel deprived drinking the cheaper whisky.

With variable withdrawal strategies, you have to make sure that your "fixed" expenses are covered - barebones groceries, property taxes, utility payments - anything you consider essential.  If your strategy doesn't cover these all the time, it won't work.  Above this minimum spend, you have some "float".  Now your float can be used for extras, but only things that can go away in bad times.  It's this here today, gone tomorrow effect that turns me off to these strategies.  Good things to do with float might include spendy vacations, charitable donations, house renovations.  Bad things to do with float include anything with ongoing payments or carrying costs, unless they're neutral to your barebones spending.

Will my spending vary year to year?  Absolutely.  8% of my budget is earmarked to sinking funds for replacement of longer-lived items, mostly cars.  The money is there for budgeting purposes, but we'll leave the money invested until we need it.  Then, every 5 to 10 years, we'll have a large expenditure year.

I expect if your plan is good and comfortable in your early years, it'll result in a need to blow lots of dough in your twilight years.  When you first retire, your years left of expected lifetime don't change drastically from year to year, so your withdrawal won't be increasing as much as it will when you're older.  A 40 year old male loses only 2.3% of his life expectancy when he turns 41, but an 80 year old male loses 6.2% of his life expectancy when he turns 81.

ardrum

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Re: Is anyone planning to use an amortization based withdrawal (ABW) strategy?
« Reply #2 on: November 24, 2021, 02:32:41 PM »
I like the simplicity of the 4% rule, even if I end up following the 3.5% rule or something else because your spending stays relatively stable.  I believe I'll be happier if I don't increase my expenditures in good years only to decrease them in bad years.  If I never get used to drinking the good whisky, I'll never feel deprived drinking the cheaper whisky.

With variable withdrawal strategies, you have to make sure that your "fixed" expenses are covered - barebones groceries, property taxes, utility payments - anything you consider essential.  If your strategy doesn't cover these all the time, it won't work.  Above this minimum spend, you have some "float".  Now your float can be used for extras, but only things that can go away in bad times.  It's this here today, gone tomorrow effect that turns me off to these strategies.  Good things to do with float might include spendy vacations, charitable donations, house renovations.  Bad things to do with float include anything with ongoing payments or carrying costs, unless they're neutral to your barebones spending.

Will my spending vary year to year?  Absolutely.  8% of my budget is earmarked to sinking funds for replacement of longer-lived items, mostly cars.  The money is there for budgeting purposes, but we'll leave the money invested until we need it.  Then, every 5 to 10 years, we'll have a large expenditure year.

I expect if your plan is good and comfortable in your early years, it'll result in a need to blow lots of dough in your twilight years.  When you first retire, your years left of expected lifetime don't change drastically from year to year, so your withdrawal won't be increasing as much as it will when you're older.  A 40 year old male loses only 2.3% of his life expectancy when he turns 41, but an 80 year old male loses 6.2% of his life expectancy when he turns 81.

Thanks for sharing your thoughts!

Yeah, I've thought if I get a lucky sequence of returns that I might try to not fully spend what I'm "allowed" to spend (perhaps putting the few extra thousand into a liquid investment for emergencies or to help cover extra spending if in other early years I get a bit of a downturn with less spending).  I will definitely have to be aware of the need to cover all basics though and be flexible enough to adjust accordingly. 

As Michael Kitces often says in interviews too, it's quite possible when FIRE people "retire" that they end up finding out they have a certain interest/hobby that ends up getting monetized and up not even having to withdraw what they planned because some kind of side hustle or side job ends up massively reducing the amount needed to withdraw from your portfolio (sort of a barista FI situation).

Based on toying around with the calculator, it seems like the need to blow lots of dough later on happens more often if you consistently underestimate your portfolio growth over time in ABW and have to keep adjusting spending upwards the vast majority of the time.  Of course, the same issue would happen (assuming you wanted to spend most of your money in your lifetime) if a 3.5% or 4% withdrawal rate method ended up being too conservative with the luck of the draw of retirement year (which is basically expected since those numbers are more oriented toward worst case historical years).  One cool feature in the calculator is you can have it calculate a positive or negative spending rate too, such that you could make it calculate so that you spend 0.5% more/less each year, which is interesting... Right now I just have it at a neutral 0% though, as I'm not really convinced which way I'd even want to orient it.

I can't really know what the actual real return will be over decades of course, but I like that I will have a system to adjust as reality presents itself to me over time.

shuffler

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Re: Is anyone planning to use an amortization based withdrawal (ABW) strategy?
« Reply #3 on: November 25, 2021, 11:41:20 AM »
I'd also be curious if anyone looked at it and chose to go another way (and why).
I've been looking at the "95% Rule", implemented on FI Calc (go to the Withdrawal Strategy section).

The idea is that when you retire you set your initial withdrawal rate according to your expenses (so say 4% for example) and then "each year you can either withdraw your Safe Withdrawal Rate (typically around 4%) or 95% of your previous year's withdrawal."

So as your portfolio grows, the 4% of your portfolio also grows (b/c you calculate it each year, unlike the traditional 4% rule).
And if your portfolio falls, you only take a 5% haircut (or less) to your spending each year.

Why does this method interest me?

I'm interested in a method with simple mechanics.  Multiplying by my SWR and/or 95% is easy.  I don't have to estimate inflation, or CAPE, or guess how long I'll live.
I'm interested in a method with high- and low-spending guardrails.  FI Calc offers that.
I'm interested in a method that I can simulate over historic periods (like all the FireCalc/CFireSim style calculators) to demonstrate its survivability.
My initial withdrawal rate would currently be sub-3%, so I'm interested in a method that allows for moderate "raises" while demonstrating solvency more than I am interested in a method that maximizes initial withdrawal rate or the earliest possible retirement date.  IOW - I'm already safe, I just want to know how I can reasonably increase spending over the years.

ardrum

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I'd also be curious if anyone looked at it and chose to go another way (and why).
I've been looking at the "95% Rule", implemented on FI Calc (go to the Withdrawal Strategy section).

The idea is that when you retire you set your initial withdrawal rate according to your expenses (so say 4% for example) and then "each year you can either withdraw your Safe Withdrawal Rate (typically around 4%) or 95% of your previous year's withdrawal."

So as your portfolio grows, the 4% of your portfolio also grows (b/c you calculate it each year, unlike the traditional 4% rule).
And if your portfolio falls, you only take a 5% haircut (or less) to your spending each year.

Why does this method interest me?

I'm interested in a method with simple mechanics.  Multiplying by my SWR and/or 95% is easy.  I don't have to estimate inflation, or CAPE, or guess how long I'll live.
I'm interested in a method with high- and low-spending guardrails.  FI Calc offers that.
I'm interested in a method that I can simulate over historic periods (like all the FireCalc/CFireSim style calculators) to demonstrate its survivability.
My initial withdrawal rate would currently be sub-3%, so I'm interested in a method that allows for moderate "raises" while demonstrating solvency more than I am interested in a method that maximizes initial withdrawal rate or the earliest possible retirement date.  IOW - I'm already safe, I just want to know how I can reasonably increase spending over the years.

This seems like a good option too that I've looked at as well.  The simplicity aspect of it is nice too, and you can certainly afford the potential downside flexibility given how much you've saved above your needs.

I think one flaw with the ABW method is that it seems if I underestimate the portfolio growth rate too much, it leads to most withdrawals happening late in life. The effect seems worse the earlier I employ the ABW method (more years).  It might be more useful in shorter timeframes for depletion.

Maybe I should reconsider whether it is so bad if my portfolio starts to grow much faster than I am spending it, at least throughout my 40s/50s.  I am exploring the idea now of still considering ABW eventually, but waiting until an older age (say, 60+) before implementing it.  If the withdrawals then are way more than I need, I could make it my "job" to give excess away in charitable donations.

A very (I think) conservative option I'm looking at now though: Save up to the point where about 3% covers my expenses.  Then, withdraw the HIGHER of either:

a) The initial withdrawal amount plus inflation estimate (just like traditional interpretation of 4% rule, but starting at 3.2%)
   or
b) 3% of the current value of the portfolio (this option should predominate over time if the portfolio begins to grow significantly such that the initial withdrawal plus inflation would otherwise drop below 3%)

I think the above withdrawal strategy would almost surely result in the portfolio growing "too fast," but then I could eventually switch to an ABW method or something similar to slow the growth or level it off so that it doesn't change much more in inflation-adjusted value over time, eventually aiming for gradual depletion if I live long enough.

secondcor521

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It's very old, but I like the Payout Period Reset approach.  It later earned an additional nickname of "Retire Again and Again" and the idea pops up from time to time when people think they've discovered a clever idea.

https://retireearlyhomepage.com/popr.html

It is safe, simple to calculate, and, relevant to my personal preferences, monotonically ratchets upward.

I think the results from several of these methods will tend to rhyme.

ardrum

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Thanks for that contribution, secondcor521.   

If someone thinks a fill-in-the-blank "x %" withdrawal rate is exceedingly conservative/safe, and then the next year the market rockets up 20%, presumably that ultra safe % would be fine to use as the new retirement year, considering the % is designed to be safe even to withstand the worst plausible retirement timing year.

secondcor521

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Thanks for that contribution, secondcor521.   

If someone thinks a fill-in-the-blank "x %" withdrawal rate is exceedingly conservative/safe, and then the next year the market rockets up 20%, presumably that ultra safe % would be fine to use as the new retirement year, considering the % is designed to be safe even to withstand the worst plausible retirement timing year.

Right.  As some will point out, it does ratchet up the SORR risk if one is using a WR% that is less than 100% historically safe.  If one is using a 100% historically safe rate, then in theory it just sops up some of the money one would otherwise not be able to take with them at end of plan.  As long as the future is no worse than the past, yadda yadda.

 

Wow, a phone plan for fifteen bucks!