VPW amortizes the portfolio with a max age of 100 and an amortization rate of 5.0% for stocks and 1.9% for bonds.Ahh, maybe I should look again. I must admit to a certain bias for self-rolled methods.VPW’s upper age limit is also 100.Longevity would be my biggest concern regardless of the method chosen.
VPW's withdrawal rate is directly tied to the length of the retirement period -- it is intended to spend down to a specific amount over a specific time period. I haven't looked lately, but I believe that period is 40 years, which is probably far too short for someone at age 40. You would be better off rolling your own version of an amortization method than sticking with that.
TPAW directly lets you plug in a more-reasonable upper age limit -- 100 by default.
Fundamentally, VPW amortizes the remaining balance down to zero over the remaining time period. The withdrawal rate is dependent upon the estimated rate of return, and the number of years remaining. The rate of return used in the base spreadsheet is (or at least was) based upon historical averages for US-based investors, and is likely too high for European based investors. Those investors should adjust accordingly. VPW will give a highly-variable spending path that closes in on zero remaining funds.
TPAW levels income/spending across the entire period and should avoid both ends of the spending range that is inherent with VPW. The two methods are both reasonable depending upon individual preferences, but are also nearly opposites. Both use practical applications of financial math, and either one is far better than any SWR-based method.
Since expected spending growth (g) = expected return of the portfolio (r) - amortization rate (v)
the expected spending growth (g) will be
> 0% if the expected return exceeds 5.0% stocks and 1.9% bonds
= 0% if the expected return equals 5.0% stocks and 1.9% bonds
< 0% if the expected return is below 5.0% stocks and 1.9% bonds
The 5.0% and 1.9% figures used by VPW remains fixed, and does not change with earnings yields or bond yields. This led to the scenario in recent years where bonds were yielding -0.5% and the portfolio was still being amortized with the 1.9%. Bond yields are now 2.3% and so the VPW amortization is not aggressive relative to the current expected bond return. But amortizing the portfolio using 1.9% when bonds were yielding -0.5% is hard to justify. Even if bond yields increase (as it did), the bond portfolio would drop (as it also did). So withdrawing from a high priced (low yield) bond portfolio as if it's yielding more is not sustainable, even if the yields rise (which is never guaranteed).
The VPW amortization can be modeled using TPAW Planner. This post has a how-to and some examples:
Modeling the VPW amortization in the online planner
Statistics: Posted by Ben Mathew — Fri May 10, 2024 1:23 am