Summary: Variable Percentage Withdrawal (VPW) is a safe way to draw down your retirement investments, and feels a lot more reasonable than relying on a fixed budget.

When I finally decided to pull the plug on the “working to earn a living” world, (and you can read about how I came to that decision here) I was still left with lingering doubts over my retirement spending plans.

Of course, I had prepared a retirement budget as part of the exercise.

Of course, I had hired an advisor to take a look at the numbers.

And as a result, of course, I had a tidy year by year breakdown of my inflation-adjusted budget and net worth. The charts always look something like the one on PERCs home page.

But my own experience made me really uneasy about this approach — in 2023 that forecast showed I couldn’t retire until 2027, but then back-to-back stock market silliness (in a good way) allowed my 80/20 investment portfolio blow through “the number” two years early!

So, on the one hand, hooray for me, but on the other hand, the story could have happened in precisely the opposite way with a (temporary, they are always temporary) market meltdown, and the moneyengineer.ca domain would have been snapped up by the Canadian Mint, and I’d still be working for a living. The variability of year to year returns isn’t a big deal over a long period of time, but it makes a huge difference in the immediate future¹, and by “immediate” I mean, “how much will I take out of my retirement portfolio this month?”

And then I stumbled upon Variable Percentage Withdrawal (VPW).

In plain language,

VPW offers you a sustainable salary in retirement; if the market is doing well, you can afford to spend more, but if the market is doing less well, tighten the belt.

VPW uses your net worth, your age, your portfolio and any current or future pensions to dynamically calculate what you can afford to spend in a given month, quarter or year.

The key is “dynamically”. Every month, quarter or year, you calculate your net worth, and the VPW Accumulation and Retirement worksheet generates two numbers: what you can afford to spend, and what that number would look like in the event of a market meltdown.

And all of a sudden, my unease evaporated. This was just like REAL (pre-retirement) LIFE! I’ve never had a “constant” budget, I’ve never had a “constant” salary, and I’ve never been able to predict what either would look like 6 months from now, let alone 15 years from now. So why pretend I had all the answers in retirement? VPW gives a boring, emotion free algorithm² for doing the work, and is perfectly aligned with my boring, emotion-free algorithm for investing.

You can watch a simulated VPW-based retirement, in real time over at https://www.financialwisdomforum.org/forum/viewtopic.php?p=638130#p638130. It’s been running since July 2019. An outstanding effort!

In future posts, I’ll talk a bit about how the mechanics of VPW work in practice with my own situation. NB: my first VPW-calculated retirement payment will be in January, 2025!

1. Interested readers should take a look at the many writings out there on “sequence of returns” risk. Basically, it’s the risk that the retiree gets really unlucky and suffers a big stock market meltdown at the very start of retirement, the worst possible time. ↩︎
2. AND spreadsheets 🙂 ↩︎