Variable Percentage Withdrawal (VPW): The “Die With Zero” Retirement Algorithm
Variable Percentage Withdrawal (VPW): The “Die With Zero” Retirement Algorithm
COACHING POINTS
- The Problem: The 4% Rule is designed to ensure your money lasts 30 years, regardless of market conditions. This excessive caution means most retirees die with more money than they started with, having lived a poorer life than they could have afforded.
- The Solution: Variable Percentage Withdrawal (VPW) adapts your withdrawal rate annually based on your remaining life expectancy and current portfolio value. It functions like a “Reverse Mortgage” on your own portfolio: spending accelerates as you age.
- The Result: VPW mathematically eliminates the risk of running out of money (bankruptcy) while allowing for a significantly higher starting income (often 5%+) compared to fixed rules.
Retirement is not about preserving capital for a corporation; it is about smoothing consumption for a human being. VPW is an algorithm developed by the Bogleheads community to solve the “miserly retiree” paradox. It tells you exactly how much you can safely spend this year to ensure you bounce your last check on the day you die. Source: Bogleheads Wiki / VPW Backtesting Data
Scenario: You have $1,000,000. Market Return: 5% Real.
- Age 65 (30 Years Left):
Divisor is conservative. Withdrawal Rate: 4.8% ($48,000). - Age 75 (20 Years Left):
Divisor shrinks. Withdrawal Rate: 6.2%. (Even if the portfolio dropped, the % bump helps stabilize income). - Age 90 (5 Years Left):
Divisor is tiny. Withdrawal Rate: 15.0%. (Spending down the final capital). - Outcome: Unlike the 4% rule which keeps the principal intact, VPW aims to consume the principal smoothly over the retiree’s lifespan.
Starting Annual Income ($1M Portfolio)
| Strategy | Safe Starting Income ($) |
|---|---|
| 4% Rule (Fixed) | 40000 |
| VPW Strategy (Variable) | 52000 |
*VPW gives you permission to spend ~$1,000 more per month immediately, because it removes the requirement to preserve the principal forever.
What-If Scenario: The Legacy Trade-Off
Comparison: What is left for the heirs at Age 95?
| Strategy | Total Lifetime Spending ($M) | Legacy Left to Heirs ($M) |
|---|---|---|
| 4% Rule | 1.2 | 2.5 |
| VPW Strategy | 2.8 | 0.1 |
Execution Protocol
VPW is calculation-heavy. You cannot do it in your head. Use the free Bogleheads VPW Spreadsheet. Input your Age, Asset Allocation (e.g., 60/40), and Portfolio Balance every January 1st to get your “allowance” for the year.
Because VPW income fluctuates with the market (if stocks crash 20%, your income might drop 10%), you must have a guaranteed income floor (Social Security/SPIA) to cover essential bills. VPW is best for discretionary spending.
Don’t calculate based on “Life Expectancy” (e.g., 85). You might live to 100. Set the VPW calculation to end at Age 100. This ensures you never deplete the portfolio prematurely, even if you become a centenarian.
COACHING DIRECTIVE
- Do This: Use VPW if you have no heirs or if you believe in “Die With Zero.” It extracts the maximum utility from every dollar you saved.
- Avoid This: Using VPW if you have fixed expenses that exceed your Social Security. You cannot tolerate a pay cut in a bear market if you have a huge mortgage.
Frequently Asked Questions
Does the money run out?
Technically, no. The percentage never reaches 100% until the terminal age (e.g., 100). The balance gets smaller, but you will always have some withdrawal available as long as you are alive.
How volatile is the income?
Historically, VPW income can drop by 10-15% during major crashes (like 2008). However, it recovers faster than the 4% rule because you are not selling as many shares when they are down (due to the variable % adjustment).
Is this better than Guardrails?
They are cousins. Guardrails (Guyton-Klinger) aims for steady income with rare cuts. VPW accepts volatile income every year in exchange for zero bankruptcy risk. VPW is mathematically purer; Guardrails is psychologically easier.