Variable Percentage Withdrawal (VPW): A Smarter Retirement Strategy
Move beyond the rigid 4% rule with a dynamic withdrawal strategy that adapts to market conditions and your changing needs.
Key Takeaways
- 1VPW adjusts withdrawals based on portfolio value and age
- 2Mathematically impossible to run out of money (but income varies)
- 3Withdrawals increase as you age (similar to RMD logic)
- 4Market downturns = lower withdrawals, upturns = higher
- 5Better adapts to sequence of returns risk than fixed rules
- 6Requires flexibility in spending to use effectively
- 7Can be combined with income floor (Social Security, pension)
What Is Variable Percentage Withdrawal?
Variable Percentage Withdrawal (VPW) is a retirement withdrawal strategy where you withdraw a changing percentage of your portfolio each year. The percentage increases as you age, ensuring you spend more of your money during your lifetime while never completely depleting the account.
- Developed from academic research and IRS RMD tables
- Withdrawal percentage increases each year based on age
- Dollar amount varies with portfolio performance
- Popular on Bogleheads forum and in academic literature
- Mathematically cannot deplete portfolio to zero
How VPW Works
Each year, you multiply your current portfolio balance by a percentage that corresponds to your age. As you get older, the percentage increases, reflecting shorter remaining life expectancy.
| Age | VPW % | $500k Portfolio | $1M Portfolio |
|---|---|---|---|
| 65 | 4.5% | $22,500 | $45,000 |
| 70 | 5.0% | $25,000 | $50,000 |
| 75 | 5.7% | $28,500 | $57,000 |
| 80 | 6.7% | $33,500 | $67,000 |
| 85 | 8.0% | $40,000 | $80,000 |
| 90 | 10.0% | $50,000 | $100,000 |
Sample VPW percentages - actual rates vary by table used
The Key Insight
Unlike the 4% rule which can run out, VPW always leaves something because you're taking a percentage of what remains. The trade-off: your income varies with market performance.
VPW vs the 4% Rule
Both are withdrawal strategies, but they work very differently.
| Feature | 4% Rule | VPW |
|---|---|---|
| Initial withdrawal | 4% of starting balance | Age-based % of current balance |
| Annual adjustments | Inflation only | Portfolio value + age increase |
| Can run out? | Yes, in bad sequences | No (mathematically impossible) |
| Income stability | Relatively stable | Varies with market |
| Responds to markets | No | Yes, automatically |
| Best for | Stable income needs | Flexible spenders |
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Calculating Your VPW
VPW calculation is straightforward once you have the percentage table.
- 1Determine your current portfolio balance (all retirement accounts)
- 2Look up your age-based VPW percentage from a table
- 3Multiply: Portfolio Balance × VPW % = Annual Withdrawal
- 4Divide by 12 for monthly amount
- 5Repeat calculation each year with new balance and age
Example Calculation
Age 70, Portfolio $800,000, VPW rate 5.0%: $800,000 × 5.0% = $40,000/year or $3,333/month. Next year at age 71, if portfolio is $780,000 with rate 5.1%: $780,000 × 5.1% = $39,780/year.
Pros and Cons of VPW
VPW isn't perfect for everyone. Consider these trade-offs.
| Pros | Cons |
|---|---|
| Cannot run out of money | Income varies with markets |
| Automatically adjusts to performance | Requires spending flexibility |
| Mathematically sound | May need to cut back in down years |
| Often allows higher initial withdrawal | Psychologically harder than fixed |
| Responds to sequence risk | More complex than 4% rule |
Portfolio Construction for VPW
VPW works best with a diversified portfolio that can weather market volatility. Including gold and precious metals can help smooth returns.
- Gold often rises when stocks fall, reducing withdrawal volatility
- Diversification reduces the severity of down-year cuts
- Ray Dalio's All Weather approach pairs well with VPW
- 5-15% gold allocation provides stability
- Gold IRA can be part of VPW portfolio calculation
- Rebalancing becomes part of annual withdrawal process
Frequently Asked Questions
1Where do VPW percentages come from?
VPW tables are derived from actuarial data and academic research. Common sources include modified IRS RMD tables, Bogleheads VPW spreadsheet, and academic papers on sustainable withdrawal rates.
2What if the market crashes right before I need money?
Your VPW withdrawal will be lower that year. This is a feature, not a bug - it preserves your portfolio for recovery. Having 1-2 years of expenses in cash/bonds provides a buffer.
3Can I combine VPW with Social Security?
Yes, and it's recommended. Social Security provides a stable income floor, while VPW handles the variable portion. This gives you stability for essentials and flexibility for discretionary spending.
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