Safe Withdrawal Rates

jamesd

aldershot wrote: »

I have been pointing this out a number of times on this forum. 4% in the current environment of financial repression is probably too high and an assumption based on favourable conditions from the past that probably don't apply today.

It's not a very good assertion. For it to be true the adverse conditions would need to persist for a time comparable to the worst times experienced in the past. The safe withdrawal planning methods take account of the existence of times like the present already.

4% is lower than the level used by the originator of the rule, who uses 4.5% for his method, adding in the small cap stocks he missed out in his initial paper, and others include a range of other results that further increase the safe withdrawal rate.

It's also pretty common to do things like assuming 100% of money is invested in just the country of residence of the retiree and that's seldom going to be sensible investing.

ex-pat_scot

the thing I don't fundamentally understand about the Telegraph article, is why it presumes you would be fully invested in local markets.

Clearly, if USA has higher long term returns than the UK, then why on earth would you restrict your savings to the UK market? (OK there's currency risk, in that you will be drawing down in £ and hence exposed to $ rate fluctuation).
At the extreme, the RATIONAL investor would keep well out of JP.

This all points for me to have a balanced global portfolio - and it's a Vanguard (VWRL) fund all the way. That gives multi currency and multi market exposure, with minimal costs.

ex-pat_scot

And another thing.

Even if there's no real growth in your funds, invested in cash/bonds, then a SWR of 2.5% would mean you had 40 years in your pot.
To me, that's fundamentally too conservative.

I'm expecting that 4% will be pretty decent for me once I retire.
Obviously i will keep a watch eye on Sequence-of-Return risk: I will have the fall back option of some part time consultancy in the early years, which is a bit of a cushion.

I also haven't factored in the state pension for my wife & I, nor the modest teachers' pension from my wife. These will kick in around 10 years after I hope to retire, so they are more of a bonus than an integral component of planning.

aldershot

jamesd wrote: »

It's not a very good assertion. For it to be true the adverse conditions would need to persist for a time comparable to the worst times experienced in the past. The safe withdrawal planning methods take account of the existence of times like the present already.

What times in the past existed like today?

Rates at "emergency levels" for 8 years
Negative nominal yields across a large proportion of the world's bond markets
Negative real yields in inflation linked bonds in the UK
Record real estate to income multiples across the world

I expect the future to be different from the past.

jamesd

ex-pat_scot wrote: »

i will keep a watch eye on Sequence-of-Return risk

See:

Jonathan Guyton Tames a Gorilla
Sequence-of-Return Risk: Gorilla or Boogeyman?

Those explain how Guyton found that using the cyclically adjusted price/earnings ratio was effective in greatly reducing the impact of sequence of returns issues.

With many equity markets now at highs the method currently indicates a reduced holding in equities. And importantly:

"Though exhaustive study on the combined impact of dynamic withdrawal and allocation policies has yet to be undertaken, results of their stand-alone impact offer strong reason to believe that employing them together would add around 100 basis points to the sustainable withdrawal rate under static policies"

That's 1% higher sustained withdrawal rate, from 4.5% to 5.5% for anyone still using the "4%" rule. Or perhaps from 6% to 7% for someone using Guyton and Klinger's rules combined with a year of planned investment income in cash savings.