Drawdown: safe withdrawal rates

OldScientist

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

bostonerimus

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

Inflation might be "the thing" in the near future. 

coyrls

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

A possible issue is getting hold of the 50-60% of fixed income to put it into fixed rate savings accounts.  If the funds are sitting in a crystallised SIPP, then withdrawing a significant amount could attract higher rate tax.  When I crystallised my SIPP I put the 25% tax free into a ladder of fixed rate savings accounts that, with the £85,000 protection per institution, are as safe as Gilts but with a higher return.  That's a one-off opportunity, however.  I have been using the ladder for income and therefore the proportion of fixed income in fixed rate savings accounts is diminishing.

michaels

coyrls said:

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

A possible issue is getting hold of the 50-60% of fixed income to put it into fixed rate savings accounts.  If the funds are sitting in a crystallised SIPP, then withdrawing a significant amount could attract higher rate tax.  When I crystallised my SIPP I put the 25% tax free into a ladder of fixed rate savings accounts that, with the £85,000 protection per institution, are as safe as Gilts but with a higher return.  That's a one-off opportunity, however.  I have been using the ladder for income and therefore the proportion of fixed income in fixed rate savings accounts is diminishing.

I would say any fixed rate savings account ove r2 months is quite risky - the 2, 3 and 5 year rates are all under 2% so could seem some pretty considerable inflation losses in the next few years - say inflation peaks at 7% next spring and takes 3 years to get back to 2% those cash accounts will lose 15% in real terms whereas money on instant access or short fix accounts may be able to be reinvested at considerably higher rates if inflation does follow that path and interest rates rise correspondingly.

Real interest rates are currently at minus 4% - is that the lowest they have ever been?  Will they hit minus 6% by next spring?!

Fermion

Audaxer said:

mlv-1967 said:

There is no such thing as a 'safe' withdrawal rate.  If there is one, it would stupidly low, like 1% or maybe 2% at the most.  You have to assume that your pot will eventually run out, so with what is left aim to buy an annuity at age 75 when you can receive a reasonable rate, especially if you have a serious illness at that age.

The safe withdrawal rate is only a guide, but a useful guide for those approaching retirement and going into drawdown. From the research done, I would think 3.5% would be reasonably safe, especially if you also hold a healthy cash buffer.

If you were only drawing 1% plus inflation annually, you could hold it all in cash and it would still last throughout a long retirement.

An annuity at 75 is an option, but for someone with a serious illness and not long left, I think it would be better to keep the money invested for the benefit of their spouse.

Absolutely correct - It's a budgetary guide, but as all company FDs will tell you, budgets need to be constantly monitored and adjusted if necessary, particularly if there are major events causing significant impact to yield/income.  I personally find it easiest to do this by holding income rather than accumulation funds and and regularly monitoring the cash yield. Much easier to monitor cash flow if you are not having to regularly sell funds to provide income. I also only budget to take the natural yield from my pension pot and also have undertaken estate planning and propose to pass our combined pension pots to our children in a family trust as beneficiaries. I actually dropped my income from 3.8% to 3.2% during the pandemic. I'm afraid I really can't see the logic behind taking an annuity at 75. 

coyrls

Yes, I set mine up 6 years ago and so my rates were OK, even with more recent roll overs, all my rates are 2% or above.  So far with 4 more years to go, I am actually ahead of CPI but I accept that the next few years are likely to be different.  I can make up inflation short fall from other sources if necessary.  I will still be way ahead of an equivalent Gilts ladder.

Prism

michaels said:

coyrls said:

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

A possible issue is getting hold of the 50-60% of fixed income to put it into fixed rate savings accounts.  If the funds are sitting in a crystallised SIPP, then withdrawing a significant amount could attract higher rate tax.  When I crystallised my SIPP I put the 25% tax free into a ladder of fixed rate savings accounts that, with the £85,000 protection per institution, are as safe as Gilts but with a higher return.  That's a one-off opportunity, however.  I have been using the ladder for income and therefore the proportion of fixed income in fixed rate savings accounts is diminishing.

I would say any fixed rate savings account ove r2 months is quite risky - the 2, 3 and 5 year rates are all under 2% so could seem some pretty considerable inflation losses in the next few years - say inflation peaks at 7% next spring and takes 3 years to get back to 2% those cash accounts will lose 15% in real terms whereas money on instant access or short fix accounts may be able to be reinvested at considerably higher rates if inflation does follow that path and interest rates rise correspondingly.

Real interest rates are currently at minus 4% - is that the lowest they have ever been?  Will they hit minus 6% by next spring?!

Agreed, but losing less to inflation may be a reasonable outcome over the next few years.

Thrugelmir

michaels said:

coyrls said:

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

A possible issue is getting hold of the 50-60% of fixed income to put it into fixed rate savings accounts.  If the funds are sitting in a crystallised SIPP, then withdrawing a significant amount could attract higher rate tax.  When I crystallised my SIPP I put the 25% tax free into a ladder of fixed rate savings accounts that, with the £85,000 protection per institution, are as safe as Gilts but with a higher return.  That's a one-off opportunity, however.  I have been using the ladder for income and therefore the proportion of fixed income in fixed rate savings accounts is diminishing.

I would say any fixed rate savings account ove r2 months is quite risky - the 2, 3 and 5 year rates are all under 2% so could seem some pretty considerable inflation losses in the next few years - say inflation peaks at 7% next spring and takes 3 years to get back to 2% those cash accounts will lose 15% in real terms whereas money on instant access or short fix accounts may be able to be reinvested at considerably higher rates if inflation does follow that path and interest rates rise correspondingly.

Real interest rates are currently at minus 4% - is that the lowest they have ever been?  Will they hit minus 6% by next spring?!

Just done some digging.  In years past Building Societies were the main source of instant deposit accounts (and mortgages with preference given to loyal savers).   Winding the clock back to June 1979. The Association of Building Societies recommended a rate of 8.50%.  Inflation was 15.65%.  That's a 7.15% shortfall. For reference base rate was 14% at the time. 

In February 1979 you could have subscribed for 13.75% Treasury Stock 2000/2003 at £96 per £100 of nominal stock. A running yield of 14.32%. 

Worth mentioning that this was before the era of debt securitisation. We are still in the post GFC era. With many issues still to be worked through. 

OldScientist

michaels said:

coyrls said:

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

A possible issue is getting hold of the 50-60% of fixed income to put it into fixed rate savings accounts.  If the funds are sitting in a crystallised SIPP, then withdrawing a significant amount could attract higher rate tax.  When I crystallised my SIPP I put the 25% tax free into a ladder of fixed rate savings accounts that, with the £85,000 protection per institution, are as safe as Gilts but with a higher return.  That's a one-off opportunity, however.  I have been using the ladder for income and therefore the proportion of fixed income in fixed rate savings accounts is diminishing.

I would say any fixed rate savings account ove r2 months is quite risky - the 2, 3 and 5 year rates are all under 2% so could seem some pretty considerable inflation losses in the next few years - say inflation peaks at 7% next spring and takes 3 years to get back to 2% those cash accounts will lose 15% in real terms whereas money on instant access or short fix accounts may be able to be reinvested at considerably higher rates if inflation does follow that path and interest rates rise correspondingly.

Real interest rates are currently at minus 4% - is that the lowest they have ever been?  Will they hit minus 6% by next spring?!

Here are the annualised real returns for UK equities, bonds, and bills over 30 year rolling periods (returns from JST database).



In answer to your question, in the past bonds have had an annualised real return of just under -4% for a number of 30 year periods - ouch! (poor fixed income performance is one of the things that made retirements starting in 1937 tricky). Note the UK bonds in the JST database have maturities of between 15 and 20 years (so longer than what is usually described as 'intermediate term', but not outrageous). It appears that the bull market in bonds that is just finishing was historically unusual.

I would agree that fixing for longer terms than a year or two may turn out to be unwise - we currently have 1 year and 2 year fixed accounts (in equal quantities, making a weighted average maturity of 1.5 years). The Vanguard Global bond fund (our other nominal fixed income holding) has an average maturity of about 9 years, so our combined maturity (in nominal assets - we also hold inflation-linked bond funds) is somewhere around 3.5 years. Ask me in 30 years whether this passive approach to fixed income was a good idea!

OldScientist

coyrls said:

OldScientist said:

jamesd said:

bostonerimus said:

Nice analysis. I assume by "bills" you mean government bonds. 

Bills means US Treasury bills with duration normally at one year rather than the normally used longer term bonds. It's a cash proxy.

Further analysis of the results in the US showed that it's the low interest rate/low inflation times when cash/T-bills dominates because reversing of interest rate trends produces a capital loss on the longer term bonds that has minimal to no effect on bills.

This research is why I write that at present cash beats bonds.

jamesd has hit the nail on the head here... for two reasons my own position is a target of 50-60% of fixed income in fixed rate savings accounts - firstly because the OH is very conservative and prefers to have a portion of our portfolio with no investment risk to capital (of course, inflation risk is another thing), and the second reason is diversification - I have no idea whether intermediate term bonds (say 10 years, whether government or other AAA bonds) or cash will give the best SWR in the future so a mix of both (which effectively reduces the maturity) suits me.

A possible issue is getting hold of the 50-60% of fixed income to put it into fixed rate savings accounts.  If the funds are sitting in a crystallised SIPP, then withdrawing a significant amount could attract higher rate tax.  When I crystallised my SIPP I put the 25% tax free into a ladder of fixed rate savings accounts that, with the £85,000 protection per institution, are as safe as Gilts but with a higher return.  That's a one-off opportunity, however.  I have been using the ladder for income and therefore the proportion of fixed income in fixed rate savings accounts is diminishing.

Cheers - the practical issue you raise is not something I'd appreciated - our own situation is unusual since more than half our net worth is tied up in DB pensions (the exact fraction depends on how you assign a value such pensions) and all our investment portfolio is held in S&S ISAs or fixed rate savings accounts (there are potential tax hits should the total interest go over £1k per year).