Drawdown: safe withdrawal rates

Thrugelmir

OldScientist said:

 It appears that the bull market in bonds that is just finishing was historically unusual.

If you enjoy data analysis. Then I can recommend a read of a heavyweight book. 

This Time Is Different: Eight Centuries of Financial Folly - Reinhart and Rogoff

Events are more predicatable than initially may seem the case. 

bostonerimus

OldScientist 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.

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).

In times of rising inflation SP and index linked DBs really show their worth. My fixed income has developed without much strategic thought and is almost entirely held inside retirement tax wrappers. I have 20% of my portfolio in a bond fund with an average maturity of 10 years, a stable value fund paying 2% and a TIAA Traditional annuity paying 4% this year. I also keep around 2 years of spending in the bank getting 0%. 

OldScientist

Thrugelmir said:

OldScientist said:

 It appears that the bull market in bonds that is just finishing was historically unusual.

If you enjoy data analysis. Then I can recommend a read of a heavyweight book. 

This Time Is Different: Eight Centuries of Financial Folly - Reinhart and Rogoff

Events are more predicatable than initially may seem the case. 

Cheers - until I retired I hadn't quite appreciated that data analysis as well as having been my work is also my hobby (even better as a hobby since there are no deadlines and I can look at whatever topics I want without having to justify the use of resources!)...

For cheapskates (sorry, money savers) there's what appears to be a pre-publication version of this book at https://www.nber.org/system/files/working_papers/w13882/w13882.pdf

westv

I was a bit bored so I thought I'd bump this useful thread. 

Albermarle

westv said:

I was a bit bored so I thought I'd bump this useful thread. 

Some old names posting there !

DairyQueen

Where is Jamesd? I miss his expertise on this issue. His profile suggests that he hasn't been on the site since Jan.

westv

Not since Jan last year.

DairyQueen

westv said:

Not since Jan last year.

 Shame

jamesd

You may have noticed that during the low inflation and low interest rate times I suggested that cash and money market were safer than bonds because of capital losses when interest rates rise. Bank Rate (base rate) is now around historic norms and while there's reason to think it might be 3.5% or so a couple of years from now the conditions which favoured cash have ended.

This post is to formally end my prefer cash to bonds guidance, for anyone who didn't notice the conditions change already. Today it's just shorter term decisions about what offers the best deal.

jamesd

People familiar with 4% rule founder Bill Bengen may know that he's said that his greatest worry about the rule is high inflation early in retirement. We haven't had the sustained high inflation that worried him and it looks as though we won't, so no action is needed.

However, if you're worried and want to act to mitigate risk and if 2022 or 2023 have been in your first five years I suggest you consider cutting your investment income to 98% of the original plan. The ongoing effect of this will deliver the safety boost. This is not a suggestion to do it, just what to do if you want to do something.

Those using other rules like Guyton-Klinger can just follow their rules as usual.

The state pension triple lock should help to compensate for the investment income reduction.