4% "Safe" Withdrawal Rate?

ex-pat_scot

westv wrote: »

Thw question was more how is the 4% calculated rather than is the 4% a safe rate.

the 4% came from the research showing that a portfolio of equities and bonds would return <inflation plus 4%> on average, for pretty much any of the last 100 years or so as a starting point.


That means you should be able to withdraw 4% of the pot value each year, whilst still seeing the pot increase in line with inflation.
Thus if you have a £1m pot now, with inflation at 2% and take 4% (£40,000) this year, then your pot will have ended the year at £1,020,000. Next year you would take £40,800, and the pot would end the year at £1,040,000. etc etc.
In principle then - your purchasing power does not diminish over time.


##clearly there's lots of assumptions in play here - which I have tried to address in previous posts - but the basic principle is in the worked example.

westv

Let's clarify the question:-

1st year Portfolio £100,000
1st year 4% = £4,000

2nd year Portfolio £86000 (a poor year for the markets)
2nd year 4% = £3,440 + inflation in previous year
or
2nd year £ 4,000 + inflation in previous year.

Triumph13

The latter again is what was implied in the 4% SWR 'rule'


And for clarity it has nothing to do with the pot value not being depleted. It was calculated using historical US data and the test was whether or not the pot dropped to zero over a 30 year retirement. It didn't on any of the periods modelled so the originators deemed it safe. Huge amounts of subsequent work has shown that you shouldn't rely on it if:

• You're not 100% US invested
• You think your retirement might last more than 30 years
• You forget to allow for expenses

atush

Thrugelmir wrote: »

3% - 3.5% is nearer the mark given more recent years market performance.

But you dont base long term market calculations on 'recent years'. Investing is for long term not short term.

Unless you have been so unwise as to not have 2 years + income in cash so as to not withdraw funds during a market correction.

and a certain % of your pot (majority really in DD) should have a natural income/yield so that no/not all the 4% needs to be from equities sold. But most/some could come from natural yield

coyrls

westv wrote: »

Let's clarify the question:-

1st year Portfolio £100,000
1st year 4% = £4,000

2nd year Portfolio £86000 (a poor year for the markets)
2nd year 4% = £3,440 + inflation in previous year
or
2nd year £ 4,000 + inflation in previous year.

The model is based on your second option: "2nd year £ 4,000 + inflation in previous year."

Other replies are questioning if the model works but I don't think that was your question.

westv

coyrls wrote: »

The model is based on your second option: "2nd year £ 4,000 + inflation in previous year."

Other replies are questioning if the model works but I don't think that was your question.

You're correct. I know there is debate after debate as to whether it works. My question was how.

jamesd

westv wrote: »

The 4% "safe" rate.
Is it 4% of the portfolio each year + inflation for the previous year
or is it 4% of the initial pot and then the same amount in subsequent years + inflation?

It is 4% of the initial pot increasing with inflation each year. It ignores fees so you must deduct something from that. It ignores a future change by the same person that increased the rate to 4.5% by adding small cap stocks to the investment mixture. The original study used a 50:50 mixture of equities and bonds and looked to ensure that the money would last 30 years if the performance of every set of 30 years starting from 1926 was considered. As a result it is too low for average result or good result time periods because it has to keep income at a level that will work for the worst cases. Usually a substantial increase will be possible and Bengen himself expects that the nominal (not inflation adjusted) pot size would normally be bigger than the starting pot size, covering 96% of the results if the 4% rule was used.

Where you invest matters more than where you live.

Later studies have produced ways to significantly improve on the 4% rule and 6-6.5% is the sort of thing that can be achieved using some of the more modern research.

While I still have much expanding to do, have a look at Drawdown: safe withdrawal rates and you will probably find interesting and useful things.

LXdaddy

jamesd wrote: »

While I still have much expanding to do, have a look at Drawdown: safe withdrawal rates and you will probably find interesting and useful things.

Seems to be an issue with the link It should be https://forums.moneysavingexpert.com/discussion/5466114 I think

jamesd

Thanks, that's right though I've fixed it now.

mozza78

I guess everyone has their own methods of determining safe levels of withdrawal. My spreadsheet I use looks at the last 30 years historic annual returns for equities, bonds, cash and dividends then adjusts for the RPI for that year to give me a rough real rate of return.
Equities μ = 3.20% and σ = 14.5%
Housing μ = 3.70% and σ = 6.89%
Cash μ = 2.14% and σ = 2.15%
Dividends μ = 3.15% and σ = 1.53%

I then plug my numbers into a spreadsheet run a monte carlo for 1000 simulations and work out the odds of going broke or having to sell certain assets before a pre determinded age. My spending and income models are also variable The problem with this I fear is the reliance on historics in a world which has now become a low interest rate environment. I just cannot envisage a 30 year period where we will have 89% return in the FTSE over 5 years like we did 95-00 or double digit cash rates like we did in the early 90s. So for all my reliance on historics I actually ignore them now and plug in my own much more conservative numbers. 1% equity, 0% housing, 1% cash and 1% dividends is what I generally look at. I'd much rather look at a worst case kind of scenario and be pleasantly surprised.