Drawdown and movement to 'safer' funds

Triumph13

FatherAbraham wrote: »

4% withdrawal rate doesn't give a 95% chance of success in the UK, though, does it?

That largely depends whether the investor is dumb enough to only invest in UK shares.

TBC15

Triumph13 wrote: »

That largely depends whether the investor is dumb enough to only invest in UK shares.

Bit harsh, Ill advised may be a bit more polite.

bostonerimus

FatherAbraham wrote: »

4% withdrawal rate doesn't give a 95% chance of success in the UK, though, does it?

Well 4% index linked withdrawal with 95% probability of success after 30 years comes from studies like Trinity that use US based portfolios. Any global cap weighted portfolio will include a large proportion of US stocks and bonds, but the sustainable withdrawal rate will be different which is why it's probably best to use something like 4% as a starting point and allow it to vary given your spending and the return of your investments. Also these studies do not include investment costs so you need to pay those out of your withdrawal rate too.

Thrugelmir

Triumph13 wrote: »

That largely depends whether the investor is dumb enough to only invest in UK shares.

Then exchange rates come into play. Nor is a UK investor likely to hold US Treasuries as their 40% fixed interest portfolio.

Thrugelmir

Prism wrote: »

It mostly has been safe with a few examples of failures in the last 100 years or so. Dynamic withdrawal starting around 4-5% seems pretty successful.

Has anybody ever conducted such a study over 100 plus years of data?

bostonerimus

Thrugelmir wrote: »

Has anybody ever conducted such a study over 100 plus years of data?

Klinger does it from 1926 to 2004 in this paper....but once again I think we can get bogged down in detail and should concentrate more on the general principles that these studies illuminate.

http://www.schulmerichandassoc.com/using_decision_rules_to_create_retirement_withdrawal_profiles.pdf

Malthusian

TBC15 wrote: »

Bit harsh, Ill advised may be a bit more polite.

If no-one's advised them to put 100% of their investments in a country representing 3% of the global economy, can we now call them dumb?

The "4% safe withdrawal rate" is not supposed to be a good withdrawal strategy, it is supposed to be a rule of thumb for how much you can reasonably expect in income from a given pension fund. Using an inflation-linked annuity (as statutory illustrations do) gives too low a rate (around 2-2.5%), as very few people need to put their entire pension in an inflation-linked annuity.

Using a bad rate leads to bad decisions like either not bothering to save into a pension because it's hopeless, or putting too much into a pension and sacrificing too much happiness in working years. So a higher, more realistic rate is needed.

Using any percentage higher than that provided by an inflation-linked annuity carries a risk of running out of money. 4% generally gives a reasonable compromise, where studies show that the risk of running out is some acceptably low figure like 5%. In reality this does not mean that 1 in 20 investors who withdraw 4% will run out of money, because with a more flexible withdrawal strategy (which generally amounts to reducing or at least not increasing withdrawals if investment performance has not been good enough), even that 1 in 20 can avoid running out of money.

There is no such thing as an average person and nobody is going to experience average stockmarket performance based on aggregated data since 1926. Everyone will need their own unique withdrawal strategy based on their needs and actual investment performance.

OldMusicGuy

Thrugelmir wrote: »

Has anybody ever conducted such a study over 100 plus years of data?

The most comprehensive study I have found is in "Living Off Your Money: The Modern Mechanics of Investing During Retirement with Stocks and Bonds" by M H McClung. He does comprehensive backtesting using four datasets:

- US Market from 1928 to 2010
- US S&P from 1871 through 2010
- UK Market from 1923 to 2010
- Japan Market from 1950 through 2010

He also includes some global market data, but there isn't much available.

This book explores different strategies (it goes beyond a simple SWR strategy) and portfolio approaches in retirement. Well worth a read, although it is very maths and data heavy. I skimmed most of the complex stuff and focused on the recommendations.

Andy_L

kidmugsy wrote: »

CPI inflation 2.5% or so.
RS interest 5%.

What erosion? You're winning, and without any investment risk.

Reg savers aren't a true 5% rate as you don't get 5% on all the money for all the year

MallyGirl

rue - but if you are populating them from a rolling set of maturing other RS accounts it can get close.